UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K
(Mark One)
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| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 20162018
OR
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| 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
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The Scotts Miracle-Gro Company
(Exact name of registrant as specified in its charter)
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| Ohio | 31-1414921 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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14111 Scottslawn Road, Marysville, Ohio | 43041 |
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Registrant’s telephone number, including area code:
937-644-0011
Securities registered pursuant to Section 12(b) of the Act:
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| 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
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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) 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, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
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| Large accelerated filer | þ | Accelerated filer | o |
| Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
| | Emerging growth company | o |
If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 April 2, 2016March 30, 2018 (the last business day of the most recently completed second quarter) was approximately $3,300,118,585.$3,397,758,257.
There were 60,086,41655,325,650 Common Shares of the registrant outstanding as of November 18, 2016.23, 2018.
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DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for the registrant’s 20172019 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, 2016.2018.
PART I
Company Description and Development of the Business
The discussion below provides a brief description ofdescribes the business conducted by The Scotts Miracle-Gro Company, an Ohio corporation (“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, 20162018 (“fiscal 2016”2018”). 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.products in North America. Our products are marketed under some of the most recognized brand names in the industry. In North America,Our key consumer lawn and garden brands include Scotts® and Turf Builder® lawn and grass seed products; Miracle-Gro®, Nature’s Care®, Scotts®, LiquaFeed® and Osmocote®1 gardening and landscape products; and Ortho®, Roundup®2, Home Defense® and Tomcat® branded insect control, weed control and rodent 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 are the exclusive agent of the Monsanto Company, a subsidiary of Bayer AG since June 2018 (“Monsanto”), for the marketing and distribution of Monsanto’s consumer Roundup® non-selective herbicideweedkiller products within the United States and certain other contractually specified countries. We have a presence in similar branded consumer branded products in Australia, the Far EastChina and Latin America. In addition, with
Through 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”),Hawthorne segment, we are a leading producermanufacturer, marketer and distributor of liquid plant food products,nutrients, growing media, advanced indoor garden, lighting and lightingventilation systems and accessories for hydroponic gardening. Our key hydroponic gardening brands include General Hydroponics®, Gavita®, Botanicare®, Vermicrop®, Agrolux®, Can-Filters® and AeroGarden®. On June 4, 2018, our Hawthorne segment acquired substantially all of the assets and certain liabilities of Sunlight Supply, Inc., Sunlight Garden Supply, Inc., Sunlight Garden Supply, ULC, and IP Holdings, LLC, and all of the issued and outstanding equity interests of Columbia River Industrial Holdings, LLC (collectively “Sunlight Supply”). Sunlight Supply is the largest distributor of hydroponic products in the United States, and is engaged in the business of developing, manufacturing, marketing and distributing horticultural, organics, lighting and hydroponics products, including lighting fixtures, nutrients, seeds and growing media, systems, trays, fans, filters, humidifiers and dehumidifiers, timers, instruments, water pumps, irrigation supplies and hand tools. Prior to the transaction, Sunlight Supply served as a non-exclusive distributor of the Company. Sunlight Supply manufactures and markets branded hydroponic gardening products under key brands including Sun System®, Gro Pro®, Mother Earth®, Hurricane® and Grower's Edge®. See “Acquisitions” for further discussion.
Prior to August 31, 2017, we operated consumer lawn and garden businesses located in Australia, Austria, Belgium, Luxembourg, Czech Republic, France, Germany, Poland and the United Kingdom (the “International Business”). On April 29, 2017, we received a binding and irrevocable conditional offer (the “Offer”) from Exponent Private Equity LLP (“Exponent”) to purchase the International Business. On July 5, 2017, we accepted the Offer and entered into the Share and Business Sale Agreement (the “Purchase and Sale Agreement”) contemplated by the Offer. Pursuant to the Purchase and Sale Agreement, Scotts-Sierra Investments LLC, an indirect wholly-owned subsidiary of the Company, and certain of its direct and indirect subsidiaries entered into separate stock or asset sale transactions with respect to the International Business. The sale of the International Business to Exponent closed on August 31, 2017.
Prior to April 13, 2016, we operated the Scotts LawnService® business (the “SLS Business”), which provided residential and commercial lawn care, tree and shrub care and 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”), 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 segmentsegments in the United States and Canada through our interest in the TruGreen Joint Venture.
Scotts Miracle-Gro an Ohio corporation, traces its heritage back to a company founded by O.M. Scott in Marysville, Ohio in 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, inIn fiscal 1995, through a merger with Stern’s Miracle-Gro Products, Inc., which was founded by Horace Hagedorn and Otto Stern in 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®, Ortho® and Roundup® are the most widely recognized brands in the consumer lawn and garden industry in the United States.
Our strategy is focused on (i) growing our core branded business, primarily in North America where we can leverage our competitive advantages in emerging areas of growth including organics, hydroponics, live goods, water positive landscapes, and internet-enabled technology, (ii) maximizing the value of non-core-assets including the divestiture of Scotts LawnService® and exploring alternatives in Europe, and (iii) cash flow including near-term investments that will drive long-term growth, a natural mid-term shift to integration of acquired businesses, and a long-term plan to return increasing amounts of cash to shareholders.
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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. |
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water-soluble garden plant foods. In 1998, we acquired the Ortho® brand in the United States and obtained exclusive rights to market Monsanto’s 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®, Ortho® and Roundup® are among the most widely recognized brands in the consumer lawn and garden industry in the United States.
Business Segments
We divide our business into the following reportable segments:
U.S. Consumer
Europe ConsumerHawthorne
Other
U.S. Consumer consists of our consumer lawn and garden business located in the geographic United States. Hawthorne consists of our indoor, urban and hydroponic gardening business. Other consists of our consumer lawn and garden business in geographies other than the U.S. and our product sales to commercial nurseries, greenhouses and other professional customers. Corporate consists of general and administrative expenses and certain other income/expense items not allocated to the business segments. 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, 20152018, 2017 and 20142016 is presented in “NOTE 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
In our reportable segments, we manufacture, market and sell consumer lawn and garden products in the following categories:
Lawn Care: The lawn care category is designed to help consumersusers obtain and enjoy the lawn they want. In the United States and Canada, productsProducts within this category include lawn fertilizer products under the Scotts® and Turf Builder® brand names; grass seed products under the Scotts®, Turf Builder®, EZ Seed®, Water SmartPatchMaster® and PatchMasterThick’R Lawn® brand names; and lawn-related weed, pest and disease control products primarily under the Scotts® brand 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, productsProducts within this category include a complete line of water-soluble plant foods under the Miracle-Gro® brand and sub-brands such as LiquaFeed®, continuous-release plant foods under the Miracle-Gro®, Scotts® and Osmocote® brands and sub-brands of Miracle-Gro® such as Shake ‘N Feed®; potting mixes and garden soils under the Miracle-Gro®, Scotts®, Hyponex®, Earthgro® and, SuperSoil®and Fafard® brand names; mulch and decorative groundcover products under the Scotts® brand, including the sub-brands Nature Scapes®, Earthgro® and Hyponex®; plant-related pest and disease control products under the Ortho® brand; organic garden products under the Miracle-Gro® Organic Choice®, Nature’s Care®, Scotts®, Whitney Farms® and EcoScraps® brand names; and live goods and seeding solutions under the Miracle-Gro® brand and Gro-ables® 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®, Scotts EcoSense®, Naturen®, Miracle-Gro® Organic Choice® and Fafard® brand names.sub-brand. 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”“Acquisitions” for further discussion.
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3 OxiCleanTM is a registered trademark of Church & Dwight Co., Inc. |
Hydroponics: The hydroponic category is designed to help users grow plants, flowers and vegetables in an indoor or urban environment using little or no soil. Products within this category include horticultural, organic, lighting and hydroponics products, including lighting fixtures, nutrients, seeds and growing media, systems, trays, fans, filters, humidifiers and dehumidifiers, timers, instruments, water pumps, irrigation supplies and hand tools, and are marketed under the General Hydroponics®, Gavita®, Botanicare®, Vermicrop®, Agrolux®, Can-Filters®, Sun System®, Gro Pro®, Mother Earth®, Hurricane®, Grower's Edge® and AeroGarden® brand names.
Controls: The controls category is designed to help consumers protect their homes from pests and maintain external home areas. In the United States, insectInsect control products are marketed under the Ortho® brand name, including Ortho Max®, Home Defense Max®and Bug B Gon Max® sub-brands;sub-brands, and the Roundup® brand name through Roundup® Bug Destroyer; 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;and Roundup® for Lawns sub-brands; and non-selective weed controlkiller 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.
Since 1998, we have served asMarketing Agreement: We are Monsanto’s exclusive marketing agent for the marketing and distribution ofMonsanto’s consumer Roundup® non-selective weedkiller products in the consumer lawn and garden market within the United States and certain other specified countries, including Australia, Austria, Belgium, Canada, France, Germany, the Netherlands and the United Kingdom. Incountries. On May 15, 2015, the territories were expandedwe entered into an amendment (the “Marketing Agreement Amendment”) 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(as amended, the “Original 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 provide 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 “Brand Extension Agreement”) and a commercialization and technology agreement (the “Commercialization and Technology Agreement”) with Monsanto. On August 31, 2017, in connection with the abilitysale of the International Business, we entered into the Second Amended and Restated Agency and Marketing Agreement (the “Restated Marketing Agreement”) and the Amended and Restated Lawn and Garden Brand Extension Agreement - Americas (the “Restated Brand Extension Agreement”) to extendreflect the Company’s transfer and assignment to Exponent of the Company’s rights and responsibilities under the Original Marketing Agreement, as amended, and the Brand Extension Agreement relating to those countries and territories subject to the sale.
Under the terms of the Restated Marketing Agreement, we are jointly responsible with Monsanto for developing consumer and trade marketing programs for Monsanto’s consumer Roundup® non-selective weedkiller products in the countries where we serve as agent. We also provide sales, merchandising, warehousing and other selling and marketing support for these products. The Company performs other services, including manufacturing conversion services, pursuant to ancillary agreements. The Restated Brand Extension Agreement provides the Company an exclusive license in each country throughout the North American continent, South American continent, Israel and China to use the Roundup® brand globally into other categorieson additional products offered by the Company outside of the non-selective weedkiller category within the residential lawn and garden beyond non-selective weed control. Monsanto continues to ownmarket. The application of the consumer Roundup® businessbrand to these additional products is subject to a product review and provides significant oversight ofapproval process developed between the brand. In addition, Monsanto continues to ownCompany and operate the agricultural Roundup® business.Monsanto. For additional details regarding the Restated Marketing Agreement, the Restated Brand Extension Agreement and the Commercialization and Technology Agreement, see “ITEM 1A. RISK FACTORS — In the event of termination of the Restated Marketing Agreement for Monsanto’s consumer Roundup® products terminates, 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.
Acquisitions
2018
On October 2, 2017, our Hawthorne segment acquired the remaining 25% noncontrolling interest in Gavita Holdings B.V., and Divestituresits subsidiaries (collectively, “Gavita”), including Agrolux Holding B.V. (now known as Hawthorne Lighting B.V.), and its subsidiaries (collectively, “Agrolux”), for $69.2 million, plus payment of contingent consideration of $3.0 million.
On October 11, 2017, our Hawthorne segment completed the acquisition of substantially all of the U.S. and Canadian assets of Can-Filters Group Inc. (“Can-Filters”) for $74.1 million. Based in British Columbia, Can-Filters is a leading wholesaler of ventilation products for indoor and hydroponic gardening and industrial markets worldwide.
On June 4, 2018, our Hawthorne segment acquired substantially all of the assets and certain liabilities of Sunlight Supply. Sunlight Supply, based in Vancouver, Washington, is a leading developer, manufacturer, marketer and distributer of horticultural, organics, lighting, and hydroponics products, and served as a non-exclusive distributor of our products prior to the transaction. The estimated purchase price of Sunlight Supply was $459.1 million.
2017
On October 3, 2016, the Company, through its subsidiary Theour Hawthorne Gardening Company,segment completed the acquisition of American Agritech, L.L.C., d/b/a Botanicare (“Botanicare”), an Arizona-based leading producer of plant nutrients, plant supplements and growing systems used for hydroponic gardening, for $92.6 million.
On November 29, 2016, our wholly-owned subsidiary SMG Growing Media, Inc. fully exercised its outstanding warrants to acquire additional shares of common stock of AeroGrow International, Inc. (“AeroGrow”) for $8.1 million, which increased our percentage ownership of AeroGrow’s outstanding shares of common stock (on a fully diluted basis) from 45% to 80%. 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 select countries in Europe, Asia and Australia.
During the first quarter of fiscal 2017, our U.S. Consumer segment also completed two acquisitions of companies whose products support our focus on the emerging areas of water positive landscapes and internet-enabled technology for an estimatedaggregate purchase price of $90.0$3.2 million.
On May 26, 2017, our majority-owned subsidiary Gavita completed the acquisition of Agrolux for $21.8 million. Agrolux, based in the Netherlands, is a worldwide supplier of horticultural lighting.
During the third quarter of fiscal 2017, our Hawthorne segment also completed the acquisition of a company focused on the technology supporting hydroponic growing systems for an aggregate purchase price of $3.5 million.
On August 11, 2017, our Hawthorne segment completed the acquisition of substantially all of the assets of the exclusive manufacturer and formulator of branded Botanicare products for $32.0 million.
During the fourth quarter of fiscal 2017, we also made a $29.4 million investment in an unconsolidated subsidiary whose products support the professional U.S. industrial, turf and ornamental market.
2016
In the second quarter of fiscal 2016, we entered into the Services Agreement and the Term Loan Agreement with Bonnie and AFC providing for our participation in the Bonnie Business. The Term Loan Agreement provides a loan from us 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, we provide 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 26, 2016, our wholly-owned subsidiary, The Hawthorne Gardening Company,segment acquired majority control and a 75% economic interest in Gavita for $136.2 million. Gavita’s former ownership group initially 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 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 and Europe. This transaction provides the Company’s Other segment with a presence in the lighting category of indoor and urban gardening, which is a part of the Company’s long-term growth strategy.
In the third quarter of fiscal 2016, the Companyour Other segment completed an acquisition to expand itsour Canadian growing media operations for an estimated purchase price of $33.9 million.
In the second quarter ofmillion, which was adjusted down by $4.3 million during 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 fee2017 based on the profitsresolution of the Bonnie Business and the reimbursement of certain costs.contingent consideration.
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:
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• | The ability to extend the Roundup® brand globally into other categories of lawn and garden beyond non-selective weed control;
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• | 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;
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• | The opportunity to propose changes to product formulations if deemed necessary to grow and/or protect the Roundup® brand;
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• | 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;
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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;
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• | 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
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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 of Scotts Miracle-Gro.
On March 30, 2015, the Companyour Hawthorne segment acquired the assets of General Hydroponics, Inc. (“General Hydroponics”) and VermicropBio-Organic Solutions, Inc. (“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 May 15, 2015, we amended our Original Marketing Agreement with Monsanto and entered into a lawn and garden brand extension agreement, and a commercialization and technology agreement with Monsanto gaining certain rights and protections pursuant to the agreements. We paid Monsanto $300.0 million in consideration for these agreements on August 14, 2015.
2014
On October 14, 2013, our U.S. Consumer segment acquired the Tomcat® consumer rodent control business from Bell Laboratories, Inc., located in Madison, Wisconsin, for $60.0 million. 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.
On September 30, 2014, our wholly-owned subsidiary, Scotts Canada Ltd.,Other segment 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 select countries in Europe, Asia and Australia.
On October 14, 2013, we acquired the Tomcat® consumer rodent control business from Bell Laboratories, Inc., located in Madison, Wisconsin, for $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, weWe have also completed several smaller acquisitions within our controls and growing media businesses.
Duringbusinesses over the past five years,years.
Divestitures
On April 29, 2017, we havereceived the Offer from Exponent to purchase the International Business for approximately $250.0 million (subject to potential adjustment following closing in respect of the actual financial position at closing) and a deferred payment amount of up to $23.8 million. On July 5, 2017, we accepted the Offer and entered into the Agreement contemplated by the Offer. On August 31, 2017, we completed several divestitures, the largestsale of the International Business for cash proceeds of $150.6 million at closing, which was net of a closing statement adjustment for expected financial position at closing and net of seller financing provided by us of $29.7 million. This transaction included the sale of our consumer lawn and garden businesses located in Australia, Austria, Belgium, Luxembourg, Czech Republic, France, Germany, Poland and the United Kingdom. On August 31, 2017, in connection with, and as a condition to, the consummation of the sale of the International Business, we entered into the Restated Marketing Agreement and Restated Brand Extension Agreement with Monsanto reflecting our transfer and assignment, to the purchaser of the International Business, of the rights and responsibilities under the Original Marketing Agreement, as amended, and the Brand Extension Agreement relating to those countries and territories subject to the sale.
On April 13, 2016, contribution ofwe contributed the SLS Business to the TruGreen Joint Venture in exchange for a minority equity interest of approximately 30% in the TruGreen Joint Venture, which had an initial fair value of $294.0 million, and received a tax-deferred 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 the TruGreen Joint Venture. InDuring the fourth quarter of fiscal 2017, we received an $87.1 million distribution from the fiscal year ended September 30, 2012 (“fiscal 2012”), we completed the wind down of our professional grass seed business. TruGreen Joint Venture.
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 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, e-commerce platforms, food and drug stores, and indoor gardening and hydroponic storesproduct distributors and retailers through both a direct sales force and our network of brokers and distributors. In addition, during fiscal 2016,2018, we employed approximately 3,3002,500 full-time and seasonal in-store associates within the United States to help our retail partners merchandise their lawn and garden departments directly to consumers of our products.
The majority of our 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.States. We primarily utilize third parties to manage the key distribution centers for our consumer business in North America, which are strategically located across the United States and Canada. The
distribution centers for our consumer 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.
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. Our objectives surrounding the procurement of these materials are to ensure continuous supply, minimize costs and 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 lawn and garden season to secure pre-determined prices. We also hedge certain commodities, particularly diesel, gasolineresin and urea, to improve cost predictability and control. Sufficient raw materials were available during fiscal 2016.2018.
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®, Tomcat®, Hyponex®, Earthgro®, General Hydroponics®, Vermicrop® and, Gavita®, Botanicare®, Agrolux®, Sun System®, Mother Earth® and Can-Filters® 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®, Weed B Gon® and Weed B Gon MaxRoundup®, for Lawns are registered in the United States and/or internationally and are considered material to our business.
In addition, we actively develop and maintain an extensive portfolio of utility and design patents covering subject matters such as fertilizer, weed killer, 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 eitherany of our business segments or the business as a whole.
Seasonality and Backlog
Our business is highly seasonal, with more 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 have been received and shipped within the same fiscal year with minimal carryover of open orders at the end of the fiscal year.
Significant Customers
We sell our consumer products primarily to home centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers, e-commerce platforms, food and drug stores, and indoor gardening and hydroponic stores. product distributors and retailers through both a direct sales force and our network of brokers and distributors.
Our three largest customers are Home Depot, Lowe’s and Walmart, which are reported within the U.S. Consumer segment and are the only customers that, during any of the periods in question, individually represent more than 10% of reported consolidated net sales. For additional details regarding significant customers, see “ITEM 1A. RISK FACTORS — 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” of this Annual Report on Form 10-K and “NOTE 20. CONCENTRATIONS OF CREDIT RISK” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
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, distributors and advertising.
In the U.S. lawn and garden, 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, Oldcastle Retail, Inc., Lebanon Seaboard Corporation, Reckitt Benckiser Group plc, FoxFarm Soil & Fertilizer Company, Nanolux Technology, Inc., Sun Gro Horticulture, Inc., Advanced Nutrients, Ltd. and Advanced Nutrients.Hydrofarm, LLC. In addition, we face competition from smaller regional competitors who operate in many of the areas where we compete.
Internationally,In Canada, we face strong competition in the lawn and garden market particularly in Europe, Australia and Canada. Our competitors include Compo AcquiCo SARL, Bayer AG, Westland Horticulture Ltd, Neudorff, Yates,from Premier Tech Ltd. and a variety of local 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 $45.5$42.5 million, $44.4$39.9 million and $46.036.0 million in fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively, including product registration costs of $14.3$11.4 million, $13.0$10.6 million and $12.510.6 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 most 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. In addition to the regulations already described, federal, state 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. Our grass seed products are regulated by the Federal Seed Act and various state regulations.
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 local, state, federal 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, 2016, $4.02018, $4.4 million was accrued for such environmental matters. During fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, we expensed $0.4$1.6 million, $0.6$1.1 million and $3.1$0.3 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, 2016,2018, we employed approximately 5,1005,150 employees. During peak sales and production periods, we employemployed approximately 6,5005,750 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 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 Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current 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 20162018 Annual Report to Shareholders (our “2016“2018 Annual Report”), contain “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. Information 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 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 20162018 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 20162018 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. Our 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 (including pesticide products that contain glyphosate) is regulated by various local, state, federal and foreign environmental and public health agencies. These regulations may, among other things, ban the use of certain ingredients contained in such products or require (i) that only certified or professional users apply the product, (ii) that certain products be used only on certain types of locations, (iii) users to post notices on properties to which products have been or will be applied, and (iv) notification to individuals in the vicinity that products will be applied in the 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 or be alleged to cause injury to the environment or to people under all circumstances.circumstances, even when used improperly or contrary to instructions. 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.
Our 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 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 reservesaccruals 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 and cash flows.
Damage to our reputation or the reputation of our products or products we market on behalf of third parties could have an adverse effect on our business.
Maintaining our strong reputation and a strong reputation of our products and products we market on behalf of third parties 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, governmental actions, investigations or other legal proceedings, and governmental investigationsadverse media commentary may harm our reputation and hinder the acceptance by consumers of our products by consumers and our retail customers,or products we market on behalf of third parties (including Monsanto’s consumer Roundup® non-selective weedkiller products). In addition to effects on consumer behavior, retailers could decide to stop carrying those products which may materially and adversely affect our business operations, decreasereduce sales and increase costs.
In addition, perceptionsnotwithstanding the weight of scientific evidence supporting the safety of these products, claims or allegations that theour products or products we produce and market on behalf of third parties 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, growing media, pesticides, and herbicides, and pesticides.also serve as marketer for Monsanto’s consumer Roundup® non-selective weedkiller products. On occasion, allegations are made that some of ourthese products have failed to perform up to expectations, are inappropriately labeled, contain insufficient instructions or have caused damage or injury to individuals or property. BasedPublic commentary by media agencies or non-governmental organizations and/or litigation-related assertions, even when such commentary or assertions may be inaccurate, may lead consumers or our retail customers to believe that certain of our products or products we market on behalf of third parties may be unsafe. For example, notwithstanding the weight of scientific evidence and regulatory determinations supporting the safety of glyphosate, recent litigation involving Monsanto’s consumer Roundup® non-selective glyphosate-containing weedkiller products has led to negative publicity and consumer sentiment with respect to these products and Monsanto’s Roundup® brand and may lead to similar effects with respect to certain of our other glyphosate-containing products. As another example, 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 perceptioncontaminated in a way that makes them unsafe.
Even when inaccurate or not supported by the scientific evidence, claims and allegations that our products or products we market on behalf of third parties are not safe whether justified or not, could impair our reputation, the reputation of our products or the reputation of products we market on behalf of third parties, involve us in litigation, damage our brand names and have a material adverse effect on our business.
Certain of our 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 or segments and/or be subject to varying, inconsistent, and rapidly changing laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions.
We sell products, including hydroponic gardening products, that end users may purchase for use in new and emerging industries or segments, including the growing of cannabis, that may not grow or achieve market acceptance as rapidly asin a manner that we expect.can predict. The demand for suchthese products may be negatively impacted ifdepends on the uncertain growth of these industries grow more slowly than we expect.or segments.
In addition, certain of ourwe sell products including, for example, our hydroponic gardening products,that end users may be purchasedpurchase for use in industries or segments, including the growing of cannabis, that are subject to varying, inconsistent, and rapidly changing laws, and regulations, with evolvingadministrative practices, enforcement approaches, judicial interpretations, and consumer perceptions. TheFor example, certain countries and 33 U.S. states have adopted frameworks that authorize, regulate, and tax the cultivation, processing, sale, and use of cannabis for medicinal and/or non-medicinal use, while the U.S. Controlled Substances Act and the laws of other U.S. states prohibit growing cannabis.
Our gardening products, including our hydroponic gardening products, are multi-purpose products designed and intended for growing a wide range of plants and are generally purchased from retailers by end users who may grow any variety of plants, including cannabis. Although the demand for suchour products may be negatively impacted if thedepending on how laws, regulations, administrative practices, enforcement approaches, judicial interpretations, and consumer perceptions applicable to such industries evolve in a manner that adversely affects the industries. Wedevelop, we cannot reasonably predict the nature of any future laws, regulations, administrative policies and consumer perceptions applicable tosuch developments or the industries in which our products are used, nor can we determine what effect, if any, that such additional laws, regulations, administrative policies and consumer perceptionsdevelopments could have on our business.
Our marketing activities may not be successful.
We invest substantial resources in advertising, consumer promotions and other marketing activities 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 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, resin and fuel needs. The hedge agreements are designed to mitigate the earnings and cash flow fluctuations associated with the costs of urea, resin and fuel. In periods of declining urea and fuel prices, utilizing these 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 to hedge our variablemanage the net interest rate exposure on debt instrumentsrisk inherent in our sources of borrowing as well as foreign currency forward contracts to manage the exchange rate risk associated with certain intercompany loans with foreign subsidiaries.subsidiaries and other approved transactional currency exposures. Utilizing these hedge agreements exposes us to certain counterparty risks. The failure of one or more of thesethe 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 and 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 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 on creating and successfully competing in part, uponmarkets for our products including our ability to improve our existing product lines and products and to develop, manufacture and market new product lines and products to meet evolving consumer needs, as well as our ability to leverage new mediumsmedia such as digital media and social networks to reach existing and potential consumers. We cannot be certain that we will be successful in developing, manufacturing and marketing 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 product lines and products or 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 product 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 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.
If we are unable to effectively execute our e-commerce business, our reputation and operating results may be harmed.
We sell certain of our products over the Internet through our online store, which represents a small but growing percentage of our overall net sales concentrated mostly in our Hawthorne segment. The success of our e-commerce business depends on our investment in this platform, consumer preferences and buying trends relating to e-commerce, and our ability to both maintain the continuous operation of our online store and our fulfillment operations and provide a shopping experience that will generate orders and return visits to our online store.
We are also vulnerable to certain additional risks and uncertainties associated with our e-commerce business, including: changes in required technology interfaces; website downtime and other technical failures; costs and technical issues associated
with website software, systems and technology investments and upgrades; data and system security; system failures, disruptions and breaches and the costs to address and remedy such failures, disruptions or breaches; computer viruses; and changes in and compliance with applicable federal and state regulations. In addition, our efforts to remain competitive with technology trends, including the use of new or improved technology, creative user interfaces and other e-commerce marketing tools such as paid search and mobile applications, among others, may increase our costs and may not increase sales or attract consumers. Our failure to successfully respond to these risks and uncertainties might adversely affect the sales of our e-commerce business, as well as damage our reputation and brands.
Additionally, the success of our e-commerce business and the satisfaction of our consumers depend on their timely receipt of our products. The efficient delivery of our products to our consumers requires that our distribution centers have adequate capacity to support the current level of e-commerce operations and any anticipated increased levels that may occur as a result of the growth of our e-commerce business. If we encounter difficulties with our distribution centers, or if any distribution centers shut down for any reason, including as a result of fire or other natural disaster, we could face shortages of inventory, resulting in out of stock conditions in our online store, and we could incur significantly higher costs and longer lead times associated with distributing our products to our consumers and experience dissatisfaction from our consumers. Any of these issues could have a material adverse effect on our business and harm our reputation.
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.
Our top three retail customers together accounted for 61% of our fiscal 20162018 net sales and 56%57% of our outstanding accounts receivable as of September 30, 20162018. The loss of, or reduction in orders from, our top three retail customers, Home Depot, Lowe’s, and Walmart, or any other significantmajor customer for any reason (including, for example, changes in a retailer’s strategy, claims or allegations that our products or products we market on behalf of third parties are unsafe, a decline in consumer demand, regulatory, legal or other external pressures or a change in marketing strategy) could have a material adverse effect on our business, financial condition, results of operations and 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 and 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 who have significant bargaining 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 providersthird parties 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 providersmanufacturers could lead to cost overruns, shortages or other problems, which could increase our costs of production or result in delivery delays to our customers.
IfIn addition, if one or more of our third-party manufacturers becomes insolvent or unwilling to continue to manufacture products of acceptable quality, at acceptable costs and 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.
Although we continue to implement risk-mitigation strategies for single-source suppliers, we also 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 experience other financial distress, we could experience disruptions in production, which could have a material adverse effect on our financial condition, results of operations and cash flows.
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 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.products.
Climate change and unfavorable weather conditions could adversely impact financial results.
The 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 unpredictable 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 any resulting unfavorable weather conditions, we cannot predict its potential impact on our financial condition, results of operations and cash flows.
Our indebtedness could limit our flexibility and adversely affect our financial condition.
As of September 30, 20162018, we had $1,316.1$2.0 billion of debt and $985.5 million of debt.was available to be borrowed under our credit agreement. Our inability to meet restrictive financial and non-financial covenants associated with that debt, or to generate sufficient cash flow to repay maturing debt, could adversely affect our financial condition.
For example, our debt level could:
make it more difficult for us to satisfy our obligations with respect to our indebtedness;
make us more vulnerable to general adverse economic and industry conditions;
require us to dedicate a substantial portion of cash flows from operating activities to payments on our indebtedness, which would reduce the cash flows available to fund working capital, capital expenditures, advertising, research and development efforts and other general corporate requirements;
limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
limit our ability to borrow additional funds;
expose us to risks inherent in interest rate fluctuations because some of our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates; and
place us at a competitive disadvantage compared to our competitors that have less debt.
Our ability to make payments on or refinance our indebtedness, fund planned capital expenditures and acquisitions, pay dividends and make repurchases of 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 ensureprovide any assurance 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.
OurIn addition, our credit facility and the indentureindentures governing our 6.000% Senior Notes due 2023 (the “6.000% Senior Notes”) and our 5.250% Senior Notes due 2026 (the “5.250% Senior Notes”) contain restrictive covenants and cross-default provisions. In addition, ourOur credit facility also 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 including prevailing economic, financial and industry conditions. A breach of any of those financial ratio covenants or other covenants could result in a default. In the event of such default, the holders of such indebtedness could elect to declare all the funds borrowed thereunder to be due and payable, together with accrued and unpaid interest, and could cease making further loans and institute foreclosure proceedings against our assets. We cannot provide any assurance that the 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 indentureindentures governing the 6.000% Senior Notes and the 5.250% Senior Notes, we may incur additional debt in the future. If we incur additional debt, the risks described above could intensify.
Our lending activities may adversely impact our business and results of operations.
As part of our strategic initiatives, we have provided financing to buyers of certain business assets we have sold and to certain strategic partners. Our exposure to credit losses on these financing balances will depend on the financial condition of these counterparties and macroeconomic factors beyond our control, such as deteriorating conditions in the world economy or in the industries served by the borrowers. While we monitor our exposure, there can be no guarantee we will be able to successfully mitigate all of these risks. Credit losses, if significant, could have a material adverse effect on our business, financial condition, results of operations and cash flows.
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 and 5.250% Senior Notes.
NRSROs rate the 6.000% Senior Notes, the 5.250% 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 the 5.250% 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 and the 5.250% 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 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 KingdomMexico, China, Norway and Germany. In fiscal 2016, sales outside of the United States accounted for 18% of our total net sales.The Netherlands. 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 continuing international business could adversely affect our results of operations, financial condition and cash flows in the future.
Unanticipated 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 tax 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 fail to 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, anin the normal course of our business, we collect, store and transmit proprietary and confidential information regarding our customers, employees, suppliers and others, including personally identifiable information. An operational failure or breach of security from increasingly sophisticated cyber threats could lead to the loss, misuse or unauthorized disclosure of both our and our retail customers’ financial, product, and other confidential information, as well as personally identifiablethis information about our employees or customers, which may result in regulatory or other legal proceedings, and have a material adverse effect on our business and reputation. We also may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber attacks. Any such attacks or precautionary measures taken to prevent anticipated attacks may result in increasing costs, including costs for additional technologies, training and third party consultants. The losses incurred from a breach of data security and operational failures as well as the precautionary measures required to address this evolving risk may adversely impact our financial condition, results of operations and cash flows.
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 such 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 and 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 providingusing certain products or services underof our recognized brand names, which could have a material adverse effect on our business, financial condition and results of operations.
In the event of termination of the Restated Marketing Agreement for Monsanto’s consumer Roundup® products terminates or Monsanto’s consumer Roundup® business materially declines, we would lose a substantial source of future earnings and overhead expense absorption.
If we were to (i) become insolvent, (ii) commit a material breach, material fraud or material misconduct under the Restated Marketing Agreement, (iii) undergo certain events resulting inexperience a change of control of the Company (subject to certain exceptions), or (iv) impermissibly assign our rights or delegate our rightsobligations under the Restated Marketing Agreement, Monsanto may haveterminate the right to terminate theRestated Marketing Agreement without paying a termination fee.fee to the Company, subject to certain terms and conditions as set forth in the applicable agreements. Monsanto may also be able to terminate the Restated Marketing Agreement in the event of a change of control of Monsanto or a sale of the Roundup® business effective at the end of the fifth full year after providing notice of termination, subject to certain terms and conditions as set forth in the applicable agreements, but Monsanto would have to pay a termination fee to the Company.
If circumstances exist or otherwise develop that result in a material decline in Monsanto’s consumer Roundup® business, we would seek to mitigate the impact of such decline on us by exercising various rights and remedies under the Restated Marketing Agreement and applicable law; we cannot, however, provide any assurance that our exercise of such rights or remedies would produce the desired outcomes or that a material decline in Monsanto’s consumer Roundup® business would not have a material adverse effect on our business, financial condition or results of operations.
In the event that the Restated Marketing Agreement terminates or Monsanto’s consumer Roundup® business materially declines, we would lose all, or a substantial portion, of the significant source of earnings and overhead expense absorption the Restated Marketing Agreement provides.
For additional information regarding the Restated Marketing Agreement including certain of our rights and remedies under the Restated 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 26%27% of our Common Shares and can significantly influence decisions that require the approval of shareholders.
Hagedorn Partnership, L.P. beneficially owned approximately 26%27% of our outstanding Common Shares on a fully diluted basis as of November 18, 2016.23, 2018. 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 our 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.’s interests could differ from, or be in conflict with, the interests of other shareholders.
While we have, over the past few years, increased the rate of cash dividends on, and engaged in repurchases of, our Common 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 market price for our Common Shares to decline.
Our payment of 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 2016,2018, we increased the amount of our quarterly cash dividend by 6%4% to $0.50$0.55 per share and increased the current share repurchase authorization by $500 million.Common Share. The total remaining share repurchase authorization as of September 30, 20162018 is $854.3$285.4 million.
We may further increase or decrease the rate of cash dividends on, and the amount of repurchases of, our Common Shares in the future. Any reduction or discontinuance by us of the payment of quarterly cash dividends or repurchases of our Common Shares pursuant to our current share repurchase authorization program could cause the market price of our Common Shares to decline. Moreover, in the 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.
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 evaluatesWe evaluate as necessary the potential disposition of assets and businesses that may no longer help it meet itsour objectives. When the Company decideswe decide to sell assets or a business, itwe may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of itsour strategic objectives. Alternatively, the Companywe may dispose of a business at a price or on terms that are less than itwe had anticipated. After reaching an agreement with a buyer or seller for the disposition of a business, the Company iswe are subject to the satisfaction of pre-closing conditions, which may prevent the Companyus 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’sour 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“ITEM 3 LEGAL PROCEEDINGS” of this Annual Report on Form 10-K). Legal proceedings, in general, can be expensive and disruptive. Some of these suits may purport or may be 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 or products we market on behalf of third parties 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 iswe are 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.reputation or the reputation of products we market on behalf of third parties. 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 areis located in Marysville, Ohio, where we own approximately 706 acres of land and lease approximately 24 acres of land. We 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 properties located in North America, Europe Australia and Asia that support the management, 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 5245 owned properties and 9792 leased properties. These properties are located in the 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 |
| | | | |
| Location | | Owned | | Leased |
| United States | | 35 | | 71 |
| Mexico | | — | | 2 |
| Canada | | 10 | | 12 |
| China | | — | | 4 |
| The Netherlands | | — | | 3 |
| Total | | 45 | | 92 |
We own or lease 7273 manufacturing properties, four14 distribution properties and twothree research and development properties in the United States. We own or lease nine19 manufacturing and one distribution property in Canada, one manufacturing and two distribution properties in the United Kingdom, twenty manufacturing properties in Canada, two manufacturing properties in France, two manufacturing properties in Australia,Netherlands, one manufacturing property in the Netherlands,China 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.Mexico. Most of the manufacturing properties, which include growing media properties and peat harvesting properties, have production lines, warehouses, offices and field processing areas.
ITEM 3. LEGAL PROCEEDINGS
As noted in the discussion in “ITEM 1. BUSINESS — Regulatory 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,accruals, 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 haveThe 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 ourthe Company’s historic use of vermiculite in certain of ourits products.
In many of these cases, the complaints are not specific about the plaintiffs’ contacts with usthe Company or ourits products. The cases vary, but complaints in these cases generally seek unspecified monetary damages (actual, compensatory, consequential and punitive) from multiple defendants. We believeThe Company believes that the claims against usit are without merit and areis vigorously defending against them. It is not currently possible to reasonably estimate a probable loss, if any, associated with the cases and, accordingly, no reservesNo accruals have been recorded in ourthe Company’s consolidated financial statements. We are reviewing agreementsstatements as the likelihood of a loss is not probable at this time; and policies that may provide insurance coverage or indemnity asthe Company does not believe a reasonably possible loss would be material to, these claims and are pursuing coverage under somenor the ultimate resolution of these agreements and policies, although there can be no assurance ofcases will have a material adverse effect on, the Company’s financial condition, results of these efforts.operations or cash flows. There can be no assurance that these cases,future developments related to pending claims or claims filed in the future, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material adverse effect on ourthe 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, we,the Company, along with ourits Chief Executive Officer, have been named as defendants in four putative class actions filed on and after June 27, 2012, which have now been consolidated, and, on March 31, 2017, certified as a class action 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.12-cv-01592-JAH-AGS. The plaintiffs allege various statutory and common law claims associated with the Company’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 assertassert: (i) hundreds of millions of dollars in monetary damages (actual, compensatory, consequential, and restitution),; (ii) punitive and treble damages; (iii) injunctive and declaratory relief; (iv) pre-judgment and post-judgment interest; and (v) costs and attorneys’ fees. The Company and ourits Chief Executive Officer dispute the plaintiffs’ assertions and intend tohave vigorously defenddefended the consolidated action. AtAs a result of the parties reaching an agreement in principle to settle this pointmatter, which the parties are in the proceedings, it is not currently possibleprocess of finalizing and which remains subject to reasonably estimateCourt approval, the Company recognized a pre-tax charge of $85.0 million for a probable loss if any, associated withrelated to this matter for the action and, accordingly, no reserves have been recordedyear ended September 30, 2018 in our consolidated financial statements with respect to the action.“Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations. There can be no assurance that future developments with respect to this action, whether as a result of an adverse outcome or as a result of significant defense costs, will not have a material adverse effect on ourthe Company’s financial condition, results of operations or cash flows.
The Company has been named as a defendant in In re Scotts EZ Seed Litigation, Case No. 12-cv-4727 (VB), a New York and California class action lawsuit filed August 9, 2012 in the United States District Court for the Southern District of New York that asserts claims under false advertising and other legal theories based on a marketing statement on the Company’s EZ Seed grass seed product from 2009 to 2012. The plaintiffs seek, on behalf of themselves and purported class members, various forms of monetary and non-monetary relief, including statutory damages that they contend could amount to hundreds of millions of dollars. The Company has defended the action vigorously, and disputes the plaintiffs’ claims and theories, including the recoverability of statutory damages. In 2017, the Court eliminated certain claims, narrowed the case in certain respects, and permitted the case to continue proceeding as a class action. On August 7, 2017, the Court requested briefs on the Company’s request for interlocutory review of issues relating to the recoverability of statutory damages in a class action by the United States Court of Appeals for the Second Circuit and, on August 31, 2017, approved that request. On January 8, 2018, however, the Second Circuit denied the interlocutory appeal request. The parties engaged in mediation on April 9, 2018 and agreed in principle to a preliminary settlement of the outstanding claims on April 10, 2018. The preliminary settlement would require the Company to pay certain attorneys’ and administrative fees and provide certain payments to the class members. The preliminary settlement will not be finalized until after the court approves the settlement and a claims process determines the payments to be provided to the class members. The date of the final settlement approval hearing with the court is December 19, 2018. During fiscal 2018, the Company recognized a charge of $11.7 million for a probable loss related to this matter within the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. The resolution of the claims process may result in additional losses in excess of the amount accrued, however, the Company does not believe a reasonably possible loss in excess of the amount accrued would be material to, nor have a material adverse effect on, the Company’s financial condition, results of operations or cash flows.
We are involved in other lawsuits and claims which arise in the normal course of our business.business including the initiation and defense of proceedings to protect intellectual property rights, advertising claims and employment disputes. In our opinion, these claims individually and in the aggregate are not expected to have 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 18, 2016,23, 2018, 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 | | 61 |
| | Chief Executive Officer and Chairman of the Board | | 29 |
| | 63 |
| | Chief Executive Officer and Chairman of the Board | | 31 |
|
| Michael C. Lukemire | | 58 |
| | President and Chief Operating Officer | | 20 |
| | 60 |
| | President and Chief Operating Officer | | 22 |
|
| Thomas R. Coleman | | 47 |
| | Executive Vice President and Chief Financial Officer | | 17 |
| | 49 |
| | Executive Vice President and Chief Financial Officer | | 19 |
|
| Ivan C. Smith | | 47 |
| | Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer | | 13 |
| | 49 |
| | Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer | | 15 |
|
Denise S. Stump
| | 62 |
| | Executive Vice President, Global Human Resources and Chief Ethics Officer | | 16 |
| | 64 |
| | Executive Vice President, Global Human Resources and Chief Ethics Officer | | 18 |
|
Executive officers serve at the discretion of the Board of Directors of Scotts Miracle-Gro and pursuant to executive 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 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 2005.2016. 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. Prior to 2012, Mr. Hagedorn held various managerial roles at the Company.
Mr. Lukemire was named President and Chief Operating Officer of Scotts Miracle-Gro in February 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. Lukemire had served as Executive Vice President, North American 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 2011 until May 2013. Prior to October 2011, he had served as Regional President for2012, Mr. Lukemire held various managerial roles at the Southeast region since May 2009.Company.
Mr. Coleman was named Executive Vice President and Chief Financial Officer of Scotts Miracle-Gro in April 2014. Prior to this appointment, Mr. Coleman had served as Senior Vice President, Global Finance Operations and Enterprise Performance Management Analytics for The Scotts Company LLC, a wholly-owned subsidiary of Scotts Miracle-Gro, 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 2013 and March 2013. Prior to 2012, Mr. Coleman held various managerial roles at the Company.
Mr. Smith was named Executive Vice President, General Counsel and Corporate Secretary of Scotts Miracle-Gro in July 2013 and Chief Compliance Officer of Scotts Miracle-Gro in October 2013. Prior to July 2013, he had served as Vice President, Global Consumer Legal and Assistant General Counsel of Scotts LLC since October 2011. Prior to 2012, Mr. Smith served as Vice President, North America Legal and Assistant General Counsel from April 2009 to September 2011 and as Vice President, Litigation of Scotts LLC from October 2007 to March 2009.held various managerial roles at the Company.
Ms. Stump was named Executive Vice President, Global Human Resources of Scotts Miracle-Gro (or its predecessor) in February 2003 and Chief Ethics Officer of Scotts Miracle-Gro in October 2013. Prior to 2012, Ms. Stump held various managerial roles at the Company.
PART II
| |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The 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, 2016 and September 30, 2015 were as follows:
|
| | | | | | | |
| | Sale Prices |
| | High | | Low |
| FISCAL 2016 | | | |
| First quarter | $ | 72.26 |
| | $ | 60.25 |
|
| Second quarter | $ | 75.13 |
| | $ | 62.20 |
|
| Third quarter | $ | 73.16 |
| | $ | 65.80 |
|
| Fourth quarter | $ | 83.73 |
| | $ | 68.24 |
|
| FISCAL 2015 | | | |
| First quarter | $ | 62.88 |
| | $ | 54.71 |
|
| Second quarter | $ | 68.99 |
| | $ | 60.18 |
|
| Third quarter | $ | 67.40 |
| | $ | 59.41 |
|
| Fourth quarter | $ | 66.27 |
| | $ | 59.10 |
|
On August 11, 2014, Scotts Miracle-Gro announced that its Board of Directors had increased the quarterly cash dividend to $0.45 per Common Share, which was paid in September of fiscal 2014 and December, March and June of fiscal 2015. On August 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 $0.50 per Common Share, which was paid in September of fiscal 2016.2016 and December, March and June of fiscal 2017. On August 1, 2017, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.53 per Common Share, which was paid in September of fiscal 2017 and December, March and June of fiscal 2018. On August 6, 2018, the Scotts Miracle-Gro Board of Directors approved an increase in the quarterly cash dividend from $0.53 to $0.55 per Common Share, which was paid in September of fiscal 2018.
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 newOn July 5, 2018, the Company entered into a fifth amended and restated credit agreement (the “Fifth A&R Credit Agreement”), which allows the Company to make unlimited restricted payments (as defined in the new credit agreement)Fifth A&R Credit Agreement), including increased or one-time dividend payments and 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 further restricted payments in an aggregate amount for each fiscal year not to exceed the amount set forth in the Fifth A&R Credit Agreement for such fiscal year ($175.0200.0 million for fiscal 20172019 and $200.0$225.0 million for fiscal 20182020 and in each fiscal year thereafter). OurThe Company’s leverage ratio was 3.104.23 at September 30, 2016.2018 and restricted payments for fiscal 2018 were within the amounts allowed by the Fifth A&R Credit Agreement. See “NOTE 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 18, 2016,23, 2018, there were approximately 52,000147,000 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, 20162018:
|
| | | | | | | | | | | | | | |
| 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 |
| | |
|
| | | | | | | | | | | | | | |
| 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 1 through July 28, 2018 | | 39,267 |
| | $ | 83.01 |
| | 38,038 |
| | $ | 294,992,929 |
|
| July 29 through August 25, 2018 | | 61,075 |
| | $ | 75.89 |
| | 59,010 |
| | $ | 290,512,386 |
|
| August 26 through September 30, 2018 | | 68,391 |
| | $ | 76.89 |
| | 66,094 |
| | $ | 285,432,143 |
|
| Total | | 168,733 |
| | $ | 77.95 |
| | 163,142 |
| | |
| |
| (1) | All of the Common Shares purchased during the fourth quarter of fiscal 2018 were purchased in open market transactions. The total number of Common Shares purchased during the quarter includes 4,5165,591 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) | OnIn August 11, 2014, the Scotts Miracle-Gro announced that its Board of Directors authorized the repurchase of up to $500$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 increasedauthorized a $500.0 million increase to the then outstandingshare repurchase authorization by an additional $500 million.ending on September 30, 2019. The amended authorization allows for repurchases of Common Shares of up to an aggregate of $1.0 billion through September 30, 2019. The dollar amounts in the “Approximate Dollar Value of Common Shares That May Yet be Purchased Under the Plans or Programs” column reflect the remaining amounts that were available for repurchase under the original $500 million and incremental $500 million authorized repurchase programs.program. |
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
The following table sets forth selected consolidated financial data for the periods indicated. You should read the following summary consolidated financial data in conjunction with our consolidated financial statements and the notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this Annual Report on Form 10-K. The summary consolidated financial data presented below as of and for the fiscal years ended September 30, 2018, 2017, 2016, 2015 and 2014 has been derived from our consolidated financial statements.
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In millions, except per share amounts) | (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 |
| $ | 2,663.4 |
| | $ | 2,642.1 |
| | $ | 2,506.2 |
| | $ | 2,371.1 |
| | $ | 2,189.3 |
|
| Gross profit | 995.4 |
| | 908.0 |
| | 890.1 |
| | 843.6 |
| | 830.2 |
| 864.6 |
| | 972.6 |
| | 900.3 |
| | 810.8 |
| | 774.2 |
|
| Income from operations | 459.3 |
| | 262.1 |
| | 283.7 |
| | 280.2 |
| | 212.7 |
| 198.9 |
| | 433.4 |
| | 447.6 |
| | 253.8 |
| | 263.3 |
|
| Income from continuing operations | 253.3 |
| | 137.8 |
| | 145.5 |
| | 140.2 |
| | 93.0 |
| 127.6 |
| | 198.3 |
| | 246.1 |
| | 128.7 |
| | 131.8 |
|
| Income (loss) from discontinued operations, net of tax | 61.5 |
| | 20.9 |
| | 20.7 |
| | 20.9 |
| | 13.5 |
| (63.9 | ) | | 20.5 |
| | 68.7 |
| | 30.0 |
| | 34.4 |
|
| Net income | 314.8 |
| | 158.7 |
| | 166.2 |
| | 161.1 |
| | 106.5 |
| 63.7 |
| | 218.8 |
| | 314.8 |
| | 158.7 |
| | 166.2 |
|
| Net income attributable to controlling interest | 315.3 |
| | 159.8 |
| | 166.5 |
| | 161.1 |
| | 106.5 |
| 63.7 |
| | 218.3 |
| | 315.3 |
| | 159.8 |
| | 166.5 |
|
NON-GAAP ADJUSTED OPERATING RESULTS(2): | | | | | | | | | | | | | | | | | | |
| Adjusted income from operations | $ | 419.9 |
| | $ | 352.1 |
| | $ | 333.7 |
| | $ | 300.5 |
| | $ | 228.0 |
| $ | 351.7 |
| | $ | 438.3 |
| | $ | 402.1 |
| | $ | 334.0 |
| | $ | 310.8 |
|
| Adjusted income from continuing operations | 241.1 |
| | 196.3 |
| | 185.4 |
| | 153.4 |
| | 104.7 |
| 211.6 |
| | 237.4 |
| | 230.2 |
| | 180.4 |
| | 170.0 |
|
| 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 |
| |
| Adjusted net income attributable to controlling interest from continuing operations | | 211.6 |
| | 236.9 |
| | 230.7 |
| | 181.5 |
| | 170.3 |
|
| SLS Divestiture adjusted income | | 211.6 |
| | 236.9 |
| | 221.7 |
| | 203.4 |
| | 190.9 |
|
| FINANCIAL POSITION: | | | | | | | | | | | | | | | | | | |
Working capital(3) | $ | 398.6 |
| | $ | 500.6 |
| | $ | 373.4 |
| | $ | 359.8 |
| | $ | 555.2 |
| $ | 273.0 |
| | $ | 337.2 |
| | $ | 325.8 |
| | $ | 382.8 |
| | $ | 256.3 |
|
Current ratio(3) | 1.7 |
| | 1.8 |
| | 1.7 |
| | 1.7 |
| | 2.4 |
| 1.4 |
| | 1.6 |
| | 1.5 |
| | 1.8 |
| | 1.6 |
|
| Property, plant and equipment, net | 470.8 |
| | 444.1 |
| | 429.4 |
| | 414.9 |
| | 420.3 |
| 530.8 |
| | 467.7 |
| | 444.9 |
| | 413.4 |
| | 393.5 |
|
| Total assets | 2,808.8 |
| | 2,527.2 |
| | 2,058.3 |
| | 1,937.1 |
| | 2,074.4 |
| 3,054.5 |
| | 2,747.0 |
| | 2,755.8 |
| | 2,458.3 |
| | 1,996.0 |
|
Total debt to total book capitalization(4) | 64.8 | % | | 65.1 | % | | 58.6 | % | | 44.4 | % | | 56.5 | % | 85.0 | % | | 68.3 | % | | 63.0 | % | | 63.1 | % | | 58.3 | % |
| Total debt | 1,316.1 |
| | 1,157.6 |
| | 782.7 |
| | 568.2 |
| | 782.6 |
| 2,016.4 |
| | 1,401.1 |
| | 1,215.9 |
| | 1,061.1 |
| | 774.9 |
|
| Total equity—controlling interest | 715.2 |
| | 620.7 |
| | 553.7 |
| | 710.5 |
| | 601.9 |
| 354.6 |
| | 648.8 |
| | 715.2 |
| | 620.7 |
| | 553.7 |
|
| CASH FLOWS: | | | | | | | | | | |
| GAAP CASH FLOWS: | | | | | | | | | | |
| Cash flows provided by operating activities | $ | 237.4 |
| | $ | 246.9 |
| | $ | 240.9 |
| | $ | 342.0 |
| | $ | 153.4 |
| $ | 342.5 |
| | $ | 363.2 |
| | $ | 244.0 |
| | $ | 250.1 |
| | $ | 242.0 |
|
| Investments in property, plant and equipment | 58.3 |
| | 61.7 |
| | 87.6 |
| | 60.1 |
| | 69.4 |
| 68.2 |
| | 69.6 |
| | 58.3 |
| | 61.7 |
| | 87.6 |
|
| Investment in marketing and license agreement | — |
| | 300.0 |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | 300.0 |
| | — |
|
| Investments in loans receivable | 90.0 |
| | — |
| | — |
| | — |
| | — |
| |
| Investments in loans receivable, net of proceeds | | 2.8 |
| | 29.7 |
| | 90.0 |
| | — |
| | — |
|
| Net distributions from unconsolidated affiliates | 194.1 |
| | — |
| | — |
| | — |
| | — |
| (0.1 | ) | | 57.4 |
| | 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 |
| |
| Investments in acquired businesses and payments on seller notes, net of cash acquired | | 501.8 |
| | 150.4 |
| | 161.2 |
| | 181.7 |
| | 114.8 |
|
Dividends paid | 116.6 |
| | 111.3 |
| | 230.8 |
| | 87.8 |
| | 75.4 |
| 120.0 |
| | 120.3 |
| | 116.6 |
| | 111.3 |
| | 230.8 |
|
| Purchases of Common Shares | 130.8 |
| | 14.8 |
| | 120.0 |
| | — |
| | 17.5 |
| 327.7 |
| | 255.2 |
| | 137.4 |
| | 18.0 |
| | 121.1 |
|
NON-GAAP CASH FLOWS(2): | | | | | | | | | | |
| Free cash flow | | 274.3 |
| | 293.6 |
| | 185.7 |
| | 188.4 |
| | 154.4 |
|
| Free cash flow productivity | | 430.6 | % | | 134.2 | % | | 59.0 | % | | 118.7 | % | | 92.9 | % |
| PER SHARE DATA: | | | | | | | | | | | | | | | | | | |
| GAAP earnings per common share from continuing operations: | | | | | | | | | | | | | | | | | | |
| Basic | $ | 4.15 |
| | $ | 2.27 |
| | $ | 2.37 |
| | $ | 2.27 |
| | $ | 1.53 |
| $ | 2.27 |
| | $ | 3.33 |
| | $ | 4.04 |
| | $ | 2.12 |
| | $ | 2.14 |
|
| Diluted | 4.09 |
| | 2.23 |
| | 2.32 |
| | 2.24 |
| | 1.50 |
| 2.23 |
| | 3.29 |
| | 3.98 |
| | 2.09 |
| | 2.11 |
|
| Non-GAAP adjusted earnings per common share from continuing operations: | | | | | | | | | | | | | | | | | | |
Adjusted diluted(2) | 3.90 |
| | 3.17 |
| | 2.96 |
| | 2.45 |
| | 1.69 |
| 3.71 |
| | 3.94 |
| | 3.72 |
| | 2.92 |
| | 2.72 |
|
Pro Forma Adjusted Earnings(2) | 3.75 |
| | 3.53 |
| | 3.29 |
| | 2.76 |
| | 1.99 |
| |
SLS Divestiture adjusted income(2) | | 3.71 |
| | 3.94 |
| | 3.58 |
| | 3.27 |
| | 3.04 |
|
Dividends per common share(5) | 1.910 |
| | 1.820 |
| | 3.763 |
| | 1.413 |
| | 1.225 |
| 2.140 |
| | 2.030 |
| | 1.910 |
| | 1.820 |
| | 3.763 |
|
| Stock price at year-end | 83.27 |
| | 60.82 |
| | 55.00 |
| | 55.03 |
| | 43.47 |
| 78.73 |
| | 97.34 |
| | 83.27 |
| | 60.82 |
| | 55.00 |
|
| Stock price range—High | 83.73 |
| | 68.99 |
| | 60.30 |
| | 55.99 |
| | 55.95 |
| 110.12 |
| | 99.91 |
| | 83.73 |
| | 68.99 |
| | 60.30 |
|
| Stock price range—Low | 60.25 |
| | 54.71 |
| | 50.51 |
| | 39.64 |
| | 35.49 |
| 72.67 |
| | 81.48 |
| | 60.25 |
| | 54.71 |
| | 50.51 |
|
| OTHER: | | | | | | | | | | | | | | | | | | |
Adjusted EBITDA(6) | $ | 517.4 |
| | $ | 471.8 |
| | $ | 412.4 |
| | $ | 390.5 |
| | $ | 302.9 |
| $ | 482.0 |
| | $ | 560.5 |
| | $ | 517.4 |
| | $ | 471.8 |
| | $ | 412.4 |
|
Leverage ratio(6) | 3.10 |
| | 2.63 |
| | 2.18 |
| | 2.05 |
| | 2.93 |
| 4.23 |
| | 3.04 |
| | 3.10 |
| | 2.63 |
| | 2.18 |
|
Interest coverage ratio(6) | 7.88 |
| | 9.34 |
| | 9.41 |
| | 6.59 |
| | 4.90 |
| 5.55 |
| | 7.54 |
| | 7.88 |
| | 9.34 |
| | 9.41 |
|
| Weighted average Common Shares outstanding | 61.1 |
| | 61.1 |
| | 61.6 |
| | 61.7 |
| | 61.0 |
| 56.2 |
| | 59.4 |
| | 61.1 |
| | 61.1 |
| | 61.6 |
|
Common shares and dilutive potential common shares used in diluted EPS calculation | 62.0 |
| | 62.2 |
| | 62.7 |
| | 62.6 |
| | 62.1 |
| 57.1 |
| | 60.2 |
| | 62.0 |
| | 62.2 |
| | 62.7 |
|
| |
| (1) | InThe Selected Financial Data has been retrospectively updated to recast activity for the fourth quarter of fiscal 2012, the Company completed the wind down of its professional seed business (“Pro Seed”). As a result, effective in our fourth quarter of fiscal 2012, we classified Pro Seed as a discontinued operation in accordance with GAAP.following: |
Discontinued Operations
In the second quarter of fiscal 2014, we completed the sale of our wild bird food business. As a result, effective in our second quarter of fiscal 2014, we classified the wild bird food business as a discontinued operation in accordance with GAAP.
On April 13, 2016, the Companywe 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 itsour second quarter of fiscal 2016, we classified the SLS Business as a discontinued operation in accordance with GAAP.
The Selected Financial Data has been retrospectively updated to recast Pro Seed,On August 31, 2017, we completed the wild bird food business andsale of the SLSInternational Business. As a result, effective in our fourth quarter of fiscal 2017, we classified the International Business as a discontinued operationsoperation in accordance with GAAP.
Recent Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (“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; however debt issuance costs relating to revolving credit facilities will remain in other assets. We adopted this guidance on a retrospective basis effective October 1, 2016. As a result, debt issuance costs have been presented as a component of the carrying amount of long-term debt in the Consolidated Balance Sheets. These amounts were previously reported within other assets.
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. We adopted this guidance on a retrospective basis during the fourth quarter of fiscal 2017. As a result, deferred tax assets have been presented net within other liabilities in the Consolidated Balance Sheets. These amounts were previously reported within prepaid and other current assets.
In March 2016, the FASB issued an accounting standard update that simplifies several aspects of the accounting for each period presented.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 amended accounting guidance requires cash paid to a tax authority when shares are withheld to satisfy statutory income tax withholding obligations to be classified as a financing activity in the statement of cash flows. These amounts were previously classified as an operating activity in the statement of cash flows.
| |
| (2) | The Five-Year Summary includes non-GAAP financial measures, as defined in Item 10(e)Reconciliation of SEC Regulation S-K, which are included as additional supplemental information, of adjusted net income from operations, adjusted net income from continuing operations, adjusted net income attributable to controlling interest from continuing operations and adjusted diluted earnings per Common 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, 2016 consisted of charges or credits relating to 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 income from operations, reported income from continuing operations and reported diluted earnings per share from continuing operations.Non-GAAP Measures |
Use of Non-GAAP Measures
To supplement the financial measures prepared in accordance with U.S. generally accepted accounting principles (“GAAP”), we use non-GAAP financial measures. The Five-Year Summary also includesreconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below. These non-GAAP financial measures should not be considered in isolation from, or as defineda substitute for or superior to, financial measures reported in Item 10(e)accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of SEC Regulation S-K,the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than us, limiting the usefulness of those measures for comparative purposes.
In addition to GAAP measures, we use these non-GAAP financial measures to evaluate our performance, engage in financial and operational planning and determine incentive compensation 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 these non-GAAP financial measures are useful to investors in their assessment of operating performance and the valuation of the Company. In addition, these non-GAAP financial measures address questions routinely received from analysts and investors and, in order to ensure that all investors have access to the same data, we have determined that it is appropriate to make this data available to all investors. Non-GAAP financial measures exclude the impact of
certain items (as further described below) and provide supplemental information regarding operating performance. By disclosing these non-GAAP financial measures, we intend to provide investors with a supplemental comparison of operating results and trends for the periods presented. We believe these measures are also useful to investors as such measures allow investors to evaluate performance using the same metrics that we use to evaluate past performance and prospects for future performance. We view free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends and discretionary investment. We view free cash flow productivity as a useful measure to help investors understand the Company’s ability to generate cash.
Exclusions from Non-GAAP Financial Measures
Non-GAAP financial measures reflect adjustments based on the following items:
Impairments, which are included as additionalexcluded because they do not occur in or reflect the ordinary course of our ongoing business operations and their exclusion results in a metric that provides supplemental information about the sustainability of Pro Forma Adjusted Earningsoperating performance.
Restructuring and Pro Forma Adjusted Earnings per Common Share. These measures are calculated as net income attributable to controlling interest, excludingemployee severance costs, which include charges or credits relating to impairments, restructurings, product registration and recall matters and other unusual items such as costs or gains related tofor discrete projects or transactions that fundamentally change our operations and are excluded because they are not part of the ongoing operations of our underlying business, which includes normal levels of reinvestment in the business.
Costs related to refinancing, which are excluded because they do not typically occur in the normal course of business and may obscure analysis of trends and financial performance. Additionally, the amount and frequency of these types of charges is not consistent and is significantly impacted by the timing and size of debt financing transactions.
Charges or credits incurred by the TruGreen Joint Venture that are apart from and not indicative of the results of its ongoing operations, including transaction related costs, refinancing costs, restructurings and other discrete projects or transactions including a non-cash purchase accounting fair value write-down adjustment related to deferred revenue and advertising (“TruGreen Joint Venture non-GAAP adjustments”). We hold a noncontrolling equity interest of approximately 30% in the TruGreen Joint Venture. We do not control, nor do we have any legal claim to, the revenues and expenses of the TruGreen Joint Venture or its other unconsolidated affiliates. The use of non-GAAP measures that are subject to TruGreen Joint Venture non-GAAP adjustments is not intended to imply that we have control over the operations and resulting revenue and expenses of the business. TheseTruGreen Joint Venture or its other unconsolidated affiliates. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all revenue and expenses of the unconsolidated affiliates.
Discontinued operations or other unusual items, which include costs or gains related to discrete projects or transactions and are excluded because they are not comparable from one period to the next and are not part of the ongoing operations of our underlying business.
The tax effect for each of the items listed above is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s) in which the item is recorded.
Definitions of Non-GAAP Financial Measures
The reconciliations of non-GAAP disclosure items include the following financial measures that are not calculated in accordance with GAAP and are utilized by us in evaluating the performance of the business, engaging in financial and operational planning, the determination of incentive compensation, and by investors and analysts in evaluating performance of the business:
Adjusted income (loss) from operations: Income (loss) from operations excluding impairment, restructuring and other charges / recoveries.
Adjusted income (loss) from continuing operations: Income (loss) from continuing operations excluding impairment, restructuring and other charges / recoveries, costs related to refinancing and TruGreen Joint Venture non-GAAP adjustments, each net of tax.
Adjusted net income (loss) attributable to controlling interest from continuing operations: Net income (loss) attributable to controlling interest excluding impairment, restructuring and other charges / recoveries, costs related to refinancing, TruGreen Joint Venture non-GAAP adjustments and discontinued operations, each net of tax.
Adjusted diluted income (loss) per common share from continuing operations: Diluted net income (loss) per common share from continuing operations excluding impairment, restructuring and other charges / recoveries, costs related to refinancing and TruGreen Joint Venture non-GAAP adjustments, each net of tax.
SLS Divestiture adjusted income (loss): Net income (loss) from continuing operations excluding impairment, restructuring and other charges / recoveries, costs related to refinancing and TruGreen Joint Venture non-GAAP
adjustments, each net of tax. This measure also includeincludes income (loss) from discontinued operations related to the SLS Business; however, excludeexcludes the gain on the contribution of the SLS Business to the TruGreen Joint Venture.Venture, each net of tax.
SLS Divestiture adjusted income (loss) per common share: Diluted net income (loss) per common share excluding impairment, restructuring and other charges / recoveries, costs related to refinancing and TruGreen Joint Venture non-GAAP adjustments, each net of tax. This measure also includes income (loss) from discontinued operations related to the SLS Business; however, excludes the gain on the contribution of the SLS Business to the TruGreen Joint Venture, each net of tax.
Free cash flow: Net cash provided by (used in) operating activities reduced by investments in property, plant and equipment.
Free cash flow productivity: Ratio of free cash flow to net income (loss).
Adjusted EBITDA: Net income (loss) before interest, taxes, depreciation and amortization as well as certain other items such as the impact of the cumulative effect of changes in accounting, costs associated with debt refinancing and other non-recurring or non-cash items affecting net income (loss). The comparable GAAP measures are reported income from operations, reported income from continuing operationspresentation of adjusted EBITDA is intended to be consistent with the calculation of that measure as required by our borrowing arrangements, and reported diluted earnings per share from continuing operations.used to calculate a leverage ratio (maximum of 5.25 at September 30, 2018) and an interest coverage ratio (minimum of 3.00 for the twelve months ended September 30, 2018).
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, |
| | 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 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In millions, except per share data) |
| Income from operations (GAAP) | $ | 198.9 |
| | $ | 433.4 |
| | $ | 447.6 |
| | $ | 253.8 |
| | $ | 263.3 |
|
| Impairment, restructuring and other charges (recoveries) | 152.8 |
| | 4.9 |
| | (45.5 | ) | | 80.2 |
| | 47.5 |
|
| Adjusted income from operations (Non-GAAP) | $ | 351.7 |
| | $ | 438.3 |
| | $ | 402.1 |
| | $ | 334.0 |
| | $ | 310.8 |
|
| Income from continuing operations (GAAP) | $ | 127.6 |
| | $ | 198.3 |
| | $ | 246.1 |
| | $ | 128.7 |
| | $ | 131.8 |
|
| Impairment, restructuring and other charges (recoveries) | 152.8 |
| | 30.1 |
| | (33.8 | ) | | 80.2 |
| | 47.5 |
|
| Costs related to refinancing | — |
| | — |
| | 8.8 |
| | — |
| | 10.7 |
|
| Other non-operating expense, net | 11.7 |
| | 13.4 |
| | — |
| | — |
| | — |
|
| Adjustment to income tax expense (benefit) from continuing operations | (80.5 | ) | | (4.4 | ) | | 9.1 |
| | (28.5 | ) | | (20.0 | ) |
| Adjusted income from continuing operations (Non-GAAP) | $ | 211.6 |
| | $ | 237.4 |
| | $ | 230.2 |
| | $ | 180.4 |
| | $ | 170.0 |
|
| Net income attributable to controlling interest (GAAP) | $ | 63.7 |
| | $ | 218.3 |
| | $ | 315.3 |
| | $ | 159.8 |
| | $ | 166.5 |
|
| Income (loss) from discontinued operations, net of tax | (63.9 | ) | | 20.5 |
| | 68.7 |
| | 30.0 |
| | 34.4 |
|
| Impairment, restructuring and other charges (recoveries) | 152.8 |
| | 30.1 |
| | (33.8 | ) | | 80.2 |
| | 47.5 |
|
| Costs related to refinancing | — |
| | — |
| | 8.8 |
| | — |
| | 10.7 |
|
| Other non-operating expense, net | 11.7 |
| | 13.4 |
| | — |
| | — |
| | — |
|
| Adjustment to income tax expense (benefit) from continuing operations | (80.5 | ) | | (4.4 | ) | | 9.1 |
| | (28.5 | ) | | (20.0 | ) |
| Adjusted net income attributable to controlling interest from continuing operations (Non-GAAP) | $ | 211.6 |
| | $ | 236.9 |
| | $ | 230.7 |
| | $ | 181.5 |
| | $ | 170.3 |
|
| Income from continuing operations (GAAP) | $ | 127.6 |
| | $ | 198.3 |
| | $ | 246.1 |
| | $ | 128.7 |
| | $ | 131.8 |
|
| Net (income) loss attributable to noncontrolling interest | — |
| | (0.5 | ) | | 0.5 |
| | 1.1 |
| | 0.3 |
|
| Net income attributable to controlling interest from continuing operations | 127.6 |
| | 197.8 |
| | 246.6 |
| | 129.8 |
| | 132.1 |
|
| Impairment, restructuring and other charges (recoveries) | 152.8 |
| | 30.1 |
| | (33.8 | ) | | 80.2 |
| | 47.5 |
|
| Costs related to refinancing | — |
| | — |
| | 8.8 |
| | — |
| | 10.7 |
|
| Other non-operating expense, net | 11.7 |
| | 13.4 |
| | — |
| | — |
| | — |
|
| Adjustment to income tax expense (benefit) from continuing operations | (80.5 | ) | | (4.4 | ) | | 9.1 |
| | (28.5 | ) | | (20.0 | ) |
| Adjusted income attributable to controlling interest from continuing operations (Non-GAAP) | $ | 211.6 |
| | $ | 236.9 |
| | $ | 230.7 |
| | $ | 181.5 |
| | $ | 170.3 |
|
| Income (loss) from discontinued operations from SLS Business | — |
| | (1.8 | ) | | 102.9 |
| | 32.5 |
| | 30.9 |
|
| Gain on contribution of SLS Business | — |
| | — |
| | (131.2 | ) | | — |
| | — |
|
| Adjustment to gain on contribution on SLS Business | — |
| | 1.0 |
| | — |
| | — |
| | — |
|
| Impairment, restructuring and other from SLS Business in discontinued operations | — |
| | 0.8 |
| | 13.6 |
| | 1.5 |
| | 1.0 |
|
| Adjustment to income tax expense (benefit) from SLS Business in discontinued operations | — |
| | — |
| | 5.7 |
| | (12.1 | ) | | (11.3 | ) |
| Adjusted income (loss) from SLS Business in discontinued operations, net of tax | — |
| | — |
| | (9.0 | ) | | 21.9 |
| | 20.6 |
|
| SLS Divestiture adjusted income (Non-GAAP) | $ | 211.6 |
| | $ | 236.9 |
| | $ | 221.7 |
| | $ | 203.4 |
| | $ | 190.9 |
|
| Diluted income per share from continuing operations (GAAP) | $ | 2.23 |
| | $ | 3.29 |
| | $ | 3.98 |
| | $ | 2.09 |
| | $ | 2.11 |
|
| Impairment, restructuring and other charges (recoveries) | 2.68 |
| | 0.50 |
| | (0.55 | ) | | 1.29 |
| | 0.76 |
|
| Costs related to refinancing | — |
| | — |
| | 0.14 |
| | — |
| | 0.17 |
|
| Other non-operating expense, net | 0.20 |
| | 0.22 |
| | — |
| | — |
| | — |
|
| Adjustment to income tax expense (benefit) from continuing operations | (1.41 | ) | | (0.07 | ) | | 0.15 |
| | (0.46 | ) | | (0.32 | ) |
| Adjusted diluted income per common share from continuing operations (Non-GAAP) | $ | 3.71 |
| | $ | 3.94 |
| | $ | 3.72 |
| | $ | 2.92 |
| | $ | 2.72 |
|
| Income (loss) from discontinued operations from SLS Business | $ | — |
| | $ | (0.03 | ) | | $ | 1.66 |
| | $ | 0.52 |
| | $ | 0.49 |
|
| Gain on contribution of SLS Business | — |
| | — |
| | (2.12 | ) | | — |
| | — |
|
| Adjustment to gain on contribution of SLS Business | — |
| | 0.02 |
| | — |
| | — |
| | — |
|
| Impairment, restructuring and other from SLS Business in discontinued operations | — |
| | 0.01 |
| | 0.22 |
| | 0.02 |
| | 0.02 |
|
| Adjustment to income tax expense (benefit) from SLS Business in discontinued operations | — |
| | — |
| | 0.09 |
| | (0.19 | ) | | (0.18 | ) |
| Adjusted diluted income (loss) from SLS Business in discontinued operations, net of tax | — |
| | — |
| | (0.15 | ) | | 0.35 |
| | 0.33 |
|
| SLS Divestiture adjusted income per common share (Non-GAAP) | $ | 3.71 |
| | $ | 3.94 |
| | $ | 3.58 |
| | $ | 3.27 |
| | $ | 3.04 |
|
The sum of the components may not equal the total due to rounding.
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In millions, except per share data) |
| Net cash provided by operating activities (GAAP) | $ | 342.5 |
| | $ | 363.2 |
| | $ | 244.0 |
| | $ | 250.1 |
| | $ | 242.0 |
|
| Investments in property, plant and equipment | (68.2 | ) | | (69.6 | ) | | (58.3 | ) | | (61.7 | ) | | (87.6 | ) |
| Free cash flow (Non-GAAP) | $ | 274.3 |
| | $ | 293.6 |
| | $ | 185.7 |
| | $ | 188.4 |
| | $ | 154.4 |
|
| Free cash flow (Non-GAAP) | $ | 274.3 |
| | $ | 293.6 |
| | $ | 185.7 |
| | $ | 188.4 |
| | $ | 154.4 |
|
| Net income (GAAP) | 63.7 |
| | 218.8 |
| | 314.8 |
| | 158.7 |
| | 166.2 |
|
| Free cash flow productivity (Non-GAAP) | 430.6 | % | | 134.2 | % | | 59.0 | % | | 118.7 | % | | 92.9 | % |
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 total equity—controlling interest. |
| |
| (5) | Scotts Miracle-Gro pays a quarterly dividend to the holders of its Common Shares. On August 8, 2011,6, 2013, Scotts Miracle-Gro announced that its Board of Directors had increased the quarterly cash dividend to $0.30$0.4375 per Common Share, which was first paid in the fourth quarter of fiscal 2011.2013. On August 9, 2012,11, 2014, Scotts Miracle-Gro announced that its Board of Directors had (i) further increased the quarterly cash dividend to $0.325$0.45 per Common Share, which was first paid in the fourth quarter of fiscal 2012.2014 and (ii) declared a special one-time cash dividend of $2.00 per Common Share, which was paid on September 17, 2014. On August 6, 2013,3, 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 first paid in the fourth quarter of fiscal 2016. On August 1, 2017, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.53 per Common Share, which was first paid in September 2017. On August 6, 2018, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.55 per Common Share, which was first paid in September 2018. |
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 agreements, and used to calculate a leverage ratio (maximum of 4.505.25 at September 30, 20162018) and an interest coverage ratio (minimum of 3.00 for the twelve months ended September 30, 20162018). Leverage ratio is calculated as average total indebtedness as described in our credit facility, divided by Adjusted EBITDA. Interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in our credit facility,the Fifth A&R Credit Agreement, and excludes costs related to refinancings. Our leverage ratio was 3.104.23 at September 30, 20162018 and our interest coverage ratio was 7.885.55 for the twelve months ended September 30, 20162018. Please refer to “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital 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 (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.income (loss). For the fourth quarter of fiscal 2015, the Company changed its calculation of Adjusted 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 net 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.
net income.
A numeric reconciliation of net income to Adjusted EBITDA to income from continuing operations is as follows:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 | 2018 | | 2017 | | 2016 | | 2015 | | 2014 |
| | (In millions, except per share data) | (In millions) |
| Income from continuing operations | $ | 253.3 |
| | $ | 137.8 |
| | $ | 145.5 |
| | $ | 140.2 |
| | $ | 93.0 |
| |
| Income tax expense from continuing operations | 139.4 |
| | 73.8 |
| | 80.2 |
| | 80.8 |
| | 57.9 |
| |
| 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 | ) | | — |
| | — |
| | — |
| | — |
| |
| Net income (GAAP) | | $ | 63.7 |
| | $ | 218.8 |
| | $ | 314.8 |
| | $ | 158.7 |
| | $ | 166.2 |
|
| Income tax expense (benefit) from continuing operations | | (11.9 | ) | | 116.6 |
| | 137.6 |
| | 76.3 |
| | 74.3 |
|
| Income tax expense (benefit) from discontinued operations | | (25.5 | ) | | 11.9 |
| | 43.2 |
| | 9.1 |
| | 17.8 |
|
| (Gain) loss on sale / contribution of business | | 0.7 |
| | (31.7 | ) | | (131.2 | ) | | — |
| | — |
|
| Costs related to refinancings | 8.8 |
| | — |
| | 10.7 |
| | — |
| | — |
| — |
| | — |
| | 8.8 |
| | — |
| | 10.7 |
|
| Interest expense | 65.6 |
| | 50.5 |
| | 47.3 |
| | 59.2 |
| | 61.8 |
| 86.4 |
| | 76.6 |
| | 65.6 |
| | 50.5 |
| | 47.3 |
|
| Depreciation | 53.8 |
| | 51.4 |
| | 50.6 |
| | 54.9 |
| | 51.5 |
| 53.4 |
| | 55.1 |
| | 53.8 |
| | 51.4 |
| | 50.6 |
|
| Amortization | 19.7 |
| | 17.6 |
| | 13.8 |
| | 11.2 |
| | 10.9 |
| 30.0 |
| | 25.0 |
| | 19.7 |
| | 17.6 |
| | 13.8 |
|
Gain on investment of unconsolidated affiliate(7) | — |
| | — |
| | (3.3 | ) | | — |
| | — |
| |
Gain on investment in unconsolidated affiliate(7) | | — |
| | — |
| | — |
| | — |
| | (3.3 | ) |
| Impairment, restructuring and other from continuing operations | (27.7 | ) | | 90.0 |
| | 32.9 |
| | 11.2 |
| | 4.7 |
| 152.8 |
| | 30.1 |
| | (33.8 | ) | | 80.2 |
| | 31.2 |
|
| Impairment, restructuring and other from discontinued operations | 13.6 |
| | 1.5 |
| | 0.8 |
| | — |
| | — |
| 86.8 |
| | 15.9 |
| | 19.7 |
| | 11.3 |
| | 2.5 |
|
| Product registration and recall matters, non-cash portion | — |
| | — |
| | — |
| | — |
| | 0.2 |
| |
| Other non-operating expense, net | | 11.7 |
| | 13.4 |
| | — |
| | — |
| | — |
|
| Interest income | | (10.0 | ) | | — |
| | — |
| | — |
| | — |
|
| Mark-to-market adjustments on derivatives | — |
| | — |
| | 1.3 |
| | 0.3 |
| | (1.0 | ) | — |
| | — |
| | — |
| | — |
| | 1.3 |
|
| Expense on certain leases | 3.6 |
| | 3.5 |
| | — |
| | — |
| | — |
| 3.5 |
| | 3.6 |
| | 3.6 |
| | 3.5 |
| | — |
|
| Share-based compensation expense | 15.6 |
| | 13.2 |
| | — |
| | — |
| | — |
| 40.4 |
| | 25.2 |
| | 15.6 |
| | 13.2 |
| | — |
|
| Adjusted EBITDA | $ | 517.4 |
| | $ | 471.8 |
| | $ | 412.4 |
| | $ | 390.5 |
| | $ | 302.9 |
| |
| Adjusted EBITDA (Non-GAAP) | | $ | 482.0 |
| | $ | 560.5 |
| | $ | 517.4 |
| | $ | 471.8 |
| | $ | 412.4 |
|
| |
| (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 discussionManagement’s Discussion and Analysis (“MD&A”) is to provide an understanding of our financial condition and results of operations by focusing on changes in certain key measures from year-to-year. Management’s Discussion and Analysis (“This MD&A”)&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 gardenusers’ growing environments. We are a leading manufacturer and marketer of consumer branded products forconsumer lawn and garden care in North America and Europe.products. We are Monsanto’sthe exclusive agent of Monsanto for the marketing and distribution of Monsanto’s consumer Roundup® non-selective herbicideweedkiller products within the United States and certain other contractually specified countries. We have a presence in similar consumer branded product categories in Australia, the Far East and Latin America. In addition, as a result ofThrough our recent acquisitions of General Hydroponics, Vermicrop, Gavita and our control of AeroGrow,Hawthorne segment, we are a leading producermanufacturer, marketer and distributor of liquid plant food products,nutrients, growing media, indoor lighting, advanced indoor garden, lighting and ventilation 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
In the first quarter of fiscal 2016, we announced a series of initiatives called Project Focus 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 August 31, 2017, we completed the divestiture of the International Business. As a result, effective in our fourth quarter of fiscal 2017, we classified our results of operations for all periods presented to reflect the International Business as a discontinued operation and classified the assets and liabilities of the International Business as held for sale. 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”)SLS Business to a newly formed subsidiary ofthe TruGreen Holdings (the “TruGreen Joint Venture”)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 segments in the United States and Canada through our interest in the TruGreen Joint Venture. For additional information, see “NOTE 2. DISCONTINUED OPERATIONS” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Beginning in fiscal 2015, our Hawthorne segment has made a series of key acquisitions, including General Hydroponics, Gavita, Botanicare, Vermicrop, Agrolux, Can-Filters and AeroGrow. On June 4, 2018, we acquired substantially all of the assets of Sunlight Supply. Sunlight Supply is the largest distributor of hydroponic products in the United States, and is engaged in the business of developing, manufacturing, marketing and distributing horticultural, organics, lighting and hydroponics products, including lighting fixtures, nutrients, seeds and growing media, systems, trays, fans, filters, humidifiers and dehumidifiers, timers, instruments, water pumps, irrigation supplies and hand tools. The estimated purchase price of Sunlight Supply was $459.1 million, a portion of which was paid by the issuance of 0.3 million Common Shares with a fair value of this interest was$23.4 million. The purchase price included contingent consideration with an estimated tofair value of $3.1 million and a maximum payout of $20.0 million, which will be $294.0 million, resulting in a pre-tax gainpaid by the Company contingent on the achievement of $131.2 million. 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 liabilitiescertain performance metrics of the SLS Business as held for sale. PriorCompany through the one year anniversary of the closing date. In connection with our acquisition of Sunlight Supply, we announced the launch of an initiative called Project Catalyst. Project Catalyst is a company-wide restructuring effort to being reported as a discontinued operation,reduce operating costs throughout our U.S. Consumer, Hawthorne and Other segments and drive synergies from recent acquisitions within Hawthorne.
Our operations are divided into three reportable segments: U.S. Consumer, Hawthorne and Other. U.S. Consumer consists of our consumer lawn and garden business located in the SLS Business was referredgeographic United States. Hawthorne consists of our indoor, urban and hydroponic gardening business. Other consists of our consumer lawn and garden business in geographies other than the U.S. and our product sales to as our former Scotts LawnService® business segment. At closing, the TruGreen Joint Venture obtained debt financingcommercial nurseries, greenhouses and pursuantother professional customers. Corporate consists of general and administrative expenses and certain other income/expense items not allocated to the termsbusiness segments. This division of reportable segments is consistent with how the Contributionsegments report to and Distribution Agreement, we received a pro rata cash distribution of $196.2 million, partially offsetare managed by an investment of $18.0 million in second lien term loan financing provided by us to the TruGreen Joint Venture and closing working capital adjustments.our chief operating decision maker.
As a leading consumer branded lawn and garden company, our product development and marketing efforts are largely focused on providing innovative and differentiated products and continually increasing brand and product awareness to inspire consumers and to create retail demand. We have implemented this model for a number of years by focusing on research and development and investing approximately 5%4-5% of our annual net sales in advertising to support and promote our consumer lawn and garden products and brands. We continually explore new and innovative ways to communicate with consumers. We believe that we receive a significant benefit from these expenditures and anticipate a similar commitment to research and development, advertising and marketing investments in the future, with the continuing objective of driving category growth and profitably increasing market share.
Our net sales in any one year are susceptible to weather conditions in the markets in which our products are 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, or delay the timing of ourthe 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 in which unfavorable weather is geographically widespread and extends across a significant portion of the lawn and garden season. We also believe that weather conditions in any one year, positive or negative, do not materially impact longer-term category growth trends.
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 |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| First Quarter | 6.9 | % | | 6.2 | % | | 5.6 | % | 8.3 | % | | 7.8 | % | | 6.1 | % |
| Second Quarter | 43.8 | % | | 39.3 | % | | 40.8 | % | 38.0 | % | | 41.1 | % | | 44.6 | % |
| Third Quarter | 35.1 | % | | 40.7 | % | | 39.7 | % | 37.3 | % | | 36.8 | % | | 35.4 | % |
| Fourth Quarter | 14.2 | % | | 13.8 | % | | 13.9 | % | 16.3 | % | | 14.3 | % | | 13.9 | % |
The Company followsWe follow 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 Companyus 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 measuresmetrics are evaluated with and without impairment, restructuring and other charges which management believes arethat do not indicative ofoccur in or reflect the earnings capabilitiesordinary course of our businesses.ongoing business operations. Metrics that exclude impairment, restructuring and other charges are used by management to evaluate our performance, engage in financial and operational planning and determine incentive compensation because we believe that these measures provide additional perspective on the performance of our underlying, ongoing business. Refer to “ITEM 6. SELECTED FINANCIAL DATA” for further discussion of non-GAAP measures. 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 Common Shares over a four-year period ending 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 our Common Shares, resulting in authority to repurchase a total of up to $700 million of 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. Common Shares held in treasury totaling 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 the repurchase of up to $500.0 million of Common Shares over a five-year period (starting(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 September 30, 2019. The amended authorization allows for repurchases of Common Shares of up to an aggregate of $1.0 billion through September 30, 2019. During fiscal 2018, Scotts Miracle-Gro repurchased 3.5 million Common Shares for $323.1 million. From the inception of this share repurchase program in the fourth quarter of fiscal 2014 through September 30, 2016,2018, Scotts Miracle-Gro repurchased approximately 2.18.3 million Common Shares for $145.7$714.6 million. Common Shares held in treasury totaling 0.4 million, 0.5 million and 0.6 million were reissued in support of share-based compensation awards and employee purchases under the employee stock purchase plan during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
On August 3, 2016, we announced that1, 2017, the Scotts Miracle-Gro Board of Directors approved an increase in our quarterly cash dividend from $0.47$0.50 to $0.50$0.53 per Common Share.Share, which was paid in September of fiscal 2017 and December, March and June of fiscal 2018.
On August 6, 2018, the Scotts Miracle-Gro Board of Directors approved an increase in our quarterly cash dividend from $0.53 to $0.55 per Common Share, which was paid in September of fiscal 2018.
Results of Operations
Effective in our fourth quarter of fiscal 2017, we classified our results of operations for all periods presented to reflect the International Business as a discontinued operation. 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. 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. As a result, and unless otherwise specifically stated, all discussions regarding results for the fiscal years ended September 30, 20162018, 20152017 and 20142016 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, |
| | 2016 |
| 2015 |
| 2014 | 2018 |
| 2017 |
| 2016 |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | 64.6 |
| | 66.5 |
| | 65.5 |
| 66.8 |
| | 63.2 |
| | 63.8 |
|
| Cost of sales—impairment, restructuring and other | 0.3 |
| | 0.2 |
| | — |
| 0.8 |
| | — |
| | 0.2 |
|
| Gross profit | 35.1 |
| | 33.3 |
| | 34.5 |
| 32.5 |
| | 36.8 |
| | 35.9 |
|
| Operating expenses: | | | | | | | | | | |
| Selling, general and administrative | 21.1 |
| | 21.0 |
| | 22.0 |
| 20.3 |
| | 20.9 |
| | 20.7 |
|
| Impairment, restructuring and other | (1.7 | ) | | 2.8 |
| | 1.9 |
| 5.0 |
| | 0.2 |
| | (2.1 | ) |
| Other income, net | (0.5 | ) | | (0.1 | ) | | (0.4 | ) | (0.3 | ) | | (0.6 | ) | | (0.6 | ) |
| Income from operations | 16.2 |
| | 9.6 |
| | 11.0 |
| 7.5 |
| | 16.4 |
| | 17.9 |
|
| Equity in loss of unconsolidated affiliates | (0.3 | ) | | — |
| | — |
| |
| Equity in (income) loss of unconsolidated affiliates | | (0.2 | ) | | 1.1 |
| | (0.3 | ) |
| Costs related to refinancing | 0.3 |
| | — |
| | 0.4 |
| — |
| | — |
| | 0.4 |
|
| Interest expense | 2.3 |
| | 1.9 |
| | 1.8 |
| 3.2 |
| | 2.9 |
| | 2.5 |
|
| Other non-operating expense, net | | 0.1 |
| | 0.5 |
| | — |
|
| Income from continuing operations before income taxes | 13.9 |
| | 7.7 |
| | 8.8 |
| 4.3 |
| | 11.9 |
| | 15.3 |
|
| Income tax expense from continuing operations | 4.9 |
| | 2.7 |
| | 3.2 |
| |
| Income tax expense (benefit) from continuing operations | | (0.4 | ) | | 4.4 |
| | 5.5 |
|
| Income from continuing operations | 9.0 |
| | 5.0 |
| | 5.6 |
| 4.8 |
| | 7.5 |
| | 9.8 |
|
| Income from discontinued operations, net of tax | 2.2 |
| | 0.8 |
| | 0.8 |
| |
| Income (loss) from discontinued operations, net of tax | | (2.4 | ) | | 0.8 |
| | 2.7 |
|
| Net income | 11.2 | % | | 5.8 | % | | 6.4 | % | 2.4 | % | | 8.3 | % | | 12.6 | % |
The sum of the components may not equal due to rounding.
Net Sales
Net sales for fiscal 20162018 increased 4.0%0.8% to $2.84$2.66 billion from $2.73$2.64 billion in fiscal 2015.2017. Net sales for fiscal 20152017 increased 5.8%5.4% to $2.64 billion from $2.582.51 billion in fiscal 2014. The change2016. These changes in net sales waswere attributable to the following:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | 2018 | | 2017 |
| Acquisitions | 2.8 | % | | 4.7 | % | 5.2 | % | | 5.8 | % |
| Foreign exchange rates | | 0.3 |
| | (0.1 | ) |
| Pricing | | (1.1 | ) | | 1.1 |
|
| Volume | 1.6 |
| | 4.4 |
| (3.6 | ) | | (1.4 | ) |
| Pricing | 0.4 |
| | (0.4 | ) | |
| Foreign exchange rates | (0.8 | ) | | (2.9 | ) | |
| Change in net sales | 4.0 | % | | 5.8 | % | 0.8 | % | | 5.4 | % |
The increase in net sales for fiscal 20162018 was primarily driven by:
the addition of net sales from acquisitions withinof $136.3 million in our OtherHawthorne segment, primarily from General Hydroponics, Vermicrop, GavitaSunlight Supply, Agrolux and Can-Filters; and
the favorable impact of foreign exchange rates as a result of the weakening of the U.S. dollar relative to the euro and the Canadian growing media operation;dollar;
partially offset by decreased sales volume driven by decreased sales of fertilizer, controls and plant food products in our U.S. Consumer segment and hydroponic gardening products in our Hawthorne segment excluding the impact of acquisitions, partially offset by increased sales volumeof soils and grass seed products in our U.S. Consumer segment and increased sales in our Other segment from our business in Canada;
decreased pricing in our U.S. Consumer segment driven by increasedhigher customer rebates and sales of hydroponic gardening products;mix; and
| |
| • | decreased net sales associated with the impactRestated Marketing Agreement for consumer Roundup®. |
The increase in net sales for fiscal 2017 was primarily driven by:
the addition of net sales from acquisitions of $136.2 million in our Hawthorne segment, primarily from Gavita, Botanicare and Agrolux, as well as the acquisition of a Canadian growing media operation in our Other segment;
increased pricing in our U.S. Consumer segment primarily driven by lower volume rebates as a result of sales volume decline; and
| |
| • | increased sales of grass seed and Roundup® For Lawns products in our amendedU.S. Consumer segment, and increased sales of hydroponic gardening products in our Hawthorne segment; |
partially offset by decreased sales of mulch products in our U.S. Consumer segment;
| |
| • | decreased net sales associated with the Restated 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 of $18.1 million in our Europe Consumer segment; and
the unfavorable impact of foreign exchange rates as a result of the strengthening of the U.S. dollar relative to other currencies including the Canadian dollar, euro and British pound.
The increase in net sales for fiscal 2015 was primarily driven by:
the addition of net sales from acquisitions within our Other segment including General Hydroponics, Vermicrop, AeroGrow, and Fafard; and
| |
• | increased sales volume in our U.S. Consumer segment, driven by increased sales of controls, including increased sales of Tomcat® products, as well as growing media and cleaners products;
|
which were partially offset by the unfavorable impact of foreign exchange rates as a result of the strengtheningweakening of the U.S. dollar relative to other 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.euro.
Cost of Sales
The following table shows the major components of cost of sales:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Materials | $ | 1,052.1 |
| | $ | 1,055.6 |
| | $ | 980.5 |
| $ | 994.2 |
| | $ | 966.9 |
| | $ | 920.7 |
|
| Manufacturing labor and overhead | 369.5 |
| | 333.3 |
| | 296.1 |
| 401.3 |
| | 356.7 |
| | 323.3 |
|
| Distribution and warehousing | 345.9 |
| | 361.2 |
| | 348.6 |
| 328.3 |
| | 289.8 |
| | 300.2 |
|
Roundup® reimbursements | 65.5 |
| | 63.3 |
| | 63.0 |
| 54.5 |
| | 56.1 |
| | 55.8 |
|
| | 1,833.0 |
| | 1,813.4 |
| | 1,688.2 |
| 1,778.3 |
| | 1,669.5 |
| | 1,600.0 |
|
| Impairment, restructuring and other | 7.7 |
| | 6.6 |
| | — |
| 20.5 |
| | — |
| | 5.9 |
|
| | $ | 1,840.7 |
| | $ | 1,820.0 |
| | $ | 1,688.2 |
| $ | 1,798.8 |
| | $ | 1,669.5 |
| | $ | 1,605.9 |
|
Factors contributing to the change in cost of sales are outlined in the following table:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (In millions) | (In millions) |
| Volume and product mix | $ | 52.0 |
| | $ | 174.4 |
| |
Roundup® reimbursements | 2.2 |
| | 0.3 |
| |
| Volume, product mix and other | | $ | 104.2 |
| | $ | 90.6 |
|
| Foreign exchange rates | (15.7 | ) | | (53.1 | ) | 6.9 |
| | (0.9 | ) |
| Material costs | (18.9 | ) | | 3.6 |
| (0.7 | ) | | (20.5 | ) |
Roundup® reimbursements | | (1.6 | ) | | 0.3 |
|
| | 19.6 |
| | 125.2 |
| 108.8 |
| | 69.5 |
|
| Impairment, restructuring and other | 1.1 |
| | 6.6 |
| 20.5 |
| | (5.9 | ) |
| Change in cost of sales | $ | 20.7 |
| | $ | 131.8 |
| $ | 129.3 |
| | $ | 63.6 |
|
The increase in cost of sales for fiscal 20162018 was primarily driven by:
costs of $125.2 million included within “volume, product mix and other” related to increased sales from acquisitions in our Hawthorne segment, primarily from Sunlight Supply, Agrolux and Can-Filters, and including $12.2 million related to acquisition date inventory fair value adjustments;
higher transportation costs included within “volume, product mix and other” associated with our U.S. Consumer, Hawthorne and Other segments;
the unfavorable impact of foreign exchange rates as a result of the weakening of the U.S. dollar relative to the euro and the Canadian dollar; and
an increase in impairment, restructuring and other charges of $20.5 million related to facility closures, impairment of property, plant and equipment and employee termination benefits associated with Project Catalyst;
partially offset by decreased sales volume in our U.S. Consumer and Other segments;
costs related toHawthorne segments excluding the impact of acquisitions, partially offset by increased sales from acquisitions withinvolume in our Other segment of $54.2 million, primarily from General Hydroponics, Vermicrop, Gavitasegment; and a Canadian growing media operation;
| |
| • | an increasea decrease in net sales attributable to reimbursements under ourthe Restated 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;The increase in cost of sales for fiscal 2017 was primarily driven by: costs of $98.2 million included within “volume, product mix and other” related to sales from acquisitions in our Hawthorne segment, primarily from Gavita, Botanicare and Agrolux, as well as $7.5 million in costs related to sales from the acquisition of a Canadian growing media operation in our Other segment; |
partially offset by lower material costs in our U.S. Consumer segment driven by lower commodity costs primarily related to fertilizer inputs and resin;inputs;
lower distribution costs withinsales volume in our U.S. Consumer segment, due to savings from lower fuel prices and reduced costs from efficienciespartially offset by increased sales volume in our growing media business; andHawthorne segment excluding the impact of acquisitions;
the favorable impact of foreign exchange rates as a result of athe strengthening of the U.S. dollar relative to other currencies including the Canadian dollar, europartially offset by weakening of the U.S. dollar relative to the euro; and British pound.
The increase in cost of sales for fiscal 2015 was primarily driven by:
costs 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 within our U.S. Consumer segment for our grass seed and growing media products; and
| |
| • | restructuring and liquidation costsa decrease in other charges of $6.6$5.9 million primarily related to the liquidation and exit from the U.K. Solus business and addressing thecosts incurred during fiscal 2016 to address consumer complaints regarding our newly reformulated Bonus® S product;product sold during fiscal 2015.
|
which were partially offset by the favorable impact of foreign exchange rates as a result of a strengthening of the U.S. dollar relative to other currencies including Canadian dollar, euro, and British pound.
Gross Profit
As a percentage of net sales, our gross profit rate was 35.1%32.5%, 33.3%36.8% and 34.5%35.9% for fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively. Factors contributing to the change in gross profit rate are outlined in the following table:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | 2018 | | 2017 |
| Acquisitions | | (1.4 | )% | | (0.6 | )% |
| Volume, product mix and other | | (1.3 | ) | | — |
|
| Pricing | | (0.8 | ) | | 0.7 |
|
Roundup® commissions and reimbursements | | (0.1 | ) | | (0.3 | ) |
| Material costs | 0.7 | % | | (0.1 | )% | — |
| | 0.8 |
|
| Product mix and volume | 0.6 |
| | (0.1 | ) | |
Roundup® commissions and reimbursements | 0.5 |
| | 0.1 |
| |
| Pricing | 0.2 |
| | (0.3 | ) | |
| Acquisitions | 0.1 |
| | (0.4 | ) | |
| | 2.1 |
| | (0.8 | ) | (3.6 | ) | | 0.6 |
|
| Impairment, restructuring and other | (0.3 | ) | | (0.4 | ) | (0.7 | ) | | 0.3 |
|
| Change in gross profit rate | 1.8 | % | | (1.2 | )% | (4.3 | )% | | 0.9 | % |
The increasedecrease in the gross profit rate for fiscal 20162018 was primarily driven by:
an unfavorable net impact from acquisitions in our Hawthorne segment, primarily from Sunlight Supply, Agrolux and Can-Filters;
higher transportation costs included within “volume, product mix and other” associated with our U.S. Consumer, Hawthorne and Other segments;
unfavorable leverage of fixed costs such as warehousing driven by lower sales volumes in our U.S. Consumer and Hawthorne segments excluding the impact of acquisitions;
unfavorable product mix in our U.S. Consumer segment due to decreased sales of fertilizer and plant food products;
decreased pricing in our U.S. Consumer segment driven by higher customer rebates and sales mix;
| |
| • | a decrease in net sales associated with the Restated Marketing Agreement for consumer Roundup®; and |
an increase in impairment, restructuring and other charges related to facility closures, impairment of property, plant and equipment and employee termination benefits associated with Project Catalyst.
The increase in gross profit rate for fiscal 2017 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;inputs;
lower distribution costs withinincreased pricing in our U.S. Consumer segment due to savings fromprimarily driven by lower fuel pricesvolume rebates as a result of year-to-date sales volume decline; and reduced costs from efficiencies in our growing media business;
| |
| • | an increasea decrease in net sales attributable to our Marketing Agreement for consumer Roundup®;
|
a favorable impact of increased pricing in the U.S. Consumer segment; and
a favorable net impact from acquisitions, primarily from General Hydroponics and Vermicrop within our Other segment;
| |
• | partially offset by other charges of $7.7$5.9 million primarily related to addressing thecosts incurred during fiscal 2016 to address consumer complaints regarding our reformulated Bonus® S product sold during fiscal 2015.2015;
|
The decreasepartially offset by an unfavorable net impact from acquisitions in our Hawthorne segment, primarily from Gavita, Botanicare and Agrolux, as well as the gross profit rate for fiscal 2015 was primarily driven by:
unfavorable product mix within our U.S. Consumer segment due to increased salesacquisition of a Canadian growing media and the net impact of acquisitions;
the unfavorable impact of decreased pricing withinoperation in our U.S. Consumer segment related to controls products;Other segment; and
increased material costs within our U.S. Consumer segment for our grass seed and growing media products;
| |
| • | partially offset by increased commission income under oura decrease in net sales associated with the Restated Marketing Agreement for consumer Roundup®.
|
Selling, General and Administrative Expenses
The following table sets forth the components of selling, general and administrative expenses (“SG&A”):
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Advertising | $ | 132.2 |
| | $ | 133.2 |
| | $ | 132.1 |
| $ | 104.2 |
| | $ | 123.0 |
| | $ | 122.3 |
|
| Advertising as a percentage of net sales | 4.7 | % | | 4.9 | % | | 5.1 | % | 3.9 | % | | 4.7 | % | | 4.9 | % |
| Research and development | | 42.5 |
| | 39.9 |
| | 36.0 |
|
| Share-based compensation | 15.6 |
| | 13.2 |
| | 11.1 |
| 40.4 |
| | 25.2 |
| | 15.6 |
|
| Research and development | 45.5 |
| | 44.4 |
| | 46.0 |
| |
| Amortization of intangibles | 16.5 |
| | 12.7 |
| | 9.5 |
| 28.9 |
| | 21.9 |
| | 13.6 |
|
| Other selling, general and administrative | 387.3 |
| | 367.9 |
| | 368.4 |
| 324.1 |
| | 340.9 |
| | 330.5 |
|
| | $ | 597.1 |
| | $ | 571.4 |
| | $ | 567.1 |
| $ | 540.1 |
| | $ | 550.9 |
| | $ | 518.0 |
|
SG&A increased $25.7decreased $10.8 million, or 4.5%2.0%, during fiscal 20162018 compared to fiscal 2015. 2017; and increased $32.9 million, or 6.4%, during fiscal 2017 compared to fiscal 2016. Advertising expense decreased $18.8 million, or 15.3%, during fiscal 2018 as our U.S. Consumer segment increased customer promotional spending with certain retailers, which are recorded as a reduction of net sales, and decreased SG&A media spending.
Share-based compensation expense increased $2.4$15.2 million, or 18.2%60.3%, in fiscal 2018 due to $15.6 millionan increase in fiscal 2016 compared to $13.2 million in fiscal 2015the expected payout percentage on long-term performance-based awards as a result of additional expense associated with fiscal 2016 awards.strong cash flow performance over the last two years and expectations for future periods. Share-based compensation expense increased $9.6 million, or 61.5%, 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 expense2017 due to the impactissuance of forfeitureslong-term performance based equity awards as part of previously recognized share-based compensation for executive departures during fiscal 2014.the Project Focus initiative.
Amortization expense increased $3.8$7.0 million, or 29.9%32.0%, to $16.5 million in fiscal 2016 compared to $12.72018 and increased $8.3 million, in fiscal 2015. Amortization expenseor 61.0%, in fiscal 2015 increased $3.2 million, or 33.7%, compared to fiscal 2014. These increases are2017 due to the impact of recent acquisitions.
Other SG&A increased $19.4decreased $16.8 million, or 5.3%4.9%, in fiscal 2016 compared2018 due to fiscal 2015 driven by increasedlower short-term variable cash incentive compensation expense 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$19.3 million as the U.S. dollar has strengthened relative to other currencies including Canadian dollar, euro,a result of lower current fiscal year operating income performance and British pound. In fiscal 2015, other SG&A decreased $0.5lower selling, marketing and fringe benefit expenses of $12.3 million, compared to fiscal 2014. The primary drivers were a favorable foreign exchange rate impact as the U.S. dollar strengthened relative to other currencies including Canadian dollar, euro, and British pound, decreased variable incentive compensation and decreased marketing spending, partially offset by the impact of recent acquisitions of $25.6$14.7 million and increased headcount and integration costs for our hydroponic business. Other SG&A increased $10.4 million, or 3.1%, in fiscal 2017 due to the impact of recent acquisitions of $14.7 million and increased headcount and integration costs for our hydroponic businesses of $6.9 million, partially offset by lower deal costs related to transaction activity of $5.3 million and decreased variable incentive compensation of $7.7 million.
Impairment, Restructuring and Other
The following table sets forth the components of impairment, restructuring and other charges (recoveries) recorded withinin the “Cost of sales—impairment, restructuring and other,” “Impairment, restructuring and other” and “Income (loss) from discontinued operations, net of tax” lines in the Consolidated Statements of Operations:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Cost of sales—impairment, restructuring and other: | | | | | | | | | | |
| Restructuring and other charges | $ | 7.7 |
| | $ | 6.6 |
| | $ | — |
| $ | 12.3 |
| | $ | — |
| | $ | 5.9 |
|
| Property, plant and equipment impairments | | 8.2 |
| | — |
| | — |
|
| Operating expenses: | | | | | | | | | | |
| Restructuring and other (recoveries) charges | (47.2 | ) | | 76.6 |
| | 16.3 |
| |
| Restructuring and other charges (recoveries), net | | 20.2 |
| | 3.9 |
| | (51.5 | ) |
| Goodwill and intangible asset impairments | — |
| | — |
| | 33.7 |
| 112.1 |
| | 1.0 |
| | — |
|
| 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 |
| |
| Impairment, restructuring and other charges (recoveries) from continuing operations | | $ | 152.8 |
| | $ | 4.9 |
| | $ | (45.6 | ) |
| Restructuring and other charges from discontinued operations | | 86.8 |
| | 15.9 |
| | 19.7 |
|
| Total impairment, restructuring and other charges (recoveries) | | $ | 239.6 |
| | $ | 20.8 |
| | $ | (25.9 | ) |
Project Catalyst
In connection with the acquisition of Sunlight Supply during the third quarter of fiscal 2018, we announced the launch of an initiative called Project Catalyst. Project Catalyst is a company-wide restructuring effort to reduce operating costs throughout our U.S. Consumer, Hawthorne and Other segments and drive synergies from recent acquisitions within our Hawthorne segment. We recognized charges of $29.4 million related to Project Catalyst during fiscal 2018. During fiscal 2018, our Hawthorne segment executed facility closures and consolidations, terminated employees in duplicate roles, and recognized employee termination benefits of $0.3 million, impairment of property, plant and equipment of $2.9 million, and facility closure costs of $9.2 million in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations. Our Hawthorne segment also recognized employee termination benefits of $3.5 million and facility closure costs of $1.9 million in the “Impairment, restructuring and other” line in the Consolidated Statement of Operations. Our U.S. Consumer segment, in connection with an announced facility closure, recognized employee termination benefits of $1.6 million, impairment of property, plant and equipment of $5.3 million, and facility closure costs of $1.3 million during fiscal 2018 in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations. Our U.S. Consumer segment also recognized employee termination benefits of $3.4 million in the “Impairment, restructuring and other” line in the Consolidated Statement of Operations. Costs incurred to date since the inception of Project Catalyst are $17.8 million for our Hawthorne segment and $11.6 million for our U.S. Consumer segment.
Project Focus
In the first quarter of fiscal 2016, we announced 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. During fiscal 2018, our U.S. Consumer segment recognized adjustments of $0.1 million related to previously recognized termination benefits associated with Project Focus in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. During fiscal 2017, we recognized restructuring costs related to termination benefits and facility closure costs of $8.3 million in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations, including $6.7 million for our U.S. Consumer segment, $0.9 million for our Hawthorne segment and $0.7 million for our Other segment. During fiscal 2016, we recognized restructuring costs related to termination benefits of $3.9 million related to Project Focus in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. Costs incurred to date since the inception of the Project Focus initiatives are $10.0 million for our U.S. Consumer segment, $0.9 million for our Hawthorne segment and $1.2 million for our Other segment, related to transaction activity, termination benefits and facility closure costs.
On April 13, 2016, as part of this project,Project Focus, 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 2017 and fiscal 2016, we recognized $0.8 million and $4.6 million, respectively, in transaction related costs associated with the divestiture of the SLS Business in the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations. During fiscal 2016, we recognized a pre-tax 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 (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
In addition, during
On August 31, 2017, we completed the sale of the International Business. Refer to “NOTE 2. DISCONTINUED OPERATIONS” for more information. During fiscal 2018, fiscal 2017 and fiscal 2016, we recognized restructuring$1.8 million, $15.5 million and $2.5 million, respectively, in transaction related costs related to termination benefitsassociated with the sale of $3.4 million within the U.S. Consumer segment and $2.0 million within the Europe Consumer segment,International Business as well as termination benefits and facility closure costs of $4.6 million related to other transaction activity. We recorded $8.2zero, $(0.4) million and $1.8$3.6 million, respectively, in the “Income (loss) from discontinued operations, net of these costs within the “Impairment, restructuring and other” and the “Cost of sales—impairment, restructuring and other” linestax” line in the Consolidated Statements of Operations, respectively.Operations.
Bonus S
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 2016, 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 recognized $22.2 million in restructuring costs related to termination benefits provided to U.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 comprised of $3.7 million related to 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 2015.2015 indicating customers were experiencing damage to their lawns after application. In fiscal 2016, we incurred $6.4 million in costs related to resolving these consumer complaints and the recognition of costs we expected to incur for consumer claims in the “Impairment, restructuring and other” and the “Cost of sales—impairment, restructuring and other” lines in the Consolidated Statements of Operations. Additionally, we recorded offsetting insurance reimbursement recoveries of $55.9 million in fiscal 2016 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. Costs incurred to date since the inception of this matter were $73.8 million, partially offset by insurance reimbursement recoveries of $60.8 million.
Other
During fiscal 2018, we recognized a non-cash impairment charge of $94.6 million related to a goodwill impairment in the third quarterHawthorne segment in the “Impairment, restructuring and other” line in the Consolidated Statements of fiscal 2014,Operations as a result of anthe Company’s annual fourth quarter quantitative goodwill impairment review,test. Refer to “NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET” for more information.
During fiscal 2018, we recognized ana non-cash impairment charge for a non-recurring fair value adjustment of $33.7 million within the U.S. Consumer segment related to the Ortho® brand. The fair value was calculated based upon the evaluation of the historical performance and future growth expectations of the Ortho® business. During fiscal 2014, we recognized $12.5 million in restructuring costs related to termination benefits provided to U.S. personnel as part of our restructuring of the U.S. administrative and overhead functions, including $1.0$17.5 million related to the SLS Businesssettlement of a portion of certain previously acquired customer relationships due to the acquisition of Sunlight Supply in the “Impairment, restructuring and other” line in the Consolidated Statement of Operations. Refer to “NOTE 7. ACQUISITIONS AND INVESTMENTS” for more information.
During fiscal 2018, we recognized withina pre-tax charge of $85.0 million for a probable loss related to the previously disclosed legal matter In re Morning Song Bird Food Litigation in the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations. We alsoRefer to “NOTE 19. CONTINGENCIES” for more information.
During fiscal 2018, we recognized $2.8a charge of $11.7 million of internationalfor a probable loss related to the previously disclosed legal matter In re Scotts EZ Seed Litigation in the “Impairment, restructuring and other adjustments duringother” line in the Consolidated Statements of Operations. Refer to “NOTE 19. CONTINGENCIES” for more information.
During fiscal 2014 for2017, we recognized a recovery of $4.4 million related to the continuationreduction of a contingent consideration liability associated with a historical acquisition and recorded a $1.0 million impairment charge on the profitability improvement initiative announcedwrite-off of a trademark asset due to recent performance and future growth expectations within the “Impairment, restructuring and other” line in December 2012. In addition, during fiscal 2014, the Company recognized $2.0 million in additional ongoing monitoring and remediation costs for the Company’s turfgrass biotechnology program.Consolidated Statements of Operations.
Other Income, net
Other income is comprised of activities outside our normal business operations, such as royalty income from the licensing of certain of our brand names, income earned from loans receivable, foreign exchange gains/losses and gains/losses from the saledisposition of non-inventory assets. Other income net, was $13.8$6.7 million, $2.1$16.6 million and $10.7$13.8 million in fiscal 2016, 2018, fiscal 20152017 and fiscal 2014,2016, respectively. The increase in other incomedecrease for fiscal 20162018 was due to a gain on the saleinterest income of a growing media plant whose operations are being relocated, an increase in income$10.0 million on loans receivable andthat was classified in the “Other income, net” line in the Consolidated Statements of Operations in fiscal 2017 but was classified in the “Other non-operating expense, net” line in the Consolidated Statements of Operations in fiscal 2018, as well as a decrease in royalty income earned from the TruGreen Joint Venture related to its use of our brand names.names following the divestiture of the SLS Business, partially offset by an increase in royalty income earned from Exponent related to its use of our brand names following the divestiture of the International Business. The decreaseincrease in other income for fiscal 20152017 was primarily due to recognition of investment gainsan increase in fiscal 2014income on loans receivable partially offset by a decrease in royalty income earned from the TruGreen Joint Venture related to its use of our investment in AeroGrow.brand names following the divestiture of the SLS Business.
Income from Operations
Income from operations in fiscal 2016 was $459.3 million compared to $262.1$198.9 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 2015 was $262.1 million compared to $283.7 million in fiscal 2014,2018, a decrease of $21.6 million, or 7.6%.54.1% from fiscal 2017 income from operations of $433.4 million. The decrease was driven by higher impairment, restructuring and other charges, during fiscal 2015 as compared to fiscal 2014, a decrease in gross profit rate,and a decrease in other income, partially offset by lower SG&A.
Income from operations was $433.4 million in fiscal 2017, a decrease of 3.2% from fiscal 2016 income from operations of $447.6 million. The decrease was driven by impairment, restructuring and an increase inother charges during fiscal 2017 as compared to recoveries during fiscal 2016, and higher SG&A, partially offset by an increase in net sales.
sales, gross profit rate and other income.
Equity in Income(Income) Loss of Unconsolidated Affiliates
We hold a minority equity interestIn the first quarter of 30%fiscal 2018, our net investment and advances in the TruGreen Joint Venture. This interest was initially recorded at fair value on the transaction dateVenture were reduced to a liability and subsequently is accounted for using the equity method of accounting, withwe no longer record our proportionate share of the TruGreen Joint Venture earnings reflected in the Condensed Consolidated Statements of Operations.Operations until our net investment and advances are no longer a liability. We recognized equitydo not have any contractual obligation to fund further losses of the TruGreen Joint Venture. During the fourth quarter of fiscal 2017, we made a $29.4 million investment in incomean unconsolidated subsidiary whose products support the professional U.S. industrial, turf and ornamental market.
Equity in (income) loss of unconsolidated affiliates of $7.8was $(4.9) million, $29.0 million and $(7.8) million in fiscal 2016. Included within income of unconsolidated affiliates for2018, fiscal 2017 and fiscal 2016, is our $11.7 millionrespectively. Our share of restructuring and other charges incurred by the TruGreen Joint Venture. TheseVenture was $25.2 million and $11.7 million in fiscal 2017 and fiscal 2016, respectively. For fiscal 2017, these charges included $1.3 million for transaction costs, $12.1 million for nonrecurring integration and separation costs, $7.2 million of costs associated with the TruGreen Joint Venture’s August 2017 debt refinancing and $4.6 million for a non-cash purchase accounting fair value write-down adjustment related to deferred revenue and advertising. For fiscal 2016, 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 purchase accounting fair value write-down adjustment onrelated to deferred revenue and advertising as part of the transaction accounting.advertising.
Costs Related to Refinancing
Costs related to refinancing were $8.8 million for fiscal 2016.2016. The costs incurred were associated with the redemption of all $200.0 million aggregate principal amount of our outstanding 6.625% senior notes due 2020 (the “6.625% Senior NotesNotes”) on December 15, 2015, and are comprised of $6.6 million of call premium and $2.2 million of unamortized bond discount and issuance costs that were written off.
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 was $86.4 million in fiscal 2016 was $65.6 million compared to $50.5 million in 2018, an increase of 13.5% from fiscal 2015 and $47.3 million in fiscal 2014.2017 interest expense of $76.1 million. The increase in fiscal 2016 was driven by an increase in average borrowings of $351.2$332.8 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 $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 interest rate of 7824 basis pointspoints. The increase in average borrowings was driven by recent acquisition activity and an increase in repurchases of our Common Shares.
Interest expense was $76.1 million in fiscal 2017, an increase of 21.0% from fiscal 2016 interest expense of $62.9 million. The increase was driven by an increase in average borrowings of $239.4 million, as well as an increase in our weighted average interest rate of 16 basis points. The increase in average borrowings was driven by recent acquisition activity and an increase in repurchases of our Common Shares. The increase in the weighted average interest rate was primarily due to reduced rates underthe issuance of our credit facility5.250% Senior Notes on December 15, 2016.
Other Non-Operating Expense, net
Other non-operating expense, net was $1.7 million, $13.4 million and zero for the fiscal 2018, fiscal 2017 and fiscal 2016, respectively. As a result of the enactment of H.R.1 (the “Act,” formerly known as the “Tax Cuts and Jobs Act”) on December 22, 2017, we repatriated cash from a foreign subsidiary during the second quarter of fiscal 2018 resulting in the liquidation of substantially all of the assets of the subsidiary and the redemptionwrite-off of accumulated foreign currency translation loss adjustments of $11.7 million during the second quarter of fiscal 2018 within the “Other non-operating expense, net” line in the Consolidated Statements of Operations. This was partially offset by interest income on loans receivable of $10.0 million that was classified in the “Other non-operating expense, net” line in the Consolidated Statements of Operations in fiscal 2018, but was classified in the “Other income, net” line in the Consolidated Statements of Operations in fiscal 2017.
On October 2, 2017, we acquired the remaining 25% noncontrolling interest in Gavita and its subsidiaries, including Agrolux, for $72.2 million. We recorded a charge of $13.4 million during the fourth quarter of fiscal 2017 to write-up the fair value of the 7.25% Senior Notes.loan to the noncontrolling ownership group of Gavita to the agreed upon buyout value in the “Other non-operating expense, net” line in the Consolidated Statements of Operations.
Income Tax Expense (Benefit) from Continuing Operations
A reconciliation of the federal corporate income tax rate and the effective tax rate on income from continuing operations before income taxes is summarized below:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 24.5 | % | | 35.0 | % | | 35.0 | % |
| Effect of foreign operations | 0.1 |
| | (0.6 | ) | | 1.7 |
| 7.4 |
| | 3.1 |
| | 0.3 |
|
| State taxes, net of federal benefit | 2.7 |
| | 3.2 |
| | 2.7 |
| 6.5 |
| | 2.9 |
| | 2.9 |
|
| Domestic production activities deduction permanent difference | (2.5 | ) | | (3.2 | ) | | (2.7 | ) | |
| Domestic Production Activities Deduction permanent difference | | (4.4 | ) | | (3.1 | ) | | (2.5 | ) |
| Effect of other permanent differences | 0.3 |
| | 0.1 |
| | 0.3 |
| (3.0 | ) | | 0.4 |
| | 0.4 |
|
| Research and experimentation and other federal tax credits | (0.2 | ) | | (0.2 | ) | | (0.9 | ) | |
| Research and Experimentation and other federal tax credits | | (1.7 | ) | | (0.4 | ) | | (0.3 | ) |
| Resolution of prior tax contingencies | (0.2 | ) | | 0.4 |
| | 0.2 |
| 1.3 |
| | 0.9 |
| | (0.1 | ) |
| Effect of tax reform | | (38.7 | ) | | — |
| | — |
|
| Other | 0.3 |
| | 0.2 |
| | (0.7 | ) | (2.2 | ) | | (1.8 | ) | | 0.2 |
|
| Effective income tax rate | 35.5 | % | | 34.9 | % | | 35.6 | % | (10.3 | )% | | 37.0 | % | | 35.9 | % |
On December 22, 2017, the Act was signed into law. The Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”). Among other items, the Act implements a territorial tax system, imposes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, and reduces the federal corporate statutory tax rate to 21% effective January 1, 2018. As our fiscal year end falls on September 30, the federal corporate statutory tax rate for fiscal 2018 was prorated to 24.5%, with the statutory rate for fiscal 2019 and beyond at 21%.
The effective tax rates related to continuing operations in fiscal 2018, fiscal 2017 and fiscal 2016 were (10.3)%, 37.0% and 35.9%, respectively. Included in the effective tax rate for fiscal 2018 are one-time impacts related to the tax law change of $42.8 million. These include a one-time $44.6 million net tax benefit adjustment reflecting the revaluation of our net deferred tax liability at the lower tax rate. In addition, we recognized a one-time tax expense on deemed repatriated earnings and cash of foreign subsidiaries as required by the Act of $21.2 million, partially offset by the recognition and application of foreign tax credits associated with these foreign subsidiaries of $18.2 million. We also reduced the value of deferred tax liabilities associated with the write-off of previously acquired customer relationship intangible assets by $7.3 million, which was recognized in the “Income tax expense (benefit) from continuing operationsoperations” line in the Consolidated Statement of Operations in fiscal 2018. During the fourth quarter of fiscal 2018, we recognized a non-cash goodwill impairment charge of $94.6 million, of which $20.0 million was 35.5% for not tax-deductible.
In connection with the sale of the International Business during fiscal 2016, compared2017, we recognized additional tax expense of $7.2 million associated with valuation allowances established in connection with historical foreign tax credits that we do not expect to 34.9% for utilize prior to their expiration. Through our increased ownership of AeroGrow, we established deferred tax assets of $10.9 million related to net operating losses (“NOLs”) of AeroGrow, subject to limitations imposed by Section 382 of the Code as a result of current and prior ownership changes. During fiscal 20152017, we determined that $10.5 million of these deferred tax assets will expire unutilized due to the closing of statutes of limitation and 35.6% for fiscal 2014.a valuation allowance was established on these deferred tax assets. We also incurred a $13.4 million charge, which is not tax-deductible, driven by the October 2017 acquisition of the remaining noncontrolling interest in Gavita and subsidiaries, to write-up the fair value of the loan to the noncontrolling ownership group of Gavita to the agreed upon buyout value.
Income from Continuing Operations
We reported incomeIncome from continuing operations of $392.7 million, or $4.09 per diluted share, in fiscal 2016 compared to $211.6was $127.6 million, or $2.23 per diluted share, in fiscal 2015.2018 compared to $198.3 million, or $3.29 per diluted share, in fiscal 2017. The increasedecrease was driven by higher impairment, restructuring and other recoveries during fiscal 2016 as compared to charges, during fiscal 2015,a decrease in gross profit, a decrease in other income, an increase in interest expense and an increase in net sales, gross profitother non-operating expense, partially offset by the lower effective tax rate, andan increase in equity in income of unconsolidated affiliates partially offset by increasesand a decrease in interest expense, costs related to refinancing and SG&A.
Diluted average common shares used in the diluted income per common share calculation were 62.057.1 million infor fiscal 20162018 compared to 62.260.2 million infor fiscal 2015.2017. The decrease was primarily driven by share repurchases,the result of Common Share repurchase activity, partially offset by the exercise of stock options and the issuance of share-based compensation awards and the payment of contingent considerationa portion of the purchase price of Sunlight Supply in Common Shares in
connection with the Vermicrop acquisition.Shares. Dilutive equivalent shares for fiscal 20162018 and fiscal 20152017 were 0.9 million and 1.10.8 million, respectively.
We reported incomeIncome from continuing operations of $211.6was $198.3 million, or $2.23$3.29 per diluted share, in fiscal 20152017 compared to $225.7$246.1 million, or $2.32$3.98 per diluted share, in fiscal 2014.2016. The decrease was driven by higher impairment, restructuring and other charges during fiscal 20152017 as compared to recoveries during fiscal 2014, a decrease2016, as well as higher SG&A, equity in gross profit rateloss of unconsolidated affiliates, interest expense and other income, an increase in SG&A and an increase in interestnon-operating expense, partially offset by an increase in net sales. sales, gross profit rate and other income and a decrease in costs related to refinancing.
Diluted average common shares used in the diluted income per common share calculation were 62.260.2 million infor fiscal 20152017 compared to 62.762.0 million infor fiscal 2014.2016. The decrease was primarily driven by share repurchases,the result of Common Share repurchase activity, partially offset by the exercise of stock options and the issuance of share-based compensation awards and the payment of consideration in Common Shares in connection with the Vermicrop acquisition.awards. Dilutive equivalent shares for fiscal 20152017 and fiscal 20142016 were 1.10.8 million and 1.10.9 million, respectively.
Income (Loss) from Discontinued Operations, net of tax
On April 13,Income (loss) from discontinued operations, net of tax, from our previously divested International Business, SLS Business and wild bird food business was $(63.9) million, $20.5 million and $68.7 million for fiscal 2018, fiscal 2017 and fiscal 2016, respectively. During fiscal 2018, we recognized a pre-tax charge of $85.0 million for a probable loss related to the previously disclosed legal matter In re Morning Song Bird Food Litigation in the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
During fiscal 2017, we recorded a gain on the sale of the International Business of $32.7 million, partially offset by the provision for income taxes of $12.0 million. During fiscal 2018, we recorded a reduction to the pre-tax gain of $0.7 million related to the resolution of post-closing working capital adjustments. We recognized $1.8 million, $15.5 million and $2.5 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively, in transaction related costs associated with the sale of the International Business as well as termination benefits and facility closure costs of zero, $(0.4) million and $3.6 million in fiscal 2018, fiscal 2017 and fiscal 2016, respectively, within the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
During fiscal 2016, we completedrecorded a gain on the contribution of the SLS Business of $131.2 million, partially offset by the provision for deferred income taxes of $51.9 million. During fiscal 2017, we recorded an adjustment to reduce 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 ofpre-tax gain by $1.0 million related to post-closing working capital adjustments. During fiscal 2017 and fiscal 2016, we classified our results of operations for all periods presented to reflectrecognized $0.8 million and $4.6 million, respectively, in transaction related costs associated with the SLS Business as a discontinued operation and classified the assets and liabilitiesdivestiture of the SLS Business as held for sale.Business. 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. The prior period amounts have been reclassified to conform. Duringaddition, 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 (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
Income from discontinued operations, net of tax in fiscal 2016 was $61.5 million compared to $20.9 million in fiscal 2015. The increase is primarily driven by the after-tax gain on contribution of $79.3 million, partially offset by a net loss from the operations of the SLS Business of $17.8 million for fiscal 2016, as compared to net income from the operations of the SLS Business of $20.9 million for fiscal 2015. Income from discontinued operations, net of tax in fiscal 2014 of $20.7 million includes net income from the operations of 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
We divide our business into three reportable segments: U.S. Consumer, Europe ConsumerHawthorne and 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.
U.S. Consumer consists of the Company’sour consumer lawn and garden business located in the geographic United States. Europe ConsumerHawthorne consists of the Company’s consumer lawnour indoor, urban and garden business located in geographic Europe.hydroponic gardening business. Other consists of the Company’sour consumer lawn and garden business in geographies other than the U.S. and Europe, the Company’s indoor, urbanour product sales to commercial nurseries, greenhouses and hydroponic gardening business, and revenues and expenses associated with the Company’s supply agreements with Israel Chemicals, Ltd.other professional customers. Corporate consists of general and administrative expenses and certain other income/expense items not allocated to the business segments. This identification of reportable segments is consistent with how the segments report to and are managed by our chief operating decision maker.
Segment performance is evaluated based on several factors, including income (loss) from continuing operations before income taxes, amortization, impairment, restructuring and other charges (“Segment Profit (Loss)”), which is not a generally accepted accounting principle (“GAAP”)non-GAAP financial measure. Senior management uses this measure of operating profit (loss) to evaluate segment performance because the Company believesthey believe this measure is indicative of performance trends and the overall earnings potential of each segment.
The following table sets forth net sales by segment:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| U.S. Consumer | $ | 2,187.4 |
| | $ | 2,141.8 |
| | $ | 2,037.4 |
| $ | 2,109.6 |
| | $ | 2,160.5 |
| | $ | 2,204.4 |
|
| Europe Consumer | 274.2 |
| | 304.7 |
| | 336.7 |
| |
| Hawthorne | | 344.9 |
| | 287.2 |
| | 121.2 |
|
| Other | 374.5 |
| | 281.5 |
| | 204.2 |
| 208.9 |
| | 194.4 |
| | 180.6 |
|
| Consolidated | $ | 2,836.1 |
| | $ | 2,728.0 |
| | $ | 2,578.3 |
| $ | 2,663.4 |
| | $ | 2,642.1 |
| | $ | 2,506.2 |
|
The following table sets forth segmentSegment Profit as well as a reconciliation to income from continuing operations before income taxes:taxes, the most directly comparable GAAP measure:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| U.S. Consumer | $ | 500.4 |
| | $ | 439.2 |
| | $ | 399.7 |
| $ | 496.6 |
| | $ | 521.5 |
| | $ | 493.7 |
|
| Europe Consumer | 13.5 |
| | 14.1 |
| | 20.9 |
| |
| Hawthorne | | (6.1 | ) | | 35.5 |
| | 11.8 |
|
| Other | 20.8 |
| | 12.3 |
| | 17.4 |
| 11.2 |
| | 13.4 |
| | 10.4 |
|
| Segment total | 534.7 |
| | 465.6 |
| | 438.0 |
| |
| Total Segment Profit (Non-GAAP) | | 501.7 |
| | 570.4 |
| | 515.9 |
|
| Corporate | (96.8 | ) | | (98.5 | ) | | (92.0 | ) | (120.8 | ) | | (109.6 | ) | | (98.9 | ) |
| Intangible asset amortization | (18.0 | ) | | (15.0 | ) | | (12.3 | ) | (29.2 | ) | | (22.5 | ) | | (14.9 | ) |
| Impairment, restructuring and other | 27.7 |
| | (90.0 | ) | | (50.0 | ) | (152.8 | ) | | (4.9 | ) | | 33.8 |
|
| Equity in income of unconsolidated affiliates | 19.5 |
| | — |
| | — |
| |
Equity in income (loss) of unconsolidated affiliates (a) | | 4.9 |
| | (29.0 | ) | | 19.5 |
|
| Costs related to refinancing | (8.8 | ) | | — |
| | (10.7 | ) | — |
| | — |
| | (8.8 | ) |
| Interest expense | (65.6 | ) | | (50.5 | ) | | (47.3 | ) | (86.4 | ) | | (76.1 | ) | | (62.9 | ) |
| Consolidated | $ | 392.7 |
| | $ | 211.6 |
| | $ | 225.7 |
| |
| Other non-operating expense, net | | (1.7 | ) | | (13.4 | ) | | — |
|
| Income from continuing operations before income taxes (GAAP) | | $ | 115.7 |
| | $ | 314.9 |
| | $ | 383.7 |
|
| |
| (a) | Included within equity in income (loss) of unconsolidated affiliates for fiscal 2017 are charges of $25.2 million, which represent our share of restructuring and other charges incurred by the TruGreen Joint Venture, including a charge of $7.2 million related to costs associated with TruGreen’s August 2017 refinancing. For fiscal 2016, our share of restructuring and other charges incurred by the TruGreen Joint Venture of $11.7 million was included within impairment, restructuring and other above. |
U.S. Consumer
U.S. Consumer segment net sales were $2.11 billion in fiscal 2018, a decrease of 2.4% from fiscal 2017 net sales of $2.16 billion. The decrease was driven by the unfavorable impact of volume and pricing of 1.0% and 1.4%, respectively. Decreased sales volume for fiscal 2018 was driven by decreased sales of fertilizer, controls and plant food products, partially offset by increased sales of soils and grass seed products. Decreased pricing for fiscal 2018 was primarily driven by higher customer rebates and sales mix.
U.S. Consumer Segment Profit was $496.6 million in fiscal 2018, a decrease of 4.8% from fiscal 2017 Segment Profit of $521.5 million. The decrease for fiscal 2018 was primarily due to a decrease in net sales, gross profit rate and interest income that was classified in the “Other non-operating expense, net” line in the Consolidated Statements of Operations, partially offset by lower SG&A.
U.S. Consumer segment net sales were $2.2$2.16 billion in fiscal 2017, a decrease of 2.0% from fiscal 2016 net sales of $2.20 billion. The decrease was driven by the unfavorable impact of volume of 3.3%, partially offset by the favorable impact of pricing of 1.2%. Decreased sales volume for fiscal 2017 was driven by decreased sales of mulch products, partially offset by increased sales of grass seed and Roundup® For Lawns products. Increased pricing for fiscal 2017 was primarily driven by lower volume rebates as a result of year-to-date sales volume decline.
U.S. Consumer Segment Profit was $521.5 million in fiscal 2017, an increase of 2.1%5.6% from fiscal 20152016 Segment Profit of $493.7 million. The increase for fiscal 2017 was primarily due to an increase in gross profit rate, higher other income and lower SG&A, partially offset by decreased net sales.
Hawthorne
Hawthorne segment net sales were $344.9 million in fiscal 2018, an increase of 20.1% from fiscal 2017 net sales of $2.1 billion.$287.2 million. The increase was driven by the favorable impactimpacts of volume, pricingacquisitions and acquisitionschanges in foreign exchange rates of 1.3%, 0.7%47.5% 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 Roundup®, partially offset by decreased sales of fertilizer products.
U.S. Consumer segment operating income increased $61.2 million, or 13.9%, in fiscal 2016 as compared to fiscal 2015. 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.
U.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 driven by the favorable impact of volume and acquisitions of 4.7% and 0.7%1.6%, respectively, partially offset by the unfavorable impact of pricingvolume of 0.3%28.8%. IncreasedDecreased sales volume infor fiscal 20152018 was driven by increased sales of controls, including increased sales of Tomcat® products, as well as growing mediadeclines in the North American hydroponic business partially offset by growth in the European professional greenhouse market and cleaners products.AeroGrow.
U.S. Consumer segment operating income increased $39.5Hawthorne Segment Loss was $6.1 million or 9.9%, in fiscal 20152018 as compared to profit of $35.5 million in fiscal 2014.2017. The changedecrease for fiscal 2018 was primarily due to a decrease in gross profit rate and higher SG&A, partially offset by increased net sales driven by acquisitions. Segment Loss for fiscal 2018 included increased cost of goods sold related to acquisition date inventory fair value adjustments and increased deal costs related to the acquisition of Sunlight Supply.
Hawthorne segment net sales were $287.2 million in fiscal 2017, an increase of 137.0% from fiscal 2016 net sales of $121.2 million. The increase was driven by increasedthe favorable impacts of acquisitions, volume and changes in foreign exchange rates of 112.4%, 23.2% and 1.5%, respectively.
Hawthorne Segment Profit was $35.5 million in fiscal 2017 as compared to $11.8 million in fiscal 2016. The increase for fiscal 2017 was primarily due to an increase in net sales and a decrease in transaction costs related to acquisition activity, 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 grass seed and growing media products.
Europe Consumer
Europe Consumer segment net sales were $274.2 million in fiscal 2016, a decrease of 10.0%higher SG&A 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 gross profit rate and lower 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 $336.7 million. The decrease was driven by the unfavorable impact of changes in foreign exchange rates and decreased pricing of 13.9% and 1.2%, respectively, partially offset by the favorable impact of 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.acquired businesses.
Other
Other segment net sales were $374.5$208.9 million in fiscal 2016,2018, an increase of 33.0%7.5% from fiscal 20152017 net sales of $281.5$194.4 million. The increase was driven by the favorable impactimpacts of volume and changes in foreign exchange rates of 5.0% and 2.3%, respectively.
Other Segment Profit was $11.2 million in fiscal 2018, a decrease of 16.4% from fiscal 2017 Segment Profit of $13.4 million. The decrease was due to a decrease in gross profit rate, partially offset by higher net sales and lower SG&A.
Other segment net sales were $194.4 million in fiscal 2017, an increase of 7.6% from fiscal 2016 net sales of $180.6 million. The increase was driven by the favorable impacts of volume and acquisitions of 4.8% and volume of 26.6% and 10.8%4.7%, respectively, partially offset by the unfavorable impact of changes in foreign exchange rates of 4.3%2.1%. Net sales from our indoor and urban gardening businesses increased $87.3
Other Segment Profit was $13.4 million in fiscal 2016.
Other segment operating income increased $8.5 million, or 69.1%, in fiscal 2016 as compared to fiscal 2015. The change was driven by increased sales, partially offset by increased SG&A from acquired businesses and transaction costs related to acquisition activity.
Other segment net sales were $281.5 million in fiscal 2015,2017, an increase of 37.9%28.8% from fiscal 2014 net sales2016 Segment Profit of $204.2$10.4 million. The increase was driven by the favorable impact of acquisitionsdue to an increase in net sales and volume of 45.0% and 7.4%, respectively,other income, partially offset by the unfavorable impact of changesa decrease in foreign exchange ratesgross profit rate 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 increasedhigher SG&A from acquired businesses and transaction costs related to acquisition activity, partially offset by increased sales.&A.
Corporate
Corporate operating loss was $96.8expenses were $120.8 million in fiscal 2016, a decrease2018, an increase of 1.7%10.2% from fiscal 2015 operating loss2017 expenses of $98.5$109.6 million. The change was primarily due to higher share-based compensation expense due to an increase in the expected payout percentage on long-term performance-based awards, a decrease in royalty income on loans receivableearned from the TruGreen Joint Venture related to its use of our brand names following the divestiture of the SLS Business and interest income that was classified in the “Other non-operating expense, net” line in the Consolidated Statements of Operations for fiscal 2018, partially offset by lower variable incentive compensation expense and an increase in royalty income earned from Exponent related to its use of our brand names following our divestiture of the International Business.
Corporate expenses were $109.6 million in fiscal 2017, an increase of 10.8% from fiscal 2016 expenses of $98.9 million. The change was primarily driven by higher share-based compensation expense due to the issuance of equity awards as part of the Project Focus initiative and a decrease in royalty income earned from the TruGreen Joint Venture related to its use of brand names, partially offset by increasedan increase in income on loans receivable and lower 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 expense and litigation settlement activity.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities totaled $237.4$342.5 million for fiscal 2016,2018, a decrease of $9.5$20.7 million as compared to cash provided by operating activities of $246.9$363.2 million for fiscal 2015. 2017. This decrease in cash provided by operating activities was driven by a decrease in gross profit and an increase in interest paid, partially offset by a decrease in income taxes paid, a decrease in payments related to restructuring activities, lower SG&A, timing of customer rebate payments and cash used in operating activities associated with the International Business during fiscal 2017.
Cash provided by operating activities from the SLS Business was $26.8 million and $28.2totaled $363.2 million for fiscal 2016 and2017, an increase of $119.2 million as compared to cash provided by operating activities of $244.0 million for fiscal 2015, respectively. The change2016. This increase was driven by an increasea decrease in cash used for working capital relatedresulting from Company-wide efforts to increasedimprove inventory management and reduce inventory levels, improved timing of customer receipts as compared to payment of current liabilities and an increasea decrease in accounts receivable from the TruGreen Joint Venture of $14.9 million for expenses incurred pursuant to a short-term transition services agreement and an employee leasing agreement, partially offset by insurance reimbursement recoveries of $40.9 millionduring fiscal 2016 related to the Bonus® S consumer complaint matter.
Cash provided by operating activities totaled $246.9 million for fiscal 2015, an increase of $6.0 million as compared to cash provided by operating activities of $240.9 million for fiscal 2014. Cash provided by operating activities from the SLS Business was $28.2 millionmatter and $19.2 million for fiscal 2015 and fiscal 2014, respectively. The change was driven by a decrease in cash used for working capital, partially offset by a decrease in net income. The decrease in cash used for working capital was primarilylower customer volume rebates due to less growth in accounts receivable and inventory, partially offset by less growth in accounts payable.lower sales volume.
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 our 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.
Investing Activities
Cash used in investing activities totaled $134.4$580.7 million for fiscal 2016,2018, a decreasechange of $402.0$603.1 million as compared to cash used inprovided by investing activities of $536.4$22.4 million for fiscal 2015. Cash used in investing activities related to the SLS Business was $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 working capital contribution of $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.2017. Cash used for investments in property, plant and equipment during fiscal 20162018 was $58.3$68.2 million. TheseDuring fiscal 2018, we completed the acquisitions of Sunlight Supply and Can-Filters which included cash outflows were partially offset by an excess distributionpayments of $196.2$492.9 million, frompaid the TruGreen Joint Venture.post-closing working capital adjustment obligation of $35.3 million related to the sale of the International Business and received cash of $13.5 million associated with currency forward contracts. Significant capital projects during fiscal 20162018 included investments in our growing media production and packaging facilities, additional capital for supply chain optimization projects, investments in information technology and facility improvement and maintenance.
Cash used inprovided by investing activities totaled $536.4$22.4 million for fiscal 2015, an increase2017, a change of $380.8$156.8 million as compared to cash used in investing activities of $155.6$134.4 million for fiscal 2014. Cash used2016. On August 31, 2017, we completed the divestiture of the International Business for cash proceeds at closing of $150.6 million, which is net of seller financing provided by us in investing activities related to the SLS Business was $24.3form of a $29.7 million loan. We received distributions of $87.1 million from the TruGreen Joint Venture, partially offset by a $29.4 million investment in an unconsolidated subsidiary whose products support the professional U.S. industrial, turf and $3.4 million for fiscal 2015 and fiscal 2014, respectively. The change inornamental market. These net cash inflows were partially offset by cash used for investments in our investing activities was primarily driven by the paymentproperty, plant and equipment during fiscal 2017 of $300 million to Monsanto in consideration for Monsanto’s entry into the amendments to our Marketing Agreement for consumer Roundup®, the lawn and garden brand extension agreement and the commercialization and technology agreement, and increased acquisitions of $66.2$69.6 million. During fiscal 2015,Additionally, we completed the acquisitions of General HydroponicsBotanicare, Agrolux, the exclusive manufacturer and Vermicrop for $120.0 millionformulator of branded Botanicare products and $15.0 million, respectively, in addition to fourthree other acquisitions of growing media operations with anwhich included aggregate estimated purchase price of $40.2 million. Additionally, Scotts LawnService® completed the acquisition of Action Pest for $21.7 million. These acquisitions included cash payments of $180.2 million during fiscal 2015.$121.7 million. Significant capital projects during fiscal 20152017 included investments in our growing media production and packaging facilities, additional capital for supply chain optimization projects, investments in information technology, facility improvement and maintenance, and investments in fleet vehicles for Scotts LawnService®.the rebuild of a plant and related equipment after a fire.
For the three fiscal years ended September 30, 2016,2018, our capital spending was allocated as follows: 70%67% for expansion and maintenance of existing productive assets; 13% for new productive assets; 10%8% to expand our information technology and transformation and integration capabilities; and 7%12% for Corporatenon-productive assets. We expect fiscal 20172019 capital expenditures to be consistent with our recent capital spending amounts and allocations.
Financing Activities
Financing activities usedprovided cash of $122.2$151.2 million in fiscal 2016 and provided2018, a change of $468.0 million as compared to cash used in financing activities of $278.9$316.8 million in fiscal 2015.2017. The change was the result of the repayment of $200.0 million aggregate principal amount of 6.625% Senior Notes,an increase in net repayments of $81.3 millionborrowings under our credit facilities of $843.1 million, a decrease in payments on seller notes of $19.8 million and an $8.1 million distribution paid by AeroGrow to its noncontrolling interest holders during fiscal 2016 compared to net borrowings of $378.0 million in fiscal 2015, payment of financing and issuance fees of $11.2 million related to our new credit agreement and the 6.000% Senior Notes,2017, partially offset by an increase in repurchases of our Common Shares of $116.0$72.5 million, the issuance of $250.0 million of 5.250% Senior Notes during fiscal 2017, $70.7 million related to the acquisition of the remaining 25% noncontrolling interest in Gavita and the prospective adoption of a new accounting pronouncement that requires excess tax benefits to be classified as an operating activity.
Financing activities used cash of $316.8 million in fiscal 2017, a change of $188.0 million as compared to cash used in financing activities of $128.8 million in fiscal 2016. The increase in fiscal 2017 was the result of an increase in repurchases of our Common Shares of $117.8 million, an increase in net repayments under our credit facilities of $87.7 million, an increase in payments on seller notes of $25.9 million, and a decrease in cash received from the exercise of stock options of $9.6an $8.1 million distribution paid by AeroGrow to its noncontrolling interest holders, partially offset by the issuance of $400.0$250.0 million aggregate principal amount of 6.000% Senior Notes.
Financing activities provided cash of $278.9 million in fiscal 2015 and used cash of $124.3 million in fiscal 2014. The change related to financing activities was the result of the redemption of $200.0 million of our 7.25%5.250% Senior Notes during fiscal 2014,2017 as compared to a decrease in dividends paid innet issuance of $200.0 million aggregate principal amount of Senior Notes during fiscal 2015 as a result of the prior year special one-time cash dividend of $2.00 per share, or $122.1 million,2016 and a decrease in repurchasesfinancing and issuance fees paid of Common Shares of $105.2 million, partially offset by a decrease in net borrowings under our credit facility of $29.5$6.8 million. Net borrowings under our credit facilities in fiscal 2015 were $378.0 million compared to $407.5 million in fiscal 2014. Financing activities also included an increase in cash received from the exercise of stock options of $4.3 million in fiscal 2015 compared to fiscal 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 having original maturities of three months or less. The cash and cash equivalents balances of $50.1$33.9 million and $71.4$120.5 million at September 30, 20162018 and 2015,2017, respectively, included $39.9$17.7 million and $55.1$39.3 million, respectively, held by controlled foreign corporations. Our current plans do not demonstrate a need to, nor doAs of September 30, 2018, and after consideration of the one time transition tax on deemed repatriation of foreign earnings, we have plans to, repatriate the retainedno unremitted earnings from theseof foreign corporations as thesubsidiaries for which earnings are indefinitelyconsidered permanently reinvested. However,We have repatriated all cash and earnings of one subsidiary in the future, ifUnited Kingdom via a loan to a U.S. affiliate in the fiscal year ended September 30, 2018. Following the one-time transition tax, we determine it is necessary to repatriate these funds, or we sell or liquidate any of these foreign corporations, we may be required to pay associateddetermined that no deferred tax liability for withholding taxes on the repatriation, sale or liquidation.subsidiary’s previously taxed earnings is required as the United Kingdom does not impose withholding taxes on distributions to the U.S. We maintain our assertions of indefinite reinvestment of the earnings of all material foreign subsidiaries with the exception of the earnings of Scotts Luxembourg Sarl, which are generally taxed on a current basis under “Subpart F” of the Code which prevents deferral of recognition of U.S. taxable income through the use of foreign entities.
Borrowing Agreements
Our primary sources of liquidity are cash generated by operations and borrowings under our credit facilities, which are guaranteed by substantially all of Scotts Miracle-Gro’s domestic subsidiaries. On December 20, 2013, we entered into the third amended and restated credit agreement, providing us with a five-year senior secured revolving loan facility in the aggregate principal amount of up to $1.7 billion (the “former credit facility”). On October 29, 2015, we entered into the fourth amended and restated credit agreement (the “new“former credit agreement”), providingthat was subsequently superseded by the Fifth A&R Credit Agreement discussed further below. The former credit agreement provided us with five-year senior secured loan facilities in the aggregate principal amount of $1.9 billion that were 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“former credit facilities”). The newformer credit agreement also provided us 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 former credit agreement, we had the ability to obtain letters of credit up to $100.0 million. Borrowings under the former credit facilities could be made in various currencies, including U.S. dollars, euro, British pounds, Australian dollars and Canadian dollars.
On July 5, 2018, we entered into the Fifth A&R Credit Agreement, providing us with five-year senior secured loan facilities in the aggregate principal amount of $2.3 billion, comprised of a revolving credit facility of $1.5 billion and a term loan in the original principal amount of $800.0 million (the “Fifth A&R Credit Facilities”). The Fifth A&R Credit Agreement also provides us 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. UnderThe Fifth A&R Credit Agreement replaces the newformer credit agreement, we have the ability to obtainand will terminate on July 5, 2023. The revolving credit facility is available for issuance of letters of credit up to $100.0$75.0 million. Borrowings onunder the revolving credit facilityFifth A&R Credit Facilities may be made in various currencies, including U.S. dollars, euro, British pounds Australian dollars and Canadian dollars. The former credit agreement would have terminated on October 29, 2020, if it had not been amended and restated pursuant to the Fifth A&R Credit Agreement.
At September 30, 2016,2018, we had letters of credit outstanding in the aggregate principal amount of $26.5$22.3 million, and $1.2 billion$985.5 million of availability under the new credit agreement,Fifth A&R Credit Agreement, subject to our continued compliance with the covenants discussed below. The weighted average interest rates on average borrowings under the new credit agreementFifth A&R Credit Agreement and the former credit facilityagreement were 3.5%4.0%, 3.9% and 4.0%3.5% for fiscal 20162018, fiscal 2017 and fiscal 2015,2016, respectively.
We maintain a Master Accounts Receivable Purchase Agreement (asOn September 25, 2015, we entered into an amended and restated master accounts receivable purchase agreement (the “MARP Agreement”), which providesprovided for the discretionary sale by us, and the discretionary purchase (outside of the commitment period specified in the MARP 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.
On March 23, 2016, we entered into a Waiver and First Amendment to the MARP Agreement that amends the MARP Agreement in the following significant respects: (1) includes subsidiaries and affiliates of the approved debtors into 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 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 MARP Agreement at September 30, 2016 and 2015, respectively. The carrying value of 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 MARP 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 usterms upon our repayment of its outstanding obligations thereunder using $133.5 million borrowed under the newformer credit agreement,agreement.
On April 7, 2017, we entered into a Master Repurchase Agreement (including the annexes thereto, the “Repurchase Agreement”) and a Master Framework Agreement (the “Framework Agreement” and, together with our other existing sourcesthe Repurchase Agreement, the “Receivables Facility”). Under the Receivables Facility, we may sell a portfolio of 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 our new credit agreement allows for the periodic sale, discounting, factoring or securitization ofavailable and eligible outstanding customer accounts receivable to the purchasers and simultaneously agree to repurchase the receivables on a weekly basis. The eligible accounts receivable consisted of up to a maximum at any one time outstanding$250.0 million in accounts receivable generated by sales to three specified customers. On August 25, 2017, we entered into Amendment No. 1 to Master Framework Agreement, which (i) extended the expiration date of $500 million.
On Januarythe Receivables Facility from August 25, 2017 to August 24, 2018, (ii) defined the seasonal commitment period of the Receivables Facility as beginning on February 23, 2018 and ending on June 15, 2014, we used a portion of our available former credit facility borrowings to redeem all of our outstanding $200.0 million aggregate principal2018, (iii) increased the eligible amount of 7.25% Senior Notes, paying a redemption pricecustomer accounts receivable which may be sold from up to $250.0 million to up to $400.0 million and (iv) increased the commitment amount of $214.5the Receivables Facility during the seasonal commitment period from up to $100.0 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 relatedup to refinancing” line on the Consolidated Statement of Operations in our second quarter of fiscal 2014.$160.0 million.
On August 24, 2018, we entered into Amendment No. 1 to the Master Repurchase Agreement (the “Repurchase Amendment”) and Amendment No. 2 to Master Framework Agreement (the “Framework Amendment, and together with the Repurchase Amendment, the “Amendments”). Under the Amendments, the eligible amount of customer accounts receivables which may be sold is $400.0 million and the commitment amount during the seasonal commitment period is $160.0 million. Among other things, the Amendments (i) extend the expiration date of the Receivables Facility from August 24, 2018 to August 23, 2019 (ii) define the seasonal commitment period of the Receivables Facility as beginning on February 22, 2019 and ending on June 21, 2019 and (iii) revise the repurchase price for customer accounts receivable to LIBOR (with a floor of zero) plus 0.875% from LIBOR (with a floor of zero) plus 0.90%. As of September 30, 2018 and 2017, there were $76.0 million and $80.0 million, respectively, in borrowings on receivables pledged as collateral under the Receivables Facility, and the carrying value of the receivables pledged as collateral was $84.5 million and $88.9 million, respectively. As of September 30, 2018 and 2017, there was $0.4 million and $11.1 million, respectively, of availability under the Receivables Facility.
On December 15, 2015,2016, 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 $6.6issued $250.0 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 the first quarter of fiscal 2016. Additionally, we had $2.2 million in unamortized bond discount and issuance costs associated with the 6.625%5.250% Senior Notes that were written off and recognized in the “Costs related to refinancing” line on the Consolidated Statement of 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”).Notes. The net proceeds of the offering were used to repay outstanding borrowings under our former credit facility.facilities. The 5.250% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 5.250% Senior Notes have interest payment dates of June 15 and December 15 of each year. The 5.250% Senior Notes may be redeemed, in whole or in part, on or after December 15, 2021 at applicable redemption premiums. The 5.250% Senior Notes contain customary covenants and events of default and mature on December 15, 2026. Substantially all of our domestic subsidiaries serve as guarantors of the 5.250% Senior Notes.
On October 13, 2015, we issued $400.0 million of 6.000% Senior Notes. The net proceeds of the offering were used to repay outstanding borrowings under a prior credit agreement. The 6.000% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 6.000% Senior Notes have interest payment dates of April 15 and October 15 of each year, commencing April 15, 2016.year. The 6.000% Senior Notes may be redeemed, in whole or in part, on or after October 15, 2018 at applicable redemption premiums. The 6.000% Senior Notes contain customary covenants and events of default and mature on October 15, 2023. Substantially all of our domestic subsidiaries serve as guarantors of the 6.000% Senior Notes.
We were in compliance with all debt covenants as of September 30, 2016. Our new credit agreementThe Fifth A&R Credit Agreement contains, among other obligations, an affirmative covenant regarding our leverage ratio on the last day of each quarter calculated as our netaverage total indebtedness, divided by adjustedour earnings before interest, taxes, depreciation and amortization.amortization (“EBITDA”), as adjusted pursuant to the terms of the Fifth A&R Credit Agreement (“Adjusted EBITDA”). The maximum leverage ratio wasis: (i) 5.25 through the second quarter of fiscal 2019, (ii) 5.00 for the third quarter of fiscal 2019 through the first quarter of fiscal 2020, (iii) 4.75 for the second quarter of fiscal 2020 through the fourth quarter of fiscal 2020 and (iv) 4.50 asfor the first quarter of September 30, 2016.fiscal 2021 and thereafter. Our leverage ratio was 3.104.23 at September 30, 2016. Our new credit agreement2018. The Fifth A&R Credit Agreement also includescontains an affirmative covenant regarding our interest coverage.coverage ratio determined as of the end of each of its fiscal quarters. The interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in the Fifth A&R Credit Agreement, and excludes costs related to refinancings. The minimum interest coverage ratio was 3.00 for the twelve months ended September 30, 2016.2018. Our interest coverage ratio was 7.885.55 for the twelve months ended September 30, 2016.2018. The new credit agreementFifth A&R Credit Agreement allows us to make unlimited restricted payments (as defined in the new credit agreement)Fifth A&R Credit Agreement), including increased or one-time dividend payments and 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 further restricted payments in an aggregate amount for each fiscal year not to exceed the amount set forth in the new credit agreementFifth A&R Credit Agreement for such fiscal year ($175.0200.0 million for fiscal 20172019 and $200.0$225.0 million for fiscal 20182020 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 agreementFifth A&R 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 2017.2019. 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, 2016,2018, 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 $650.0$800.0 million at September 30, 2016.2018. Interest payments made between the effective date and expiration date are hedged by the swap agreements, except as noted below. On November 1, 2016,October 12, 2018, 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 tohave a fixed rate of approximately 0.83%2.93% beginning in November 2016October 2018 through expiration dates in June, July and August 2018.October 2021.
The notional amount, effective date, expiration date and rate of each of these swap agreements outstanding at September 30, 20162018 are shown in the table below.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 |
| (d) | 12/6/2012 | | 9/6/2017 | | 2.96 | % | |
| 200 |
| | 2/7/2014 | | 11/7/2017 | | 1.28 | % | |
| 150 | 150 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.12 | % |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.12 | % |
| 50 | 50 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.25 | % |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.25 | % |
| 50 | |
| | 2/28/2018 | | 5/28/2019 | | 2.01 | % |
| 200 | 200 |
| (c) | 12/20/2016 | | 6/20/2019 | | 2.12 | % |
| (c) | 12/20/2016 | | 6/20/2019 | | 2.12 | % |
| 250 | |
| (d) | 1/8/2018 | | 6/8/2020 | | 2.09 | % |
| 100 | |
| | 6/20/2018 | | 10/20/2020 | | 2.15 | % |
| |
| (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 duringNotional amount adjusts in accordance with a specified seasonal schedule. This represents the nine-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement.maximum notional amount at any point in time. |
We believe that our cash flows from operations and borrowings under our agreements described herein will be sufficient to meet debt service, capital expenditures and working capital needs for the foreseeable future. However, we cannot ensure that our business will generate sufficient cash flow from operations or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other liquidity needs. Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in “Item 1A. RISK FACTORS — 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.accruals. We do not believe that any liabilitiesour assessment of contingencies is reasonable and that may result from these pending judicial and administrative proceedingsthe related accruals, in the aggregate, are reasonably likely to have a material effect on our financial condition, results of operations, or cash flows;adequate; however, there can be no assurance that future quarterly or annual operating results will not be materially affected by these proceedings, whether as a result of adverse outcomes or as a result of significant defense costs.
Contractual Obligations
The following table summarizes our future cash outflows for contractual obligations as of September 30, 2016:2018:
| | | | | | | Payments Due by Period | | | | Payments Due by Period |
| Contractual Cash Obligations | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 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 | | $ | 1,316.1 |
| | $ | 185.0 |
| | $ | 31.3 |
| | $ | 661.5 |
| | $ | 438.3 |
| | $ | 2,025.7 |
| | $ | 132.6 |
| | $ | 80.9 |
| | $ | 1,162.2 |
| | $ | 650.0 |
|
| Interest expense on debt obligations | | 286.8 |
| | 56.9 |
| | 100.4 |
| | 69.5 |
| | 60.0 |
| | 454.4 |
| | 90.6 |
| | 161.3 |
| | 144.5 |
| | 58.0 |
|
| Operating lease obligations | | 171.0 |
| | 40.9 |
| | 66.8 |
| | 41.8 |
| | 21.5 |
| | 136.0 |
| | 44.7 |
| | 61.7 |
| | 22.4 |
| | 7.2 |
|
| Purchase obligations | | 285.1 |
| | 140.4 |
| | 99.9 |
| | 38.6 |
| | 6.2 |
| | 312.6 |
| | 140.8 |
| | 126.4 |
| | 40.3 |
| | 5.1 |
|
| Other, primarily retirement plan obligations | | 97.2 |
| | 3.5 |
| | 7.9 |
| | 7.9 |
| | 77.9 |
| | 149.2 |
| | 8.6 |
| | 24.3 |
| | 26.1 |
| | 90.2 |
|
| Total contractual cash obligations | | $ | 2,156.2 |
| | $ | 426.7 |
| | $ | 306.3 |
| | $ | 819.3 |
| | $ | 603.9 |
| | $ | 3,077.9 |
| | $ | 417.3 |
| | $ | 454.6 |
| | $ | 1,395.5 |
| | $ | 810.5 |
|
We have long-term debt obligations and interest payments due primarily under the 5.250% Senior Notes and 6.000% Senior Notes and our new credit facility.facilities. Amounts in the table represent scheduled future maturities of long-term debt principal for the periods indicated.
The interest payments for our new credit facilityfacilities are based on outstanding borrowings as of September 30, 2016.2018. 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 outsourced information services which comprise the unconditional purchase obligations disclosed in “NOTE 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 20162018 are based on preliminary estimates using actuarial assumptions determined as of September 30, 2016.2018. The above table excludes liabilities for unrecognized tax benefits and insurance accruals as we are unable to estimate the timing of payments for these items.
Off-Balance Sheet Arrangements
At September 30, 2016,2018, we have letters of credit in the aggregate face amount of $26.5$22.3 million outstanding. Further, we have a residual value guarantee on our corporate aircraft as disclosed in “NOTE 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. 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,accruals, 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 — Regulatory Matters”Considerations” and “ITEM 3. LEGAL PROCEEDINGS” of this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our discussion and analysis of our 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 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, reservesaccruals 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 Statements of Operations reflect the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments 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,net realizable value, principally determined by the first-in, first-outfirst in, first out method of accounting. Inventories acquired through the recent acquisition of Sunlight Supply, which represent approximately 19% of our consolidated inventories, were initially recorded at fair value and subsequently were measured using the average costing method of inventory valuation. 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. We make provisions for obsolete or slow-moving inventories as necessary to properly reflect inventory at the lower of cost or net realizable value. 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. During fiscal 2018, we determined it was preferable to use the first in, first out inventory valuation method and adopted this method for the remaining U.S. Consumer segment inventories not subject to the first in, first out method. The impact on inventory value and cost of goods sold was immaterial.
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, non-competition agreements 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 estimatesa combination of income-based and market-based approaches. If it is determined that an impairment has occurred, an impairment loss is recognized for the amount by which the carrying value of the reporting unit or intangible asset exceeds its estimated fair value.
Under the income-based approach, we determine fair value using a discounted cash flow approach that requires significant judgment with respect to revenue and expense growth rates, changes in working capital, and future cash flows, which arecapital expenditure requirements based upon annual budgets and longer-range strategic plans.plans, and the selection of an appropriate discount rate. These budgets and plans are used for internal purposes and are also the basis for communication with outside parties about future business trends. Under the market-based approach, we determine fair value by comparing our reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. We also use the guideline transaction method to determine fair value based on pricing multiples derived from the sale of companies that are similar to our reporting units.
Fair value estimates employed in our annual impairment review of indefinite-lived intangible assets and goodwill were determined using models involving several assumptions. Changes in our assumptions could materially impact our fair value
estimates. Assumptions critical to our fair value estimates were: (i) discount rates used in determining the fair value of the reporting units and intangible assets; (ii) royalty rates used in our intangible asset valuations; (iii) projected future revenues, expenses, working capital and capital expenditures used in the reporting unit and intangible 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. While we believe the assumptions we useused 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 intangible 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 intangible assets; (ii) royalty rates used in our intangible asset valuations; (iii) projected revenue and operating profit growth rates used in the reporting unit and intangible 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, 20162018, goodwill totaled $373.2$543.0 million, with $211.9$228.1 million, $304.1 million and $161.3$10.8 million of goodwill for theour U.S. Consumer, Hawthorne and Other segments, respectively. No goodwillWe performed annual impairment was recognizedtesting as a result of the annual evaluation performedfirst day of our fourth fiscal quarter in fiscal 2018, 2017 and 2016 and, with the exception of our Hawthorne reporting unit in fiscal 2018, concluded that there were no impairments of goodwill as of July 3, 2016. Thethe estimated fair value of each reporting unit with a significant goodwill balance was substantially in excess ofexceeded its carrying value asvalue. Based on the results of the annual test date. If we were to alterquantitative evaluation for fiscal 2018, the fair values of our impairment testingU.S. Consumer and Other segment reporting units exceeded their respective carrying values by increasing247% and 12%, respectively. A 100 basis point change in the discount rate would not have resulted in an impairment for our U.S. Consumer and Other segment reporting units. As discussed further in “NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET,” during the fourth quarter of fiscal 2018 we recognized a non-cash goodwill impairment charge of $94.6 million related to our Hawthorne reporting unit in the discounted cash flow analysis“Impairment, restructuring and other” line in the Consolidated Statements of Operations. The impairment was primarily driven by 100 basis points, there still would not be any impairment indicated for any reporting units. the downturn in the U.S. retail hydroponic market, which has continued longer than anticipated in our earlier forecasts, as well as the completion of our annual budget process.
At September 30, 2016,2018, indefinite-lived intangible assets consisted of tradenames of $184.8$168.2 million, as well as the Marketing Agreement Amendment of $188.3$155.7 million and the Brand Extension Agreement of $111.7 million. Based on the results of the annual evaluation for fiscal 2018, the fair values of our indefinite-lived intangible assets exceeded their respective carrying values in a range of 6% to over 900%. The fair value of the Ortho® tradename and the Marketing Agreement Amendment exceeded their carrying values by 6% and 9%, respectively. A 100 basis point change in the discount rate would have resulted in an impairment of the Ortho® tradename of $5.3 million which were both acquired during fiscal 2015. Theand an impairment of the Marketing Agreement Amendment of $5.0 million. All other indefinite-lived intangible assets had an estimated fair value of each tradename 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 tradenames.
During the third quarter of fiscal 2014, as a result of an impairment review, we recognized an impairment charge for a non-recurring fair value adjustment of $33.7 million within the U.S. Consumer segment related to the Ortho® 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 20162019 pension expense. A 100 basis point change in the discount rate would have a $63.8$43.3 million change in our projected benefit obligations as of September 30, 2016.2018.
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 reservesaccruals 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 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 proceedings which have a high degree of uncertainty associated with them. We continually assess the likely outcome of these proceedings and the adequacy of reserves,accruals, if any, provided for their resolution. There can be no assurance that the ultimate outcomes of these proceedings will not differ
materially from our current assessment of them, nor that all proceedings 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.
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| 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, 20162018 and 20152017 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, 20162018 and 2015,2017, we had outstanding interest rate swap agreements with a total U.S. dollar equivalent notional value of $650.0$800.0 million and $1,300.0$1,100.0 million, respectively. The weighted average fixed rate of swap agreements outstanding at September 30, 20162018 was 1.9%2.1%.
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, 20162018 and 2015.2017. 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, 20162018 and 2015.2017. 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 20162018 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 |
| 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | After | | |
| 2018 | | | 2019 | | 2020 | | 2021 | | 2022 | | 2023 | | After | | Total | | Fair Value |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate debt | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 288.8 |
| | $ | 400.0 |
| | $ | 688.8 |
| | $ | 715.8 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 650.0 |
| | $ | 650.0 |
| | $ | 650.4 |
|
| Average rate | | — |
| | — |
| | — |
| | — |
| | 2.6 | % | | 6.0 | % | | 5.7 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 5.7 | % | | 5.7 | % | | — |
|
| Variable rate debt | | $ | 138.6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 417.4 |
| | $ | — |
| | $ | 556.0 |
| | $ | 556.0 |
| | $ | 116.0 |
| | $ | 40.0 |
| | $ | 40.0 |
| | $ | 40.0 |
| | $ | 1,122.2 |
| | $ | — |
| | $ | 1,358.2 |
| | $ | 1,358.2 |
|
| Average rate | | 1.4 | % | | — |
| | — |
| | — |
| | 2.1 | % | | — |
| | 1.9 | % | | — |
| | 3.4 | % | | 4.0 | % | | 4.0 | % | | 4.0 | % | | 3.8 | % | | — |
| | 3.8 | % | | — |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | $ | (0.8 | ) | | $ | (0.9 | ) | | $ | (4.7 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (6.4 | ) | | $ | (6.4 | ) | | $ | 2.9 |
| | $ | 0.9 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 3.8 |
| | $ | 3.8 |
|
| Average rate | | 3.0 | % | | 1.3 | % | | 2.1 | % | | — |
| | — |
| | — |
| | 1.9 | % | | — |
| | 2.1 | % | | 2.1 | % | | — |
| | — |
| | — |
| | — |
| | 2.1 | % | | — |
|
| | | | | Expected Maturity Date | | Total | | Fair Value | | Expected Maturity Date | | Total | | Fair Value |
| 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | After | | |
| 2017 | | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | After | | Total | | Fair Value |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate debt | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 200.0 |
| | $ | 200.0 |
| | $ | 206.3 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 273.8 |
| | $ | — |
| | $ | 650.0 |
| | $ | 923.8 |
| | $ | 965.2 |
|
| Average rate | | — |
| | — |
| | — |
| | — |
| | — |
| | 6.6 | % | | 6.6 | % | | — |
| | — |
| | — |
| | — |
| | 3.3 | % | | — |
| | 5.7 | % | | 5.0 | % | | — |
|
| Variable rate debt | | $ | 122.3 |
| | $ | — |
| | $ | — |
| | $ | 816.3 |
| | $ | — |
| | $ | — |
| | $ | 938.6 |
| | $ | 938.6 |
| | $ | 80.0 |
| | $ | — |
| | $ | — |
| | $ | 300.5 |
| | $ | — |
| | $ | — |
| | $ | 380.5 |
| | $ | 380.5 |
|
| Average rate | | 0.9 | % | | — |
| | — |
| | 2.3 | % | | — |
| | — |
| | 2.1 | % | | — |
| | 2.1 | % | | — |
| | — |
| | 2.9 | % | | — |
| | — |
| | 2.8 | % | | — |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | $ | (6.2 | ) | | $ | (1.6 | ) | | $ | (2.4 | ) | | $ | (3.2 | ) | | $ | — |
| | $ | — |
| | $ | (13.4 | ) | | $ | (13.4 | ) | | $ | 1.3 |
| | $ | (1.2 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.1 |
| | $ | 0.1 |
|
| Average rate | | 2.9 | % | | 3.0 | % | | 1.3 | % | | 2.1 | % | | — |
| | — |
| | 2.0 | % | | — |
| | 0.9 | % | | 2.1 | % | | — |
| | — |
| | — |
| | — |
| | 1.6 | % | | — |
|
Excluded from the information provided above are $71.3miscellaneous debt instruments of $17.5 million and $19.0$105.4 million at September 30, 20162018 and 2015, respectively, of miscellaneous debt instruments.2017, respectively.
Other Market Risks
Through fiscal 20162018, we had transactions that were denominated in currencies other than the currency of the country of origin. We use currency forward contracts to manage the exchange rate risk associated with intercompany loans with foreign subsidiaries that areand certain other balances denominated in localforeign currencies. At September 30, 20162018, the notional amount of outstanding currency forward contracts was $165.8$117.2 million with a fair value of $0.4$(0.6) million. At September 30, 20152017, the notional amount of outstanding currency forward contracts was $52.3$268.3 million with a negative fair value of $0.7 million.$1.8 million. The outstanding contracts will mature over the next fiscal quarter.
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. 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 use derivatives to partially mitigate the effect of fluctuating diesel and gasoline costs on our businesses. We had outstanding derivative contracts for 8,106,0006,678,000 and 8,022,0006,972,000 gallons of fuel at September 30, 20162018 and 2015,2017, respectively. The outstanding derivative contracts had a negative fair value of $0.1$1.7 million at September 30, 2016,2018, compared to a negative fair value of $3.2$0.6 million at September 30, 2015.2017. 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 40,50088,000 and 52,50076,500 aggregate tons of urea at September 30, 20162018 and 2015,2017, respectively. The outstanding derivative contracts had a negative fair value of $0.3$6.1 million at September 30, 2016,2018, compared to a negative fair value of $1.3$3.2 million at September 30, 2015.2017.
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| 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 5360 of this Annual Report on Form 10-K.
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| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
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| 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), 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 5461 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 5562 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 of 1934) occurred during the Registrant’s fiscal quarter ended September 30, 2016,2018, that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
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| ITEM 9B. | OTHER INFORMATION |
None.
PART III
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| 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 27, 201725, 2019 (the “2017“2019 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 20172019 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, 2016.2018.
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 — Nominating and Governance 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 20162018 Annual Meeting of Shareholders held on January 28, 2016.26, 2018.
Audit 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” in Scotts Miracle-Gro’s Definitive Proxy Statement.
Committee Charters; Code of Business Conduct & Ethics; Corporate Governance Guidelines
The Board of Directors of Scotts Miracle-Gro has adopted charters for each of the Audit Committee, the Nominating and Governance Committee, the Compensation and Organization Committee, the Innovation and Technology Committee and the Finance 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 & 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 & 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 & 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 & Ethics, Scotts Miracle-Gro’s Corporate Governance Guidelines, the Audit Committee charter, the Nominating and Governance Committee charter, the Compensation and Organization Committee charter, the Innovation and Technology Committee charter and the Finance 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.
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| 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,” “NON-EMPLOYEE DIRECTOR 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 COMMITTEE MATTERS — Fees of the Independent Registered Public Accounting Firm” and “AUDIT 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 5360 of this Annual Report on Form 10-K.
(b) EXHIBITS
The exhibits listed on the “Index to Exhibits” beginning on page 126137 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 5360 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.
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| | | |
| | THE SCOTTS MIRACLE-GRO COMPANY |
| | | | |
| | By: | | /s/ JAMES HAGEDORN |
| | | | James Hagedorn, Chief Executive Officer and Chairman of the Board |
Dated: November 28, 201629, 2018
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/ THOMAS RANDAL COLEMAN | | Chief Financial Officer and Executive Vice President | | November 28, 201629, 2018 |
| Thomas Randal Coleman | | (Principal Financial Officer and Principal Accounting Officer) | | |
| | | | | |
| /s/ JAMES HAGEDORN | | Chief Executive Officer, Chairman of the Board and Director | | November 28, 201629, 2018 |
| James Hagedorn | | (Principal Executive Officer) | | |
| | | | | |
/s/ BRIAN D. FINN* DAVID C. EVANS* | | Director | | November 28, 201629, 2018 |
| David C. Evans | | | | |
| | | | |
| /s/ BRIAN D. FINN* | | Director | | November 29, 2018 |
| Brian D. Finn | | | | |
| | | | | |
| /s/ ADAM HANFT* | | Director | | November 28, 201629, 2018 |
| Adam Hanft | | | | |
| | | | | |
/s/ MICHELLE A. JOHNSON* CRAIG R. HARGREAVES* | | Director | | November 28, 201629, 2018 |
Michelle A. JohnsonCraig R. Hargreaves | | | | |
| | | | | |
| /s/ STEPHEN L. JOHNSON* | | Director | | November 28, 201629, 2018 |
| Stephen L. Johnson | | | | |
| | | | | |
| /s/ THOMAS N. KELLY JR.* | | Director | | November 28, 201629, 2018 |
| Thomas N. Kelly Jr. | | | | |
| | | | | |
| /s/ KATHERINE HAGEDORN LITTLEFIELD* | | Director | | November 28, 201629, 2018 |
| Katherine Hagedorn Littlefield | | | | |
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
| /s/ JAMES F. MCCANN* | | Director | | November 28, 201629, 2018 |
| James F. McCann | | | | |
| | | | | |
| /s/ NANCY G. MISTRETTA* | | Director | | November 28, 201629, 2018 |
| Nancy G. Mistretta | | | | |
| | | | |
| /s/ PETER E. SHUMLIN* | | Director | | November 29, 2018 |
| Peter E. Shumlin | | | | |
| | | | | |
| /s/ JOHN R. VINES* | | Director | | November 28, 201629, 2018 |
| 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/ THOMAS RANDAL COLEMAN | |
| | 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, 2016,2018, 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.Sunlight Supply, Inc. and itsCan-Filters Group Inc., and their subsidiaries, and a Canadian growing media operation, which were acquired in fiscal 2016.2018. These acquisitions constituted 9.5%17.6% of total assets, 1.4%4.1% and 0.5%(19.6)% of revenues and net income, respectively, included in our consolidated financial statements as of and for the fiscal year ended September 30, 2016.2018.
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, 2016,2018, 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 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, 20162018 and has issued their attestation report which appears herein.
|
| | | | |
| /s/ JAMES HAGEDORN | | /s/ THOMAS RANDAL COLEMAN |
| James Hagedorn | | Thomas Randal Coleman |
| Chief Executive Officer and Chairman of the Board | | Executive Vice President and Chief Financial Officer |
| | | | | |
| Dated: | November 28, 201629, 2018 | | Dated: | November 28, 201629, 2018 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company
Marysville, Ohio
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of The Scotts Miracle-Gro Company and subsidiaries (the “Company”) as of September 30, 20162018 and 2015, and2017, 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, 2016. Our audits also included2018, and the related notes and schedules (collectively referred to as the “financial statements”). In our opinion, the financial statement schedules listedstatements present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows, for each of the three years in the Index at Item 15. period ended September 30, 2018 in conformity with accounting principles generally accepted in the United States of America.
Changes in Accounting Principle
As discussed in Note 1 to the financial statements, on October 1, 2017, the Company prospectively adopted the new accounting guidance in ASU 2016-09 Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. On June 30, 2018, the Company prospectively adopted the new accounting guidance in ASU 2017-04 Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. On July 1, 2018, the Company changed its accounting for a portion of its inventories to the first-in, first-out method which was determined to be a preferable accounting principle for such inventories.
Basis for Opinion
These financial statements and financial statement schedules are the responsibility of the Company’sCompany's management. Our responsibility is to express an opinion on the Company's financial statements and financial statement schedules based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. 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 includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statement presentation.statements. 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 at September 30, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 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, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 28, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
|
| |
| /s/ DELOITTE & TOUCHE LLP | |
| | |
| Columbus, Ohio | |
November 28, 201629, 2018 | |
| We have served as the Company's auditor since 2005. | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company
Marysville, Ohio
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of The Scotts Miracle-Gro Company and subsidiaries (the “Company”) as of September 30, 2016,2018, based on criteria established in Internal Control —- Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
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.Sunlight Supply, Inc. and itsCan-Filters Group Inc., and their subsidiaries and a Canadian growing media operation which were acquired in fiscal 2016.2018. These acquisitions constituted 9.5%17.6% of total assets, 1.4%4.1% and 0.5%(19.6)% of revenues and net income, respectively, included in the consolidated financial statements as of and for the fiscal year ended September 30, 2016.2018. Accordingly, our audit did not include the internal control over financial reporting at Gavita International BV. Sunlight Supply, Inc. and Can-Filters Group Inc., and their subsidiaries. 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, 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 have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements as of and for the year ended September 30, 2018, of the Company and our report dated November 29, 2018, expressed an unqualified opinion on those financial statements and included an explanatory paragraph regarding the Company’s change in accounting for employee share-based payments, goodwill impairment testing and inventory valuation.
Basis for Opinion
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, 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 are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. 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.
Definition and Limitations of Internal Control over Financial Reporting
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. 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 theits 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 preventedprevent or detected on a timely basis.detect misstatements. 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, 2016, based on the criteria established in Internal Control — Integrated Framework (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, 2016 of the Company and our report dated November 28, 2016 expressed an unqualified opinion on those financial statements and financial statement schedules.
|
| |
| /s/ DELOITTE & TOUCHE LLP | |
| | |
| Columbus, Ohio | |
November 28, 201629, 2018 | |
THE SCOTTS MIRACLE-GRO COMPANY
Consolidated Statements of Operations
(In millions, except per share data)
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Net sales | $ | 2,836.1 |
| | $ | 2,728.0 |
| | $ | 2,578.3 |
| $ | 2,663.4 |
| | $ | 2,642.1 |
| | $ | 2,506.2 |
|
| Cost of sales | 1,833.0 |
| | 1,813.4 |
| | 1,688.2 |
| 1,778.3 |
| | 1,669.5 |
| | 1,600.0 |
|
| Cost of sales—impairment, restructuring and other | 7.7 |
| | 6.6 |
| | — |
| 20.5 |
| | — |
| | 5.9 |
|
| Gross profit | 995.4 |
| | 908.0 |
| | 890.1 |
| 864.6 |
| | 972.6 |
| | 900.3 |
|
| Operating expenses: | | | | | | | | | | |
| Selling, general and administrative | 597.1 |
| | 571.4 |
| | 567.1 |
| 540.1 |
| | 550.9 |
| | 518.0 |
|
| Impairment, restructuring and other | (47.2 | ) | | 76.6 |
| | 50.0 |
| 132.3 |
| | 4.9 |
| | (51.5 | ) |
| Other income, net | (13.8 | ) | | (2.1 | ) | | (10.7 | ) | (6.7 | ) | | (16.6 | ) | | (13.8 | ) |
| Income from operations | 459.3 |
| | 262.1 |
| | 283.7 |
| 198.9 |
| | 433.4 |
| | 447.6 |
|
| Equity in income of unconsolidated affiliates | (7.8 | ) | | — |
| | — |
| |
| Equity in (income) loss of unconsolidated affiliates | | (4.9 | ) | | 29.0 |
| | (7.8 | ) |
| Costs related to refinancing | 8.8 |
| | — |
| | 10.7 |
| — |
| | — |
| | 8.8 |
|
| Interest expense | 65.6 |
| | 50.5 |
| | 47.3 |
| 86.4 |
| | 76.1 |
| | 62.9 |
|
| Other non-operating expense, net | | 1.7 |
| | 13.4 |
| | — |
|
| Income from continuing operations before income taxes | 392.7 |
| | 211.6 |
| | 225.7 |
| 115.7 |
| | 314.9 |
| | 383.7 |
|
| Income tax expense from continuing operations | 139.4 |
| | 73.8 |
| | 80.2 |
| |
| Income tax expense (benefit) from continuing operations | | (11.9 | ) | | 116.6 |
| | 137.6 |
|
| Income from continuing operations | 253.3 |
| | 137.8 |
| | 145.5 |
| 127.6 |
| | 198.3 |
| | 246.1 |
|
| Income from discontinued operations, net of tax | 61.5 |
| | 20.9 |
| | 20.7 |
| |
| Income (loss) from discontinued operations, net of tax | | (63.9 | ) | | 20.5 |
| | 68.7 |
|
| Net income | $ | 314.8 |
| | $ | 158.7 |
| | $ | 166.2 |
| $ | 63.7 |
| | $ | 218.8 |
| | $ | 314.8 |
|
| Net loss attributable to noncontrolling interest | 0.5 |
| | 1.1 |
| | 0.3 |
| |
| Net (income) loss attributable to noncontrolling interest | | — |
| | (0.5 | ) | | 0.5 |
|
| Net income attributable to controlling interest | $ | 315.3 |
| | $ | 159.8 |
| | $ | 166.5 |
| $ | 63.7 |
| | $ | 218.3 |
| | $ | 315.3 |
|
| | | | | | | | | | | |
| Basic income per common share: | | | | | | |
| Basic income (loss) per common share: | | | | | | |
| Income from continuing operations | $ | 4.15 |
| | $ | 2.27 |
| | $ | 2.37 |
| $ | 2.27 |
| | $ | 3.33 |
| | $ | 4.04 |
|
| Income from discontinued operations | 1.01 |
| | 0.35 |
| | 0.33 |
| |
| Income (loss) from discontinued operations | | (1.14 | ) | | 0.35 |
| | 1.12 |
|
| Basic net income per common share | $ | 5.16 |
| | $ | 2.62 |
| | $ | 2.70 |
| $ | 1.13 |
| | $ | 3.68 |
| | $ | 5.16 |
|
| Diluted income per common share: | | | | | | |
| Diluted income (loss) per common share: | | | | | | |
| Income from continuing operations | $ | 4.09 |
| | $ | 2.23 |
| | $ | 2.32 |
| $ | 2.23 |
| | $ | 3.29 |
| | $ | 3.98 |
|
| Income from discontinued operations | 1.00 |
| | 0.34 |
| | 0.33 |
| |
| Income (loss) from discontinued operations | | (1.11 | ) | | 0.34 |
| | 1.11 |
|
| Diluted net income per common share | $ | 5.09 |
| | $ | 2.57 |
| | $ | 2.65 |
| $ | 1.12 |
| | $ | 3.63 |
| | $ | 5.09 |
|
See Notes to Consolidated Financial Statements.
THE SCOTTS MIRACLE-GRO COMPANY
Consolidated Statements of Comprehensive Income (Loss)
(In millions)
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| Net income | $ | 314.8 |
| | $ | 158.7 |
| | $ | 166.2 |
|
| Other comprehensive income (loss): | | | | | |
| Net foreign currency translation adjustment | (6.2 | ) | | (14.2 | ) | | (8.2 | ) |
| 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) | (10.1 | ) | | (20.6 | ) | | (8.4 | ) |
| Comprehensive income | 304.7 |
| | 138.1 |
| | 157.8 |
|
| Comprehensive income attributable to noncontrolling interest | — |
| | — |
| | — |
|
| Comprehensive income attributable to controlling interest | $ | 304.7 |
| | $ | 138.1 |
| | $ | 157.8 |
|
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| Net income | $ | 63.7 |
| | $ | 218.8 |
| | $ | 314.8 |
|
| Other comprehensive income (loss): | | | | | |
| Net foreign currency translation adjustment, including reclassifications to net income of $11.7, $18.5 and $0.0 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively | 9.0 |
| | 28.2 |
| | (6.2 | ) |
| Net unrealized gain (loss) on derivative instruments, net of tax of $3.3, $3.1 and $(0.9) for fiscal 2018, fiscal 2017 and fiscal 2016, respectively | 9.3 |
| | 4.9 |
| | (1.5 | ) |
| Reclassification of net unrealized (gains) losses on derivative instruments to net income, net of tax of $(1.1), $1.1 and $3.6 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively | (3.1 | ) | | 1.8 |
| | 5.8 |
|
| Net unrealized gain (loss) in pension and other post-retirement benefits, net of tax of $2.4, $6.0 and $(6.2) for fiscal 2018, fiscal 2017 and fiscal 2016, respectively | 6.7 |
| | 9.6 |
| | (10.0 | ) |
| Reclassification of net pension and other post-retirement benefit losses to net income, net of tax of $0.4, $2.3 and $1.1 for fiscal 2018, fiscal 2017 and fiscal 2016, respectively | 1.3 |
| | 3.6 |
| | 1.8 |
|
| Total other comprehensive income (loss) | 23.2 |
| | 48.1 |
| | (10.1 | ) |
| Comprehensive income | 86.9 |
| | 266.9 |
| | 304.7 |
|
| Comprehensive (income) loss attributable to noncontrolling interest | — |
| | (0.9 | ) | | 0.5 |
|
| Comprehensive income attributable to controlling interest | $ | 86.9 |
| | $ | 266.0 |
| | $ | 305.2 |
|
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, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| OPERATING ACTIVITIES | | | | | | | | | | |
| Net income | $ | 314.8 |
| | $ | 158.7 |
| | $ | 166.2 |
| $ | 63.7 |
| | $ | 218.8 |
| | $ | 314.8 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Impairment, restructuring and other | 0.2 |
| | 4.3 |
| | 33.7 |
| 121.5 |
| | 1.2 |
| | 0.2 |
|
| Costs related to refinancing | 2.2 |
| | — |
| | 3.5 |
| — |
| | — |
| | 2.2 |
|
| Share-based compensation expense | 15.6 |
| | 13.2 |
| | 11.1 |
| 40.4 |
| | 25.2 |
| | 15.6 |
|
| Depreciation | 53.8 |
| | 51.4 |
| | 50.6 |
| 53.4 |
| | 55.1 |
| | 53.8 |
|
| Amortization | 19.7 |
| | 17.6 |
| | 13.8 |
| 30.0 |
| | 25.0 |
| | 19.7 |
|
| Deferred taxes | 83.6 |
| | 1.3 |
| | 12.1 |
| (87.6 | ) | | (17.4 | ) | | 83.6 |
|
| (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 | — |
| | — |
| | (1.4 | ) | |
| Equity in income of unconsolidated affiliates, net of distributions | (0.3 | ) | | — |
| | — |
| |
| Gain on investment of unconsolidated affiliates | — |
| | — |
| | (5.7 | ) | |
| Gain on long-lived assets | | (0.6 | ) | | (3.3 | ) | | (0.8 | ) |
| (Gain) loss on sale / contribution of business | | 0.7 |
| | (31.7 | ) | | (131.2 | ) |
| Equity in (income) loss and distributions from unconsolidated affiliates | | (4.9 | ) | | 32.6 |
| | (0.3 | ) |
| Recognition of accumulated foreign currency translation loss | | 11.7 |
| | — |
| | — |
|
| Changes in assets and liabilities, net of acquired businesses: | | | | | | | | | | |
| Accounts receivable | (29.8 | ) | | (12.5 | ) | | (29.4 | ) | (2.7 | ) | | 48.6 |
| | (29.8 | ) |
| Inventories | (29.4 | ) | | (17.5 | ) | | (38.7 | ) | 14.3 |
| | 3.6 |
| | (29.4 | ) |
| Prepaid and other assets | (9.3 | ) | | 1.8 |
| | (3.2 | ) | 18.0 |
| | (12.2 | ) | | (9.3 | ) |
| Accounts payable | (45.3 | ) | | 6.9 |
| | 52.6 |
| (3.9 | ) | | 9.0 |
| | (45.3 | ) |
| Other current liabilities | 22.9 |
| | 12.9 |
| | (22.9 | ) | 4.5 |
| | 26.9 |
| | 22.9 |
|
| Restructuring reserves | (7.3 | ) | | 12.1 |
| | 4.9 |
| |
| Restructuring and other | | 100.1 |
| | (8.7 | ) | | (7.3 | ) |
| Other non-current items | (18.4 | ) | | (3.4 | ) | | (14.6 | ) | (13.6 | ) | | (10.4 | ) | | (11.8 | ) |
| Other, net | (3.6 | ) | | 0.1 |
| | 7.2 |
| (2.5 | ) | | 0.9 |
| | (3.6 | ) |
| Net cash provided by operating activities | 237.4 |
| | 246.9 |
| | 240.9 |
| 342.5 |
| | 363.2 |
| | 244.0 |
|
| INVESTING ACTIVITIES | | | | | | | | | | |
| Proceeds from sale of long-lived assets | 2.4 |
| | 5.5 |
| | 3.7 |
| 5.1 |
| | 5.7 |
| | 2.4 |
|
| Proceeds from sale of business, net of transaction costs | — |
| | — |
| | 7.2 |
| |
| Post-closing working capital payment related to sale of International Business | | (35.3 | ) | | — |
| | — |
|
| Proceeds from sale of business, net of cash disposed of | | — |
| | 180.3 |
| | — |
|
| Investments in property, plant and equipment | (58.3 | ) | | (61.7 | ) | | (87.6 | ) | (68.2 | ) | | (69.6 | ) | | (58.3 | ) |
| Investments in loans receivable | (90.0 | ) | | — |
| | — |
| (17.1 | ) | | (29.7 | ) | | (90.0 | ) |
| Proceeds from sale and leaseback transaction | — |
| | — |
| | 35.1 |
| |
| Proceeds from loans receivable | | 14.3 |
| | — |
| | — |
|
| Cash contributed to TruGreen Joint Venture | (24.2 | ) | | — |
| | — |
| — |
| | — |
| | (24.2 | ) |
| Net distributions from unconsolidated affiliates | 194.1 |
| | — |
| | — |
| (0.1 | ) | | 57.4 |
| | 194.1 |
|
| Investment in marketing and license agreement | — |
| | (300.0 | ) | | — |
| |
| Investments in acquired businesses, net of cash acquired | (158.4 | ) | | (180.2 | ) | | (114.0 | ) | (492.9 | ) | | (121.7 | ) | | (158.4 | ) |
| Net cash used in investing activities | (134.4 | ) | | (536.4 | ) | | (155.6 | ) | |
| Other investing, net | | 13.5 |
| | — |
| | — |
|
| Net cash (used in) provided by investing activities | | (580.7 | ) | | 22.4 |
| | (134.4 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | 2,069.1 |
| | 1,836.0 |
| | 1,932.8 |
| 2,987.0 |
| | 1,449.3 |
| | 2,069.1 |
|
| Repayments under revolving and bank lines of credit and term loans | (2,150.4 | ) | | (1,458.0 | ) | | (1,525.3 | ) | (2,312.9 | ) | | (1,618.3 | ) | | (2,150.4 | ) |
| Proceeds from issuance of 5.250% Senior Notes | | — |
| | 250.0 |
| | — |
|
| Proceeds from issuance of 6.000% Senior Notes | 400.0 |
| | — |
| | — |
| — |
| | — |
| | 400.0 |
|
| Repayment of 6.625% Senior Notes | (200.0 | ) | | — |
| | — |
| — |
| | — |
| | (200.0 | ) |
| Repayment of 7.25% Senior Notes | — |
| | — |
| | (200.0 | ) | |
| Financing and issuance fees | (11.2 | ) | | (0.5 | ) | | (6.1 | ) | (6.1 | ) | | (4.4 | ) | | (11.2 | ) |
| Dividends paid | (116.6 | ) | | (111.3 | ) | | (230.8 | ) | (120.0 | ) | | (120.3 | ) | | (116.6 | ) |
| Distribution paid by AeroGrow to noncontrolling interest | | — |
| | (8.1 | ) | | — |
|
| Purchase of Common Shares | (130.8 | ) | | (14.8 | ) | | (120.0 | ) | (327.7 | ) | | (255.2 | ) | | (137.4 | ) |
| Payments on sellers notes | (2.8 | ) | | (1.5 | ) | | (0.8 | ) | (8.9 | ) | | (28.7 | ) | | (2.8 | ) |
| Excess tax benefits from share-based payment arrangements | 5.8 |
| | 4.7 |
| | 5.9 |
| — |
| | 7.9 |
| | 5.8 |
|
| Cash received from exercise of stock options | 14.7 |
| | 24.3 |
| | 20.0 |
| 10.5 |
| | 11.0 |
| | 14.7 |
|
| Acquisition of noncontrolling interests | | (70.7 | ) | | — |
| | — |
|
| Net cash (used in) provided by financing activities | (122.2 | ) | | 278.9 |
| | (124.3 | ) | 151.2 |
| | (316.8 | ) | | (128.8 | ) |
| Effect of exchange rate changes on cash | (2.1 | ) | | (7.3 | ) | | (1.5 | ) | 0.4 |
| | 1.6 |
| | (2.1 | ) |
| Net decrease in cash and cash equivalents | (21.3 | ) | | (17.9 | ) | | (40.5 | ) | |
| Net increase (decrease) in cash and cash equivalents | | (86.6 | ) | | 70.4 |
| | (21.3 | ) |
| Cash and cash equivalents at beginning of year excluding cash classified within assets held for sale | | 120.5 |
| | 28.6 |
| | 50.8 |
|
| Cash and cash equivalents at beginning of year classified within assets held for sale | | — |
| | 21.5 |
| | 20.6 |
|
| Cash and cash equivalents at beginning of year | 71.4 |
| | 89.3 |
| | 129.8 |
| 120.5 |
| | 50.1 |
| | 71.4 |
|
| Cash and cash equivalents at end of year | $ | 50.1 |
| | $ | 71.4 |
| | $ | 89.3 |
| $ | 33.9 |
| | $ | 120.5 |
| | $ | 50.1 |
|
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, |
| | 2016 | | 2015 | 2018 | | 2017 |
ASSETS | | Current assets: | | | | | | |
| Cash and cash equivalents | $ | 50.1 |
| | $ | 71.4 |
| $ | 33.9 |
| | $ | 120.5 |
|
| Accounts receivable, less allowances of $7.2 in 2016 and $6.5 in 2015 | 196.4 |
| | 157.7 |
| |
| Accounts receivable, less allowances of $3.6 in 2018 and $3.1 in 2017 | | 226.0 |
| | 197.7 |
|
| Accounts receivable pledged | 174.7 |
| | 152.9 |
| 84.5 |
| | 88.9 |
|
| Inventories | 448.2 |
| | 395.8 |
| 481.4 |
| | 407.5 |
|
| Assets held for sale | — |
| | 220.3 |
| |
| Prepaid and other current assets | 122.3 |
| | 121.1 |
| 59.9 |
| | 67.1 |
|
| Total current assets | 991.7 |
| | 1,119.2 |
| 885.7 |
| | 881.7 |
|
| Investment in unconsolidated affiliates | 101.0 |
| | — |
| 36.1 |
| | 31.1 |
|
| Property, plant and equipment, net | 470.8 |
| | 444.1 |
| 530.8 |
| | 467.7 |
|
| Goodwill | 373.2 |
| | 283.8 |
| 543.0 |
| | 441.6 |
|
| Intangible assets, net | 750.9 |
| | 655.1 |
| 857.3 |
| | 748.9 |
|
| Other assets | 121.2 |
| | 25.0 |
| 201.6 |
| | 176.0 |
|
| Total assets | $ | 2,808.8 |
| | $ | 2,527.2 |
| $ | 3,054.5 |
| | $ | 2,747.0 |
|
LIABILITIES AND EQUITY | | Current liabilities: | | | | | | |
| Current portion of debt | $ | 185.0 |
| | $ | 132.6 |
| $ | 132.6 |
| | $ | 143.1 |
|
| Accounts payable | 165.9 |
| | 193.1 |
| 150.5 |
| | 153.1 |
|
| Liabilities held for sale | — |
| | 41.7 |
| |
| Other current liabilities | 242.2 |
| | 251.2 |
| 329.6 |
| | 248.3 |
|
| Total current liabilities | 593.1 |
| | 618.6 |
| 612.7 |
| | 544.5 |
|
| Long-term debt | 1,131.1 |
| | 1,025.0 |
| 1,883.8 |
| | 1,258.0 |
|
| Distributions in excess of investment in unconsolidated affiliate | | 21.9 |
| | 21.9 |
|
| Other liabilities | 350.3 |
| | 250.5 |
| 176.5 |
| | 260.9 |
|
| Total liabilities | 2,074.5 |
| | 1,894.1 |
| 2,694.9 |
| | 2,085.3 |
|
| 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 |
| |
| Common shares and capital in excess of $.01 stated value per share; shares outstanding of 55.3 in 2018 and 58.1 in 2017 | | 420.3 |
| | 407.6 |
|
| Retained earnings | 881.8 |
| | 684.2 |
| 919.9 |
| | 978.2 |
|
| Treasury shares, at cost; 7.8 shares in 2016 and 6.7 shares in 2015 | (451.4 | ) | | (357.1 | ) | |
| Treasury shares, at cost; 12.8 shares in 2018 and 10.0 shares in 2017 | | (939.6 | ) | | (667.8 | ) |
| Accumulated other comprehensive loss | (116.9 | ) | | (106.8 | ) | (46.0 | ) | | (69.2 | ) |
| Total equity—controlling interest | 715.2 |
| | 620.7 |
| 354.6 |
| | 648.8 |
|
| Noncontrolling interest | 19.1 |
| | 12.4 |
| 5.0 |
| | 12.9 |
|
| Total equity | 734.3 |
| | 633.1 |
| 359.6 |
| | 661.7 |
|
| Total liabilities and equity | $ | 2,808.8 |
| | $ | 2,527.2 |
| $ | 3,054.5 |
| | $ | 2,747.0 |
|
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) | | | | Non-controlling Interest | | | 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 | | Total | Shares | | Amount | | Shares | | Amount | | Total | | Total |
| 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 | | | | | | | | | | | | | (20.6 | ) | | (20.6 | ) | | | | (20.6 | ) | |
| Share-based compensation | | | | | 17.5 |
| | | | | | | | | | 17.5 |
| | | | 17.5 |
| |
| Dividends declared ($1.8200 per share) | | | | | | | (112.5 | ) | | | | | | | | (112.5 | ) | | | | (112.5 | ) | |
| Treasury share purchases | | | | | | | | | 0.2 |
| | (14.8 | ) | | | | (14.8 | ) | | | | (14.8 | ) | |
| Treasury share issuances | | | | | (12.4 | ) | | | | (0.9 | ) | | 50.0 |
| | | | 37.6 |
| | | | 37.6 |
| |
| 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 |
| 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 |
| — |
| | — |
| | — |
| | 315.3 |
| | — |
| | — |
| | — |
| | 315.3 |
| | (0.5 | ) | | 314.8 |
|
| Other comprehensive loss | | | | | | | | | | | | | (10.1 | ) | | (10.1 | ) | | | | (10.1 | ) | |
| Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (10.1 | ) | | (10.1 | ) | | — |
| | (10.1 | ) |
| Share-based compensation | | | | | 21.6 |
| | | | | | | | | | 21.6 |
| | | | 21.6 |
| — |
| | — |
| | 21.6 |
| | — |
| | — |
| | — |
| | — |
| | 21.6 |
| | — |
| | 21.6 |
|
| Dividends declared ($1.9100 per share) | | | | | | | (117.7 | ) | | | | | | | | (117.7 | ) | | | | (117.7 | ) | |
| Dividends declared ($1.910 per share) | | — |
| | — |
| | — |
| | (117.7 | ) | | — |
| | — |
| | — |
| | (117.7 | ) | | — |
| | (117.7 | ) |
| Treasury share purchases | | | | | | | | | 1.8 |
| | (130.8 | ) | | | | (130.8 | ) | | | | (130.8 | ) | — |
| | — |
| | — |
| | — |
| | 1.8 |
| | (137.4 | ) | | — |
| | (137.4 | ) | | — |
| | (137.4 | ) |
| Treasury share issuances | | | | | (20.3 | ) | | | | (0.7 | ) | | 36.5 |
| | | | 16.2 |
| | | | 16.2 |
| — |
| | — |
| | (20.3 | ) | | — |
| | (0.7 | ) | | 43.1 |
| | — |
| | 22.8 |
| | — |
| | 22.8 |
|
| Investment in noncontrolling interest | | | | | | | | | | | | | | | — |
| | 7.2 |
| | 7.2 |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 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 |
| 68.1 |
| | 0.3 |
| | 401.4 |
| | 881.8 |
| | 7.8 |
| | (451.4 | ) | | (116.9 | ) | | 715.2 |
| | 19.1 |
| | 734.3 |
|
| Net income (loss) | | — |
| | — |
| | — |
| | 218.3 |
| | — |
| | — |
| | — |
| | 218.3 |
| | 0.5 |
| | 218.8 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 47.7 |
| | 47.7 |
| | 0.4 |
| | 48.1 |
|
| Share-based compensation | | — |
| | — |
| | 33.4 |
| | — |
| | — |
| | — |
| | — |
| | 33.4 |
| | — |
| | 33.4 |
|
| Dividends declared ($2.030 per share) | | — |
| | — |
| | — |
| | (121.9 | ) | | — |
| | — |
| | — |
| | (121.9 | ) | | — |
| | (121.9 | ) |
| Treasury share purchases | | — |
| | — |
| | — |
| | — |
| | 2.7 |
| | (255.0 | ) | | — |
| | (255.0 | ) | | — |
| | (255.0 | ) |
| Treasury share issuances | | — |
| | — |
| | (26.5 | ) | | — |
| | (0.5 | ) | | 38.6 |
| | — |
| | 12.1 |
| | — |
| | 12.1 |
|
| Adjustment to noncontrolling interest due to ownership change | | — |
| | — |
| | (1.0 | ) | | — |
| | — |
| | — |
| | — |
| | (1.0 | ) | | 1.0 |
| | — |
|
| Distribution declared by AeroGrow | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (8.1 | ) | | (8.1 | ) |
| Balance at September 30, 2017 | | 68.1 |
| | 0.3 |
| | 407.3 |
| | 978.2 |
| | 10.0 |
| | (667.8 | ) | | (69.2 | ) | | 648.8 |
| | 12.9 |
| | 661.7 |
|
| Net income (loss) | | — |
| | — |
| | — |
| | 63.7 |
| | — |
| | — |
| | — |
| | 63.7 |
| | — |
| | 63.7 |
|
| Other comprehensive income (loss) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 23.2 |
| | 23.2 |
| | — |
| | 23.2 |
|
| Share-based compensation | | — |
| | — |
| | 40.5 |
| | — |
| | — |
| | — |
| | — |
| | 40.5 |
| | — |
| | 40.5 |
|
| Dividends declared ($2.140 per share) | | — |
| | — |
| | — |
| | (122.0 | ) | | — |
| | — |
| | — |
| | (122.0 | ) | | — |
| | (122.0 | ) |
| Treasury share purchases | | — |
| | — |
| | — |
| | — |
| | 3.5 |
| | (326.1 | ) | | — |
| | (326.1 | ) | | — |
| | (326.1 | ) |
| Treasury share issuances | | — |
| | — |
| | (22.1 | ) | | — |
| | (0.7 | ) | | 54.3 |
| | — |
| | 32.2 |
| | — |
| | 32.2 |
|
| Acquisition of remaining noncontrolling interest in Gavita | | — |
| | — |
| | (5.7 | ) | | — |
| | — |
| | — |
| | — |
| | (5.7 | ) | | (7.9 | ) | | (13.6 | ) |
| Balance at September 30, 2018 | | 68.1 |
| | $ | 0.3 |
| | $ | 420.0 |
| | $ | 919.9 |
| | 12.8 |
| | $ | (939.6 | ) | | $ | (46.0 | ) | | $ | 354.6 |
| | $ | 5.0 |
| | $ | 359.6 |
|
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 Scotts Miracle-Gro, the “Company”) are engaged in the manufacturing, marketing and sale of consumer branded products for lawn and garden care.care and indoor and hydroponic gardening. The Company’s primary customers include 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.product distributors and retailers. The Company’s products are sold primarily in North America, Europe and the European Union.
Prior to April 13, 2016, the Company operated the Scotts LawnService® business (the “SLS Business”), which provided residential and commercial lawn care, tree and shrub care and 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.
In March 2014, the Company completed the sale of its U.S. and Canadian wild bird food business. 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.Asia.
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 its subsidiaries. All intercompany transactions and accounts have 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 a controlling interests, areinterest, is 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(income) loss attributable to noncontrolling interest in the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income (Loss), respectively. The results of businesses acquired or disposed of are included in the consolidated financial statements from the date of each acquisition or up to the date of disposal, 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 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“Original Marketing Agreement”) and the Second Amended and Restated Agency and Marketing Agreement (the “Restated Marketing Agreement”), pursuant to which the Company has served, since its 1998 fiscal year, as the exclusive agent to theof Monsanto Company (“Monsanto”) for the marketing and distribution of Monsanto’s consumer Roundup® herbicidenon-selective weedkiller products in the United States and certain other specified countries, the Company performs certain functions, primarily manufacturing conversion services (in North America), distributionsales, merchandising, warehousing and logistics, andother selling and marketing support,services, on behalf of Monsanto in the conduct of theits consumer Roundup® business. The Company performs other services, including conversion services, pursuant to ancillary agreements. 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” line in the Consolidated StatementStatements of Operations, with no effect on gross profit dollars or net income.
Under the terms of the Marketing, R&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
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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” line, with no effect on gross profit dollars or net income.
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 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. The costs deferred at September 30, 20162018 and 20152017 were $0.2zero and $0.4 million, and $0.7 million, respectively.
Advertising expenses were $132.2$104.2 million in fiscal 2016, $133.22018, $123.0 million in fiscal 20152017 and $132.1$122.3 million in fiscal 2014.2016.
Research and Development
All costs associated with research and development are charged to expense as incurred. Expenses for fiscal 20162018, fiscal 20152017 and fiscal 20142016 were $45.5$42.5 million, $44.4$39.9 million and $46.0$36.0 million, respectively, including product registration costs of $14.3$11.4 million, $13.0$10.6 million and $12.5$10.6 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 to five 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.
Other Non-Operating Expense, net
In fiscal 2017, the “Other non-operating expense, net” line in the Consolidated Statements of Operations included a $13.4 million non tax-deductible charge, related to the October 2017 acquisition of the remaining noncontrolling interest in Gavita Holdings B.V., and its subsidiaries (collectively, “Gavita”), to write-up the fair value of the loan to the noncontrolling ownership group to the agreed upon buyout value.
As a result of the enactment of the H.R.1 (the “Act,” formerly known as the “Tax Cuts and Jobs Act”) on December 22, 2017, the Company repatriated cash from a foreign subsidiary during the second quarter of fiscal 2018 resulting in the liquidation of substantially all of the assets of the subsidiary and the write-off of accumulated foreign currency translation loss adjustments of $11.7 million in the “Other non-operating expense, net” line in the Consolidated Statements of Operations.
For fiscal 2018, the Company has classified interest income on loans receivable of $10.0 million in the “Other non-operating expense, net” line in the Consolidated Statements of Operations. For fiscal 2017 and fiscal 2016, interest income on loans receivable of $10.0 million and $3.9 million, respectively, is classified in the “Other income, net” line in the Consolidated Statements of Operations.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Earnings per Common Share
Basic earningsincome per common share of Scotts Miracle-Gro (“Common ShareShare”) is computed based onby dividing income attributable to controlling interest from continuing operations, income (loss) from discontinued operations or net income attributable to controlling interest by the weighted-averageweighted average number of Common Shares outstanding each period. Diluted earningsincome per Common Share is computed based onby dividing income attributable to controlling interest from continuing operations, income (loss) from discontinued operations or net income attributable to controlling interest by the weighted-averageweighted average number of Common Shares andoutstanding plus all dilutive potential Common Shares (stock options, stock appreciation rights, performance shares 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.
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 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,net realizable value, principally determined by the first in, first out method of accounting. Inventories acquired through the recent acquisition of Sunlight Supply (as defined in “NOTE 7. ACQUISITIONS AND INVESTMENTS”), which represent approximately 19% of the Company’s consolidated inventories, were initially recorded at fair value and subsequently were measured using the average costing method of inventory valuation. 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 marketnet realizable value. Adjustments to reflect inventories at net realizable values were $10.8$8.1 million and $17.8$10.5 million at September 30, 20162018 and 20152017, respectively. During fiscal 2018, the Company determined it was preferable to use the first in, first out inventory valuation method and adopted this method for the remaining U.S. Consumer segment inventories not subject to the first in, first out method. The impact of this change in accounting principle on inventory value and cost of goods sold was immaterial.
Loans 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 was $10.0 million for fiscal 2018, $10.0 million for fiscal 2017 and $3.9 million for fiscal 2016. Interest income is recorded on an accrual basis,basis. The Company classified interest income in the “Other non-operating expense, net” line in the Consolidated Statements of Operations in fiscal 2018 and is recognized in the “Other income, net” line in the Consolidated Statements of Operations.Operations in fiscal 2017 and fiscal 2016.
Interest incomeAt September 30, 2018, the carrying value and estimated fair value of loans receivable was $112.6 million and $128.2 million, respectively. At September 30, 2017, the carrying value and estimated fair value of loans receivable was $110.4 million and $125.6 million, respectively. The estimated fair value 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 credit risk and discount rates. The fair value measurement is recordedbased on an accrual basis, and is recognizedsignificant inputs unobservable in the “Other income, net” line in the Consolidated Statements of Operations. Interest income was $3.9 million for fiscal 2016market and zero for fiscal 2015 and fiscal 2014.thus represents a Level 3 measurement.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Long-Lived Assets
Property, plant and equipment are stated at cost. Interest capitalized in property, plant and equipment amounted to $0.3 million, $0.4$0.1 million and $0.4$0.3 million during fiscal 2016, 2018, fiscal 20152017 and fiscal 2014,2016, 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 years |
| Buildings | 10 – 40 years |
| Machinery and equipment | 3 – 15 years |
| Furniture and fixtures | 6 – 10 years |
| Software | 3 – 8 years |
Intangible assets 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 group would be compared to the asset’sasset group 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”other” within “Operating expenses” in the Consolidated Statements of Operations.
The Company had non-cash investing activities of $12.4$9.8 million, $8.5$16.1 million and $7.0$12.4 million during fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively, representing unpaid liabilities incurred during each fiscal year to acquire property, plant and equipment.
Statements of Cash Flows
Supplemental cash flow information was as follows for fiscal 2016,2018, fiscal 20152017 and fiscal 2014:2016: | | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Interest paid | $ | (54.1 | ) | | $ | (47.6 | ) | | $ | (46.9 | ) | $ | (81.6 | ) | | $ | (69.8 | ) | | $ | (54.1 | ) |
| Call premium on 6.625% Senior Notes | (6.6 | ) | | — |
| | — |
| — |
| | — |
| | (6.6 | ) |
| Call premium on 7.25% Senior Notes | — |
| | — |
| | (7.3 | ) | |
| Property and equipment acquired under capital leases | | — |
| | (0.9 | ) | | — |
|
| Income taxes paid | (80.9 | ) | | (108.3 | ) | | (55.3 | ) | (56.3 | ) | | (111.9 | ) | | (80.9 | ) |
During fiscal 2018, the Company paid contingent consideration of $3.0 million and $5.8 million, respectively, related to the fiscal 2016 acquisition of Gavita and the fiscal 2017 acquisition of Agrolux Holding B.V., and its subsidiaries (collectively, “Agrolux”). During fiscal 2017, the Company paid contingent consideration of $6.7 million, $6.5 million and $15.5 million, respectively, related to the fiscal 2014 acquisition of Fafard & Brothers Ltd. (“Fafard”), the fiscal 2016 acquisition of a Canadian growing media operation and the fiscal 2017 acquisition of American Agritech, L.L.C., d/b/a Botanicare (“Botanicare”).
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.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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, 20162018 and 2015,2017, the Company had $11.3$11.2 million and $18.3$10.6 million, respectively, in unamortized capitalized internal use computer software costs. Amortization of these costs was $6.8$3.9 million, $6.0$5.1 million and $8.3$6.1 million during fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, 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 or cash flows 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.values. A reporting unit is defined as an operating segment or one level below an operating segment. The Company has identified fiveseven reporting units. The Company determines the fair value of its reporting units under theusing a combination of income-based approach utilizing discounted cash flowsand market-based approaches and incorporates assumptions it believes marketplacemarket participants would utilize. The Company also uses a comparativeincome-based approach utilizes discounted cash flows while the market-based approach usingutilizes market multiplesmultiples. These approaches are dependent upon internally-developed forecasts that are based upon annual budgets and other factorslonger-range strategic plans. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective reporting units and in the internally-developed forecasts. To further confirm fair value, the Company compares the aggregate fair value of the reporting units to corroborate the discounted cash flow results used.Company’s total market capitalization.
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 marketplacemarket 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 reporting unit or intangible asset exceeds its estimated fair value and classified as “Impairment, restructuring and other charges”other” 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. 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
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
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, net” in the Consolidated Statements of Operations.
Derivative Instruments
The Company is exposed to market risks, such as changes in interest rates, currency exchange rates and 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 onin the 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 certain 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
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Income Taxes
On December 22, 2017, the Act was signed into law. The Act provides for significant changes to the U.S. Internal Revenue Code of 1986, as amended (the “Code”). Among other items, the Act implements a changeterritorial tax system, imposes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries, and reduces the federal corporate statutory tax rate to 21% effective January 1, 2018.
Additionally, the Securities and Exchange Commission (the “SEC”) released Staff Accounting Bulletin No. 118 (“SAB 118”) which provides guidance on accounting for the Act’s impact under Accounting Standards Codification (“ASC”) Topic 740, Income Taxes (“ASC 740”). The guidance in SAB 118 addresses certain fact patterns where the accounting for changes in tax laws or tax rates under ASC 740 is incomplete upon issuance of an entity's financial statements for the reporting period in which the Act is enacted. Under the SEC staff guidance in SAB 118, in the fair valuefinancial reporting period in which the Act is enacted, the income tax effects of the Act for which the accounting under ASC 740 is incomplete would be reported as a qualifying instrumentprovisional amount based on a reasonable estimate (to the extent a reasonable estimate can be determined), which would be subject to adjustment during a “measurement period” until the accounting under ASC 740 is immediately recognizedcomplete. The measurement period is limited to no more than one year beyond the enactment date under the SEC staff’s guidance. SAB 118 also describes supplemental disclosures that should accompany the provisional amounts, including the reasons for the incomplete accounting, the additional information or analysis
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
that is needed, and other information relevant to why the registrant was not able to complete the accounting required under ASC 740 in earnings.a timely manner.
RECENT ACCOUNTING PRONOUNCEMENTSFor discussion of the impacts of the Act that are material to the Company and required disclosures related to the Act pursuant to the guidance provided under SAB 118, refer to “NOTE 14. INCOME TAXES.”
Revenue Recognition from Contracts with CustomersShare-Based Compensation
In May 2014,March 2016, the Financial Accounting Standards Board (“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 Company adopted this guidance effective October 1, 2017. The impact resulting from the adoption of this amended guidance is summarized below.
The amended accounting guidance that replaces most existing revenuerequires all excess tax benefits and tax deficiencies to be recognized as income tax benefit or expense on a prospective basis in the period of adoption. The adoption of this provision of the amended accounting guidance resulted in the recognition of excess tax benefits of $4.5 million in the “Income tax expense (benefit) from continuing operations” line in the Consolidated Statement of Operations for fiscal 2018. As the Company adopted the guidance under GAAP. Thison a prospective basis, prior year activity has not been adjusted to conform with the current presentation and excess tax benefits of $7.9 million and $5.8 million have been recognized in the “Common shares and capital in excess of $0.01 stated value per share” line within “Total equity—controlling interest” in the Consolidated Balance Sheets for fiscal 2017 and fiscal 2016, respectively.
The amended accounting 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 expectsexcess tax benefits to be entitledclassified as an operating activity in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertaintystatement of revenuecash flows. Previously, excess tax benefits were presented as a cash inflow from financing activities and cash flows arisingoutflow from contractsoperating activities. The Company has elected to present these changes on a prospective basis and therefore fiscal 2017 and fiscal 2016 have not been adjusted to conform with customers. Subsequently, additionalthe current presentation.
The amended accounting guidance was issued on several areas including guidance intendedrequires cash paid to improvea tax authority when shares are withheld to satisfy statutory income tax withholding obligations to be classified as a financing activity in the operability and understandabilitystatement of cash flows. The Company’s retrospective adoption of this provision of the implementationamended accounting guidance resulted in the classification of principal versus agent considerationspayments of $3.0 million, $9.2 million and clarifications on$6.6 million as cash outflows from financing activities in the identification“Purchase of performance obligationsCommon Shares” line in the Consolidated Statements of Cash Flows for fiscal 2018, fiscal 2017 and implementation of guidance related to licensing. The provisions are effective for the Company’s financial statements no later than the fiscal year beginning October 1, 2018. The standard allows for either a full retrospective or a modified retrospective transition method. 2016, respectively.
The Company is currently evaluatinghas elected to continue to estimate the impactnumber of this standard on its consolidated results of operations, financial positionawards expected to vest, as permitted by the amended accounting guidance, rather than electing to account for forfeitures as they occur.
Derivatives and cash flows.
Discontinued Operations ReportingHedging
In April 2014,August 2017, the FASB issued an accounting standard update that amends themodifies hedge accounting guidance relatedby making more hedge strategies eligible for hedge accounting, amending presentation and disclosure requirements, and changing how companies assess effectiveness. The intent is to discontinued operations. This amendment defines discontinued operations as a component or groupsimplify application of components that is disposedhedge accounting and increase transparency of or is classified as held for sale and represents a strategic shift that has or will have a major effect oninformation about an entity’s operationsrisk management activities. The Company early adopted this guidance effective October 1, 2017 using a modified retrospective transition approach for cash flow hedges existing at the date of adoption and financial results. This amendment also introduces new disclosuresa prospective approach for disposals that do not meet the criteria of discontinued operations. The provisions are effective for fiscal years beginning after December 15, 2014presentation and apply to new disposals and new classifications of disposal groups as held for sale after the effective date.disclosure requirements. The adoption of the amendedthis guidance impacts presentation and disclosure of future divestitures and did not have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
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 areCompany adopted this guidance on a prospective basis effective prospectively for fiscal years beginning after December 15, 2016 and areOctober 1, 2017. The adoption of this guidance did not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
Debt Issuance CostsGoodwill
In April 2015,January 2017, the FASB issued an accounting standard update which removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step 2 of the goodwill impairment test. Goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of the goodwill. The Company adopted this guidance on a prospective basis during the third quarter of fiscal 2018.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Revenue Recognition from Contracts with Customers
In May 2014, the FASB issued amended accounting guidance that replaces most existing revenue recognition guidance under GAAP. This guidance requires debt issuance costscompanies 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 standard involves a five-step process that includes identifying the contract with the customer, identifying the performance obligations in the contract, determining the transaction price, allocating the transaction price to the performance obligations in the contract and recognizing revenue when the entity satisfies the performance obligations. 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 identification of performance obligations and implementation of guidance related to a recognized debt liabilitylicensing.
The Company is substantially complete with its evaluation of the amended guidance, including identification of revenue streams and customer contract reviews. The Company applied the five-step model to be presented inthose contracts and revenue streams to evaluate the balance sheet as a direct deduction fromquantitative and qualitative impacts the corresponding debt liability rather than as an asset.new standard will have on its business and reported revenues. The provisions are effective retrospectively for the Company in the first quarter of fiscal 2019 and the Company will adopt the guidance under the modified retrospective approach, which recognizes the cumulative effect of adoption as an adjustment to retained earnings at the date of initial application. The Company’s financial statements forrevenue is primarily product sales, which are recognized at a point in time when title transfers to customers and the Company has no further obligation to provide services related to such products. The Company’s timing of recognition of revenue will be substantially unchanged under the amended guidance. The new accounting guidance will require the Company to recognize earlier certain deferred revenue associated with a license agreement related to the sale of the International Business (as defined in “NOTE 2. DISCONTINUED OPERATIONS”), resulting in a cumulative adjustment to its September 30, 2018 retained earnings of $9.2 million in its fiscal year beginning October 1, 2016. The2019 first quarter Form 10-Q. With the exception of this item, the adoption of the amended accounting guidance impacts presentation and disclosure of debt issuance costs and iswill not expected to have a significantmaterial 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.statements.
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 as of or are entered into after the beginning of either (i) the date of adoption or (ii) the earliest comparative period presented in the financial statements. The Company is currently evaluating available transition methods and the impact of this standard on its consolidated results of operations, financial position and cash flows. The Company has made progress on its evaluation of the amended guidance, including identification of the population of leases affected including the $136.0 million of future minimum lease payments related to various operating lease agreements with third parties for property and equipment (see “NOTE 17. OPERATING LEASES” for further discussion), determining the information required to calculate the lease liability and right-of-use asset and evaluating models to assist in future reporting.
Cash Flow Presentation
In August 2016, the FASB issued an accounting standard update that amends the guidance on the classification of certain cash receipts and payments in the statement of cash flows. The provisions are effective retrospectively for the Company’s financial statements no later than the fiscal year beginning October 1, 2018, and are not expected to have a significant impact on the Company’s consolidated cash flows.
Business Combinations
In January 2017, the FASB issued an accounting standard update that clarifies the definition of a business to provide additional guidance to assist in evaluating whether transactions should be accounted for as an acquisition (or disposal) of either an asset or business. The provisions are effective prospectively for the Company’s financial statements no later than the fiscal year beginning October 1, 2018, and are not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share-Based CompensationEmployee Benefit Plans
In March 2016,2017, the FASB issued an accounting standard update that simplifies several aspectswhich requires entities to (1) disaggregate the current-service-cost component from the other components of net benefit cost (the “other components”) and present the accountingcurrent-service-cost with other current compensation costs for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classificationrelated employees in the income statement, (2) present the other components elsewhere in the income statement and outside of cash flows.income from operations if that subtotal is presented and (3) limit the amount of costs eligible for capitalization (e.g., as part of inventory or property, plant, and equipment) to only the service-cost component of net benefit cost. The provisions are effective for the Company’s financial statements no later than the fiscal year beginning October 1, 2017.2018, and are required to be applied retrospectively for the presentation of cost components in the income statement and prospectively for the capitalization of cost components. The provisions are not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
Reporting Comprehensive Income
In February 2018, the FASB issued an accounting standard update that would allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Act. The provisions are effective for the Company’s financial statements no later than the fiscal year beginning October 1, 2018. The update may be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Act is recognized. The Company is currently evaluatingcontinuing to assess the impact of thisthe amended guidance.
Share-Based Compensation
On June 20, 2018, the FASB issued an accounting standard update which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under the amended accounting guidance, most of the guidance on itssuch payments to nonemployees would be aligned with the requirements for share-based payments granted to employees. The provisions are effective for the Company’s financial statements no later than the fiscal year beginning October 1, 2019 and are not expected to have a significant impact on the Company’s consolidated financial position, results of operations financial position andor cash flows.
Defined Benefit Plans
On August 28, 2018, the FASB issued an accounting standard update to add, remove, and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The amended accounting guidance adds requirements for an entity to disclose a narrative description of the reasons for significant gains and losses affecting the benefit obligation for the period, and an explanation of any other significant changes in the benefit obligation or plan assets that are not otherwise apparent in other required disclosures. In addition, the amended accounting guidance removes certain disclosure requirements, including: (1) the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year; (2) information about plan assets to be returned to the entity, including amounts and expected timing; and (3) the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost, and the benefit obligation for postretirement health care benefits. The provisions are effective for the Company’s financial statements no later than the fiscal year beginning October 1, 2020. The Company is continuing to assess the impact of the amended guidance.
NOTE 2. DISCONTINUED OPERATIONS
International Business
Prior to August 31, 2017, the Company operated consumer lawn and garden businesses located in Australia, Austria, Belgium, Luxembourg, Czech Republic, France, Germany, Poland and the United Kingdom (the “International Business”). On April 29, 2017, the Company received a binding and irrevocable conditional offer (the “Offer”) from Exponent Private Equity LLP (“Exponent”) to purchase the International Business for approximately $250.0 million (subject to potential adjustment following closing in respect of the actual financial position at closing) and a deferred payment amount of up to $23.8 million. On July 5, 2017, the Company accepted the Offer and entered into the Share and Business Sale Agreement (the “Agreement”) contemplated by the Offer. Pursuant to the Agreement, Scotts-Sierra Investments LLC, an indirect wholly-owned subsidiary of the Company (“Sierra”) and certain of its direct and indirect subsidiaries, entered into separate stock or asset sale transactions with respect to the International Business. As a result, effective in its fourth quarter of fiscal 2017, the Company classified its results of operations for all periods presented to reflect the International Business as a discontinued operation and classified the assets and liabilities of the International Business as held for sale.
On August 31, 2017, the Company completed the sale of the International Business for cash proceeds of $150.6 million at closing, which was net of a closing statement adjustment for expected financial position at closing and net of seller financing provided by the Company in the form of a $29.7 million loan for seven years bearing interest at 5% for the first three years, with
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
annual 2.5% increases thereafter. The transaction also included contingent consideration, a non-cash investing activity, with a maximum payout of $23.8 million and an initial fair value of $18.2 million, the payment of which will depend on the achievement of certain performance criteria by the International Business following the closing of the transaction through fiscal 2020. The seller financing loan and the contingent consideration receivable are recorded in the “Other assets” line in the Consolidated Balance Sheets. The cash proceeds from the sale were subject to post-closing adjustments and the Company originally accrued $27.8 million at September 30, 2017 in the “Other current liabilities” line in the Consolidated Balance Sheets related to the expected working capital adjustment obligation in respect of the actual closing date financial position of the International Business. The Company recorded a pre-tax gain on the sale of the International Business of $32.7 million, partially offset by the provision for income taxes of $12.0 million, during fiscal 2017. The fiscal 2017 pre-tax gain included a write-off of accumulated foreign currency translation loss adjustments of $18.5 million. During fiscal 2018, the Company recorded a decrease to the pre-tax gain of $0.7 million related to the resolution of post-closing working capital adjustments.
In connection with the transaction, the Company entered into certain ancillary agreements including a transition services agreement and a material supply agreement, which are not material, as well as a licensing agreement for the use of certain of the Company’s brand names with an initial fair value of $14.1 million. Deferred licensing revenues of $12.1 million and $14.0 million were recorded on the Consolidated Balance Sheets as of September 30, 2018 and 2017, respectively. Refer to “NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for further discussion of the expected future impact of the amended revenue recognition accounting guidance that is effective for the Company in the first quarter of fiscal 2019.
During fiscal 2018, fiscal 2017 and fiscal 2016, the Company recognized $1.8 million, $15.5 million and $2.5 million, respectively, in transaction related costs associated with the sale of the International Business as well as termination benefits and facility closure costs of zero, $(0.4) million and $3.6 million, respectively, in the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
Scotts LawnService®
Prior to April 13, 2016, the Company operated the Scotts LawnService® business (the “SLS Business”), which provided residential and commercial lawn care, tree and shrub care and 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 thea newly formed subsidiary of TruGreen Holdings (the “TruGreen Joint VentureVenture”) in exchange for a minority equity interest of approximately 30% in the TruGreen Joint Venture.Venture which had an initial fair value of $294.0 million. 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. In connection with the closing of the transactions on April 13, 2016, the TruGreen Joint Venture obtained debt financing and made a distribution of $196.2 million to the Company and the Company invested $18.0 million in second lien term loan financing to the TruGreen Joint Venture. During the fourth quarter of fiscal 2017, the Company received an $87.1 million distribution from the TruGreen Joint Venture in connection with its August 2017 debt refinancing.
The Company’sCompany recorded a gain on the contribution of $131.2 million, partially offset by the provision for deferred income taxes of $51.9 million, has beenduring fiscal 2016. During fiscal 2017, the Company recorded inan adjustment to reduce the pre-tax gain by $1.0 million related to post-closing working capital adjustments.
During fiscal 2017 and fiscal 2016, within resultsthe Company recognized $0.8 million and $4.6 million, respectively, in transaction related costs associated with the divestiture of the SLS Business in the “Income (loss) from discontinued operations.operations, net of tax” line in the Consolidated Statements of Operations. During fiscal 2016, the Company recognized a charge of $9.0 million for the resolution of a prior SLS Business litigation matter within the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
Wild Bird Food
In MarchDuring fiscal 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.business. 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. During fiscal 2018, the Company recognized a pre-tax charge of $85.0 million for a probable loss related to the previously disclosed legal matter In addition,re Morning Song Bird Food Litigation. This accrual is recorded in the third quarter“Other current liabilities” line in the Consolidated Balance Sheets and the related deferred tax asset of fiscal 2014,$22.0 million is recorded in the Company received $3.1 million for“Other liabilities” line in the Consolidated Balance Sheets. This matter relates to a pending class-action lawsuit filed in 2012 in connection with the sale of the remaining wild bird food manufacturing facilities resultingproducts that were the subject of a voluntary recall in a gain of $1.2 million.
The following table summarizes2008 by the results of the SLS Business and theCompany’s previously sold wild bird food business within discontinued operationsbusiness. Refer to “NOTE 19. CONTINGENCIES” for each of the periods presented:more information. |
| | | | | | | | | | | |
| | 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 major classesresults of assetsdiscontinued operations described above and liabilities ofreflected within discontinued operations in the SLS BusinessCompany’s consolidated financial statements for each of the periods presented:
|
| | | |
| | 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 |
|
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Net sales | $ | — |
| | $ | 294.1 |
| | $ | 431.1 |
|
| Operating and exit costs | 1.9 |
| | 275.9 |
| | 429.5 |
|
| Impairment, restructuring and other | 86.8 |
| | 15.9 |
| | 19.7 |
|
| Other (income) expense, net | — |
| | 1.2 |
| | (1.5 | ) |
| (Gain) loss on sale / contribution of business | 0.7 |
| | (31.7 | ) | | (131.2 | ) |
| Interest expense | — |
| | 0.4 |
| | 2.7 |
|
| Income (loss) from discontinued operations before income taxes | (89.4 | ) | | 32.4 |
| | 111.9 |
|
| Income tax expense (benefit) from discontinued operations | (25.5 | ) | | 11.9 |
| | 43.2 |
|
| Income (loss) from discontinued operations, net of tax | $ | (63.9 | ) | | $ | 20.5 |
| | $ | 68.7 |
|
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 (used in) operating activities from the SLS Business was $26.8related to discontinued operations totaled$(1.6) million, $28.2$(11.6) million and $19.2$18.8 million for fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, respectively. Cash used inprovided by (used in) investing activities related to the SLS Business was $1.4discontinued operations totaled $(35.3) million, $24.3$148.1 million and $3.4$(5.3) million for fiscal 2016,2018, fiscal 20152017 and fiscal 2014,2016, 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 (loss) from discontinued operations, net of tax” lines in the Consolidated Statements of Operations.
The following table details impairment, restructuring and other charges (recoveries) during fiscal 2016, 2018, fiscal 20152017 and fiscal 2014:2016:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Cost of sales—impairment, restructuring and other: | | | | | | | | | | |
| Restructuring and other charges | $ | 7.7 |
| | $ | 6.6 |
| | $ | — |
| $ | 12.3 |
| | $ | — |
| | $ | 5.9 |
|
| Property, plant and equipment impairments | | 8.2 |
| | — |
| | — |
|
| Operating expenses: | | | | | | | | | | |
| Restructuring and other (recoveries) charges | (47.2 | ) | | 76.6 |
| | 16.3 |
| |
| Restructuring and other charges (recoveries), net | | 20.2 |
| | 3.9 |
| | (51.5 | ) |
| Goodwill and intangible asset impairments | — |
| | — |
| | 33.7 |
| 112.1 |
| | 1.0 |
| | — |
|
| 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 |
| |
| Impairment, restructuring and other charges (recoveries) from continuing operations | | $ | 152.8 |
| | $ | 4.9 |
| | $ | (45.6 | ) |
| Restructuring and other charges from discontinued operations | | 86.8 |
| | 15.9 |
| | 19.7 |
|
| Total impairment, restructuring and other charges (recoveries) | | $ | 239.6 |
| | $ | 20.8 |
| | $ | (25.9 | ) |
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, 2018, fiscal 20152017 and fiscal 2014:2016:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Amounts reserved for restructuring and other at beginning of year | $ | 28.1 |
| | $ | 16.0 |
| | $ | 11.1 |
| |
| Amounts accrued for restructuring and other at beginning of year | | $ | 12.1 |
| | $ | 20.8 |
| | $ | 28.1 |
|
| Restructuring and other charges from continuing operations | 16.4 |
| | 83.2 |
| | 16.3 |
| 32.7 |
| | 8.3 |
| | 10.3 |
|
| Restructuring and other charges from discontinued operations | 13.6 |
| | 1.4 |
| | 1.0 |
| 86.8 |
| | 15.9 |
| | 19.7 |
|
| Payments and other | (37.3 | ) | | (72.5 | ) | | (12.4 | ) | (19.4 | ) | | (32.9 | ) | | (37.3 | ) |
| Amounts reserved for restructuring and other at end of year | $ | 20.8 |
| | $ | 28.1 |
| | $ | 16.0 |
| |
| Amounts accrued for restructuring and other at end of year | | $ | 112.2 |
| | $ | 12.1 |
| | $ | 20.8 |
|
Included in the restructuring reserves,accruals, as of September 30, 2016,2018, is $1.5$0.8 million that is classified as long-term. Payments against the long-term reservesaccruals will be incurred as the employees covered by the restructuring plan retire or through the passage of time. The remaining amounts reservedaccrued will continue to be paid out over the course of the next twelve months.
Project Catalyst
Fiscal 2016In connection with the acquisition of Sunlight Supply during the third quarter of fiscal 2018, the Company announced the launch of an initiative called Project Catalyst. Project Catalyst is a company-wide restructuring effort to reduce operating costs throughout the U.S. Consumer, Hawthorne and Other segments and drive synergies from recent acquisitions within Hawthorne. The Company recognized charges of $29.4 million related to Project Catalyst during fiscal 2018. During fiscal 2018, the Company’s Hawthorne segment executed facility closures and consolidations, terminated employees in duplicate roles, and recognized employee termination benefits of $0.3 million, impairment of property, plant and equipment of $2.9 million, and facility closure costs of $9.2 million in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations. The Company’s Hawthorne segment also recognized employee termination benefits of $3.5 million and facility closure costs of $1.9 million in the “Impairment, restructuring and other” line in the Consolidated Statement of Operations. The Company’s U.S. Consumer segment, in connection with an announced facility closure, recognized employee termination benefits of $1.6 million, impairment of property, plant and equipment of $5.3 million, and facility closure costs of $1.3 million during fiscal 2018 in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations. The Company’s U.S. Consumer segment also recognized employee termination benefits of $3.4 million in the “Impairment, restructuring and other” line in the Consolidated Statement of Operations. Costs incurred to date since the inception of Project Catalyst are $17.8 million for the Hawthorne segment and $11.6 million for the U.S. Consumer segment.
Project Focus
In the first quarter of fiscal 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. During fiscal 2018, the Company’s U.S. Consumer segment recognized adjustments of $0.1 million related to previously recognized termination benefits associated with Project Focus in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. During fiscal 2017, the Company recognized restructuring costs related to termination benefits and facility closure costs of $8.3 million in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations, including $6.7 million for the U.S. Consumer segment, $0.9 million for the Hawthorne segment and $0.7 million for the Other segment. During fiscal 2016, the Company recognized restructuring costs related to termination benefits of $3.9 million related to Project Focus in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. Costs incurred to date since the inception of the current Project Focus initiatives are $10.0 million for the U.S. Consumer segment, $0.9 million for the Hawthorne segment and $1.2 million for the Other segment, related to transaction activity, termination benefits and facility closure costs.
On April 13, 2016, as part of this project,Project Focus, 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 2017 and fiscal 2016, the Company recognized $0.8 million and $4.6 million, respectively, in transaction related costs associated with the divestiture of the SLS Business in the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations. During fiscal 2016, the Company recognized a pre-tax 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 (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations. In addition, during
On August 31, 2017, the Company completed the sale of the International Business. Refer to “NOTE 2. DISCONTINUED OPERATIONS” for more information. During fiscal 2018, fiscal 2017 and fiscal 2016, the Company recognized restructuring$1.8 million, $15.5 million and $2.5 million, respectively, in transaction related costs related toassociated with the sale of the International Business as
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
well as termination benefits of $3.4 million within the U.S. Consumer segment and $2.0 million within the Europe Consumer segment, as well asfacility closure costs of $4.6zero, $(0.4) million related to other transaction activity withinand $3.6 million, respectively, in the “Impairment, restructuring and other”“Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
Bonus S
During 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. DuringIn fiscal 2016, the Company recognizedincurred $6.4 million in costs related to resolving these consumer complaints and the recognition of costs the Company expectsexpected to incur for currentconsumer claims in the “Impairment, restructuring and expected consumer claims.other” and the “Cost of sales—impairment, restructuring and other” lines in the Consolidated Statements of Operations. Additionally, the Company recorded offsetting insurance reimbursement recoveries of $55.9 million in fiscal 2016 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. Costs incurred through September 30, 2016to date since the inception of this matter excludingwere $73.8 million, partially offset by insurance reimbursement recoveries 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.million.
Fiscal 2015
Other
During fiscal 2015,2018, the Company recognized $22.2a non-cash impairment charge of $94.6 million in restructuring costs related to termination benefits provided to U.S.a goodwill impairment in the Hawthorne segment in the “Impairment, restructuring and international personnelother” line in the Consolidated Statements of Operations as parta result of the Company’s restructuringannual fourth quarter quantitative goodwill impairment test. Refer to “NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET” for more information.
During fiscal 2018, the Company recognized a non-cash impairment charge 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 acceleration of equity compensation expense, and were comprised of $3.7$17.5 million related to the U.S. Consumer segment, $10.3settlement of a portion of certain previously acquired customer relationships due to the acquisition of Sunlight Supply in the “Impairment, restructuring and other” line in the Consolidated Statement of Operations. Refer to “NOTE 7. ACQUISITIONS AND INVESTMENTS” for more information.
During fiscal 2018, the Company recognized a pre-tax charge of $85.0 million for a probable loss related to the Europe Consumer segment, $0.2 million related topreviously disclosed legal matter In re Morning Song Bird Food Litigation in 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 (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
Refer to “NOTE 19. CONTINGENCIES” for more information.
During fiscal 2015,2018, the Company recognized $62.4a charge of $11.7 million in costs related to consumer complaints and claimsfor a probable loss related to the reformulated Bonuspreviously disclosed legal matter ®In re Scotts EZ Seed Litigation S fertilizer product sold in the southeastern United States during“Impairment, restructuring and other” line in the Consolidated Statements of Operations. Refer to “NOTE 19. CONTINGENCIES” for more information.
During fiscal 2015.2017, the Company recognized a recovery of $4.4 million related to the reduction of a contingent consideration liability associated with a historical acquisition and recorded a $1.0 million impairment charge on the write-off of a trademark asset due to recent performance and future growth expectations within the “Impairment, restructuring and other” line in the Consolidated Statements of Operations.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal 2014
During the third quarter of fiscal 2014, as a result of financial performance, the Company recognized an impairment charge for a non-recurring fair value adjustment of $33.7 million within the U.S. Consumer segment related to the Ortho® brand. The fair value was calculated based upon the evaluation of the historical performance and future growth expectations of the Ortho® business.
During fiscal 2014, the Company recognized $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 restructuring 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. In addition, during fiscal 2014, the Company recognized $2.0 million in additional ongoing monitoring and remediation costs for the Company’s turfgrass biotechnology program.
NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET
The following table displays a rollforward of the carrying amount of goodwill by reportable segment:
| | | | U.S. Consumer | | Europe Consumer | | Other | | Total | U.S. Consumer | | Hawthorne | | Other | | Total |
| | (In millions) | (In millions) |
| Goodwill | $ | 202.5 |
| | $ | 58.5 |
| | $ | 20.8 |
| | $ | 281.8 |
| $ | 213.7 |
| | $ | 147.3 |
| | $ | 12.7 |
| | $ | 373.7 |
|
| Accumulated impairment losses | (1.8 | ) | | (58.5 | ) | | (2.5 | ) | | (62.8 | ) | (1.8 | ) | | — |
| | — |
| | (1.8 | ) |
| 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 |
| |
| Balance at September 30, 2016 | | 211.9 |
| | 147.3 |
| | 12.7 |
| | 371.9 |
|
| Acquisitions, net of purchase price adjustments | | (1.1 | ) | | 67.6 |
| | (2.1 | ) | | 64.4 |
|
| Foreign currency translation | | — |
| | 4.7 |
| | 0.6 |
| | 5.3 |
|
| Reallocation | | 17.3 |
| | (17.3 | ) | | — |
| | — |
|
| | | | | | | | | | | | | | | |
| Goodwill | $ | 213.1 |
| | $ | 58.5 |
| | $ | 75.0 |
| | $ | 346.6 |
| $ | 229.9 |
| | $ | 202.3 |
| | $ | 11.2 |
| | $ | 443.4 |
|
| Accumulated impairment losses | (1.8 | ) | | (58.5 | ) | | (2.5 | ) | | (62.8 | ) | (1.8 | ) | | — |
| | — |
| | (1.8 | ) |
| 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 |
| |
| Balance at September 30, 2017 | | 228.1 |
| | 202.3 |
| | 11.2 |
| | 441.6 |
|
| Acquisitions, net of purchase price adjustments | | — |
| | 198.0 |
| | — |
| | 198.0 |
|
| Foreign currency translation | | — |
| | (1.6 | ) | | (0.4 | ) | | (2.0 | ) |
| Impairment | | — |
| | (94.6 | ) | | — |
| | (94.6 | ) |
| | | | | | | | | | | | | | | |
| Goodwill | $ | 213.7 |
| | $ | 58.5 |
| | $ | 161.3 |
| | $ | 433.5 |
| $ | 229.9 |
| | $ | 398.7 |
| | $ | 10.8 |
| | $ | 639.4 |
|
| Accumulated impairment losses | (1.8 | ) | | (58.5 | ) | | — |
| | (60.3 | ) | (1.8 | ) | | (94.6 | ) | | — |
| | (96.4 | ) |
| Balance at September 30, 2016 | $ | 211.9 |
| | $ | — |
| | $ | 161.3 |
| | $ | 373.2 |
| |
| Balance at September 30, 2018 | | $ | 228.1 |
| | $ | 304.1 |
| | $ | 10.8 |
| | $ | 543.0 |
|
The Company performed annual impairment testing as of the first day of its fourth fiscal quarter in fiscal 2018, 2017 and 2016 and, with the exception of the Hawthorne reporting unit in fiscal 2018, concluded that there were no impairments of goodwill as the estimated fair value of each reporting unit exceeded its carrying value. During the fourth quarter of fiscal 2018, the Company recognized a non-cash goodwill impairment charge of $94.6 million related to the Hawthorne reporting unit in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. The impairment was primarily driven by the downturn in the U.S. retail hydroponic market, which has continued longer than anticipated in the Company’s earlier forecasts, as well as the completion of the Company’s annual budget process. This impairment charge does not impact the Company’s liquidity, cash flows from operations or compliance with debt covenants. The fair value estimates utilize significant unobservable inputs and thus represent Level 3 nonrecurring fair value measurements.
During fiscal 2017 there was a change in the Company’s internal organizational structure resulting from the Company’s divestiture of the International Business. This change in organizational structure resulted in a change in the Company’s operating segments and reporting units. The Company allocated goodwill to the new reporting units using a relative fair value approach, resulting in $17.3 million of goodwill reallocated from the Hawthorne segment to the U.S. Consumer segment during fiscal 2017.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents intangible assets, net:
| | | | September 30, 2016 | | September 30, 2015 | September 30, 2018 | | September 30, 2017 |
| | 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: | | | | | | | | | | | | | | | | | | | | | | |
| Tradenames | | $ | 258.1 |
| | $ | (37.8 | ) | | $ | 220.3 |
| | $ | 176.7 |
| | $ | (28.4 | ) | | $ | 148.3 |
|
| Customer accounts | | 212.5 |
| | (43.2 | ) | | 169.3 |
| | 157.7 |
| | (28.0 | ) | | 129.7 |
|
| Technology | $ | 70.3 |
| | $ | (59.2 | ) | | $ | 11.1 |
| | $ | 69.7 |
| | $ | (56.9 | ) | | $ | 12.8 |
| 49.1 |
| | (34.4 | ) | | 14.7 |
| | 69.7 |
| | (52.8 | ) | | 16.9 |
|
| Customer accounts | 144.7 |
| | (41.2 | ) | | 103.5 |
| | 95.6 |
| | (32.1 | ) | | 63.5 |
| |
| Tradenames | 150.7 |
| | (22.3 | ) | | 128.4 |
| | 94.6 |
| | (16.9 | ) | | 77.7 |
| |
| Other | 97.9 |
| | (74.8 | ) | | 23.1 |
| | 88.7 |
| | (72.4 | ) | | 16.3 |
| 24.4 |
| | (7.0 | ) | | 17.4 |
| | 59.5 |
| | (41.1 | ) | | 18.4 |
|
| Total finite-lived intangible assets, net | | | | | 266.1 |
| | | | | | 170.3 |
| | | | | 421.7 |
| | | | | | 313.3 |
|
| Indefinite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | |
| Indefinite-lived tradenames | | | | | 184.8 |
| | | | | | 184.8 |
| | | | | 168.2 |
| | | | | | 168.2 |
|
| Marketing Agreement Amendment | | | | | 188.3 |
| | | | | | 188.3 |
| | | | | 155.7 |
| | | | | | 155.7 |
|
| Brand Extension Agreement | | | | | 111.7 |
| | | | | | 111.7 |
| | | | | 111.7 |
| | | | | | 111.7 |
|
| Total indefinite-lived intangible assets | | | | | 484.8 |
| | | | | | 484.8 |
| | | | | 435.6 |
| | | | | | 435.6 |
|
| Total intangible assets, net | | | | | $ | 750.9 |
| |
| | | | $ | 655.1 |
| | | | | $ | 857.3 |
| |
| | | | $ | 748.9 |
|
During the third quarter of fiscal 2018, the Company’s Hawthorne segment recognized a non-cash impairment charge of $17.5 million related to the settlement of a portion of certain previously acquired customer relationships due to the acquisition of Sunlight Supply.
Fiscal 2016
As a result of the annual impairment review inDuring the fourth quarter of fiscal 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 2014,2017, the Company completed anits annual impairment review and recognized an impairment charge for a non-recurring fair value adjustment of $33.7$1.0 million within the U.S. Consumer segment related to the Ortho® brand.a trademark asset. The fair value was calculated based upon the evaluation of the historical performance and future growth expectations of the Ortho® business.trademark. The impact of the fair value adjustment was to reduce the carrying value of the indefinite-lived Ortho®definite-lived brand and sub-brands from $126.0$1.0 million to $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 forzero. No impairment of goodwill or other 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.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total amortization expense for the years ended September 30, 2018, 2017, and 2016 2015, and 2014 was $18.8$30.0 million, $15.7$23.3 million and $13.0$15.7 million, respectively. Amortization expense is estimated to be as follows for the years ending September 30 (in millions):
| | | 2017 | $ | 19.2 |
| |
| 2018 | 18.5 |
| |
| 2019 | 17.2 |
| $ | 33.7 |
|
| 2020 | 16.4 |
| 30.9 |
|
| 2021 | 15.9 |
| 29.1 |
|
| 2022 | | 26.8 |
|
| 2023 | | 25.4 |
|
NOTE 5. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
The following is detail of certain financial statement accounts:
| | | | September 30, | September 30, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (In millions) | (In millions) |
| INVENTORIES: | | | | | | |
| Finished goods | $ | 248.7 |
| | $ | 218.9 |
| $ | 292.1 |
| | $ | 210.6 |
|
| Work-in-progress | 56.9 |
| | 48.3 |
| 60.1 |
| | 57.6 |
|
| Raw materials | 142.6 |
| | 128.6 |
| 129.2 |
| | 139.3 |
|
| | $ | 448.2 |
| | $ | 395.8 |
| $ | 481.4 |
| | $ | 407.5 |
|
| PREPAID AND OTHER CURRENT ASSETS: | | | | |
| Deferred tax asset | $ | 62.1 |
| | $ | 78.2 |
| |
| Accounts receivable, non-trade | 17.7 |
| | 10.9 |
| |
| Other | 42.5 |
| | 32.0 |
| |
| | $ | 122.3 |
| | $ | 121.1 |
| |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | September 30, | September 30, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (In millions) | (In millions) |
| PROPERTY, PLANT AND EQUIPMENT, NET: | | | | | | |
| Land and improvements | $ | 113.0 |
| | $ | 96.5 |
| $ | 122.8 |
| | $ | 109.4 |
|
| Buildings | 249.1 |
| | 219.7 |
| 249.1 |
| | 209.7 |
|
| Machinery and equipment | 552.2 |
| | 538.3 |
| 567.7 |
| | 546.8 |
|
| Furniture and fixtures | 39.8 |
| | 36.8 |
| 42.8 |
| | 37.2 |
|
| Software | 114.8 |
| | 111.5 |
| 99.9 |
| | 106.0 |
|
| Aircraft | 6.7 |
| | 6.7 |
| 16.6 |
| | 8.3 |
|
| Construction in progress | 28.5 |
| | 28.5 |
| 42.4 |
| | 41.4 |
|
| | 1,104.1 |
| | 1,038.0 |
| 1,141.3 |
| | 1,058.8 |
|
| Less: accumulated depreciation | (633.3 | ) | | (593.9 | ) | (610.5 | ) | | (591.1 | ) |
| | $ | 470.8 |
| | $ | 444.1 |
| $ | 530.8 |
| | $ | 467.7 |
|
| OTHER ASSETS: | | | | | | |
| Loans receivable | | $ | 112.6 |
| | $ | 110.4 |
|
| Accrued pension, postretirement and executive retirement assets | | 44.0 |
| | 25.1 |
|
| Contingent consideration receivable | | 17.7 |
| | 18.1 |
|
| Bonnie Option | | 13.0 |
| | 11.8 |
|
| Unamortized debt issuance costs | $ | 16.7 |
| | $ | 11.3 |
| 9.6 |
| | 8.2 |
|
| Loans receivable | 90.0 |
| | — |
| |
| Other | 14.5 |
| | 13.7 |
| 4.7 |
| | 2.4 |
|
| | $ | 121.2 |
| | $ | 25.0 |
| $ | 201.6 |
| | $ | 176.0 |
|
|
| | | | | | | |
| | September 30, |
| | 2018 | | 2017 |
| | (In millions) |
| OTHER CURRENT LIABILITIES: | | | |
| Accrued restructuring and other | $ | 111.4 |
| | $ | 10.4 |
|
| Advertising and promotional accruals | 52.5 |
| | 23.8 |
|
| Payroll and other compensation accruals | 39.2 |
| | 55.9 |
|
| Accrued interest | 16.7 |
| | 16.4 |
|
| Accrued insurance and claims | 12.6 |
| | 16.1 |
|
| Accrued taxes | 11.3 |
| | 28.1 |
|
| International Business divestiture accrual | — |
| | 27.8 |
|
| Other | 85.9 |
| | 69.8 |
|
| | $ | 329.6 |
| | $ | 248.3 |
|
| OTHER NON-CURRENT LIABILITIES: | | | |
| Accrued pension, postretirement and executive retirement liabilities | $ | 75.7 |
| | $ | 78.6 |
|
| Deferred tax liabilities | 69.6 |
| | 157.5 |
|
| Deferred licensing revenue | 10.7 |
| | 12.6 |
|
| Other | 20.5 |
| | 12.2 |
|
| | $ | 176.5 |
| | $ | 260.9 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | |
| | September 30, |
| | 2016 | | 2015 |
| | (In millions) |
| OTHER CURRENT LIABILITIES: | | | |
| Payroll and other compensation accruals | $ | 72.6 |
| | $ | 56.5 |
|
| Advertising and promotional accruals | 65.8 |
| | 67.0 |
|
| Other | 103.8 |
| | 127.7 |
|
| | $ | 242.2 |
| | $ | 251.2 |
|
| OTHER NON-CURRENT LIABILITIES: | | | |
| Accrued pension and postretirement liabilities | $ | 94.8 |
| | $ | 92.5 |
|
| Deferred tax liabilities | 219.1 |
| | 125.4 |
|
| Other | 36.4 |
| | 32.6 |
|
| | $ | 350.3 |
| | $ | 250.5 |
|
| | | | September 30, | September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| ACCUMULATED OTHER COMPREHENSIVE LOSS: | | | | | | | | | | |
| 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 | ) | |
| Unrecognized gain (loss) on derivatives, net of tax of ($2.9), ($1.3) and $2.8, respectively | | $ | 8.3 |
| | $ | 2.0 |
| | $ | (4.7 | ) |
| Pension and other postretirement liabilities, net of tax of $31.4, $33.4 and $41.2, respectively | | (45.6 | ) | | (54.5 | ) | | (66.9 | ) |
| Foreign currency translation adjustment | (45.3 | ) | | (34.1 | ) | | (16.9 | ) | (8.7 | ) | | (16.7 | ) | | (45.3 | ) |
| | $ | (116.9 | ) | | $ | (106.8 | ) | | $ | (86.2 | ) | $ | (46.0 | ) | | $ | (69.2 | ) | | $ | (116.9 | ) |
NOTE 6. MARKETING AGREEMENT
The Scotts Company LLC (“Scotts LLC”) and Monsanto are parties tois the Marketing Agreement, pursuant to which the Company has served since its 1998 fiscal year, as Monsanto’s exclusive agent of Monsanto for the marketing and distribution of Monsanto’s consumer Roundup® herbicidenon-selective weedkiller products (with additional rights to new products containing glyphosate or other similar non-selective herbicides) in the consumer lawn and garden market. Under the terms of themarket in certain countries pursuant to an Amended and Restated Exclusive Agency and 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(the “Original Marketing Agreement is calculated as a percentage of the actual earnings before interest and income taxes of the consumer Roundup® business in the markets covered by the Marketing Agreement subject to the achievement of annual earnings 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. From 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 outlined below.
Agreement”). In consideration for the rights granted to the Company under the Original Marketing Agreement in 1998, the Company paid a marketing fee of $32$32.0 million to Monsanto. The Company deferred this amount on the basis that the payment will provide a future benefit through commissions that will be earned under the Original Marketing Agreement. The economic useful life over which the marketing fee is beingwas amortized is twenty years, withover a remaining unamortized amount of $1.6 million and remaining amortization period of two20 years and was fully amortized as of September 30, 2016.
2018. On May 15, 2015, the Company and Monsanto entered into an Amendment to the Original 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 onand recorded this amount as intangible assets for which the related economic useful life is indefinite.
On August 14, 2015 using borrowings31, 2017, in connection with and as a condition to the consummation of the Company’s sale of its International Business, the Company entered into the Second Amended and Restated Agency and Marketing Agreement (the “Restated Marketing Agreement”) and the Amended and Restated Lawn and Garden Brand Extension Agreement - Americas (the “Restated Brand Extension Agreement”) to reflect the Company’s transfer and assignment to the purchaser of such business of the Company’s rights and responsibilities under its credit facility.
Among other things,the Original Marketing Agreement, as amended, and the Brand Extension Agreement relating to those countries subject to the sale. The Company included $32.6 million of the carrying amount of the intangible asset associated with the Marketing Agreement Amendment amendswith the International Business disposal unit on the basis of the asset’s historical carrying amount and this amount was disposed of as part of the sale of the International Business.
From 1998 until May 15, 2015, the Original Marketing Agreement incovered the following significant respects:
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
ExpandsUnited States and other specified countries, including Australia, Austria, Belgium, Canada, France, Germany, the Netherlands and the United Kingdom. The Marketing Agreement Amendment expanded the covered territories in which the Company may serve as Monsanto’s exclusive agent in the consumer lawn and garden marketcountries 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 The Restated Marketing Agreement appliedfurther revised the covered territories and countries to European Union (“EU”) countries. As amended,only include Israel, China and every country throughout the termCaribbean and the continents of North America and South America that is not subject to a comprehensive U.S. trade embargo or certain other embargoes and trade restrictions.
Under the terms of the Restated Marketing Agreement, will now continue indefinitelythe Company is entitled to receive an annual commission from Monsanto as consideration for all includedthe performance of the Company’s duties as agent. The annual commission payable under the Restated Marketing Agreement is equal to (1) 50% of the actual earnings before interest and income taxes of Monsanto’s consumer Roundup® business in the markets including EU countries withincovered by the includedRestated Marketing Agreement for program years 2017 and 2018 and (2) 50% of the actual earnings before interest and income taxes of Monsanto’s consumer Roundup® business in the markets unlesscovered by the Restated Marketing Agreement in excess of $40.0 million for program years 2019 and until otherwise terminated in accordance with thethereafter. The Restated 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.
|
RequiresAgreement also requires the Company to (1) provide noticemake annual payments of $18.0 million to Monsanto as a contribution against the overall expenses of certain proposals and processesits consumer Roundup® business.
Unless Monsanto terminates the Restated Marketing Agreement due to an event of default by the Company, upon a termination of the Restated Marketing Agreement by Monsanto, in addition to other remedies that may result in a sale ofbe available to the Company, and (2) conduct non-exclusive negotiations with Monsanto with respect to suchthe Restated Marketing Agreement requires a sale.
Increases the minimum termination fee payable underto the Marketing AgreementCompany equal to the greater of (1) $200.0$175.0 million or (2) four times (A) the average of the program earnings before interest orand income taxes for the three trailing program years prior to the year of termination, minus (B) $186.4 million (the “Termination Fee”). The Company may terminate the 2015 program earnings before interestRestated Marketing Agreement upon a material breach of the Restated Marketing Agreement by Monsanto or income taxes.upon a material fraud or material willful
Amends Monsanto’s termination rightsTHE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
misconduct committed by Monsanto, among other potential remedies, and provides additional rights to the Company in the event of such a termination as follows:
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◦ | 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;
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◦ | 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 |
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◦ | 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, Monsanto is required 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 Monsantopay to the Company for each program year at an amount equal to 50%the Termination Fee. Upon a significant decline in either (i) Monsanto’s consumer Roundup® business of more than 25% compared to program year 2014; or (ii) the Roundup® brand, subject to certain terms and conditions, the Company may either terminate the Restated Marketing Agreement or continue the Restated Marketing Agreement and be entitled to receive an additional commission amount. The Restated Marketing Agreement also provides the Company with additional rights and remedies, including the right to terminate the Restated Marketing Agreement in certain circumstances and the right to indemnification for product liability claims relating to its marketing and distribution of Monsanto’s consumer Roundup® products in its capacity as Monsanto’s agent. The term of the program earnings before interestRestated Marketing Agreement will continue indefinitely for all included markets unless and income taxes for such program year.until otherwise terminated in accordance therewith.
The Restated Brand Extension Agreement provides the Company a worldwide,an exclusive license in every country throughout the North American continent, South American continent, Central America, the Caribbean, Israel and China (in each case that is not subject to a comprehensive U.S. trade embargo or certain other embargoes and trade restrictions) to use the Roundup® brand on additional products offered by the Company outside of the non-selective weedweedkiller 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 Restated Brand Extension Agreement has an initiala 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 Restated Marketing Agreement or the Restated 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 Restated Marketing Agreement, the Company performs certain functions, primarily manufacturing conversion services (in North America), distributionsales, merchandising, warehousing and logistics, andother selling and marketing support,services, on behalf of Monsanto in the conduct of theits consumer Roundup® business. The Company performs other services, including conversion services, pursuant to ancillary agreements. 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” line in the Consolidated StatementStatements of Operations, with no effect on gross profit dollars or net income.
The gross commission earned under the Restated 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 and reimbursements earned under the Restated Marketing Agreement and included in “Net sales” are as follows:
| | | | Year Ended September 30 | Year Ended September 30 |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Gross commission | $ | 109.1 |
| | $ | 88.7 |
| | $ | 85.2 |
| $ | 80.5 |
| | $ | 87.7 |
| | $ | 97.9 |
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| Contribution expenses | (20.0 | ) | | (20.0 | ) | | (20.0 | ) | (18.0 | ) | | (18.0 | ) | | (18.0 | ) |
| Amortization of marketing fee | (0.8 | ) | | (0.8 | ) | | (0.8 | ) | (0.8 | ) | | (0.8 | ) | | (0.8 | ) |
| Net commission income | 88.3 |
| | 67.9 |
| | 64.4 |
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| Reimbursements associated with Marketing Agreement | 65.5 |
| | 63.3 |
| | 63.0 |
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| Total net sales associated with Marketing Agreement | $ | 153.8 |
| | $ | 131.2 |
| | $ | 127.4 |
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| Net commission | | 61.7 |
| | 68.9 |
| | 79.1 |
|
| Reimbursements associated with Restated Marketing Agreement | | 54.5 |
| | 56.1 |
| | 55.8 |
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| Total net sales associated with Restated Marketing Agreement | | $ | 116.2 |
| | $ | 125.0 |
| | $ | 134.9 |
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NOTE 7. ACQUISITIONS AND INVESTMENTS
Fiscal 2016FISCAL 2018
Sunlight Supply
On June 4, 2018, the Company’s Hawthorne segment acquired substantially all of the assets and certain liabilities of Sunlight Supply, Inc., Sunlight Garden Supply, Inc., Sunlight Garden Supply, ULC, and IP Holdings, LLC, and all of the issued and outstanding equity interests of Columbia River Industrial Holdings, LLC (collectively “Sunlight Supply”). Sunlight Supply, based in Vancouver, Washington, is a leading developer, manufacturer, marketer and distributer of horticultural, organics, lighting, and
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
hydroponics products. Prior to the transaction, Sunlight Supply served as a non-exclusive distributor of the Company. The estimated purchase price of Sunlight Supply was $459.1 million, a portion of which was paid by the issuance of 0.3 million Common Shares, a non-cash investing and financing activity, with a fair value of $23.4 million based on the average share price at the time of payment. The purchase price included contingent consideration, a non-cash investing activity, with an initial fair value of $3.1 million and a maximum payout of $20.0 million, which will be paid by the Company contingent on the achievement of certain performance metrics of the Company through the one year anniversary of the closing date. The purchase price is also subject to a post-closing net working capital adjustment for which the Company has accrued $7.4 million as of September 30, 2018 in the “Other current liabilities” line in the Consolidated Balance Sheets related to the expected obligation for this net working capital adjustment.
The preliminary valuation of the acquired assets included (i) $7.6 million of cash, prepaid and other current assets, (ii) $20.3 million of accounts receivable, (iii) $84.3 million of inventory, (iv) $64.4 million of fixed assets, (v) $13.7 million of accounts payable and other current liabilities, (vi) $151.1 million of finite-lived identifiable intangible assets, and (vii) $145.1 million of tax-deductible goodwill. Identifiable intangible assets included tradenames of $65.1 million, customer relationships of $84.1 million and non-competes of $1.9 million 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. Certain estimated values for the acquisition, including goodwill, intangible assets, and property, plant and equipment, are not yet finalized and are subject to revision as additional information becomes available and more detailed analysis is completed. The contingent consideration related to the Sunlight Supply acquisition is required to be accounted for as a derivative instrument and is recorded at fair value in the “Other current liabilities” line in the Consolidated Balance Sheets, with changes in fair value recognized in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. The estimated fair value of the contingent consideration was $0.9 million as of September 30, 2018 and the fair value measurement was classified in Level 3 of the fair value hierarchy.
The acquisition of Sunlight Supply also resulted in the settlement of a portion of certain previously acquired customer relationships, which resulted in a non-cash impairment charge of $17.5 million recognized in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations to reduce the carrying value of these previously acquired customer relationship intangible assets to an estimated fair value of $30.9 million. The estimated fair value was 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, and has been included as part of goodwill at September 30, 2018. Additionally, the Company reduced the value of deferred tax liabilities associated with the write-off of these previously acquired customer relationship intangible assets by $7.3 million, which was recognized in the “Income tax expense (benefit) from continuing operations” line in the Consolidated Statement of Operations for fiscal 2018.
Net sales for Sunlight Supply included within the Hawthorne segment for fiscal 2018 were $97.3 million. The following unaudited pro forma information presents the combined results of operations as if the acquisition of Sunlight Supply had occurred at the beginning of fiscal 2017. Sunlight Supply’s pre-acquisition results have been added to the Company’s historical results. The pro forma results contained in the table below include adjustments for (i) the elimination of intercompany sales, (ii) amortization of acquired intangibles, (iii) increased depreciation expense as a result of acquisition date fair value adjustments, (iv) increased cost of goods sold for fiscal 2017 and decreased cost of goods sold for fiscal 2018 related to the acquisition date inventory fair value adjustment, (v) increased interest expense related to the financing of the acquisition, (vi) removal of the non-cash impairment charge of $17.5 million during the third quarter of fiscal 2018 related to the settlement of a portion of certain previously acquired customer relationships due to the acquisition of Sunlight Supply, (vii) adjustments to tax expense based on condensed consolidated pro forma results, and (viii) the impact of additional Common Shares issued as a result of the acquisition. The pro forma information does not reflect the realization of any potential cost savings or other synergies from the acquisition as a result of restructuring activities and other cost savings initiatives. These pro forma results have been prepared for comparative purposes only and are not necessarily indicative of the results of operations as they would have been had the acquisitions occurred on the assumed dates, nor are they necessarily an indication of future operating results.
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| | | | | | | |
| | Year Ended September 30 |
| Unaudited Consolidated Pro Forma Results | 2018 | | 2017 |
| | (In millions, except for common share data) |
| Proforma net sales | $ | 2,879.7 |
| | $ | 3,032.4 |
|
| Proforma net income attributable to controlling interest | 90.0 |
| | 228.5 |
|
| Proforma diluted net income per common share | 1.57 |
| | 3.78 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Gavita
On May 26, 2016, the Company, through its wholly-ownedCompany’s Hawthorne segment acquired majority control and a 75% economic interest in Gavita. Gavita’s former ownership group initially 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 by Gavita. The loan was recorded at fair value in the “Long-term debt” line in the Consolidated Balance Sheets. On October 2, 2017, the Company’s Hawthorne segment acquired the remaining 25% noncontrolling interest in Gavita, including Agrolux, for $69.2 million, plus payment of contingent consideration of $3.0 million. The carrying value of the 25% noncontrolling interest consisted of long-term debt of $55.6 million and noncontrolling interest of $7.9 million. The difference between purchase price and carrying value of $5.7 million was recognized in the “Common shares and capital in excess of $0.01 stated value per share” line within “Total equity—controlling interest” in the Consolidated Balance Sheets.
Can-Filters
On October 11, 2017, the Company’s Hawthorne segment completed the acquisition of substantially all of the U.S. and Canadian assets of Can-Filters Group Inc. (“Can-Filters”) for $74.1 million. Based in British Columbia, Can-Filters is a leading wholesaler of ventilation products for indoor and hydroponic gardening and industrial markets worldwide. The valuation of the acquired assets included (i) $1.5 million of cash, prepaid and other current assets, (ii) $7.7 million of inventory and accounts receivable, (iii) $4.4 million of fixed assets, (iv) $0.7 million of accounts payable and other current liabilities, (v) $39.7 million of finite-lived identifiable intangible assets, and (vi) $21.5 million of tax-deductible goodwill. Identifiable intangible assets included tradenames and customer relationships with useful lives of 25 years. The estimated fair value 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 Can-Filters included within the Hawthorne segment for fiscal 2018 were $10.7 million.
FISCAL 2017
Agrolux
On May 26, 2017, the Company’s majority-owned subsidiary Gavita completed the acquisition of Agrolux for $21.8 million. Based in the Netherlands, Agrolux is a worldwide supplier of horticultural lighting. The purchase price included contingent consideration, a non-cash investing activity, with a maximum payout and initial fair value of $5.2 million, which was paid during the third quarter of fiscal 2018. The valuation of the acquired assets included (i) $8.0 million of cash, prepaid and other current assets, (ii) $9.9 million of inventory and accounts receivable, (iii) $0.5 million of fixed assets, (iv) $8.6 million of accounts payable and other current liabilities, (v) $6.7 million of short-term debt, (vi) $16.1 million of finite-lived identifiable intangible assets, (vii) $6.6 million of non-deductible goodwill, and (viii) $4.0 million of deferred tax liabilities. Identifiable intangible assets included tradenames and customer relationships with useful lives ranging between 10 and 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 Agrolux included within the Hawthorne Gardening Company,segment for fiscal 2018 and fiscal 2017 were $53.2 million and $16.4 million, respectively.
Botanicare
On October 3, 2016, the Company’s Hawthorne segment completed the acquisition of Botanicare, an Arizona-based leading producer of plant nutrients, plant supplements and growing systems used for hydroponic gardening, for $92.6 million. The purchase price included contingent consideration, a non-cash investing activity, of $15.5 million, which was paid during the third quarter of fiscal 2017. The valuation of the acquired assets included (i) $1.2 million of cash, prepaid and other current assets, (ii) $8.4 million of inventory and accounts receivable, (iii) $1.4 million of fixed assets, (iv) $2.3 million of accounts payable and other current liabilities, (v) $53.0 million of finite-lived identifiable intangible assets, and (vi) $30.9 million of tax-deductible goodwill. 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.
Other
On August 11, 2017, the Company’s Hawthorne segment completed the acquisition of substantially all of the assets of the exclusive manufacturer and formulator of branded Botanicare products for $32.0 million. The valuation of the acquired assets included (i) $0.3 million of inventory, (ii) $5.0 million of finite-lived identifiable intangible assets, and (iii) $26.7 million of tax-deductible goodwill. Identifiable intangible assets included manufacturing know-how and non-compete agreements with useful lives ranging between 5 and 10 years. The estimated fair values of the identifiable intangible assets were determined using an
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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.
During the first quarter of fiscal 2017, the Company’s U.S. Consumer segment completed two acquisitions of companies whose products support the Company’s focus on the emerging areas of water positive landscapes and internet-enabled technology for an aggregate purchase price of $3.2 million. The valuation of the acquired assets for the transactions included finite-lived identifiable intangible assets and goodwill of $2.8 million. During the third quarter of fiscal 2017, the Company’s Hawthorne segment completed the acquisition of a company focused on the technology supporting hydroponic growing systems for an aggregate purchase price of $3.5 million, which included finite-lived identifiable intangible assets of $3.2 million.
FISCAL 2016
Gavita
On May 26, 2016, the Company’s Hawthorne segment acquired majority control and a 75% economic interest in Gavita for $136.2 million. The remaining 25% interest was initially retained by Gavita’s former ownership group. This transaction provides the Company’s Other segment with a presence in the lighting category of indoor 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 includesincluded contingent consideration, a non-cash investing activity, with an estimatedinitial fair value of $2.5 million, which was paid during the paymentfirst quarter of which will depend on the performance of the business through calendar year 2019.fiscal 2018. The preliminary valuation of the acquired assets included (i) $6.4 million of cash, prepaid and other current assets, (ii) $38.3$37.9 million of inventory and accounts receivable, (iii) $1.5$1.3 million inof fixed assets, (iv) $18.7 million of accounts payable and other current liabilities, (v) $5.5 million of short termshort-term debt, (vi) $102.6 million of finite-lived identifiable intangible assets, (vii) $82.7$83.3 million of non-deductible 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 COMPANYOther
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
by Gavita. The loan 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.
InDuring 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 initial purchase price includesincluded contingent consideration, a non-cash investing activity, with an estimated fair value of $10.8 million, the payment of which will depend on$6.5 million was paid during the performancefirst quarter of fiscal 2017, and the business in fiscal years 2016remaining $4.3 million has been adjusted and 2017.reclassified to the acquired assets. The preliminary valuation of the acquired assets included (i) $4.7 million of inventory and accounts receivable, (ii) $18.6$18.5 million inof fixed assets, (iii) $11.4$9.3 million of finite-lived identifiable intangible assets, (iv) $1.4$1.2 million of deferred tax liabilities, and (v) an investment in an unconsolidated joint venture of $0.7 million and (vi) $2.1 million of goodwill.$0.5 million. 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.
InDuring 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 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”) as well as a Services Agreement pursuant to which the Company will provideprovides 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. These agreements also include options beginning in fiscal 2020 that provide for either (i) the Company to increase its economic interest in the Bonnie Business (the “Bonnie Option”) or (ii) AFC and Bonnie to repurchase the Company’s economic interest in the Bonnie Business. During fiscal 2018, fiscal 2017 and fiscal 2016, the Company recognized commission feesincome of $2.9 million, $2.2 million and $3.6 million, respectively, and recognized cost reimbursements of $2.0 million, $2.6 million and $0.6 million, respectively.
The Company’s option to increase its economic interest in the Bonnie Business (the “Bonnie Option”)Option is required to be accounted for as a derivative 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 StatementStatements of Operations. The estimated fair value of the Bonnie Option was determined using a simulation approach, whereby the total value of the loan receivable$13.0 million 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$11.8 million as of September 30, 2016,2018 and 2017, respectively, and the fair value measurement was classified in Level 3 of the fair value hierarchy.
Fiscal 2015
On March 30, 2015, the Company acquired 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 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 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 purchase price into fiscal 2016, of which $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 contingent consideration was paid in common shares of Scotts Miracle-Gro (“Common Shares”) based on the average share price at the time of payment. The valuation of the acquired assets was determined during the third quarter of fiscal 2015 and included (i) $14.2 million of inventory and accounts receivable, (ii) $5.7 million in fixed assets, (iii) $65.0 million of finite-lived identifiable intangible assets, and (iv) $53.9 million of tax-deductible goodwill. Identifiable intangible assets included tradenames, customer relationships and non-compete arrangements with useful lives ranging between 5 and 26 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 General Hydroponics and Vermicrop included within the Other segment for fiscal 2016 and fiscal 2015 were $64.1 million and $30.9 million, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During fiscal 2015, the Company completed four acquisitions of growing media operations, two within the U.S. Consumer segment and two within the Other segment, for an aggregate purchase price of $40.2 million. These acquisitions expand 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 in finite-lived identifiable intangible assets, (ii) $11.4 million in fixed assets, (iii) $10.6 million in tax deductible goodwill, and (iv) $9.9 million of inventory and accounts receivable. Identifiable intangible assets include tradenames and customer relationships with useful lives ranging between 7 and 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.
The consolidated financial statements include the results of operations for these business combinations from the date of each acquisition.
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 assets 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. 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 generate over the remaining 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 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, 2016,2018, the Company held a minority equity interest of approximately 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 intoare parties to 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. The Company’s interest had an initial fair value of $294.0 million and is accounted for using the equity method of accounting. In the first quarter of fiscal 2018, the Company’s net investment and advances were reduced to a liability and the Company no longer records its proportionate share of the TruGreen Joint Venture earnings in the Consolidated Statements of Operations until the Company’s net investment and advances are no longer a liability. The Company does not have any contractual obligations to fund losses 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 excessa 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 second lien term loan receivable had a carrying value of $18.1 million at September 30, 2018 and 2017 and is recorded in the “Other assets” line in the Consolidated Balance Sheets. The Company was reimbursed $1.4 million, $40.2 million and $52.6 million during fiscal 2018, fiscal 2017 and fiscal 2016, hasrespectively, and had accounts receivable of $14.9$0.2 million and $0.4 million at September 30, 20162018 and 2017, respectively, 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.programs and an employee leasing agreement. The Company received distributions from unconsolidated affiliates intended to cover required tax payments of zero, $3.6 million and $7.5 million during fiscal 2016.2018, fiscal 2017 and fiscal 2016, respectively. The Company also had an indemnification asset of $2.7 million and $4.8 million at September 30, 2018 and 2017, respectively, for future payments on claims associated with insurance programs. During the fourth quarter of fiscal 2017, the Company received an $87.1 million distribution from the TruGreen Joint Venture in connection with its August 2017 debt refinancing. The Company has received cumulative distributions from the TruGreen Joint Venture in excess of its investment balance, which resulted in an amount recorded in the “Distributions in excess of investment in unconsolidated affiliate” line in the Consolidated Balance Sheets of $21.9 million at September 30, 2018 and 2017. In accordance with the applicable accounting guidance, the Company has classified the negative balance in the liability section of the Consolidated Balance Sheets.
During the fourth quarter of fiscal 2017, the Company made a $29.4 million investment in an unconsolidated subsidiary whose products support the professional U.S. industrial, turf and ornamental market (the “IT&O Joint Venture”). The Company provided the IT&O Joint Venture with line of credit financing of $14.3 million during fiscal 2018, which was fully repaid as of September 30, 2018.
The following tables present summarized financial information for the TruGreen Joint Venture as of September 30, 2016 and for the Company’s fiscal 2016:unconsolidated affiliates:
|
| | | |
| | 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 |
|
|
| | | | | | | |
| | September 30, |
| | 2018 | | 2017 |
| | (In millions) |
| Cash and cash equivalents | $ | 110.6 |
| | $ | 26.4 |
|
| Other current assets | 198.6 |
| | 180.9 |
|
| Intangible assets, net | 809.8 |
| | 860.7 |
|
| Goodwill | 199.8 |
| | 184.0 |
|
| Other assets | 222.5 |
| | 229.5 |
|
| Total assets | $ | 1,541.3 |
| | $ | 1,481.5 |
|
| | | | |
| Current liabilities | $ | 276.5 |
| | $ | 221.0 |
|
| Current portion of debt | 12.5 |
| | 15.5 |
|
| Long-term debt | 981.9 |
| | 987.5 |
|
| Other liabilities | 56.7 |
| | 57.9 |
|
| Equity | 213.7 |
| | 199.6 |
|
| Total liabilities and equity | $ | 1,541.3 |
| | $ | 1,481.5 |
|
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. |
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| | (in millions) | | |
| Revenue | $ | 1,427.4 |
| | $ | 1,340.2 |
| | $ | 808.4 |
|
| Gross margin | 475.0 |
| | 429.7 |
| | 287.5 |
|
| Selling and administrative expenses | 330.2 |
| | 316.8 |
| | 167.8 |
|
| Amortization expense | 62.0 |
| | 72.8 |
| | 27.1 |
|
| Interest expense | 74.5 |
| | 69.9 |
| | 30.8 |
|
| Restructuring and other charges | 14.6 |
| | 67.5 |
| | 34.8 |
|
| Net (loss) income | $ | (6.3 | ) | | $ | (97.3 | ) | | $ | 27.0 |
|
Net income (loss) does not include income taxes, which are recognized and paid by the partners of the TruGreen Joint Venture.unconsolidated affiliates. The income taxes associated with the Company’s share of net income has(loss) have been recorded in the “Income tax expense (benefit) from continuing operations” line in the Consolidated Statement of Operations.
The Company recognized equity in income(income) loss of unconsolidated affiliates of $7.8$(4.9) million, $29.0 million and $(7.8) million in fiscal 2016.2018, fiscal 2017 and fiscal 2016, respectively. Included within income(income) loss of unconsolidated affiliates for fiscal 2017 and fiscal 2016, respectively, is the Company’s $25.2 million and $11.7 million share of restructuring and other charges incurred by the TruGreen Joint Venture. TheseFor fiscal 2017, these charges included $1.3 million for transaction costs, $12.1 million for nonrecurring integration and separation costs, $7.2 million of costs associated with the TruGreen Joint Venture’s August 2017 debt refinancing and $4.6 million for a non-cash purchase accounting fair value write-down adjustment related to deferred revenue and advertising. For fiscal 2016, 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 purchase accounting fair value write-down adjustment onrelated to 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.advertising.
NOTE 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 $13.0$15.3 million, $11.5$13.9 million and $11.7$13.0 million under the plan in fiscal 20162018, fiscal 20152017 and fiscal 20142016, 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 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.
The Company sponsors defined benefit pension plans associated with its former international businesses in the United Kingdom Germany, France and the Netherlands.Germany. These plans generally cover all associates of the respective businesses, withprovide retirement benefits primarily based on years of service and compensation levels. In fiscal 2013, the Company’s remaining obligations were settled for the defined benefit pension plan associated with its Netherlands business. On July 1, 2010, the Company froze its two U.K. United Kingdom defined benefit pension plans and transferred participants to an amended defined contribution plan. Under the frozen defined benefit plans,Prior to August 31, 2017, participants arewere no longer credited for future service; however, future salary increases will continuecontinued to be factored into each participant’s final pension benefit. In connection with the sale of the International Business on August 31, 2017, the Company (1) retained all obligations related to the two United Kingdom defined benefit pension plans provided that future salary increases are no longer factored into each participant’s final pension benefit, (2) retained the Germany defined benefit pension obligations associated with inactive participants and (3) disposed of the Germany defined benefit pension obligations associated with active participants and all obligations associated with the France defined benefit pension plans. These changes resulted in a decrease in the projected benefit obligation of $7.1 million during fiscal 2017. The Company recognized a settlement charge of $1.4 million during fiscal 2017 as part of the gain on the sale of the International Business in the “Income (loss) from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
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 Pension Plans | | International Defined Benefit Pension Plans | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension Plans |
| | 2016 | | 2015 | | 2016 | | 2015 | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions) | (In millions) |
| Change in projected benefit obligation: | | | | | | | | | | | | | | |
| Benefit obligation at beginning of year | $ | 117.3 |
| | $ | 109.2 |
| | $ | 198.1 |
| | $ | 208.3 |
| $ | 110.0 |
| | $ | 118.2 |
| | $ | 190.7 |
| | $ | 206.2 |
|
| Service cost | — |
| | — |
| | 1.1 |
| | 1.2 |
| — |
| | — |
| | — |
| | 0.9 |
|
| Interest cost | 4.3 |
| | 4.0 |
| | 6.5 |
| | 7.3 |
| 3.1 |
| | 2.8 |
| | 4.2 |
| | 3.7 |
|
| Actuarial loss | 3.8 |
| | 11.4 |
| | 45.5 |
| | 4.5 |
| |
| Actuarial (gain) loss | | (5.8 | ) | | (3.8 | ) | | (6.8 | ) | | (13.0 | ) |
| Benefits paid | (7.2 | ) | | (7.3 | ) | | (8.0 | ) | | (6.4 | ) | (7.2 | ) | | (7.2 | ) | | (8.2 | ) | | (6.0 | ) |
| Divestiture | | — |
| | — |
| | — |
| | (7.1 | ) |
| Other | — |
| | — |
| | (0.9 | ) | | (1.1 | ) | — |
| | — |
| | — |
| | (0.8 | ) |
| Foreign currency translation | — |
| | — |
| | (26.9 | ) | | (15.7 | ) | — |
| | — |
| | (4.9 | ) | | 6.8 |
|
| Projected benefit obligation at end of year | $ | 118.2 |
| | $ | 117.3 |
| | $ | 215.4 |
| | $ | 198.1 |
| $ | 100.1 |
| | $ | 110.0 |
| | $ | 175.0 |
| | $ | 190.7 |
|
| Accumulated benefit obligation at end of year | $ | 118.2 |
| | $ | 117.3 |
| | $ | 209.7 |
| | $ | 192.0 |
| $ | 100.1 |
| | $ | 110.0 |
| | $ | 175.0 |
| | $ | 190.7 |
|
| Change in plan assets: | | | | | | | | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 83.5 |
| | $ | 89.8 |
| | $ | 168.6 |
| | $ | 166.3 |
| $ | 87.5 |
| | $ | 89.4 |
| | $ | 181.2 |
| | $ | 173.9 |
|
| Actual return on plan assets | 9.9 |
| | (1.4 | ) | | 37.1 |
| | 13.9 |
| 0.2 |
| | 5.0 |
| | 6.5 |
| | 2.2 |
|
| Employer contribution | 3.2 |
| | 2.4 |
| | 6.1 |
| | 7.4 |
| 0.2 |
| | 0.3 |
| | 7.7 |
| | 5.6 |
|
| Benefits paid | (7.2 | ) | | (7.3 | ) | | (8.0 | ) | | (6.4 | ) | (7.2 | ) | | (7.2 | ) | | (8.2 | ) | | (6.0 | ) |
| Foreign currency translation | — |
| | — |
| | (26.4 | ) | | (11.5 | ) | — |
| | — |
| | (5.7 | ) | | 6.3 |
|
| Other | — |
| | — |
| | (0.9 | ) | | (1.1 | ) | — |
| | — |
| | — |
| | (0.8 | ) |
| Fair value of plan assets at end of year | $ | 89.4 |
| | $ | 83.5 |
| | $ | 176.5 |
| | $ | 168.6 |
| $ | 80.7 |
| | $ | 87.5 |
| | $ | 181.5 |
| | $ | 181.2 |
|
| Underfunded status at end of year | $ | (28.8 | ) | | $ | (33.8 | ) | | $ | (38.9 | ) | | $ | (29.5 | ) | |
| Overfunded (underfunded) status at end of year | | $ | (19.4 | ) | | $ | (22.5 | ) | | $ | 6.5 |
| | $ | (9.5 | ) |
| Information for pension plans with an accumulated benefit obligation in excess of plan assets: | | | | | | | | | | | | | | |
| Projected benefit obligation | $ | 118.2 |
| | $ | 117.3 |
| | $ | 215.4 |
| | $ | 198.1 |
| $ | 100.1 |
| | $ | 110.0 |
| | $ | 18.1 |
| | $ | 190.7 |
|
| Accumulated benefit obligation | 118.2 |
| | 117.3 |
| | 209.7 |
| | 192.0 |
| 100.1 |
| | 110.0 |
| | 18.1 |
| | 190.7 |
|
| Fair value of plan assets | 89.4 |
| | 83.5 |
| | 176.5 |
| | 168.6 |
| 80.7 |
| | 87.5 |
| | — |
| | 181.2 |
|
| Amounts recognized in the Consolidated Balance Sheets consist of: | | | | | | | | | | | | | | |
| Noncurrent assets | $ | — |
| | $ | — |
| | $ | 0.5 |
| | $ | 2.4 |
| $ | — |
| | $ | — |
| | $ | 24.7 |
| | $ | 9.4 |
|
| Current liabilities | (0.2 | ) | | (0.2 | ) | | (0.9 | ) | | (0.9 | ) | (0.2 | ) | | (0.2 | ) | | (1.0 | ) | | (0.9 | ) |
| Noncurrent liabilities | (28.6 | ) | | (33.6 | ) | | (38.5 | ) | | (31.0 | ) | (19.2 | ) | | (22.3 | ) | | (17.2 | ) | | (17.9 | ) |
| Total amount accrued | $ | (28.8 | ) | | $ | (33.8 | ) | | $ | (38.9 | ) | | $ | (29.5 | ) | $ | (19.4 | ) | | $ | (22.5 | ) | | $ | 6.5 |
| | $ | (9.4 | ) |
| Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | | | | | | | | | |
| Actuarial loss | $ | 46.4 |
| | $ | 49.2 |
| | $ | 64.2 |
| | $ | 57.8 |
| $ | 37.9 |
| | $ | 40.7 |
| | $ | 42.6 |
| | $ | 50.8 |
|
| Prior service cost | — |
| | — |
| | 0.3 |
| | 0.3 |
| |
| Total amount recognized | $ | 46.4 |
| | $ | 49.2 |
| | $ | 64.5 |
| | $ | 58.1 |
| $ | 37.9 |
| | $ | 40.7 |
| | $ | 42.6 |
| | $ | 50.8 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension Plans | U.S. Defined
Benefit Pension Plans | | International
Defined
Benefit Pension Plans |
| | 2016 | | 2015 | | 2016 | | 2015 | 2018 | | 2017 | | 2018 | | 2017 |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Total change in other comprehensive loss attributable to: | | | | | | | | | | | | | | |
| Pension benefit (loss) gain during the period | $ | 1.1 |
| | $ | (18.2 | ) | | $ | (15.8 | ) | | $ | 0.5 |
| |
| Pension benefit gain during the period | | $ | 1.3 |
| | $ | 4.0 |
| | $ | 5.9 |
| | $ | 9.8 |
|
| Reclassification of pension benefit losses to net income | 1.8 |
| | 3.3 |
| | 1.6 |
| | 1.7 |
| 1.5 |
| | 1.7 |
| | 1.1 |
| | 1.9 |
|
| Settlement loss during the period | | — |
| | — |
| | — |
| | 1.4 |
|
| Foreign currency translation | — |
| | — |
| | 7.8 |
| | 4.8 |
| — |
| | — |
| | 1.2 |
| | (1.7 | ) |
| Total change in other comprehensive loss | $ | 2.9 |
| | $ | (14.9 | ) | | $ | (6.4 | ) | | $ | 7.0 |
| $ | 2.8 |
| | $ | 5.7 |
| | $ | 8.2 |
| | $ | 11.4 |
|
| Amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost in fiscal 2017 are as follows: | | | | | | | | |
| Amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost in fiscal 2019 are as follows: | | | | | | | | |
| Actuarial loss | $ | 1.7 |
| | | | $ | 2.1 |
| | | $ | 1.5 |
| | | | $ | 0.9 |
| | |
| Prior service cost | — |
| | | | — |
| | | |
| Amount to be amortized into net periodic benefit cost | $ | 1.7 |
| | | | $ | 2.1 |
| | | $ | 1.5 |
| | | | $ | 0.9 |
| | |
| Weighted average assumptions used in development of projected benefit obligation: | | | | | | | | | | | | | | |
| Discount rate | 3.07 | % | | 3.82 | % | | 2.07 | % | | 3.52 | % | 3.95 | % | | 3.41 | % | | 2.57 | % | | 2.47 | % |
| Rate of compensation increase | n/a |
| | n/a |
| | 3.46 | % | | 3.49 | % | |
| | | | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension Plans | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension Plans |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Components of net periodic benefit cost: | | | | | | | | | | | | |
| Components of net periodic benefit (income) cost: | | | | | | | | | | | | |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.1 |
| | $ | 1.2 |
| | $ | 1.2 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 0.9 |
| | $ | 0.9 |
|
| Interest cost | 4.3 |
| | 4.0 |
| | 4.5 |
| | 6.5 |
| | 7.3 |
| | 8.3 |
| 3.1 |
| | 2.8 |
| | 4.3 |
| | 4.2 |
| | 3.7 |
| | 6.3 |
|
| Expected return on plan assets | (5.0 | ) | | (5.4 | ) | | (5.2 | ) | | (7.4 | ) | | (8.9 | ) | | (9.4 | ) | (4.6 | ) | | (4.9 | ) | | (5.0 | ) | | (7.2 | ) | | (7.7 | ) | | (7.3 | ) |
| Net amortization | 1.8 |
| | 3.3 |
| | 3.7 |
| | 1.6 |
| | 1.7 |
| | 1.4 |
| 1.5 |
| | 1.7 |
| | 1.8 |
| | 1.1 |
| | 1.8 |
| | 1.5 |
|
| Net periodic benefit cost | 1.1 |
| | 1.9 |
| | 3.0 |
| | 1.8 |
| | 1.3 |
| | 1.5 |
| |
| Contractual termination benefits | — |
| | — |
| | — |
| | — |
| | — |
| | 0.3 |
| |
| Total benefit cost | $ | 1.1 |
| | $ | 1.9 |
| | $ | 3.0 |
| | $ | 1.8 |
| | $ | 1.3 |
| | $ | 1.8 |
| |
| Weighted average assumptions used in development of net periodic benefit cost: | | | | | | | | | | | | |
| Discount rate | 3.81 | % | | 3.81 | % | | 4.32 | % | | 3.52 | % | | 3.73 | % | | 4.32 | % | |
| Net periodic benefit (income) cost | | — |
| | (0.4 | ) | | 1.1 |
| | (1.9 | ) | | (1.3 | ) | | 1.4 |
|
| Settlement | | — |
| | — |
| | — |
| | — |
| | 1.4 |
| | — |
|
| Total benefit (income) cost | | $ | — |
| | $ | (0.4 | ) | | $ | 1.1 |
| | $ | (1.9 | ) | | $ | 0.1 |
| | $ | 1.4 |
|
| Weighted average assumptions used in development of net periodic benefit (income) cost: | | | | | | | | | | | | |
| Weighted average discount rate | | n/a |
| | n/a |
| | 3.81 | % | | n/a |
| | n/a |
| | 3.58 | % |
| Weighted average discount rate - service cost | | n/a |
| | n/a |
| | n/a |
| | n/a |
| | 1.37 | % | | n/a |
|
| Weighted average discount rate - interest cost | | 2.87 | % | | 2.44 | % | | n/a |
| | 2.21 | % | | 1.84 | % | | n/a |
|
| Expected return on plan assets | 5.50 | % | | 6.25 | % | | 6.25 | % | | 4.70 | % | | 5.63 | % | | 6.17 | % | 5.50 | % | | 5.50 | % | | 5.50 | % | | 4.45 | % | | 4.55 | % | | 4.75 | % |
| Rate of compensation increase | n/a |
| | n/a |
| | n/a |
| | 3.5 | % | | 3.7 | % | | 3.7 | % | n/a |
| | n/a |
| | n/a |
| | n/a |
| | 3.50 | % | | 3.53 | % |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension 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, 2017: | | | | |
| Target for September 30, 2019: | | | | |
| Equity securities | 25 | % | | 30 | % | 21 | % | | 33 | % |
| Debt securities | 70 | % | | 68 | % | 75 | % | | 64 | % |
| Real estate securities | 5 | % | | — | % | 4 | % | | — | % |
| Cash and cash equivalents | — | % | | — | % | — | % | | — | % |
| Insurance contracts | — | % | | 2 | % | — | % | | 3 | % |
| September 30, 2016: | | | | |
| September 30, 2018 | | | | |
| Equity securities | 23 | % | | 29 | % | 22 | % | | 34 | % |
| Debt securities | 70 | % | | 69 | % | 71 | % | | 63 | % |
| Real estate securities | 4 | % | | — | % | 4 | % | | — | % |
| Cash and cash equivalents | 3 | % | | — | % | 3 | % | | 1 | % |
| Insurance contracts | — | % | | 2 | % | — | % | | 2 | % |
| September 30, 2015: | | | | |
| September 30, 2017 | | | | |
| Equity securities | 23 | % | | 31 | % | 26 | % | | 31 | % |
| Debt securities | 70 | % | | 67 | % | 67 | % | | 66 | % |
| Real estate securities | 4 | % | | — | % | 4 | % | | — | % |
| Cash and cash equivalents | 3 | % | | — | % | 3 | % | | — | % |
| Insurance contracts | — | % | | 2 | % | — | % | | 3 | % |
| Expected Company contributions in fiscal 2017 | $ | 3.7 |
| | $ | 4.7 |
| |
| | | | | |
| Expected company contributions in fiscal 2019 | | $ | 0.2 |
| | $ | 6.6 |
|
| Expected future benefit payments: | | | | | | |
| 2017 | $ | 7.7 |
| | $ | 6.0 |
| |
| 2018 | 7.7 |
| | 6.3 |
| |
| 2019 | 7.7 |
| | 6.6 |
| $ | 7.8 |
| | $ | 5.2 |
|
| 2020 | 7.7 |
| | 6.6 |
| 7.6 |
| | 5.4 |
|
| 2021 | 7.6 |
| | 7.0 |
| 7.5 |
| | 5.6 |
|
| 2022 – 2027 | 36.5 |
| | 41.8 |
| |
| 2022 | | 7.5 |
| | 6.0 |
|
| 2023 | | 7.4 |
| | 6.3 |
|
| 2024 – 2028 | | 34.4 |
| | 35.0 |
|
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, 2016 | September 30, 2018 |
| | 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 Pension Plan Assets | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 2.2 |
| | $ | — |
| | $ | — |
| | $ | 2.2 |
| $ | 2.6 |
| | $ | — |
| | $ | — |
| | $ | 2.6 |
|
| Mutual funds—real estate | — |
| | 3.8 |
| | — |
| | 3.8 |
| — |
| | 3.2 |
| | — |
| | 3.2 |
|
| Mutual funds—equities | — |
| | 20.9 |
| | — |
| | 20.9 |
| — |
| | 18.0 |
| | — |
| | 18.0 |
|
| Mutual funds—fixed income | — |
| | 62.5 |
| | — |
| | 62.5 |
| — |
| | 56.9 |
| | — |
| | 56.9 |
|
| Total | $ | 2.2 |
| | $ | 87.2 |
| | $ | — |
| | $ | 89.4 |
| $ | 2.6 |
| | $ | 78.1 |
| | $ | — |
| | $ | 80.7 |
|
| International Defined Benefit Pension Plan Assets | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 0.7 |
| | $ | — |
| | $ | — |
| | $ | 0.7 |
| $ | 1.0 |
| | $ | — |
| | $ | — |
| | $ | 1.0 |
|
| Insurance contracts | — |
| | 2.6 |
| | — |
| | 2.6 |
| — |
| | 4.5 |
| | — |
| | 4.5 |
|
| Mutual funds—equities | — |
| | 51.8 |
| | — |
| | 51.8 |
| — |
| | 61.2 |
| | — |
| | 61.2 |
|
| Mutual funds—fixed income | — |
| | 121.4 |
| | — |
| | 121.4 |
| — |
| | 114.8 |
| | — |
| | 114.8 |
|
| Total | $ | 0.7 |
| | $ | 175.8 |
| | $ | — |
| | $ | 176.5 |
| $ | 1.0 |
| | $ | 180.5 |
| | $ | — |
| | $ | 181.5 |
|
| | | | September 30, 2015 | September 30, 2017 |
| | 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 Pension Plan Assets | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 2.6 |
| | $ | — |
| | $ | — |
| | $ | 2.6 |
| $ | 2.4 |
| | $ | — |
| | $ | — |
| | $ | 2.4 |
|
| Mutual funds—real estate | — |
| | 3.5 |
| | — |
| | 3.5 |
| — |
| | 3.7 |
| | — |
| | 3.7 |
|
| Mutual funds—equities | — |
| | 19.0 |
| | — |
| | 19.0 |
| — |
| | 22.5 |
| | — |
| | 22.5 |
|
| Mutual funds—fixed income | — |
| | 58.4 |
| | — |
| | 58.4 |
| — |
| | 58.9 |
| | — |
| | 58.9 |
|
| Total | $ | 2.6 |
| | $ | 80.9 |
| | $ | — |
| | $ | 83.5 |
| $ | 2.4 |
| | $ | 85.1 |
| | $ | — |
| | $ | 87.5 |
|
| International Defined Benefit Pension Plan Assets | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | 0.6 |
| | $ | — |
| | $ | — |
| | $ | 0.6 |
| $ | 0.4 |
| | $ | — |
| | $ | — |
| | $ | 0.4 |
|
| Insurance contracts | — |
| | 2.6 |
| | — |
| | 2.6 |
| — |
| | 4.7 |
| | — |
| | 4.7 |
|
| Mutual funds—equities | — |
| | 52.3 |
| | — |
| | 52.3 |
| — |
| | 56.7 |
| | — |
| | 56.7 |
|
| Mutual funds—fixed income | — |
| | 113.1 |
| | — |
| | 113.1 |
| — |
| | 119.4 |
| | — |
| | 119.4 |
|
| Total | $ | 0.6 |
| | $ | 168.0 |
| | $ | — |
| | $ | 168.6 |
| $ | 0.4 |
| | $ | 180.8 |
| | $ | — |
| | $ | 181.2 |
|
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.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 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 10ten 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.
| | | | 2016 | | 2015 | 2018 | | 2017 |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Change in Accumulated Plan Benefit Obligation (APBO): | | | | | | |
| Benefit obligation at beginning of year | $ | 26.0 |
| | $ | 32.4 |
| $ | 23.9 |
| | $ | 26.2 |
|
| Service cost | 0.2 |
| | 0.4 |
| 0.3 |
| | 0.3 |
|
| Interest cost | 1.0 |
| | 1.3 |
| 0.7 |
| | 0.7 |
|
| Plan participants’ contributions | 0.5 |
| | 1.2 |
| 0.3 |
| | 0.3 |
|
| 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 | ) | |
| Actuarial (gain) loss | | (1.9 | ) | | (1.2 | ) |
| Benefits paid | | (1.9 | ) | | (2.4 | ) |
| Benefit obligation at end of year | $ | 26.2 |
| | $ | 26.0 |
| $ | 21.4 |
| | $ | 23.9 |
|
| Change in plan assets: | | | | | | |
| Fair value of plan assets at beginning of year | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
| Employer contribution | 2.3 |
| | 2.2 |
| 1.6 |
| | 2.1 |
|
| Plan participants’ contributions | 0.5 |
| | 1.2 |
| 0.3 |
| | 0.3 |
|
| Gross benefits paid | (2.8 | ) | | (3.4 | ) | (1.9 | ) | | (2.4 | ) |
| Fair value of plan assets at end of year | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
| Unfunded status at end of year | $ | (26.2 | ) | | $ | (26.0 | ) | $ | (21.4 | ) | | $ | (23.9 | ) |
| Amounts recognized in the Consolidated Balance Sheets consist of: | | | | | | |
| Current liabilities | $ | (1.8 | ) | | $ | (2.1 | ) | $ | (1.8 | ) | | $ | (1.8 | ) |
| Noncurrent liabilities | (24.4 | ) | | (23.9 | ) | (19.6 | ) | | (22.1 | ) |
| Total amount accrued | $ | (26.2 | ) | | $ | (26.0 | ) | $ | (21.4 | ) | | $ | (23.9 | ) |
| Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | |
| Actuarial loss | $ | 4.7 |
| | $ | 3.4 |
| $ | 1.1 |
| | $ | 3.2 |
|
| Unamortized prior service credit | (6.9 | ) | | (8.1 | ) | (4.7 | ) | | (5.8 | ) |
| Total amount recognized | $ | (2.2 | ) | | $ | (4.7 | ) | $ | (3.6 | ) | | $ | (2.6 | ) |
| Total change in other comprehensive loss attributable to: | | | | | | |
| Benefit loss during the period | $ | 1.5 |
| | $ | 2.1 |
| |
| Net prior service credit | — |
| | (8.2 | ) | |
| Benefit gain during the period | | $ | (1.9 | ) | | $ | (1.1 | ) |
| Net amortization of prior service credit and actuarial loss during the year | 1.0 |
| | — |
| 0.9 |
| | 0.7 |
|
| Total change in other comprehensive loss (income) | $ | 2.5 |
| | $ | (6.1 | ) | $ | (1.0 | ) | | $ | (0.4 | ) |
| | | | | | | |
| Discount rate used in development of APBO | 3.26 | % | | 4.03 | % | 4.17 | % | | 3.56 | % |
| | | | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Components of net periodic benefit cost | | | | | | | | | | |
| Service cost | $ | 0.2 |
| | $ | 0.4 |
| | $ | 0.4 |
| $ | 0.3 |
| | $ | 0.3 |
| | $ | 0.2 |
|
| Interest cost | 1.0 |
| | 1.3 |
| | 1.4 |
| 0.7 |
| | 0.7 |
| | 1.0 |
|
| Amortization of actuarial loss | 0.1 |
| | — |
| | — |
| 0.2 |
| | 0.4 |
| | 0.1 |
|
| Amortization of prior service credit | (1.1 | ) | | — |
| | — |
| (1.1 | ) | | (1.1 | ) | | (1.1 | ) |
| Total postretirement benefit cost | $ | 0.2 |
| | $ | 1.7 |
| | $ | 1.8 |
| $ | 0.1 |
| | $ | 0.3 |
| | $ | 0.2 |
|
| | | | | | | | | | | |
| Discount rate used in development of net periodic benefit cost | 4.03 | % | | 4.08 | % | | 4.54 | % | n/a |
| | n/a |
| | 4.03 | % |
| Discount rate used in development of service cost | | 3.71 | % | | 3.44 | % | | n/a |
|
| Discount rate used in development of interest cost | | 2.96 | % | | 2.56 | % | | n/a |
|
The estimated actuarial loss and prior service credit that will be amortized from accumulated loss into net periodic benefit cost over the next fiscal year is $0.4 millionzero and $1.1 million, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For measurement as of September 30, 2016,2018, management has assumed that health care costs will increase at an annual rate of 7.00% in fiscal 2016,6.50%, and thereafter decreasing 0.25% per year to an ultimate trend rate of 5.00% in 2024. A 1%100 basis point increase or decrease in health cost trend rate assumptions would increasenot have a material effect on the APBO by $0.1 million as of September 30, 2016 and a 1% decrease would decrease the APBO by $0.1 million as of September 30, 2016.2018. A 1%100 basis point increase or decrease in the health cost trend rate assumptions 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 | | Net Company Payments | Gross Benefit Payments | | Retiree Contributions | | Net Company Payments |
| | (In millions) | (In millions) |
| 2017 | $ | 2.1 |
| | $ | (0.3 | ) | | $ | 1.8 |
| |
| 2018 | 2.3 |
| | (0.4 | ) | | 1.9 |
| |
| 2019 | 2.5 |
| | (0.5 | ) | | 2.0 |
| $ | 2.3 |
| | $ | (0.5 | ) | | $ | 1.8 |
|
| 2020 | 2.6 |
| | (0.6 | ) | | 2.0 |
| 2.4 |
| | (0.6 | ) | | 1.8 |
|
| 2021 | 2.6 |
| | (0.6 | ) | | 2.0 |
| 2.5 |
| | (0.7 | ) | | 1.8 |
|
| 2022 – 2026 | 11.9 |
| | (3.2 | ) | | 8.7 |
| |
| 2022 | | 2.5 |
| | (0.7 | ) | | 1.8 |
|
| 2023 | | 2.5 |
| | (0.7 | ) | | 1.8 |
|
| 2024 – 2028 | | 10.9 |
| | (3.3 | ) | | 7.6 |
|
The Company also provides comprehensive major medical benefits to its associates. The Company is self-insured for certain health benefits up to $0.6$0.7 million per occurrence per individual. The cost of such benefits is recognized as expense in the period the claim is incurred. This cost was $31.8$31.2 million, $29.6$33.4 million and $29.0$31.8 million in fiscal 2016,2018, fiscal 20152017 and fiscal 20142016, respectively.
NOTE 11. DEBT
The components of long-term debt are as follows:
|
| | | | | | | |
| | September 30, |
| | 2016 | | 2015 |
| | (In millions) |
| Credit Facilities: | | | |
| Revolving loans | $ | 417.4 |
| | $ | 816.3 |
|
| Term loans | 288.8 |
| | — |
|
| Senior Notes – 6.625% | — |
| | 200.0 |
|
| Senior Notes – 6.000% | 400.0 |
| | — |
|
| Master Accounts Receivable Purchase Agreement | 138.6 |
| | 122.3 |
|
| Other | 71.3 |
| | 19.0 |
|
| | 1,316.1 |
| | 1,157.6 |
|
| Less current portions | 185.0 |
| | 132.6 |
|
| Long-term debt | $ | 1,131.1 |
| | $ | 1,025.0 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | |
| | September 30, |
| | 2018 | | 2017 |
| | (In millions) |
| Credit Facilities: | | | |
| Revolving loans | $ | 492.2 |
| | $ | 300.5 |
|
| Term loans | 790.0 |
| | 273.8 |
|
| Senior Notes – 5.250% | 250.0 |
| | 250.0 |
|
| Senior Notes – 6.000% | 400.0 |
| | 400.0 |
|
| Receivables facility | 76.0 |
| | 80.0 |
|
| Other | 17.5 |
| | 105.4 |
|
| Total debt | 2,025.7 |
| | 1,409.7 |
|
| Less current portions | 132.6 |
| | 143.1 |
|
| Less unamortized debt issuance costs | 9.3 |
| | 8.6 |
|
| Long-term debt | $ | 1,883.8 |
| | $ | 1,258.0 |
|
The Company’s debt matures as follows for each of the next five fiscal years and thereafter (in millions):
|
| | | |
| 2019 | $ | 132.6 |
|
| 2020 | 40.9 |
|
| 2021 | 40.0 |
|
| 2022 | 40.0 |
|
| 2023 | 1,122.2 |
|
| Thereafter | 650.0 |
|
| | $ | 2,025.7 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | |
| 2017 | $ | 185.0 |
|
| 2018 | 15.7 |
|
| 2019 | 15.6 |
|
| 2020 | 15.4 |
|
| 2021 | 646.1 |
|
| Thereafter | 438.3 |
|
| | $ | 1,316.1 |
|
Credit Facilities
On December 20, 2013, the Company entered into the third amended and restated credit agreement, providing the Company and certain of its subsidiaries with a five-year senior secured revolving loan facility in the aggregate principal amount of up to $1.7 billion (the “former credit facility”). On October 29, 2015, the Company entered into the fourth amended and restated credit agreement (the “new“former credit agreement”), providingthat was subsequently superseded by the fifth amended and restated credit agreement discussed further below. The former credit agreement provided the Company and certain of its subsidiaries with five-year senior secured loan facilities in the aggregate principal amount of $1.9 billion that were 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“former credit facilities”). The newformer credit agreement also provided 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 former credit agreement, the Company had the ability to obtain letters of credit up to $100.0 million. Borrowings under the former credit facilities could be made in various currencies, including U.S. dollars, euro, British pounds, Australian dollars and Canadian dollars. The terms of the former credit agreement included customary representations and warranties, affirmative and negative covenants, financial covenants and events of default. Under the terms of the former credit agreement, loans bore interest, at the Company’s election, at a rate per annum equal to either the ABR or Adjusted LIBO Rate (both as defined in the former credit agreement) plus the applicable margin.
On July 5, 2018, the Company entered into a fifth amended and restated credit agreement (the “Fifth A&R Credit Agreement”), providing the Company and certain of its subsidiaries with five-year senior secured loan facilities in the aggregate principal amount of $2.3 billion, comprised of a revolving credit facility of $1.5 billion and a term loan in the original principal amount of $800.0 million (the “Fifth A&R Credit Facilities”). The Fifth A&R 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. UnderThe Fifth A&R Credit Agreement replaces the newformer credit agreement, the Company has the ability to obtainand will terminate on July 5, 2023. The revolving credit facility is available for issuance of letters of credit up to $100.0$75.0 million. The new credit agreement replacesBorrowings under the former credit facility, and will terminate on October 29, 2020. Borrowings on the revolving credit facilityFifth A&R Credit Facilities may be made in various currencies, including U.S. dollars, euro, British pounds Australian dollars and Canadian dollars. The terms of the new credit agreementFifth A&R Credit Agreement include customary representations and warranties, customary affirmative and negative covenants, customary financial covenants, and customary events of default. The proceeds of borrowings onunder the new credit facilitiesFifth A&R Credit Facilities may be used: (i) to finance working capital requirements and other general corporate purposes of the Company and its subsidiaries; and (ii) to refinance the amounts outstanding under the former credit facility.agreement. The former credit agreement would have terminated on October 29, 2020, if it had not been amended and restated pursuant to the Fifth A&R Credit Agreement.
Under the terms of the new credit agreement,Fifth A&R Credit Agreement, loans made under the Fifth A&R Credit Facilities bear interest, at the Company’s election, at a rate per annum equal to either (i) the ABR or Adjusted LIBOAlternate Base Rate (bothplus the Applicable Spread (each, as defined in the new credit agreement)Fifth A&R Credit Agreement) or (ii) the Adjusted LIBO Rate for the Interest Period in effect for such borrowing plus the Applicable Spread (all as defined in the Fifth A&R Credit Agreement). Swingline Loans bear interest at the applicable margin.Swingline Rate set forth in the Fifth A&R Credit Agreement. The new credit facilitiesFifth A&R Credit Facilities are guaranteed by substantially alland among the Company and certain of the Company’sits domestic subsidiaries, and aresubsidiaries. The Fifth A&R Credit Agreement is secured by (i) a perfected first priority security interest in all of the accounts receivable, inventory and equipment of the Company and certain of the Company’s domestic subsidiaries that are guarantors and (ii) the pledge of all of the capital stock of certain of the Company’s domestic subsidiaries that are guarantors.and a portion of the capital stock of certain of the Company’s foreign subsidiaries. The collateral does not include any of the Company’s or the Company’s subsidiaries’ intellectual property.
At September 30, 2016,2018, the Company had letters of credit outstanding in the aggregate principal amount of $26.5$22.3 million, and $1.2 billion$985.5 million of availability under the new credit agreement, subject to the Company’s continued compliance with the covenants discussed below.Fifth A&R Credit Agreement. The weighted average interest rates on average borrowings under the new credit agreementFifth A&R Credit Agreement and the former credit facilityagreement were 3.5%4.0%, 3.9% and 4.0%3.5% for fiscal 20162018, fiscal 2017 and fiscal 2015,2016, respectively.
The new credit agreementFifth A&R Credit Agreement contains, among other obligations, an affirmative covenant regarding the Company’s leverage ratio on the last day of each quarter calculated as average total indebtedness, divided by the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), as adjusted pursuant to the terms of the new credit agreementFifth A&R Credit Agreement (“Adjusted EBITDA”). The maximum leverage ratio wasis: (i) 5.25 through the second quarter of fiscal 2019, (ii) 5.00 for the third quarter of fiscal 2019 through the first quarter of fiscal 2020, (iii) 4.75 for the second quarter of fiscal 2020 through the fourth quarter of fiscal 2020 and (iv) 4.50 asfor the first quarter of September 30, 2016.fiscal 2021 and thereafter. The Company’s leverage ratio was 3.104.23 at September 30, 2016.2018. The new credit agreementFifth A&R Credit Agreement also includescontains an affirmative covenant regarding itsthe Company’s interest coverage ratio.ratio determined as of the end of each of its fiscal quarters. The interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in the new credit agreement,Fifth A&R Credit Agreement, and excludes costs related to refinancings. The minimum interest coverage ratio was 3.00 for the twelve months ended September 30, 2016.2018. The Company’s interest coverage ratio was 7.885.55 for the twelve months ended September 30, 2016.2018. The new credit agreementFifth A&R Credit Agreement allows the Company to make unlimited restricted payments (as defined in the new credit agreement)Fifth A&R Credit Agreement), including increased or one-time dividend payments and Common Share
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 further restricted payments in an aggregate amount for each fiscal year not to exceed the amount set forth in the new credit agreementFifth A&R Credit Agreement for such fiscal year ($175.0200.0 million for fiscal 20172019 and $200.0$225.0 million for fiscal 20182020 and thereafter).
Senior Notes - 5.250%
On December 15, 2016, Scotts Miracle-Gro issued $250.0 million aggregate principal amount of 5.250% senior notes due 2026 (the “5.250% Senior Notes”). The net proceeds of the offering were used to repay outstanding borrowings under the former credit facilities. The 5.250% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with the Company’s existing and future unsecured senior debt. The 5.250% Senior Notes have interest payment dates of June 15 and December 15 of each fiscal year thereafter).year. The 5.250% Senior Notes may be redeemed, in whole or in part, on or after December 15, 2021 at applicable redemption premiums. The 5.250% Senior Notes contain customary covenants and events of default and mature on December 15, 2026. Substantially all of Scotts Miracle-Gro’s domestic subsidiaries serve as guarantors of the 5.250% Senior Notes.
Senior Notes - 6.625%
On December 15, 2015, Scotts Miracle-Gro redeemed all $200.0 million aggregate principal amount of its outstanding 6.625% senior notes due 2020 (the “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 the first quarter of fiscal 2016. Additionally, the Company 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 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 formera prior credit facility.agreement. The 6.000% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with the Company’s existing and future unsecured senior debt. The 6.000% Senior Notes have interest payment dates of April 15 and October 15 of each year. The 6.000% Senior Notes may be redeemed, in whole or in part, on or after October 15, 2018 at applicable redemption premiums. The 6.000% Senior Notes contain customary covenants and events of default and mature on October 15, 2023. Substantially all of Scotts Miracle-Gro’s domestic subsidiaries serve as guarantors of the 6.000% Senior Notes.
Master Accounts Receivable PurchaseReceivables Facility
On September 25, 2015, the Company entered into an amended and restated master accounts receivable purchase agreement (the “MARP Agreement”). The MARP Agreement
The Company maintains a Master Accounts Receivable Purchase Agreement (“MARP Agreement”), which provides provided for the discretionary sale by the Company, and the discretionary purchase (outside of the commitment period specified in the MARP 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.terminated effective October 14, 2016 in accordance with its terms upon the Company’s repayment of its outstanding obligations thereunder using $133.5 million borrowed under the former credit agreement.
On March 23, 2016, Scotts Miracle-Gro and Scotts LLCApril 7, 2017, the Company entered into a WaiverMaster Repurchase Agreement (including the annexes thereto, the “Repurchase Agreement”) and First Amendmenta Master Framework Agreement (the “Framework Agreement” and, together with the Repurchase Agreement, the “Receivables Facility”). Under the Receivables Facility, the Company may sell a portfolio of available and eligible outstanding customer accounts receivable to the MARP Agreement that amendspurchasers and simultaneously agree to repurchase the MARP Agreementreceivables on a weekly basis. The eligible accounts receivable consisted of up to $250.0 million in accounts receivable generated by sales to three specified customers. The repurchase price for customer accounts receivable bears interest at LIBOR (with a zero floor), as defined in the following significant respects: (1) includes subsidiaries and affiliatesRepurchase Agreement, plus 0.90%. On August 25, 2017, the Company entered into Amendment No. 1 to Master Framework Agreement, which (i) extended the expiration date of the approved debtors inReceivables Facility from August 25, 2017 to August 24, 2018, (ii) defined the definitionseasonal commitment period of approved debtors; (2) requires Scotts LLCthe Receivables Facility as beginning on February 23, 2018 and ending on June 15, 2018, (iii) increased the eligible amount of customer accounts receivable which may be sold from up to repurchase all$250.0 million to up to $400.0 million and (iv) increased the commitment amount of the Receivables Facility during the seasonal commitment period from up to $100.0 million to up to $160.0 million.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
On August 24, 2018, the Company entered into Amendment No. 1 to the Master Repurchase Agreement (the “Repurchase Amendment”) and Amendment No. 2 to Master Framework Agreement (the “Framework Amendment,” and together with the Repurchase Amendment, the “Amendments”). Under the Amendments, the eligible amount of customer accounts receivables (including any defaulted receivables) from the banks on each settlement date; and (3) provides the administrative agentwhich may be sold is $400.0 million and the banks with full recourse to Scotts LLC in case of non-payment of any purchased receivable oncommitment amount during the maturityseasonal commitment period is $160.0 million. Among other things, the Amendments (i) extend the expiration date thereof, regardless of the reason for such non-payment. UnderReceivables Facility from August 24, 2018 to August 23, 2019 (ii) define the termsseasonal commitment period of the amended MARP Agreement,Receivables Facility as beginning on February 22, 2019 and ending on June 21, 2019 and (iii) revises the banks have the opportunity to purchase thoserepurchase price for customer accounts receivable offered by the Company atto LIBOR (with a discount (from the agreed base value thereof) effectively equal to the one-week LIBO ratefloor of zero) plus 0.95%0.875% from LIBOR (with a floor of zero) plus 0.90%.
The Company accounts for the sale of receivables under the MARP Agreement (as amended)Receivables Facility 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. ThereAs of September 30, 2018 and 2017, there were $138.6$76.0 million and $122.3$80.0 million, respectively, in borrowings oron receivables pledged as collateral under the MARP Agreement at September 30, 2016Receivables Facility, and 2015, respectively. Thethe carrying value of the receivables pledged as collateral was $174.7$84.5 million at September 30, 2016 and $152.9$88.9 million, at September 30, 2015.respectively. As of September 30, 2016,2018 and 2017, there was $7.6$0.4 million and $11.1 million, respectively, of availability under the MARP Agreement.
On August 25, 2016, Scotts Miracle-Gro and Scotts LLC entered into a Second Amendment to the MARP Agreement that extended the stated termination date of the Agreement through October 14, 2016. The MARP Agreement terminated effective October 14, 2016 in accordance with its terms.Receivables Facility.
Other
In connection with the acquisition of a controlling interest in Gavita during fiscal 2016, the Company recorded a loan to the noncontrolling ownership group of Gavita. The fair value of the loan was $38.3$55.6 million at September 30, 2016.2017. On October 2, 2017, the Company’s Hawthorne segment acquired the remaining 25% noncontrolling interest in Gavita, which included extinguishment of the loan to the noncontrolling ownership group of Gavita with a fair value and carrying value of $55.6 million.
Interest Rate Swap Agreements
The Company has outstanding interest rate swap agreements with major financial institutions that effectively convert a portion of the Company’s variable-rate debt to a fixed rate. The swap agreements had a maximum total U.S. dollar equivalent notional amount of $650.0$800.0 million and $1,300.0$1,100.0 million at September 30, 20162018 and September 30, 2015.2017, respectively. Interest payments made between the effective date and expiration date are hedged by the swap agreements, except as noted below, respectively.below. On November 1, 2016,October 12, 2018, 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 tohave a fixed rate of approximately 0.83%2.93% beginning in November 2016October 2018 through expiration dates in June, July and August 2018.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
October 2021.
The notional amount, effective date, expiration date and rate of each of these swap agreements outstanding at September 30, 20162018 are shown in the table below.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 |
| (d) | 12/6/2012 | | 9/6/2017 | | 2.96 | % | 150 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.12 | % |
| 200 |
|
| 2/7/2014 | | 11/7/2017 | | 1.28 | % | |
| 150 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.12 | % | |
| 50 | | 50 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.25 | % |
| 50 | 50 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.25 | % | 50 |
|
| 2/28/2018 | | 5/28/2019 | | 2.01 | % |
| 200 | 200 |
| (c) | 12/20/2016 | | 6/20/2019 | | 2.12 | % | 200 |
| (c) | 12/20/2016 | | 6/20/2019 | | 2.12 | % |
| 250 | | 250 |
| (d) | 1/8/2018 | | 6/8/2020 | | 2.09 | % |
| 100 | | 100 |
|
| 6/20/2018 | | 10/20/2020 | | 2.15 | % |
| |
| (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 duringNotional amount adjusts in accordance with a specified seasonal schedule. This represents the nine-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement.
maximum notional amount at any point in time. |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated Fair Values
The methods and assumptions used to estimate the fair values of the Company’s debt instruments are described below:
Credit Facilities
The interest rate currently available to the Company fluctuates with the applicable LIBO 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 facilities was classified in Level 2 of the fair value hierarchy.
5.250% Senior Notes
The fair value of the 5.250% Senior Notes was determined based on the trading of the 5.250% Senior Notes in the open market. The difference between the carrying value and the fair value of the 5.250% Senior Notes represents the premium or discount on that date. The fair value measurement for the 5.250% Senior Notes was classified in Level 1 of the fair value hierarchy.
6.000% Senior Notes
The fair value of the 6.000% Senior Notes can bewas determined based on the trading of the 6.000% Senior Notes in the open market. The difference between the carrying value and the fair value of the 6.000% Senior Notes represents the premium or discount on that date. The fair value measurement for the 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 was 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 represented the premium or discount on that date. The fair value 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 AgreementReceivables Facility fluctuated with the applicable LIBO rateLIBOR and thus the carrying value representedis a reasonable estimate of fair value. The fair value measurement for the MARP AgreementReceivables Facility was classified in Level 2 of the fair value hierarchy.
The estimated fair values of the Company’s debt instruments are as follows:
|
| | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | (In millions) |
| Revolving loans | $ | 492.2 |
| | $ | 492.2 |
| | $ | 300.5 |
| | $ | 300.5 |
|
| Term loans | 790.0 |
| | 790.0 |
| | 273.8 |
| | 273.8 |
|
| Senior Notes – 5.250% | 250.0 |
| | 239.4 |
| | 250.0 |
| | 264.4 |
|
| Senior Notes – 6.000% | 400.0 |
| | 411.0 |
| | 400.0 |
| | 427.0 |
|
| Receivables facility | 76.0 |
| | 76.0 |
| | 80.0 |
| | 80.0 |
|
| Other | 17.5 |
| | 17.5 |
| | 105.4 |
| | 105.4 |
|
Weighted Average Interest Rate
The weighted average interest rates on the Company’s debt were 4.3%, 4.6% and 4.4% for fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
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, |
| | 2016 | | 2015 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | (In millions) |
| Revolving loans | $ | 417.4 |
| | $ | 417.4 |
| | $ | 816.3 |
| | $ | 816.3 |
|
| Term loans | 288.8 |
| | 288.8 |
| | — |
| | — |
|
| Senior Notes – 6.625% | — |
| | — |
| | 200.0 |
| | 206.3 |
|
| Senior Notes – 6.000% | 400.0 |
| | 427.0 |
| | — |
| | — |
|
| Master Accounts Receivable Purchase Agreement | 138.6 |
| | 138.6 |
| | 122.3 |
| | 122.3 |
|
| Other | 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 12. EQUITY
Authorized and issued shares consisted of the following:
| | | | September 30, | September 30, |
| | 2016 | | 2015 | 2018 | | 2017 |
| | (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: | | |
| 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 |
In fiscal 1995, The Scotts Company merged with Stern’s Miracle-Gro Products, Inc. (“Miracle-Gro”). At September 30, 2016,2018, the former shareholders of Miracle-Gro, including the Hagedorn Partnership, L.P., owned approximately 26%27% of Scotts Miracle-Gro’s outstanding Common Shares on a fully diluted basis 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 million of Common Shares over a four-year period ending 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 Common Shares, resulting in authority to repurchase a total of up to $700 million of 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 up to $1.0 billion through September 30, 2019. The authorization provides the Company with flexibility to purchase 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, 2019, may be suspended or discontinued at any time, and there can be no guarantee as to the timing or amount of any repurchases. During fiscal 2018, fiscal 2017 and fiscal 2016, Scotts Miracle-Gro repurchased 3.5 million, 2.7 million and 1.8 million Common Shares for $323.1 million, $245.8 million and $130.8 million, respectively. From the inception of this share repurchase program in the fourth quarter of fiscal 2014 through September 30, 2016,2018, Scotts Miracle-Gro repurchased approximately 2.18.3 million Common Shares for $145.7$714.6 million. The “Treasury share purchases” line in the Consolidated Statements of Shareholders’ Equity also includes cash paid to tax authorities to satisfy statutory income tax withholding obligations related to share-based compensation of $3.0 million, $9.2 million and $6.6 million for fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Special DividendAcquisition of Sunlight Supply
In August 2014, theOn June 4, 2018, Scotts Miracle-Gro issued 0.3 million Common Shares, which represented a carrying value of $20.7 million, out of its treasury shares for payment of a portion of the purchase price for the acquisition of Sunlight Supply.
Gavita
On October 2, 2017, the Company’s Hawthorne segment acquired the remaining 25% noncontrolling interest in Gavita, including Agrolux, for $69.2 million, plus payment of contingent consideration of $3.0 million. The carrying value of the 25% noncontrolling interest consisted of long-term debt of $55.6 million and noncontrolling interest of $7.9 million. The difference between purchase price and carrying value of $5.7 million was recognized in the “Common shares and capital in excess of $0.01 stated value per share” line within “Total equity—controlling interest” in the Consolidated Balance Sheets.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Exercise of Outstanding AeroGrow Warrants
On November 29, 2016, the Company’s wholly-owned subsidiary SMG Growing Media, Inc. fully exercised its outstanding warrants to acquire additional shares of common stock of AeroGrow for an aggregate warrant exercise price of $47.8 million in exchange for the issuance of 21.6 million shares of common stock of AeroGrow, which increased the Company’s percentage ownership of AeroGrow’s outstanding shares of common stock (on a fully diluted basis) from 45% to 80%. The financial results of AeroGrow have been consolidated into the Company’s consolidated financial statements since the fourth quarter of fiscal 2014, when the Company obtained control of AeroGrow’s operations through increased involvement, influence and a working capital loan provided to AeroGrow. Following the exercise of the warrants, the Board of Directors of AeroGrow declared a special one-time cash dividend$40.5 million distribution ($1.21 per share) payable on January 3, 2017 to shareholders of $2.00 per Common Share that wasrecord on December 20, 2016. On January 3, 2017, AeroGrow paid on September 17, 2014. The paymenta distribution of the special one-time cash dividend required$8.1 million to its noncontrolling interest holders.
Other
During fiscal 2016, Scotts Miracle-Gro to adjust the number of Common Shares subject to stock options outstanding under the Scotts 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 options in an aggregate amount ofissued 0.1 million Common Shares. The methodology usedShares, which represented a carrying value of $4.2 million, out of its treasury shares for payment of contingent consideration related to adjust the awards was consistent with Internal Revenue Code (IRC) Section 409A and 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 holderacquisition 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.Bio-Organic Solutions, Inc. (“Vermicrop”).
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 units, deferred stock units and performance-based awards. 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 atis generally one year from the time of the award. Vesting of performance-based awards is 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.date, except in cases where employees are eligible for accelerated vesting based on having satisfied retirement requirements relating to age and years of service. The Company estimates that 15% to 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 have exercise prices equal to the market price of the underlying Common 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.
On January 30, 2017, the Company issued 0.5 million upfront performance-based award units, covering a five-year performance period, with an estimated fair value of $43.3 million on the date of grant to certain senior executives as part of its Project Focus initiative. These awards provide for a five-year vesting period based on achievement of specific performance goals aligned with the strategic objectives of the Company’s Project Focus initiatives. Based on the extent to which the targets are achieved, vested shares may range from 50 to 250 percent of the target award amount. The performance goals include a combination of five year cumulative operating cash flow less capital expenditures; five year average annual non-GAAP diluted EPS growth; and dividend yield. The Company assesses the probability of achievement of performance goals each period and records expense for the awards based on the probable achievement of such metrics. Performance-based award units accrue cash dividend equivalents that are payable upon vesting of the awards.
On October 30, 2017, the Company issued 0.2 million upfront performance-based award units, covering a four-year performance period, with an estimated fair value of $20.2 million on the date of grant to certain Hawthorne segment employees as part of its Project Focus initiative. These awards vest after approximately four years subject to the achievement of specific performance goals aligned with the strategic objectives of the Company’s Project Focus initiatives. Based on the extent to which the performance goals are achieved, vested shares may range from 50 to 250 percent of the target award amount. The performance goals are based on cumulative Hawthorne non-GAAP adjusted earnings. These performance-based award units accrue cash dividend equivalents that are payable upon vesting of the awards.
A maximum of 23.17.3 million Common Shares are available for issuance under share-based award plans. At September 30, 2016,2018, approximately 1.93.6 million Common Shares were not subject to outstanding awards and were available to underlie the grant of new share-based awards. Common Shares held in treasury totaling 0.60.4 million, 0.5 million and 0.90.6 million were reissued in support of share-based compensation awards and employee purchases under the employee stock purchase plan during fiscal 20162018, fiscal 2017 and fiscal 2015,2016, respectively.
The following is a recap of the share-based awards granted during the periods indicated:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| Employees | | | | | |
| Options | 444,890 |
| | 440,690 |
| | — |
|
| Restricted stock units | 74,467 |
| | 78,463 |
| | 112,315 |
|
| Performance units | 56,315 |
| | 78,352 |
| | 161,229 |
|
| Board of Directors | | | | | |
| Deferred stock units | 28,621 |
| | 29,913 |
| | 38,418 |
|
| Options due to special $2.00 dividend | — |
| | — |
| | 98,186 |
|
| Total share-based awards | 604,293 |
| | 627,418 |
| | 311,962 |
|
| Aggregate fair value at grant dates (in millions) | $ | 16.4 |
| | $ | 17.0 |
| | $ | 17.5 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a summary of the share-based awards granted during each of the periods indicated:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| Employees | | | | | |
| Options | — |
| | — |
| | 444,890 |
|
| Restricted stock units | 198,807 |
| | 109,708 |
| | 74,467 |
|
| Performance units | 246,430 |
| | 487,809 |
| | 56,315 |
|
| Board of Directors | | | | | |
| Deferred stock units | 25,858 |
| | 24,291 |
| | 28,621 |
|
| Total share-based awards | 471,095 |
| | 621,808 |
| | 604,293 |
|
| | | | | | |
| Aggregate fair value at grant dates (in millions) | $ | 43.5 |
| | $ | 57.8 |
| | $ | 16.4 |
|
Total share-based compensation was as follows for each of the periods indicated:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Share-based compensation | $ | 15.6 |
| | $ | 13.2 |
| | $ | 11.1 |
| $ | 40.5 |
| | $ | 25.2 |
| | $ | 15.6 |
|
| Tax benefit recognized | 6.0 |
| | 5.1 |
| | 3.9 |
| 10.5 |
| | 9.8 |
| | 6.0 |
|
As of September 30, 2016, total unrecognized compensation cost related to non-vested share-based awards amounted to $10.3 million. This cost is expected to be recognized over a weighted-average period of 1.7 years. The tax benefit realized from the tax deductions associated with the exercise of share-based awards and the vesting of restricted stock totaled $15.1$4.5 million for fiscal 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.2018.
Stock Options/SARsOptions
Aggregate stock option and SAR activity consisted of the following for fiscal 2016 (options/SARs in millions):was as follows:
| | | | No. of Options/SARs | | WTD. Avg. Exercise Price | No. of Options | | Wtd. Avg. Exercise Price |
| Beginning balance | 1.8 |
| | $ | 44.38 |
| |
| Awards outstanding at September 30, 2017 | | 1,517,310 |
| | $ | 53.05 |
|
| Granted | 0.4 |
| | 68.68 |
| — |
| | — |
|
| Exercised | (0.4 | ) | | 38.21 |
| (294,153 | ) | | 29.57 |
|
| Forfeited | — |
| | — |
| (6,065 | ) | | 61.51 |
|
| Ending balance | 1.8 |
| | 51.38 |
| |
| Awards outstanding at September 30, 2018 | | 1,217,092 |
| | 58.68 |
|
| Exercisable | 1.0 |
| | 38.42 |
| 804,941 |
| | 53.56 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At September 30, 2018, the total pre-tax compensation cost, net of estimated forfeitures, related to nonvested stock options not yet recognized was $0.2 million, which is expected to be recognized over a weighted-average period of 0.3 years. The total intrinsic value of stock options exercised was $17.2 million, $14.5 million and $13.6 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively. Cash received from the exercise of stock options, including amounts received from employee purchases under the employee stock purchase plan, for fiscal 2018, fiscal 2017 and fiscal 2016 was $10.5 million, $11.0 million and $14.7 million, respectively. As of September 30, 2018, the Company expects 0.80.4 million of the remaining unexercisable stock options (after forfeitures), with a weighted-average exercise price of $66.09,$68.68, intrinsic value of $12.9$4.1 million and average remaining term of 8.87.3 years, to vest and be exercised in the future. The following summarizes certain information pertaining to stock option awards outstanding and exercisable at September 30, 20162018 (options in millions):
|
| | | | | | | | | | | | | | | | | | |
| | | Awards Outstanding | | Awards Exercisable |
Range of Exercise Price | | No. of Options | | Wtd. Avg. Remaining Life | | Wtd. Avg. Exercise Price | | No. of Options | | Wtd. Avg. Remaining Life | | Wtd. Avg. Exercise Price |
| $38.81 – $49.19 | | 0.4 |
| | 2.44 | | $ | 45.24 |
| | 0.4 |
| | 2.44 | | $ | 45.24 |
|
| $63.43 – $68.68 | | 0.8 |
| | 6.87 | | 66.26 |
| | 0.4 |
| | 6.34 | | 63.53 |
|
| | | 1.2 |
| | 5.27 | | $ | 58.68 |
| | 0.8 |
| | 4.21 | | $ | 53.56 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | 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 valuevalues of the stock option and SAR awards outstanding and exercisable at September 30, 20162018 were as follows (in millions):
| | | | 2016 | 2018 |
| Outstanding | $ | 57.7 |
| $ | 24.4 |
|
| Exercisable | 43.3 |
| 20.3 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The grant date fair value of stock option awards is 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 Common Shares and historical volatility specific to the 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 were granted in fiscal 2018 or fiscal 2017. The weighted average assumptions for awards granted in fiscal 2016 are as follows:
|
| | | | |
| | | 2016 |
| Expected market price volatility | | 25.5 | % |
| Risk-free interest rates | | 1.5 | % |
| Expected dividend yield | | 2.7 | % |
| Expected life of stock options in years | | 6.0 |
|
| Estimated weighted-average fair value per stock option | | $ | 12.33 |
|
The total intrinsic value of stock options exercised was $13.6 million, $16.3 million and $21.3 million during fiscal 2016, fiscal 2015 and fiscal 2014, respectively. Cash received from the exercise of stock options for fiscal 2016, fiscal 2015 and fiscal 2014 was $14.7 million, $24.3 million and $20.0 million, respectively.
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 |
| Awards outstanding at September 30, 2013 | 409,651 |
| | $ | 47.36 |
|
| Granted | 150,733 |
| | 59.35 |
|
| Vested | (81,597 | ) | | 41.88 |
|
| Forfeited | (44,895 | ) | | 47.43 |
|
| Awards outstanding at September 30, 2014 | 433,892 |
| | 52.55 |
|
| Granted | 108,376 |
| | 63.85 |
|
| Vested | (135,562 | ) | | 47.33 |
|
| Forfeited | (25,197 | ) | | 58.44 |
|
| Awards outstanding at September 30, 2015 | 381,509 |
| | 57.22 |
|
| Granted | 103,088 |
| | 69.00 |
|
| Vested | (161,440 | ) | | 47.21 |
|
| Forfeited | (17,494 | ) | | 60.18 |
|
| Awards outstanding at September 30, 2016 | 305,663 |
| | 66.31 |
|
The total fair value of restricted stock units and deferred stock units vested was $7.6 million, $6.2 million and $3.4 million during fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted share-based awards
Restricted share-based award activity (including restricted stock units and deferred stock units) was as follows:
|
| | | | | | |
| | No. of Shares | | Wtd. Avg. Grant Date Fair Value per Share |
| Awards outstanding at September 30, 2015 | 381,509 |
| | $ | 57.22 |
|
| Granted | 103,088 |
| | 69.00 |
|
| Vested | (161,440 | ) | | 47.21 |
|
| Forfeited | (17,494 | ) | | 60.18 |
|
| Awards outstanding at September 30, 2016 | 305,663 |
| | 66.31 |
|
| Granted | 133,999 |
| | 92.70 |
|
| Vested | (144,029 | ) | | 60.66 |
|
| Forfeited | (4,114 | ) | | 72.40 |
|
| Awards outstanding at September 30, 2017 | 291,519 |
| | 81.15 |
|
| Granted | 224,665 |
| | 87.09 |
|
| Vested | (92,842 | ) | | 67.63 |
|
| Forfeited | (19,902 | ) | | 83.69 |
|
| Awards outstanding at September 30, 2018 | 403,440 |
| | 87.42 |
|
At September 30, 2018, the total pre-tax compensation cost, net of estimated forfeitures, related to nonvested restricted share units not yet recognized was $10.6 million, which is expected to be recognized over a weighted-average period of 2.1 years. The total fair value of restricted stock units and deferred stock units vested was $6.3 million, $8.7 million and $7.6 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
Performance-based awards
Performance-based award activity was as follows:follows (based on target award amounts):
| | | | 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, 2013 | 261,917 |
| | $ | 46.81 |
| |
| Granted | 161,229 |
| | 59.39 |
| |
| Vested | — |
| | — |
| |
| Forfeited | (111,897 | ) | | 53.24 |
| |
| Awards outstanding at September 30, 2014 | 311,249 |
| | 51.21 |
| |
| Granted | 78,352 |
| | 63.36 |
| |
| Vested | (49,467 | ) | | 47.66 |
| |
| Forfeited | (910 | ) | | 47.66 |
| |
| Awards outstanding at September 30, 2015 | 339,224 |
| | 54.86 |
| 339,224 |
| | $ | 54.86 |
|
| Granted | 56,315 |
| | 68.68 |
| 56,315 |
| | 68.68 |
|
| Vested | (128,941 | ) | | 45.06 |
| (128,941 | ) | | 45.06 |
|
| Forfeited | — |
| | — |
| — |
| | — |
|
| Awards outstanding at September 30, 2016 | 266,598 |
| | 62.52 |
| 266,598 |
| | 62.52 |
|
| Granted | | 487,809 |
| | 92.95 |
|
| Vested | | (147,696 | ) | | 59.82 |
|
| Forfeited | | (9,778 | ) | | 65.39 |
|
| Awards outstanding at September 30, 2017 | | 596,933 |
| | 88.01 |
|
| Granted | | 246,430 |
| | 97.04 |
|
| Vested | | (53,644 | ) | | 63.43 |
|
| Forfeited | | (33,912 | ) | | 95.37 |
|
| Awards outstanding at September 30, 2018 | | 755,807 |
| | 92.96 |
|
At September 30, 2018, the total pre-tax compensation cost, net of estimated forfeitures, related to nonvested performance-based units not yet recognized was $30.6 million, which is expected to be recognized over a weighted-average period of 2.8 years. The total fair value of performance-based units vested was $3.4 million, $8.8 million and $5.8 million during fiscal 2018, fiscal 2017 and fiscal 2016, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 13. EARNINGS PER COMMON SHARE
BasicThe following table presents information necessary to calculate basic and diluted income per Common 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 Shares outstanding. Diluted income per Common 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 Shares outstanding plus all potentially dilutive securities outstanding each period. Share.
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| | (In millions, except per share data) |
| Income from continuing operations | $ | 127.6 |
| | $ | 198.3 |
| | $ | 246.1 |
|
| Net (income) loss attributable to noncontrolling interest | — |
| | (0.5 | ) | | 0.5 |
|
| Income attributable to controlling interest from continuing operations | 127.6 |
| | 197.8 |
| | 246.6 |
|
| Income (loss) from discontinued operations, net of tax | (63.9 | ) | | 20.5 |
| | 68.7 |
|
| Net income attributable to controlling interest | $ | 63.7 |
| | $ | 218.3 |
| | $ | 315.3 |
|
| BASIC INCOME PER COMMON SHARE: | | | | | |
Weighted-average Common Shares outstanding during the period | 56.2 |
| | 59.4 |
| | 61.1 |
|
| Income from continuing operations | $ | 2.27 |
| | $ | 3.33 |
| | $ | 4.04 |
|
| Income (loss) from discontinued operations | (1.14 | ) | | 0.35 |
| | 1.12 |
|
| Net income | $ | 1.13 |
| | $ | 3.68 |
| | $ | 5.16 |
|
| DILUTED INCOME PER COMMON SHARE: | | | | | |
Weighted-average Common Shares outstanding during the period | 56.2 |
| | 59.4 |
| | 61.1 |
|
| Dilutive potential Common Shares | 0.9 |
| | 0.8 |
| | 0.9 |
|
| Weighted-average number of Common Shares outstanding and dilutive potential Common Shares | 57.1 |
| | 60.2 |
| | 62.0 |
|
| Income from continuing operations | $ | 2.23 |
| | $ | 3.29 |
| | $ | 3.98 |
|
| Income (loss) from discontinued operations | (1.11 | ) | | 0.34 |
| | 1.11 |
|
| Net income | $ | 1.12 |
| | $ | 3.63 |
| | $ | 5.09 |
|
Stock options with exercise prices greater than the average market price of the underlying Common Shares are excluded from the computation of diluted income per Common Share because they are out-of-the-money and the effect of their inclusion would be anti-dilutive. The number of Common 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 basic2018 or September 30, 2017, and diluted income perthere were 0.2 million Common Share.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| | (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 | $ | 4.15 |
| | $ | 2.27 |
| | $ | 2.37 |
|
| Income from discontinued operations | 1.01 |
| | 0.35 |
| | 0.33 |
|
| Net income | $ | 5.16 |
| | $ | 2.62 |
| | $ | 2.70 |
|
| DILUTED EARNINGS PER COMMON SHARE: | | | | | |
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 | $ | 4.09 |
| | $ | 2.23 |
| | $ | 2.32 |
|
| Income from discontinued operations | 1.00 |
| | 0.34 |
| | 0.33 |
|
| Net income | $ | 5.09 |
| | $ | 2.57 |
| | $ | 2.65 |
|
NOTE 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, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Current: | | | | | | | | | | |
| Federal | $ | 93.4 |
| | $ | 63.8 |
| | $ | 60.2 |
| $ | 47.7 |
| | $ | 104.5 |
| | $ | 89.7 |
|
| State | 12.4 |
| | 8.3 |
| | 7.5 |
| 10.3 |
| | 12.4 |
| | 11.8 |
|
| Foreign | 4.4 |
| | 2.2 |
| | 3.5 |
| 0.2 |
| | 8.1 |
| | 4.3 |
|
| Total Current | 110.2 |
| | 74.3 |
| | 71.2 |
| 58.2 |
| | 125.0 |
| | 105.8 |
|
| Deferred: | | | | | | | | | | |
| Federal | 28.2 |
| | (1.0 | ) | | 7.9 |
| (58.4 | ) | | (7.4 | ) | | 30.7 |
|
| State | 2.3 |
| | 1.2 |
| | 1.2 |
| (2.0 | ) | | (0.5 | ) | | 2.5 |
|
| Foreign | (1.3 | ) | | (0.7 | ) | | (0.1 | ) | (9.7 | ) | | (0.5 | ) | | (1.4 | ) |
| Total Deferred | 29.2 |
| | (0.5 | ) | | 9.0 |
| (70.1 | ) | | (8.4 | ) | | 31.8 |
|
| Provision for income taxes | $ | 139.4 |
| | $ | 73.8 |
| | $ | 80.2 |
| |
| Provision (benefit) for income taxes | | $ | (11.9 | ) | | $ | 116.6 |
| | $ | 137.6 |
|
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, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Domestic | $ | 362.3 |
| | $ | 185.2 |
| | $ | 200.1 |
|
| Foreign | 30.4 |
| | 26.4 |
| | 25.6 |
|
| Income from continuing operations before income taxes | $ | 392.7 |
| | $ | 211.6 |
| | $ | 225.7 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Domestic | $ | 159.5 |
| | $ | 296.0 |
| | $ | 357.0 |
|
| Foreign | (43.8 | ) | | 18.9 |
| | 26.7 |
|
| Income from continuing operations before income taxes | $ | 115.7 |
| | $ | 314.9 |
| | $ | 383.7 |
|
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, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 24.5 | % | | 35.0 | % | | 35.0 | % |
| Effect of foreign operations | 0.1 |
| | (0.6 | ) | | 1.7 |
| 7.4 |
| | 3.1 |
| | 0.3 |
|
| State taxes, net of federal benefit | 2.7 |
| | 3.2 |
| | 2.7 |
| 6.5 |
| | 2.9 |
| | 2.9 |
|
| Domestic Production Activities Deduction permanent difference | (2.5 | ) | | (3.2 | ) | | (2.7 | ) | (4.4 | ) | | (3.1 | ) | | (2.5 | ) |
| Effect of other permanent differences | 0.3 |
| | 0.1 |
| | 0.3 |
| (3.0 | ) | | 0.4 |
| | 0.4 |
|
| Research and Experimentation and other federal tax credits | (0.2 | ) | | (0.2 | ) | | (0.9 | ) | (1.7 | ) | | (0.4 | ) | | (0.3 | ) |
| Resolution of prior tax contingencies | (0.2 | ) | | 0.4 |
| | 0.2 |
| 1.3 |
| | 0.9 |
| | (0.1 | ) |
| Effect of tax reform | | (38.7 | ) | | — |
| | — |
|
| Other | 0.3 |
| | 0.2 |
| | (0.7 | ) | (2.2 | ) | | (1.8 | ) | | 0.2 |
|
| Effective income tax rate | 35.5 | % | | 34.9 | % | | 35.6 | % | (10.3 | )% | | 37.0 | % | | 35.9 | % |
On December 22, 2017, the Act was signed into law. The Act makes broad and complex changes to the Code that affect the Company’s fiscal year 2018 financial results in two primary ways.
First, effective January 1, 2018, the Act reduces the U.S. federal corporate statutory income tax rate from 35% to 21%. Due to the Company’s fiscal year nature, a blended U.S. corporate income tax rate of 24.5% is recorded in the fiscal 2018 financial results. The Company’s U.S. corporate statutory income tax rate decreased to 21% on October 1, 2018. As a result of the lower tax rate, the Company remeasured its U.S. deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. Guidance under SAB 118 allows companies to use a measurement period, similar to that used in business combinations, to account for the impacts of the Act in their consolidated financial statements. Consistent with SAB 118, the Company recorded a provisional net benefit for the first quarter of fiscal 2018 of $45.9 million in the “Income tax expense (benefit) from continuing operations” line in the Condensed Consolidated Statement of Operations. Due to the consideration of full year financial information and additional analysis of the Act, the Company revised its calculation and recorded measurement period adjustments resulting in a total net benefit of $44.6 million for the year ended September 30, 2018. In addition, the Company will evaluate adoption of accounting standard update 2018-02, issued February 14, 2018, in its first quarter of fiscal 2019. The accounting standard update allows an entity to elect a one-time reclassification from accumulated other comprehensive income (loss) (“AOCI”) to retained earnings of “stranded” tax effects resulting from the Act. The amount of the reclassification includes (1) the effect of the change in the U.S. federal corporate statutory income tax rate on the gross deferred tax amounts and related valuation allowances, if any, on the date of enactment of the Act related to items remaining in AOCI and (2) other income tax effects of the Act on items remaining in AOCI that an entity elects to reclassify. Other than the considerations for accounting standard update 2018-02, the Company considers the accounting for this element of the Act to be complete.
Second, due to the move to a territorial tax system, the Act requires companies to pay a mandatory one-time U.S. transition tax on deemed repatriation of certain undistributed earnings of foreign subsidiaries. Under SAB 118, the Company made a reasonable estimate of this deemed repatriation tax for the first quarter of fiscal 2018 and recorded in the “Income tax expense (benefit) from continuing operations” line in the Condensed Consolidated Statement of Operations an estimated U.S. transition tax of $14.0 million, offset by $10.7 million of foreign tax credits generated from the repatriation plus $3.2 million of foreign tax credit carryovers previously reserved under a full valuation allowance. As a result of additional analysis and support related to the Act, the Company revised its calculation and recorded measurement period adjustments resulting in U.S. transition tax of $21.2
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
million based on $97.8 million of undistributed earnings of foreign subsidiaries. This expense is largely offset by $18.2 million of foreign tax credits, $0.5 million of which was carried forward from prior periods and was offset by a full valuation allowance. The Company considers key estimates of the deemed repatriation tax to be currently incomplete subject to continuing analysis and the anticipated future release of additional authoritative guidance and interpretations on the topic. The Company expects to complete its analysis in the first quarter of fiscal 2019.
In addition, the Act also establishes new tax provisions that will affect the Company beginning October 1, 2018, including (1) eliminating the U.S. manufacturing deduction; (2) establishing new limitations on deductible interest expense and certain executive compensation; (3) creating the base erosion anti-abuse tax (“BEAT”); (4) creating a new provision designed to tax global intangible low-tax income (“GILTI”); (5) establishing a deduction for foreign-derived intangible income (“FDII”); and (6) generally eliminating U.S. federal income taxes on dividends from foreign subsidiaries.
Regarding the new GILTI tax rules, the Company is allowed to make an accounting policy election to either (1) treat taxes due on future GILTI exclusions in U.S. taxable income as a current period expense when incurred or (2) reflect such portion of the future GILTI exclusions in U.S. taxable income that relate to existing basis differences in the Company’s measurement of deferred taxes. The Company’s analysis of the new GILTI rules and ultimate impact are incomplete and the Company has not made a policy election regarding the treatment of the GILTI tax.
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, |
| | 2016 | | 2015 |
| | (In millions) |
| DEFERRED TAX ASSETS | | | |
| Inventories | $ | 10.8 |
| | $ | 14.1 |
|
| Accrued liabilities | 58.8 |
| | 71.6 |
|
| Postretirement benefits | 33.3 |
| | 30.3 |
|
| Accounts receivable | 6.3 |
| | 8.3 |
|
| State NOL carryovers | 0.6 |
| | 1.0 |
|
| Foreign NOL carryovers | 45.3 |
| | 45.0 |
|
| Foreign tax credit carryovers | 7.4 |
| | 8.6 |
|
| Interest rate swaps | 2.4 |
| | 4.9 |
|
| Other | 3.4 |
| | 3.3 |
|
| Gross deferred tax assets | 168.3 |
| | 187.1 |
|
| Valuation allowance | (45.1 | ) | | (45.8 | ) |
| Total deferred tax assets | 123.2 |
| | 141.3 |
|
| DEFERRED TAX LIABILITIES | | | |
| Property, plant and equipment | (65.7 | ) | | (59.7 | ) |
| Intangible assets | (114.2 | ) | | (114.8 | ) |
| Outside basis difference in equity investments | (83.3 | ) | | — |
|
| Other | (17.0 | ) | | (14.0 | ) |
| Total deferred tax liabilities | (280.2 | ) | | (188.5 | ) |
| 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, |
| | 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 | ) |
|
| | | | | | | |
| | September 30, |
| | 2018 | | 2017 |
| | (In millions) |
| DEFERRED TAX ASSETS | | | |
| Inventories | $ | 9.3 |
| | $ | 8.0 |
|
| Accrued liabilities | 68.4 |
| | 58.9 |
|
| Postretirement benefits | 7.7 |
| | 19.9 |
|
| Accounts receivable | 4.7 |
| | 5.3 |
|
| Federal NOL carryovers | 10.9 |
| | 20.3 |
|
| State NOL carryovers | 1.5 |
| | 1.3 |
|
| Foreign NOL carryovers | 3.8 |
| | 3.7 |
|
| Foreign tax credit carryovers | 16.4 |
| | 7.6 |
|
| Other | 2.0 |
| | (1.6 | ) |
| Gross deferred tax assets | 124.7 |
| | 123.4 |
|
| Valuation allowance | (33.6 | ) | | (29.7 | ) |
| Total deferred tax assets | 91.1 |
| | 93.7 |
|
| DEFERRED TAX LIABILITIES | | | |
| Property, plant and equipment | (50.9 | ) | | (68.5 | ) |
| Intangible assets | (54.1 | ) | | (127.5 | ) |
| Outside basis difference in equity investments | (45.4 | ) | | (47.5 | ) |
| Interest rate swaps | (1.0 | ) | | — |
|
| Other | (9.3 | ) | | (7.7 | ) |
| Total deferred tax liabilities | (160.7 | ) | | (251.2 | ) |
| Net deferred tax liability | $ | (69.6 | ) | | $ | (157.5 | ) |
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 $45.1$33.6 million and $45.8$29.7 million of deferred tax assets as of September 30, 20162018 and 2015,2017, respectively. Most of these valuation allowances relate to certain foreigncredits and net operating losses (“NOLs”), as explained further below.
The Company has electedDeferred tax assets related 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 $171.5 million at September 30, 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 $40.7 million and $41.2 million for the years ended September 30, 2016 and 2015, respectively.
Foreign net operating lossesNOLs of certain controlled foreign corporations were $17.8$3.8 million as of September 30, 2016,2018, the majority of which have indefinite carryforward periods. Due to a history of losses in many of these entities, a full
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
valuation allowance has been established against $3.3 million of these deferred tax assets. A valuation allowance has also been placedestablished against the statutorya deferred tax benefit associated with all but $3.7 millionasset related to Scotts’ China subsidiary of these losses at September 30, 2016.$1.3 million.
Foreign tax credits were $7.4$16.4 million and $8.6$7.6 million at September 30, 20162018 and 2015,2017, respectively. A full valuation allowance in the amount of $0.4 million has been established against those$16.4 million of foreign tax credits the Company does not expect to utilize prior to their expiration.
State net operating lossesDue to the Company’s increased ownership of AeroGrow during fiscal 2017, it may potentially utilize up to $10.9 million of deferred tax assets related to the NOLs of that subsidiary. These NOLs are subject to limitation under IRC §382 from current and prior ownership changes. The Company determined that $10.5 million of these deferred tax assets will expire unutilized due to the closing of statutes of limitation and has established a valuation allowance accordingly. The Company estimates that the remaining $0.4 million of deferred tax assets will be available for utilization in tax years ending after September 30, 2018. These remaining NOLs will be utilized gradually through the tax year ending September 30, 2032.
Deferred tax assets related to state NOLs were $6.1$1.5 million as of September 30, 2016,2018, with carryforward periods ranging from 5 to 20 years. Any losses not utilized within a specific state’s carryforward period will expire. A valuation allowance was recorded against $1.4 million of these deferred tax assets as of September 30, 2018 for state NOLs that the Company does not expect to realize within their respective carryover periods. Tax benefits associated with state tax credits will expire if not utilized and amounted to $0.7$1.4 million and $0.6$1.0 million at September 30, 20162018 and 2015. A valuation allowance was recorded against $0.4 million of deferred tax assets as of September 30, 2016 for state net operating losses that the company does not expect to realize within their respective carryover periods.2017, respectively. A valuation allowance in the amount of $0.2$0.7 million has been established related to state credits the Company does not expect to utilize.
As of September 30, 2018 and after consideration of the one time transition tax on deemed repatriation of foreign earnings, the Company had no unremitted earnings of foreign subsidiaries for which earnings are considered permanently reinvested. The Company recognizedhas repatriated all cash and earnings of one subsidiary in the United Kingdom via a loan to a U.S. affiliate in the fiscal year ended September 30, 2018. Following the one-time transition tax, the Company determined that no 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 $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 $39.9 million and $55.1 million at September 30, 2016 and 2015, respectively. Our current plans do not demonstrate a need to, nor do we 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 associatedwithholding taxes on the repatriation. We may also besubsidiary’s previously taxed earnings is required as the United Kingdom does not impose withholding taxes on distributions to withhold foreign taxes depending on the foreign jurisdiction from which the funds are repatriated.U.S. The effective rateCompany maintains its assertions 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 meritsindefinite reinvestment of the position. The amount recognized is measured asearnings of all material foreign subsidiaries with the largest amountexception of tax benefit that is greater than 50% likelythe earnings of being realized upon settlement.Scotts Luxembourg Sarl, which are generally taxed on a current basis under “Subpart F” of the Code which prevents deferral of recognition of U.S. taxable income through the use of foreign entities.
The Company had $5.1$13.9 million, $9.2$10.2 million and $11.2$5.1 million of gross unrecognized tax benefits related to uncertain tax positions at September 30, 2018, 2017 and 2016, 2015respectively. Of these amounts, $4.8 million, $0.7 million and 2014,$0.3 million of gross unrecognized tax benefits are related to discontinued operations at September 30, 2018, 2017 and 2016, respectively. Included in the September 30, 2016, 20152018, 2017 and 20142016 balances were
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$3.5 $12.6 million, $6.6$8.5 million and $8.5$3.5 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, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| | (In millions) | (In millions) |
| Balance at beginning of year | $ | 9.2 |
| | $ | 11.2 |
| | $ | 6.7 |
| $ | 10.2 |
| | $ | 5.1 |
| | $ | 9.2 |
|
| Additions for tax positions of the current year | 0.3 |
| | 0.2 |
| | 0.2 |
| 0.9 |
| | 1.4 |
| | 0.3 |
|
| Additions for tax positions of prior years | 1.9 |
| | 4.1 |
| | 7.6 |
| 6.1 |
| | 3.9 |
| | 1.9 |
|
| Reductions for tax positions of prior years | (2.6 | ) | | (3.2 | ) | | (2.7 | ) | (0.8 | ) | | (0.2 | ) | | (2.6 | ) |
| Settlements with tax authorities | (2.7 | ) | | (2.7 | ) | | — |
| (1.9 | ) | | 0.9 |
| | (2.7 | ) |
| Expiration of statutes of limitation | (1.0 | ) | | (0.4 | ) | | (0.6 | ) | (0.6 | ) | | (0.9 | ) | | (1.0 | ) |
| Balance at end of year | $ | 5.1 |
| | $ | 9.2 |
| | $ | 11.2 |
| $ | 13.9 |
| | $ | 10.2 |
| | $ | 5.1 |
|
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, 2016, 20152018, 2017 and 2014,2016, respectively, the Company had $1.5 million, $1.1 million $1.8 million and $1.8$1.1 million accrued for the payment of interest that, if recognized, would impact the effective tax rate. As of September 30, 2016, 20152018, 2017 and 2014,2016, respectively, the Company had $0.5$0.4 million, $0.7$0.4 million and $0.6$0.5 million accrued for the payment of penalties that, if recognized, would impact the effective tax rate. For the fiscal year ended September 30, 2016,2018, the Company recognized a benefit of $0.9$2.3 million for tax interest and tax penalties in its Consolidated Statement of Operations.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Scotts Miracle-Gro Company or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. Subject to the following exceptions, the Company is no longer subject to examination by these tax authorities for fiscal years prior to 2013.2015. The Company is currently under examination by the Internal Revenue Service and certain foreign and U.S. state and local tax authorities. The U.S. federal examination is limited to fiscal years 2011 and 2012. With respect to the foreign jurisdictions, a GermanFrench audit is currently ongoing covering fiscal years 20092013 through 2012.2016 is underway with no known material impact to the financial statements. In regard to the multiple U.S. state and local audits, the tax periods under examination are limited to fiscal 2008years 2012 through fiscal 2014.2017. In addition to the 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 within the next twelve months. The Company is unable to make a reasonably reliable estimate as to when or if cash settlements with taxing authorities may occur. 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.
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 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 uses currency forward contracts to manage the exchange rate risk associated with intercompany loans with foreign subsidiaries that areand certain other balances denominated in localforeign currencies. At September 30, 2016,2018, the notional amount of outstanding currency forward contracts was $165.8$117.2 million, with a fair value of $0.4$(0.6) million. At September 30, 2015,2017, the notional amount of outstanding currency forward contracts was $52.3$268.3 million, with a negative fair value of $0.7$1.8 million. The fair value of currency forward contracts is determined using forward rates in commonly quoted intervals for the full term of the contracts. The outstanding contracts will mature over the next fiscal year.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
quarter.
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. 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”)AOCI within the Consolidated Balance Sheets except for any ineffective portion of the change in fair value, which is immediately recorded in interest expense.Sheets. 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.
The Company has outstanding interest rate swap agreements with major financial institutions that effectively convert a portion of the Company’s variable-rate debt to a fixed rate. The swap agreements had a maximum total U.S. dollar equivalent notional amount of $650.0$800.0 million and $1,300.0$1,100.0 million at September 30, 20162018 and 2015,2017, respectively. Refer to “NOTE 11. DEBT” for the terms of the swap agreements outstanding at September 30, 2016.2018. Included in the AOCI balance at September 30, 20162018 was a lossgain of $2.0$1.6 million related to interest rate swap agreements that is expected to be reclassified to earnings during the next twelve months, consistent with the timing of the underlying hedged transactions.
Commodity Price Risk Management
The Company enters 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. Since the contracts have been designated as hedging instruments, unrealized gains or losses resulting from adjusting these contracts to fair value are recorded as elements of AOCI within the 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, 20162018 was a lossgain of $0.2$4.5 million related to urea derivatives that is expected to be reclassified to earnings during the next twelve months, consistent with the timing of the underlying hedged transactions.
The Company also uses derivatives to partially mitigate the effect of fluctuating diesel costs on operating results. These financial instruments are carried at fair value within the Consolidated Balance Sheets. Changes in the fair value of derivative contracts that qualify for hedge accounting are recorded in AOCI except for any ineffective portion of the change in fair value, which is immediately recorded in earnings.AOCI. The effective portion of the change in fair value remains as a
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
component of AOCI until the related fuel is consumed, at which time the accumulated gain or loss on the derivative contract is reclassified to cost of sales. Changes in the fair value of derivatives that do not qualify for hedge accounting are recorded as an element of cost of sales. At September 30, 2016,2018, 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, |
| | 2016 | | 2015 |
| Commodity | | | |
| Urea | 40,500 tons | | 52,500 tons |
| Diesel | 6,384,000 gallons | | 5,250,000 gallons |
| Heating Oil | 1,722,000 gallons | | 2,772,000 gallons |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | |
| | September 30, |
| | 2018 | | 2017 |
| Commodity | | | |
| Urea | 88,000 tons | | 76,500 tons |
| Diesel | 5,460,000 gallons | | 5,586,000 gallons |
| Heating Oil | 1,218,000 gallons | | 1,386,000 gallons |
Fair Values of Derivative Instruments
The fair values of the Company’s derivative instruments were as follows:
| | | | | Assets / (Liabilities) | | Assets / (Liabilities) |
| | | | | 2016 | | 2015 | | | | 2018 | | 2017 |
| Derivatives Designated As Hedging Instruments | | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| | | (In millions) | | (In millions) |
| Interest rate swap agreements | | Other current liabilities | | $ | (3.3 | ) | | $ | (8.8 | ) | | Prepaid and other current assets | | $ | 2.0 |
| | $ | 1.3 |
|
| | | | Other assets | | 1.8 |
| | — |
|
| | | | Other current liabilities | | — |
| | (0.8 | ) |
| | | Other liabilities | | (3.1 | ) | | (4.6 | ) | | Other liabilities | | — |
| | (0.4 | ) |
| Commodity hedging instruments | | Other current liabilities | | (0.3 | ) | | (1.3 | ) | | Prepaid and other current assets | | 6.1 |
| | 3.2 |
|
| Total derivatives designated as hedging instruments | | $ | (6.7 | ) | | $ | (14.7 | ) | | $ | 9.9 |
| | $ | 3.3 |
|
| | | | | | | | | |
| Derivatives Not Designated As Hedging Instruments | | Balance Sheet Location | | | | | | Balance Sheet Location | | | | |
| Currency forward contracts | | Prepaid and other current assets | | $ | 1.2 |
| | $ | — |
| | Prepaid and other current assets | | $ | 0.9 |
| | $ | 2.0 |
|
| | | Other current liabilities | | (0.8 | ) | | (0.7 | ) | | Other current liabilities | | (1.5 | ) | | (0.2 | ) |
| Commodity hedging instruments | | Other current liabilities | | (0.1 | ) | | (3.2 | ) | | Prepaid and other current assets | | 1.7 |
| | 0.6 |
|
| Total derivatives not designated as hedging instruments | | 0.3 |
| | (3.9 | ) | | 1.1 |
| | 2.4 |
|
| Total derivatives | | $ | (6.4 | ) | | $ | (18.6 | ) | | $ | 11.0 |
| | $ | 5.7 |
|
The effect of derivative instruments on AOCI and the Consolidated Statements of Operations for the years 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 | | 2016 | | 2015 | |
| Derivatives In Cash Flow Hedging Relationships | | | 2018 | | 2017 |
| | | (In millions) | | (In millions) |
| Interest rate swap agreements | | $ | (0.9 | ) | | $ | (7.7 | ) | | $ | 3.7 |
| | $ | 2.2 |
|
| Commodity hedging instruments | | (0.6 | ) | | (0.9 | ) | | 5.6 |
| | 2.7 |
|
| Total | | $ | (1.5 | ) | | $ | (8.6 | ) | | $ | 9.3 |
| | $ | 4.9 |
|
|
| | | | | | | | | | |
| | | Reclassified From AOCI Into | | Amount of Gain / (Loss) |
| Derivatives in Cash Flow Hedging Relationships | | Statement of Operations | | 2016 | | 2015 |
| | | | | (In millions) |
| Interest rate swap agreements | | Interest expense | | $ | (5.0 | ) | | $ | (6.5 | ) |
| Commodity hedging instruments | | Cost of sales | | (0.8 | ) | | — |
|
| Total | | | | $ | (5.8 | ) | | $ | (6.5 | ) |
|
| | | | | | | | | | |
| | | | | Amount of Gain / (Loss) |
| Derivatives Not Designated As Hedging Instruments | | Recognized in Statement of Operations | | 2016 | | 2015 |
| | | | | (In millions) |
| Currency forward contracts | | Other income, net | | $ | (8.0 | ) | | $ | 8.1 |
|
| Commodity hedging instruments | | Cost of sales | | (2.8 | ) | | (10.4 | ) |
| Total | | | | $ | (10.8 | ) | | $ | (2.3 | ) |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | |
| | | Reclassified From AOCI Into | | Amount Of Gain / (Loss) |
| Derivatives In Cash Flow Hedging Relationships | | Statement Of Operations | | 2018 | | 2017 |
| | | | | (In millions) |
| Interest rate swap agreements | | Interest expense | | $ | 1.0 |
| | $ | (1.7 | ) |
| Commodity hedging instruments | | Cost of sales | | 2.1 |
| | (0.1 | ) |
| Total | | | | $ | 3.1 |
| | $ | (1.8 | ) |
|
| | | | | | | | | | |
| | | Recognized In | | Amount Of Gain / (Loss) |
| Derivatives Not Designated As Hedging Instruments | | Statement of Operations | | 2018 | | 2017 |
| | | | | (In millions) |
| Currency forward contracts | | Other income, net | | $ | 11.6 |
| | $ | 0.1 |
|
| Commodity hedging instruments | | Cost of sales | | 3.3 |
| | 0.7 |
|
| Total | | | | $ | 14.9 |
| | $ | 0.8 |
|
NOTE 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 — Quoted prices in active markets for identical assets or liabilities.
Level 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 — 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.
Cash Equivalents
Cash equivalents consist of highly liquid financial instruments with original maturities of three months or less. The carrying value of these cash equivalents approximates fair value due to their short-term maturities.
Derivatives
Derivatives consist of currency, interest rate and commodity derivative instruments. Currency 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 the 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.
Cash Equivalents
Cash equivalents consist of highly liquid financial instruments with original maturities of three months or less. The carrying value of these cash equivalents approximates fair value due to their short-term maturities.
Other
Other consists ofassets include investment securities in non-qualified retirement plan assets and the Company’s option to increase its economic interest in Bonnie Option.Plants, Inc. (the “Bonnie Option”). Other liabilities include the contingent consideration related to the acquisition of Sunlight Supply. Investment securities in non-qualified retirement plan assets are valued using observable market prices in active 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
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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 consistsIn connection with the acquisition of a controlling interest in Gavita during fiscal 2016, the Company recorded a loan provided to the noncontrolling ownership group of Gavita. The estimated fair valueOn October 2, 2017, the Company’s Hawthorne segment acquired the remaining 25% noncontrolling interest in Gavita, which included extinguishment of the loan was determined using an income-based approach, which includes market participant expectationsto the noncontrolling ownership group of cash flows over the remaining useful life discounted to presentGavita with a fair value using an appropriate discount rate.and carrying value of $55.6 million. The estimate requiresrequired subjective assumptions to be made, including those related to future business results and discount rates. The fair value measurement iswas based on significant inputs unobservable in the market and thus representsrepresented a Level 3 measurement.
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2018:
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total |
| | (In millions) |
| Assets | | | | | | | |
| Cash equivalents | $ | 1.4 |
| | $ | — |
| | $ | — |
| | $ | 1.4 |
|
| Derivatives | | | | | | | |
| Interest rate swap agreements | — |
| | 3.8 |
| | — |
| | 3.8 |
|
| Currency forward contracts | — |
| | 0.9 |
| | — |
| | 0.9 |
|
| Commodity hedging instruments | — |
| | 7.8 |
| | — |
| | 7.8 |
|
| Other | 19.4 |
| | — |
| | 13.0 |
| | 32.4 |
|
| Total | $ | 20.8 |
| | $ | 12.5 |
| | $ | 13.0 |
| | $ | 46.3 |
|
| Liabilities | | | | | | | |
| Derivatives | | | | | | | |
| Currency forward contracts | $ | — |
| | $ | (1.5 | ) | | $ | — |
| | $ | (1.5 | ) |
| Other | — |
| | — |
| | (0.9 | ) | | (0.9 | ) |
| Total | $ | — |
| | $ | (1.5 | ) | | $ | (0.9 | ) | | $ | (2.4 | ) |
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, 2016:
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total |
| | (In millions) |
| Assets | | | | | | | |
| Cash equivalents | $ | 11.5 |
| | $ | — |
| | $ | — |
| | $ | 11.5 |
|
| Derivatives | | | | | | | |
| Currency forward contracts | — |
| | 1.2 |
| | — |
| | 1.2 |
|
| Other | 11.8 |
| | — |
| | 10.9 |
| | 22.7 |
|
| Total | $ | 23.3 |
| | $ | 1.2 |
| | $ | 10.9 |
| | $ | 35.4 |
|
| Liabilities | | | | | | | |
| Derivatives | | | | | | | |
| Interest rate swap agreements | $ | — |
| | $ | (6.4 | ) | | $ | — |
| | $ | (6.4 | ) |
| Currency forward contracts | — |
| | (0.8 | ) | | — |
| | (0.8 | ) |
| Commodity hedging instruments | — |
| | (0.4 | ) | | — |
| | (0.4 | ) |
| Long-term debt | — |
| | — |
| | (38.3 | ) | | (38.3 | ) |
| Total | $ | — |
| | $ | (7.6 | ) | | $ | (38.3 | ) | | $ | (45.9 | ) |
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2015:2017:
| | | | 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 | $ | 28.6 |
| | $ | — |
| | $ | — |
| | $ | 28.6 |
| $ | 26.2 |
| | $ | — |
| | $ | — |
| | $ | 26.2 |
|
| Derivatives | |
| |
| |
| |
|
| Interest rate swap agreements | | — |
| | 1.3 |
| | — |
| | 1.3 |
|
| Currency forward contracts | | — |
| | 2.0 |
| | — |
| | 2.0 |
|
| Commodity hedging instruments | | — |
| | 3.8 |
| | — |
| | 3.8 |
|
| Other | 8.9 |
| | — |
| | — |
| | 8.9 |
| 15.7 |
| | — |
| | 11.8 |
| | 27.5 |
|
| Total | $ | 37.5 |
| | $ | — |
| | $ | — |
| | $ | 37.5 |
| $ | 41.9 |
| | $ | 7.1 |
| | $ | 11.8 |
| | $ | 60.8 |
|
| Liabilities |
| |
| |
| |
|
| |
| |
| |
|
| Derivatives |
| |
| |
| |
|
| |
| |
| |
|
| Interest rate swap agreements | $ | — |
| | $ | (13.4 | ) | | $ | — |
| | $ | (13.4 | ) | $ | — |
| | $ | (1.2 | ) | | $ | — |
| | $ | (1.2 | ) |
| Currency forward contracts | — |
| | (0.7 | ) | | — |
| | (0.7 | ) | — |
| | (0.2 | ) | | — |
| | (0.2 | ) |
| Commodity hedging instruments | — |
| | (4.5 | ) | | — |
| | (4.5 | ) | |
| Long-term debt | | — |
| | — |
| | (55.6 | ) | | (55.6 | ) |
| Total | $ | — |
| | $ | (18.6 | ) | | $ | — |
| | $ | (18.6 | ) | $ | — |
| | $ | (1.4 | ) | | $ | (55.6 | ) | | $ | (57.0 | ) |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 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, 20162018, were as follows (in millions):
| | | 2017 | $ | 40.9 |
| |
| 2018 | 36.1 |
| |
| 2019 | 30.7 |
| $ | 44.7 |
|
| 2020 | 23.5 |
| 35.8 |
|
| 2021 | 18.3 |
| 25.9 |
|
| 2022 | | 15.8 |
|
| 2023 | | 6.6 |
|
| Thereafter | 21.5 |
| 7.2 |
|
| Total future minimum lease payments | $ | 171.0 |
| $ | 136.0 |
|
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, 20162018, the Company’s residual value guarantee would have approximated $2.6$4.2 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) | | |
| Corporate aircraft | $ | 27.0 |
| | 2019 |
Rent expense for fiscal 20162018, fiscal 20152017 and fiscal 20142016 totaled $58.8$62.5 million, $56.2$53.6 million and $50.6$51.3 million, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 18. COMMITMENTS
The Company has the following unconditional purchase obligations due during each of the next five fiscal years that have not been recognized in the Consolidated Balance Sheet at September 30, 20162018 (in millions):
| | | 2017 | $ | 140.4 |
| |
| 2018 | 66.1 |
| |
| 2019 | 33.8 |
| $ | 140.8 |
|
| 2020 | 23.0 |
| 80.2 |
|
| 2021 | 15.6 |
| 46.2 |
|
| 2022 | | 27.9 |
|
| 2023 | | 12.4 |
|
| Thereafter | 6.2 |
| 5.1 |
|
| | $ | 285.1 |
| $ | 312.6 |
|
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 17. OPERATING LEASES.”
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 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 reservesaccruals 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, the assessment of contingencies is reasonable and related reserves,accruals, 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, 2016, $4.02018, $4.4 million was accrued in the “Other liabilities” line in the Consolidated Balance Sheet for environmental actions, the majority of which are 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 reservesNo accruals have been recorded in the Company’s consolidated financial statements. Thestatements as the likelihood of a loss is not probable at this time; and the Company is reviewing agreements and policies that may provide insurance coverage or indemnity asdoes not believe a reasonably possible loss would be material to, these claims and is pursuing coverage under somenor the ultimate resolution of these agreements and policies, although there can be no assurance ofcases will have a material adverse effect on, the Company’s financial condition, results of these efforts.operations or cash flows. There can be no assurance that these cases,future developments related to pending claims or claims filed in the future, 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, hasalong with its 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, and, on March 31, 2017, certified as a class action 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.12-cv-01592-JAH-AGS. The plaintiffs allege various statutory and common law claims associated with the Company’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 assertassert: (i) hundreds of millions of dollars in monetary damages (actual, compensatory, consequential, and restitution),; (ii) punitive and treble damages; (iii) injunctive and declaratory relief; (iv) pre-judgment and post-judgment interest; and (v) costs and attorneys’
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
fees. The Company disputesand its Chief Executive Officer dispute the plaintiffs’ assertions and intends tohave vigorously defenddefended the consolidated action. AtAs a result of the parties reaching an agreement in principle to settle this pointmatter, which the parties are in the proceedings, it is not currently possibleprocess of finalizing and which remains subject to reasonably estimateCourt approval, the Company recognized a pre-tax charge of $85.0 million for a probable loss if any, associated withrelated to this matter for the action and, accordingly, no reserves have been recordedyear ended September 30, 2018 in the Company’s consolidated financial statements with respect to“Income (loss) from discontinued operations, net of tax” line in the action.Consolidated Statements of Operations. There can be no assurance that future developments with respect to this action, whether as a result of an adverse outcome or as a result of significant defense costs, will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
The Company has been named as a defendant in In re Scotts EZ Seed Litigation, Case No. 12-cv-4727 (VB), a New York and California class action lawsuit filed August 9, 2012 in the United States District Court for the Southern District of New York that asserts claims under false advertising and other legal theories based on a marketing statement on the Company’s EZ Seed grass seed product from 2009 to 2012. The plaintiffs seek, on behalf of themselves and purported class members, various forms of monetary and non-monetary relief, including statutory damages that they contend could amount to hundreds of millions of dollars. The Company has defended the action vigorously, and disputes the plaintiffs’ claims and theories, including the recoverability of statutory damages. In 2017, the Court eliminated certain claims, narrowed the case in certain respects, and permitted the case to continue proceeding as a class action. On August 7, 2017, the Court requested briefs on the Company’s request for interlocutory review of issues relating to the recoverability of statutory damages in a class action by the United States Court of Appeals for the Second Circuit and, on August 31, 2017, approved that request. On January 8, 2018, however, the Second Circuit denied the interlocutory appeal request. The parties engaged in mediation on April 9, 2018 and agreed in principle to a preliminary settlement of the outstanding claims on April 10, 2018. The preliminary settlement would require the Company to pay certain attorneys’ and administrative fees and provide certain payments to the class members. The preliminary settlement will not be finalized until after the court approves the settlement and a claims process determines the payments to be provided to the class members. The date of the final settlement approval hearing with the court is December 19, 2018. During fiscal 2018, the Company recognized a charge of $11.7 million for a probable loss related to this matter within the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. The resolution of the claims process may result in additional losses in excess of the amount accrued, however, the Company does not believe a reasonably possible loss in excess of the amount accrued would be material to, nor have a material adverse effect on, the Company’s financial condition, results of operations or cash 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 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 retailerscustomers principally located in the United States. The Company’s retail customers include 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.product distributors and retailers. Concentrations of net sales and accounts receivable in the United States as a percentage of consolidated net sales and accounts receivable at September 30 were as follows:
|
| | | | | | | | | | | | | | |
| | 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 | % |
|
| | | | | | | | | | | | | | |
| | Percentage of Net Sales | | Percentage of Net Accounts Receivable at September 30, |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 |
| Concentration in United States | 89 | % | | 90 | % | | 92 | % | | 88 | % | | 83 | % |
The remainder of the Company’s net sales and accounts receivable at September 30, 2016, 2015 and 2014 were generated from customers located outside of the United States, primarily retailers, distributors and nurseries in Europe Canada and Australia.Canada. No concentrations of these customers or individual customers within this group accounted for more than 10% of the Company’s net sales or accounts receivable for any period presented above.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s three largest customers are the only customers that individually represent more than 10% of reported consolidated net sales and accounts receivable for eachduring any of the last three fiscal years. These three customers accounted for the following percentages of net sales for the fiscal years ended September 30:
| | | | Percentage of Net Sales | Percentage of Net Sales |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Home Depot | 34 | % | | 33 | % | | 35 | % | 35 | % | | 35 | % | | 38 | % |
| Lowe’s | 16 | % | | 17 | % | | 19 | % | 17 | % | | 17 | % | | 19 | % |
| Walmart | 11 | % | | 12 | % | | 13 | % | 9 | % | | 9 | % | | 12 | % |
Accounts receivable for these three largest customers as a percentage of consolidated accounts receivable were 56%57% and 60% foras of September 30, 20162018 and 2015,2017, respectively.
NOTE 21. OTHER INCOME, NET
Other (income) expense consisted of the following:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Royalty income, net | $ | (6.2 | ) | | $ | (1.3 | ) | | $ | (1.8 | ) |
| Interest on loans receivable | (3.9 | ) | | — |
| | — |
|
| Foreign currency losses | 0.7 |
| | 1.6 |
| | 1.0 |
|
| Gain on investment of unconsolidated affiliate | — |
| | — |
| | (5.7 | ) |
| Other | (4.4 | ) | | (2.4 | ) | | (4.2 | ) |
| Total | $ | (13.8 | ) | | $ | (2.1 | ) | | $ | (10.7 | ) |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) |
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Royalty income, net | $ | (2.8 | ) | | $ | (4.8 | ) | | $ | (5.9 | ) |
| Interest on loans receivable | — |
| | (10.0 | ) | | (3.9 | ) |
| Foreign currency losses | 0.9 |
| | 0.8 |
| | 0.3 |
|
| Other | (4.8 | ) | | (2.6 | ) | | (4.3 | ) |
| Total | $ | (6.7 | ) | | $ | (16.6 | ) | | $ | (13.8 | ) |
NOTE 22. SEGMENT INFORMATION
The Company divides its business into three reportable segments: U.S. Consumer, Europe ConsumerHawthorne and 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 valueU.S. Consumer consists of the Company’s non-core assets and focus on emerging categories of theconsumer lawn and garden industrybusiness located in its core U.S. business. On April 13, 2016, as part of this project, the Company completed the contributiongeographic United States. Hawthorne consists 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 operationCompany’s indoor, urban and classified the assets and liabilitieshydroponic gardening business. Other consists of the SLS Business as held for sale. The prior period amounts have been reclassifiedCompany’s consumer lawn and garden business in geographies other than the U.S. and the Company’s product sales to conform withcommercial nurseries, greenhouses and other professional customers. Corporate consists of general and administrative expenses and certain other income/expense items not allocated to the newbusiness segments. This divisionidentification of reportable segments is consistent with how the segments report to and are managed by the chief operating decision maker of the Company.
U.S. Consumer consists of the Company’s consumer lawn and garden business located in the geographic United States. Europe Consumer consists of the Company’s consumer lawn and garden business located in 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 Israel Chemicals, Ltd. Corporate consists of general and administrative expenses and certain other income/expense items not allocated to the business segments.
Segment performance is evaluated based on several factors, including income (loss) from continuing operations before income taxes, amortization, impairment, restructuring and other charges which is not a GAAP measure.(“Segment Profit (Loss)”). 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 the overall earnings potential of each segment.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present financial information for the Company’s reportable segments for the periods indicated:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Net sales: | | | | | |
| U.S. Consumer | $ | 2,109.6 |
| | $ | 2,160.5 |
| | $ | 2,204.4 |
|
| Hawthorne | 344.9 |
| | 287.2 |
| | 121.2 |
|
| Other | 208.9 |
| | 194.4 |
| | 180.6 |
|
| Consolidated | $ | 2,663.4 |
| | $ | 2,642.1 |
| | $ | 2,506.2 |
|
| Segment Profit (Loss): | | | | | |
| U.S. Consumer | $ | 496.6 |
| | $ | 521.5 |
| | $ | 493.7 |
|
| Hawthorne | (6.1 | ) | | 35.5 |
| | 11.8 |
|
| Other | 11.2 |
| | 13.4 |
| | 10.4 |
|
| Total Segment Profit | 501.7 |
| | 570.4 |
| | 515.9 |
|
| Corporate | (120.8 | ) | | (109.6 | ) | | (98.9 | ) |
| Intangible asset amortization | (29.2 | ) | | (22.5 | ) | | (14.9 | ) |
| Impairment, restructuring and other | (152.8 | ) | | (4.9 | ) | | 33.8 |
|
Equity in income (loss) of unconsolidated affiliates (a) | 4.9 |
| | (29.0 | ) | | 19.5 |
|
| Costs related to refinancing | — |
| | — |
| | (8.8 | ) |
| Interest expense | (86.4 | ) | | (76.1 | ) | | (62.9 | ) |
| Other non-operating expense, net | (1.7 | ) | | (13.4 | ) | | — |
|
| Income from continuing operations before income taxes | $ | 115.7 |
| | $ | 314.9 |
| | $ | 383.7 |
|
| Depreciation and amortization: | | | | | |
| U.S. Consumer | $ | 46.7 |
| | $ | 47.9 |
| | $ | 48.1 |
|
| Hawthorne | 27.8 |
| | 18.4 |
| | 9.2 |
|
| Other | 5.6 |
| | 4.8 |
| | 2.1 |
|
| Corporate | 3.3 |
| | 2.7 |
| | 2.9 |
|
| | $ | 83.4 |
| | $ | 73.8 |
| | $ | 62.3 |
|
| Capital expenditures: | | | | | |
| U.S. Consumer | $ | 53.2 |
| | $ | 53.4 |
| | $ | 46.3 |
|
| Hawthorne | 8.7 |
| | 7.1 |
| | 1.2 |
|
| Other | 6.3 |
| | 5.0 |
| | 6.3 |
|
| | $ | 68.2 |
| | $ | 65.5 |
| | $ | 53.8 |
|
| |
| (a) | Included within equity in income (loss) of unconsolidated affiliates for fiscal 2017 are charges of $25.2 million, which represent the Company’s share of restructuring and other charges incurred by the TruGreen Joint Venture, including a charge of $7.2 million related to costs associated with TruGreen’s August 2017 refinancing. For fiscal 2016, the Company’s share of restructuring and other charges incurred by the TruGreen Joint Venture of $11.7 million were included within impairment, restructuring and other above. |
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:
|
| | | | | | | | | | | |
| | 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)
|
| | | | | | | |
| | September 30, |
| | 2018 | | 2017 |
| | (In millions) |
| Total assets: | | | |
| U.S. Consumer | $ | 1,702.2 |
| | $ | 1,650.3 |
|
| Hawthorne | 978.6 |
| | 648.0 |
|
| Other | 161.3 |
| | 150.7 |
|
| Corporate | 212.4 |
| | 298.0 |
|
| Consolidated | $ | 3,054.5 |
| | $ | 2,747.0 |
|
The following table presents net sales by product category:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 | | 2016 |
| Net sales: | | | | | | | | | | |
| Growing media | | 35 | % | | 34 | % | | 38 | % |
| Lawn care | 29 | % | | 31 | % | | 33 | % | 29 |
| | 30 |
| | 31 |
|
| Growing media | 38 |
| | 38 |
| | 36 |
| |
| Controls | 15 |
| | 16 |
| | 16 |
| 13 |
| | 13 |
| | 13 |
|
| Indoor, urban and hydroponic gardening | | 13 |
| | 11 |
| | 5 |
|
Roundup® Marketing Agreement | 5 |
| | 4 |
| | 5 |
| 4 |
| | 5 |
| | 5 |
|
| Other, primarily gardening, hydroponics and landscape | 13 |
| | 11 |
| | 10 |
| |
| Other, primarily gardening and landscape | | 6 |
| | 7 |
| | 8 |
|
| Segment total product sales | 100 | % | | 100 | % | | 100 | % | 100 | % | | 100 | % | | 100 | % |
The following table presents net sales andby geographic area:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2018 | | 2017 | | 2016 |
| | (In millions) |
| Net sales: | | | | | |
| United States | $ | 2,375.5 |
| | $ | 2,385.1 |
| | $ | 2,314.8 |
|
| International | 287.9 |
| | 257.0 |
| | 191.4 |
|
| | $ | 2,663.4 |
| | $ | 2,642.1 |
| | $ | 2,506.2 |
|
The following table presents long-lived assets (property, plant and equipment and finite-lived intangibles) by geographic area:
| | | | Year Ended September 30, | September 30, |
| | 2016 | | 2015 | | 2014 | 2018 | | 2017 |
| | (In millions) | (In millions) |
| Net sales: | | | | | | |
| United States | $ | 2,315.1 |
| | $ | 2,220.0 |
| | $ | 2,065.2 |
| |
| International | 521.0 |
| | 508.0 |
| | 513.1 |
| |
| | $ | 2,836.1 |
| | $ | 2,728.0 |
| | $ | 2,578.3 |
| |
| Long-lived assets: | | | | | | | | |
| United States | $ | 531.0 |
| | $ | 540.6 |
| | $ | 448.0 |
| $ | 789.8 |
| | $ | 586.2 |
|
| International | 205.9 |
| | 73.8 |
| | 91.1 |
| 162.7 |
| | 194.8 |
|
| | $ | 736.9 |
| | $ | 614.4 |
| | $ | 539.1 |
| $ | 952.5 |
| | $ | 781.0 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 23. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of 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 2016 | | | | | | | | | | |
| FISCAL 2018 | | | | | | | | | | |
| Net sales | $ | 194.5 |
| | $ | 1,245.2 |
| | $ | 994.1 |
| | $ | 402.3 |
| | $ | 2,836.1 |
| $ | 221.5 |
| | $ | 1,013.3 |
| | $ | 994.6 |
| | $ | 433.9 |
| | $ | 2,663.4 |
|
| Gross profit | 16.7 |
| | 521.6 |
| | 357.4 |
| | 99.7 |
| | 995.4 |
| 34.0 |
| | 409.2 |
| | 347.6 |
| | 73.7 |
| | 864.6 |
|
| Income (loss) from continuing operations | (79.3 | ) | | 225.8 |
| | 127.0 |
| | (20.2 | ) | | 253.3 |
| (20.0 | ) | | 152.7 |
| | 125.5 |
| | (130.6 | ) | | 127.6 |
|
| Income (loss) from discontinued operations, net of tax | (1.5 | ) | | (16.0 | ) | | 85.7 |
| | (6.7 | ) | | 61.5 |
| (1.2 | ) | | (3.7 | ) | | (42.7 | ) | | (16.3 | ) | | (63.9 | ) |
| Net income (loss) | (80.8 | ) | | 209.8 |
| | 212.7 |
| | (26.9 | ) | | 314.8 |
| (21.2 | ) | | 149.0 |
| | 82.8 |
| | (146.9 | ) | | 63.7 |
|
| 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 |
| |
| Net income (loss) attributable to controlling interest | | (21.2 | ) | | 148.9 |
| | 82.9 |
| | (147.0 | ) | | 63.7 |
|
| Basic income (loss) per Common Share: | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (1.24 | ) | | $ | 2.28 |
| | $ | 1.89 |
| | $ | (0.65 | ) | | $ | 2.27 |
| $ | (0.35 | ) | | $ | 2.70 |
| | $ | 2.27 |
| | $ | (2.36 | ) | | $ | 2.27 |
|
| Income (loss) from discontinued operations | 0.01 |
| | (0.23 | ) | | 0.29 |
| | 0.27 |
| | 0.35 |
| (0.02 | ) | | (0.06 | ) | | (0.77 | ) | | (0.29 | ) | | (1.14 | ) |
| Basic net income (loss) per Common Share | $ | (1.23 | ) | | $ | 2.05 |
| | $ | 2.18 |
| | $ | (0.38 | ) | | $ | 2.62 |
| $ | (0.37 | ) | | $ | 2.64 |
| | $ | 1.50 |
| | $ | (2.65 | ) | | $ | 1.13 |
|
| Common Shares used in basic EPS calculation | 60.8 |
| | 60.9 |
| | 61.3 |
| | 61.4 |
| | 61.1 |
| 57.6 |
| | 56.5 |
| | 55.4 |
| | 55.4 |
| | 56.2 |
|
| Diluted income (loss) per Common Share: | | | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (1.24 | ) | | $ | 2.24 |
| | $ | 1.85 |
| | $ | (0.65 | ) | | $ | 2.23 |
| $ | (0.35 | ) | | $ | 2.66 |
| | $ | 2.23 |
| | $ | (2.36 | ) | | $ | 2.23 |
|
| Income (loss) from discontinued operations | 0.01 |
| | (0.23 | ) | | 0.29 |
| | 0.27 |
| | 0.34 |
| (0.02 | ) | | (0.07 | ) | | (0.76 | ) | | (0.29 | ) | | (1.11 | ) |
| Diluted net income (loss) per Common Share | $ | (1.23 | ) | | $ | 2.01 |
| | $ | 2.14 |
| | $ | (0.38 | ) | | $ | 2.57 |
| $ | (0.37 | ) | | $ | 2.59 |
| | $ | 1.47 |
| | $ | (2.65 | ) | | $ | 1.12 |
|
| Common Shares and dilutive potential Common Shares used in diluted EPS calculation | 60.8 |
| | 62.1 |
| | 62.3 |
| | 61.4 |
| | 62.2 |
| 57.6 |
| | 57.4 |
| | 56.3 |
| | 55.4 |
| | 57.1 |
|
| FISCAL 2017 | | | | | | | | | | |
| Net sales | | $ | 207.4 |
| | $ | 1,084.6 |
| | $ | 973.4 |
| | $ | 376.7 |
| | $ | 2,642.1 |
|
| Gross profit | | 36.8 |
| | 464.3 |
| | 383.4 |
| | 88.1 |
| | 972.6 |
|
| Income (loss) from continuing operations | | (58.1 | ) | | 154.1 |
| | 144.6 |
| | (42.3 | ) | | 198.3 |
|
| Income (loss) from discontinued operations, net of tax | | (6.8 | ) | | 11.1 |
| | 7.3 |
| | 8.9 |
| | 20.5 |
|
| Net income (loss) | | (64.9 | ) | | 165.2 |
| | 151.9 |
| | (33.4 | ) | | 218.8 |
|
| Net income (loss) attributable to controlling interest | | (65.3 | ) | | 165.1 |
| | 151.9 |
| | (33.4 | ) | | 218.3 |
|
| Basic income (loss) per Common Share: | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | (0.97 | ) | | $ | 2.58 |
| | $ | 2.44 |
| | $ | (0.72 | ) | | $ | 3.33 |
|
| Income (loss) from discontinued operations | | (0.12 | ) | | 0.18 |
| | 0.13 |
| | 0.15 |
| | 0.35 |
|
| Basic net income (loss) per Common Share | | $ | (1.09 | ) | | $ | 2.76 |
| | $ | 2.57 |
| | $ | (0.57 | ) | | $ | 3.68 |
|
| Common Shares used in basic EPS calculation | | 60.1 |
| | 59.8 |
| | 59.2 |
| | 58.4 |
| | 59.4 |
|
| Diluted income (loss) per Common Share: | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | (0.97 | ) | | $ | 2.55 |
| | $ | 2.41 |
| | $ | (0.72 | ) | | $ | 3.29 |
|
| Income (loss) from discontinued operations | | (0.12 | ) | | 0.18 |
| | 0.12 |
| | 0.15 |
| | 0.34 |
|
| Diluted net income (loss) per Common Share | | $ | (1.09 | ) | | $ | 2.73 |
| | $ | 2.53 |
| | $ | (0.57 | ) | | $ | 3.63 |
|
| Common Shares and dilutive potential Common Shares used in diluted EPS calculation | | 60.1 |
| | 60.6 |
| | 60.0 |
| | 58.4 |
| | 60.2 |
|
The sum of the quarters may not equal full year due to rounding.
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 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 approximatelyin excess of 75% of net sales occurring in the second and third fiscal quarters.
Significant impairment, restructuring and other charges / recoveries reflected in the quarterly financial information during fiscal 20162018 are as follows: first quarter recovery of $0.2 million from continuing operations related to adjustments to previously recognized termination benefits associated with Project Focus and a charge of $1.4 million from discontinued operations related to transaction related costs associated with the sale of the International Business; second quarter charge of $10.2 million from continuing operations for a probable loss related to the previously disclosed legal matter In re Scotts EZ Seed Litigation, $0.1 million adjustment to previously recognized termination benefits associated with Project Focus from continuing operations and a $0.2 million charge from discontinued operations related to transaction related costs associated with the sale of the International Business; third quarter charge of $12.9 million from continuing operations associated with Project Catalyst, a non-cash impairment charge of $17.5 million from continuing operations related to the settlement of a portion of certain previously acquired customer relationships due to the acquisition of Sunlight Supply, a $0.1 million charge from discontinued operations related to transaction related costs associated with the sale of the International Business and a $65.0 million pre-tax charge from discontinued operations for a probable loss related to the previously disclosed legal matter In re Morning Song Bird Food Litigation; fourth quarter charge of $16.5 million from continuing operations associated with Project Catalyst, a non-cash charge of $94.6 million from continuing operations related to a goodwill impairment in the Hawthorne segment, a $1.5 million charge from continuing operations for a probable loss related to the previously disclosed legal matter In re Scotts EZ Seed Litigation, a $20.0 million pre-tax charge from discontinued operations for a probable loss related to the previously disclosed legal matter In re Morning Song Bird Food Litigation and a $0.1 million charge from discontinued operations related to transaction related costs associated with the sale of the International Business.
Additionally, during the first quarter of fiscal 2018 the Company recorded a provisional net benefit of $45.9 million in the “Income tax expense (benefit) from continuing operations” line in the Condensed Consolidated Statement of Operations. Due to the consideration of full year financial information and additional analysis of the Act, the Company revised its calculation and recorded measurement period adjustments resulting in a total net benefit of $44.6 million for the year ended September 30, 2018. During the second quarter of fiscal 2018, the Company repatriated cash from a foreign subsidiary resulting in the liquidation of substantially all of the assets of the subsidiary and the write-off of accumulated foreign currency translation loss adjustments of $11.7 million in the “Other non-operating expense, net” line in the Condensed Consolidated Statement of Operations.
Significant impairment, restructuring and other charges / recoveries reflected in the quarterly financial information during fiscal 2017 are as follows: first quarter restructuring costs of $9.3$2.0 million from discontinued operations 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$0.6 million in transaction related costs associated with the divestiture of the SLS Business and $1.4 million in transaction related costs associated with the sale of the International Business; second quarter restructuring costs of $0.9$3.4 million related to other transaction activity associated with Project Focus; second quarter net recoveries of $36.5 millionfrom discontinued operations 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$0.1 million in transaction related costs associated with the divestiture of the SLS Business and $3.3 million in transaction related costs associated with the sale of the International Business; third quarter restructuring costs of $1.7$4.2 million from discontinued operations including $0.1 million in transaction related to other transaction activitycosts associated with Project Focus; third quarter net recoveriesthe divestiture of $5.4the SLS Business and $4.1 million in transaction related to Bonus® S insurance reimbursements;costs associated with the sale of the International Business; and fourth quarter restructuring costs of $6.7$11.2 million including costs of $8.3 million from continuing operations and recoveries of $0.4 million from discontinued operations related to termination benefits and facility closure costs associated with Project Focus, including costsrecovery of $5.4$4.4 million from continuing operations related to termination benefits for U.S.the reduction of a contingent consideration liability associated with a historical acquisition, an impairment charge of $1.0 million from continuing operations on the write-off of a trademark asset due to recent performance and international employeesfuture growth expectations, and costs of $2.3$6.7 million from discontinued operations for transaction related to other transaction activity.costs associated with the sale of the International Business.
Significant impairment, restructuring and other charges reflected in the quarterly financial information during fiscal 2015 are as follows: first quarter restructuring costs of $9.6 million related to termination benefits for U.S. and international employees; second quarter restructuring costs of $5.1 million related to termination benefits for U.S. and 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 sold in the southeastern United States during fiscal 2015; and fourth quarter restructuring costs of $0.9 million related to termination benefits for U.S. and international employees, and $24.7 million in charges related to Bonus® S insurance reimbursements.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
The 6.000% and 5.250% Senior Notes were issued on October 13, 2015 and December 15, 2016, respectively, and are guaranteed by certain of the Company’s domestic subsidiaries and, therefore, the Company reports 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. 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 werewas 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 indentureindentures governing the 6.000% and 5.250% 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 indentureindentures governing the 6.000% and 5.250% 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% and 5.250% Senior Notes pursuant to the indentureindentures governing the 6.000% and 5.250% 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, 20162018 the 6.000% and 5.250% Senior Notes on a joint and several basis: 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.; Swiss Farms Products, Inc.; SMGM LLC; The Scotts Company LLC; The Hawthorne Gardening Company; Hawthorne Hydroponics LLC; HGCI, Inc.; GenSource, Inc.; SLS Holdings, Inc. and SLSSMG ITO Holdings, Inc. (collectively, the “Guarantors”). Effective in the three-month period ending July 1, 2017, American Agritech, L.L.C. was merged into Hawthorne Hydroponics LLC, and has been classified as a Guarantor for all periods presented. Effective in the three-month period ending July 2, 2016, the SLS Business was contributed to the TruGreen Joint Venture and 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 as held for sale within the financial information of the Guarantors. Subsequent to their contribution to the TruGreen Joint Venture, EG Systems, LLC (formerly known as EG Systems, Inc.) and SLS Franchise Systems LLC are no longer guarantorsGuarantors of the 6.000% Senior Notes.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
SLS Holdings, Inc. was added as a Guarantor effective in the three-month period ending July 2, 2016, HGCI, Inc. and GenSource, Inc. were added as Guarantors effective in the three-month period ending January 2, 2016 and SMG ITO Holdings, Inc. was added as a Guarantor effective in the three-month period ending September 30, 2018, and each of which have been classified as Guarantors for all periods presented. SMG ITO Holdings, Inc., SLS Holdings, Inc., HGCI, Inc. and GenSource, Inc. did not have any activity for fiscal 2016.
The following information presents Condensed Consolidating Statements of Operations for each of the three years ended September 30, 2016, 20152018, 2017 and 2014,2016, Condensed Consolidating Statements of Comprehensive Income (Loss) for each of the three years ended September 30, 2016, 20152018, 2017 and 2014,2016, Condensed Consolidating Statements of Cash Flows for each of the three years ended September 30, 2016, 20152018, 2017 and 2014,2016, and Condensed Consolidating Balance Sheets as of September 30, 20162018 and 2015.2017. 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 2018, fiscal 2017 and fiscal 2016 are $934.4$1,306.9 million, $918.6 million and $940.9 million, respectively, 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 infrom investing activities. Included in the Parent Condensed Consolidating StatementStatements of Cash Flows for fiscal 20152018, fiscal 2017 and fiscal 20142016 are $255.5$24.4 million, $28.8 million and $422.8 million, respectively,zero 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, 2018
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/ Consolidations | | Consolidated |
| Net sales | $ | — |
| | $ | 2,322.8 |
| | $ | 340.6 |
| | $ | — |
| | $ | 2,663.4 |
|
| Cost of sales | — |
| | 1,507.1 |
| | 271.2 |
| | — |
| | 1,778.3 |
|
| Cost of sales—impairment, restructuring and other | — |
| | 14.7 |
| | 5.8 |
| | — |
| | 20.5 |
|
| Gross profit | — |
| | 801.0 |
| | 63.6 |
| | — |
| | 864.6 |
|
| Operating expenses: | | | | | | | | | |
| Selling, general and administrative | — |
| | 467.6 |
| | 71.2 |
| | 1.3 |
| | 540.1 |
|
| Impairment, restructuring and other | — |
| | 83.1 |
| | 49.2 |
| | — |
| | 132.3 |
|
| Other (income) loss, net | (0.9 | ) | | (3.5 | ) | | (2.3 | ) | | — |
| | (6.7 | ) |
| Income (loss) from operations | 0.9 |
| | 253.8 |
| | (54.5 | ) | | (1.3 | ) | | 198.9 |
|
| Equity (income) loss in subsidiaries | (121.4 | ) | | 29.3 |
| | — |
| | 92.1 |
| | — |
|
| Equity in (income) loss of unconsolidated affiliates | — |
| | (4.8 | ) | | (0.1 | ) | | — |
| | (4.9 | ) |
| Interest expense | 75.9 |
| | 51.7 |
| | 3.8 |
| | (45.0 | ) | | 86.4 |
|
| Other non-operating (income) expense, net | (23.9 | ) | | (10.1 | ) | | (9.3 | ) | | 45.0 |
| | 1.7 |
|
| Income (loss) from continuing operations before income taxes | 70.3 |
| | 187.7 |
| | (48.9 | ) | | (93.4 | ) | | 115.7 |
|
| Income tax expense (benefit) from continuing operations | 5.2 |
| | (22.2 | ) | | 5.1 |
| | — |
| | (11.9 | ) |
| Income (loss) from continuing operations | 65.1 |
| | 209.9 |
| | (54.0 | ) | | (93.4 | ) | | 127.6 |
|
| Income (loss) from discontinued operations, net of tax | — |
| | (64.5 | ) | | 0.6 |
| | — |
| | (63.9 | ) |
| Net income (loss) | $ | 65.1 |
| | $ | 145.4 |
| | $ | (53.4 | ) | | $ | (93.4 | ) | | $ | 63.7 |
|
| Net (income) loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
|
| Net income (loss) attributable to controlling interest | $ | 65.1 |
| | $ | 145.4 |
| | $ | (53.4 | ) | | $ | (93.4 | ) | | $ | 63.7 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Comprehensive Income (Loss)
for the fiscal year ended September 30, 2018
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
| Net income (loss) | $ | 65.1 |
| | $ | 145.4 |
| | $ | (53.4 | ) | | $ | (93.4 | ) | | $ | 63.7 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | |
| Net foreign currency translation adjustment | 9.0 |
| | — |
| | 9.0 |
| | (9.0 | ) | | 9.0 |
|
| Net change in derivatives | 6.2 |
| | 3.5 |
| | — |
| | (3.5 | ) | | 6.2 |
|
| Net change in pension and other post-retirement benefits | 8.0 |
| | 2.8 |
| | 5.2 |
| | (8.0 | ) | | 8.0 |
|
| Total other comprehensive income (loss) | 23.2 |
| | 6.3 |
| | 14.2 |
| | (20.5 | ) | | 23.2 |
|
| Comprehensive income (loss) | $ | 88.3 |
| | $ | 151.7 |
| | $ | (39.2 | ) | | $ | (113.9 | ) | | $ | 86.9 |
|
| Comprehensive (income) loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
|
| Comprehensive income (loss) attributable to controlling interest | $ | 88.3 |
| | $ | 151.7 |
| | $ | (39.2 | ) | | $ | (113.9 | ) | | $ | 86.9 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 2018
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES(a) | $ | 6.1 |
| | $ | 294.2 |
| | $ | 68.4 |
| | $ | (26.2 | ) | | $ | 342.5 |
|
INVESTING ACTIVITIES(a) | | | | | | | | | |
| Proceeds from sale of long-lived assets | — |
| | 4.7 |
| | 0.4 |
| | — |
| | 5.1 |
|
| Post-closing working capital payment related to sale of International Business | — |
| | (35.3 | ) | | — |
| | — |
| | (35.3 | ) |
| Investments in property, plant and equipment | — |
| | (61.1 | ) | | (7.1 | ) | | — |
| | (68.2 | ) |
| Investments in loans receivable | — |
| | (16.6 | ) | | (0.5 | ) | | — |
| | (17.1 | ) |
| Proceeds from loans receivable | — |
| | 14.3 |
| | — |
| | — |
| | 14.3 |
|
| Net distributions from (investments in) unconsolidated affiliates | — |
| | — |
| | (0.1 | ) | | — |
| | (0.1 | ) |
| Investments in acquired businesses, net of cash acquired | — |
| | (455.9 | ) | | (37.0 | ) | | — |
| | (492.9 | ) |
| Return of investments from affiliates | 1,306.9 |
| | — |
| | — |
| | (1,306.9 | ) | | — |
|
| Investing cash flows from (to) affiliates | (869.9 | ) | | (90.8 | ) | | (81.5 | ) | | 1,042.2 |
| | — |
|
| Other investing, net | — |
| | 12.7 |
| | 0.8 |
| | — |
| | 13.5 |
|
| Net cash provided by (used in) investing activities | 437.0 |
| | (628.0 | ) | | (125.0 | ) | | (264.7 | ) | | (580.7 | ) |
| FINANCING ACTIVITIES | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | — |
| | 2,658.4 |
| | 328.6 |
| | — |
| | 2,987.0 |
|
| Repayments under revolving and bank lines of credit and term loans | — |
| | (2,005.5 | ) | | (307.4 | ) | | — |
| | (2,312.9 | ) |
| Financing and issuance fees | (5.9 | ) | | (0.2 | ) | | — |
| | — |
| | (6.1 | ) |
| Dividends paid | (120.0 | ) | | (1,306.9 | ) | | (26.2 | ) | | 1,333.1 |
| | (120.0 | ) |
| Purchase of Common Shares | (327.7 | ) | | — |
| | — |
| | — |
| | (327.7 | ) |
| Payments on seller notes | — |
| | (0.2 | ) | | (8.7 | ) | | — |
| | (8.9 | ) |
| Cash received from exercise of stock options | 10.5 |
| | — |
| | — |
| | — |
| | 10.5 |
|
| Acquisition of noncontrolling interests | — |
| | — |
| | (70.7 | ) | | — |
| | (70.7 | ) |
| Financing cash flows from (to) affiliates | — |
| | 951.4 |
| | 90.8 |
| | (1,042.2 | ) | | — |
|
| Net cash provided by (used in) financing activities | (443.1 | ) | | 297.0 |
| | 6.4 |
| | 290.9 |
| | 151.2 |
|
| Effect of exchange rate changes on cash | — |
| | — |
| | 0.4 |
| | — |
| | 0.4 |
|
| Net increase (decrease) in cash and cash equivalents | — |
| | (36.8 | ) | | (49.8 | ) | | — |
| | (86.6 | ) |
| Cash and cash equivalents at beginning of year | — |
| | 39.8 |
| | 80.7 |
| | — |
| | 120.5 |
|
| Cash and cash equivalents at end of year | $ | — |
| | $ | 3.0 |
| | $ | 30.9 |
| | $ | — |
| | $ | 33.9 |
|
| |
| (a) | Cash received by the Parent from the Guarantors and Non-Guarantors in the form of dividends in the amount of $1,306.9 million represent return of investments and are included in cash flows from investing activities. Cash received by the Parent from the Guarantors and Non-Guarantors in the form of dividends in the amount of $24.4 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 $1.8 million represent return on investments and are included in cash flows from operating activities. |
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Balance Sheet
As of September 30, 2018
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
| ASSETS |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 3.0 |
| | $ | 30.9 |
| | $ | — |
| | $ | 33.9 |
|
| Accounts receivable, net | — |
| | 172.5 |
| | 53.5 |
| | — |
| | 226.0 |
|
| Accounts receivable pledged | — |
| | 84.5 |
| | — |
| | — |
| | 84.5 |
|
| Inventories | — |
| | 394.5 |
| | 86.9 |
| | — |
| | 481.4 |
|
| Prepaid and other current assets | 2.2 |
| | 44.6 |
| | 13.1 |
| | — |
| | 59.9 |
|
| Total current assets | 2.2 |
| | 699.1 |
| | 184.4 |
| | — |
| | 885.7 |
|
| Investment in unconsolidated affiliates | — |
| | 35.2 |
| | 0.9 |
| | — |
| | 36.1 |
|
| Property, plant and equipment, net | — |
| | 464.7 |
| | 66.1 |
| | — |
| | 530.8 |
|
| Goodwill | — |
| | 420.6 |
| | 110.8 |
| | 11.6 |
| | 543.0 |
|
| Intangible assets, net | — |
| | 752.3 |
| | 97.5 |
| | 7.5 |
| | 857.3 |
|
| Other assets | 11.4 |
| | 164.8 |
| | 25.4 |
| | — |
| | 201.6 |
|
| Equity investment in subsidiaries | 860.0 |
| | — |
| | — |
| | (860.0 | ) | | — |
|
| Intercompany assets | 1,422.8 |
| | — |
| | 6.5 |
| | (1,429.3 | ) | | — |
|
| Total assets | $ | 2,296.4 |
| | $ | 2,536.7 |
| | $ | 491.6 |
| | $ | (2,270.2 | ) | | $ | 3,054.5 |
|
| LIABILITIES AND EQUITY |
| Current liabilities: | | | | | | | | | |
| Current portion of debt | $ | 40.0 |
| | $ | 118.4 |
| | $ | 14.2 |
| | $ | (40.0 | ) | | $ | 132.6 |
|
| Accounts payable | — |
| | 119.0 |
| | 31.5 |
| | — |
| | 150.5 |
|
| Other current liabilities | 17.8 |
| | 278.3 |
| | 33.5 |
| | — |
| | 329.6 |
|
| Total current liabilities | 57.8 |
| | 515.7 |
| | 79.2 |
| | (40.0 | ) | | 612.7 |
|
| Long-term debt | 1,883.0 |
| | 1,140.9 |
| | 102.1 |
| | (1,242.2 | ) | | 1,883.8 |
|
| Distributions in excess of investment in unconsolidated affiliate | — |
| | 21.9 |
| | — |
| | — |
| | 21.9 |
|
| Other liabilities | 1.0 |
| | 143.6 |
| | 26.9 |
| | 5.0 |
| | 176.5 |
|
| Equity investment in subsidiaries | — |
| | 1.5 |
| | — |
| | (1.5 | ) | | — |
|
| Intercompany liabilities | — |
| | 125.0 |
| | — |
| | (125.0 | ) | | — |
|
| Total liabilities | 1,941.8 |
| | 1,948.6 |
| | 208.2 |
| | (1,403.7 | ) | | 2,694.9 |
|
| Total equity—controlling interest | 354.6 |
| | 588.1 |
| | 283.4 |
| | (871.5 | ) | | 354.6 |
|
| Noncontrolling interest | — |
| | — |
| | — |
| | 5.0 |
| | 5.0 |
|
| Total equity | 354.6 |
| | 588.1 |
| | 283.4 |
| | (866.5 | ) | | 359.6 |
|
| Total liabilities and equity | $ | 2,296.4 |
| | $ | 2,536.7 |
| | $ | 491.6 |
| | $ | (2,270.2 | ) | | $ | 3,054.5 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Operations
for the fiscal year ended September 30, 2017
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
| Net sales | $ | — |
| | $ | 2,308.4 |
| | $ | 333.7 |
| | $ | — |
| | $ | 2,642.1 |
|
| Cost of sales | — |
| | 1,415.8 |
| | 253.7 |
| | — |
| | 1,669.5 |
|
| Gross profit | — |
| | 892.6 |
| | 80.0 |
| | — |
| | 972.6 |
|
| Operating expenses: | | | | | | | | | |
| Selling, general and administrative | — |
| | 480.4 |
| | 69.1 |
| | 1.4 |
| | 550.9 |
|
| Impairment, restructuring and other | — |
| | 4.5 |
| | 0.4 |
| | — |
| | 4.9 |
|
| Other (income) loss, net | (0.8 | ) | | (14.2 | ) | | (1.6 | ) | | — |
| | (16.6 | ) |
| Income (loss) from operations | 0.8 |
| | 421.9 |
| | 12.1 |
| | (1.4 | ) | | 433.4 |
|
| Equity (income) loss in subsidiaries | (250.4 | ) | | (15.9 | ) | | — |
| | 266.3 |
| | — |
|
| Other non-operating (income) loss | (20.7 | ) | | — |
| | (21.4 | ) | | 42.1 |
| | — |
|
| Equity in (income) loss of unconsolidated affiliates | — |
| | 28.9 |
| | 0.1 |
| | — |
| | 29.0 |
|
| Interest expense | 70.1 |
| | 43.8 |
| | 4.3 |
| | (42.1 | ) | | 76.1 |
|
| Other non-operating expense, net | — |
| | — |
| | 13.4 |
| | — |
| | 13.4 |
|
| Income (loss) from continuing operations before income taxes | 201.8 |
| | 365.1 |
| | 15.7 |
| | (267.7 | ) | | 314.9 |
|
| Income tax expense (benefit) from continuing operations | (18.0 | ) | | 128.8 |
| | 5.8 |
| | — |
| | 116.6 |
|
| Income (loss) from continuing operations | 219.8 |
| | 236.3 |
| | 9.9 |
| | (267.7 | ) | | 198.3 |
|
| Income (loss) from discontinued operations, net of tax | — |
| | (0.7 | ) | | 21.2 |
| | — |
| | 20.5 |
|
| Net income (loss) | $ | 219.8 |
| | $ | 235.6 |
| | $ | 31.1 |
| | $ | (267.7 | ) | | $ | 218.8 |
|
| Net (income) loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | (0.5 | ) | | (0.5 | ) |
| Net income (loss) attributable to controlling interest | $ | 219.8 |
| | $ | 235.6 |
| | $ | 31.1 |
| | $ | (268.2 | ) | | $ | 218.3 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Comprehensive Income (Loss)
for the fiscal year ended September 30, 2017
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
| Net income (loss) | $ | 219.8 |
| | $ | 235.6 |
| | $ | 31.1 |
| | $ | (267.7 | ) | | $ | 218.8 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | |
| Net foreign currency translation adjustment | 28.2 |
| | — |
| | 28.2 |
| | (28.2 | ) | | 28.2 |
|
| Net change in derivatives | 6.7 |
| | 2.8 |
| | — |
| | (2.8 | ) | | 6.7 |
|
| Net change in pension and other post-retirement benefits | 13.2 |
| | 3.7 |
| | 9.5 |
| | (13.2 | ) | | 13.2 |
|
| Total other comprehensive income (loss) | 48.1 |
| | 6.5 |
| | 37.7 |
| | (44.2 | ) | | 48.1 |
|
| Comprehensive income (loss) | $ | 267.9 |
| | $ | 242.1 |
| | $ | 68.8 |
| | $ | (311.9 | ) | | $ | 266.9 |
|
| Comprehensive (income) loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | (0.9 | ) | | (0.9 | ) |
| Comprehensive income attributable to controlling interest | $ | 267.9 |
| | $ | 242.1 |
| | $ | 68.8 |
| | $ | (312.8 | ) | | $ | 266.0 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 2017
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES(a) | $ | (48.3 | ) | | $ | 471.4 |
| | $ | (16.1 | ) | | $ | (43.8 | ) | | $ | 363.2 |
|
INVESTING ACTIVITIES(a) | | | | | | | | | |
| Proceeds from sale of long-lived assets | — |
| | 5.6 |
| | 0.1 |
| | — |
| | 5.7 |
|
| Proceeds from sale of business, net of cash disposed of | — |
| | 178.6 |
| | 1.7 |
| | — |
| | 180.3 |
|
| Investments in property, plant and equipment | — |
| | (59.5 | ) | | (10.1 | ) | | — |
| | (69.6 | ) |
| Investments in loans receivable | — |
| | (29.7 | ) | | — |
| | — |
| | (29.7 | ) |
| Net distributions from (investments in) unconsolidated affiliates | — |
| | 57.7 |
| | (0.3 | ) | | — |
| | 57.4 |
|
| Investments in acquired businesses, net of cash acquired | — |
| | (112.5 | ) | | (9.2 | ) | | — |
| | (121.7 | ) |
| Return of investments from affiliates | 918.6 |
| | 32.4 |
| | — |
| | (951.0 | ) | | — |
|
| Investing cash flows from (to) affiliates | (759.9 | ) | | (208.6 | ) | | — |
| | 968.5 |
| | — |
|
| Net cash provided by (used in) investing activities | 158.7 |
| | (136.0 | ) | | (17.8 | ) | | 17.5 |
| | 22.4 |
|
| FINANCING ACTIVITIES | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | — |
| | 1,196.1 |
| | 253.2 |
| | — |
| | 1,449.3 |
|
| Repayments under revolving and bank lines of credit and term loans | — |
| | (1,319.6 | ) | | (298.7 | ) | | — |
| | (1,618.3 | ) |
| Proceeds from issuance of 5.250% Senior Notes | 250.0 |
| | — |
| | — |
| | — |
| | 250.0 |
|
| Financing and issuance fees | (3.8 | ) | | (0.6 | ) | | — |
| | — |
| | (4.4 | ) |
| Dividends paid | (120.3 | ) | | (918.6 | ) | | (43.8 | ) | | 962.4 |
| | (120.3 | ) |
| Distribution paid by AeroGrow to noncontrolling interest | — |
| | — |
| | (40.5 | ) | | 32.4 |
| | (8.1 | ) |
| Purchase of Common Shares | (255.2 | ) | | — |
| | — |
| | — |
| | (255.2 | ) |
| Payments on seller notes | — |
| | (15.5 | ) | | (13.2 | ) | | — |
| | (28.7 | ) |
| Excess tax benefits from share-based payment arrangements | 7.9 |
| | — |
| | — |
| | — |
| | 7.9 |
|
| Cash received from exercise of stock options | 11.0 |
| | — |
| | — |
| | — |
| | 11.0 |
|
| Financing cash flows from (to) affiliates | — |
| | 759.9 |
| | 208.6 |
| | (968.5 | ) | | — |
|
| Net cash provided by (used in) financing activities | (110.4 | ) | | (298.3 | ) | | 65.6 |
| | 26.3 |
| | (316.8 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 1.6 |
| | — |
| | 1.6 |
|
| Net increase (decrease) in cash and cash equivalents | — |
| | 37.1 |
| | 33.3 |
| | — |
| | 70.4 |
|
| Cash and cash equivalents at beginning of year excluding cash classified within assets held for sale | — |
| | 2.7 |
| | 25.9 |
| | — |
| | 28.6 |
|
| Cash and cash equivalents at beginning of year classified within assets held for sale | — |
| | — |
| | 21.5 |
| | — |
| | 21.5 |
|
| Cash and cash equivalents at beginning of year | — |
| | 2.7 |
| | 47.4 |
| | — |
| | 50.1 |
|
| Cash and cash equivalents at end of year | $ | — |
| | $ | 39.8 |
| | $ | 80.7 |
| | $ | — |
| | $ | 120.5 |
|
| |
| (a) | Cash received by the Parent from the Guarantors and the Non-Guarantors in the form of distributions in the amount of $918.6 million represent return of investments and are included in cash flows from investing activities. Cash received by the Parent from the Guarantors and Non-Guarantors in the form of dividends in the amount of $28.8 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 distributions in the amount of $32.4 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 $15.0 million represent return on investments and are included in cash flows from operating activities. |
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Balance Sheet
As of September 30, 2017
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
| ASSETS |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 39.8 |
| | $ | 80.7 |
| | $ | — |
| | $ | 120.5 |
|
| Accounts receivable, net | — |
| | 137.6 |
| | 60.1 |
| | — |
| | 197.7 |
|
| Accounts receivable, pledged | — |
| | 88.9 |
| | — |
| | — |
| | 88.9 |
|
| Inventories | — |
| | 314.0 |
| | 93.5 |
| | — |
| | 407.5 |
|
| Prepaid and other current assets | 1.3 |
| | 43.6 |
| | 22.2 |
| | — |
| | 67.1 |
|
| Total current assets | 1.3 |
| | 623.9 |
| | 256.5 |
| | — |
| | 881.7 |
|
| Investment in unconsolidated affiliates | — |
| | 30.4 |
| | 0.7 |
| | — |
| | 31.1 |
|
| Property, plant and equipment, net | — |
| | 406.4 |
| | 61.3 |
| | — |
| | 467.7 |
|
| Goodwill | — |
| | 320.7 |
| | 109.3 |
| | 11.6 |
| | 441.6 |
|
| Intangible assets, net | — |
| | 606.3 |
| | 133.8 |
| | 8.8 |
| | 748.9 |
|
| Other assets | 8.1 |
| | 158.3 |
| | 9.6 |
| | — |
| | 176.0 |
|
| Equity investment in subsidiaries | 1,112.8 |
| | — |
| | — |
| | (1,112.8 | ) | | — |
|
| Intercompany assets | 759.7 |
| | — |
| | — |
| | (759.7 | ) | | — |
|
| Total assets | $ | 1,881.9 |
| | $ | 2,146.0 |
| | $ | 571.2 |
| | $ | (1,852.1 | ) | | $ | 2,747.0 |
|
| LIABILITIES AND EQUITY |
| Current liabilities: | | | | | | | | | |
| Current portion of debt | $ | 15.0 |
| | $ | 97.8 |
| | $ | 45.3 |
| | $ | (15.0 | ) | | $ | 143.1 |
|
| Accounts payable | — |
| | 124.9 |
| | 28.2 |
| | — |
| | 153.1 |
|
| Other current liabilities | 17.1 |
| | 191.5 |
| | 39.7 |
| | — |
| | 248.3 |
|
| Total current liabilities | 32.1 |
| | 414.2 |
| | 113.2 |
| | (15.0 | ) | | 544.5 |
|
| Long-term debt | 1,200.7 |
| | 508.6 |
| | 108.0 |
| | (559.3 | ) | | 1,258.0 |
|
| Distribution in excess of investment in unconsolidated affiliate | — |
| | 21.9 |
| | — |
| | — |
| | 21.9 |
|
| Other liabilities | 0.3 |
| | 197.4 |
| | 58.2 |
| | 5.0 |
| | 260.9 |
|
| Equity investment in subsidiaries | — |
| | 91.7 |
| | — |
| | (91.7 | ) | | — |
|
| Intercompany liabilities | — |
| | 38.3 |
| | 131.6 |
| | (169.9 | ) | | — |
|
| Total liabilities | 1,233.1 |
| | 1,272.1 |
| | 411.0 |
| | (830.9 | ) | | 2,085.3 |
|
| Total equity—controlling interest | 648.8 |
| | 873.9 |
| | 160.2 |
| | (1,034.1 | ) | | 648.8 |
|
| Noncontrolling interest | — |
| | — |
| | — |
| | 12.9 |
| | 12.9 |
|
| Total equity | 648.8 |
| | 873.9 |
| | 160.2 |
| | (1,021.2 | ) | | 661.7 |
|
| Total liabilities and equity | $ | 1,881.9 |
| | $ | 2,146.0 |
| | $ | 571.2 |
| | $ | (1,852.1 | ) | | $ | 2,747.0 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Operations
for the fiscal year ended September 30, 2016
(inIn millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
| Net sales | $ | — |
| | $ | 2,285.6 |
| | $ | 550.5 |
| | $ | — |
| | $ | 2,836.1 |
| $ | — |
| | $ | 2,285.6 |
| | $ | 220.6 |
| | $ | — |
| | $ | 2,506.2 |
|
| Cost of sales | — |
| | 1,434.4 |
| | 398.6 |
| | — |
| | 1,833.0 |
| — |
| | 1,434.7 |
| | 165.3 |
| | — |
| | 1,600.0 |
|
| Cost of sales—impairment, restructuring and other | — |
| | 5.9 |
| | 1.8 |
| | — |
| | 7.7 |
| — |
| | 5.9 |
| | — |
| | — |
| | 5.9 |
|
| Gross profit | — |
| | 845.3 |
| | 150.1 |
| | — |
| | 995.4 |
| — |
| | 845.0 |
| | 55.3 |
| | — |
| | 900.3 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | — |
| | 455.4 |
| | 140.2 |
| | 1.5 |
| | 597.1 |
| — |
| | 461.8 |
| | 54.7 |
| | 1.5 |
| | 518.0 |
|
| Impairment, restructuring and other | — |
| | (49.1 | ) | | 1.9 |
| | — |
| | (47.2 | ) | — |
| | (49.8 | ) | | (1.7 | ) | | — |
| | (51.5 | ) |
| Other (income) loss, net | (0.5 | ) | | (12.8 | ) | | (0.5 | ) | | — |
| | (13.8 | ) | (0.5 | ) | | (12.8 | ) | | (0.5 | ) | | — |
| | (13.8 | ) |
| Income (loss) from operations | 0.5 |
| | 451.8 |
| | 8.5 |
| | (1.5 | ) | | 459.3 |
| 0.5 |
| | 445.8 |
| | 2.8 |
| | (1.5 | ) | | 447.6 |
|
| Equity (income) loss in subsidiaries | (348.2 | ) | | (8.4 | ) | | — |
| | 356.6 |
| | — |
| (348.2 | ) | | (8.4 | ) | | — |
| | 356.6 |
| | — |
|
| Other non-operating (income) loss | (22.0 | ) | | — |
| | (22.4 | ) | | 44.4 |
| | — |
| (22.0 | ) | | — |
| | (22.4 | ) | | 44.4 |
| | — |
|
| Equity in (income)/loss of unconsolidated affiliates | — |
| | (7.9 | ) | | 0.1 |
| | — |
| | (7.8 | ) | |
| Equity in (income) loss of unconsolidated affiliates | | — |
| | (7.9 | ) | | 0.1 |
| | — |
| | (7.8 | ) |
| Costs related to refinancing | 8.8 |
| | — |
| | — |
| | — |
| | 8.8 |
| 8.8 |
| | — |
| | — |
| | — |
| | 8.8 |
|
| Interest expense | 62.1 |
| | 43.6 |
| | 4.3 |
| | (44.4 | ) | | 65.6 |
| 62.1 |
| | 43.6 |
| | 1.6 |
| | (44.4 | ) | | 62.9 |
|
| Income (loss) from continuing operations before income taxes | 299.8 |
| | 424.5 |
| | 26.5 |
| | (358.1 | ) | | 392.7 |
| 299.8 |
| | 418.5 |
| | 23.5 |
| | (358.1 | ) | | 383.7 |
|
| Income tax (benefit) expense from continuing operations | (17.2 | ) | | 147.3 |
| | 9.3 |
| | — |
| | 139.4 |
| |
| Income tax expense (benefit) from continuing operations | | (17.2 | ) | | 146.1 |
| | 8.7 |
| | — |
| | 137.6 |
|
| Income (loss) from continuing operations | 317.0 |
| | 277.2 |
| | 17.2 |
| | (358.1 | ) | | 253.3 |
| 317.0 |
| | 272.4 |
| | 14.8 |
| | (358.1 | ) | | 246.1 |
|
| Income from discontinued operations, net of tax | — |
| | 61.5 |
| | — |
| | — |
| | 61.5 |
| |
| Income (loss) from discontinued operations, net of tax | | — |
| | 66.3 |
| | 2.4 |
| | — |
| | 68.7 |
|
| Net income (loss) | $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (358.1 | ) | | $ | 314.8 |
| $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (358.1 | ) | | $ | 314.8 |
|
| Net (income) loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
| — |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
|
| Net income (loss) attributable to controlling interest | $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (357.6 | ) | | $ | 315.3 |
| $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (357.6 | ) | | $ | 315.3 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Comprehensive Income (Loss)
for the twelve monthsfiscal year ended September 30, 2016
(In millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
| Net income (loss) | $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (358.1 | ) | | $ | 314.8 |
| $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (358.1 | ) | | $ | 314.8 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | |
| Net foreign currency translation adjustment | (6.2 | ) | | — |
| | (6.2 | ) | | 6.2 |
| | (6.2 | ) | (6.2 | ) | | — |
| | (6.2 | ) | | 6.2 |
| | (6.2 | ) |
| Net change in derivatives | 4.3 |
| | 0.3 |
| | — |
| | (0.3 | ) | | 4.3 |
| 4.3 |
| | 0.3 |
| | — |
| | (0.3 | ) | | 4.3 |
|
| Net change in pension and other post retirement benefits | (8.2 | ) | | 0.4 |
| | (8.6 | ) | | 8.2 |
| | (8.2 | ) | |
| Net change in pension and other post-retirement benefits | | (8.2 | ) | | 0.4 |
| | (8.6 | ) | | 8.2 |
| | (8.2 | ) |
| Total other comprehensive income (loss) | (10.1 | ) | | 0.7 |
| | (14.8 | ) | | 14.1 |
| | (10.1 | ) | (10.1 | ) | | 0.7 |
| | (14.8 | ) | | 14.1 |
| | (10.1 | ) |
| Comprehensive income (loss) | $ | 306.9 |
| | $ | 339.4 |
| | $ | 2.4 |
| | $ | (344.0 | ) | | $ | 304.7 |
| $ | 306.9 |
| | $ | 339.4 |
| | $ | 2.4 |
| | $ | (344.0 | ) | | $ | 304.7 |
|
| Comprehensive (income) loss attributable to noncontrolling interest | | — |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
|
| Comprehensive income attributable to controlling interest | | $ | 306.9 |
| | $ | 339.4 |
| | $ | 2.4 |
| | $ | (343.5 | ) | | $ | 305.2 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 2016
(inIn millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations/
Consolidations | | Consolidated |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES(a) | $ | 18.0 |
| | $ | 212.8 |
| | $ | 10.2 |
| | $ | (3.6 | ) | | $ | 237.4 |
| $ | 18.0 |
| | $ | 219.4 |
| | $ | 10.2 |
| | $ | (3.6 | ) | | $ | 244.0 |
|
INVESTING ACTIVITIES(a) | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of long-lived assets | — |
| | 2.4 |
| | — |
| | — |
| | 2.4 |
| — |
| | 2.4 |
| | — |
| | — |
| | 2.4 |
|
| Investments in property, plant and equipment | — |
| | (49.0 | ) | | (9.3 | ) | | — |
| | (58.3 | ) | — |
| | (49.0 | ) | | (9.3 | ) | | — |
| | (58.3 | ) |
| Investments in loans receivable | — |
| | (90.0 | ) | | — |
| | — |
| | (90.0 | ) | — |
| | (90.0 | ) | | — |
| | — |
| | (90.0 | ) |
| Net distributions from unconsolidated affiliates | — |
| | 194.1 |
| | — |
| | — |
| | 194.1 |
| |
| Cash contributed to TruGreen Joint Venture | — |
| | (24.2 | ) | | — |
| | — |
| | (24.2 | ) | — |
| | (24.2 | ) | | — |
| | — |
| | (24.2 | ) |
| Net distributions from (investments in) unconsolidated affiliate | | — |
| | 194.1 |
| | — |
| | — |
| | 194.1 |
|
| Investments in acquired businesses, net of cash acquired | — |
| | — |
| | (158.4 | ) | | — |
| | (158.4 | ) | — |
| | — |
| | (158.4 | ) | | — |
| | (158.4 | ) |
| Return of investments from affiliates | 934.3 |
| | — |
| | — |
| | (934.3 | ) | | — |
| 940.9 |
| | — |
| | — |
| | (940.9 | ) | | — |
|
| Investing cash flows from (to) affiliates | (914.2 | ) | | (29.1 | ) | | — |
| | 943.3 |
| | — |
| (914.2 | ) | | (29.1 | ) | | — |
| | 943.3 |
| | — |
|
| Net cash provided by (used in) investing activities | 20.1 |
| | 4.2 |
| | (167.7 | ) | | 9.0 |
| | (134.4 | ) | 26.7 |
| | 4.2 |
| | (167.7 | ) | | 2.4 |
| | (134.4 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | — |
| | 1,819.5 |
| | 249.6 |
| | — |
| | 2,069.1 |
| — |
| | 1,819.5 |
| | 249.6 |
| | — |
| | 2,069.1 |
|
| Repayments under revolving and bank lines of credit and term loans | — |
| | (1,937.7 | ) | | (212.7 | ) | | — |
| | (2,150.4 | ) | — |
| | (1,937.7 | ) | | (212.7 | ) | | — |
| | (2,150.4 | ) |
| Proceeds from issuance of 6.000% Senior Notes | 400.0 |
| | — |
| | — |
| | — |
| | 400.0 |
| 400.0 |
| | — |
| | — |
| | — |
| | 400.0 |
|
| Repayment of 6.625% Senior Notes | (200.0 | ) | | — |
| | — |
| | — |
| | (200.0 | ) | (200.0 | ) | | — |
| | — |
| | — |
| | (200.0 | ) |
| Financing and issuance fees | (11.2 | ) | | — |
| | — |
| | — |
| | (11.2 | ) | (11.2 | ) | | — |
| | — |
| | — |
| | (11.2 | ) |
| Dividends paid | (116.6 | ) | | (909.4 | ) | | (26.5 | ) | | 935.9 |
| | (116.6 | ) | (116.6 | ) | | (916.0 | ) | | (26.5 | ) | | 942.5 |
| | (116.6 | ) |
| Purchase of Common Shares | (130.8 | ) | | — |
| | — |
| | — |
| | (130.8 | ) | (137.4 | ) | | — |
| | — |
| | — |
| | (137.4 | ) |
| Payments on seller notes | — |
| | (2.3 | ) | | (0.5 | ) | | — |
| | (2.8 | ) | — |
| | (2.3 | ) | | (0.5 | ) | | — |
| | (2.8 | ) |
| Excess tax benefits from share-based payment arrangements | 5.8 |
| | — |
| | — |
| | — |
| | 5.8 |
| 5.8 |
| | — |
| | — |
| | — |
| | 5.8 |
|
| Cash received from exercise of stock options | 14.7 |
| | — |
| | — |
| | — |
| | 14.7 |
| 14.7 |
| | — |
| | — |
| | — |
| | 14.7 |
|
| Financing cash flows from (to) affiliates | — |
| | 808.2 |
| | 133.1 |
| | (941.3 | ) | | — |
| — |
| | 808.2 |
| | 133.1 |
| | (941.3 | ) | | — |
|
| Net cash provided by (used in) financing activities | (38.1 | ) | | (221.7 | ) | | 143.0 |
| | (5.4 | ) | | (122.2 | ) | (44.7 | ) | | (228.3 | ) | | 143.0 |
| | 1.2 |
| | (128.8 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | (2.1 | ) | | — |
| | (2.1 | ) | — |
| | — |
| | (2.1 | ) | | — |
| | (2.1 | ) |
| Net increase (decrease) in cash and cash equivalents | — |
| | (4.7 | ) | | (16.6 | ) | | — |
| | (21.3 | ) | — |
| | (4.7 | ) | | (16.6 | ) | | — |
| | (21.3 | ) |
| Cash and cash equivalents at beginning of year excluding cash classified within assets held for sale | | — |
| | 7.4 |
| | 43.4 |
| | — |
| | 50.8 |
|
| Cash and cash equivalents at beginning of year classified within assets held for sale | | — |
| | — |
| | 20.6 |
| | — |
| | 20.6 |
|
| Cash and cash equivalents at beginning of year | — |
| | 7.4 |
| | 64.0 |
| | — |
| | 71.4 |
| — |
| | 7.4 |
| | 64.0 |
| | — |
| | 71.4 |
|
| Cash and cash equivalents at end of year | $ | — |
| | $ | 2.7 |
| | $ | 47.4 |
| | $ | — |
| | $ | 50.1 |
| $ | — |
| | $ | 2.7 |
| | $ | 47.4 |
| | $ | — |
| | $ | 50.1 |
|
| |
| (a) | Cash received by the Parent from the Guarantors and non Guarantorsthe Non-Guarantors in the form of dividendsdistributions in the amount of $934.4$940.9 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, 2016
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| ASSETS |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 2.7 |
| | $ | 47.4 |
| | $ | — |
| | $ | 50.1 |
|
| Accounts receivable, net | — |
| | 92.4 |
| | 104.0 |
| | — |
| | 196.4 |
|
| Accounts receivable pledged | — |
| | 174.7 |
| | — |
| | — |
| | 174.7 |
|
| Inventories | — |
| | 327.8 |
| | 120.4 |
| | — |
| | 448.2 |
|
| Prepaid and other current assets | 0.1 |
| | 82.8 |
| | 39.4 |
| | — |
| | 122.3 |
|
| Total current assets | 0.1 |
| | 680.4 |
| | 311.2 |
| | — |
| | 991.7 |
|
| Investment in unconsolidated affiliates | — |
| | 100.3 |
| | 0.7 |
| | — |
| | 101.0 |
|
| Property, plant and equipment, net | — |
| | 392.1 |
| | 78.7 |
| | — |
| | 470.8 |
|
| Goodwill | — |
| | 260.4 |
| | 101.2 |
| | 11.6 |
| | 373.2 |
|
| Intangible assets, net | — |
| | 596.4 |
| | 144.3 |
| | 10.2 |
| | 750.9 |
|
| Other assets | 19.2 |
| | 103.8 |
| | 0.7 |
| | (2.5 | ) | | 121.2 |
|
| Equity investment in subsidiaries | 808.8 |
| | — |
| | — |
| | (808.8 | ) | | — |
|
| Intercompany assets | 1,013.0 |
| | — |
| | — |
| | (1,013.0 | ) | | — |
|
| Total assets | $ | 1,841.1 |
| | $ | 2,133.4 |
| | $ | 636.8 |
| | $ | (1,802.5 | ) | | $ | 2,808.8 |
|
| LIABILITIES AND EQUITY |
| Current liabilities: | | | | | | | | | |
| Current portion of debt | $ | 15.0 |
| | $ | 154.2 |
| | $ | 30.8 |
| | $ | (15.0 | ) | | $ | 185.0 |
|
| Accounts payable | — |
| | 108.8 |
| | 57.1 |
| | — |
| | 165.9 |
|
| Other current liabilities | 16.6 |
| | 143.6 |
| | 82.0 |
| | — |
| | 242.2 |
|
| Total current liabilities | 31.6 |
| | 406.6 |
| | 169.9 |
| | (15.0 | ) | | 593.1 |
|
| Long-term debt | 1,091.1 |
| | 575.7 |
| | 117.2 |
| | (652.9 | ) | | 1,131.1 |
|
| Other liabilities | 3.2 |
| | 268.7 |
| | 76.0 |
| | 2.4 |
| | 350.3 |
|
| Equity investment in subsidiaries | — |
| | 161.0 |
| | — |
| | (161.0 | ) | | — |
|
| Intercompany liabilities | — |
| | 147.2 |
| | 187.1 |
| | (334.3 | ) | | — |
|
| Total liabilities | 1,125.9 |
| | 1,559.2 |
| | 550.2 |
| | (1,160.8 | ) | | 2,074.5 |
|
| 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 OperationsSchedule II—Valuation and Qualifying Accounts
for the fiscal year ended September 30, 20152018
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 2,192.1 |
| | $ | 535.9 |
| | $ | — |
| | $ | 2,728.0 |
|
| Cost of sales | — |
| | 1,426.7 |
| | 386.7 |
| | — |
| | 1,813.4 |
|
| Cost of sales—impairment, restructuring and other | — |
| | 3.1 |
| | 3.5 |
| | — |
| | 6.6 |
|
| Gross profit | — |
| | 762.3 |
| | 145.7 |
| | — |
| | 908.0 |
|
| Operating expenses: | | | | | | | | | |
| Selling, general and administrative | — |
| | 429.4 |
| | 140.3 |
| | 1.7 |
| | 571.4 |
|
| Impairment, restructuring and other | — |
| | 69.6 |
| | 7.0 |
| | — |
| | 76.6 |
|
| 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 | 55.2 |
| | 44.1 |
| | 2.6 |
| | (51.4 | ) | | 50.5 |
|
| Income (loss) from continuing operations before income taxes | 151.9 |
| | 228.5 |
| | 18.2 |
| | (187.0 | ) | | 211.6 |
|
| Income tax (benefit) expense from continuing operations | (9.6 | ) | | 77.0 |
| | 6.4 |
| | — |
| | 73.8 |
|
| Income (loss) from continuing operations | 161.5 |
| | 151.5 |
| | 11.8 |
| | (187.0 | ) | | 137.8 |
|
| Income from discontinued operations, net of tax | — |
| | 20.9 |
| | — |
| | — |
| | 20.9 |
|
| Net income (loss) | $ | 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, Consolidating Statement of Comprehensive Income (Loss)
for the twelve months endedSeptember 30, 2015
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net income (loss) | $ | 161.5 |
| | $ | 172.4 |
| | $ | 11.8 |
| | $ | (187.0 | ) | | $ | 158.7 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | |
| Net foreign currency translation adjustment | (14.2 | ) | | — |
| | (14.2 | ) | | 14.2 |
| | (14.2 | ) |
| Net change in derivatives | (2.1 | ) | | (0.8 | ) | | — |
| | 0.8 |
| | (2.1 | ) |
| Net change in pension and other post retirement benefits | (4.3 | ) | | (5.4 | ) | | 1.1 |
| | 4.3 |
| | (4.3 | ) |
| Total other comprehensive income (loss) | (20.6 | ) | | (6.2 | ) | | (13.1 | ) | | 19.3 |
| | (20.6 | ) |
| Comprehensive income (loss) | $ | 140.9 |
| | $ | 166.2 |
| | $ | (1.3 | ) | | $ | (167.7 | ) | | $ | 138.1 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Column A | | 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 |
| | | (In millions) |
| Valuation and qualifying accounts deducted from the assets to which they apply: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 3.1 |
| | $ | — |
| | $ | 0.8 |
| | $ | (0.3 | ) | | $ | 3.6 |
|
| Income tax valuation allowance | | 29.7 |
| | — |
| | 12.3 |
| | (8.4 | ) | | 33.6 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Cash FlowsSchedule II—Valuation and Qualifying Accounts
for the fiscal year ended September 30, 20152017
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
NET CASH PROVIDED BY (USED IN)OPERATING ACTIVITIES(a) | $ | 239.4 |
| | $ | 249.3 |
| | $ | 39.5 |
| | $ | (281.3 | ) | | $ | 246.9 |
|
INVESTING ACTIVITIES(a) | | | | | | | | | |
| Proceeds from sale of long-lived assets | — |
| | 5.5 |
| | — |
| | — |
| | 5.5 |
|
| Investments in property, plant and equipment | — |
| | (56.6 | ) | | (5.1 | ) | | — |
| | (61.7 | ) |
| Investing cash flows from (to) affiliates | (141.9 | ) | | — |
| | — |
| | 141.9 |
| | — |
|
| Investments in acquired businesses, net of cash acquired | — |
| | (170.8 | ) | | (9.4 | ) | | — |
| | (180.2 | ) |
| Investment in marketing and license agreement | — |
| | (300.0 | ) | | — |
| | — |
| | (300.0 | ) |
| Net cash used in investing activities | (141.9 | ) | | (521.9 | ) | | (14.5 | ) | | 141.9 |
| | (536.4 | ) |
| FINANCING ACTIVITIES | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | — |
| | 1,568.1 |
| | 267.9 |
| | — |
| | 1,836.0 |
|
| Repayments under revolving and bank lines of credit and term loans | — |
| | (1,284.1 | ) | | (173.9 | ) | | — |
| | (1,458.0 | ) |
| Financing and issuance fees | (0.4 | ) | | (0.1 | ) | | — |
| | — |
| | (0.5 | ) |
| Dividends paid | (111.3 | ) | | (255.5 | ) | | (25.8 | ) | | 281.3 |
| | (111.3 | ) |
| Purchase of Common Shares | (14.8 | ) | | — |
| | — |
| | — |
| | (14.8 | ) |
| Payments on seller notes | — |
| | (1.5 | ) | | — |
| | — |
| | (1.5 | ) |
| Excess tax benefits from share-based payment arrangements | 4.7 |
| | — |
| | — |
| | — |
| | 4.7 |
|
| Cash received from exercise of stock options | 24.3 |
| | — |
| | — |
| | — |
| | 24.3 |
|
| Financing cash flows from (to) affiliates | — |
| | 230.0 |
| | (88.1 | ) | | (141.9 | ) | | — |
|
| Net cash provided by (used in) financing activities | (97.5 | ) | | 256.9 |
| | (19.9 | ) | | 139.4 |
| | 278.9 |
|
| Effect of exchange rate changes on cash | — |
| | — |
| | (7.3 | ) | | — |
| | (7.3 | ) |
| Net increase (decrease) in cash and cash equivalents | — |
| | (15.7 | ) | | (2.2 | ) | | — |
| | (17.9 | ) |
| Cash and cash equivalents at beginning of year | — |
| | 23.1 |
| | 66.2 |
| | — |
| | 89.3 |
|
| Cash and cash equivalents at end of year | $ | — |
| | $ | 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, 2015
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| ASSETS |
| Current assets: | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 7.4 |
| | $ | 64.0 |
| | $ | — |
| | $ | 71.4 |
|
| Accounts receivable, net | — |
| | 63.3 |
| | 94.4 |
| | — |
| | 157.7 |
|
| Accounts receivable, pledged | — |
| | 152.9 |
| | — |
| | — |
| | 152.9 |
|
| Inventories | — |
| | 306.9 |
| | 88.9 |
| | — |
| | 395.8 |
|
| Assets held for sale | — |
| | 220.3 |
| | — |
| | — |
| | 220.3 |
|
| Prepaid and other current assets | — |
| | 86.4 |
| | 34.7 |
| | — |
| | 121.1 |
|
| Total current assets | — |
| | 837.2 |
| | 282.0 |
| | ��� |
| | 1,119.2 |
|
| Property, plant and equipment, net | — |
| | 388.0 |
| | 56.1 |
| | — |
| | 444.1 |
|
| Goodwill | — |
| | 260.2 |
| | 12.0 |
| | 11.6 |
| | 283.8 |
|
| Intangible assets, net | — |
| | 584.6 |
| | 58.8 |
| | 11.7 |
| | 655.1 |
|
| Other assets | 16.3 |
| | 11.0 |
| | 15.0 |
| | (17.3 | ) | | 25.0 |
|
| Equity investment in subsidiaries | 461.3 |
| | — |
| | — |
| | (461.3 | ) | | — |
|
| Intercompany assets | 1,179.4 |
| | — |
| | — |
| | (1,179.4 | ) | | — |
|
| Total assets | $ | 1,657.0 |
| | $ | 2,081.0 |
| | $ | 423.9 |
| | $ | (1,634.7 | ) | | $ | 2,527.2 |
|
| LIABILITIES AND EQUITY |
| Current liabilities: | | | | | | | | | |
| Current portion of debt | $ | — |
| | $ | 122.9 |
| | $ | 9.7 |
| | $ | — |
| | $ | 132.6 |
|
| Accounts payable | — |
| | 136.7 |
| | 56.4 |
| | — |
| | 193.1 |
|
| Liabilities held for sale | — |
| | 41.7 |
| | — |
| | — |
| | 41.7 |
|
| Other current liabilities | 15.5 |
| | 162.7 |
| | 73.0 |
| | — |
| | 251.2 |
|
| Total current liabilities | 15.5 |
| | 464.0 |
| | 139.1 |
| | — |
| | 618.6 |
|
| Long-term debt | 1,016.3 |
| | 724.9 |
| | 100.1 |
| | (816.3 | ) | | 1,025.0 |
|
| Other liabilities | 4.5 |
| | 226.0 |
| | 32.3 |
| | (12.3 | ) | | 250.5 |
|
| Equity investment in subsidiaries | — |
| | 156.2 |
| | — |
| | (156.2 | ) | | — |
|
| Intercompany liabilities | — |
| | 296.6 |
| | 47.5 |
| | (344.1 | ) | | — |
|
| Total liabilities | 1,036.3 |
| | 1,867.7 |
| | 319.0 |
| | (1,328.9 | ) | | 1,894.1 |
|
| 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, 2014
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 2,051.0 |
| | $ | 527.3 |
| | $ | — |
| | $ | 2,578.3 |
|
| Cost of sales | — |
| | 1,318.8 |
| | 369.4 |
| | — |
| | 1,688.2 |
|
| Gross profit | — |
| | 732.2 |
| | 157.9 |
| | — |
| | 890.1 |
|
| Operating expenses: | | | | | | | | | |
| Selling, general and administrative | — |
| | 421.9 |
| | 145.2 |
| | — |
| | 567.1 |
|
| Impairment, restructuring and other | — |
| | 47.2 |
| | 2.8 |
| | — |
| | 50.0 |
|
| 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 | 10.7 |
| | — |
| | — |
| | — |
| | 10.7 |
|
| Interest expense | 52.5 |
| | 37.4 |
| | 0.9 |
| | (43.5 | ) | | 47.3 |
|
| 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 | (14.9 | ) | | 83.6 |
| | 11.5 |
| | — |
| | 80.2 |
|
| Income (loss) from continuing operations | 166.2 |
| | 159.6 |
| | 21.8 |
| | (202.1 | ) | | 145.5 |
|
| Income (loss) from discontinued operations, net of tax | — |
| | 20.3 |
| | 0.4 |
| | — |
| | 20.7 |
|
| 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, Consolidating Statement of Comprehensive Income (Loss)
for the twelve months endedSeptember 30, 2014
(In millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| 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 | (8.2 | ) | | — |
| | (8.2 | ) | | 8.2 |
| | (8.2 | ) |
| Net change in derivatives | 4.6 |
| | 1.3 |
| | — |
| | (1.3 | ) | | 4.6 |
|
| Net change in pension and other post retirement benefits | (4.8 | ) | | 0.7 |
| | (5.5 | ) | | 4.8 |
| | (4.8 | ) |
| Total other comprehensive income (loss) | (8.4 | ) | | 2.0 |
| | (13.7 | ) | | 11.7 |
| | (8.4 | ) |
| Comprehensive income (loss) | $ | 157.8 |
| | $ | 181.9 |
| | $ | 8.5 |
| | $ | (190.4 | ) | | $ | 157.8 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| Column A | | 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 |
| | | (In millions) |
| Valuation and qualifying accounts deducted from the assets to which they apply: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 4.8 |
| | $ | — |
| | $ | 1.0 |
| | $ | (2.7 | ) | | $ | 3.1 |
|
| Income tax valuation allowance | | 4.1 |
| | — |
| | 25.6 |
| | — |
| | 29.7 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 2014
(in millions)
|
| | | | | | | | | | | | | | | | | | | |
| | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
NET CASH PROVIDED BY (USED IN)OPERATING ACTIVITIES(a) | $ | 388.8 |
| | $ | 254.5 |
| | $ | 21.7 |
| | $ | (424.1 | ) | | $ | 240.9 |
|
INVESTING ACTIVITIES(a) | | | | | | | | | |
| Proceeds from sale of long-lived assets | — |
| | 3.7 |
| | — |
| | — |
| | 3.7 |
|
| Proceeds from sale of business, net of transaction costs | — |
| | 6.6 |
| | 0.6 |
| | — |
| | 7.2 |
|
| Investments in property, plant and equipment | — |
| | (81.0 | ) | | (6.6 | ) | | — |
| | (87.6 | ) |
| 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 | — |
| | 1,596.1 |
| | 336.7 |
| | — |
| | 1,932.8 |
|
| Repayments under revolving and bank lines of credit and term loans | — |
| | (1,184.7 | ) | | (340.6 | ) | | — |
| | (1,525.3 | ) |
| Repayment of 7.25% Senior Notes | (200.0 | ) | | — |
| | — |
| | — |
| | (200.0 | ) |
| Financing and issuance fees | (6.1 | ) | | — |
| | — |
| | — |
| | (6.1 | ) |
| Dividends paid | (230.8 | ) | | (404.9 | ) | | (19.2 | ) | | 424.1 |
| | (230.8 | ) |
| Purchase of Common Shares | (120.0 | ) | | — |
| | — |
| | — |
| | (120.0 | ) |
| Payments on seller notes | — |
| | (0.8 | ) | | — |
| | — |
| | (0.8 | ) |
| Excess tax benefits from share-based payment arrangements | — |
| | 5.9 |
| | — |
| | — |
| | 5.9 |
|
| Cash received from exercise of stock options | 20.0 |
| | — |
| | — |
| | — |
| | 20.0 |
|
| Intercompany financing | 148.1 |
| | (151.1 | ) | | 3.0 |
| | — |
| | — |
|
| Net cash used in financing activities | (388.8 | ) | | (139.5 | ) | | (20.1 | ) | | 424.1 |
| | (124.3 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | (1.5 | ) | | — |
| | (1.5 | ) |
| Net increase (decrease) in cash and cash equivalents | — |
| | 20.5 |
| | (61.0 | ) | | — |
| | (40.5 | ) |
| Cash and cash equivalents at beginning of year | — |
| | 2.6 |
| | 127.2 |
| | — |
| | 129.8 |
|
| Cash and cash equivalents at end of year | $ | — |
| | $ | 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, 2016
|
| | | | | | | | | | | | | | | | | | | | |
| Column A | | 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 |
| | | (In millions) |
| Valuation and qualifying accounts deducted from the assets to which they apply: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 6.5 |
| | $ | — |
| | $ | 4.1 |
| | $ | (3.4 | ) | | $ | 7.2 |
|
| Income tax valuation allowance | | 45.8 |
| | — |
| | (0.9 | ) | | 0.2 |
| | 45.1 |
|
Schedule II—Valuation and Qualifying Accounts
for the fiscal year ended September 30, 2015
|
| | | | | | | | | | | | | | | | | | | | |
| Column A | | 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 |
| | | (In millions) |
| Valuation and qualifying accounts deducted from the assets to which they apply: | | | | | | | | | | |
| Allowance for doubtful accounts | | $ | 5.5 |
| | $ | — |
| | $ | 1.4 |
| | $ | (0.4 | ) | | $ | 6.5 |
|
| Income tax valuation allowance | | 48.3 |
| | — |
| | 1.5 |
| | (4.0 | ) | | 45.8 |
|
Schedule II—Valuation and Qualifying Accounts
for the fiscal year ended September 30, 2014
| | | 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 | | $ | 7.5 |
| | $ | — |
| | $ | 1.6 |
| | $ | (3.6 | ) | | $ | 5.5 |
| | $ | 5.1 |
| | $ | — |
| | $ | 0.1 |
| | $ | (0.4 | ) | | $ | 4.8 |
|
| Income tax valuation allowance | | 51.5 |
| | — |
| | (1.5 | ) | | (1.7 | ) | | 48.3 |
| | 4.3 |
| | — |
| | 0.3 |
| | (0.5 | ) | | 4.1 |
|
The Scotts Miracle-Gro Company
Index to Exhibits
|
| | | | |
Exhibit No. | | Description | | Location |
| 3.1(a) | | | | Incorporated herein by reference to the Current Report on Form 8-K of The Scotts Miracle-Gro Company (the “Registrant”) filed March 24, 2005 [Exhibit 3.1] |
| | | | | |
| 3.1(b) | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed March 24, 2005 [Exhibit 3.2] |
| | | | | |
| 3.2 | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed March 24, 2005 [Exhibit 3.3] |
| | | | | |
| 4.1(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 [Exhibit 4.1] |
| | | | |
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’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 filed November 23, 2011 [Exhibit 4.2(b)] |
| | | | |
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 [Exhibit 4.2] |
| | | | |
4.2(a) | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed October 14, 2015 [Exhibit 4.1] |
| | | | | |
4.2(b)4.1(b) | | | | 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)4.1(c) | | | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 filed August 8, 2018 [Exhibit 10.5] |
| | | | |
| 4.1(d) | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed October 14, 2015 [Exhibit 4.2] |
| | | | | |
|
| | | | |
4.2(d)4.2(a) | | Registration Rights Agreement,Indenture, dated as of October 13, 2015,December 15, 2016, by and among The Scotts Miracle-Gro Company, the guarantors named thereinGuarantors (as defined therein) and Merrill Lynch, Pierce, Fenner & Smith Incorporated,U.S. Bank National Association, as representative of the several initial purchasers named thereintrustee | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed October 14, 2015December 16, 2016 [Exhibit 4.3]4.1] |
| | | | |
| 4.2(b) | | | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 filed August 8, 2018 [Exhibit 10.4] |
| | | | |
| 4.2(c) | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 16, 2016 [Exhibit 4.2] |
| | | | | |
| 4.3 | | | | * |
| | | | | |
| 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 [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 [Exhibit 2] |
| | | | |
10.2(a) | | FourthFifth Amended and Restated Credit Agreement, dated as of October 29, 2015,July 5, 2018, 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, and Mizuho Bank, Ltd. as Co- SyndicationCo-Syndication Agents; CoBank, ACB, Mizuho Bank LTD.of America, N.A., Fifth Third Bank, Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”Rabobank U.A., New York Branch, Sumitomo Mitsui Banking Corporation and 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 Current Report on Form 8-K filed November 3, 2015July 11, 2018 [Exhibit 10.1] |
| | | | |
10.2(b) | | Amendment 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 October 29, 2015, made by The Scotts Miracle-Gro Company, each domestic Subsidiary Borrower under the Fourth 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 November 3, 2015 [Exhibit 10.2] |
| | | | | |
|
| | | | |
10.2(d)10.1(b) | | Amendment No. 1, dated July 29, 2016, to FourthFifth Amended and Restated Guarantee and Collateral Agreement, dated as of October 29, 2015,July 5, 2018, made by The Scotts Miracle-Gro Company, each domestic Subsidiary Borrower under the FourthFifth 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 QuarterlyCurrent Report on Form 10-Q for the quarterly period ended8-K filed July 2, 2016 filed August 10, 201611, 2018 [Exhibit 10]10.2] |
| | | | | |
10.3(a)10.2(a)† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 24, 2013 [Exhibit 10.1] |
| | | | | |
10.3(b)10.2(b)† | | | | 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 10.3] |
| | | | | |
10.3(c)10.2(c)† | | | | 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 10.4] |
| | | | | |
10.3(d)(i)10.2(d)† | | Form of Restricted Stock Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grant of Restricted Stock Units made on December 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 28, 2015 filed May 7, 2015 [Exhibit 10.5] |
| | | | |
10.3(d)(iii)† | | | | 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] |
| | | | | |
10.3(e)10.2(e)† | | | | 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)10.2(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 filed November 29, 2007 [Exhibit 10(t)(3)] |
| | | | |
10.3(f)(ii)† | | | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 2, 2010 filed February 11, 2010 [Exhibit 10.4] |
| | | | | |
|
| | | | |
10.3(f)(iii)10.2(f)(ii)†
| | | | 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 [Exhibit 10.3]
|
| | | | | |
10.3(f)(iv)10.2(f)(iii)† | | | | 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 10.7] |
| | | | | |
| 10.3(a)† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 30, 2017 [Exhibit 10.1] |
| | | | |
|
| | | | |
| 10.3(b)† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 30, 2017 [Exhibit 10.2] |
| | | | |
| 10.3(c)† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 30, 2017 [Exhibit 10.3] |
| | | | |
| 10.3(d)† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 30, 2017 [Exhibit 10.4] |
| | | | |
| 10.3(e)† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 30, 2017 [Exhibit 10.5] |
| | | | |
| 10.3(f)† | | | | * |
| | | | |
| 10.3(g)† | | | | * |
| | | | |
| 10.3(h)(i)† | | | | * |
| | | | |
| 10.3(h)(ii)† | | | | * |
| | | | |
| 10.4(a)† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed February 5, 2014 [Exhibit 10.1] |
| | | | | |
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 filed November 25, 2008 [Exhibit 10.2(b)(i)] |
| | | | |
10.4(b)(ii)† | | | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2006 filed August 10, 2006 [Exhibit 10.1] |
| | | | | |
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) | | * |
| | | | |
| 10.5† | | | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 27, 2014 filed February 5, 2015 [Exhibit 10.2] |
| | | | | |
10.6†10.6(a)† | | Summary | | Incorporated herein by reference to the Registrant’s AnnualCurrent Report on Form 10-K for the fiscal year ended September 30, 20148-K filed November 25, 2014December 17, 2013 [Exhibit 10.9]10.2]
|
| | | | | |
10.7†10.6(b)† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 17, 2013 [Exhibit 10.1] |
| | | | |
|
| | | | |
| 10.7† | | | | |
10.8† | | Separation Agreement and Release of All Claims, entered into as of December 18, 2014, by and between The Scotts Company LLC and Barry W. Sanders | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 19, 2014 [Exhibit 10.1]* |
| | | | | |
10.9(a)10.8(a)† | | | | 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 10.2] |
| | | | |
10.9(b)† | | Consulting Agreement, dated February 12, 2016, between The Scotts Company LLC and Hanft Projects LLC2018] | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 2, 20161, 2017 filed May 11, 201610, 2017 [Exhibit 10.3]10.6] |
| | | | | |
10.10†10.8(b)† | | Incentive Compensation/Retention Award | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 30, 2017 filed February 8, 2018 [Exhibit 10.1] |
| | | | |
| 10.9(a)† | | | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 2, 20161, 2017 filed May 11, 201610, 2017 [Exhibit 10.2]10.9] |
| | | | | |
10.11(a)10.9(b)† | | 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 [Exhibit 10.1] |
| | | | |
10.11(b)† | | | | Incorporated herein by reference to the Registrant’s CurrentQuarterly Report on Form 8-K10-Q for the quarterly period ended April 1, 2017 filed May 10, 20112017 [Exhibit 10.2]10.10] |
| | | | | |
10.11(c)†10.10 | | 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, 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 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, 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 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 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) | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K/A filed May 20, 2015 [Exhibit 10.4] |
| | | | | |
10.1310.11(a) | | Purchase | | Incorporated herein by reference to the subsidiary guarantors named thereinRegistrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 filed November 28, 2017 [Exhibit 10.14(a)] |
| | | | |
| 10.11(b) | | | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 filed November 28, 2017 [Exhibit 10.14(b)] |
| | | | |
| 10.12(a)(i) | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 16, 2010 [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, 2015April 13, 2017 [Exhibit 10.1] |
| | | | | |
10.15(a) | | Amended and Restated 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 Administrative 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 Amended and Restated 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 Administrative Agent | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed March 29, 2016 [Exhibit 10.1] |
| | | | |
10.15(c)10.12(a)(ii) | | Second Amendment No. 1 to Master Repurchase Agreement with Coöperatieve Rabobank, U.A. (New York Branch), as agent and purchaser, and Sumitomo Mitsui Banking Corporation (New York Branch), as purchaser, dated as of August 25, 2016, to the Amended and Restated 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 Administrative Agent and Bank
24, 2018
| | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed August 26, 201624, 2018 [Exhibit 10.1] |
| | | | | |
10.1610.13(a)(i) | | Contribution | | Incorporated herein by reference to the Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarterly period ended January 2, 20168-K filed February 11, 2016April 13, 2017 [Exhibit 10.5]10.2] |
| | | | | |
10.1710.13(a)(ii) | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed August 31, 2017 [Exhibit 10.1] |
| | | | |
| 10.13(a)(iii) | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed August 24, 2018 [Exhibit 10.2] |
| | | | |
| 10.14 | | | | 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
|
| | | | |
| 10.15 | | Computation of Ratio of Earnings | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2017 filed November 28, 2017 [Exhibit 10.20] |
| | | | |
| 10.16 | | Purchase Agreement, dated April 12, 2018, among Sunlight Supply, Inc., Sunlight Garden Supply, Inc., Sunlight Garden Supply, ULC, IP Holdings, LLC, Craig R. Hargreaves, Kim E. Hargreaves, Hawthorne Hydroponics LLC and The Scotts Miracle-Gro Company | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2018 filed August 8, 2018 [Exhibit 10.1] |
| | | | |
10.17† | | | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed August 24, 2018 [Exhibit 10.3] |
| | | | |
| 18 | | | | * |
| | | | | |
| 21 | | | | * |
| | | | | |
| 23 | | | | * |
| | | | | |
| 24 | | | | * |
| | | | | |
| 31.1 | | | | * |
| | | | | |
| 31.2 | | | | * |
| | | | | |
| 32 | | | | * |
| | | | | |
| 101.INS | | XBRL Instance Document | | * |
| | | | | |
| 101.SCH | | XBRL Taxonomy Extension Schema | | * |
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| 101.CAL | | XBRL Taxonomy Extension Calculation Linkbase | | * |
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| 101.DEF | | XBRL Taxonomy Extension Definition Linkbase | | * |
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| 101.LAB | | XBRL Taxonomy Extension Label Linkbase | | * |
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| 101.PRE | | XBRL Taxonomy Extension Presentation Linkbase | | * |
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| * | Filed or furnished herewith. |
† | Management contract, compensatory plan or arrangement. |