The purpose of this Management's Discussion and Analysis ("MD&A") is to provide
an understanding of our financial condition and results of operations by
focusing on changes in certain key measures from year-to-year. This MD&A is
divided into the following sections:
•Executive summary
•Results of operations
•Segment results
•Liquidity and capital resources
•Non-GAAP measures
•Regulatory matters
•Critical accounting policies and estimates
Executive Summary
Through our U.S. Consumer and Other segments, we are the leading manufacturer
and marketer of branded consumer lawn and garden products in North America . Our
products are marketed under some of the most recognized brand names in the
industry. Our key consumer lawn and garden brands include Scotts® and Turf
Builder® lawn and grass seed products; Miracle-Gro® soil, plant food and
insecticide, LiquaFeed® plant food and Osmocote® gardening and landscape
products; and Ortho®, Home Defense® and Tomcat® branded insect control, weed
control and rodent control products. We are the exclusive agent of Monsanto for
the marketing and distribution of certain of Monsanto's consumer Roundup®
branded products within the United States and certain other specified countries.
We also have a presence in similar branded consumer products in China . In
addition, we own a 50% equity interest in Bonnie Plants, LLC , a joint venture
with AFC, focused on planting, growing, developing, manufacturing, distributing,
marketing, and selling live plants, plant food, fertilizer and potting soil.
Through our Hawthorne segment, we are the leading manufacturer, marketer and
distributor of lighting, nutrients, growing media, growing environments and
hardware products for indoor and hydroponic gardening in North America . Our key
brands include General Hydroponics®, Gavita®, Botanicare®, Agrolux®,
Can-Filters®, Sun System®, Gro Pro®, Mother Earth®, Hurricane®, Grower's Edge®
and Hydro-Logic®.
During fiscal 2021, we announced the creation of a newly formed subsidiary, The
Hawthorne Collective, Inc. , which will focus on strategic minority non-equity
investments in areas of the cannabis industry not currently pursued by our
Hawthorne segment. This initiative is designed to allow us, in the future, to
participate directly in a larger marketplace as the legal environment changes
over time. On August 24, 2021 , we made our initial investment under this
initiative in the form of a $150.0 six-year convertible note issued to us by
Toronto -based RIV Capital (CSE: RIV) (OTC: CNPOF), a cannabis investment and
acquisition firm listed on the Canadian Securities Exchange. During the fourth
quarter of fiscal 2021, we made additional minority non-equity investments of
$43.1 million in other entities focused on branded cannabis and high quality
genetics. These investments include conversion features that would provide us
with minority ownership interests in these entities if we exercise the
conversion features.
Our operations are divided into three reportable segments: U.S. Consumer,
Hawthorne and Other. U.S. Consumer consists of our consumer lawn and garden
business in the United States . Hawthorne consists of our indoor and hydroponic
gardening business. Other primarily consists of our consumer lawn and garden
business outside the United States . This division of reportable segments is
consistent with how the segments report to and are managed by our chief
operating decision maker. In addition, Corporate consists of general and
administrative expenses and certain other income and expense items not allocated
to the business segments. See "SEGMENT RESULTS" below for additional information
regarding our evaluation of segment performance.
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
As a leading consumer branded lawn and garden company, our product development
and marketing efforts are largely focused on providing innovative and
differentiated products and continually increasing brand and product awareness
to inspire consumers to create retail demand. We have implemented this model for
a number of years by focusing on research and development and investing
approximately 4-5% of our U.S. Consumer segment annual net sales in advertising
to support and promote our consumer lawn and garden products and brands. We
continually explore new and innovative ways to communicate with consumers. We
believe that we receive a significant benefit from these expenditures and
anticipate a similar commitment to research and development, advertising and
marketing investments in the future, with the continuing objective of driving
category growth and profitably increasing market share.
Our consumer lawn and garden net sales in any one year are susceptible to
weather conditions in the markets in which our products are sold 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. We believe that our diversified product line and our geographic
diversification reduce this risk, although to a lesser extent in a year in which
unfavorable weather is geographically widespread and extends across a
significant portion of the lawn and garden season. We also believe that weather
conditions in any one year, positive or negative, do not materially impact
longer-term category growth trends.
Due to the seasonal nature of the consumer 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 table 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
2021 2020 2019
First Quarter 15.2 % 8.9 % 9.4 %
Second Quarter 37.1 % 33.5 % 37.7 %
Third Quarter 32.7 % 36.1 % 37.1 %
Fourth Quarter 15.0 % 21.5 % 15.8 %
We 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 us to cycle forward the first three
fiscal quarter ends every six years. Fiscal 2021 was impacted by this process
and, as a result, our first quarter of fiscal 2021 had five additional days and
our fourth quarter of fiscal 2021 had six fewer days compared to the respective
quarters of fiscal 2020.
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 metrics are evaluated
with and without impairment, restructuring and other charges that do not occur
in or reflect the ordinary course of our ongoing business operations. Metrics
that exclude impairment, restructuring and other nonrecurring items are used by
management to evaluate our performance, engage in financial and operational
planning and determine incentive compensation because we believe that these
measures provide additional perspective on the performance of our underlying,
ongoing business. Refer to the "Non-GAAP Measures" section of the MD&A 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.
On August 11, 2014 , Scotts Miracle-Gro announced that its Board of Directors
authorized the repurchase of up to $500.0 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 increase to the share repurchase authorization ending on September 30,
2019 . On August 2, 2019 , the Scotts Miracle-Gro Board of Directors authorized an
extension of the share repurchase authorization through March 28, 2020 . The
amended authorization allowed for repurchases of Common Shares of up to an
aggregate amount of $1,000.0 through March 28, 2020 . During fiscal 2020
through March 28, 2020 , Scotts Miracle-Gro repurchased 0.4 million Common Shares
under this share repurchase authorization for $48.2 . There were no share
repurchases under this share repurchase authorization during fiscal 2019. From
the effective date of this share repurchase authorization in the fourth quarter
of fiscal 2014 through March 28, 2020 , Scotts Miracle-Gro repurchased
approximately 8.7 million Common Shares for $762.8 .
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) OnFebruary 6, 2020 ,Scotts Miracle-Gro announced that its Board of Directors authorized the repurchase of up to$750.0 of Common Shares fromApril 30, 2020 throughMarch 25, 2023 . There were no share repurchases under this share repurchase authorization during fiscal 2020. During fiscal 2021,Scotts Miracle-Gro repurchased 0.6 million Common Shares under this share repurchase authorization for$113.1 . OnJuly 27, 2020 , the ScottsMiracle-Gro Board of Directors approved a special cash dividend of$5.00 per Common Share, which was paid onSeptember 10, 2020 to all shareholders of record at the close of business onAugust 27, 2020 . In addition, onJuly 27, 2020 , the ScottsMiracle-Gro Board of Directors approved an increase in our quarterly cash dividend from$0.58 to$0.62 per Common Share, which was first paid in the fourth quarter of fiscal 2020. OnJuly 30, 2021 , the ScottsMiracle-Gro Board of Directors approved an increase in our quarterly cash dividend from$0.62 to$0.66 per Common Share, which was first paid in the fourth quarter of fiscal 2021. COVID-19 Response and Impacts The COVID-19 pandemic has had, and continues to have, an impact on financial markets, economic conditions, and portions of our business and industry. We have actively addressed the pandemic's ongoing impact on our employees, operations, customers, consumers, and communities, by, among other things, implementing contingency plans, making operational adjustments where necessary, and providing assistance to organizations that support front-line workers. The first priority of our pandemic response has been and remains the health, safety and well-being of our employees. Many of our employees continue to work from home. In those instances where our employees cannot perform their work at home, we have implemented additional health and safety measures and social distancing protocols, consistent with government recommendations and/or requirements, to help to ensure their safety. In addition, we implemented an interim premium pay allowance for certain associates in our field sales force and our manufacturing or distribution centers, which has paid out nearly$50.0 since the inception of the COVID-19 pandemic. During fiscal 2021, we continued to experience increased demand for many of our products compared to periods before the pandemic. The extent to which the COVID-19 pandemic will impact our business, results of operations, financial condition and cash flows in the future will depend on future developments, including the duration, spread and intensity of the pandemic, our continued ability to manufacture and distribute our products, as well as any future government actions affecting consumers and the economy generally, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. We are not able to predict the impact, if any, that the COVID-19 pandemic may have on the seasonality of our business. Although we currently expect to be able to continue operating our business as described above and we intend to continue to work with government authorities and to follow the necessary protocols to maintain the health and safety of our employees, uncertainty resulting from COVID-19 could result in an unforeseen additional disruption to our business, including our global supply chain and retailer network, and/or require us to incur additional operational costs. 28
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Results of Operations
The following table sets forth the components of earnings as a percentage of net
sales:
Year Ended September 30,
2021 % of Net Sales 2020 % of Net Sales 2019 % of Net Sales
Net sales $ 4,925.0 100.0 %
3,431.3 69.7 2,768.6 67.0 2,130.5 67.5 Cost of sales-impairment, restructuring and other 24.7 0.5 16.0 0.4 5.9 0.2 Gross profit 1,469.0 29.8 1,347.0 32.6 1,019.6 32.3 Operating expenses: Selling, general and administrative 743.5 15.1 757.8 18.3 601.3 19.1 Impairment, restructuring and other 4.3 0.1 0.8 - 7.4 0.2 Other (income) expense, net (1.8) - 3.2 0.1 1.3 - Income from operations 723.0 14.7 585.2 14.2 409.6 13.0 Equity in income of unconsolidated affiliates (14.4) (0.3) - - (3.3) (0.1) Costs related to refinancing - - 15.1 0.4 - - Interest expense 78.9 1.6 79.6 1.9 101.8 3.2 Other non-operating income, net (18.6) (0.4) (20.1) (0.5) (270.5) (8.6) Income from continuing operations before income taxes 677.1 13.7 510.6 12.4 581.6 18.4 Income tax expense from continuing operations 159.8 3.2 123.7 3.0 144.9 4.6 Income from continuing operations 517.3 10.5 386.9 9.4 436.7 13.8 Income (loss) from discontinued operations, net of tax (3.9) (0.1) 1.7 - 23.5 0.7 Net income$ 513.4 10.4 %$ 388.6 9.4 %$ 460.2 14.6 % The sum of the components may not equal due to rounding.Net Sales Net sales for fiscal 2021 were$4,925.0 , an increase of 19.2% from net sales of$4,131.6 for fiscal 2020. Net sales for fiscal 2020 increased 30.9% from net sales of$3,156.0 for fiscal 2019. These changes in net sales were attributable to the following: Year Ended September 30, 2021 2020 Volume 16.9 % 29.2 % Pricing 1.5 1.9 Foreign exchange rates 0.8 (0.2) Change in net sales 19.2 % 30.9 % The increase in net sales for fiscal 2021 as compared to fiscal 2020 was primarily driven by: •increased sales volume driven by soils, fertilizer, grass seed, mulch, controls, plant food and direct to consumer products in ourU.S. Consumer segment; lighting, nutrients, growing media, hardware and growing environment products in our Hawthorne segment; and increased sales in our Other segment; •increased pricing in ourU.S. Consumer, Hawthorne and Other segments; •increased net sales associated with the Roundup® marketing agreement; and •the favorable impact of foreign exchange rates as a result of the weakening of theU.S. dollar relative to the euro and the Canadian dollar. 29
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
The increase in net sales for fiscal 2020 as compared to fiscal 2019 was
primarily driven by:
•increased sales volume due to increased consumer demand including impacts of
the COVID-19 pandemic and driven by soils, fertilizer, grass seed, controls and
plant food products in our U.S. Consumer segment; lighting, nutrients, hardware
and growing environments products in our Hawthorne segment; and increased sales
in our Other segment; partially offset by decreased sales of mulch products in
our U.S. Consumer segment and a decrease of approximately $29.7 due to the loss
in sales from the Roundup® brand extension products that were sold to Monsanto
during fiscal 2019;
•increased pricing in our U.S. Consumer and Hawthorne segments; and
•increased net sales associated with the Roundup® marketing agreement and the
Bonnie Services Agreement;
•partially offset by the unfavorable impact of foreign exchange rates as a
result of the strengthening of the U.S. dollar relative to the Canadian dollar.
Cost of Sales
The following table shows the major components of cost of sales:
Year Ended September 30,
2021 2020 2019
Materials $ 1,962.5 $ 1,599.3 $ 1,196.4
Manufacturing labor and overhead 714.0 615.1 485.8
Distribution and warehousing 684.0
492.6 394.9 Costs related to the Roundup® commercialization agreement 70.8 61.6
53.4
Cost of sales 3,431.3 2,768.6 2,130.5
Cost of sales-impairment, restructuring and other 24.7 16.0 5.9
$ 3,456.0 $ 2,784.6 $ 2,136.4
Factors contributing to the change in cost of sales are outlined in the
following table:
Year Ended September 30,
2021 2020
Volume, product mix and other $ 545.9 $ 643.0
Material cost changes 83.0 (8.3)
Foreign exchange rates 24.6 (4.8)
Costs associated with Roundup® marketing agreement 9.2 8.2
662.7 638.1
Impairment, restructuring and other 8.7 10.1
Change in cost of sales $ 671.4 $ 648.2
The increase in cost of sales for fiscal 2021 as compared to fiscal 2020 was
primarily driven by:
•higher sales volume in our U.S. Consumer, Hawthorne and Other segments;
•higher material prices in our U.S. Consumer, Hawthorne and Other segments;
•higher transportation prices and warehousing costs included within "volume,
product mix and other" in our U.S. Consumer and Hawthorne 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;
•an increase in costs associated with the Roundup® marketing agreement; and
•an increase in impairment, restructuring and other charges as a result of costs
associated with the COVID-19 pandemic.
The increase in cost of sales for fiscal 2020 as compared to fiscal 2019 was
primarily driven by:
•higher sales volume in our U.S. Consumer, Hawthorne and Other segments;
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) •higher warehousing costs and inventory adjustments to net realizable value included within "volume, product mix and other" associated with ourU.S. Consumer segment; •an increase in costs associated with the Roundup® marketing agreement; and •an increase in impairment, restructuring and other charges as a result of costs associated with the COVID-19 pandemic; •partially offset by the favorable impact of foreign exchange rates as a result of the strengthening of theU.S. dollar relative to the Canadian dollar; •lower material prices in ourU.S. Consumer, Hawthorne and Other segments; and •lower transportation prices included within "volume, product mix and other" in ourU.S. Consumer segment. Gross Profit As a percentage of net sales, our gross profit rate was 29.8%, 32.6% and 32.3% for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Factors contributing to the change in gross profit rate are outlined in the following table: Year EndedSeptember 30, 2021
2020
Volume, product mix and other (1.8) % (0.6) % Material costs (1.7)
0.2
Roundup® commissions and reimbursements - 0.1
Pricing 0.8 0.8
(2.7) 0.5
Impairment, restructuring and other (0.1)
(0.2)
Change in gross profit rate (2.8) %
0.3%
The decrease in gross profit rate for fiscal 2021 as compared to fiscal 2020 was primarily driven by: •higher transportation prices and warehousing costs included within "volume, product mix and other" in ourU.S. Consumer and Hawthorne segments; •higher material prices in ourU.S. Consumer, Hawthorne and Other segments; and •unfavorable mix driven by higher sales growth in our Hawthorne segment relative to ourU.S. Consumer segment; •partially offset by favorable leverage of fixed costs driven by higher sales volume in ourU.S. Consumer, Hawthorne and Other segments; and •increased pricing in ourU.S. Consumer, Hawthorne and Other segments. The increase in gross profit rate for fiscal 2020 as compared to fiscal 2019 was primarily driven by: •increased pricing in ourU.S. Consumer and Hawthorne segments; •lower material prices in ourU.S. Consumer, Hawthorne and Other segments; •increased net sales associated with the Roundup® marketing agreement; •increased net sales associated with the Bonnie Services Agreement included within "volume, product mix and other" in ourU.S. Consumer segment; •lower transportation prices included within "volume, product mix and other" in ourU.S. Consumer segment; and •favorable leverage of fixed costs driven by higher sales volume in ourU.S. Consumer, Hawthorne and Other segments; •partially offset by unfavorable mix driven by higher sales growth in our Hawthorne segment relative to ourU.S. Consumer segment and increased sales of lower tier and commodity soils products within ourU.S. Consumer segment; •higher warehousing costs and inventory adjustments to net realizable value included within "volume, product mix and other" associated with ourU.S. Consumer segment; and •an increase in impairment, restructuring and other charges as a result of costs associated with the COVID-19 pandemic. 31
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
Selling, general and administrative expenses The following table presents the items of selling, general and administrative expenses (“SG&A”):
Year Ended September 30,
2021 2020 2019
Advertising $ 165.7 $ 147.4 $ 120.3
Advertising as a percentage of revenue 3.4% 3.6%
3.8 %
Research and development 45.4 39.7 39.6
Share-based compensation 40.6 57.9 38.4
Amortization of intangibles 29.1 31.5 32.9
Other selling, general and administrative 462.7 481.3 370.1
$ 743.5 $ 757.8 $ 601.3
SG&A decreased $14.3 , or 1.9%, during fiscal 2021 compared to fiscal 2020.
Share-based compensation expense decreased $17.3 , or 29.9%, in fiscal 2021 due
to a more significant increase in the expected payout percentage on long-term
performance-based awards during fiscal 2020 as compared to fiscal 2021.
Advertising expense increased $18.3 , or 12.4%, in fiscal 2021 driven by
increased media spending in our U.S. Consumer, Hawthorne and Other segments.
Other SG&A decreased $18.6 , or 3.9%, in fiscal 2021 driven by lower short-term
variable cash incentive compensation expense of $48.8 and lower corporate
spending, partially offset by increases in various categories supporting the
continued growth of the business including information technology, strategy and
people costs.
SG&A increased $156.5 , or 26.0%, during fiscal 2020 compared to fiscal 2019.
Advertising expense increased $27.1 , or 22.5%, in fiscal 2020 driven by
increased media spending in our U.S. Consumer and Hawthorne segments.
Share-based compensation expense increased $19.5 , or 50.8%, in fiscal 2020 due
to an increase in the expected payout percentage on long-term performance-based
awards. Other SG&A increased $111.2 , or 30.0%, in fiscal 2020 driven by higher
short-term variable cash incentive compensation expense of $67.6 , higher selling
expense of $18.6 , higher one-time payments and retirement contributions to our
hourly and certain salaried associates who do not participate in our short-term
variable cash incentive compensation plans and higher contributions supporting
community initiatives and charities.
Impairment, Restructuring and Other
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) for each of the periods presented:
Year Ended September 30,
2021 2020 2019
Cost of Depreciation of Sales, Restructuring and Others: COVID-19 Costs
$ 25.0 $ 15.5 $ - Restructuring and other charges (recoveries), net (0.3) (0.1) 5.1 Intangible asset and property, plant and equipment impairments - 0.6 0.8 Operating expenses: COVID-19 related costs 4.2 3.9 - Restructuring and other charges (recoveries), net 0.1 (3.1) 7.4 Impairment, restructuring and other charges from continuing operations 29.0 16.8 13.3
Restructuring and other charges (recoveries), net, of discontinued operations
- (3.1) (35.8) Total impairment, restructuring and other charges (recoveries)$ 29.0 $ 13.7 $ (22.5) COVID-19 In response to the COVID-19 pandemic, we implemented measures intended to protect the health and safety of our employees and maintain our ability to provide products to our customers as described in additional detail above under "COVID-19 Response and Impacts." During fiscal 2021, we incurred costs of$29.2 associated with the COVID-19 pandemic primarily related to premium pay. We incurred costs of$21.2 in ourU.S. Consumer segment,$3.2 in our Hawthorne segment and$0.6 in our Other segment in the "Cost of sales-impairment, restructuring and other" line in the Consolidated Statements 32
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) of Operations during fiscal 2021. We incurred costs of$4.0 in ourU.S. Consumer segment and$0.2 in our Other segment in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2021. During fiscal 2020, we incurred costs of$19.4 associated with the COVID-19 pandemic primarily related to premium pay. We incurred costs of$12.4 in ourU.S. Consumer segment,$2.6 in our Hawthorne segment and$0.5 in our Other segment in the "Cost of sales-impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2020. We incurred costs of$3.8 in ourU.S. Consumer segment and$0.1 in our Other segment in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2020. Project Catalyst During fiscal 2018 we announced the launch of an initiative called Project Catalyst, which was a company-wide restructuring effort to reduce operating costs throughout ourU.S. Consumer, Hawthorne and Other segments and drive synergies from acquisitions within our Hawthorne segment. Costs incurred during fiscal 2021 and fiscal 2020 related to Project Catalyst were not material. Costs incurred to date since the inception of Project Catalyst are$24.5 for our Hawthorne segment,$13.9 for ourU.S. Consumer segment,$1.3 for our Other segment and$2.8 for Corporate. Additionally, during fiscal 2020, we received$2.6 from the final settlement of escrow funds related to a previous acquisition within the Hawthorne segment that was recognized in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations. During fiscal 2019, we incurred charges of$13.7 related to Project Catalyst. We incurred charges of$1.1 in ourU.S. Consumer segment,$4.2 in our Hawthorne segment and$0.6 in our Other segment in the "Cost of sales-impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2019 related to employee termination benefits, facility closure costs and impairment of property, plant and equipment. We incurred charges of$0.5 in ourU.S. Consumer segment,$3.9 in our Hawthorne segment,$0.6 in our Other segment and$2.8 at Corporate in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2019 related to employee termination benefits and facility closure costs. Other We recognized insurance recoveries related to the previously disclosed legal matter In re Morning Song Bird Food Litigation of$1.5 and$13.4 during fiscal 2020 and fiscal 2019, respectively, in the "Income (loss) from discontinued operations, net of tax" line in the Consolidated Statements of Operations. In addition, during fiscal 2019, we recognized a favorable adjustment of$22.5 in the "Income (loss) from discontinued operations, net of tax" line in the Consolidated Statements of Operations as a result of the final resolution of the previously disclosed settlement agreement related to this matter. Refer to "NOTE 20. CONTINGENCIES" of the Notes to the Consolidated Financial Statements included in this Form 10-K for more information. Other (Income) Expense, net Other (income) expense is comprised of activities outside our normal business operations, such as royalty income from the licensing of certain of our brand names, foreign exchange transaction gains and losses and gains and losses from the disposition of non-inventory assets. Other (income) expense was$(1.8) ,$3.2 and$1.3 in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The change for fiscal 2021 was primarily due to foreign exchange transaction gains and losses. The change for fiscal 2020 was primarily due to losses on long-lived assets. Income from Operations Income from operations was$723.0 in fiscal 2021, an increase of 23.5% compared to$585.2 in fiscal 2020. The increase was driven by higher net sales, lower SG&A and higher other income, partially offset by a decrease in gross profit rate and higher impairment, restructuring and other charges. Income from operations was$585.2 in fiscal 2020, an increase of 42.9% compared to$409.6 in fiscal 2019. The increase was driven by higher net sales and an increase in gross profit rate, partially offset by higher SG&A. Equity in Income of Unconsolidated Affiliates Equity in income of unconsolidated affiliates was$14.4 , zero and$3.3 in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. We acquired a 50% equity interest inBonnie Plants, LLC onDecember 31, 2020 . Our interest is accounted for using the equity method of accounting, with our proportionate share ofBonnie Plants, LLC earnings subsequent toDecember 31, 2020 reflected in the Consolidated Statements of Operations. The decrease for fiscal 2020 was attributable to theApril 1, 2019 sale of our noncontrolling equity interest in an unconsolidated subsidiary whose products support the professionalU.S. industrial, turf and ornamental market (the "IT&O Joint Venture"). Refer to "NOTE 9. INVESTMENT IN UNCONSOLIDATED AFFILIATES" of the Notes to the Consolidated Financial Statements included in this Form 10-K for more information regarding the IT&O Joint Venture. 33
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Costs Related to Refinancing Costs related to refinancing were zero,$15.1 and zero in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The costs incurred in fiscal 2020 were associated with the redemption of our 6.000% Senior Notes due 2023 (the "6.000% Senior Notes"), and are comprised of$12.0 of redemption premium and$3.1 of unamortized bond issuance costs that were written off. Refer to "NOTE 12. DEBT" of the Notes to the Consolidated Financial Statements included in this Annual Report on Form 10-K for more information regarding the redemption of the 6.000% Senior Notes. Interest Expense Interest expense was$78.9 in fiscal 2021, a decrease of 0.9% compared to$79.6 in fiscal 2020. The decrease was driven by a decrease in our weighted average interest rate of 61 basis points, partially offset by an increase in average borrowings of$289.0 . The decrease in our weighted average interest rate was driven by lower borrowing rates on the Fifth A&R Credit Agreement. The increase in average borrowings was primarily driven by higher inventory production, capital expenditures and acquisition activity. Interest expense was$79.6 in fiscal 2020, a decrease of 21.8% compared to$101.8 in fiscal 2019. The decrease was driven by a decrease in average borrowings of$256.4 and a decrease in our weighted average interest rate of 50 basis points. The decrease in average borrowings was primarily driven by the application of the proceeds from the sale of our approximately 30% equity interest inOutdoor Home Services Holdings LLC , a lawn services joint venture between the Company andTruGreen Holding Corporation (the "TruGreen Joint Venture"), the payoff of second lien term loan financing by the TruGreen Joint Venture, the sale of our noncontrolling equity interest in the IT&O Joint Venture and the sale of the Roundup® brand extension assets to reduce our indebtedness. The decrease in our weighted average interest rate was driven by lower borrowing rates on the Fifth A&R Credit Agreement, the issuance of the 4.500% Senior Notes and the redemption of the 6.000% Senior Notes. Refer to "NOTE 9. INVESTMENT IN UNCONSOLIDATED AFFILIATES" of the Notes to the Consolidated Financial Statements included in this Form 10-K for more information regarding the TruGreen Joint Venture. Other Non-Operating Income, net Other non-operating income was$18.6 ,$20.1 and$270.5 in fiscal 2021, fiscal 2020 and fiscal 2019, respectively, which included interest income of$4.1 ,$7.6 and$8.6 for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. OnDecember 31, 2020 , we acquired a 50% equity interest inBonnie Plants, LLC in exchange for cash payments of$102.3 , forgiveness of our outstanding loan receivable with AFC and surrender of our options to increase our economic interest in the Bonnie Plants business. Our loan receivable with AFC, which was previously recognized in the "Other assets" line in the Consolidated Balance Sheets, had a carrying value of$66.4 onDecember 31, 2020 . We recognized a gain of$12.5 during the first quarter of fiscal 2021 to write-up the value of the loan to its closing date fair value of$78.9 . During the fourth quarter of fiscal 2020, we recognized an increase in the fair value of the Bonnie Option of$12.0 driven by an increase in sales and profits of the Bonnie Business. OnMarch 19, 2019 , we entered into an agreement under which we sold, toTruGreen Companies L.L.C. , a subsidiary ofTruGreen Holding Corporation , all of our approximately 30% equity interest in the TruGreen Joint Venture. In connection with this transaction, we received cash proceeds of$234.2 related to the sale of our equity interest in the TruGreen Joint Venture and$18.4 related to the payoff of second lien term loan financing by the TruGreen Joint Venture. During fiscal 2019, we also received a distribution from the TruGreen Joint Venture intended to cover certain required tax payments of$3.5 , which was classified as an investing activity in the Consolidated Statements of Cash Flows. During fiscal 2019, we recognized a pre-tax gain of$259.8 related to this sale. The cash proceeds were applied to reduce our indebtedness. During fiscal 2019, we made cash tax payments of$99.5 associated with this disposition. OnApril 1, 2019 , we sold all of our noncontrolling equity interest in the IT&O Joint Venture for cash proceeds of$36.6 . During fiscal 2019, we recognized a pre-tax gain of$2.9 related to this sale. During fiscal 2019, we received a distribution of net earnings from the IT&O Joint Venture of$4.9 , which was classified as an operating activity in the Consolidated Statements of Cash Flows. During the second quarter of fiscal 2019, we recognized a charge of$2.5 related to the write-off of accumulated foreign currency translation loss adjustments of a foreign subsidiary that was substantially liquidated. 34
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Income Tax Expense 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,
2021 2020 2019
Statutory income tax rate 21.0 % 21.0 % 21.0 %
Effect of foreign operations (0.1) (0.7) 0.3
State taxes, net of federal benefit 3.9 3.5 1.8
Effect of other permanent differences (1.1) - (0.2)
Research and Experimentation and other federal tax credits (0.2) (0.3) (0.3)
Effect of tax contingencies - 0.1 1.9
Other 0.1 0.6 0.4
Effective income tax rate 23.6 % 24.2 % 24.9 %
Income from Continuing Operations
Income from continuing operations was $517.3 , or $9.03 per diluted share, in
fiscal 2021 compared to $386.9 , or $6.78 per diluted share, in fiscal 2020. The
increase was driven by higher net sales, lower SG&A, higher other income, higher
equity in income of unconsolidated affiliates and lower costs related to
refinancing, partially offset by a decrease in gross profit rate and higher
impairment, restructuring and other charges.
Diluted average common shares used in the diluted income per common share
calculation were 57.2 million for fiscal 2021 compared to 56.9 million for
fiscal 2020. The increase was primarily the result of the exercise and issuance
of share-based compensation awards, partially offset by Common Share repurchase
activity. Dilutive equivalent shares for fiscal 2021 and fiscal 2020 were 1.5
million and 1.2 million, respectively.
Income from continuing operations was $386.9 , or $6.78 per diluted share, in
fiscal 2020 compared to $436.7 , or $7.77 per diluted share, in fiscal 2019. The
decrease was driven by lower other non-operating income, higher SG&A and higher
costs related to refinancing, partially offset by higher net sales, an increase
in gross profit rate and lower interest expense.
Diluted average common shares used in the diluted income per common share
calculation were 56.9 million for fiscal 2020 compared to 56.3 million for
fiscal 2019. The increase was primarily the result of the exercise and issuance
of share-based compensation awards, partially offset by Common Share repurchase
activity. Dilutive equivalent shares for fiscal 2020 and fiscal 2019 were 1.2
million and 0.8 million, respectively.
Income (Loss) from Discontinued Operations, net of tax
Income (loss) from discontinued operations, net of tax, was $(3.9) , $1.7 and
$23.5 for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. On August 31,
2017 , we completed the sale 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. The transaction included contingent consideration with a
maximum payout of $23.8 and an initial fair value of $18.2 , the payment of which
depended on the achievement of certain performance criteria by the International
Business following the closing of the transaction through fiscal 2020. During
fiscal 2021, we agreed to accept a contingent consideration payout of $6.0 ,
which will be paid to us prior to March 31, 2022 . This amount is recorded in the
"Prepaid and other current assets" line in the Consolidated Balance Sheets as of
September 30, 2021 . We recorded a pre-tax charge of $12.2 during fiscal 2021 to
write-down the contingent consideration receivable to the agreed upon payout
amount.
We recognized insurance recoveries related to the previously disclosed legal
matter In re Morning Song Bird Food Litigation of $1.5 and $13.4 during fiscal
2020 and fiscal 2019, respectively. In addition, during fiscal 2019, we
recognized a favorable pre-tax adjustment of $22.5 as a result of the final
resolution of the previously disclosed settlement agreement related to this
matter. Refer to "NOTE 20. CONTINGENCIES" of the Notes to the Consolidated
Financial Statements included in this Annual Report on Form 10-K for more
information.
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Segment Results
During the first quarter of fiscal 2021, we changed our internal organization
structure such that AeroGrow is now managed by and reported within our U.S.
Consumer segment. Within our U.S. Consumer segment, AeroGrow is integrated into
our overall direct to consumer focus and strategy. AeroGrow was previously
managed by and reported within our Hawthorne segment. The prior period amounts
have been reclassified to conform to the new organization structure.
The performance of each reportable segment is evaluated based on several
factors, including income (loss) from continuing operations before income taxes,
amortization, impairment, restructuring and other charges ("Segment Profit
(Loss)"), which is a non-GAAP financial measure. Senior management uses Segment
Profit (Loss) to evaluate segment performance because they believe this measure
is indicative of performance trends and the overall earnings potential of each
segment.
The following table sets forth net sales by segment:
Year Ended September 30,
2021 2020 2019
U.S. Consumer $ 3,197.7 $ 2,883.5 $ 2,311.7
Hawthorne 1,424.2 1,023.1 640.6
Other 303.1 225.0 203.7
Consolidated $ 4,925.0 $ 4,131.6 $ 3,156.0
The following table sets forth Segment Profit (Loss) as well as a reconciliation
to income from continuing operations before income taxes, the most directly
comparable GAAP measure:
Year Ended September 30,
2021 2020 2019
U.S. Consumer $ 726.7 $ 694.3 $ 526.7
Hawthorne 163.8 111.9 54.6
Other 42.1 11.7 10.3
Total Segment Profit (Non-GAAP) 932.6 817.9 591.6
Corporate (149.7) (183.4) (135.3)
Intangible asset amortization (30.9) (32.5) (33.4)
Impairment, restructuring and other (29.0) (16.8) (13.3)
Equity in income of unconsolidated affiliates 14.4 - 3.3
Costs related to refinancing - (15.1) -
Interest expense (78.9) (79.6) (101.8)
Other non-operating income, net 18.6 20.1 270.5
Income from continuing operations before income
taxes (GAAP) $ 677.1 $ 510.6 $ 581.6
U.S. Consumer
U.S. Consumer segment net sales were $3,197.7 in fiscal 2021, an increase of
10.9% from fiscal 2020 net sales of $2,883.5 . The increase was driven by the
favorable impacts of volume and pricing of 10.2% and 0.7%, respectively. The
increase in sales volume for fiscal 2021 was driven by soils, fertilizer, grass
seed, mulch, controls, plant food and direct to consumer products as well as
increased net sales associated with the Roundup® marketing agreement.
U.S. Consumer Segment Profit was $726.7 in fiscal 2021, an increase of 4.7% from
fiscal 2020 Segment Profit of $694.3 . The increase for fiscal 2021 was primarily
due to higher net sales, partially offset by a lower gross profit rate and
higher SG&A.
U.S. Consumer segment net sales were $2,883.5 in fiscal 2020, an increase of
24.7% from fiscal 2019 net sales of $2,311.7 . The increase was driven by the
favorable impacts of volume and pricing of 23.2% and 1.5%, respectively. The
increase in sales volume for fiscal 2020 was driven by soils, fertilizer, grass
seed, controls and plant food products, partially offset by decreased sales of
mulch products and the loss in sales from the Roundup® brand extension products
that were sold to Monsanto during fiscal 2019.
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)U.S. Consumer Segment Profit was$694.3 in fiscal 2020, an increase of 31.8% from fiscal 2019 Segment Profit of$526.7 . The increase for fiscal 2020 was primarily due to higher net sales and a higher gross profit rate, partially offset by higher SG&A.Hawthorne Hawthorne segment net sales were$1,424.2 in fiscal 2021, an increase of 39.2% from fiscal 2020 net sales of$1,023.1 . The increase was driven by the favorable impacts of volume, pricing and foreign exchange rates of 35.1%, 3.4% and 0.7%, respectively. The increase in sales volume for fiscal 2021 was driven by lighting, nutrients, growing media, hardware and growing environment products. Hawthorne Segment Profit was$163.8 in fiscal 2021, an increase of 46.4% from fiscal 2020 Segment Profit of$111.9 . The increase for fiscal 2021 was driven by higher net sales, partially offset by a lower gross profit rate and higher SG&A. Hawthorne segment net sales were$1,023.1 in fiscal 2020, an increase of 59.7% from fiscal 2019 net sales of$640.6 . The increase was driven by the favorable impacts of volume and pricing of 56.0% and 3.7%, respectively. The increase in sales volume for fiscal 2020 was driven by lighting, nutrients, hardware and growing environment products. Hawthorne Segment Profit was$111.9 in fiscal 2020, an increase of 104.9% from fiscal 2019 Segment Profit of$54.6 . The increase for fiscal 2020 was driven by higher net sales and a higher gross profit rate, partially offset by higher SG&A. Other Other segment net sales were$303.1 in fiscal 2021, an increase of 34.7% from fiscal 2020 net sales of$225.0 . The increase was driven by the favorable impacts of volume, foreign exchange rates and pricing of 20.6%, 11.2% and 2.9%, respectively. Other Segment Profit was$42.1 in fiscal 2021, an increase of 259.8% from fiscal 2020 Segment Profit of$11.7 . The increase was driven by higher net sales and a higher gross profit rate, partially offset by higher SG&A. Other segment net sales were$225.0 in fiscal 2020, an increase of 10.5% from fiscal 2019 net sales of$203.7 . The increase was driven by the favorable impact of volume of 13.9%, partially offset by the unfavorable impacts of foreign exchange rates and pricing of 3.1% and 0.4%, respectively. Other Segment Profit was$11.7 in fiscal 2020, an increase of 13.6% from fiscal 2019 Segment Profit of$10.3 . The increase was driven by higher net sales, partially offset by higher SG&A. Corporate Corporate expenses were$149.7 in fiscal 2021, a decrease of 18.4% from fiscal 2020 expenses of$183.4 . The decrease was driven by lower short-term variable cash incentive compensation expense, lower corporate spending and lower share-based compensation expense. Corporate expenses were$183.4 in fiscal 2020, an increase of 35.6% from fiscal 2019 expenses of$135.3 . The increase was driven by higher short-term variable cash incentive compensation expense, an increase in the expected payout percentage on long-term performance-based awards, higher one-time payments and retirement contributions to our hourly and certain salaried associates who do not participate in our short-term variable cash incentive compensation plans and higher contributions supporting community initiatives and charities. Liquidity and Capital Resources The following table summarizes cash activities for the years endedSeptember 30 : 2021 2020
2019
Net cash provided by operating activities$ 271.5 $ 558.0 $ 226.8 Net cash (used in) provided by investing activities (538.6) 46.9
255.2
Net cash provided by (used in) financing activities 494.0 (607.1)
(496.5)
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Operating Activities Cash provided by operating activities totaled$271.5 for fiscal 2021, a decrease of$286.5 as compared to$558.0 for fiscal 2020. This decrease was driven by higher inventory production, higher short-term variable cash incentive compensation payouts and higher tax payments during fiscal 2021, partially offset by higher net income and lower interest payments. Higher inventory production was driven by the growth in net sales and an effort to build inventory levels to meet expected future demand. Fiscal 2021 was also impacted by extended payment terms with several of our major vendors across theU.S. Consumer and Hawthorne segments, as well as Monsanto, for payments originally due in the final weeks of fiscal 2021 and paid in the first quarter of fiscal 2022. Cash provided by operating activities totaled$558.0 for fiscal 2020, an increase of$331.2 as compared to$226.8 for fiscal 2019. This increase was driven by higher net income and lower interest payments during fiscal 2020, payments made in connection with litigation settlements during fiscal 2019 of$73.9 which were partially offset by insurance reimbursements of$13.4 received during fiscal 2019, and lower tax payments including$99.5 of payments made in connection with the sale of our equity interest in the TruGreen Joint Venture during fiscal 2019, partially offset by higher short-term variable cash incentive compensation payouts and higher SG&A during fiscal 2020. The seasonal nature of ourNorth America consumer lawn and garden business generally requires cash to fund significant increases in inventories during the first half of the fiscal year. Receivables and payables also build substantially in our second quarter of the fiscal year in line with the timing of sales to support our retailers' spring selling season. Investing Activities Cash used in investing activities totaled$538.6 for fiscal 2021 as compared to cash provided by investing activities of$46.9 for fiscal 2020. Cash used for investments in property, plant and equipment during fiscal 2021 was$106.9 . During fiscal 2021, we acquired a 50% equity interest inBonnie Plants, LLC in exchange for cash payments of$102.3 , as well as non-cash investing activities that included forgiveness of the Company's outstanding loan receivable with AFC and surrender of our options to increase our economic interest in the Bonnie Plants business. We also made payments of$127.8 in connection with the acquisitions ofHydro-Logic Purification Systems, Inc. ,Rhizoflora, Inc. and other contract and license rights, and made payments of$193.1 in connection with minority non-equity convertible debt investments. In addition, we paid cash of$8.7 associated with currency forward contracts during fiscal 2021. Cash provided by investing activities totaled$46.9 for fiscal 2020 as compared to$255.2 for fiscal 2019. Cash used for investments in property, plant and equipment during fiscal 2020 was$62.7 . During fiscal 2020, we received proceeds of$115.5 from the sale of the Roundup® brand extension assets. In addition, during fiscal 2020, we made loan investments of$3.4 and paid cash of$2.9 associated with currency forward contracts. For the three fiscal years endedSeptember 30, 2021 , our capital spending was allocated as follows: 72% for expansion and maintenance of existing productive assets; 7% for new productive assets; 16% to expand our information technology and transformation and integration capabilities; and 5% for corporate assets. We expect fiscal 2022 capital expenditures to be higher than 2021 due to strategic investments supporting growth and existing infrastructure. Financing Activities Cash provided by financing activities totaled$494.0 for fiscal 2021 as compared to cash used in financing activities of$607.1 for fiscal 2020. This increase was driven by the issuance of$500.0 aggregate principal amount of 4.000% Senior Notes and$400.0 aggregate principal amount of 4.375% Senior Notes, a decrease in net repayments of our Fifth A&R Credit Facilities (as defined below) of$72.8 and a decrease in dividends paid of$268.2 as a result of the special cash dividend paid in fiscal 2020, partially offset by an increase in repurchases of our Common Shares of$76.1 and payments of$17.5 associated with the acquisition of the remaining outstanding shares ofAeroGrow . Cash used in financing activities totaled$607.1 in fiscal 2020 as compared to$496.5 in fiscal 2019. This change was the result of an increase in dividends paid of$286.7 driven by the special cash dividend of$5.00 per Common Share paid onSeptember 10, 2020 , an increase in repurchases of our Common Shares of$50.1 during fiscal 2020, the redemption of all$400.0 aggregate principal amount of 6.000% Senior Notes, an increase in financing and issuance fees of$18.5 and a decrease in cash received from the exercise of stock options of$3.8 , partially offset by the issuance of$450.0 aggregate principal amount of 4.500% Senior Notes and net repayments of our Fifth A&R Credit Facilities of$191.1 during fiscal 2020 as compared to net repayments of our Fifth A&R Credit Facilities of$389.3 during fiscal 2019. 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$244.1 and$16.6 atSeptember 30, 2021 and 2020, respectively, included$15.9 and$9.4 , respectively, 38
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) held by controlled foreign corporations. As ofSeptember 30, 2021 , we maintain our assertion of indefinite reinvestment of the earnings of all material foreign subsidiaries. Borrowing Agreements Credit Facilities Our primary sources of liquidity are cash generated by operations and borrowings under our credit facilities, which are guaranteed by substantially all ofScotts Miracle-Gro's domestic subsidiaries. We maintain the Fifth A&R Credit Agreement that provides senior secured loan facilities in the aggregate principal amount of$2,300.0 , comprised of a revolving credit facility of$1,500.0 and a term loan in the original principal amount of$800.0 (the "Fifth A&R Credit Facilities"). The Fifth A&R Credit Agreement is available for issuance of letters of credit up to$75.0 and will terminate onJuly 5, 2023 . AtSeptember 30, 2021 , we had letters of credit outstanding in the aggregate principal amount of$19.8 , and$1,480.2 of borrowing availability under the Fifth A&R Credit Agreement. The weighted average interest rates on average borrowings under the Fifth A&R Credit Agreement were 1.9%, 3.3% and 4.6% for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The 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 average total indebtedness divided by our earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted pursuant to the terms of the Fifth A&R Credit Agreement ("Adjusted EBITDA"). The maximum leverage ratio is 4.50. Our leverage ratio was 2.70 atSeptember 30, 2021 . The Fifth A&R Credit Agreement also contains an affirmative covenant regarding our interest coverage ratio determined as of the end of each of our 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 endedSeptember 30, 2021 . Our interest coverage ratio was 10.63 for the twelve months endedSeptember 30, 2021 . As ofSeptember 30, 2021 , we were in compliance with these financial covenants. The Fifth A&R Credit Agreement allows us to make unlimited restricted payments (as defined in the Fifth A&R Credit Agreement), including dividend payments on, and repurchases of, our Common Shares, as long as the leverage ratio resulting from the making of such restricted payments is 4.00 or less. Otherwise, we may make further restricted payments in an aggregate amount for each fiscal year not to exceed$225.0 . We continue to monitor our compliance with the leverage ratio, interest coverage ratio and other covenants contained in the Fifth 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 2022. 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 the Fifth A&R Credit Agreement, potentially causing us to have to seek an amendment or waiver from our lending group which could result in repricing of the Fifth A&R Credit Agreement. 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. Senior Notes OnDecember 15, 2016 , we issued$250.0 aggregate principal amount of 5.250% Senior Notes. 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 ofJune 15 andDecember 15 of each year. Substantially all of our directly and indirectly owned domestic subsidiaries serve as guarantors of the 5.250% Senior Notes. OnOctober 22, 2019 , we issued$450.0 aggregate principal amount of 4.500% Senior Notes. The net proceeds of the offering were used to redeem all of our outstanding 6.000% Senior Notes and for general corporate purposes. The 4.500% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 4.500% Senior Notes have interest payment dates ofApril 15 andOctober 15 of each year. All of our domestic subsidiaries that serve as guarantors of the 5.250% Senior Notes also serve as guarantors of the 4.500% Senior Notes. OnOctober 23, 2019 , we redeemed all of our outstanding 6.000% Senior Notes for a redemption price of$412.5 , comprised of$0.5 of accrued and unpaid interest,$12.0 of redemption premium, and$400.0 for outstanding principal amount. The$12.0 redemption premium was recognized in the "Costs related to refinancing" line on the Consolidated Statements of Operations during the first quarter of fiscal 2020. Additionally, we had$3.1 in unamortized bond issuance costs associated with the 6.000% Senior Notes, which were written-off during the first quarter of fiscal 2020 and were recognized in the "Costs related to refinancing" line in the Consolidated Statements of Operations. 39
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
On March 17, 2021 , we issued $500.0 aggregate principal amount of 4.000% Senior
Notes. The net proceeds of the offering were used to reduce borrowings under the
Fifth A&R Credit Facilities. The 4.000% Senior Notes represent general unsecured
senior obligations and rank equal in right of payment with our existing and
future unsecured senior debt. The 4.000% Senior Notes have interest payment
dates of April 1 and October 1 of each year, commencing October 1, 2021 . All of
our domestic subsidiaries that serve as guarantors of the 5.250% Senior Notes
also serve as guarantors of the 4.000% Senior Notes.
On August 13, 2021 , we issued $400.0 aggregate principal amount of 4.375% Senior
Notes due 2032. The net proceeds of the offering were used to reduce borrowings
under the Fifth A&R Credit Facilities and for other general corporate purposes.
The 4.375% Senior Notes represent general unsecured senior obligations and rank
equal in right of payment with our existing and future unsecured senior debt.
The 4.375% Senior Notes have interest payment dates of February 1 and August 1
of each year, commencing February 1, 2022 . All of our domestic subsidiaries that
serve as guarantors of the 5.250% Senior Notes also serve as guarantors of the
4.375% Senior Notes.
Receivables Facility
We also maintain a Master Repurchase Agreement (including the annexes thereto,
the "Repurchase Agreement") and a Master Framework Agreement, as amended (the
"Framework Agreement" and, together with the Repurchase Agreement, the
"Receivables Facility"). Under the Receivables Facility, we may sell a portfolio
of available and eligible outstanding customer accounts receivable to the
purchasers and simultaneously agree to repurchase the receivables on a weekly
basis. The eligible accounts receivable consist of accounts receivable generated
by sales to three specified customers. The eligible amount of customer accounts
receivables which may be sold under the Receivables Facility is $400.0 and the
commitment amount during the seasonal commitment period beginning on
February 25, 2022 and ending on June 17, 2022 is $160.0 . The Receivables
Facility expires on August 19, 2022 .
We account for the sale of receivables under the Receivables Facility as
short-term debt and continue to carry the receivables on our Consolidated
Balance Sheets, primarily as a result of our requirement to repurchase
receivables sold. As of September 30, 2021 and 2020, there were zero and $20.0 ,
respectively, in borrowings on receivables pledged as collateral under the
Receivables Facility, and the carrying value of the receivables pledged as
collateral was zero and $22.3 , respectively.
Interest Rate Swap Agreements
We enter into interest rate swap agreements with major financial institutions
that effectively convert a portion of our variable rate debt to a fixed rate.
Interest payments made between the effective date and expiration date are hedged
by the swap agreements. Swap agreements that were hedging interest payments as
of September 30, 2021 and 2020 had a maximum total U.S. dollar equivalent
notional amount of $600.0 . The notional amount, effective date, expiration date
and rate of each of the swap agreements outstanding at September 30, 2021 are
shown in the table below:
Effective Expiration Fixed
Notional Amount Date (a) Date Rate
200 11/7/2018 10/7/2021 2.98 %
100 12/21/2020 6/20/2023 1.36 %
300 (b) 1/7/2021 6/7/2023 1.34 %
200 10/7/2021 6/7/2023 1.37 %
200 (b) 1/20/2022 6/20/2024 0.58 %
200 6/7/2023 6/8/2026 0.85 %
(a)The effective date refers to the date on which interest payments are first
hedged by the applicable swap agreement.
(b)Notional amount adjusts in accordance with a specified seasonal schedule.
This represents the maximum notional amount at any point in time.
Availability and Use of Cash
We believe that our cash flows from operations and borrowings under our
agreements described herein will be sufficient to meet debt service, capital
expenditures and working capital needs for the foreseeable future. However, we
cannot ensure that our business will generate sufficient cash flow from
operations or that future borrowings will be available under our borrowing
agreements in amounts sufficient to pay indebtedness or fund other liquidity
needs. Additionally, the extent to which the COVID-19 pandemic will ultimately
impact our business, results of operations, financial condition and cash flows
depends on future developments that are highly uncertain, rapidly evolving and
difficult to predict at this time. Actual results of operations will depend on
numerous factors, many of which are beyond our control as further discussed in
"Item 1A. RISK FACTORS - Risks Related to Our M&A, Lending and Financing
Activities - Our indebtedness could limit our flexibility and adversely
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) affect our financial condition" and "Item 1A. RISK FACTORS - Risks Related to Our Business - The effects of the ongoing coronavirus (COVID-19) pandemic and any possible recurrence of other similar types of pandemics, or any other widespread public health emergencies, could have a material adverse effect on our business, results of operations, financial condition and/or cash flows" of this Annual Report on Form 10-K. Financial Disclosures About Guarantors and Issuers ofGuaranteed Securities The 5.250% Senior Notes, 4.500% Senior Notes, 4.000% Senior Notes and 4.375% Senior Notes (collectively, the "Senior Notes") were issued byScotts Miracle-Gro onDecember 15, 2016 ,October 22, 2019 ,March 17, 2021 andAugust 13, 2021 , respectively. The Senior Notes are guaranteed by certain consolidated domestic subsidiaries ofScotts Miracle-Gro (collectively, the "Guarantors") and, therefore, we report summarized financial information in accordance with SEC Regulation S-X, Rule 13-01, "Guarantors and Issuers of Guaranteed Securities Registered or Being Registered." The guarantees are "full and unconditional," as those terms are used in Regulation S-X, Rule 3-10(b)(3), except that a Guarantor's guarantee will be released in certain circumstances set forth in the indentures governing the Senior Notes, such as: (i) upon any sale or other disposition of all or substantially all of the assets of the Guarantor (including by way of merger or consolidation) to any person other thanScotts Miracle-Gro or any "restricted subsidiary" under the applicable indenture; (ii) if the Guarantor merges with and intoScotts Miracle-Gro , withScotts Miracle-Gro surviving such merger; (iii) if the Guarantor is designated an "unrestricted subsidiary" in accordance with the applicable indenture or otherwise ceases to be a "restricted subsidiary" (including by way of liquidation or dissolution) in a transaction permitted by such indenture; (iv) upon legal or covenant defeasance; (v) at the election ofScotts Miracle-Gro following the Guarantor's release as a guarantor under the Fifth A&R Credit Agreement, except a release by or as a result of the repayment of the Fifth A&R Credit Agreement; or (vi) if the Guarantor ceases to be a "restricted subsidiary" and the Guarantor is not otherwise required to provide a guarantee of the Senior Notes pursuant to the applicable indenture. Our foreign subsidiaries and certain of our domestic subsidiaries are not guarantors (collectively, the "Non-Guarantors") on the Senior Notes. Payments on the Senior Notes are only required to be made byScotts Miracle-Gro and the Guarantors. As a result, no payments are required to be made from the assets of the Non-Guarantors, unless those assets are transferred by dividend or otherwise toScotts Miracle-Gro or a Guarantor. In the event of a bankruptcy, insolvency, liquidation or reorganization of any of the Non-Guarantors, holders of their indebtedness, including their trade creditors and other obligations, will be entitled to payment of their claims from the assets of the Non-Guarantors before any assets are made available for distribution toScotts Miracle-Gro or the Guarantors. As a result, the Senior Notes are effectively subordinated to all the liabilities of the Non-Guarantors. The guarantees may be subject to review under federal bankruptcy laws or relevant state fraudulent conveyance or fraudulent transfer laws. In certain circumstances, the court could void the guarantee, subordinate the amounts owing under the guarantee, or take other actions detrimental to the holders of the Senior Notes. As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is satisfied. A court would likely find that a Guarantor did not receive reasonably equivalent value or fair consideration for its guarantee to the extent such Guarantor did not obtain a reasonably equivalent benefit from the issuance of the Senior Notes. The measure of insolvency varies depending upon the law of the jurisdiction that is being applied. Regardless of the measure being applied, a court could determine that a Guarantor was insolvent on the date the guarantee was issued, so that payments to the holders of the Senior Notes would constitute a preference, fraudulent transfer or conveyances on other grounds. If a guarantee is voided as a fraudulent conveyance or is found to be unenforceable for any other reason, the holders of the Senior Notes will not have a claim against the Guarantor. Each guarantee contains a provision intended to limit the Guarantor's liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent conveyance. However, there can be no assurance as to what standard a court will apply in making a determination of the maximum liability of each Guarantor. Moreover, this provision may not be effective to protect the guarantees from being voided under fraudulent conveyance laws. There is a possibility that the entire guarantee may be set aside, in which case the entire liability may be extinguished. 41
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
The following tables present summarized financial information on a combined
basis for Scotts Miracle-Gro and the Guarantors. Transactions between Scotts
Miracle-Gro and the Guarantors have been eliminated and the summarized financial
information does not reflect investments of the Scotts Miracle-Gro and the
Guarantors in the Non-Guarantor subsidiaries.
SEPTEMBER 30,
2021
Current assets $ 1,834.8
Noncurrent assets (a) 2,484.5
Current liabilities 1,038.1
Noncurrent liabilities 2,611.8
(a) Includes amounts owed by subsidiaries that do not guarantee
YEAR ENDED
SEPTEMBER 30,
2021
Net sales $ 4,507.6
Gross profit 1,380.6
Income (loss) from continuing operations (a) 510.9
Net income (loss) 510.8
Net income (loss) attributable to controlling interest 509.9
(a)Includes intercompany expense from Non-Guarantor subsidiaries of $(26.3) .
Judicial and Administrative Proceedings
We are party to various pending judicial and administrative proceedings arising
in the ordinary course of business, including, among others, proceedings based
on accidents or product liability claims and alleged violations of environmental
laws. We have reviewed these pending judicial and administrative proceedings,
including the probable outcomes, reasonably anticipated costs and expenses, and
the availability and limits of our insurance coverage, and have established what
we believe to be appropriate accruals. We believe that our assessment of
contingencies is reasonable and that the related accruals, in the aggregate, are
adequate; however, there can be no assurance that future quarterly or annual
operating results will not be materially affected by these proceedings, whether
as a result of adverse outcomes or as a result of significant defense costs.
Contractual Obligations
The following table summarizes our future cash outflows for contractual
obligations as of September 30, 2021 :
Payments Due by Period
More Than
Contractual Cash Obligations Total Less Than 1 Year 1-3 Years 3-5 Years 5 Years
Debt obligations $ 2,281.9 $
51.9
Interest expense on debt securities
636.2 87.5 156.3 144.6 247.8 Finance lease obligations 39.6 7.0 14.2 4.8 13.6 Operating lease obligations 328.9 75.3 123.2 76.9 53.5 Purchase obligations 972.7 563.6 313.9 87.8 7.4 Other, primarily retirement plan obligations 63.1 9.3 15.8 16.0 22.0 Total contractual cash obligations$ 4,322.4 $
794.6
We had long-term debt obligations and interest payments due primarily under the 5.250% Senior Notes, 4.500% Senior Notes, 4.000% Senior Notes and 4.375% Senior Notes and our credit facilities. Amounts in the table represent scheduled future maturities of debt principal for the periods indicated. The interest payments for our credit facilities are based on outstanding borrowings as ofSeptember 30, 2021 . Actual interest expense will likely be higher due to the seasonality of our business and associated higher average borrowings. 42
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Purchase obligations primarily represent commitments for materials used in our manufacturing processes, including urea and packaging, as well as commitments for warehouse services, grass seed, marketing services and information technology services which comprise the unconditional purchase obligations disclosed in "NOTE 19. COMMITMENTS" of the Notes to Consolidated Financial Statements included in this 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 2021 are based on preliminary estimates using actuarial assumptions determined as ofSeptember 30, 2021 . These amounts represent expected payments through 2031. Based on the accounting rules for defined benefit pension plans and retirement health care plans, the liabilities reflected in our Consolidated Balance Sheets differ from these expected future payments (see Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K). The above table excludes liabilities for unrecognized tax benefits and insurance accruals as we are unable to estimate the timing of payments for these items. Off-Balance Sheet Arrangements AtSeptember 30, 2021 , we have letters of credit in the aggregate face amount of$19.8 outstanding. Non-GAAP Measures Use of Non-GAAP Measures To supplement the financial measures prepared in accordance withU.S. generally accepted accounting principles ("GAAP"), we use non-GAAP financial measures. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than us, limiting the usefulness of those measures for comparative purposes. In addition to GAAP measures, we use these non-GAAP financial measures to evaluate our performance, engage in financial and operational planning and determine incentive compensation because we believe that these non-GAAP financial measures provide additional perspective on and, in some circumstances are more closely correlated to, the performance of our underlying, ongoing business. 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 non-GAAP financial measures are also useful to investors as such measures allow investors to evaluate performance using the same metrics that we use to evaluate past performance and prospects for future performance. We view free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends and discretionary investment. Exclusions from Non-GAAP Financial Measures Non-GAAP financial measures reflect adjustments based on the following items: •Impairments, which are excluded because they do not occur in or reflect the ordinary course of our ongoing business operations and their exclusion results in a metric that provides supplemental information about the sustainability of operating performance. •Restructuring and employee severance costs, which include charges for discrete projects or transactions that fundamentally change our operations and are excluded because they are not part of the ongoing operations of our underlying business, which includes normal levels of reinvestment in the business. •Costs related to refinancing, which are excluded because they do not typically occur in the normal course of business and may obscure analysis of trends and financial performance. Additionally, the amount and frequency of these types of charges is not consistent and is significantly impacted by the timing and size of debt financing transactions. 43
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) •Discontinued operations and other unusual items, which include costs or gains related to discrete projects or transactions and are excluded because they are not comparable from one period to the next and are not part of the ongoing operations of our underlying business. The tax effect for each of the items listed above is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s) in which the item is recorded. Definitions of Non-GAAP Financial Measures The reconciliations 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, determining incentive compensation and determining the amount of cash available for dividends and discretionary investments, 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 other non-operating income / expense, 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, other non-operating income / expense 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 other non-operating income / expense, each net of tax. •Adjusted EBITDA: Net income (loss) before interest, taxes, depreciation and amortization as well as certain other items such as the impact of the cumulative effect of changes in accounting, costs associated with debt refinancing and other non-recurring or non-cash items affecting net income (loss). The presentation of adjusted EBITDA is intended to be consistent with the calculation of that measure as required by our borrowing arrangements, and used to calculate a leverage ratio (maximum of 4.50 atSeptember 30, 2021 ) and an interest coverage ratio (minimum of 3.00 for the twelve months endedSeptember 30, 2021 ). •Free cash flow: Net cash provided by (used in) operating activities reduced by investments in property, plant and equipment. 44
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
The reconciliations between the non-GAAP measures and the most directly comparable GAAP measures are presented in the following tables:
Year Ended September 30,
2021 2020 2019
Income from operations (GAAP) $ 723.0 $ 585.2 $ 409.6
Impairment, restructuring and other charges 29.0 16.8 13.3
Adjusted income from operations (Non-GAAP) $ 752.1
Income from continuing operations (GAAP)$ 517.3 $ 386.9 $ 436.7 Impairment, restructuring and other charges 29.0 16.8 13.3 Costs related to refinancing - 15.1 - Other non-operating (income) expense, net (12.6) 0.8 (260.2) Adjustment to income tax expense (benefit) from continuing operations (5.1) (6.7) 61.5 Adjusted income from continuing operations (Non-GAAP)$ 528.6 $ 412.9 $ 251.3 Net income attributable to controlling interest (GAAP)$ 512.5
Loss (of profit) from discontinued operations, net of tax
3.9 (1.7) (23.5) Impairment, restructuring and other charges 29.0 16.8 13.3 Costs related to refinancing - 15.1 - Other non-operating (income) expense, net (12.6) 0.8 (260.2) Adjustment to income tax expense (benefit) from continuing operations (5.1) (6.7) 61.5 Adjusted net income attributable to controlling interest from continuing operations (Non-GAAP)$ 527.7
The sum of the components may not equal the total due to rounding.
Year Ended September 30,
2021 2020 2019
Diluted earnings per share from continuing operations (GAAP)
$ 9.03 $ 6.78 $ 7.77 Impairment, restructuring and other charges 0.51 0.30 0.24 Costs related to refinancing - 0.27 - Other non-operating (income) expense, net (0.22) 0.01 (4.62) Adjustment to income tax expense (benefit) from continuing operations (0.09) (0.12) 1.09 Adjusted diluted income per common share from continuing operations (Non-GAAP)$ 9.23
Net cash provided by operating activities (GAAP)$ 271.5 $ 558.0 $ 226.8 Investments in property, plant and equipment (106.9) (62.7) (42.4) Free cash flow (Non-GAAP)$ 164.6
The sum of the components may not equal the total due to rounding.
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 - Risks Related to Our M&A, Lending and Financing Activities - Our indebtedness could limit our flexibility and adversely affect our financial condition" of this Form 10-K for a more complete discussion of the risks associated with our debt and our credit facility and the restrictive covenants therein. Our ability to generate cash flows sufficient to cover our debt service costs is essential to our ability to maintain our borrowing capacity. We believe that Adjusted EBITDA provides additional information for determining our ability to meet debt service requirements. The presentation of Adjusted EBITDA herein is intended to be consistent with the calculation of that measure as required by our borrowing arrangements, and used to calculate a leverage ratio (maximum of 4.50 atSeptember 30, 2021 ) and an interest coverage ratio (minimum of 3.00 for the twelve months endedSeptember 30, 2021 ). The leverage ratio is calculated as average total indebtedness divided by Adjusted EBITDA. 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. 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. 45
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Our calculation of Adjusted EBITDA does not represent and should not be
considered as an alternative to net income or cash flows from operating
activities as determined by GAAP. We make no representation or assertion that
Adjusted EBITDA is indicative of our cash flows from operating activities or
results of operations. We have provided a reconciliation of Adjusted EBITDA to
net income solely for the purpose of complying with SEC regulations and not as
an indication that Adjusted EBITDA is a substitute measure for net income.
A numeric reconciliation of net income to Adjusted EBITDA is as follows:
Year Ended September 30,
2021 2020 2019
Net income (GAAP) $ 513.4 $ 388.6 $ 460.2
Income tax expense from continuing operations 159.8 123.7 144.9
Income tax expense (benefit) from discontinued
operations (8.4) 0.1 11.7
Loss on contingent consideration for discontinued operations
12.2 - - Costs related to refinancing - 15.1 - Interest expense 78.9 79.6 101.8 Depreciation 62.9 62.2 55.9 Amortization 30.9 32.5 33.4 Impairment, restructuring and other charges from continuing operations 29.0 16.8 13.3 Impairment, restructuring and other charges (recoveries) from discontinued operations - (3.1) (35.8) Other non-operating (income) expense, net (12.6) 0.8 (260.2) Interest income (4.1) (7.6) (8.6) Expense on certain leases - - 3.2 Share-based compensation expense 40.6 57.9 38.4 Adjusted EBITDA (Non-GAAP)$ 902.6 $ 766.6 $ 558.2 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 accruals, is not expected to have a material effect on our financial condition, results of operations or cash flows. However, there can be no assurance that the resolution of these matters will not materially affect our future quarterly or annual results of operations, financial condition or cash flows. Additional information on environmental matters affecting us is provided in "ITEM 1. BUSINESS - Regulatory Considerations" and "ITEM 3. LEGAL PROCEEDINGS" of this Annual Report on Form 10-K. Critical Accounting Policies and Estimates The preparation of financial statements requires management to use judgment and make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. 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. By their nature, these judgments are subject to uncertainty. We base our estimates on historical experience and on various other sources that we believe to be reasonable under the circumstances. Certain accounting policies are particularly significant, including those related to revenue recognition, income taxes and goodwill and intangible assets. Our critical accounting policies are reviewed periodically with the Audit Committee of the Board of Directors ofScotts Miracle-Gro . Revenue Recognition and Promotional Allowances Our revenue is primarily generated from sales of branded and private label lawn and garden care and indoor and hydroponic gardening finished products. Product sales are recognized at a point in time when control of products transfers to 46
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) customers and we have no further obligation to provide services related to such products. Sales are typically recognized when products are delivered to or picked up by the customer. We are generally the principal in a transaction, therefore revenue is primarily recorded on a gross basis. Revenue for product sales is recorded net of sales returns and allowances. Revenues are measured based on the amount of consideration that we expect to receive as derived from a list price, reduced by estimates for variable consideration. Variable consideration includes the cost of current and continuing promotional programs and expected sales returns. Our promotional programs primarily include rebates based on sales volumes, in-store promotional allowances, cooperative advertising programs, direct consumer rebate programs and special purchasing incentives. The cost of promotional programs is estimated considering all reasonably available information, including current expectations and historical experience. Promotional costs (including allowances and rebates) incurred during the year are expensed to interim periods in relation to revenues and are recorded as a reduction of net sales. Provisions for estimated returns and allowances are recorded at the time revenue is recognized based on historical rates and are periodically adjusted for known changes in return levels. Shipping and handling costs are accounted for as contract fulfillment costs and included in the "Cost of sales" line in the Consolidated Statements of Operations. We exclude from revenue any amounts collected from customers for sales or other taxes. Income Taxes Our annual effective tax rate is established based on our pre-tax income (loss), statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. Valuation allowances are used to reduce deferred tax assets to the balances that are more likely than not to be realized. 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.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 impairment for goodwill and indefinite-lived intangible assets, we perform either an initial qualitative or quantitative evaluation for each of our reporting units and indefinite-lived intangible assets. Factors considered in the qualitative test include operating results as well as new events and circumstances impacting the operations or cash flows of the reporting unit or indefinite-lived intangible assets. For the quantitative test, the review for impairment of goodwill and indefinite-lived intangible assets is based on a combination of income-based and market-based approaches. If it is determined that an impairment has occurred, an impairment loss is recognized for the amount by which the carrying value of the reporting unit or intangible asset exceeds its estimated fair value. Under the income-based approach, we determine fair value using a discounted cash flow approach that requires significant judgment with respect to revenue and profitability growth rates, based upon annual budgets and longer-range strategic plans, and the selection of an appropriate discount rate. These budgets and plans are used for internal purposes and are also the basis for communication with outside parties about future business trends. Under the market-based approach, we determine fair value by comparing our reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. We also use the guideline transaction method to determine fair value based on pricing multiples derived from the sale of companies that are similar to our reporting units. 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 and profitability 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 used to estimate future cash flows are reasonable, there can be no assurance that the expected future cash flows will be realized. As a result, impairment charges that possibly would have been recognized in earlier periods may not be recognized 47
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) until later periods if actual results deviate unfavorably from earlier estimates. The use of different assumptions would increase or decrease discounted cash flows or earnings projections and, therefore, could change impairment determinations. AtSeptember 30, 2021 , goodwill totaled$605.2 , with$243.9 ,$350.2 and$11.1 for ourU.S. Consumer, Hawthorne and Other segments, respectively. We performed annual impairment testing as of the first day of our fiscal fourth quarter and concluded that there were no impairments of goodwill as the estimated fair value of each reporting unit exceeded its carrying value. Based on the results of the annual quantitative evaluation for fiscal 2021, the fair values of ourU.S. Consumer, Hawthorne and Other segment reporting units exceeded their respective carrying values by 350%, 225% and 124%, respectively. A 100 basis point change in the discount rate would not have resulted in an impairment for any of our reporting units. AtSeptember 30, 2021 , indefinite-lived intangible assets consisted of tradenames of$168.2 and the Roundup® marketing agreement amendment of$155.7 . Based on the results of the annual evaluation for fiscal 2021, the fair values of our indefinite-lived intangible assets exceeded their respective carrying values in a range of 27% to over 1,600%. A 100 basis point change in the discount rate would not have resulted in an impairment of any of our indefinite-lived intangible assets. Other Significant Accounting Policies Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed above, are also critical to understanding the consolidated financial statements. The Notes to Consolidated Financial Statements included in this Form 10-K contain additional information related to our accounting policies, including recent accounting pronouncements, and should be read in conjunction with this discussion.
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