SCOTTS MIRACLE GRO : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-K)

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

• Regulatory matters

• Critical accounting policies and estimates

Executive Summary
We are a leading manufacturer and marketer of branded consumer lawn and garden
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. Through our Hawthorne
segment, we are a leading manufacturer, marketer and distributor of nutrients,
growing media, advanced indoor garden, lighting and ventilation systems and
accessories for indoor, urban and hydroponic gardening.
Beginning in fiscal 2015, our Hawthorne segment made a series of key
acquisitions, including General Hydroponics, Gavita, Botanicare, Vermicrop,
Agrolux, Can-Filters and AeroGrow. On June 4, 2018, our Hawthorne segment
acquired substantially all of the assets of Sunlight Supply. Prior to the
acquisition, Sunlight Supply was the largest distributor of hydroponic products
in the United States, and engaged in the business of developing, manufacturing,
marketing and distributing horticultural, organics, lighting and hydroponics
products, including lighting fixtures, nutrients, seeds and growing media,
systems, trays, fans, filters, humidifiers and dehumidifiers, timers,
instruments, water pumps, irrigation supplies and hand tools. In connection with
our acquisition of Sunlight Supply, we announced the launch of an initiative
called Project Catalyst. Project Catalyst is a company-wide restructuring effort
to reduce operating costs throughout our U.S. Consumer, Hawthorne and Other
segments and drive synergies from acquisitions within our Hawthorne segment.
Our operations are divided into three reportable segments: U.S. Consumer,
Hawthorne and Other. U.S. Consumer consists of our consumer lawn and garden
business located in the geographic United States. Hawthorne consists of our
indoor, urban and hydroponic gardening business. Other consists of our consumer
lawn and garden business in geographies other than the U.S. and our product
sales to commercial nurseries, greenhouses and other professional customers. In
addition, Corporate consists of general and administrative expenses and certain
other income and expense items not allocated to the business segments. This
division of reportable segments is consistent with how the segments report to
and are managed by our chief operating decision maker. See "SEGMENT RESULTS"
below for additional information regarding our evaluation of segment
performance.
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 annual net sales in advertising to support and promote
our consumer lawn and garden products and brands. We continually explore new and
innovative ways to communicate with consumers. We believe that we receive a
significant benefit from these expenditures and anticipate a similar commitment
to research and development, advertising and marketing investments in the
future, with the continuing objective of driving category growth and profitably
increasing market share.
Our net sales in any one year are susceptible to weather conditions in the
markets in which our products are sold and our services are offered. For
instance, periods of abnormally wet or dry weather can adversely impact the sale
of certain products, while increasing demand for other products, or delay the
timing of the provision of certain services. 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.

                                       30
--------------------------------------------------------------------------------



Due to the seasonal nature of the lawn and garden business, significant portions
of our products ship to our retail customers during our second and third fiscal
quarters, as noted in the chart below. Our annual net sales are further
concentrated in the second and third fiscal quarters by retailers who rely on
our ability to deliver products closer to when consumers buy our products,
thereby reducing retailers' pre-season inventories.

                    Percent of Net Sales from Continuing
                            Operations by Quarter
                   2019              2018             2017
First Quarter        9.4 %             8.3 %             7.8 %
Second Quarter      37.7 %            38.0 %            41.1 %
Third Quarter       37.1 %            37.3 %            36.8 %
Fourth Quarter      15.8 %            16.3 %            14.3 %



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.
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 charges are used by management
to evaluate our performance, engage in financial and operational planning and
determine incentive compensation because we believe that these measures provide
additional perspective on the performance of our underlying, ongoing business.
Refer to "ITEM 6. SELECTED FINANCIAL DATA" for further discussion of non-GAAP
measures. We also focus on measures to optimize cash flow and return on invested
capital, including the management of working capital and capital expenditures.

On August 11, 2014, Scotts Miracle-Gro announced that its Board of Directors
authorized the repurchase of up to $500.0 million of Common Shares over a
five-year period (effective November 1, 2014 through September 30, 2019). On
August 3, 2016, Scotts Miracle-Gro announced that its Board of Directors
authorized a $500.0 million increase to the share repurchase authorization
ending on September 30, 2019. On August 2, 2019, the Scotts Miracle-Gro Board of
Directors authorized an extension of the current share repurchase authorization
through March 28, 2020. The amended authorization allows for repurchases of
Common Shares of up to an aggregate of $1.0 billion through March 28, 2020.
There were no share repurchases under the program during fiscal 2019. From the
inception of this share repurchase program in the fourth quarter of fiscal 2014
through September 30, 2019, Scotts Miracle-Gro repurchased approximately 8.3
million Common Shares for $714.6 million.
On August 6, 2018, Scotts Miracle-Gro announced that its Board of Directors
approved an increase in our quarterly cash dividend from $0.53 to $0.55 per
Common Share, which was first paid in the fourth quarter of fiscal 2018. On
July 30, 2019, the Scotts Miracle-Gro Board of Directors approved an increase in
our quarterly cash dividend from $0.55 to $0.58 per Common Share, which was
first paid in the fourth quarter of fiscal 2019.


                                       31
--------------------------------------------------------------------------------



Results of Operations
Effective in our fourth quarter of fiscal 2017, we classified our results of
operations for all periods presented to reflect the International Business as a
discontinued operation. As a result, unless otherwise specifically stated, all
discussions regarding results for the fiscal years ended September 30, 2019,
2018 and 2017 reflect results from our continuing operations.
The following table sets forth the components of income and expense as a
percentage of net sales:
                                                                   Year Ended September 30,
                                       2019     % of Net Sales       2018     % of Net Sales       2017     % of Net Sales
Net sales                           $ 3,156.0        100.0  %     $ 2,663.4        100.0  %     $ 2,642.1        100.0  %
Cost of sales                         2,130.5         67.5          1,778.3         66.8          1,669.5         63.2
Cost of sales-impairment,
restructuring and other                   5.9          0.2             20.5          0.8                -            -
Gross profit                          1,019.6         32.3            864.6         32.5            972.6         36.8
Operating expenses:
Selling, general and administrative     601.3         19.1            540.1         20.3            550.9         20.9
Impairment, restructuring and other       7.4          0.2            132.3          5.0              4.9          0.2
Other (income) expense, net               1.3            -             (6.7 )       (0.3 )          (16.6 )       (0.6 )
Income from operations                  409.6         13.0            198.9          7.5            433.4         16.4
Equity in income of unconsolidated
affiliates                               (3.3 )       (0.1 )           (4.9 )       (0.2 )           29.0          1.1
Interest expense                        101.8          3.2             86.4          3.2             76.1          2.9
Other non-operating (income)
expense, net                           (270.5 )       (8.6 )            1.7          0.1             13.4          0.5
Income from continuing operations
before income taxes                     581.6         18.4            115.7          4.3            314.9         11.9
Income tax expense (benefit) from
continuing operations                   144.9          4.6            (11.9 )       (0.4 )          116.6          4.4
Income from continuing operations       436.7         13.8            127.6          4.8            198.3          7.5
Income (loss) from discontinued
operations, net of tax                   23.5          0.7            (63.9 )       (2.4 )           20.5          0.8
Net income                          $   460.2         14.6  %     $    63.7          2.4  %     $   218.8          8.3  %

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

Net Sales
Net sales for fiscal 2019 were $3,156.0 million, an increase of 18.5% from net
sales of $2,663.4 million for fiscal 2018. Net sales for fiscal 2018 increased
0.8% from net sales of $2,642.1 million for fiscal 2017. These changes in net
sales were attributable to the following:
                         Year Ended September 30,
                           2019            2018
Volume                      9.0  %          (3.6 )%
Acquisitions                8.7              5.2
Pricing                     1.3             (1.1 )
Foreign exchange rates     (0.5 )            0.3
Change in net sales        18.5  %           0.8  %

The increase in net sales for fiscal 2019 as compared to fiscal 2018 was primarily driven by: • increased sales volume driven by increased sales of soils, mulch, grass

seed and fertilizer products in our U.S. Consumer segment and hydroponic

gardening products in our Hawthorne segment excluding the impact of

acquisitions, partially offset by decreased sales in our Other segment as

a result of the closure of our business in Mexico;

• the addition of net sales from the Sunlight Supply acquisition of $231.4

million in our Hawthorne segment; and

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

offset by higher volume-based customer rebates in our U.S. Consumer

segment and decreased pricing in our Hawthorne segment primarily driven by

       increased promotional activities;



                                       32

--------------------------------------------------------------------------------

• partially offset by decreased net sales associated with the Roundup®

       marketing agreement; and


•      the unfavorable impact of foreign exchange rates as a result of the

strengthening of the U.S. dollar relative to the euro and the Canadian

dollar.

The increase in net sales for fiscal 2018 as compared to fiscal 2017 was
primarily driven by:
•      the addition of net sales from acquisitions of $136.3 million in our
       Hawthorne segment, primarily from Sunlight Supply, Agrolux, and
       Can-Filters; and


•      the favorable impact of foreign exchange rates as a result of the

weakening of the U.S. dollar relative to the euro and the Canadian dollar;

• partially offset by decreased sales volume driven by decreased sales of

fertilizer, controls and plant food products in our U.S. Consumer segment

       and hydroponic gardening products in our Hawthorne segment excluding the
       impact of acquisitions, partially offset by increased sales of soils and
       grass seed products in our U.S. Consumer segment and increased sales in
       our Other segment from our business in Canada;

• decreased pricing in our U.S. Consumer segment driven by higher customer

rebates and sales mix; and

• decreased net sales associated with the Roundup® marketing agreement.

Cost of Sales
The following table shows the major components of cost of sales:
                                                         Year Ended September 30,
                                                      2019         2018         2017
                                                              (In millions)
Materials                                          $ 1,196.4    $   994.2    $   966.9
Manufacturing labor and overhead                       485.8        401.3   

356.7

Distribution and warehousing                           394.9        328.3   

289.8

Costs associated with Roundup® marketing agreement 53.4 54.5

56.1

Cost of sales                                        2,130.5      1,778.3   

1,669.5

Cost of sales-impairment, restructuring and other 5.9 20.5

         -
                                                   $ 2,136.4    $ 1,798.8    $ 1,669.5



Factors contributing to the change in cost of sales are outlined in the
following table:
                                                      Year Ended September 30,
                                                        2019             2018
                                                            (In millions)
Volume, product mix and other                      $     358.2       $     104.2
Material costs                                             5.6              (0.7 )
Costs associated with Roundup® marketing agreement        (1.1 )            (1.6 )
Foreign exchange rates                                   (10.5 )             6.9
                                                         352.2             108.8
Impairment, restructuring and other                      (14.6 )            20.5
Change in cost of sales                            $     337.6       $     129.3


The increase in cost of sales for fiscal 2019 as compared to fiscal 2018 was
primarily driven by:
•      costs of $199.6 million included within "volume, product mix and other"

related to sales from the Sunlight Supply acquisition in our Hawthorne

segment;

• higher sales volume in our U.S. Consumer and Hawthorne segments excluding

       the impact of acquisitions, partially offset by decreased sales in our
       Other segment;


•      higher transportation costs included within "volume, product mix and
       other" associated with our U.S. Consumer segment; and

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

                                       33
--------------------------------------------------------------------------------

• partially offset by a decrease in costs associated with the Roundup®

       marketing agreement;


•      the favorable impact of foreign exchange rates as a result of the

strengthening of the U.S. dollar relative to the euro and the Canadian

dollar; and

• a decrease in impairment, restructuring and other charges of $14.6 million

as a result of lower costs associated with Project Catalyst.

The increase in cost of sales for fiscal 2018 as compared to fiscal 2017 was
primarily driven by:
•      costs of $125.2 million included within "volume, product mix and other"

related to sales from acquisitions in our Hawthorne segment, primarily

from Sunlight Supply, Agrolux and Can-Filters, and including $12.2 million

       related to acquisition date inventory fair value adjustments;


•      higher transportation costs included within "volume, product mix and

other" associated with our U.S. Consumer, Hawthorne and Other segments;

• the unfavorable impact of foreign exchange rates as a result of the

weakening of the U.S. dollar relative to the euro and the Canadian dollar;

and

• an increase in impairment, restructuring and other charges of $20.5

       million related to facility closures, impairment of property, plant and
       equipment and employee termination benefits associated with Project
       Catalyst;


•      partially offset by decreased sales volume in our U.S. Consumer and

Hawthorne segments excluding the impact of acquisitions, partially offset

by increased sales volume in our Other segment; and

• a decrease in net sales attributable to reimbursements under the Roundup®

       marketing agreement.


Gross Profit
As a percentage of net sales, our gross profit rate was 32.3%, 32.5% and 36.8%
for fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Factors contributing
to the change in gross profit rate are outlined in the following table:
                                          Year Ended September 30,
                                            2019            2018
Acquisitions                                (1.5 )%          (1.4 )%
Material costs                              (0.2 )              -
Roundup® commissions and reimbursements     (0.1 )           (0.1 )
Volume, product mix and other                0.3             (1.3 )
Pricing                                      0.8             (0.8 )
                                            (0.7 )           (3.6 )
Impairment, restructuring and other          0.5             (0.7 )
Change in gross profit rate                 (0.2 )%          (4.3 )%


The decrease in gross profit rate for fiscal 2019 as compared to fiscal 2018 was
primarily driven by:
•      an unfavorable impact from acquisitions in our Hawthorne segment related

to Sunlight Supply;

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

•      higher transportation costs included within "volume, product mix and
       other" associated with our U.S. Consumer segment;

• partially offset by the favorable impact within "volume, product mix and

       other" of Sunlight Supply acquisition date inventory fair value
       adjustments of $12.2 million incurred during fiscal 2018;

• increased pricing in our U.S. Consumer and Other segments, net of higher

volume-based customer rebates in our U.S. Consumer segment and decreased

pricing in our Hawthorne segment primarily driven by increased promotional

activities;

• favorable leverage of fixed costs such as warehousing driven by higher

sales volume in our U.S. Consumer and Hawthorne segments; and

• a decrease in impairment, restructuring and other charges as a result of

       lower costs associated with Project Catalyst.



                                       34

--------------------------------------------------------------------------------



The decrease in gross profit rate for fiscal 2018 as compared to fiscal 2017 was
primarily driven by:
•      an unfavorable net impact from acquisitions in our Hawthorne segment,
       primarily from Sunlight Supply, Agrolux and Can-Filters;


•      higher transportation costs included within "volume, product mix and

other" associated with our U.S. Consumer, Hawthorne and Other segments;

•      unfavorable leverage of fixed costs such as warehousing driven by lower
       sales volumes in our U.S. Consumer and Hawthorne segments excluding the
       impact of acquisitions;

• unfavorable product mix in our U.S. Consumer segment due to decreased

sales of fertilizer and plant food products;

• decreased pricing in our U.S. Consumer segment driven by higher customer

rebates and sales mix;

• a decrease in net sales associated with the Roundup® marketing agreement; and

•      an increase in impairment, restructuring and other charges related to
       facility closures, impairment of property, plant and equipment and
       employee termination benefits associated with Project Catalyst.

Selling, General and Administrative Expenses The following table sets forth the components of selling, general and administrative expenses ("SG&A"):

                                                            Year Ended September 30,
                                                 2019                  2018                 2017
                                                    (In millions, except percentage figures)
Advertising                               $          120.3       $        104.2       $        123.0
Advertising as a percentage of net sales               3.8 %                3.9 %                4.7 %
Research and development                              39.6                 42.5                 39.9
Share-based compensation                              38.4                 40.4                 25.2
Amortization of intangibles                           32.9                 28.9                 21.9
Other selling, general and administrative            370.1                324.1                340.9
                                          $          601.3       $        540.1       $        550.9


SG&A increased $61.2 million, or 11.3%, during fiscal 2019 compared to fiscal
2018. Advertising expense increased $16.1 million, or 15.5%, during fiscal 2019
driven by increased media spending in our U.S. Consumer segment. Share-based
compensation expense decreased $2.0 million, or 5.0%, in fiscal 2019 due to a
more significant increase in the expected payout percentage on long-term
performance-based awards during fiscal 2018 as compared to fiscal 2019.
Amortization expense increased $4.0 million, or 13.8%, in fiscal 2019 due to the
impact of recent acquisitions. Other SG&A increased $46.0 million, or 14.2%, in
fiscal 2019 driven by higher short-term variable cash incentive compensation
expense of $33.3 million and the impact of recent acquisitions of $11.8 million.
SG&A decreased $10.8 million, or 2.0%, during fiscal 2018 compared to fiscal
2017. Advertising expense decreased $18.8 million, or 15.3%, during fiscal 2018
as our U.S. Consumer segment increased customer promotional spending with
certain retailers, which is recorded as a reduction of net sales, and decreased
SG&A media spending. Share-based compensation expense increased $15.2 million,
or 60.3%, in fiscal 2018 due to an increase in the expected payout percentage on
long-term performance-based awards as a result of strong cash flow performance.
Amortization expense increased $7.0 million, or 32.0%, in fiscal 2018 due to the
impact of recent acquisitions. Other SG&A decreased $16.8 million, or 4.9%, in
fiscal 2018 due to lower short-term variable cash incentive compensation expense
of $19.3 million as a result of decreased operating income in fiscal 2018 and
lower selling, marketing and fringe benefit expenses of $12.3 million, partially
offset by the impact of recent acquisitions of $14.7 million and increased
headcount and integration costs for our hydroponic business.

                                       35
--------------------------------------------------------------------------------



Impairment, Restructuring and Other
The following table sets forth the components of impairment, restructuring and
other charges (recoveries) recorded in the "Cost of sales-impairment,
restructuring and other," "Impairment, restructuring and other" and "Income
(loss) from discontinued operations, net of tax" lines in the Consolidated
Statements of Operations:
                                                          Year Ended September 30,
                                                     2019             2018           2017
                                                                (In millions)
Cost of sales-impairment, restructuring and
other:
Restructuring and other charges                 $       5.1       $     12.3     $        -
Property, plant and equipment impairments               0.8              8.2              -
Operating expenses:
Restructuring and other charges, net                    7.4             20.2            3.9
Goodwill and intangible asset impairments                 -            112.1            1.0
Impairment, restructuring and other charges
from continuing operations                      $      13.3       $    152.8     $      4.9
Restructuring and other charges (recoveries)
from discontinued operations                          (35.8 )           86.8           15.9
Total impairment, restructuring and other
charges (recoveries)                            $     (22.5 )     $    239.6     $     20.8


Project Catalyst
In connection with the acquisition of Sunlight Supply during the third quarter
of fiscal 2018, we announced the launch of an initiative called Project
Catalyst, which is a company-wide restructuring effort to reduce operating costs
throughout our U.S. Consumer, Hawthorne and Other segments and drive synergies
from acquisitions within our Hawthorne segment. During fiscal 2019, we incurred
charges of $13.7 million related to Project Catalyst. We incurred charges of
$1.1 million in our U.S. Consumer segment, $4.2 million in our Hawthorne segment
and $0.6 million 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 million in our U.S. Consumer segment, $3.9 million in our Hawthorne
segment, $0.6 million in our Other segment and $2.8 million 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.
During fiscal 2018, we incurred charges of $29.4 million related to Project
Catalyst. We incurred charges of $8.2 million in our U.S. Consumer segment and
$12.4 million in our Hawthorne segment in the "Cost of sales-impairment,
restructuring and other" line in the Consolidated Statements of Operations
during fiscal 2018 related to employee termination benefits, facility closure
costs and impairment of property, plant and equipment. We incurred charges of
$3.4 million in our U.S. Consumer segment and $5.4 million in our Hawthorne
segment in the "Impairment, restructuring and other" line in the Consolidated
Statements of Operations during fiscal 2018 related to employee termination
benefits.
Project Focus
In the first quarter of fiscal 2016, we announced a series of initiatives called
Project Focus designed to maximize the value of our non-core assets and focus on
emerging categories of the lawn and garden industry in our core U.S. business.
During fiscal 2018, our U.S. Consumer segment recognized adjustments of $0.1
million related to previously recognized termination benefits associated with
Project Focus in the "Impairment, restructuring and other" line in the
Consolidated Statements of Operations. During fiscal 2017, we recognized
restructuring costs related to termination benefits and facility closure costs
of $8.3 million in the "Impairment, restructuring and other" line in the
Consolidated Statements of Operations, including $6.7 million for our U.S.
Consumer segment, $0.9 million for our Hawthorne segment and $0.7 million for
our Other segment.
On August 31, 2017, we completed the sale of the International Business. Refer
to "NOTE 3. DISCONTINUED OPERATIONS" for more information. During fiscal 2018
and fiscal 2017, we recognized $1.8 million and $15.5 million, respectively, in
transaction related costs associated with the sale of the International Business
as well as termination benefits and facility closure costs of zero and $(0.4)
million, respectively, in the "Income (loss) from discontinued operations, net
of tax" line in the Consolidated Statements of Operations.
Other
During fiscal 2019, we recognized a favorable adjustment of $22.5 million as a
result of the final resolution of the previously disclosed settlement agreement
related to the In re Morning Song Bird Food Litigation legal matter in the
"Income (loss) from discontinued operations, net of tax" line in the
Consolidated Statements of Operations. In addition, during fiscal 2019, we
recognized insurance recoveries of $13.4 million related to this matter in the
"Income (loss) from discontinued operations, net of tax" line in

                                       36
--------------------------------------------------------------------------------



the Consolidated Statements of Operations. During fiscal 2018, we recognized a
pre-tax charge of $85.0 million for a probable loss related to this matter in
the "Income (loss) from discontinued operations, net of tax" line in the
Consolidated Statements of Operations. Refer to "NOTE 20. CONTINGENCIES" for
more information.
During fiscal 2019, we recognized a favorable adjustment of $0.4 million related
to the previously disclosed legal matter In re Scotts EZ Seed Litigation in the
"Impairment, restructuring and other" line in the Consolidated Statements of
Operations. During fiscal 2018, we recognized a charge of $11.7 million for a
probable loss related to this matter in the "Impairment, restructuring and
other" line in the Consolidated Statements of Operations. Refer to "NOTE 20.
CONTINGENCIES" for more information.
During fiscal 2018, we recognized a non-cash impairment charge of $94.6 million
related to a goodwill impairment in our Hawthorne segment in the "Impairment,
restructuring and other" line in the Consolidated Statements of Operations as a
result of the Company's annual fourth quarter quantitative goodwill impairment
test. Refer to "NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET" for more
information.
During fiscal 2018, we recognized a non-cash impairment charge of $17.5 million
related to the settlement of a portion of certain previously acquired customer
relationships due to the acquisition of Sunlight Supply in the "Impairment,
restructuring and other" line in the Consolidated Statement of Operations. Refer
to "NOTE 8. ACQUISITIONS AND INVESTMENTS" for more information.
During fiscal 2017, we recognized a recovery of $4.4 million related to the
reduction of a contingent consideration liability associated with a historical
acquisition and recorded a $1.0 million impairment charge on the write-off of a
trademark asset due to recent performance and future growth expectations within
the "Impairment, restructuring and other" line in the Consolidated Statements of
Operations.
Other (Income) Expense, net
Other (income) expense, net 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, net was
$1.3 million, $(6.7) million and $(16.6) million in fiscal 2019, fiscal 2018 and
fiscal 2017, respectively. The decrease for fiscal 2019 was primarily due to
foreign currency transactional losses, a decrease in royalty income earned from
Exponent related to its use of our brand names following the divestiture of the
International Business due to the adoption of the amended revenue recognition
accounting guidance and losses on long-lived assets. The decrease for fiscal
2018 was due to interest income of $10.0 million on loans receivable that was
classified in the "Other (income) expense, net" line in the Consolidated
Statements of Operations in fiscal 2017 but was classified in the "Other
non-operating (income) expense, net" line in the Consolidated Statements of
Operations in fiscal 2018, as well as a decrease in royalty income earned from
the TruGreen Joint Venture related to its use of our brand names following the
divestiture of the SLS Business, partially offset by an increase in royalty
income earned from Exponent related to its use of our brand names following the
divestiture of the International Business.
Income from Operations
Income from operations was $409.6 million in fiscal 2019, an increase of 105.9%
from fiscal 2018 income from operations of $198.9 million. The increase was
driven by higher net sales and lower impairment, restructuring and other
charges, partially offset by a decrease in gross profit rate, higher SG&A and a
decrease in other income.
Income from operations was $198.9 million in fiscal 2018, a decrease of 54.1%
from fiscal 2017 income from operations of $433.4 million. The decrease was
driven by higher impairment, restructuring and other charges, a decrease in
gross profit and a decrease in other income, partially offset by lower SG&A.
Equity in (Income) Loss of Unconsolidated Affiliates
Equity in (income) loss of unconsolidated affiliates was $(3.3) million, $(4.9)
million and $29.0 million in fiscal 2019, fiscal 2018 and fiscal 2017,
respectively. The decrease for fiscal 2019 was attributable to the sale of our
noncontrolling equity interest in the IT&O Joint Venture on April 1, 2019.
Fiscal 2017 included our share of restructuring and other charges incurred by
the TruGreen Joint Venture of $25.2 million. These charges included $1.3 million
for transaction costs, $12.1 million for nonrecurring integration and separation
costs, $7.2 million of costs associated with the TruGreen Joint Venture's August
2017 debt refinancing and $4.6 million for a non-cash purchase accounting fair
value write-down adjustment related to deferred revenue and advertising.

                                       37
--------------------------------------------------------------------------------



Interest Expense
Interest expense was $101.8 million in fiscal 2019, an increase of 17.8% from
fiscal 2018 interest expense of $86.4 million. The increase was driven by an
increase in average borrowings of $111.9 million and an increase in our weighted
average interest rate of 50 basis points. The increase in average borrowings was
driven by our acquisition activity and Common Share repurchase activity during
fiscal 2018, partially offset by the application of the proceeds from the sale
of our equity interests in the TruGreen Joint Venture and the IT&O Joint Venture
to reduce our indebtedness. The increase in our weighted average interest rate
was driven by higher borrowing rates.
Interest expense was $86.4 million in fiscal 2018, an increase of 13.5% from
fiscal 2017 interest expense of $76.1 million. The increase was driven by an
increase in average borrowings of $332.8 million, partially offset by a decrease
in our weighted average interest rate of 24 basis points. The increase in
average borrowings was driven by acquisition activity and an increase in
repurchases of our Common Shares during fiscal 2018.
Other Non-Operating (Income) Expense, net
Other non-operating (income) expense, net was $(270.5) million, $1.7 million and
$13.4 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
On March 19, 2019, we entered into an agreement under which we sold all of our
approximately 30% equity interest in the TruGreen Joint Venture. In connection
with this transaction, we received cash proceeds of $234.2 million related to
the sale of our equity interest in the TruGreen Joint Venture and $18.4 million
related to the payoff of second lien term loan financing, which was previously
recorded in the "Other assets" line in the Consolidated Balance Sheets. During
fiscal 2019, we also received a distribution from the TruGreen Joint Venture
intended to cover certain required tax payments of $3.5 million, 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 million
related to this sale. The cash proceeds were applied to reduce our indebtedness.
During fiscal 2019, we made cash tax payments of $99.5 million associated with
this disposition.
On April 1, 2019, we sold all of our noncontrolling equity interest in the IT&O
Joint Venture for cash proceeds of $36.6 million. During fiscal 2019, we
recognized a pre-tax gain of $2.9 million related to this sale. During fiscal
2019, we received a distribution of net earnings from the IT&O Joint Venture of
$4.9 million, 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 million
related to the write-off of accumulated foreign currency translation loss
adjustments of a foreign subsidiary that was substantially liquidated as part of
Project Catalyst.
As a result of the enactment of H.R.1 (the "Act," formerly known as the "Tax
Cuts and Jobs Act") on December 22, 2017, we repatriated cash from a foreign
subsidiary during the second quarter of fiscal 2018 resulting in the liquidation
of substantially all of the assets of the subsidiary and the write-off of
accumulated foreign currency translation loss adjustments of $11.7 million. This
was partially offset by interest income on loans receivable of $10.0
million that was classified in the "Other non-operating (income) expense, net"
line in the Consolidated Statements of Operations in fiscal 2018, but was
classified in the "Other income, net" line in the Consolidated Statements of
Operations in fiscal 2017.
On October 2, 2017, we acquired the remaining 25% noncontrolling interest in
Gavita and its subsidiaries, including Agrolux, for $72.2 million. We recorded a
charge of $13.4 million during the fourth quarter of fiscal 2017 to write-up the
fair value of the loan to the noncontrolling ownership group of Gavita to the
agreed upon buyout value.

                                       38
--------------------------------------------------------------------------------



Income Tax Expense (Benefit) from Continuing Operations
A reconciliation of the federal corporate income tax rate and the effective tax
rate on income from continuing operations before income taxes is summarized
below:
                                                          Year Ended September 30,
                                                    2019             2018           2017
Statutory income tax rate                            21.0  %          24.5  %        35.0  %
Effect of foreign operations                          0.3              7.4            3.1
State taxes, net of federal benefit                   1.8              6.5  

2.9

Domestic Production Activities Deduction
permanent difference                                    -             (4.4 )         (3.1 )
Effect of other permanent differences                (0.2 )           (3.0 )          0.4
Research and Experimentation and other federal
tax credits                                          (0.3 )           (1.7 )         (0.4 )
Effect of tax contingencies                           1.9              1.3            0.9
Effect of tax reform                                    -            (38.7 )            -
Other                                                 0.4             (2.2 )         (1.8 )
Effective income tax rate                            24.9  %         (10.3 

)% 37.0 %

On December 22, 2017, the Act was signed into law. The Act provides for
significant changes to the U.S. Internal Revenue Code of 1986, as amended (the
"Code"). Among other items, the Act implements a territorial tax system, imposed
a one-time transition tax on deemed repatriated earnings of foreign
subsidiaries, and reduces the federal corporate statutory tax rate to 21%
effective January 1, 2018. As our fiscal year end falls on September 30, the
federal corporate statutory tax rate for fiscal 2018 was prorated to 24.5%, with
the statutory rate for fiscal 2019 and beyond at 21%. Included in the effective
tax rate for fiscal 2018 are one-time impacts related to the tax law change of
$42.8 million. These include a one-time $44.6 million net tax benefit adjustment
reflecting the revaluation of our net deferred tax liability at the lower tax
rate. In addition, we recognized a one-time tax expense on deemed repatriated
earnings and cash of foreign subsidiaries as required by the Act of $21.2
million, partially offset by the recognition and application of foreign tax
credits associated with these foreign subsidiaries of $18.2 million. We also
reduced the value of deferred tax liabilities associated with the write-off of
previously acquired customer relationship intangible assets by $7.3 million,
which was recognized in the "Income tax expense (benefit) from continuing
operations" line in the Consolidated Statement of Operations in fiscal 2018.
During the fourth quarter of fiscal 2018, we recognized a non-cash goodwill
impairment charge of $94.6 million, of which $20.0 million was not
tax-deductible.
Income from Continuing Operations
Income from continuing operations was $436.7 million, or $7.77 per diluted
share, in fiscal 2019 compared to $127.6 million, or $2.23 per diluted share, in
fiscal 2018. The increase was driven by higher net sales, lower impairment,
restructuring and other charges and an increase in other non-operating income,
partially offset by a lower gross profit rate, higher SG&A, decreased other
income and an increase in interest expense.
Diluted average common shares used in the diluted income per common share
calculation were 56.3 million for fiscal 2019 compared to 57.1 million for
fiscal 2018. The decrease was primarily the result of Common Share repurchase
activity during fiscal 2018, partially offset by the exercise and issuance of
share-based compensation awards and the payment of a portion of the purchase
price of Sunlight Supply in Common Shares. Dilutive equivalent shares for fiscal
2019 and fiscal 2018 were 0.8 million and 0.9 million, respectively.
Income from continuing operations was $127.6 million, or $2.23 per diluted
share, in fiscal 2018 compared to $198.3 million, or $3.29 per diluted share, in
fiscal 2017. The decrease was driven by higher impairment, restructuring and
other charges, a decrease in gross profit, a decrease in other income, an
increase in interest expense and an increase in other non-operating expense,
partially offset by the lower effective tax rate, an increase in equity in
income of unconsolidated affiliates and a decrease in SG&A.
Diluted average common shares used in the diluted income per common share
calculation were 57.1 million for fiscal 2018 compared to 60.2 million for
fiscal 2017. The decrease was primarily the result of Common Share repurchase
activity, partially offset by the exercise and issuance of share-based
compensation awards and the payment of a portion of the purchase price of
Sunlight Supply in Common Shares. Dilutive equivalent shares for fiscal 2018 and
fiscal 2017 were 0.9 million and 0.8 million, respectively.
Income (Loss) from Discontinued Operations, net of tax
Income (loss) from discontinued operations, net of tax, was $23.5 million,
$(63.9) million and $20.5 million for fiscal 2019, fiscal 2018 and fiscal 2017,
respectively.

                                       39
--------------------------------------------------------------------------------



During fiscal 2019, we recognized a favorable pre-tax adjustment of $22.5
million as a result of the final resolution of the previously disclosed
settlement agreement related to the In re Morning Song Bird Food Litigation
legal matter and recognized insurance recoveries of $13.4 million related to
this matter. During fiscal 2018, we recognized a pre-tax charge of $85.0 million
for a probable loss related to this matter. Refer to "NOTE 20. CONTINGENCIES"
for more information.
During fiscal 2017, we recorded a gain on the sale of the International Business
of $32.7 million, partially offset by the provision for income taxes of $12.0
million. During fiscal 2018, we recorded a reduction to the pre-tax gain of $0.7
million related to the resolution of post-closing working capital adjustments.
During fiscal 2018 and fiscal 2017, we recognized $1.8 million and $15.5
million, respectively, in transaction related costs associated with the sale of
the International Business. Refer to "NOTE 3. DISCONTINUED OPERATIONS" for more
information.
Segment Results
We divide our business into three reportable segments: U.S. Consumer, Hawthorne
and Other. U.S. Consumer consists of our consumer lawn and garden business
located in the geographic United States. Hawthorne consists of our indoor, urban
and hydroponic gardening business. Other consists of our consumer lawn and
garden business in geographies other than the U.S. and our product sales to
commercial nurseries, greenhouses and other professional customers. In addition,
Corporate consists of general and administrative expenses and certain other
income and expense items not allocated to the business segments. This
identification of reportable segments is consistent with how the segments report
to and are managed by our chief operating decision maker.
Segment performance is evaluated based on several factors, including income
(loss) from continuing operations before income taxes, amortization, impairment,
restructuring and other charges ("Segment Profit (Loss)"), which is a non-GAAP
financial measure. Senior management uses this measure of 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,
                 2019         2018         2017
                         (In millions)
U.S. Consumer $ 2,281.1    $ 2,109.6    $ 2,160.5
Hawthorne         671.2        344.9        287.2
Other             203.7        208.9        194.4
Consolidated  $ 3,156.0    $ 2,663.4    $ 2,642.1


The following table sets forth Segment Profit as well as a reconciliation to
income from continuing operations before income taxes, the most directly
comparable GAAP measure:
                                                      Year Ended September 30,
                                              2019              2018              2017
                                                           (In millions)
U.S. Consumer                           $        527.8     $       496.6     $       521.5
Hawthorne                                         53.5              (6.1 )            35.5
Other                                             10.3              11.2              13.4
Total Segment Profit (Non-GAAP)                  591.6             501.7    

570.4

Corporate                                       (135.3 )          (120.8 )          (109.6 )
Intangible asset amortization                    (33.4 )           (29.2 )           (22.5 )
Impairment, restructuring and other              (13.3 )          (152.8 )            (4.9 )
Equity in income (loss) of
unconsolidated affiliates (a)                      3.3               4.9             (29.0 )
Interest expense                                (101.8 )           (86.4 )           (76.1 )
Other non-operating income (expense),
net                                              270.5              (1.7 )           (13.4 )
Income from continuing operations
before income taxes (GAAP)              $        581.6     $       115.7     $       314.9



(a)    Included within equity in income (loss) of unconsolidated affiliates for
       fiscal 2017 are charges of $25.2 million, which represent our share of

restructuring and other charges incurred by the TruGreen Joint Venture.

                                       40
--------------------------------------------------------------------------------



U.S. Consumer
U.S. Consumer segment net sales were $2,281.1 million in fiscal 2019, an
increase of 8.1% from fiscal 2018 net sales of $2,109.6 million. The increase
was driven by the favorable impacts of volume and pricing of 6.3% and 1.8%,
respectively. Increased sales volume for fiscal 2019 was driven by increased
sales of soils, mulch, grass seed and fertilizer products.
U.S. Consumer Segment Profit was $527.8 million in fiscal 2019, an increase of
6.3% from fiscal 2018 Segment Profit of $496.6 million. The increase for fiscal
2019 was primarily due to higher net sales, partially offset by higher SG&A and
lower other income.
U.S. Consumer segment net sales were $2,109.6 million in fiscal 2018, a decrease
of 2.4% from fiscal 2017 net sales of $2,160.5 million. The decrease was driven
by the unfavorable impacts of volume and pricing of 1.0% and 1.4%, respectively.
Decreased sales volume for fiscal 2018 was driven by decreased sales of
fertilizer, controls and plant food products, partially offset by increased
sales of soils and grass seed products. Decreased pricing for fiscal 2018 was
primarily driven by higher customer rebates and sales mix.
U.S. Consumer Segment Profit was $496.6 million in fiscal 2018, a decrease of
4.8% from fiscal 2017 Segment Profit of $521.5 million. The decrease for fiscal
2018 was primarily due to a decrease in net sales, gross profit rate and
interest income that was classified in the "Other non-operating (income)
expense, net" line in the Consolidated Statements of Operations, partially
offset by lower SG&A.
Hawthorne
Hawthorne segment net sales were $671.2 million in fiscal 2019, an increase of
94.6% from fiscal 2018 net sales of $344.9 million. The increase was driven by
the favorable impacts of acquisitions and volume of 67.1% and 31.7%,
respectively, partially offset by the unfavorable impacts of pricing and changes
in foreign exchange rates of 2.2% and 2.0%, respectively.
Hawthorne Segment Profit was $53.5 million in fiscal 2019 as compared to fiscal
2018 Segment Loss of $6.1 million. The increase for fiscal 2019 was driven by
higher net sales, gross profit rate, cost savings and other synergies as a
result of Project Catalyst activities.
Hawthorne segment net sales were $344.9 million in fiscal 2018, an increase of
20.1% from fiscal 2017 net sales of $287.2 million. The increase was driven by
the favorable impacts of acquisitions and changes in foreign exchange rates of
47.5% and 1.6%, respectively, partially offset by the unfavorable impact of
volume of 28.8%. Decreased sales volume for fiscal 2018 was driven by declines
in the North American hydroponic business partially offset by growth in the
European professional greenhouse market and AeroGrow.
Hawthorne Segment Loss was $6.1 million in fiscal 2018 as compared to fiscal
2017 Segment Profit of $35.5 million. The decrease for fiscal 2018 was primarily
due to a decrease in gross profit rate and higher SG&A, partially offset by
increased net sales driven by acquisitions. Segment Loss for fiscal 2018
included increased cost of goods sold related to acquisition date inventory fair
value adjustments and increased deal costs related to the acquisition of
Sunlight Supply.
Other
Other segment net sales were $203.7 million in fiscal 2019, a decrease of 2.5%
from fiscal 2018 net sales of $208.9 million. The decrease was driven by the
unfavorable impacts of foreign exchange rates and volume of 2.9% and 1.8%,
respectively, partially offset by the favorable impact of pricing of 2.2%. The
decrease in sales volume for fiscal 2019 was driven by the closure of our
business in Mexico.
Other Segment Profit was $10.3 million in fiscal 2019, a decrease of 8.0% from
fiscal 2018 Segment Profit of $11.2 million. The decrease was due to lower net
sales and lower other income, partially offset by a higher gross profit rate.
Other segment net sales were $208.9 million in fiscal 2018, an increase of 7.5%
from fiscal 2017 net sales of $194.4 million. The increase was driven by the
favorable impacts of volume and changes in foreign exchange rates of 5.0% and
2.3%, respectively.
Other Segment Profit was $11.2 million in fiscal 2018, a decrease of 16.4% from
fiscal 2017 Segment Profit of $13.4 million. The decrease was due to a decrease
in gross profit rate, partially offset by higher net sales and lower SG&A.
Corporate
Corporate expenses were $135.3 million in fiscal 2019, an increase of 12.0% from
fiscal 2018 expenses of $120.8 million. The increase was primarily due to higher
short-term variable cash incentive compensation expense and a decrease in
royalty income earned from Exponent related to its use of our brand names
following our divestiture of the International Business due to the adoption of
the amended revenue recognition accounting guidance, partially offset by a
decrease in expense related to long-term performance-based awards due to a more
significant increase in the expected payout percentage during fiscal 2018 as
compared to fiscal 2019.

                                       41
--------------------------------------------------------------------------------



Corporate expenses were $120.8 million in fiscal 2018, an increase of 10.2% from
fiscal 2017 expenses of $109.6 million. The increase was primarily driven by
higher share-based compensation expense due to an increase in the expected
payout percentage on long-term performance-based awards, a decrease in royalty
income earned from the TruGreen Joint Venture related to its use of our brand
names following the divestiture of the SLS Business and interest income that was
classified in the "Other non-operating (income) expense, net" line in the
Consolidated Statements of Operations for fiscal 2018, partially offset by lower
variable incentive compensation expense and an increase in royalty income earned
from Exponent related to its use of our brand names following our divestiture of
the International Business.

Liquidity and Capital Resources The following table summarizes cash activities for the years ended September 30:

                                                      2019        2018      

2017

Net cash provided by operating activities           $ 226.8     $ 342.5     $ 363.2
Net cash provided by (used in) investing activities   255.2      (580.7 )   

22.4

Net cash (used in) provided by financing activities (496.5 ) 151.2

(316.8 )

Operating Activities
Cash provided by operating activities totaled $226.8 million for fiscal 2019, a
decrease of $115.7 million as compared to cash provided by operating activities
of $342.5 million for fiscal 2018. This decrease was driven by tax payments made
in connection with the sale of our equity interest in the TruGreen Joint Venture
of $99.5 million, payments made in connection with litigation settlements of
$73.9 million partially offset by insurance reimbursements of $13.4 million, the
timing of customer rebate payments, an increase in interest payments and higher
SG&A, partially offset by increased net sales, lower short-term variable cash
incentive payouts and a distribution of net earnings from the IT&O Joint
Venture.
Cash provided by operating activities totaled $342.5 million for fiscal 2018, a
decrease of $20.7 million as compared to cash provided by operating activities
of $363.2 million for fiscal 2017. This decrease was driven by a decrease in
gross profit and an increase in interest paid, partially offset by a decrease in
income taxes paid, a decrease in payments related to restructuring activities,
lower SG&A, the timing of customer rebate payments and cash used in operating
activities associated with the International Business during fiscal 2017.
The seasonal nature of our operations generally requires cash to fund
significant increases in inventories during the first half of the fiscal year.
Receivables and payables also build substantially in our second quarter of the
fiscal year in line with the timing of sales to support our retailers' spring
selling season. These balances liquidate during the June through September
period as the lawn and garden season unwinds.
Investing Activities
Cash provided by investing activities totaled $255.2 million for fiscal 2019 as
compared to cash used in investing activities of $580.7 million for fiscal 2018.
During fiscal 2019, we sold our equity interest in the TruGreen Joint Venture
for cash proceeds of $234.2 million related to the sale of the equity interest
and $18.4 million related to the payoff of second lien term loan financing, and
we sold our equity interest in the IT&O Joint Venture for cash proceeds of $36.6
million. Cash used for investments in property, plant and equipment during
fiscal 2019 was $42.4 million. During fiscal 2019, we paid a post-closing net
working capital adjustment obligation of $6.6 million related to the fiscal 2018
acquisition of Sunlight Supply and we received cash of $7.0 million associated
with currency forward contracts.
Cash used in investing activities totaled $580.7 million for fiscal 2018 as
compared to cash provided by investing activities of $22.4 million for fiscal
2017. Cash used for investments in property, plant and equipment during fiscal
2018 was $68.2 million. During fiscal 2018, we completed the acquisitions of
Sunlight Supply and Can-Filters which included cash payments of $492.9 million,
paid a post-closing working capital adjustment obligation of $35.3 million
related to the sale of the International Business and received cash of $13.5
million associated with currency forward contracts.
For the three fiscal years ended September 30, 2019, our capital spending was
allocated as follows: 68% for expansion and maintenance of existing productive
assets; 9% for new productive assets; 11% to expand our information technology
and transformation and integration capabilities; and 12% for corporate assets.
We expect fiscal 2020 capital expenditures to be consistent with our recent
capital spending amounts and allocations.

                                       42
--------------------------------------------------------------------------------



Financing Activities
Cash used in financing activities totaled $496.5 million in fiscal 2019 as
compared to cash provided by financing activities of $151.2 million in fiscal
2018. This change was the result of net repayments under our Fifth A&R Credit
Facilities of $389.3 million during fiscal 2019 driven by proceeds from the sale
of our equity interests in the TruGreen Joint Venture and the IT&O Joint Venture
that were used to reduce our indebtedness and an increase in cash received from
the exercise of stock options of $10.9 million, as compared to net borrowings
under our Fifth A&R Credit Facilities of $674.1 million during fiscal 2018
driven by the acquisitions of Sunlight Supply and Can-Filters, repurchases of
our Common Shares of $327.7 million and a cash outflow of $70.7 million related
to the acquisition of the remaining 25% noncontrolling interest in Gavita during
fiscal 2018.
Financing activities provided cash of $151.2 million in fiscal 2018, a change of
$468.0 million as compared to cash used in financing activities of $316.8
million in fiscal 2017. The change was the result of an increase in net
borrowings under our credit facilities of $843.1 million, a decrease in payments
on seller notes of $19.8 million and an $8.1 million distribution paid by
AeroGrow to its noncontrolling interest holders during fiscal 2017, partially
offset by an increase in repurchases of our Common Shares of $72.5 million, the
issuance of $250.0 million of 5.250% Senior Notes during fiscal 2017, $70.7
million related to the acquisition of the remaining 25% noncontrolling interest
in Gavita and the prospective adoption of a new accounting pronouncement that
requires excess tax benefits to be classified as an operating activity.
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 $18.8 million and $33.9 million at
September 30, 2019 and 2018, respectively, included $7.2 million and $17.7
million, respectively, held by controlled foreign corporations. As of
September 30, 2019, we maintain our assertion of indefinite reinvestment of the
earnings of all material foreign subsidiaries with the exception of the
cumulative earnings of Scotts Luxembourg Sarl, which are generally taxed on a
current basis under "Subpart F" of the Code which prevents deferral of
recognition of U.S. taxable income through the use of foreign entities.
Borrowing Agreements
Credit Facilities
Our primary sources of liquidity are cash generated by operations and borrowings
under our credit facilities, which are guaranteed by substantially all of Scotts
Miracle-Gro's domestic subsidiaries. We maintain a fifth amended and restated
credit agreement (the "Fifth A&R Credit Agreement") that provides senior secured
loan facilities in the aggregate principal amount of $2.3 billion, comprised of
a revolving credit facility of $1.5 billion and a term loan in the original
principal amount of $800.0 million (the "Fifth A&R Credit Facilities"). The
Fifth A&R Credit Agreement will terminate on July 5, 2023. The revolving credit
facility is available for issuance of letters of credit up to $75.0 million.
At September 30, 2019, we had letters of credit outstanding in the aggregate
principal amount of $26.7 million, and $1,326.2 million 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 and the former
credit agreement were 4.6%, 4.0% and 3.9% for fiscal 2019, fiscal 2018 and
fiscal 2017, 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: (i) 5.00 for the third quarter of fiscal 2019 through the first quarter of
fiscal 2020; (ii) 4.75 for the second quarter of fiscal 2020 through the fourth
quarter of fiscal 2020; and (iii) 4.50 for the first quarter of fiscal 2021 and
thereafter. Our leverage ratio was 3.67 at September 30, 2019. The Fifth A&R
Credit Agreement also contains an affirmative covenant regarding our interest
coverage ratio determined as of the end of each of its fiscal quarters. The
interest coverage ratio is calculated as Adjusted EBITDA divided by interest
expense, as described in the Fifth A&R Credit Agreement, and excludes costs
related to refinancings. The minimum interest coverage ratio was 3.00 for the
twelve months ended September 30, 2019. Our interest coverage ratio was 5.78 for
the twelve months ended September 30, 2019. As of September 30, 2019, 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 and
Common Share repurchases, as long as the leverage ratio resulting from the
making of such restricted payments is 4.00 or less. Otherwise, we may make
further restricted payments in an aggregate amount for each fiscal year not to
exceed the amount set forth in the Fifth A&R Credit Agreement for such fiscal
year ($200.0 million for fiscal 2019 and $225.0 million for fiscal 2020 and
thereafter). 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 2020. However,

                                       43
--------------------------------------------------------------------------------



an unanticipated shortfall in earnings, an increase in net indebtedness or other
factors could materially affect our ability to remain in compliance with the
financial or other covenants of our credit agreement, potentially causing us to
have to seek an amendment or waiver from our lending group which could result in
repricing of our credit facilities. While we believe we have good relationships
with our lending group, we can provide no assurance that such a request would
result in a modified or replacement credit agreement on reasonable terms, if at
all.
Senior Notes
At September 30, 2019, we had senior notes outstanding of $250.0 million
aggregate principal amount of 5.250% Senior Notes due 2026 (the "5.250% Senior
Notes") and $400.0 million aggregate principal amount of 6.000% Senior Notes due
2023 (the "6.000% Senior Notes"). These senior notes represent general unsecured
senior obligations and rank equal in right of payment with our existing and
future unsecured senior debt. Substantially all of our domestic subsidiaries
serve as guarantors of the 5.250% and 6.000% Senior Notes.
On October 22, 2019, we issued $450.0 million aggregate principal amount
of 4.500% Senior Notes due 2029. 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. Substantially all of our domestic subsidiaries serve as guarantors of the
4.500% Senior Notes.
On October 23, 2019, we redeemed all of our outstanding 6.000% Senior Notes for
a redemption price of $412.5 million, comprised of $0.5 million of accrued and
unpaid interest, $12.0 million of redemption premium, and $400.0 million for
outstanding principal amount. The $12.0 million redemption premium will be
recognized in our first quarter of fiscal 2020. As of September 30, 2019, we
classified the $400.0 million of 6.000% Senior Notes as long-term debt on the
Consolidated Balance Sheet. Additionally, we had $3.1 million in unamortized
bond issuance costs as of September 30, 2019, which are expected to be
written-off in the first quarter of fiscal 2020.
Receivables Facility
We also maintain a master repurchase agreement that allows us to 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
million and the commitment amount during the seasonal commitment period is
$160.0 million. This agreement expires on August 21, 2020.
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 Sheet, primarily as a result of our requirement to repurchase
receivables sold. As of September 30, 2019 and 2018, there were $76.0 million in
borrowings on receivables pledged as collateral under the Receivables Facility,
and the carrying value of the receivables pledged as collateral was $84.5
million. As of September 30, 2019 and 2018, there was $0.1 million and $0.4
million, respectively, of availability under the Receivables Facility.
Interest Rate Swap Agreements
We enter into interest rate swap agreements with major financial institutions as
a means to hedge our variable interest rate risk on our Fifth A&R Credit
Agreement. The swap agreements had a maximum total U.S. dollar equivalent
notional amount of $850.0 million and $800.0 million at September 30, 2019 and
2018, respectively. Interest payments made between the effective date and
expiration date are hedged by the swap agreements, except as noted below. The
notional amount, effective date, expiration date and rate of each of these swap
agreements outstanding at September 30, 2019 are shown in the table below:
Notional Amount       Effective   Expiration   Fixed
 (in millions)        Date (a)       Date       Rate
            250  (b)   1/8/2018     6/8/2020   2.09 %
            100       6/20/2018   10/20/2020   2.15 %
            200  (b)  11/7/2018     6/7/2021   2.87 %
            100       11/7/2018     7/7/2021   2.96 %
            200       11/7/2018    10/7/2021   2.98 %


(a)    The effective date refers to the date on which interest payments were
       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.



                                       44

--------------------------------------------------------------------------------



We believe that our cash flows from operations and borrowings under our
agreements described herein will be sufficient to meet debt service, capital
expenditures and working capital needs for the foreseeable future. However, we
cannot ensure that our business will generate sufficient cash flow from
operations or that future borrowings will be available under our borrowing
agreements in amounts sufficient to pay indebtedness or fund other liquidity
needs. Actual results of operations will depend on numerous factors, many of
which are beyond our control as further discussed in "Item 1A. RISK FACTORS -
Our indebtedness could limit our flexibility and adversely affect our financial
condition" of this Annual Report on Form 10-K.
Judicial and Administrative Proceedings
We are party to various pending judicial and administrative proceedings arising
in the ordinary course of business, including, among others, proceedings based
on accidents or product liability claims and alleged violations of environmental
laws. We have reviewed these pending judicial and administrative proceedings,
including the probable outcomes, reasonably anticipated costs and expenses, and
the availability and limits of our insurance coverage, and have established what
we believe to be appropriate 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, 2019:
                                                                           Payments Due by Period
                                                                                                             More Than
Contractual Cash Obligations              Total        Less Than 1 Year       1-3 Years      3-5 Years        5 Years
                                                                         (In millions)
Debt obligations                       $ 1,633.5     $            126.0     $      80.3     $  1,177.2     $     250.0
Interest expense on debt obligations       344.6                   74.9           147.5           89.3            32.9
Capital lease obligations                   32.6                    3.0             7.0            7.2            15.4
Operating lease obligations                157.1                   52.8            68.4           23.3            12.6
Purchase obligations                       457.7                  228.7           200.0           27.0             2.0
Other, primarily retirement plan
obligations                                141.9                   10.5            25.6           26.4            79.4
Total contractual cash obligations     $ 2,767.4     $            495.9     

$ 528.8 $ 1,350.4 $ 392.3

We had long-term debt obligations and interest payments due primarily under the
5.250% Senior Notes, 6.000% Senior Notes and our credit facilities. Amounts in
the table represent scheduled future maturities of long-term debt principal for
the periods indicated. The impacts of the issuance of the 4.500% Senior Notes
and the redemption of the 6.000% Senior Notes are not reflected in the table as
these events took place subsequent to September 30, 2019.
The interest payments for our credit facilities are based on outstanding
borrowings as of September 30, 2019. Actual interest expense will likely be
higher due to the seasonality of our business and associated higher average
borrowings.
Purchase obligations primarily represent commitments for materials used in our
manufacturing processes, including urea and packaging, as well as commitments
for warehouse services, grass seed and out-sourced information 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 2019 are based on preliminary estimates using
actuarial assumptions determined as of September 30, 2019. The above table
excludes liabilities for unrecognized tax benefits and insurance accruals as we
are unable to estimate the timing of payments for these items.
Off-Balance Sheet Arrangements
At September 30, 2019, we have letters of credit in the aggregate face amount of
$26.7 million outstanding.


                                       45

--------------------------------------------------------------------------------



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, should not
have a material effect on our financial condition, results of operations or cash
flows. However, there can be no assurance that the resolution of these matters
will not materially affect our future quarterly or annual results of operations,
financial condition or cash flows. Additional information on environmental
matters affecting us is provided in "ITEM 1. BUSINESS - Regulatory
Considerations" 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, inventories, goodwill and
intangibles, certain associate benefits and contingencies. Our critical
accounting policies are reviewed periodically with the Audit Committee of the
Board of Directors of Scotts Miracle-Gro.
Revenue Recognition and Promotional Allowances
Our revenue is primarily generated from sales of branded and private label lawn
and garden care and indoor and hydroponic gardening finished products. Product
sales are recognized at a point in time when control of products transfers to
customers and we have no further obligation to provide services related to such
products. Sales are typically recognized when products are delivered to or
picked up by the customer. We are generally the principal in a transaction,
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. Promotion
costs (including allowances and rebates) incurred during the year are expensed
to interim periods in relation to revenues and are recorded as a reduction of
net sales. 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.

                                       46
--------------------------------------------------------------------------------

Inventories

Inventories are stated at the lower of cost or net realizable value, principally
determined by the first in, first out method of accounting. Inventories acquired
through the acquisition of or subsequently produced by Sunlight Supply, which
represent approximately 22% of our consolidated inventories, were initially
recorded at fair value at the date of the acquisition and subsequently
were measured using the average costing method of inventory valuation.
Inventories include the cost of raw materials, labor, manufacturing overhead and
freight and in-bound handling costs incurred to pre-position goods in our
warehouse network. We make provisions for obsolete or slow-moving inventories as
necessary to properly reflect inventory at the lower of cost or net realizable
value. Adjustments to net realizable value for excess and obsolete inventory are
based on a variety of factors, including product changes and improvements,
changes in active ingredient availability and regulatory acceptance, new product
introductions and estimated future demand. The adequacy of our adjustments could
be materially affected by changes in the demand for our products or regulatory
actions. During fiscal 2018, we determined it was preferable to use the first
in, first out inventory valuation method and adopted this method for the
remaining U.S. Consumer segment inventories not subject to the first in, first
out method. The impact on inventory value and cost of goods sold was immaterial.
Goodwill and Indefinite-lived Intangible Assets
We have significant investments in intangible assets and goodwill. Our annual
goodwill and indefinite-lived intangible asset testing is performed as of the
first day of our fiscal fourth quarter or more frequently if circumstances
indicate potential impairment. In our evaluation of goodwill and
indefinite-lived intangible assets impairment, we perform either an initial
qualitative or quantitative evaluation for each of our reporting units and
indefinite-lived intangible assets. Factors considered in the qualitative test
include operating results as well as new events and circumstances impacting the
operations or cash flows of the reporting unit and indefinite-lived intangible
assets. For the quantitative test, the review for impairment of goodwill and
indefinite-lived intangible assets is 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
expense 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 expenses 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 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.
At September 30, 2019, goodwill totaled $538.7 million, with $228.1 million,
$300.0 million and $10.6 million of goodwill for our U.S. Consumer, Hawthorne
and Other segments, respectively. We performed annual impairment testing as of
the first day of our fourth fiscal quarter in fiscal 2019, 2018 and 2017 and,
with the exception of our Hawthorne reporting unit in fiscal 2018, concluded
that there were no impairments of goodwill as the estimated fair value of each
reporting unit exceeded its carrying value. Based on the results of the annual
quantitative evaluation for fiscal 2019, the fair values of our U.S. Consumer,
Hawthorne and Other segment reporting units exceeded their respective carrying
values by 260%, 5% and 9%, respectively. A 100 basis point change in the
discount rate would not have resulted in an impairment for our U.S. Consumer and
Other segment reporting units, and would have resulted in a goodwill impairment
charge of $11.7 million for our Hawthorne reporting unit. As discussed further
in "NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET," during the fourth quarter of
fiscal 2018 we recognized a non-cash goodwill impairment charge of $94.6 million
related to our Hawthorne reporting unit in the "Impairment, restructuring and
other" line in the Consolidated Statements of Operations.

                                       47
--------------------------------------------------------------------------------



At September 30, 2019, indefinite-lived intangible assets consisted of
tradenames of $168.2 million and the Marketing Agreement Amendment of $155.7
million. Based on the results of the annual evaluation for fiscal 2019, the fair
values of our indefinite-lived intangible assets exceeded their respective
carrying values in a range of 17% to over 900%. All of our indefinite-lived
intangible assets had an estimated fair value substantially in excess of
carrying value as of the annual test date. A 100 basis point change in the
discount rate would not have resulted in an impairment of any of our
indefinite-lived intangible assets.
Associate Benefits
We sponsor various post-employment benefit plans, including pension plans, both
defined contribution plans and defined benefit plans, and other post-employment
benefit ("OPEB") plans, consisting primarily of health care for retirees. For
accounting purposes, the defined benefit pension and OPEB plans are dependent on
a variety of assumptions to estimate the projected and accumulated benefit
obligations and annual expense determined by actuarial valuations. These
assumptions include the following: discount rate; expected salary increases;
certain employee-related factors, such as turnover, retirement age and
mortality; expected return on plan assets; and health care cost trend rates.
Assumptions are reviewed annually for appropriateness and updated as necessary.
We base the discount rate assumption on investment yields available at fiscal
year-end on high-quality corporate bonds that could be purchased to effectively
settle the pension liabilities. The salary growth assumption reflects our
long-term actual experience, the near-term outlook and assumed inflation. The
expected return on plan assets assumption reflects asset allocation, investment
strategy and the views of investment managers regarding the market. Retirement
and mortality rates are based primarily on actual and expected plan experience.
The effects of actual results that differ from our assumptions are accumulated
and amortized over future periods.
Changes in the discount rate and investment returns can have a significant
effect on the funded status of our pension plans and shareholders' equity. We
cannot predict discount rates or investment returns with certainty and,
therefore, cannot determine whether adjustments to our shareholders' equity for
pension-related activity in subsequent years will be significant. We also cannot
predict future investment returns, and therefore cannot determine whether future
pension plan funding requirements could materially affect our financial
condition, results of operations or cash flows. A 100 basis point change in the
discount rate would have an immaterial effect on fiscal 2020 pension expense. A
100 basis point change in the discount rate would have a $34.5 million change in
our projected benefit obligations as of September 30, 2019.
Contingencies
As described more fully in "NOTE 20. CONTINGENCIES" of the Notes to Consolidated
Financial Statements included in this Annual Report on Form 10-K, we are
involved in environmental and legal proceedings which have a high degree of
uncertainty associated with them. We continually assess the likely outcome of
these proceedings and the adequacy of accruals, if any, provided for their
resolution. There can be no assurance that the ultimate outcomes of these
proceedings will not differ materially from our current assessment of them, nor
that all proceedings that may currently be brought against us are known by us at
this time.
Other Significant Accounting Policies
Other significant accounting policies, primarily those with lower levels of
uncertainty than those discussed above, are also critical to understanding the
consolidated financial statements. The Notes to Consolidated Financial
Statements included in this Annual Report on Form 10-K contain additional
information related to our accounting policies, including recent accounting
pronouncements, and should be read in conjunction with this discussion.


                                       48

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses