. 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, management intends to provide
investors with a supplemental comparison of operating results and
trends for the periods presented. Management believes these
measures are also useful to investors as such measures allow
investors to evaluate performance using the same metrics that
management uses to evaluate past performance and prospects for
future performance. Management views 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.
Management views free cash flow productivity as a useful measure to
help investors understand the Company’s ability to generate
cash.
Exclusions from Non-GAAP
Financial Measures
Non-GAAP financial measures reflect adjustments
based on the following items:
Impairments, which are excluded because they
do not occur in or reflect the ordinary course of the Company’s
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 the Company’s operations and are excluded
because they are not part of the ongoing operations of its
underlying business, which includes normal levels of reinvestment
in the business.
Costs related to refinancing, which are
excluded because they do not typically occur in the normal course
of business and may obscure analysis of trends and financial
performance. Additionally, the amount and frequency of these types
of charges is not consistent and is significantly impacted by the
timing and size of debt financing transactions.
Charges or credits incurred by the Company’s
joint venture with TruGreen Holding Corporation (the “TruGreen
Joint Ventureâ€) that are apart from and not indicative of the
results of its ongoing operations, including transaction related
costs, refinancing costs, restructurings and other discrete
projects or transactions including a non-cash purchase accounting
fair value write-down adjustment related to deferred revenue and
advertising (“TruGreen Joint Venture non-GAAP adjustmentsâ€). The
Company held a noncontrolling equity interest of approximately 30%
in the TruGreen Joint Venture. The Company did not control, nor did
it have any legal claim to, the revenues and expenses of the
TruGreen Joint Venture or its other unconsolidated affiliates. The
use of non-GAAP measures that are subject to TruGreen Joint Venture
non-GAAP adjustments is not intended to imply that the Company had
control over the operations and resulting revenue and expenses of
the TruGreen Joint Venture or its other unconsolidated affiliates.
Moreover, these non-GAAP financial measures have limitations in
that they do not reflect all revenue and expenses of the
unconsolidated affiliates.
Discontinued operations 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 the Company’s 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 management in evaluating
the performance of the business, engaging in financial and
operational planning, the determination of incentive compensation,
and by investors and analysts in evaluating performance of the
business:
Adjusted gross profit: Gross profit excluding
impairment, restructuring and other charges / recoveries. Adjusted income (loss) from operations: Income
(loss) from operations excluding impairment, restructuring and
other charges / recoveries. Adjusted income (loss) from continuing operations before
income taxes: Income (loss) from continuing
operations
before income taxes excluding impairment, restructuring and other
charges / recoveries, costs related to refinancing
and TruGreen Joint Venture non-GAAP adjustments. Adjusted income tax expense (benefit) from continuing
operations: Income tax expense (benefit) from continuing
operations excluding the tax effect of impairment, restructuring
and other charges / recoveries, costs related to refinancing and
TruGreen Joint Venture non-GAAP adjustments. Adjusted income (loss) from continuing operations:
Income (loss) from continuing operations excluding impairment,
restructuring and other charges / recoveries, costs related to
refinancing and TruGreen Joint Venture non-GAAP adjustments, each
net of tax. Adjusted net income (loss) attributable to controlling
interest from continuing operations: Net income (loss)
attributable to controlling interest excluding impairment,
restructuring and other charges / recoveries, costs related to
refinancing, TruGreen Joint Venture non-GAAP adjustments and
discontinued operations, each net of tax. Adjusted diluted income (loss) per common share from
continuing operations: Diluted income (loss) per common
share from continuing operations excluding impairment,
restructuring and other charges / recoveries, costs related to
refinancing and TruGreen Joint Venture non-GAAP adjustments, each
net of tax. 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 the Company’s
borrowing arrangements, and used to calculate a leverage ratio
(maximum of 5.25 at March 30, 2019) and an interest coverage
ratio (minimum of 3.00 for the twelve months ended March 30,
2019). Free cash flow: Net cash provided by (used in)
operating activities reduced by investments in property, plant and
equipment. Free cash flow productivity: Ratio of free cash
flow to net income (loss).
For the three and six months ended
March 30, 2019, the following items were adjusted, in
accordance with the definitions above, to arrive at the non-GAAP
financial measures:
On March 19, 2019, the Company entered into
an agreement under which it sold, to TruGreen Companies L.L.C., a
subsidiary of TruGreen Holding Corporation, all of its
approximately 30% equity interest in Outdoor Home Services Holdings
LLC, a lawn services joint venture between the Company and TruGreen
Holding Corporation (the “TruGreen Joint Ventureâ€). Under the
terms of the agreement, the Company received cash proceeds of
$234.2 million related to the sale of its equity interest in the
TruGreen Joint Venture and $18.4 million related to the payoff of
second lien term loan financing. During the three and six months
ended March 30, 2019, the Company recognized a pre-tax gain of
$259.8 million related to this sale in the “Other non-operating
(income) expense, net†line in the Condensed Consolidated Statement
of Operations.
In connection with the acquisition of
Sunlight Supply during the third quarter of fiscal 2018, the
Company announced the launch of an initiative called Project
Catalyst, which is a company-wide restructuring effort to reduce
operating costs throughout the U.S. Consumer, Hawthorne and Other
segments and drive synergies from recent acquisitions within the
Hawthorne segment. During the three and six months ended
March 30, 2019, the Company continued to execute on its
planned facility closures and consolidations which resulted in
charges of $2.1 million and $7.6 million, respectively, related to
Project Catalyst. During the three and six months ended
March 30, 2019, the Company recognized charges of $1.0 million
and $3.5 million, respectively, in the “Cost of sales—impairment,
restructuring and other†line in the Condensed Consolidated
Statements of Operations related to employee termination benefits,
facility closure costs and impairment of property, plant and
equipment. During the three and six months ended March 30,
2019, the Company recognized charges of $1.1 million and $4.1
million, respectively, in the “Impairment, restructuring and otherâ€
line in the Condensed Consolidated Statements of Operations related
to employee termination benefits and facility closure costs. The
Company also recognized a charge of $2.5 million for the three and
six months ended March 30, 2019 in the “Other non-operating
(income) expense, net†line in the Condensed Consolidated
Statements of Operations related to the write-off of accumulated
foreign currency translation loss adjustments of a foreign
subsidiary that was substantially liquidated.
The Company recognized favorable adjustments
of $0.9 million and $0.4 million, respectively, related to the
previously disclosed legal matter In re Scotts EZ Seed
Litigation for the three and six months ended March 30,
2019, respectively, in the “Impairment, restructuring and otherâ€
line in the Condensed Consolidated Statements of Operations.
The Company recognized insurance recoveries
of $5.0 million related to the previously disclosed legal
matter In re Morning Song Bird Food
Litigation for the six months ended March 30, 2019
in the “Income (loss) from discontinued operations, net of taxâ€
line in the Condensed Consolidated Statements of Operations.
For the three and six months ended
March 31, 2018, the following items were adjusted, in
accordance with the definitions above, to arrive at the non-GAAP
financial measures:
The Company recognized adjustments to
previously recognized termination benefits related to Project Focus
activity of $0.2 million for the six months
ended March 31, 2018 within the “Impairment,
restructuring and other†line in the Condensed Consolidated
Statements of Operations.
The Company recognized a charge of $10.2
million for a probable loss on a previously disclosed legal matter
for the three and six months ended March 31,
2018 within the “Impairment, restructuring and other†line in
the Condensed Consolidated Statements of Operations.
On December 22, 2017, H.R.1 (the “Act,â€
formerly known as the “Tax Cuts and Jobs Actâ€) was signed into law.
The Act provides for significant changes to the U.S. Internal
Revenue Code of 1986, as amended. Among other items, the Act
implements a territorial tax system, imposes a one-time transition
tax on deemed repatriated earnings of foreign subsidiaries, and
reduces the federal corporate statutory tax rate to 21% effective
January 1, 2018. As the Company’s 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 2019 and
beyond at 21%. Included in the effective tax rate for the three
and six months ended March 31, 2018 are
one-time impacts related to the tax law change of $45.7 million.
These include a one-time $45.9 million net tax benefit adjustment
reflecting the revaluation of the Company’s net deferred tax
liability at the lower tax rate. In addition, as part of the Act,
the Company recognized a one-time tax expense on deemed repatriated
earnings and cash of foreign subsidiaries as required by the Act of
$14.0 million, partially offset by the recognition and application
of foreign tax credits associated with these foreign subsidiaries
of $13.9 million.
As a result of the enactment of the Act, the
Company repatriated cash from a foreign subsidiary during the
second quarter of fiscal 2018 resulting in the liquidation of
substantially all of the assets of the subsidiary and the write-off
of accumulated foreign currency translation loss adjustments of
$11.7 million for the three and six months
ended March 31, 2018 within the “Other non-operating
(income) expense, net†line in the Condensed Consolidated
Statements of Operations.
Forward Looking Non-GAAP
Measures
In this earnings release, the Company presents
its outlook for fiscal 2019 non-GAAP adjusted EPS. The Company does
not provide a GAAP EPS outlook, which is the most directly
comparable GAAP measure to non-GAAP adjusted EPS, because changes
in the items that the Company excludes from GAAP EPS to calculate
non-GAAP adjusted EPS, described above, can be dependent on future
events that are less capable of being controlled or reliably
predicted by management and are not part of the Company’s routine
operating activities. Additionally, due to their unpredictability,
management does not forecast the excluded items for internal use
and therefore cannot create or rely on a GAAP EPS outlook without
unreasonable efforts. The timing and amount of any of the excluded
items could significantly impact the Company’s GAAP EPS. As a
result, the Company does not provide a reconciliation of guidance
for non-GAAP adjusted EPS to GAAP EPS, in reliance on the
unreasonable efforts exception provided under Item 10(e)(1)(i)(B)
of Regulation S-K.