What changed in this filing

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Item 1A. Risk Factors

2021-11-23 compared with 2020-11-24 · 56 added, 57 removed, 257 unchanged (31% of the section changed)

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COVID-19 has affected and may continue to affect how we and our customers are operating our businesses and overall demand for our products.

We have experienced varying impacts to our Garden and Pet businesses due to COVID-19.

In March and April 2020, we experienced increased demand in pet consumables due to consumers stocking up on products as COVID-19 shelter-in-place mandates were implemented.

We also saw reduced consumption on other items, such as live fish and live plants, due to in-store curtailments of foot traffic and limited access to outdoor garden departments.

In May 2020, state and county governments began phased reopenings of their local economies.

Access to outdoor garden departments resulted in increased demand for our products in May and June 2020.

Additionally, as a result of shelter-in-place requirement periods, pet ownership significantly increased, and we saw increased sales continue in May and June 2020 across our Pet segment portfolio.

During July through September, our fiscal fourth quarter, most of our businesses continued to experience high sales.

We also continued to see rapid increase in demand in the eCommerce channel.

Although our facilities have largely been exempt or partially exempt from government closure orders as essential businesses, to support the health and well-being of our employees, customers and communities, we are requiring a significant portion of our workforce to work remotely, and local and state governments in the United States and in the United Kingdom have imposed shelter-in-place requirements and certain travel restrictions, all of which have changed how we operate our business.

We have experienced varying impacts to our Garden and Pet businesses due to COVID-19 but overall, we believe that the pandemic has driven consumer demand for our products and higher sales.

We have also seen a rapid increase in demand in the eCommerce channel.

Although our facilities have largely been exempt or partially exempt from government closure orders as essential businesses, to support the health and well-being of our employees, customers and communities, we are requiring a significant portion of our workforce to work remotely, and local and state governments in the United States and in the United Kingdom have from time to time imposed shelter-in-place requirements and certain travel restrictions, all of which have changed how we operate our business.

For our employees who are not working remotely, we have taken several actions to ensure their safety, including instituting workplace safety measures and ensuring the availability of personal protective equipment.

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At some of our facilities, we have experienced reduced productivity and increased employee absences, which we expect to continue during the current pandemic.

The pandemic and near-term increase in demand for pet consumables have created operational challenges for our distribution network and impacted our ability to meet our normal fill rate standards.

Our supply chain has been impacted by the rapid increase in demand and it is possible we will experience increased operational and logistics costs.

The pandemic and increase in demand for our products have created operational challenges for our distribution network and impacted our ability to meet our normal fill rate standards.

Our supply chain has been impacted by the rapid increase in demand and we have experienced increased operational and logistics costs.

We may experience additional disruptions in our supply chain as the pandemic continues, though we cannot reasonably estimate the potential impact or timing of those events, and we may not be able to mitigate such impact.

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We recorded an impairment charge of $3.6 million for two private-company investments in our third fiscal quarter ended June 27, 2020, and may be required to write off certain assets that could be material in future periods.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, independent contractors and customers and consumers.

The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus and rates of vaccination, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, independent contractors and customers and consumers.

If we are not able to respond to and manage the impact of such events effectively, our business will be harmed.

As noted above, many of our product categories in both Pet and Garden have benefited from increased pet adoption during the pandemic and stay at home orders that positively impacted demand for lawn and garden products.

As noted above, many of our product categories in both Pet and Garden have benefited from increased pet adoption during the pandemic and stay at home orders and remote working that positively impacted demand for lawn and garden products.

As the pandemic lessens and consumers return to more normal purchasing patterns, demand for product categories which benefited from the COVID-19 pandemic could be adversely impacted, which could negatively impact our financial results.

The COVID-19 pandemic may also have the effect of heightening many of the other risks identified elsewhere in this “Risk Factors” section or incorporated by reference into this prospectus supplement.

We are in the process of implementing our Vision 2025 strategy, which could result in increased expenses over the next few years .

In fiscal 2020, we embarked upon a company-wide strategic review led by our new Chief Executive Officer to develop our Vision 2025 strategy, which is expected to consist of a comprehensive series of organizational and operational initiatives intended to build and grow our consumer brands, create a leading eCommerce platform and strengthen our relationships with key customers, drive a strong portfolio strategy, reduce costs to improve margins and fuel growth and strengthen our entrepreneurial, business unit-led growth culture.

We expect to implement these initiatives over the next several years.

The COVID-19 pandemic may also have the effect of heightening many of the other risks identified elsewhere in this “Risk Factors” section.

We are in the process of implementing our Central to Home strategy, which could result in increased expenses over the next few years .

In fiscal 2020, we embarked upon a company-wide strategic review led by our Chief Executive Officer to develop our Central to Home strategy, which consists of a comprehensive series of organizational and operational initiatives intended to build and grow our consumer brands, create a leading eCommerce platform and strengthen our relationships with key customers, drive a strong portfolio strategy, reduce costs to improve margins and fuel growth and strengthen our entrepreneurial, business unit-led growth culture.

We expect to continue to implement these initiatives over the next several years.

We anticipate incurring substantial costs relating to this strategy in each of the next several years.

There can be no assurance that we will be able to successfully execute our Vision 2025 strategic initiatives or that we will be able to do so within the anticipated time period.

There can be no assurance that we will be able to successfully execute our Central to Home strategic initiatives or that we will be able to do so within the anticipated time period.

During the process of implementation, we will be making substantial investments in our business and will incur substantial transitional costs.

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In particular, our Pennington and Kaytee businesses are exposed to fluctuations in market prices for commodity seeds and grains used to produce bird feed.

Historically, market prices for commodity seeds and grains have fluctuated in response to a number of factors, including changes in U.S.

Historically, market prices for commodity seeds and grains have fluctuated in response to a number of factors,

including changes in U.S.

government farm support programs, changes in international agricultural and trading policies and weather conditions during the growing and harvesting seasons.

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In contrast, if market prices for such products decrease, we may end up purchasing grains and seeds pursuant to the purchase contracts at prices above market.

We took certain pricing actions in fiscal 2019 and 2018 to offset the impact of inflationary pressures.

In fiscal 2020, we encountered higher key commodity prices.

In fiscal 2021, we experienced increasing inflationary costs in key commodities (e.g., sunflower, milo and millet).

In fiscal 2020, we also encountered higher key commodity prices.

Although we have been able to negotiate some price increases in the past with our retailers, it is possible that price increases may not fully offset rising costs in the future, resulting in margin erosion.

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As retailers pass along price increases, consumers may shift to our lower margin bird feed, switch to competing products or reduce purchases of wild bird feed products.

Supply chain delays and interruptions may result in lost sales, reduced fill rates and service levels and delays in expanding capacity and automating processes.

The COVID-19 pandemic and rapid increase in demand for our products have created operational challenges for our distribution network which have impacted our service and fill rates and resulted in lost sales.

The increased demand for our products also continues to challenge our supply chain and our ability to procure and manufacture enough product to meet the continued high levels of demand.

We continue to face supply constraints of commodities, material and freight and the limited availability of labor and freight and inflationary pressures stemming from the COVID-19 operating environment, including notable increases in costs for key commodities, material, labor and freight.

We may experience additional disruptions in our supply chain, whether it is our ability to procure the materials needed for manufacture or our ability to ship our products to our customers, as the pandemic continues.

We cannot reasonably estimate the potential impact or timing of those events, and we may not be able to mitigate such impact.

We are subject to significant risks associated with innovation, including the risk that our new product innovations will not produce sufficient sales to recoup our investment.

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Our failure to develop new products or improved formulations and introduce them successfully and in a timely manner could harm our ability to grow our business and could have a material adverse effect on our business, results of operations and financial condition.

In 2018, we launched a new formulation for our Comfort Zone behavioral management product that did not perform as expected.

Consequently, we faced additional costs to fix the issue and lost market share.

We believe that the period of time to gain consumer acceptance of major innovations is longer in the garden industry than in many industries, which compounds the risks generally associated with major new product innovations.

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The sale of fish, pet birds and small animals subjects us to additional risk, including risks associated with sourcing, developing captive breeding programs, health of the fish, pet birds and small animals supplied by us and future governmental regulation of the sale of fish, pet birds and small animals.

In fiscal 2019, WalMart exited the live fish business, which has had a negative impact on Segrest’s sales.

If other retailers follow suit, demand for aquarium fish may further soften, resulting in a negative impact on our financial results.

Similarly, the COVID-19 pandemic has resulted in a significant decline in traffic in retail stores, which has adversely impacted demand for pet birds, small animals and fish.

Our lawn and garden sales are highly seasonal and subject to adverse weather.

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Because demand for lawn and garden products is significantly influenced by weather, particularly weekend weather during the peak gardening season, our results of operations and cash flow could also be adversely affected by certain weather patterns such as unseasonably cool or warm temperatures, heavy rains, water shortages or floods.

During fiscal 2020, we experienced very favorable weather during the garden season.

During fiscal 2020, we experienced very favorable weather during the garden season while the fiscal 2021 season was not as favorable.

Less favorable weather in the future could have a significant adverse effect on the profitability of our lawn and garden business.

We depend on a few customers for a significant portion of our business.

Walmart, our largest customer, represented approximately 17% of our total company net sales in fiscal 2020 and 16% of our total company net sales in each of the fiscal years 2019 and 2018.

Walmart, our largest customer, represented approximately 16% of our total company net sales in fiscal 2021 and 17% of our total company net sales in fiscal 2020 and 16% in fiscal 2019.

Home Depot, our second largest customer, represented approximately 15%, 13% and 12% of our total company net sales in fiscal 2021, 2020 and 2019, respectively.

Lowe's, our third largest customer, represented approximately 9%, 10% and 9% of our total company net sales in fiscal 2021, 2020 and 2019, respectively.

Costco, and PetSmart are also significant customers, and together with Walmart, Home Depot and Lowe's accounted for approximately 52% of our net sales in fiscal 2020, 49% in fiscal 2019 and 48% in fiscal 2018.

Costco and Petco are also significant customers, and together with Walmart, Home Depot and Lowe's accounted for approximately 51% of our net sales in fiscal 2021.

The market shares of many of these key retailers have increased and may continue to increase in future years.

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Since July 2018, the United States has imposed a series of tariffs, ranging from 5% to 25%, on a variety of imports from China and subsequently implemented tariffs on additional goods imported from China.

Approximately 10% of the products that we sell in the United States are manufactured in China.

Less than 10% of the products that we sell are manufactured in China.

If the United States continues the China tariffs, or if additional tariffs or trade restrictions are implemented by the United States or other countries in connection with a global trade war, the cost of our products manufactured in China, or other countries, and imported into the United States or other countries could increase, which in turn could adversely affect the demand for these products and have a material adverse effect on our business and results of operations.

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To the extent that the key retailers on which we depend lose share to the eCommerce channel, we could lose sales.

We plan to make additional investments to access this channel more effectively, and there can be no assurances that any such investments will be successful.

We continue to make additional investments to access this channel more effectively, and there can be no assurances that any such investments will be successful.

If we are not successful in developing and utilizing eCommerce channels that consumers may prefer, we may experience lower than expected revenues.

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Our products compete against national and regional products and private label products produced by various suppliers.

Our largest competitors in the Pet segment are Spectrum Brands and Hartz Mountain, and our largest competitors in the Garden segment are Scotts and Spectrum Brands.

Our largest competitors in the Pet segment are Spectrum Brands, Hartz Mountain, Mars, Inc.

and the J.M Smucker Co., and our largest competitors in the Garden segment are Scotts Miracle-Gro, Spectrum Brands and S.C.

Johnson & Son.

To compete effectively, among other things, we must:

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Our inability to compete effectively could have a material adverse effect on our business, results of operations and financial condition.

We continue to implement an enterprise resource planning information technology system.

In fiscal 2005, we began incurring costs associated with designing and implementing SAP, a company-wide enterprise resource planning (ERP) software system with the objective of gradually migrating to the new system.

This new system replaces numerous accounting and financial reporting systems, most of which were obtained in connection with business acquisitions.

We continue to implement enterprise resource planning information technology systems.

We are incurring costs associated with designing and implementing enterprise resource planning (ERP) software systems with the objective of gradually migrating our businesses to one or the other of two systems.

The choice of which is to be used for each business is dependent on the needs of the business unit.

These two systems are to replace numerous accounting and financial reporting systems, most of which have been obtained in connection with business acquisitions.

To date, we have reduced the number of ERP systems from 43 to 14.

Capital expenditures for our enterprise resource planning software system for fiscal 2021 and beyond will depend upon the pace of conversion for those remaining legacy systems.

Capital expenditures for our enterprise resource planning software systems for fiscal 2022 and beyond will depend upon the pace of conversion for those remaining legacy systems.

If the balance of the implementation is not executed successfully, we could experience business interruptions.

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government's trade policies, including the imposition of tariffs on goods imported from China.

Because we rely on Chinese third-party

manufacturers for a significant portion of our product needs, any disruption in our relationships with these manufacturers could adversely affect our operations.

Because we rely on Chinese third-party manufacturers for a significant portion of our product needs, any disruption in our relationships with these manufacturers could adversely affect our operations.

Deterioration in operating results could prevent us from fulfilling our obligations under the terms of our indebtedness or impact our ability to refinance our debt on favorable terms as it matures.

We have, and we will continue to have, significant indebtedness.

As of September 26, 2020, after giving effect to our debt refinancing in October 2020, we had total indebtedness of approximately $800 million.

As of September 25, 2021, after giving effect to our debt refinancings in October 2020 and April 2021, we had total indebtedness of approximately $1.2 billion.

This level of indebtedness and our future borrowing needs could have material adverse consequences for our business, including:

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We have faced, and expect to continue to face, intense competition for acquisition candidates, which may limit our ability to make acquisitions and may lead to higher acquisition prices.

We cannot assure you that we will be able to identify, acquire or manage profitably

additional businesses or to integrate successfully any acquired businesses into our existing business without substantial costs, delays or other operational or financial difficulties.

We cannot assure you that we will be able to identify, acquire or manage profitably additional businesses or to integrate successfully any acquired businesses into our existing business without substantial costs, delays or

other operational or financial difficulties.

In future acquisitions, we also could incur additional indebtedness or pay consideration in excess of fair value, which could have a material adverse effect on our business, results of operations and financial condition.

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Most of our goodwill is associated with our Pet segment.

In connection with our annual goodwill impairment testing performed during fiscal years 2020, 2019 and 2018, we made a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the fair values of its reporting units under the two-step goodwill impairment test.

In connection with our annual goodwill impairment testing performed during fiscal years 2021, 2020 and 2019 we made a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the fair values of our reporting units under the quantitative goodwill impairment test.

We completed our qualitative assessment of potential goodwill impairment and it was determined that it was more likely than not the fair values of our reporting units were greater than their carrying amounts, and accordingly, no further testing of goodwill was required.

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The loss of the services of these persons could have a material adverse effect on our business.

Our future performance depends on our ability to attract and retain skilled employees.

Our future performance depends on our ability to attract and retain skilled employees in all facets of our business, including management and manufacturing and distribution.

We cannot assure you that we will be able to retain our existing personnel or attract additional qualified employees in the future.

Inflation, deflation, economic uncertainty and other adverse macro-economic conditions may harm our business.

Our revenues and margins are dependent on various economic factors, including rates of inflation or deflation, energy costs, consumer attitudes toward discretionary spending, currency fluctuations, and other macro-economic factors which may impact consumer spending.

If we are unable to pass through rising input costs and raise the price of our products, or consumer confidence weakens, we may experience gross margin declines.

Inflation, economic uncertainty and other adverse macro-economic conditions may harm our business.

Our revenues and margins are dependent on various economic factors, including rates of inflation, energy costs, consumer attitudes toward discretionary spending, currency fluctuations, and other macro-economic factors which may impact consumer spending.

During fiscal 2021, we experienced significant cost increases in many parts of our business, including input costs, labor costs, and fuel costs and we expect the inflationary environment to continue during fiscal 2022.

If we are unable to pass through rising input costs and raise the price of our products, or consumer confidence weakens, we are likely to experience gross margin and operating income declines.

Our inability to protect our trademarks and any other proprietary rights may have a significant, negative impact on our business.

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Rising energy prices could adversely affect our operating results.

At various times in the past, energy prices have increased substantially, which resulted in increased fuel costs for our businesses and increased raw materials costs for many of our branded products.

During 2021, energy prices have increased substantially, which resulted in increased fuel costs for our businesses and increased raw materials costs for many of our branded products, and may continue to rise during fiscal 2022.

Rising energy prices in the future could adversely affect consumer spending and demand for our products and increase our operating costs, both of which would reduce our sales and operating income.

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A successful product liability claim in excess of our insurance coverage could have a material adverse effect on us and could prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms.

We have pending litigation which could adversely impact our operating results.

We have unresolved litigation which could adversely impact our operating results.

We are a party to litigation alleging that the applicator developed and used by us for certain of our branded topical flea and tick products infringes a patent held by Nite Glow Industries, Inc.

and claims for breach of contract and misappropriation of confidential information.

On June 27, 2018, a jury returned a verdict in favor of Nite Glow and awarded damages of approximately $12.6 million.

On June 27, 2018, a jury returned a verdict in favor of Nite Glow on each of the three claims and awarded damages of approximately $12.6 million.

The court ruled on post-trial motions in early June 2020, reducing the judgment amount to $12.4 million and denying the plaintiff's request for attorneys' fees.

The Company has filed its notice of appeal and the plaintiffs have cross-appealed.

The Company intends to vigorously pursue its rights on appeal and believes that it will prevail on the merits.

However, the outcome of litigation is inherently uncertain.

Regardless of the ultimate outcome, we could incur significant legal expenses pursuing an appeal and could experience the diversion of time by our management team.

If we are unsuccessful in post-trial proceedings or on appeal, our operating results could be adversely affected.

We filed our notice of appeal and the plaintiffs cross-appealed.

On July 14, 2021, the Federal Circuit Court of Appeals issued its decision on the appeal.

The Federal Circuit concluded that the Company did not infringe plaintiff's patent and determined that the breach of contract claim raised no non-duplicative damages and should be dismissed.

The court affirmed the jury's liability verdict on the misappropriation of confidential information claim but ordered a new trial on damages on that single claim limited to the "head start" benefit, if any, generated by the confidential information.

We intend to vigorously pursue our defenses in the future proceedings and believe that we will prevail on the merits as to the head start damages issue.

While we believe that the ultimate resolution of this matter will not have a material impact on our consolidated financial statements, the outcome of litigation is inherently uncertain and the final resolution of this matter may result in expense to us in excess of management's expectations.

We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.

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Provisions of our credit facility and the indenture governing our senior subordinated notes restrict our ability to pay cash dividends.

Any future determination to pay cash dividends will be at the discretion of our Board of Directors, subject to limitations under applicable law and

contractual restrictions, and will depend upon our results of operations, financial condition and other factors deemed relevant by our Board of Directors.

Any future determination to pay cash dividends will be at the discretion of our Board of Directors, subject to limitations under applicable law and contractual restrictions, and will depend upon our results of operations, financial condition and other factors deemed relevant by our Board of Directors.

We may issue additional shares of our common stock or Class A common stock that could dilute the value and market price of our stock.

We issued shares in 2018 and may decide or be required to issue, including upon the exercise of any outstanding stock options, or in connection with any acquisition made by us, additional shares of our common stock or Class A common stock that could dilute the value of your common stock or Class A common stock and may adversely affect the market price of our common stock or Class A common stock.

We may decide or be required to issue, including upon the exercise of any outstanding stock options, or in connection with any acquisition made by us, additional shares of our common stock or Class A common stock that could dilute the value of your common stock or Class A common stock and may adversely affect the market price of our common stock or Class A common stock.

Our founder, through his holdings of our Class B common stock, exercises effective control of the Company, which may discourage potential acquisitions of our business and could have an adverse effect on the market price of our stock.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors