Unassociated Document
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
(Mark
One)
|
R
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE QUARTERLY PERIOD ENDED MARCH
28, 2009
OR
|
£
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
FOR THE TRANSITION PERIOD FROM
________________ TO _________________
COMMISSION
FILE NUMBER: 1-11593
THE
SCOTTS MIRACLE-GRO COMPANY
(Exact Name of Registrant as
Specified in Its Charter)
OHIO
|
31-1414921
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
|
|
14111
SCOTTSLAWN ROAD,
MARYSVILLE,
OHIO
|
43041
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(937)
644-0011
(Registrant’s
telephone number, including area code)
NO
CHANGE
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes R No £
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes £ No £
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer R
|
|
Accelerated filer £
|
Non-accelerated filer
£ (Do not check if a smaller reporting company)
|
|
Smaller reporting company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes
£ No
R
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date:
Class
|
|
Outstanding
at May 6, 2009
|
Common
Shares, $0.01 stated value, no par value
|
|
65,673,288
common shares
|
THE
SCOTTS MIRACLE-GRO COMPANY
INDEX
|
PAGE NO.
|
PART
I. FINANCIAL INFORMATION:
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
Condensed,
Consolidated Statements of Operations — Three and six months ended March
28, 2009 and March 29, 2008
|
3
|
|
Condensed,
Consolidated Statements of Cash Flows — Six months ended March 28, 2009
and March 29, 2008
|
4
|
|
Condensed,
Consolidated Balance Sheets — March 28, 2009, March 29, 2008 and September
30, 2008
|
5
|
|
Notes
to Condensed, Consolidated Financial Statements
|
6
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
23
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
30
|
Item
4.
|
Controls
and Procedures
|
30
|
|
|
PART
II. OTHER INFORMATION:
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
31
|
Item
1A.
|
Risk
Factors
|
31
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
32
|
Item
6.
|
Exhibits
|
32
|
Signatures
|
|
33
|
Index
to Exhibits
|
34
|
PART I —
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
THE
SCOTTS MIRACLE-GRO COMPANY
CONDENSED,
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN
MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH
28,
2009
|
|
|
MARCH
29,
2008
|
|
|
MARCH
28,
2009
|
|
|
MARCH
29,
2008
|
|
Net
sales
|
|
$ |
960.1 |
|
|
$ |
958.0 |
|
|
$ |
1,278.1 |
|
|
$ |
1,266.7 |
|
Cost
of sales
|
|
|
599.3 |
|
|
|
612.6 |
|
|
|
831.8 |
|
|
|
850.0 |
|
Cost
of sales – product registration and recall matters
|
|
|
2.5 |
|
|
|
22.6 |
|
|
|
3.8 |
|
|
|
22.6 |
|
Gross
profit
|
|
|
358.3 |
|
|
|
322.8 |
|
|
|
442.5 |
|
|
|
394.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
215.9 |
|
|
|
208.4 |
|
|
|
369.1 |
|
|
|
352.7 |
|
Product
registration and recall matters
|
|
|
5.5 |
|
|
|
1.2 |
|
|
|
11.7 |
|
|
|
1.2 |
|
Other
income, net
|
|
|
— |
|
|
|
(1.0 |
) |
|
|
(2.4 |
) |
|
|
(4.2 |
) |
Income
from operations
|
|
|
136.9 |
|
|
|
114.2 |
|
|
|
64.1 |
|
|
|
44.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
15.9 |
|
|
|
23.5 |
|
|
|
32.2 |
|
|
|
42.5 |
|
Income
before income taxes
|
|
|
121.0 |
|
|
|
90.7 |
|
|
|
31.9 |
|
|
|
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
|
43.6 |
|
|
|
32.7 |
|
|
|
11.5 |
|
|
|
0.7 |
|
Net
income
|
|
$ |
77.4 |
|
|
$ |
58.0 |
|
|
$ |
20.4 |
|
|
$ |
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC
NET INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding during the period
|
|
|
64.9 |
|
|
|
64.4 |
|
|
|
64.8 |
|
|
|
64.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
1.19 |
|
|
$ |
0.90 |
|
|
$ |
0.31 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED
NET INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding during the period plus dilutive potential common
shares
|
|
|
65.8 |
|
|
|
65.6 |
|
|
|
65.7 |
|
|
|
65.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income per common share
|
|
$ |
1.18 |
|
|
$ |
0.88 |
|
|
$ |
0.31 |
|
|
$ |
0.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$ |
0.125 |
|
|
$ |
0.125 |
|
|
$ |
0.250 |
|
|
$ |
0.250 |
|
See notes
to condensed, consolidated financial statements
THE
SCOTTS MIRACLE-GRO COMPANY
CONDENSED,
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN
MILLIONS)
(UNAUDITED)
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
OPERATING
ACTIVITIES
|
|
|
|
|
|
|
Net
income
|
|
$ |
20.4 |
|
|
$ |
1.2 |
|
Adjustments
to reconcile net income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
8.1 |
|
|
|
7.2 |
|
Depreciation
|
|
|
23.0 |
|
|
|
26.4 |
|
Amortization
|
|
|
6.6 |
|
|
|
8.2 |
|
Gain
on sale of property, plant and equipment
|
|
|
(0.7 |
) |
|
|
— |
|
Changes
in assets and liabilities, net of acquired businesses:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(613.5 |
) |
|
|
(624.1 |
) |
Inventories
|
|
|
(263.4 |
) |
|
|
(213.5 |
) |
Prepaid
and other current assets
|
|
|
(23.8 |
) |
|
|
(29.7 |
) |
Accounts
payable
|
|
|
151.5 |
|
|
|
160.7 |
|
Accrued
liabilities
|
|
|
75.5 |
|
|
|
116.2 |
|
Restructuring
reserves
|
|
|
(0.3 |
) |
|
|
(0.7 |
) |
Other
non-current items
|
|
|
2.7 |
|
|
|
(4.9 |
) |
Other,
net
|
|
|
(5.0 |
) |
|
|
(2.7 |
) |
Net
cash used in operating activities
|
|
|
(618.9 |
) |
|
|
(555.7 |
) |
|
|
|
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of property, plant and equipment
|
|
|
0.8 |
|
|
|
0.6 |
|
Investments
in property, plant and equipment
|
|
|
(19.1 |
) |
|
|
(25.1 |
) |
Investments
in intellectual property
|
|
|
(1.0 |
) |
|
|
— |
|
Investments
in acquired businesses, net of cash acquired
|
|
|
(9.3 |
) |
|
|
— |
|
Net
cash used in investing activities
|
|
|
(28.6 |
) |
|
|
(24.5 |
) |
|
|
|
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
|
|
|
|
|
Borrowings
under revolving and bank lines of credit
|
|
|
895.3 |
|
|
|
760.1 |
|
Repayments
under revolving and bank lines of credit
|
|
|
(270.5 |
) |
|
|
(168.6 |
) |
Dividends
paid
|
|
|
(17.1 |
) |
|
|
(16.4 |
) |
Payments
on seller notes
|
|
|
(0.8 |
) |
|
|
(1.4 |
) |
Excess
tax benefits from share-based payment arrangements
|
|
|
0.9 |
|
|
|
1.6 |
|
Cash
received from the exercise of stock options
|
|
|
4.1 |
|
|
|
5.5 |
|
Net
cash provided by financing activities
|
|
|
611.9 |
|
|
|
580.8 |
|
Effect
of exchange rate changes on cash
|
|
|
(1.0 |
) |
|
|
8.4 |
|
Net
(decrease) increase in cash
|
|
|
(36.6 |
) |
|
|
9.0 |
|
Cash
and cash equivalents at beginning of period
|
|
|
84.7 |
|
|
|
67.9 |
|
Cash
and cash equivalents at end of period
|
|
$ |
48.1 |
|
|
$ |
76.9 |
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
|
Interest
paid, net of interest capitalized
|
|
|
25.8 |
|
|
|
34.0 |
|
Income
taxes refunded
|
|
|
7.6 |
|
|
|
6.9 |
|
See notes
to condensed, consolidated financial statements
THE
SCOTTS MIRACLE-GRO COMPANY
CONDENSED,
CONSOLIDATED BALANCE SHEETS
(IN
MILLIONS EXCEPT PER SHARE DATA)
|
|
MARCH
28,
2009
|
|
|
MARCH
29,
2008
|
|
|
SEPTEMBER
30,
2008
|
|
|
|
UNAUDITED
|
|
|
(SEE
NOTE 1)
|
|
ASSETS
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
48.1 |
|
|
$ |
76.9 |
|
|
$ |
84.7 |
|
Accounts
receivable, less allowances of $13.6, $15.7 and $10.6,
respectively
|
|
|
637.5 |
|
|
|
738.9 |
|
|
|
259.8 |
|
Accounts
receivable pledged
|
|
|
370.9 |
|
|
|
296.2 |
|
|
|
146.6 |
|
Inventories,
net
|
|
|
667.6 |
|
|
|
625.1 |
|
|
|
415.9 |
|
Prepaid
and other current assets
|
|
|
159.9 |
|
|
|
159.7 |
|
|
|
137.9 |
|
Total
current assets
|
|
|
1,884.0 |
|
|
|
1,896.8 |
|
|
|
1,044.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net of accumulated depreciation of $467.6, $447.6 and
$460.6, respectively
|
|
|
335.5 |
|
|
|
363.3 |
|
|
|
344.1 |
|
Goodwill,
net
|
|
|
368.0 |
|
|
|
467.3 |
|
|
|
377.7 |
|
Intangible
assets, net
|
|
|
361.5 |
|
|
|
417.9 |
|
|
|
367.2 |
|
Other
assets
|
|
|
18.9 |
|
|
|
25.6 |
|
|
|
22.4 |
|
Total
assets
|
|
$ |
2,967.9 |
|
|
$ |
3,170.9 |
|
|
$ |
2,156.3 |
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of debt
|
|
$ |
396.0 |
|
|
$ |
281.8 |
|
|
$ |
150.0 |
|
Accounts
payable
|
|
|
352.3 |
|
|
|
368.0 |
|
|
|
207.6 |
|
Other
current liabilities
|
|
|
382.7 |
|
|
|
421.2 |
|
|
|
320.5 |
|
Total
current liabilities
|
|
|
1,131.0 |
|
|
|
1,071.0 |
|
|
|
678.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,196.2 |
|
|
|
1,445.9 |
|
|
|
849.5 |
|
Other
liabilities
|
|
|
187.5 |
|
|
|
187.8 |
|
|
|
192.0 |
|
Total
liabilities
|
|
|
2,514.7 |
|
|
|
2,704.7 |
|
|
|
1,719.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (notes 2 and 10)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
shares and capital in excess of $.01 stated value per share, 65.6, 64.5
and 65.2 shares issued and outstanding, respectively
|
|
|
460.8 |
|
|
|
476.4 |
|
|
|
472.4 |
|
Retained
earnings
|
|
|
220.0 |
|
|
|
245.4 |
|
|
|
216.7 |
|
Treasury
shares, at cost: 3.0, 3.7 and 3.4 shares,
respectively
|
|
|
(164.4 |
) |
|
|
(200.4 |
) |
|
|
(185.3 |
) |
Accumulated
other comprehensive loss
|
|
|
(63.2 |
) |
|
|
(55.2 |
) |
|
|
(67.1 |
) |
Total
shareholders’ equity
|
|
|
453.2 |
|
|
|
466.2 |
|
|
|
436.7 |
|
Total
liabilities and shareholders’ equity
|
|
$ |
2,967.9 |
|
|
$ |
3,170.9 |
|
|
$ |
2,156.3 |
|
See notes
to condensed, consolidated financial statements
NOTES TO
CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF
OPERATIONS
The
Scotts Miracle-Gro Company (“Scotts Miracle-Gro”) and its subsidiaries
(collectively, together with Scotts Miracle-Gro, the “Company”) are engaged in
the manufacturing, marketing and sale of lawn and garden care products. The
Company’s primary customers include home centers, mass merchandisers, warehouse
clubs, large hardware chains, independent hardware stores, nurseries, garden
centers, food and drug stores, commercial nurseries and greenhouses and
specialty crop growers. The Company’s products are sold primarily in North
America and the European Union. The Company also operates the Scotts
LawnService® business, which provides lawn, tree and shrub fertilization, insect
control and other related services in the United States, and Smith &
Hawken®, a leading brand in the outdoor living and gardening lifestyle category,
with sales primarily through its own retail stores, Internet and catalog
channels.
Due to
the nature of the lawn and garden business, the majority of sales to customers
occur in the Company’s second and third fiscal quarters. On a combined basis,
net sales for the second and third fiscal quarters generally represent 70% to
75% of annual net sales.
ORGANIZATION
AND BASIS OF PRESENTATION
The
Company’s condensed, consolidated financial statements are unaudited; however,
in the opinion of management, these financial statements are presented in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”). The condensed, consolidated financial statements include the
accounts of Scotts Miracle-Gro and all wholly-owned and majority-owned
subsidiaries. All intercompany transactions and accounts have been eliminated in
consolidation. The Company’s consolidation criteria are based on majority
ownership (as evidenced by a majority voting interest in the entity) and an
objective evaluation and determination of effective management control. Interim
results reflect all normal and recurring adjustments and are not necessarily
indicative of results for a full year. The interim financial statements and
notes are presented as specified by Regulation S-X of the Securities and
Exchange Commission, and should be read in conjunction with the consolidated
financial statements and accompanying notes in Scotts Miracle-Gro’s Annual
Report on Form 10-K, as amended by Form 10-K/A (Amendment No. 1), for the fiscal
year ended September 30, 2008.
The
Condensed, Consolidated Balance Sheet at September 30, 2008 has been derived
from the audited Consolidated Balance Sheet at that date, but does not include
all of the information and footnotes required by GAAP for complete financial
statements.
USE OF
ESTIMATES
The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the amounts reported in the
condensed, consolidated financial statements and accompanying notes. Although
these estimates are based on management’s best knowledge of current events and
actions the Company may undertake in the future, actual results ultimately may
differ from the estimates.
REVENUE
RECOGNITION
Revenue
is recognized when title and risk of loss transfer, which generally occurs when
products or services are received by the customer. 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 included in cost of sales.
Under the
terms of the Amended and Restated Exclusive Agency and Marketing Agreement (the
“Marketing Agreement”) between the Company and Monsanto Company (“Monsanto”),
the Company performs certain functions, primarily manufacturing conversion,
distribution and logistics, and selling and manufacturing support, in its role
as exclusive agent for Monsanto in the conduct of the consumer Roundup®
business. The actual costs incurred by the Company on behalf of Roundup® are
recovered from Monsanto through the terms of the Marketing Agreement. The
reimbursement of costs for which the Company is considered the primary obligor
is included in net sales.
PROMOTIONAL
ALLOWANCES
The
Company promotes its branded products through, among other things, cooperative
advertising programs with retailers. Retailers may also be offered in-store
promotional allowances and rebates based on sales volumes. Certain products are
promoted with direct consumer rebate programs and special purchasing incentives.
Promotion costs (including allowances and rebates) incurred during the year are
expensed to interim periods in relation to revenues and are recorded as a
reduction of net sales. Accruals for expected payouts under these programs are
included in the “Other current liabilities” line in the Condensed, Consolidated
Balance Sheets.
ADVERTISING
Advertising
costs incurred during the year by our Global Consumer segment are expensed to
interim periods in relation to revenues. All advertising costs, except for
external production costs, are expensed within the fiscal year in which
such costs are incurred. External production costs for advertising programs are
deferred until the period in which the advertising is first aired.
Scotts
LawnService® promotes
its service offerings primarily through direct mail campaigns. External costs
associated with these campaigns that qualify as direct response advertising
costs are deferred and recognized as advertising expense in proportion to
revenues over a period not beyond the end of the subsequent calendar year. Costs
that do not qualify as direct response advertising costs are expensed on a
monthly basis within the fiscal year incurred in proportion to net sales. The
costs deferred at March 28, 2009, March 29, 2008 and September 30, 2008 were
$8.3 million, $11.8 million and $4.5 million, respectively.
Smith &
Hawken® promotes
its products primarily through catalogs. Costs related to the production,
printing and distribution of catalogs are expensed over the expected sales life
of the related catalog: four weeks for consumer catalogs and 52 weeks for
trade catalogs. Other advertising costs, such as Internet, radio and print, are
expensed as incurred. The costs deferred at March 28, 2009, March 29, 2008 and
September 30, 2008 were $1.3 million, $1.4 million and $0.6 million,
respectively.
STOCK-BASED
COMPENSATION AWARDS
The fair
value of awards is expensed ratably over the vesting period, generally three
years. The Company uses a binomial model to determine the fair value of its
option grants.
GOODWILL
AND INDEFINITE-LIVED INTANGIBLE ASSETS
In
accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142,
“Goodwill and Other Intangible Assets” (“SFAS 142”), goodwill and
intangible assets determined to have indefinite lives are not subject to
amortization. Goodwill and indefinite-lived intangible assets are reviewed for
impairment by applying a fair-value based test on an annual basis, scheduled for
the first day of the fourth fiscal quarter, or more frequently if circumstances
indicate a potential impairment. If it is determined that an impairment has
occurred, an impairment loss is recognized for the amount by which the carrying
amount of the asset exceeds its estimated fair value and classified as
“Impairment, restructuring and other charges” in the Condensed, Consolidated
Statements of Operations.
INCOME
TAXES
Income
tax expense was calculated assuming an effective tax rate of 36.0% for both the
three and six months ended March 28, 2009 and March 29, 2008. The effective tax
rate used for interim reporting purposes was based on management’s best estimate
of factors impacting the effective tax rate for the fiscal year. Factors
affecting the estimated effective tax rate include assumptions as to income by
jurisdiction (domestic and foreign), the availability and utilization of tax
credits and the existence of elements of income and expense that may not be
taxable or deductible, as well as other items. The estimated effective tax rate
is subject to revision in later interim periods and at fiscal year end as facts
and circumstances change during the course of the fiscal year. There can be no
assurance that the effective tax rate estimated for interim financial reporting
purposes will approximate the effective tax rate determined at fiscal year
end.
NET
INCOME PER COMMON SHARE
The
following represents a reconciliation from basic net income per common share to
diluted net income per common share. Basic net income per common
share is computed based on the weighted-average number of common shares
outstanding each period. Diluted net income per common share is computed based
on the weighted-average number of common shares and dilutive potential common
shares (stock options, restricted stock, restricted stock units, performance
shares and stock appreciation rights) outstanding each period. Stock options
with exercise prices greater than the average market price of the underlying
common shares are excluded from the computation of diluted net income per share
because the effect would be anti-dilutive. The number of stock
options excluded was 2.4 million and 2.6 million for the three-month periods,
and 3.0 million and 2.0 million for the six-month periods ended March 28, 2009
and March 29, 2008, respectively.
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
|
(IN MILLIONS, EXCEPT PER SHARE DATA)
|
|
Determination
of diluted weighted-average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average
common shares outstanding
|
|
|
64.9 |
|
|
|
64.4 |
|
|
|
64.8 |
|
|
|
64.3 |
|
Assumed
conversion of dilutive potential common shares
|
|
|
0.9 |
|
|
|
1.2 |
|
|
|
0.9 |
|
|
|
1.4 |
|
Diluted
weighted-average common shares outstanding
|
|
|
65.8 |
|
|
|
65.6 |
|
|
|
65.7 |
|
|
|
65.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
net income per common share
|
|
$ |
1.19 |
|
|
$ |
0.90 |
|
|
$ |
0.31 |
|
|
$ |
0.02 |
|
Diluted
net income per common share
|
|
$ |
1.18 |
|
|
$ |
0.88 |
|
|
$ |
0.31 |
|
|
$ |
0.02 |
|
RECENT
ACCOUNTING PRONOUNCEMENTS
Statement
of Financial Accounting Standards No. 157 — Fair Value Measurements
On
October 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements”
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The
effect of the adoption of SFAS 157 was not material and required no adjustment
to the Company’s financial condition or results of operations. Refer to “NOTE
12. FAIR VALUE MEASUREMENTS” for further information regarding the effect of the
adoption of SFAS 157 with respect to financial assets and liabilities. In
February 2008, the Financial Accounting Standards Board (the “FASB”) issued FASB
Staff Position 157-1, “Application of FASB Statement No. 157 to FASB
Statement No. 13 and Other Accounting Pronouncements That Address Fair
Value Measurements for Purposes of Lease Classification or Measurement under
Statement 13,” which removes leasing transactions accounted for under SFAS No.
13, “Accounting for Leases,” and related guidance from the scope of
SFAS 157. In February 2008, the FASB also issued FASB Staff Position 157-2,
“Effective Date of FASB Statement No. 157” (“FSP SFAS 157-2”), which
delays the effective date of SFAS 157 for all nonrecurring fair value
measurements of nonfinancial assets and nonfinancial liabilities until fiscal
years beginning after November 15, 2008. FSP SFAS 157-2 states
that a measurement is recurring if it happens at least annually and defines
nonfinancial assets and nonfinancial liabilities as all assets and liabilities
other than those meeting the definition of a financial asset or financial
liability in SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities-Including an amendment of FASB Statement No. 115”
(“SFAS 159”). The Company is completing its evaluation of the effect of FSP
SFAS 157-2 and does not expect it to have a material impact on the Company’s
financial condition or results of operations.
Statement
of Financial Accounting Standards No. 159 — The Fair Value
Option for Financial Assets and Financial Liabilities
In
February 2007, the FASB issued SFAS No. 159, which allows an entity the
irrevocable option to elect fair value for the initial and subsequent
measurement for certain financial assets and liabilities on a
contract-by-contract basis. Subsequent changes in fair value of these financial
assets and liabilities would be recognized in earnings when they occur.
SFAS 159 further establishes certain additional disclosure requirements.
The Company adopted SFAS 159 as of October 1, 2008. The Company has
not elected to measure any financial assets or liabilities at fair value which
were not previously required to be measured at fair value.
Statement
of Financial Accounting Standards No. 161 — Disclosures about
Derivative Instruments and Hedging Activities
In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FASB Statement
No. 133” (“SFAS 161”). The objective of SFAS 161 is to enhance
the disclosure framework in FASB Statement No. 133 and improve the
transparency of financial reporting for derivative instruments and hedging
activities. SFAS 161 requires entities to provide enhanced disclosures
about: (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133 and its related interpretations and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance and cash flows. The Company adopted SFAS 161 for
the fiscal quarter ended March 28, 2009. Refer to “NOTE 11.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES” for the SFAS 161
disclosures.
Statement
of Financial Accounting Standards No. 141(R) — Business Combinations
In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”
(“SFAS 141(R)”), which replaced SFAS 141. The objective of
SFAS 141(R) is to improve the relevance, representational faithfulness and
comparability of the information that a reporting entity provides in its
financial reports about a business combination and its effects. SFAS 141(R)
establishes principles and requirements for how the acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed and any noncontrolling interest in the acquiree; recognizes
and measures the goodwill acquired in the business combination or the gain from
a bargain purchase; and determines what information to disclose to enable users
of the financial statements to evaluate the nature and financial effects of the
business combination. SFAS 141(R) applies to all transactions or other
events in which an entity (the “acquirer”) obtains control of one or more
businesses (the “acquiree”), including those sometimes referred to as “true
mergers” or “mergers of equals” and combinations achieved without the transfer
of consideration. In April 2009, the FASB issued FASB Staff Position 141(R)-1,
“Accounting for Assets Acquired and Liabilities Assumed in a Business
Combination That Arise from Contingencies” (“FSP FAS 141(R)-1”),
which amends and clarifies SFAS 141(R) to address application issues of
SFAS 141(R) arising from contingencies in a business combination.
SFAS 141(R) and FSP FAS 141(R)-1 will be effective for the Company’s
financial statements for the fiscal year beginning October 1,
2009.
Statement
of Financial Accounting Standards No. 160 — Noncontrolling
Interests in Consolidated Financial Statements
In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements — an amendment of ARB No. 51”
(“SFAS 160”). The objective of SFAS 160 is to improve the relevance,
comparability and transparency of the financial information that a reporting
entity provides in its consolidated financial statements. SFAS 160 amends
ARB No. 51 to establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and for the deconsolidation of a
subsidiary. SFAS 160 also changes the way the consolidated financial
statements are presented, establishes a single method of accounting for changes
in a parent’s ownership interest in a subsidiary that do not result in
deconsolidation, requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated and expands disclosures in the consolidated
financial statements that clearly identify and distinguish between the parent’s
ownership interest and the interest of the noncontrolling owners of a
subsidiary. The provisions of SFAS 160 are to be applied prospectively as
of the beginning of the fiscal year in which SFAS 160 is adopted, except
for the presentation and disclosure requirements, which are to be applied
retrospectively for all periods presented. SFAS 160 will be effective for
the Company’s financial statements for the fiscal year beginning October 1,
2009. The Company is in the process of evaluating the impact that the adoption
of SFAS 160 may have on its financial statements and related
disclosures.
FASB
Staff Position 142-3 — Determination of the Useful Life of Intangible
Assets
In April
2008, the FASB issued FASB Staff Position 142-3, “Determination of the Useful
Life of Intangible Assets” (“FSP FAS 142-3”), which amends the list of
factors an entity should consider in developing renewal or extension assumptions
used in determining the useful life of recognized intangible assets under SFAS
142. The new guidance applies to: (1) intangible assets that are acquired
individually or with a group of other assets and (2) intangible assets
acquired in both business combinations and asset acquisitions. Under FSP
FAS 142-3, entities estimating the useful life of a recognized intangible
asset must consider their historical experience in renewing or extending similar
arrangements or, in the absence of historical experience, must consider
assumptions that market participants would use about renewal or extension. FSP
FAS 142-3 will require certain additional disclosures beginning
October 1, 2009 and prospective application to useful life estimates for
intangible assets acquired after September 30, 2009. The Company is in the
process of evaluating the impact that the adoption of FSP FAS 142-3 may
have on its financial statements and related disclosures.
FASB Staff Position 132(R)-1
— Employers’ Disclosures About Postretirement Benefit Plan
Assets
In
December 2008, the FASB issued FASB Staff Position 132(R)-1, “Employers’
Disclosures About Postretirement Benefit Plan Assets” (“FSP FAS 132(R)-1”), to
provide guidance on employers’ disclosures about assets of a defined benefit
pension or other postretirement plan. FSP FAS 132(R)-1 requires employers to
disclose information about fair value measurements of plan assets similar to
SFAS 157. The objectives of the disclosures are to provide an understanding of:
(a) how investment allocation decisions are made, including the factors that are
pertinent to an understanding of investment policies and strategies, (b) the
major categories of plan assets, (c) the inputs and valuation techniques used to
measure the fair value of plan assets, (d) the effect of fair value measurements
using significant unobservable inputs on changes in plan assets for the period
and (e) significant concentrations of risk within plan assets. The disclosures
required by FSP FAS 132(R)-1 will be effective for the Company’s financial
statements for the fiscal year beginning October 1, 2009. The Company is in the
process of evaluating the impact that the adoption of FSP FAS 132(R)-1 may
have on its financial statements and related disclosures.
NOTE
2. PRODUCT REGISTRATION AND RECALL MATTERS
In April
2008, the Company learned that a former associate apparently deliberately
circumvented the Company’s policies and U.S. Environmental Protection
Agency (“U.S. EPA”) regulations under the Federal Insecticide, Fungicide,
and Rodenticide Act of 1947, as amended (“FIFRA”), by failing to obtain valid
registrations for products and/or causing invalid product registration forms to
be submitted to regulators. Since that time, the Company has been cooperating
with the U.S. EPA in its civil investigation into pesticide product
registration issues involving the Company and with the U.S. EPA and the
U.S. Department of Justice (the “U.S. DOJ”) in a related criminal
investigation. In late April of 2008, in connection with the U.S. EPA’s
investigation, the Company conducted a consumer-level recall of certain consumer
lawn and garden products and a Scotts LawnService® product.
Subsequently, the Company and the U.S. EPA agreed upon a Compliance Review
Plan for conducting a comprehensive, independent review of the Company’s product
registration records. Pursuant to the Compliance Review Plan, an independent
third-party firm, Quality Associates Incorporated (“QAI”), has been reviewing
all of the Company’s U.S. pesticide product registration records, some of
which are historical in nature and no longer support sales of the Company’s
products. The U.S. EPA investigation and QAI review process identified
several issues affecting registrations which resulted in the temporary
suspension of sales and shipments of the products affected. In addition, as the
QAI review process or the Company’s internal review has identified FIFRA
registration issues or potential FIFRA registration issues (some of which appear
unrelated to the former associate), the Company has endeavored to stop selling
or distributing the affected products until the issues could be resolved with
the U.S. EPA.
QAI has
completed a review of substantially all of the Company’s registrations,
advertising and related promotional support of the Company’s registered
pesticide products. While the Company does not expect the results of the
QAI review process to significantly affect its fiscal year 2009 sales, the
registration review process has not concluded, and the Company continues to
cooperate with the U.S. EPA and U.S. DOJ in their related
investigations.
On
September 26, 2008, the Company, doing business as Scotts LawnService®, was
named as a defendant in a purported class action filed in the U.S. District
Court for the Eastern District of Michigan relating to certain pesticide
products. In the suit, Mark Baumkel, on behalf of himself and the purported
classes, seeks an unspecified amount of damages, plus costs and attorneys’ fees,
for alleged claims involving breach of contract, unjust enrichment and violation
of the Michigan consumer protection act. Given the preliminary stages of the
proceedings, no accruals have been recorded, and the Company intends to
vigorously contest the plaintiff’s assertions.
In fiscal
2008, the Company conducted a voluntary recall of most of its wild bird food
products due to a formulation issue. The wild bird food products had been
treated with pest control additives to avoid insect infestation, especially at
retail stores. While the pest control additives had been labeled for use on
certain stored grains that can be processed for human and/or animal consumption,
they were not labeled for use on wild bird food products. This voluntary recall
was completed prior to the end of fiscal 2008, and the Company does not expect
any material impact to its fiscal 2009 financial condition, results of
operations or cash flows as a result of such recall.
As a
result of these registration and recall matters, the Company has reversed sales
associated with estimated returns of affected products, recorded an impairment
estimate for affected inventory and recorded other registration and
recall-related costs. The impact of these adjustments was pre-tax charges of
$8.0 million and $30.8 million for the three-month periods, and
$15.6 million and $30.8 million for the six-month periods, ended March
28, 2009 and March 29, 2008, respectively. Although the Company has begun to
reduce its need for third-party professional services related to the recall and
registration matters, the Company nevertheless expects to incur $10 to $15
million in additional charges, exclusive of potential fines, penalties and/or
judgments, related to the recalls and known registration issues, including those
associated with more aggressively addressing impacted inventory as permitted by
the U.S. EPA. While the Company believes that the FIFRA compliance review
process is substantially complete, the U.S. EPA and U.S. DOJ investigations and
the review process continue and may result in future state, federal or private
rights of action including fines and/or penalties with respect to known or
potential additional product registration issues. Until the U.S. EPA and
U.S. DOJ investigations and the compliance review process are complete, the
Company cannot fully quantify the extent of additional issues. At this time,
management cannot reasonably determine the scope or magnitude of possible
liabilities that could result from known or potential additional product
registration issues, and no reserves for these potential liabilities have been
established as of March 28, 2009. However, it is possible that such liabilities,
including fines, penalties and/or judgments, could be material and have an
adverse effect on the Company’s financial condition, results of operations or
cash flows.
The
following tables summarize the impact of the product registration and recall
matters on the results of operations during the three and six months ended March
28, 2009 and March 29, 2008 and accrued liabilities and inventory reserves as of
March 28, 2009:
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
|
(IN
MILLIONS)
|
|
Net
sales — product recalls
|
|
$ |
— |
|
|
$ |
(19.0 |
) |
|
$ |
(0.3 |
) |
|
$ |
(19.0 |
) |
Cost
of sales — product recalls
|
|
|
— |
|
|
|
(12.0 |
) |
|
|
(0.2 |
) |
|
|
(12.0 |
) |
Cost
of sales — inventory impairment and other
|
|
|
2.5 |
|
|
|
22.6 |
|
|
|
3.8 |
|
|
|
22.6 |
|
Gross
profit
|
|
|
(2.5 |
) |
|
|
(29.6 |
) |
|
|
(3.9 |
) |
|
|
(29.6 |
) |
Selling,
general and administrative
|
|
|
5.5 |
|
|
|
1.2 |
|
|
|
11.7 |
|
|
|
1.2 |
|
Loss
from operations
|
|
|
(8.0 |
) |
|
|
(30.8 |
) |
|
|
(15.6 |
) |
|
|
(30.8 |
) |
Income
tax benefit
|
|
|
2.9 |
|
|
|
11.1 |
|
|
|
5.6 |
|
|
|
11.1 |
|
Net
loss
|
|
$ |
(5.1 |
) |
|
$ |
(19.7 |
) |
|
$ |
(10.0 |
) |
|
$ |
(19.7 |
) |
|
|
RESERVES
AT SEPTEMBER 30, 2008
|
|
|
ADDITIONAL
COSTS
AND
CHANGES
IN
ESTIMATE
|
|
|
RESERVES USED
|
|
|
RESERVES
AT MARCH
28,
2009
|
|
|
|
(IN
MILLIONS)
|
|
Sales
returns — product recalls
|
|
$ |
0.2 |
|
|
$ |
0.3 |
|
|
$ |
(0.5 |
) |
|
$ |
— |
|
Cost
of sales returns — product recalls
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
0.3 |
|
|
|
— |
|
Inventory
impairment
|
|
|
5.9 |
|
|
|
2.2 |
|
|
|
(2.4 |
) |
|
|
5.7 |
|
Other
incremental costs of sales
|
|
|
3.2 |
|
|
|
1.6 |
|
|
|
(2.1 |
) |
|
|
2.7 |
|
Other
general and administrative costs
|
|
|
4.3 |
|
|
|
11.7 |
|
|
|
(12.8 |
) |
|
|
3.2 |
|
Accrued
liabilities and inventory reserves
|
|
$ |
13.5 |
|
|
$ |
15.6 |
|
|
$ |
(17.5 |
) |
|
$ |
11.6 |
|
NOTE
3. DETAIL OF INVENTORIES, NET
Inventories,
net of provisions for slow moving, obsolete or impaired inventory of $28.5
million, $29.4 million and $26.2 million, as of March 28, 2009, March 29, 2008
and September 30, 2008, respectively, consisted of:
|
|
MARCH
28, 2009
|
|
|
MARCH
29, 2008
|
|
|
SEPTEMBER
30, 2008
|
|
|
|
(IN
MILLIONS)
|
|
Finished
goods
|
|
$ |
462.6 |
|
|
$ |
470.0 |
|
|
$ |
277.3 |
|
Work-in-process
|
|
|
46.2 |
|
|
|
30.5 |
|
|
|
29.9 |
|
Raw
materials
|
|
|
158.8 |
|
|
|
124.6 |
|
|
|
108.7 |
|
|
|
$ |
667.6 |
|
|
$ |
625.1 |
|
|
$ |
415.9 |
|
NOTE
4. MARKETING AGREEMENT
The
Company is Monsanto’s exclusive agent for the domestic and international
marketing and distribution of consumer Roundup®
herbicide products. Under the terms of the Marketing Agreement with Monsanto,
the Company is entitled to receive an annual commission from Monsanto in
consideration for the performance of the Company’s duties as agent. The annual
gross commission under the Marketing Agreement is calculated as a percentage of
the actual earnings before interest and income taxes (“EBIT”) of the consumer
Roundup®
business, and is based on the achievement of two earnings thresholds, as defined
in the Marketing Agreement. The Marketing Agreement also requires the Company to
make annual payments to Monsanto as a contribution against the overall expenses
of the consumer Roundup®
business. The annual contribution payment is defined in the Marketing Agreement
as $20 million.
In
consideration for the rights granted to the Company under the Marketing
Agreement for North America, the Company was required to pay a marketing fee of
$32 million to Monsanto. The Company has deferred this amount on the basis
that the payment will provide a future benefit through commissions that will be
earned under the Marketing Agreement. Based on management’s current assessment
of the likely term of the Marketing Agreement, the useful life over which the
marketing fee is being amortized is 20 years.
Under the
terms of the Marketing Agreement, the Company performs certain functions,
primarily manufacturing conversion, distribution and logistics, and selling and
marketing support, on behalf of Monsanto in the conduct of the consumer
Roundup®
business. The actual costs incurred for these activities are charged to and
reimbursed by Monsanto. The Company records costs incurred under the Marketing
Agreement for which the Company is the primary obligor on a gross basis,
recognizing such costs in “Cost of sales” and the reimbursement of these costs
in “Net sales,” with no effect on gross profit or net income. The related net
sales and cost of sales were $15.2 million and $17.6 million for the
three-month periods, and $30.8 million and $30.1 million for the
six-month periods, ended March 28, 2009 and March 29, 2008,
respectively.
The
elements of the net commission earned under the Marketing Agreement and included
in “Net sales” are as follows:
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
|
(IN MILLIONS)
|
|
|
(IN MILLIONS)
|
|
Gross
commission
|
|
$ |
18.0 |
|
|
$ |
17.1 |
|
|
$ |
18.0 |
|
|
$ |
17.1 |
|
Contribution
expenses
|
|
|
(5.0 |
) |
|
|
(5.0 |
) |
|
|
(10.0 |
) |
|
|
(10.0 |
) |
Amortization
of marketing fee
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Net
commission income
|
|
|
12.8 |
|
|
|
11.9 |
|
|
|
7.6 |
|
|
|
6.7 |
|
Reimbursements
associated with Marketing Agreement
|
|
|
15.2 |
|
|
|
17.6 |
|
|
|
30.8 |
|
|
|
30.1 |
|
Total
net sales associated with Marketing Agreement
|
|
$ |
28.0 |
|
|
$ |
29.5 |
|
|
$ |
38.4 |
|
|
$ |
36.8 |
|
The
Marketing Agreement has no definite term except as it relates to the European
Union countries (the “EU term”). The EU term extends through September 30,
2011, with up to two additional automatic renewal periods of two years each,
subject to non-renewal only upon the occurrence of certain performance defaults.
Thereafter, the Marketing Agreement provides that the parties may agree to renew
the EU term for an additional three years.
The
Marketing Agreement provides Monsanto with the right to terminate the Marketing
Agreement upon an event of default (as defined in the Marketing Agreement) by
the Company, a change in control of Monsanto or the sale of the consumer
Roundup®
business. The Marketing Agreement provides the Company with the right to
terminate the Marketing Agreement in certain circumstances, including an event
of default by Monsanto or the sale of the consumer Roundup®
business. Unless Monsanto terminates the Marketing Agreement due to an event of
default by the Company, Monsanto is required to pay a termination fee to the
Company that varies by program year. The termination fee is calculated as a
percentage of the value of the Roundup® business
exceeding a certain threshold, but in no event will the termination fee be less
than $16 million. If Monsanto were to terminate the Marketing Agreement due
to an event of default by the Company, however, the Company would not be
entitled to any termination fee, and the Company would lose all, or a
substantial portion, of the significant source of earnings and overhead expense
absorption the Marketing Agreement provides. Monsanto may also be able to
terminate the Marketing Agreement within a given region, including North
America, without paying a termination fee if unit volume sales to consumers in
that region decline: (1) over a cumulative three-fiscal-year period; or
(2) by more than 5% for each of two consecutive years.
NOTE
5. DEBT
The
components of long-term debt are as follows:
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
SEPTEMBER 30,
2008
|
|
|
|
(IN MILLIONS)
|
|
Credit Facilities:
|
|
|
|
|
|
|
|
|
|
Revolving
loans
|
|
$ |
757.9 |
|
|
$ |
894.1 |
|
|
$ |
375.8 |
|
Term
loans
|
|
|
533.4 |
|
|
|
557.2 |
|
|
|
540.4 |
|
Master
Accounts Receivable Purchase Agreement
|
|
|
275.0 |
|
|
|
241.9 |
|
|
|
62.1 |
|
Notes
due to sellers
|
|
|
12.1 |
|
|
|
13.6 |
|
|
|
12.8 |
|
Foreign
bank borrowings and term loans
|
|
|
6.6 |
|
|
|
12.0 |
|
|
|
0.7 |
|
Other
|
|
|
7.2 |
|
|
|
8.9 |
|
|
|
7.7 |
|
|
|
|
1,592.2 |
|
|
|
1,727.7 |
|
|
|
999.5 |
|
Less
current portions
|
|
|
396.0 |
|
|
|
281.8 |
|
|
|
150.0 |
|
|
|
$ |
1,196.2 |
|
|
$ |
1,445.9 |
|
|
$ |
849.5 |
|
Scotts
Miracle-Gro and certain of its subsidiaries have entered into the following loan
facilities totaling up to $2.15 billion in the aggregate: (a) a senior
secured five-year term loan in the principal amount of $560 million and
(b) a senior secured five-year revolving loan facility in the aggregate
principal amount of up to $1.59 billion. Under the terms of the loan
facilities, the Company may request an additional $200 million in revolving
credit and/or term credit commitments, subject to approval from the lenders.
Borrowings may be made in various currencies including U.S. dollars, Euros,
British pounds sterling, Australian dollars and Canadian dollars. Amortization
payments on the term loan portion of the credit facilities began on September
30, 2007 and will continue quarterly through 2012. As of March 28, 2009, the
cumulative total amortization payments on the term loan were $26.6 million,
reducing the balance of our term loans and effectively reducing the size of the
credit facilities.
As of
March 28, 2009, there was $795.2 million of availability under the
revolving loan facility, including letters of credit. Under the revolving loan
facility, the Company has the ability to issue letter of credit commitments up
to $65 million. At March 28, 2009, the Company had letters of credit in the
amount of $36.9 million outstanding.
At March
28, 2009, the Company had outstanding interest rate swaps with major financial
institutions that effectively converted a portion of variable-rate debt
denominated in U.S. dollars to a fixed rate. The key terms of these swaps are as
follows:
NOTIONAL
AMOUNT
(IN
MILLIONS)
|
|
EFFECTIVE
DATE
(a)
|
|
EXPIRATION
DATE
|
|
FIXED
RATE
|
|
$200
(b)
|
|
3/31/2007
|
|
3/31/2009
|
|
|
4.90%
|
|
200
(b)
|
|
3/30/2007
|
|
3/30/2010
|
|
|
4.87%
|
|
200
(b)
|
|
2/14/2007
|
|
2/14/2012
|
|
|
5.20%
|
|
50
(b)
|
|
2/14/2012
|
|
2/14/2016
|
|
|
3.78%
|
|
150
(c)
|
|
11/16/2009
|
|
5/16/2016
|
|
|
3.26%
|
|
50
(d)
|
|
2/16/2010
|
|
5/16/2016
|
|
|
3.05%
|
|
|
(a)
|
The
effective date refers to the date on which interest payments are first
hedged by the applicable swap
contract.
|
|
(b)
|
Interest
payments made between the effective date and expiration date are hedged by
the swap contracts.
|
|
(c)
|
Interest
payments made during the six-month period beginning November 14 of each
year between the effective date and expiration date are hedged by the swap
contract.
|
|
(d)
|
Interest
payments made during the three-month period beginning February 14 of each
year between the effective date and expiration date are hedged by the swap
contract.
|
Master Accounts Receivable
Purchase Agreement
On
April 11, 2007, the Company entered into a one-year Master Accounts
Receivable Purchase Agreement (the “2007 MARP Agreement”). On April 9,
2008, the Company terminated the 2007 MARP Agreement and entered into a Master
Accounts Receivable Purchase Agreement (the “2008 MARP Agreement”), which
expired on April 8, 2009. The terms of the 2008 MARP Agreement were
substantially the same as the 2007 MARP Agreement. The 2008 MARP Agreement
provided an interest rate that was equal to the 7-day LIBOR rate plus 85 basis
points. The 2008 MARP Agreement provided for the discounted sale, on a revolving
basis, of accounts receivable generated by specified account debtors, with
seasonally adjusted monthly aggregate limits ranging from $10 million to
$300 million. The 2008 MARP Agreement also provided for specified account
debtor sublimit amounts, which provided limits on the amount of receivables owed
by individual account debtors that could be sold to the banks.
On May 1,
2009, the Company entered into a Master Accounts Receivable Purchase Agreement
(the “2009 MARP Agreement”), with a stated termination date of May 1, 2010, or
such later date as may be mutually agreed by the Company and its lender. The
2009 MARP Agreement provides an interest rate that is equal to the 7-day LIBOR
rate plus 225 basis points. The 2009 MARP Agreement provides for the discounted
sale, on an uncommitted, revolving basis, of accounts receivable generated by a
specified account debtor, with aggregate limits not to exceed $80
million.
The
caption “Accounts receivable pledged” on the accompanying Condensed,
Consolidated Balance Sheets reflecting the amounts of $370.9 million, $296.2
million and $146.6 million as of March 28, 2009, March 29, 2008 and September
30, 2008, respectively, represents the pool of receivables that have been
designated as “sold” and serve as collateral for short-term debt in the amount
of $275.0 million, $241.9 million and $62.1 million, as of those dates,
respectively.
The
Company was in compliance with the terms of all borrowing agreements at March
28, 2009.
NOTE
6. COMPREHENSIVE INCOME
The
components of other comprehensive income (expense) and total comprehensive
income (loss) were as follows:
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
|
(IN MILLIONS)
|
|
|
(IN MILLIONS)
|
|
Net
income
|
|
$ |
77.4 |
|
|
$ |
58.0 |
|
|
$ |
20.4 |
|
|
$ |
1.2 |
|
Other
comprehensive income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in valuation of derivative instruments
|
|
|
4.4 |
|
|
|
(12.3 |
) |
|
|
(14.2 |
) |
|
|
(17.4 |
) |
Change
in pension and other postretirement liabilities
|
|
|
1.7 |
|
|
|
— |
|
|
|
8.1 |
|
|
|
— |
|
Foreign
currency translation adjustments
|
|
|
0.6 |
|
|
|
1.6 |
|
|
|
10.0 |
|
|
|
4.2 |
|
Comprehensive
income (loss)
|
|
$ |
84.1 |
|
|
$ |
47.3 |
|
|
$ |
24.3 |
|
|
$ |
(12.0 |
) |
NOTE
7. RETIREMENT AND RETIREE MEDICAL PLANS COST INFORMATION
The
following summarizes the net periodic benefit cost for the various retirement
and retiree medical plans sponsored by the Company:
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
|
(IN MILLIONS)
|
|
|
(IN MILLIONS)
|
|
Frozen
defined benefit plans
|
|
$ |
0.9 |
|
|
$ |
0.1 |
|
|
$ |
1.8 |
|
|
$ |
0.3 |
|
International
benefit plans
|
|
|
1.9 |
|
|
|
1.2 |
|
|
|
3.7 |
|
|
|
2.4 |
|
Retiree
medical plan
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
1.0 |
|
|
|
1.2 |
|
NOTE
8. STOCK-BASED COMPENSATION AWARDS
The
following is a recap of the share-based awards granted during the periods
indicated:
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
|
|
|
|
|
|
Options
|
|
|
696,100 |
|
|
|
884,700 |
|
Performance
shares
|
|
|
— |
|
|
|
40,000 |
|
Restricted
stock
|
|
|
240,400 |
|
|
|
149,900 |
|
Restricted
stock units (including deferred stock units)
|
|
|
218,641 |
|
|
|
29,995 |
|
Total
share-based awards
|
|
|
1,155,141 |
|
|
|
1,104,595 |
|
|
|
|
|
|
|
|
|
|
Aggregate
fair value at grant dates (in millions)
|
|
$ |
16.0 |
|
|
$ |
18.5 |
|
Total
share-based compensation and the tax benefit recognized in compensation expense
were as follows for the periods indicated (in millions):
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
Share-based
compensation
|
|
$ |
4.4 |
|
|
$ |
3.7 |
|
|
$ |
8.1 |
|
|
$ |
7.2 |
|
Tax
benefit recognized
|
|
|
1.6 |
|
|
|
1.3 |
|
|
|
2.9 |
|
|
|
2.6 |
|
NOTE
9. INCOME TAXES
Consistent
with the requirements promulgated under FASB Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,”
the balance of unrecognized tax benefits and the amount of related interest and
penalties were as follows:
|
|
MARCH 28,
2009
|
|
|
SEPTEMBER 30,
2008
|
|
|
|
(IN MILLIONS)
|
|
Unrecognized
tax benefits
|
|
$ |
7.2 |
|
|
$ |
7.2 |
|
Portion
that, if recognized, would impact the effective tax rate
|
|
|
6.8 |
|
|
|
6.5 |
|
Accrued
penalties on unrecognized tax benefits
|
|
|
0.7 |
|
|
|
0.6 |
|
Accrued
interest on unrecognized tax benefits
|
|
|
1.2 |
|
|
|
1.2 |
|
The
Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state, local and foreign jurisdictions. With few
exceptions, the Company is no longer subject to examinations by these tax
authorities for fiscal years prior to 2005. The Company is currently under
examination by certain foreign and U.S. state and local tax authorities. With
regard to the foreign audits, the tax periods under investigation are limited to
fiscal years 2004 through 2007. With regard to the U.S. state and
local audits, the tax periods under investigation are limited to fiscal years
2001 through 2007. In addition to the aforementioned audits, certain other tax
deficiency issues and refund claims for previous years remain
unresolved.
The
Company currently anticipates that few of its open and active audits will be
resolved in the next 12 months. The Company is unable to make a
reasonable reliable estimate as to when or if cash settlements with taxing
authorities may occur. Although audit outcomes and the timing of
audit payments are subject to significant uncertainty, the Company does not
anticipate that the resolution of these tax matters or any events related
thereto will have a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
Management
regularly evaluates the Company’s contingencies, including various lawsuits and
claims which arise in the normal course of
business, product and general liabilities, workers’ compensation, property
losses and other fiduciary liabilities for which the Company is self-insured or
retains a high exposure limit. Self-insurance reserves are established based on
actuarial loss estimates for specific individual claims plus actuarially
estimated amounts for incurred but not reported claims and adverse development
factors for existing claims. Legal costs incurred in connection with the
resolution of claims, lawsuits and other contingencies generally are expensed as
incurred. In the opinion of management, its assessment of contingencies is
reasonable and related reserves, in the aggregate, are adequate; however, there
can be no assurance that final resolution of these matters will not have a
material adverse effect on the Company’s financial condition, results of
operations or cash flows. The following are the more significant of the
Company’s identified contingencies:
FIFRA
Compliance and the Corresponding Governmental Investigation
The
Company’s products that contain pesticides are subject to FIFRA. In April 2008,
the Company learned that a former associate apparently deliberately circumvented
the Company’s policies and U.S. EPA regulations under FIFRA by failing to
obtain valid registrations for products and/or causing invalid product
registration forms to be submitted to regulators. Since that time, the Company
has been cooperating with the U.S. EPA in its civil investigation into
pesticide product registration issues involving the Company and with the
U.S. EPA and the U.S. DOJ in a related criminal investigation. In late
April of 2008, in connection with the U.S. EPA’s investigation, the Company
conducted a consumer-level recall of certain consumer lawn and garden products
and a Scotts LawnService® product. Subsequently, the Company and the
U.S. EPA agreed upon a Compliance Review Plan for conducting a
comprehensive, independent review of the Company’s product registration records.
Pursuant to the Compliance Review Plan, an independent third-party firm, QAI,
has been reviewing all of the Company’s U.S. pesticide product registration
records, some of which are historical in nature and no longer support sales of
the Company’s products. The U.S. EPA investigation and QAI review process
identified several issues affecting registrations which resulted in the
temporary suspension of sales and shipments of the products affected. In
addition, as the QAI review process or the Company’s internal review has
identified FIFRA registration issues or potential FIFRA registration issues
(some of which appear unrelated to the former associate), the Company has
endeavored to stop selling or distributing the affected products until the
issues could be resolved with the U.S. EPA.
QAI has
completed a review of substantially all of the Company’s registrations,
advertising and related promotional support of the Company’s registered
pesticide products. While the Company does not expect the results of the
QAI review process to significantly affect its fiscal year 2009 sales, the
registration review process has not concluded, and the Company continues to
cooperate with the U.S. EPA and U.S. DOJ in their related
investigations.
On
September 26, 2008, the Company, doing business as Scotts LawnService®, was
named as a defendant in a purported class action filed in the U.S. District
Court for the Eastern District of Michigan relating to certain pesticide
products. In the suit, Mark Baumkel, on behalf of himself and the purported
classes, seeks an unspecified amount of damages, plus costs and attorneys’ fees,
for alleged claims involving breach of contract, unjust enrichment and violation
of the Michigan consumer protection act. Given the preliminary stages of the
proceedings, no accruals have been recorded, and the Company intends
to vigorously contest the plaintiff’s assertions.
The
U.S. EPA and related U.S. DOJ investigations or the compliance review
process may result in future state or federal action or private rights of action
including fines and/or penalties with respect to known or potential additional
product registration issues. Until the U.S. EPA and U.S. DOJ investigations and
compliance review process are complete, the Company cannot fully quantify the
extent of additional issues. As of March 28, 2009, no reserves have been
established with respect to potential fines, penalties and/or judgments at the
state and/or federal level, as the scope and magnitude of such potential
liabilities are not currently estimable. However, it is possible that such
fines, penalties and/or judgments could be material and have an adverse effect
on the Company’s financial condition, results of operations or cash
flows.
In 1997,
the Ohio Environmental Protection Agency initiated an enforcement action against
the Company with respect to alleged surface water violations and inadequate
treatment capabilities at its Marysville, Ohio facility, seeking corrective
action under the federal Resource Conservation and Recovery Act. The action
related to discharges from on-site waste water treatment and several
discontinued on-site disposal areas. Pursuant to a Consent Order entered by the
Union County Common Pleas Court in 2002, the Company is actively engaged in
restoring the site to eliminate exposure to waste materials from the
discontinued on-site disposal areas.
At March
28, 2009, $3.3 million was accrued for other regulatory matters in the
“Other liabilities” line in the Condensed, Consolidated Balance Sheets. The
amounts accrued are believed to be adequate to cover such known environmental
exposures based on current facts and estimates of likely outcomes. However, if
facts and circumstances change significantly, they could result in a material
adverse effect on the Company’s financial condition, results of operations or
cash flows.
U.S. Horticultural Supply,
Inc. (F/K/A E.C. Geiger, Inc.)
On
November 5, 2004, U.S. Horticultural Supply, Inc. (“Geiger”) filed
suit against the Company in the U.S. District Court for the Eastern
District of Pennsylvania. The complaint alleged that the Company conspired with
another distributor, Griffin Greenhouse Supplies, Inc., to restrain trade in the
horticultural products market, in violation of Section 1 of the Sherman
Antitrust Act. Geiger’s damages expert quantified Geiger’s alleged damages at
approximately $3.3 million, which could have been trebled under antitrust
laws. Geiger also sought recovery of attorneys’ fees and costs. On January 13,
2009, the U.S. District Court granted the Company’s motion for summary
judgment and entered judgment for the Company. Geiger has appealed the ruling to
the U.S. Court of Appeals for the Third Circuit.
The
Company continues to pursue the collection of funds owed to the Company by
Geiger as confirmed by the Company’s April 25, 2005 judgment against
Geiger.
The
Company has been named as a defendant in a number of cases alleging injuries
that the lawsuits claim resulted from exposure to asbestos-containing products,
apparently based on the Company’s historic use of vermiculite in certain of its
products. The complaints in these cases are not specific about the plaintiffs’
contacts with the Company or its products. The Company in each case is one of
numerous defendants and none of the claims seek damages from the Company alone.
The Company believes that the claims against it are without merit and is
vigorously defending against them. It is not currently possible to reasonably
estimate a loss, if any, associated with these cases. The Company is reviewing
agreements and policies that may provide insurance coverage or indemnity as to
these claims and is pursuing coverage under some of these agreements and
policies, although there can be no assurance of the results of these efforts.
There can be no assurance that these cases, whether as a result of adverse
outcomes or as a result of significant defense costs, will not have a material
adverse effect on the Company’s financial condition, results of operations or
cash flows.
On
April 27, 2007, the Company received a proposed Order On Consent from the
New York State Department of Environmental Conservation (the “Proposed Order”)
alleging that, during calendar year 2003, the Company and James Hagedorn,
individually and as Chairman of the Board and Chief Executive Officer of the
Company, unlawfully donated to a Port Washington, New York youth sports
organization forty bags of Scotts® LawnPro Annual Program Step 3 Insect Control
Plus Fertilizer which, while federally registered, was allegedly not registered
in the state of New York. The Proposed Order requests penalties totaling
$695,000. The Company has responded in writing to the New York State Department
of Environmental Conservation with respect to the Proposed Order and is awaiting
a response.
The
Company is involved in other lawsuits and claims which arise in the normal
course of business. These claims individually and in the aggregate are not
expected to result in a material adverse effect on the Company’s financial
condition, results of operations or cash flows.
NOTE
11. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Derivatives and
Hedging
The
Company is exposed to market risks, such as changes in interest rates, currency
exchange rates and commodity prices. To manage the volatility related to these
exposures, the Company enters into various financial transactions, which are
accounted for under SFAS 133, “Accounting for Derivative Instruments and Hedging
Activities” (“SFAS 133”), as amended and interpreted. The utilization of
these financial transactions is governed by policies covering acceptable
counterparty exposure, instrument types and other hedging practices. The Company
does not hold or issue derivative financial instruments for speculative trading
purposes.
The
Company formally designates and documents qualifying instruments as hedges of
underlying exposures at inception. The Company formally assesses, both at
inception and at least quarterly, whether the financial instruments used in
hedging transactions are effective at offsetting changes in either the fair
value or cash flows of the related underlying exposure. Fluctuations in the
value of these instruments generally are offset by changes in the fair value or
cash flows of the underlying exposures being hedged. This offset is driven by
the high degree of effectiveness between the exposure being hedged and the
hedging instrument. SFAS 133 requires all derivative instruments to be
recognized as either assets or liabilities at fair value in the statement of
financial position. In accordance with SFAS 133, the Company designates
commodity hedges as cash flow hedges of forecasted purchases of commodities and
interest rate swaps as cash flow hedges of interest expense on variable rate
borrowings. Any ineffective portion of a change in the fair value of
a qualifying instrument is immediately recognized in earnings. There were no
amounts recorded in earnings related to ineffectiveness of derivative hedges for
the fiscal quarter ended March 28, 2009.
Foreign Currency Swap
Agreements
The
Company periodically uses foreign currency swap contracts to manage the exchange
rate risk associated with intercompany loans with foreign subsidiaries that are
denominated in U.S. dollars. At March 28, 2009, there were no outstanding
foreign currency swap contracts.
Interest Rate Swap
Agreements
The
Company enters into interest rate swap agreements as a means to hedge its
variable interest rate exposure on debt instruments. Since the interest rate
swaps have been designated as hedging instruments, their fair values are
reflected in the Company’s Condensed, Consolidated Balance Sheets. Net amounts
to be received or paid under the swap agreements are reflected as adjustments to
interest expense. Unrealized gains or losses resulting from adjusting these
swaps to fair value are recorded as elements of accumulated other comprehensive
loss within the Condensed, Consolidated Balance Sheets. The fair value of the
swap agreements is determined based on the present value of the estimated future
net cash flows using implied rates in the applicable yield curve as of the
valuation date.
At March
28, 2009, the Company had outstanding interest rate swaps with major financial
institutions that effectively converted a portion of the Company’s variable-rate
debt to a fixed rate. Refer to “NOTE 5. DEBT” for the terms of the swaps
outstanding at March 28, 2009. Included in the accumulated other comprehensive
loss balance at March 28, 2009 is a pre-tax loss of $11.9 million related to
interest rate swap agreements that is expected to be reclassified to earnings
during the next 12 months, consistent with the timing of the underlying hedged
transactions.
Commodity
Hedges
The
Company’s outstanding hedging arrangements at March 28, 2009, which are designed
to fix the price of a portion of its urea needs, settled April 30, 2009.
The contracts are designated as hedges of the Company’s exposure to future cash
flow fluctuations associated with the cost of urea. The objective of the hedges
is to mitigate the earnings and cash flow volatility attributable to the risk of
changing prices. Unrealized gains or losses in the fair value of these contracts
are recorded to the accumulated other comprehensive loss component of
shareholders’ equity. Realized gains or losses remain as a component of
accumulated other comprehensive loss (“OCI”) until the related inventory is
sold. Upon sale of the underlying inventory, the gain or loss is reclassified to
cost of sales. Included in the accumulated other comprehensive loss balance at
March 28, 2009 is a pre-tax loss of $8.7 million related to urea derivatives
that is expected to be reclassified to earnings during the next 12 months,
consistent with the timing of the underlying hedged transactions.
Periodically,
the Company also uses fuel derivatives to partially mitigate the effect of
fluctuating diesel and gasoline costs on operating results. To date, the fuel
derivatives used by the Company have not qualified for hedge accounting
treatment under SFAS 133 and are marked-to-market, with unrealized gains
and losses on open contracts and realized gains or losses on settled contracts
recorded as an element of cost of sales.
As of
March 28, 2009, the Company had the following outstanding commodity contracts
that were entered into to hedge forecasted purchases:
COMMODITY
|
|
VOLUME
|
Urea
|
|
8,000
tons
|
Diesel
|
|
4,452,000
gallons
|
Gasoline
|
|
714,000
gallons
|
Fair Values of Derivative
Instruments
The fair
values of the Company’s derivative instruments were as follows (in
millions):
|
|
ASSETS
/ (LIABILITIES)
|
|
|
|
MARCH
28, 2009
|
|
MARCH
29, 2008
|
|
|
|
BALANCE
SHEET
LOCATION
|
|
FAIR
VALUE
|
|
BALANCE
SHEET
LOCATION
|
|
FAIR
VALUE
|
|
DERIVATIVES
DESIGNATED AS HEDGING
INSTRUMENTS UNDER SFAS 133
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
Other
assets
|
|
$
|
–
|
|
Other
assets
|
|
$
|
1.0
|
|
|
|
Other
liabilities
|
|
|
(36.0
|
)
|
Other
liabilities
|
|
|
(31.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
hedging instruments
|
|
Other
current liabilities
|
|
|
(2.6
|
)
|
Other
current liabilities
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives designated as hedging instruments under SFAS
133
|
|
|
|
$
|
(38.6
|
)
|
|
|
$
|
(31.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
DERIVATIVES
NOT DESIGNATED AS HEDGING
INSTRUMENTS UNDER SFAS 133
(1)
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
hedging instruments
|
|
Prepaid
and other assets
|
|
$
|
–
|
|
Prepaid
and other assets
|
|
$
|
1.1
|
|
|
|
Other
current liabilities
|
|
|
(0.6
|
)
|
Other
current liabilities
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives not designated as hedging instruments under SFAS 133 (1)
|
|
|
|
$
|
(0.6
|
|
|
|
$
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivatives
|
|
|
|
$
|
(39.2
|
|
|
|
$
|
(29.5
|
|
(1) |
See
discussion above for additional information regarding the Company’s
purpose for entering into derivatives not designated as hedging
instruments and its overall risk management
strategy.
|
Refer to
“NOTE 12. FAIR VALUE MEASUREMENTS” for the Company’s fair value measurements of
derivative instruments as they relate to the valuation
hierarchy.
The
effect of derivative instruments on accumulated other comprehensive loss and the
Condensed, Consolidated Statements of Operations for the three- and six-month
periods ended March 28, 2009 and March 29, 2008 was as follows:
|
|
AMOUNT
OF GAIN / (LOSS) RECOGNIZED IN OCI
(IN
MILLIONS)
|
|
|
|
THREE
MONTHS
ENDED
|
|
|
SIX
MONTHS
ENDED
|
|
DERIVATIVES
IN SFAS 133 CASH FLOW HEDGING
RELATIONSHIPS
|
|
MARCH
28, 2009
|
|
|
MARCH
29, 2008
|
|
|
MARCH
28, 2009
|
|
|
MARCH
29, 2008
|
|
Interest
rate swap agreements
|
|
$ |
(5.0 |
) |
|
$ |
(10.3 |
) |
|
$ |
(17.6 |
) |
|
$ |
(16.1 |
) |
Commodity
hedging instruments
|
|
|
1.0 |
|
|
|
(1.2 |
) |
|
|
(7.0 |
) |
|
|
0.5 |
|
Total
|
|
$ |
(4.0 |
) |
|
$ |
(11.5 |
) |
|
$ |
(24.6 |
) |
|
$ |
(15.6 |
) |
|
|
LOCATION
OF GAIN / (LOSS)
|
|
AMOUNT
OF GAIN / (LOSS) RECLASSIFIED FROM ACCUMULATED OCI INTO
INCOME
(IN
MILLIONS)
|
|
DERIVATIVES
IN SFAS 133 CASH
|
|
RECLASSIFIED
FROM
|
|
THREE
MONTHS
ENDED
|
|
|
SIX
MONTHS
ENDED
|
|
FLOW
HEDGING RELATIONSHIPS
|
|
ACCUMULATED
OCI
INTO
INCOME
|
|
MARCH
28, 2009
|
|
|
MARCH
29, 2008
|
|
|
MARCH
28, 2009
|
|
|
MARCH
29, 2008
|
|
Interest
rate swap agreements
|
|
Interest
expense
|
|
$ |
(5.1 |
) |
|
$ |
(0.7 |
) |
|
$ |
(7.5 |
) |
|
$ |
(0.3 |
) |
Commodity
hedging instruments
|
|
Cost
of sales
|
|
|
(3.1 |
) |
|
|
1.1 |
|
|
|
(3.0 |
) |
|
|
1.2 |
|
Total
|
|
|
|
$ |
(8.2 |
) |
|
$ |
0.4 |
|
|
$ |
(10.5 |
) |
|
$ |
0.9 |
|
|
|
|
|
AMOUNT
OF GAIN / (LOSS) RECOGNIZED IN INCOME
(IN
MILLIONS)
|
|
DERIVATIVES NOT DESIGNATED AS
|
|
LOCATION OF GAIN /
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
HEDGING
INSTRUMENTS UNDER SFAS 133
|
|
(LOSS) RECOGNIZED IN INCOME
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
|
MARCH 28, 2009
|
|
|
MARCH 29, 2008
|
|
Foreign
currency swap agreements
|
|
Interest
expense
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
(6.4 |
) |
|
$ |
1.0 |
|
Commodity
hedging instruments
|
|
Cost
of sales
|
|
|
(0.6 |
) |
|
|
1.7 |
|
|
|
(0.6 |
) |
|
|
1.7 |
|
Total
|
|
|
|
$ |
(0.6 |
) |
|
$ |
1.7 |
|
|
$ |
(7.0 |
) |
|
$ |
2.7 |
|
NOTE
12. FAIR VALUE MEASUREMENTS
As
disclosed in “NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES,” the Company
adopted SFAS 157 effective October 1, 2008 with respect to the fair value
measurement and disclosure of financial assets and liabilities. SFAS 157
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. SFAS 157 defines fair value
as the exchange price that would be received for an asset or paid to transfer a
liability (an exit price) in the principal or the most advantageous market for
the asset or liability in an orderly transaction between market participants at
the measurement date. SFAS 157 establishes a three-level fair value hierarchy
that prioritizes the inputs used to measure fair value. The hierarchy requires
entities to maximize the use of observable inputs and minimize the use of
unobservable inputs. The three levels of inputs used to measure fair value are
as follows:
|
Level
1 – Quoted prices in active markets for identical assets or
liabilities.
|
|
Level
2 – Observable inputs other than quoted prices included in Level 1, such
as quoted prices for similar assets and liabilities in active markets;
quoted prices for similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be corroborated by
observable market data.
|
|
Level
3 – Unobservable inputs that are supported by little or no market activity
and that are significant to the fair value of the assets or liabilities.
This includes pricing models, discounted cash flow methodologies and
similar techniques that use significant unobservable
inputs.
|
The
following describes the valuation methodologies used for financial assets and
liabilities measured at fair value, as well as the general classification within
the valuation hierarchy.
Derivatives
consist of foreign currency, interest rate and commodity derivative instruments.
The Company uses foreign currency swap contracts to manage the exchange rate
risk associated with intercompany loans with foreign subsidiaries that are
denominated in U.S. dollars. These contracts are valued using observable forward
rates in commonly quoted intervals for the full term of the
contracts.
Interest
rate derivatives consist of interest rate swaps. The Company enters into
interest rate swap agreements as a means to hedge its variable interest rate
exposure on debt instruments. The fair value of the swap agreements is
determined based on the present value of the estimated future net cash flows
using implied rates in the applicable yield curve as of the valuation
date.
The
Company has hedging arrangements designed to fix the price of a portion of its
urea and fuel needs. The objective of the hedges is to mitigate the earnings and
cash flow volatility attributable to the risk of changing prices. These
contracts are measured using observable commodity exchange prices in active
markets.
These
derivative instruments are classified within Level 2 of the valuation hierarchy
and are included within other noncurrent assets and other noncurrent liabilities
in our Condensed, Consolidated Balance Sheets.
For
further information on the Company’s derivative instruments, refer to “NOTE 11.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.”
Other
financial assets and liabilities consist of investment securities in
non-qualified retirement plan assets. These securities are valued using
observable market prices in active markets. These investment securities, and the
related liabilities, are classified within Level 1 of the valuation hierarchy
and are included within other noncurrent assets and other noncurrent liabilities
in our Condensed, Consolidated Balance Sheets.
The
following table presents the Company’s financial assets and liabilities measured
at fair value on a recurring basis at March 28, 2009 (in millions):
|
|
Quoted
Prices in Active
Markets for Identical
Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Unobservable Inputs
(Level 3)
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
– |
|
Other
|
|
|
4.4 |
|
|
|
– |
|
|
|
– |
|
|
|
4.4 |
|
Total
|
|
$ |
4.4 |
|
|
$ |
– |
|
|
$ |
– |
|
|
$ |
4.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate swap agreements
|
|
$ |
– |
|
|
$ |
(36.0 |
) |
|
$ |
– |
|
|
$ |
(36.0 |
) |
Commodity hedging instruments
|
|
|
– |
|
|
|
(3.2 |
) |
|
|
– |
|
|
|
(3.2 |
) |
Other
|
|
|
(4.4 |
) |
|
|
– |
|
|
|
– |
|
|
|
(4.4 |
) |
Total
|
|
$ |
(4.4 |
) |
|
$ |
(39.2 |
) |
|
$ |
– |
|
|
$ |
(43.6 |
) |
On
October 1, 2008, the Company completed its acquisition of Humax Horticulture
Limited (“Humax”), a privately-owned growing media company in the United
Kingdom.
Preliminary
purchase accounting allocations have been recorded for Humax, including the
allocation of the purchase price to assets acquired and liabilities assumed,
based on estimated fair values at the date of acquisition. The Company expects
to finalize accounting for the acquisition prior to the end of fiscal year
2009.
Pro forma
net sales, net income and net income per common share for the three and six
months ended March 29, 2008 would not have been significantly different had the
acquisition of Humax occurred as of October 1, 2007.
NOTE
14. SEGMENT INFORMATION
The
Company’s operations are divided into the following reportable segments —
Global Consumer, Global Professional, Scotts LawnService® and
Corporate & Other. This division of reportable segments is consistent
with how the segments report to and are managed by senior management of the
Company.
The
Global Consumer segment consists of the North American Consumer and
International Consumer business groups. The business groups comprising this
segment manufacture, market and sell dry, granular slow-release lawn
fertilizers, combination lawn fertilizer and control products, grass seed,
spreaders, water-soluble, liquid and continuous release garden and indoor plant
foods, plant care products, potting, garden and lawn soils, mulches and other
growing media products and pesticide products. Products are marketed to mass
merchandisers, home centers, large hardware chains, warehouse clubs,
distributors, garden centers and grocers in the United States, Canada and
Europe.
The
Global Professional segment is focused on a full line of horticultural products
including controlled-release and water-soluble fertilizers and plant protection
products, grass seed products, spreaders and customer application services.
Products are sold to commercial nurseries and greenhouses and specialty crop
growers, primarily in North America and Europe. Our consumer businesses in
Australia and Latin America are also part of the Global Professional
segment.
The
Scotts LawnService® segment
provides lawn fertilization, disease and insect control and other related
services such as core aeration and tree and shrub fertilization primarily to
residential consumers through company-owned branches and franchises in the
United States. In our larger branches, an exterior barrier pest control service
is also offered.
The
Corporate & Other segment consists of the Smith & Hawken® business
and corporate general and administrative expenses.
The
following table presents segment financial information in accordance with
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information” (“SFAS 131”). Pursuant to SFAS 131, the presentation of the
segment financial information is consistent with the basis used by management
(i.e., certain costs not allocated to business segments for internal management
reporting purposes are not allocated for purposes of this
presentation).
|
|
THREE MONTHS
ENDED
|
|
|
SIX MONTHS
ENDED
|
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
|
(IN MILLIONS)
|
|
|
(IN MILLIONS)
|
|
Net
sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Consumer
|
|
$ |
833.7 |
|
|
$ |
820.5 |
|
|
$ |
1,016.0 |
|
|
$ |
987.4 |
|
Global
Professional
|
|
|
74.5 |
|
|
|
99.5 |
|
|
|
140.0 |
|
|
|
161.9 |
|
Scotts
LawnService®
|
|
|
32.8 |
|
|
|
32.4 |
|
|
|
71.6 |
|
|
|
70.7 |
|
Corporate
& Other
|
|
|
19.3 |
|
|
|
24.8 |
|
|
|
51.2 |
|
|
|
66.1 |
|
Segment
total
|
|
|
960.3 |
|
|
|
977.2 |
|
|
|
1,278.8 |
|
|
|
1,286.1 |
|
Roundup®
amortization
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Product
registration and recall matters-returns
|
|
|
— |
|
|
|
(19.0 |
) |
|
|
(0.3 |
) |
|
|
(19.0 |
) |
Consolidated
|
|
$ |
960.1 |
|
|
$ |
958.0 |
|
|
$ |
1,278.1 |
|
|
$ |
1,266.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Global
Consumer
|
|
$ |
199.3 |
|
|
$ |
179.2 |
|
|
$ |
163.7 |
|
|
$ |
141.2 |
|
Global
Professional
|
|
|
8.0 |
|
|
|
16.3 |
|
|
|
21.9 |
|
|
|
22.7 |
|
Scotts
LawnService®
|
|
|
(16.1 |
) |
|
|
(18.5 |
) |
|
|
(23.9 |
) |
|
|
(30.0 |
) |
Corporate
& Other
|
|
|
(43.2 |
) |
|
|
(27.9 |
) |
|
|
(75.4 |
) |
|
|
(50.5 |
) |
Segment
total
|
|
|
148.0 |
|
|
|
149.1 |
|
|
|
86.3 |
|
|
|
83.4 |
|
Roundup®
amortization
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Other
amortization
|
|
|
(2.9 |
) |
|
|
(3.9 |
) |
|
|
(6.2 |
) |
|
|
(7.8 |
) |
Product
registration and recall matters
|
|
|
(8.0 |
) |
|
|
(30.8 |
) |
|
|
(15.6 |
) |
|
|
(30.8 |
) |
Consolidated
|
|
$ |
136.9 |
|
|
$ |
114.2 |
|
|
$ |
64.1 |
|
|
$ |
44.4 |
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
SEPTEMBER 30,
2008
|
|
|
|
(IN
MILLIONS)
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
Global
Consumer
|
|
$ |
2,289.1 |
|
|
$ |
2,414.5 |
|
|
$ |
1,483.8 |
|
Global
Professional
|
|
|
299.0 |
|
|
|
350.5 |
|
|
|
289.9 |
|
Scotts
LawnService®
|
|
|
175.0 |
|
|
|
180.5 |
|
|
|
186.5 |
|
Corporate
& Other
|
|
|
204.8 |
|
|
|
225.4 |
|
|
|
196.1 |
|
Consolidated
|
|
$ |
2,967.9 |
|
|
$ |
3,170.9 |
|
|
$ |
2,156.3 |
|
Segment
operating income (loss) represents earnings before amortization of intangible
assets, interest and taxes, since this is the measure of profitability used by
management. Accordingly, the Corporate & Other operating loss for the three
and six months ended March 28, 2009 and March 29, 2008 includes corporate
general and administrative expenses and certain other income/expense items not
allocated to the business segments.
Total
assets reported for the Company’s operating segments include the intangible
assets associated with the acquired businesses within those segments. Corporate
& Other assets primarily include deferred financing and debt issuance costs,
corporate intangible assets, deferred tax assets and Smith & Hawken®
assets.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Management’s
Discussion and Analysis (“MD&A”) is organized in the following
sections:
·
|
Liquidity
and capital resources
|
·
|
Critical
accounting policies and estimates
|
EXECUTIVE
SUMMARY
The
Scotts Miracle-Gro Company (“Scotts
Miracle-Gro”)
and its subsidiaries (collectively, together with Scotts Miracle-Gro, the “Company”), “we” or
“us” are dedicated to delivering strong, consistent financial results and
outstanding shareholder returns by providing products of superior quality and
value in order to enhance consumers’ outdoor living environments. We are a
leading manufacturer and marketer of consumer branded products for lawn and
garden care and professional horticulture in North America and Europe. We
are Monsanto’s exclusive agent for the marketing and distribution of consumer
Roundup®
non-selective herbicide products within the United States and other
contractually specified countries. We have a presence in similar consumer
branded and professional horticulture products in Australia, the Far East, Latin
America and South America. In the United States, we operate Scotts
LawnService®, the
second largest residential lawn care service business, and Smith &
Hawken®, a
leading brand in the outdoor living and garden lifestyle category. Our
operations are divided into the following reportable segments: Global Consumer,
Global Professional, Scotts LawnService® and
Corporate & Other. The Corporate & Other segment consists of
the Smith & Hawken® business
and corporate general and administrative expenses.
As a
leading consumer branded lawn and garden company, our marketing efforts are
largely focused on building brand and product awareness to inspire consumers and
create retail demand. We have successfully applied this consumer marketing focus
for a number of years, consistently investing approximately 5% of our annual net
sales in advertising to support and promote our products and brands. We
continually explore new and innovative ways to communicate with consumers.
We believe that we receive a significant return on these marketing expenditures
and anticipate a similar level of advertising and marketing investments in the
future, with the continuing objective of driving category growth and increasing
market share.
Our sales
are susceptible to global weather conditions. For instance, periods of wet
weather can adversely impact sales of certain products, while increasing demand
for other products. We believe that our diversified product line provides some
mitigation to this risk. We also believe that our broad geographic
diversification further reduces this risk.
|
|
Percent Net Sales by Quarter
|
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
First
Quarter
|
|
|
10.4 |
% |
|
|
9.5 |
% |
|
|
9.3 |
% |
Second
Quarter
|
|
|
32.1 |
% |
|
|
34.6 |
% |
|
|
33.6 |
% |
Third
Quarter
|
|
|
39.3 |
% |
|
|
38.2 |
% |
|
|
38.9 |
% |
Fourth
Quarter
|
|
|
18.2 |
% |
|
|
17.7 |
% |
|
|
18.2 |
% |
Due to
the nature of our lawn and garden business, significant portions of our products
ship to our retail customers during the second and third fiscal quarters. Our
annual sales are further concentrated in the second and third fiscal quarters by
retailers who increasingly rely on our ability to deliver products “in season”
when consumers buy our products, thereby reducing retailers’
inventories.
Management
focuses on a variety of key indicators and operating metrics to monitor the
health and performance of our business. These metrics include consumer purchases
(point-of-sale data), market share, net sales (including unit volume, pricing,
product mix and foreign exchange movements), organic sales growth (net sales
growth excluding the impact of foreign exchange movements and product recalls),
gross profit margins, income from operations, net income and earnings per share.
To the extent applicable, these measures are evaluated with and without
impairment, restructuring and other charges, which management believes are not
indicative of the ongoing earnings capabilities of our businesses. We also focus
on measures to optimize cash flow and return on invested capital, including the
management of working capital and capital expenditures.
Product
Registration and Recall Matters
In April
2008, we learned that a former associate apparently deliberately circumvented
our policies and U.S. Environmental Protection Agency (“U.S. EPA”)
regulations under the Federal Insecticide, Fungicide, and Rodenticide Act of
1947, as amended (“FIFRA”), by failing to obtain valid registrations for
products and/or causing invalid product registration forms to be submitted to
regulators. Since that time, we have been cooperating with the U.S. EPA in
its civil investigation into pesticide product registration issues involving the
Company and with the U.S. EPA and the U.S. Department of Justice (the
“U.S. DOJ”) in a related criminal investigation. In late April of 2008, in
connection with the U.S. EPA’s investigation, we conducted a consumer-level
recall of certain consumer lawn and garden products and a Scotts
LawnService® product.
Subsequently, we agreed with the U.S. EPA on a Compliance Review Plan for
conducting a comprehensive, independent review of our product registration
records. Pursuant to the Compliance Review Plan, an independent third-party
firm, Quality Associates Incorporated (“QAI”), has been reviewing all of our
U.S. pesticide product registration records, some of which are historical in
nature and no longer support sales of our products. The U.S. EPA
investigation and QAI review process identified several issues affecting
registrations which resulted in the temporary suspension of sales and shipments
of the products affected. In addition, as the QAI review process or our internal
review has identified FIFRA registration issues or potential FIFRA registration
issues (some of which appear unrelated to the former associate), we have
endeavored to stop selling or distributing the affected products until the
issues could be resolved with the U.S. EPA.
QAI has
completed a review of substantially all of our registrations, advertising and
related promotional support of our registered pesticide products. While we
do not expect the results of the QAI review process to significantly affect our
fiscal year 2009 sales, the registration review process has not concluded, and
we continue to cooperate with the U.S. EPA and U.S. DOJ in their related
investigations.
While we
believe that the FIFRA compliance review process is substantially complete, the
U.S. EPA and U.S. DOJ investigations and the review process continue and may
result in future state, federal or private rights of action including fines
and/or penalties with respect to known or potential additional product
registration issues. Until the U.S. EPA and U.S. DOJ investigations and
the compliance review process are complete, we cannot fully quantify the
extent of additional issues. At this time, we cannot reasonably determine the
scope or magnitude of possible liabilities that could result from known or
potential additional product registration issues, and no reserves for these
potential liabilities have been established as of March 28, 2009. However, it is
possible that such liabilities, including fines, penalties and/or judgments,
could be material and have an adverse effect on our financial condition, results
of operations or cash flows.
On
September 26, 2008, the Company, doing business as Scotts LawnService®, was
named as a defendant in a purported class action filed in the U.S. District
Court for the Eastern District of Michigan relating to certain pesticide
products. In the suit, Mark Baumkel, on behalf of himself and the purported
classes, seeks an unspecified amount of damages, plus costs and attorneys’ fees,
for alleged claims involving breach of contract, unjust enrichment and violation
of the Michigan consumer protection act. Given the preliminary stages of the
proceedings, no accruals have been recorded, and we intend to
vigorously contest the plaintiff’s assertions.
In fiscal
2008, we conducted a voluntary recall of most of our wild bird food products due
to a formulation issue. The wild bird food products had been treated with pest
control additives to avoid insect infestation, especially at retail stores.
While the pest control additives had been labeled for use on certain stored
grains that can be processed for human and/or animal consumption, they were not
labeled for use on wild bird food products. This voluntary recall was completed
prior to the end of fiscal 2008, and we do not expect any material impact to our
fiscal 2009 financial condition, results of operations or cash flows as a result
of such recall.
As a
result of these registration and recall matters, we have reversed sales
associated with estimated returns of affected products, recorded an impairment
estimate for affected inventory and recorded other registration and
recall-related costs. The impact of these adjustments was pre-tax charges
of $8.0 million and $30.8 million for the three-month periods, and
$15.6 million and $30.8 million for the six-month periods, ended March
28, 2009 and March 29, 2008, respectively. Although we have begun to reduce our
need for third-party professional services related to the recall and
registration matters, we nevertheless expect to incur $10 to $15 million in
additional charges, exclusive of potential fines, penalties, and/or
judgments, related to the recalls and known registration issues, including those
associated with more aggressively addressing impacted inventory as
permitted by the U.S. EPA.
We are
committed to providing our customers and consumers with products of superior
quality and value to enhance their lawns, gardens and overall outdoor living
environments. We believe consumers have come to trust our brands based on the
superior quality and value they deliver, and that trust is highly valued. We are
also committed to conducting business with the highest degree of ethical
standards and in adherence to the law. While we are disappointed in these
events, we believe we have made significant progress in addressing the issues
and restoring customer and consumer confidence in our products.
RESULTS
OF OPERATIONS
The
following table sets forth the components of income and expense as a percentage
of net sales for the three- and six-month periods ended March 28, 2009 and March
29, 2008:
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
Net
sales
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost
of sales
|
|
|
62.4 |
|
|
|
63.9 |
|
|
|
65.1 |
|
|
|
67.1 |
|
Cost
of sales – product registration and recall matters
|
|
|
0.3 |
|
|
|
2.4 |
|
|
|
0.3 |
|
|
|
1.8 |
|
Gross
profit
|
|
|
37.3 |
|
|
|
33.7 |
|
|
|
34.6 |
|
|
|
31.1 |
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
22.4 |
|
|
|
21.8 |
|
|
|
28.9 |
|
|
|
27.8 |
|
Selling,
general and administrative – product registration and recall
matters
|
|
|
0.6 |
|
|
|
0.1 |
|
|
|
0.9 |
|
|
|
0.1 |
|
Other
income, net
|
|
|
— |
|
|
|
(0.1 |
) |
|
|
(0.2 |
) |
|
|
(0.3 |
) |
Income
from operations
|
|
|
14.3 |
|
|
|
11.9 |
|
|
|
5.0 |
|
|
|
3.5 |
|
Interest
expense
|
|
|
1.7 |
|
|
|
2.4 |
|
|
|
2.5 |
|
|
|
3.4 |
|
Income
before income taxes
|
|
|
12.6 |
|
|
|
9.5 |
|
|
|
2.5 |
|
|
|
0.1 |
|
Income
taxes
|
|
|
4.6 |
|
|
|
3.4 |
|
|
|
0.9 |
|
|
|
0.0 |
|
Net
income
|
|
|
8.0 |
% |
|
|
6.1 |
% |
|
|
1.6 |
% |
|
|
0.1 |
% |
Net sales
for the three months ended March 28, 2009 were $960.1 million, essentially flat
compared to net sales of $958 million for the three months ended March 29, 2008.
Net sales for the first six months of fiscal 2009 grew 0.9% versus the
comparable period of fiscal 2008. Foreign exchange movements decreased sales
growth for the second quarter and six months ended March 28, 2009 by 4.9% and
5.0%, respectively. Additionally, product returns related to recall matters in
2008 had the impact of decreasing net sales, thereby increasing sales growth for
the second quarter and six months ended March 28, 2009 by 2.1% and 1.6%,
respectively. Organic net sales growth, which excludes the impact of foreign
exchange movements and product recalls, was 3.0% and 4.3% for the second quarter
and first six months of 2009, respectively. In the Global Consumer segment,
organic net sales grew by 5.5% and 7.0% for the second quarter and first six
months, respectively, primarily due to an increase in sales in North America.
Global Professional organic net sales declined by 10.6% for the second quarter,
and were essentially flat year-to-date compared to the same period in fiscal
2008. Organic net sales growth for the Scotts LawnService® segment was 1.2% and
1.3% for the three and six months ended March 28, 2009, respectively. Smith
& Hawken® organic net sales decreased by 22.1% and 22.4% for the second
quarter and first six months of fiscal 2009, respectively.
In recent
years, consolidated net sales for the first six months have typically comprised
42% to 45% of our total fiscal year consolidated net sales. However, there can
be no assurance that a similar sales trend will apply to fiscal 2009. On a
consolidated basis, we anticipate fiscal 2009 organic net sales to increase by
5% to 7% compared to fiscal 2008.
As a
percentage of net sales, gross profit was 37.3% for the second quarter of fiscal
2009 compared to 33.7% for the second quarter of fiscal 2008. For the first six
months of fiscal 2009, our gross profit percentage increased to 34.6% from 31.1%
in the comparable period of fiscal 2008. Excluding product registration and
recall matters, gross profit for the second quarter and first six months of
fiscal 2009 increased 150 and 190 basis points, respectively. The fiscal 2009
second quarter and year-to-date gross profit rate increases were driven by cost
productivity improvements and increased selling prices net of increased
commodity costs. Excluding the impact of product registration and recall
matters, for fiscal 2009 we anticipate the gross profit rate as a percentage of
net sales to increase nearly 200 basis points compared to fiscal 2008,
consistent with trends from the first half of the year.
Selling,
General and Administrative Expenses
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
|
(IN MILLIONS)
|
|
|
(IN MILLIONS)
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
Advertising
|
|
$ |
46.1 |
|
|
$ |
49.7 |
|
|
$ |
60.3 |
|
|
$ |
64.5 |
|
Other
selling, general and administrative
|
|
|
166.9 |
|
|
|
154.8 |
|
|
|
302.6 |
|
|
|
280.4 |
|
Amortization
of intangibles
|
|
|
2.9 |
|
|
|
3.9 |
|
|
|
6.2 |
|
|
|
7.8 |
|
|
|
$ |
215.9 |
|
|
$ |
208.4 |
|
|
$ |
369.1 |
|
|
$ |
352.7 |
|
Selling,
general and administrative (“SG&A”) expenses increased $7.5 million, or
3.6%, to $215.9 million for the second quarter and $16.4 million, or 4.6%, to
$369.1 million for the first six months of fiscal 2009. Excluding the impact of
foreign exchange rates, SG&A expenses for the second quarter and first six
months of fiscal 2009 increased 7.5% and 8.7%, respectively. Lower advertising
expense year-to-date was largely attributable to increased media efficiencies in
the Global Consumer business. We expect full-year advertising expense to reflect
increased spend in the North America Consumer segment, offset by lower media
spending in the International Consumer segment, primarily due to media
efficiencies. The increase in other SG&A for the second quarter and
year-to-date was primarily driven by increased estimates for full-year variable
compensation and retention costs, investments in research and development and
technology, and increased pension costs. We continue to expect full-year growth
of SG&A expenses in the mid- to high-single digits, with the largest
incremental driver being variable compensation, which is linked to our
results.
We
recorded $5.5 million and $11.7 million of SG&A-related product registration
and recall costs during the second quarter and first six months of fiscal 2009,
respectively, which primarily related to third-party compliance review, legal
and consulting fees. For both the quarter and six months ended March 29, 2008,
we recorded $1.2 million of SG&A-related product registration and recall
costs.
Interest
expense for the second quarter and first six months of fiscal 2009 was $15.9
million and $32.2 million, respectively, compared to $23.5 million and $42.5
million for the second quarter and first six months of fiscal 2008. The decrease
was primarily due to a decline in our borrowing rates, as well as the favorable
impact of foreign exchange rates and a reduction in average debt outstanding.
Weighted-average interest rates decreased by 88 basis points during the first
six months of fiscal 2009 as compared to the same period of fiscal 2008. Average
borrowings also decreased by $160.7 million.
Income
tax expense was calculated assuming an effective tax rate of 36.0% for the first
half of both fiscal 2009 and fiscal 2008. The effective tax rate used for
interim reporting purposes was based on management’s best estimate of factors
impacting the effective tax rate for the full fiscal year. Factors affecting the
estimated effective tax rate include assumptions as to income by jurisdiction
(domestic and foreign), the availability and utilization of tax credits and the
existence of elements of income and expense that may not be taxable or
deductible, as well as other items. The estimated effective tax rate is subject
to revision in later interim periods and at fiscal year end as facts and
circumstances change during the course of the fiscal year. There can be no
assurance that the effective tax rate estimated for interim financial reporting
purposes will approximate the effective tax rate determined at fiscal year
end.
Diluted
average common shares used in the diluted net income per common share
calculation were 65.8 million for the second quarter of fiscal 2009 compared to
65.6 million for the same period a year ago. Diluted average common shares used
in the diluted net income per common share calculation were 65.7 million for the
six months ended both March 28, 2009 and March 29, 2008. Diluted average common
shares included 0.9 million equivalent shares for the second quarter and
year-to-date periods in fiscal 2009 to reflect the effect of the assumed
conversion of dilutive stock options, restricted stock and restricted stock unit
awards. For the second quarter and first six months of fiscal 2008, diluted
average common shares included 1.2 million and 1.4 million equivalent shares,
respectively.
SEGMENT
RESULTS
Our
operations are divided into the following segments: Global Consumer, Global
Professional, Scotts LawnService® and Corporate & Other. The Corporate &
Other segment consists of Smith & Hawken® and corporate general and
administrative expenses. Segment performance is evaluated based on several
factors, including income from operations before amortization, product
registration and recall costs, and impairment, restructuring and other charges,
which are not generally accepted accounting principles measures. Management uses
this measure of operating profit to gauge segment performance because we believe
this measure is the most indicative of performance trends and the overall
earnings potential of each segment.
The following table sets forth net sales by segment:
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
|
(IN MILLIONS)
|
|
|
(IN MILLIONS)
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
Global
Consumer
|
|
$ |
833.7 |
|
|
$ |
820.5 |
|
|
$ |
1,016.0 |
|
|
$ |
987.4 |
|
Global
Professional
|
|
|
74.5 |
|
|
|
99.5 |
|
|
|
140.0 |
|
|
|
161.9 |
|
Scotts
LawnService®
|
|
|
32.8 |
|
|
|
32.4 |
|
|
|
71.6 |
|
|
|
70.7 |
|
Corporate
& other
|
|
|
19.3 |
|
|
|
24.8 |
|
|
|
51.2 |
|
|
|
66.1 |
|
Segment
total
|
|
|
960.3 |
|
|
|
977.2 |
|
|
|
1,278.8 |
|
|
|
1,286.1 |
|
Roundup®
amortization
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Product
registrations and recall matters - returns
|
|
|
— |
|
|
|
(19.0 |
) |
|
|
(0.3 |
) |
|
|
(19.0 |
) |
Consolidated
|
|
$ |
960.1 |
|
|
$ |
958.0 |
|
|
$ |
1,278.1 |
|
|
$ |
1,266.7 |
|
The following table sets forth operating income (loss) by segment:
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
MARCH 28,
2009
|
|
|
MARCH 29,
2008
|
|
|
|
(IN MILLIONS)
|
|
|
(IN MILLIONS)
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
Global
Consumer
|
|
$ |
199.3 |
|
|
$ |
179.2 |
|
|
$ |
163.7 |
|
|
$ |
141.2 |
|
Global
Professional
|
|
|
8.0 |
|
|
|
16.3 |
|
|
|
21.9 |
|
|
|
22.7 |
|
Scotts
LawnService®
|
|
|
(16.1 |
) |
|
|
(18.5 |
) |
|
|
(23.9 |
) |
|
|
(30.0 |
) |
Corporate
& other
|
|
|
(43.2 |
) |
|
|
(27.9 |
) |
|
|
(75.4 |
) |
|
|
(50.5 |
) |
Segment
total
|
|
|
148.0 |
|
|
|
149.1 |
|
|
|
86.3 |
|
|
|
83.4 |
|
Roundup®
amortization
|
|
|
(0.2 |
) |
|
|
(0.2 |
) |
|
|
(0.4 |
) |
|
|
(0.4 |
) |
Other
amortization
|
|
|
(2.9 |
) |
|
|
(3.9 |
) |
|
|
(6.2 |
) |
|
|
(7.8 |
) |
Product
registration and recall matters
|
|
|
(8.0 |
) |
|
|
(30.8 |
) |
|
|
(15.6 |
) |
|
|
(30.8 |
) |
Consolidated
|
|
$ |
136.9 |
|
|
$ |
114.2 |
|
|
$ |
64.1 |
|
|
$ |
44.4 |
|
Global
Consumer
Global
Consumer segment net sales were $833.7 million for the second quarter and $1.02
billion for the first six months of fiscal 2009, an increase of 1.6% and 2.9%
from the second quarter and first six months of fiscal 2008, respectively.
Organic net sales growth for the second quarter and first six months of fiscal
2009 was 5.5% and 7.0%, respectively, including the favorable impact of price
increases of 8.9% and 8.2%. Foreign exchange movements decreased net sales by
3.9% and 4.1% for the second quarter and first six months of fiscal 2009,
respectively.
Organic
net sales in North America increased 8.2% and 9.6% for the second quarter and
first six months of fiscal 2009, respectively. Organic net sales growth includes
the favorable impact of higher selling prices, which increased North American
sales by 9.1% and 8.6% for the second quarter and first six months of fiscal
2009, respectively. Sales of our products to consumers at retail
(point-of-sales) for our largest U.S. customers increased by 18.0% and 10.9% for
the quarter and year-to-date, respectively, primarily driven by sales in lawn
fertilizers, growing media and plant foods. Organic net sales in Europe
decreased by 7.1% and 3.6% for the second quarter and first six months of fiscal
2009, respectively, primarily driven by delayed purchasing by our retailers. All
European regions, except for Germany and Central Europe, were unfavorably
impacted by the delayed purchasing. Pricing actions in Europe increased net
sales by 8.0% and 6.6% for the quarter and year-to-date, partially offsetting
the decline in volumes.
Global
Consumer segment operating income increased by $20.1 million and $22.5 million
in the second quarter and first six months of fiscal 2009, respectively.
Excluding foreign exchange movements, segment operating income increased by
$25.7 million and $26.0 million in the second quarter and first six months of
fiscal 2009, respectively. The increase in operating income was driven by the
increase in net sales accompanied by improvement in gross margin rates of 170
basis points for both the second quarter and first six months of fiscal 2009.
The increase in gross margin rates was the result of cost productivity projects,
as well as the net impact of pricing in excess of commodity cost increases. The
improvement in net sales and gross margin rates were partially offset by
increases in SG&A spending, primarily related to higher research and
development costs and increased variable compensation.
Global
Professional
Global
Professional segment net sales were $74.5 million for the second quarter and
$140.0 million for the first six months of fiscal 2009, a decrease of 25.1% and
13.5% from the second quarter and first six months of fiscal 2008, respectively.
Organic net sales, which excludes the effect of exchange rates, decreased by
10.6% for the second quarter and were essentially flat for the first six months
of fiscal 2009. Pricing actions increased net sales by 11.3% and 16.1% for the
second quarter and first six months of fiscal 2009, respectively. The decrease
in net sales for the second quarter was driven primarily by volume declines in
North America resulting from a decline in category demand and a reduction in
grower and distributor inventory.
Global
Professional segment operating income decreased $8.3 million in the second
quarter of fiscal 2009, or $6.1 million excluding the impact of foreign exchange
rates. The decrease in operating income was primarily driven by declines in
gross margins. Operating income decreased by $0.8 million for the first six
months of fiscal 2009, and increased by $3.2 million excluding the impact of
foreign exchanges rates. The increased operating income for the first six months
of fiscal year 2009 was driven by improved year-to-date gross margins, partially
offset by an increase in SG&A spending.
Scotts
LawnService®
Compared
to the same periods in the prior fiscal year, Scotts LawnService® revenues
increased 1.2% to $32.8 million in the second quarter of fiscal 2009 and
increased 1.3% to $71.6 million in the first six months of fiscal 2009. The
Scotts LawnService® segment operating loss decreased by $2.4 million and $6.1
million in the second quarter and first six months of fiscal 2009, respectively.
The decreases were primarily driven by productivity improvements as well as a
decline in SG&A spending.
Corporate
& Other
Net sales
for the Corporate & Other segment, which pertain primarily to Smith &
Hawken®, decreased $5.5 million for the second quarter of fiscal 2009 and $14.9
million year-to-date. Smith & Hawken® sales decreased across all channels
due to an extremely challenging retail environment. We continue to evaluate
options for the Smith & Hawken® business.
The
operating loss for Corporate & Other increased by $15.3 million for the
second quarter and $24.9 million for the first six months of fiscal 2009. The
increases in operating loss were driven by increased variable compensation and
retention costs, higher information technology spending, increased regulatory
and compliance costs, pension costs, and an increase in the operating loss for
Smith & Hawken®.
LIQUIDITY
AND CAPITAL RESOURCES
Operating
Activities
Cash used
in operating activities amounted to $618.9 million and $555.7 million for the
six months ended March 28, 2009 and March 29, 2008, respectively. The use of
cash in the first six months of our fiscal year is due to the seasonal nature of
our operations. We build inventories in preparation for the spring selling
season and accounts receivable increase significantly due to heavy March
shipments. The increase in the use of cash for operating activities during the
first half of fiscal 2009 compared to the first half of fiscal 2008 was due
primarily to higher inventory builds in fiscal 2009, partially attributable to
approximately $40 million of inventory “on hold” related to the product
registration and recall matters, increased input costs and new private label
products.
Investing
Activities
Cash used
in investing activities was $28.6 million and $24.5 million for the six months
ended March 28, 2009 and March 29, 2008, respectively. We had acquisition
activity in the first half of fiscal 2009 totaling $9.3 million. There was no
acquisition activity in the first half of fiscal 2008. Capital spending
decreased from $25.1 million in the first half of fiscal 2008 to $20.1 million
in the first half of fiscal 2009.
Financing
Activities
Financing
activities provided cash of $611.9 million and $580.8 million for the six months
ended March 28, 2009 and March 29, 2008, respectively. The cash provided by
financing activities reflects borrowing activity primarily to support seasonal
investment in working capital.
Credit
Agreements
Our
primary sources of liquidity are cash generated by operations and borrowings
under our credit agreements. Scotts Miracle-Gro and certain of its subsidiaries
have entered into the following loan facilities totaling up to
$2.15 billion in the aggregate: (a) a senior secured five-year term
loan facility in the principal amount of $560 million and (b) a senior
secured five-year revolving loan facility in the aggregate principal amount of
up to $1.59 billion. Borrowings may be made in various currencies including
U.S. dollars, Euros, British pounds, Australian dollars and Canadian
dollars. Under our current structure, we may request an additional
$200 million in revolving credit and/or term credit commitments, subject to
approval from our lenders. As of March 28, 2009, there was $795.2 million
of availability under the revolving loan facility, including letters of credit.
Refer to “NOTE 5. DEBT” to the accompanying condensed, consolidated
financial statements for additional information pertaining to our borrowing
arrangements.
At March
28, 2009, we had outstanding interest rate swaps with major financial
institutions that effectively converted a portion of our variable-rate debt
denominated in U.S. dollars to a fixed rate. The key terms of these swaps are
shown in the table below.
NOTIONAL AMOUNT
(IN MILLIONS)
|
|
EFFECTIVE
DATE (a)
|
|
EXPIRATION
DATE
|
|
FIXED
RATE
|
|
$200(b)
|
|
3/31/2007
|
|
3/31/2009
|
|
|
4.90%
|
|
200(b)
|
|
3/30/2007
|
|
3/30/2010
|
|
|
4.87%
|
|
200(b)
|
|
2/14/2007
|
|
2/14/2012
|
|
|
5.20%
|
|
50(b)
|
|
2/14/2012
|
|
2/14/2016
|
|
|
3.78%
|
|
150(c)
|
|
11/16/2009
|
|
5/16/2016
|
|
|
3.26%
|
|
50(d)
|
|
2/16/2010
|
|
5/16/2016
|
|
|
3.05%
|
|
|
(a)
|
The
effective date refers to the date on which interest payments are first
hedged by the applicable swap
contract.
|
|
(b)
|
Interest
payments made between the effective date and expiration date are hedged by
the swap contract.
|
|
(c)
|
Interest
payments made during the six-month period beginning November 14 of each
year between the effective date and expiration date are hedged by the swap
contract.
|
|
(d)
|
Interest
payments made during the three-month period beginning February 14 of each
year between the effective date and expiration date are hedged by the swap
contract.
|
On
April 11, 2007, we entered into a one-year Master Accounts Receivable
Purchase Agreement (the “2007 MARP Agreement”). On April 9, 2008, we
terminated the 2007 MARP Agreement and entered into a Master Accounts Receivable
Purchase Agreement (the “2008 MARP Agreement”), which expired on April 8,
2009. The terms of the 2008 MARP Agreement were substantially the same as the
2007 MARP Agreement. The 2008 MARP Agreement provided an interest rate that was
equal to the 7-day LIBOR rate plus 85 basis points. The 2008 MARP Agreement
provided for the discounted sale, on a revolving basis, of accounts receivable
generated by specified account debtors, with seasonally adjusted monthly
aggregate limits ranging from $10 million to $300 million. The 2008
MARP Agreement also provided for specified account debtor sublimit amounts,
which provided limits on the amount of receivables owed by individual account
debtors that could be sold to the banks. Borrowings under the 2008 MARP
Agreement at March 28, 2009 were $275.0 million.
On May 1,
2009, we entered into a Master Accounts Receivable Purchase Agreement (the “2009
MARP Agreement), with a stated termination date of May 1, 2010, or such later
date as may be mutually agreed by us and our lender. The 2009 MARP Agreement
provides an interest rate that is equal to the 7-day LIBOR rate plus 225 basis
points. The 2009 MARP Agreement provides for the discounted sale, on an
uncommitted, revolving basis, of accounts receivable generated by a specified
account debtor, with aggregate limits not to exceed $80 million.
As of
March 28, 2009, we were in compliance with all debt covenants. Our credit
facilities contain, among other obligations, an affirmative covenant regarding
our leverage ratio, calculated as indebtedness relative to our earnings before
taxes, depreciation and amortization. Under the terms of the credit facilities,
the permissible leverage ratio was 4.25 as of March 28, 2009, which is scheduled
to decrease to 3.75 on September 30, 2009. Management continues to monitor our
compliance with the leverage ratio and other covenants contained in the credit
facilities and, based upon our current operating assumptions, we expect to
remain in compliance with the permissible leverage ratio throughout fiscal 2009.
However, an unanticipated charge to earnings, an increase in debt or other
factors could materially affect our ability to remain in compliance with the
financial or other covenants of our credit facilities, potentially causing us to
have to seek an amendment or waiver from our lending group. While we believe we
have good relationships with our banking group, given the adverse conditions
currently present in the global credit markets, we can provide no assurance that
such a request would be likely to result in a modified or replacement credit
facility on reasonable terms, if at all.
Judicial
and Administrative Proceedings
Apart
from the proceedings surrounding the FIFRA compliance matters, which are
discussed separately, we are party to various pending judicial and
administrative proceedings arising in the ordinary course of business,
including, among others, proceedings based on accidents or product liability
claims and alleged violations of environmental laws. We have reviewed these
pending judicial and administrative proceedings, including the probable
outcomes, reasonably anticipated costs and expenses, and the availability and
limits of our insurance coverage, and have established what we believe to be
appropriate reserves. We do not believe that any liabilities that may result
from these pending judicial and administrative proceedings are reasonably likely
to have a material adverse effect on our financial condition, results of
operations or cash flows; however, there can be no assurance that future
quarterly or annual operating results will not be materially affected by final
resolution of these matters.
Liquidity
In our
opinion, cash flows from operations and capital resources will be sufficient to
meet debt service and working capital needs during fiscal 2009, and thereafter
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 credit facilities 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.
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. Apart from the proceedings surrounding the
FIFRA compliance matters, which are discussed separately, we are involved in
several legal actions with various governmental agencies related to
environmental matters. While it is difficult to quantify the potential financial
impact of actions involving these environmental matters, particularly
remediation costs at waste disposal sites and future capital expenditures for
environmental control equipment, in the opinion of management, the ultimate
liability arising from such environmental matters, taking into account
established reserves, should not have a material adverse effect on our financial
position, 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 Scotts Miracle-Gro’s Annual Report on Form 10-K, as amended by Form 10-K/A
(Amendment No. 1), for the fiscal year ended September 30, 2008, under
“ITEM 1. BUSINESS — Regulatory Considerations,” “ITEM 1.
BUSINESS — FIFRA Compliance, the Corresponding Governmental Investigation
and Related Matters,” “ITEM 1. BUSINESS — Other Regulatory Matters”
and “ITEM 3. LEGAL PROCEEDINGS.”
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preceding discussion and analysis of our consolidated results of operations and
financial condition should be read in conjunction with our condensed,
consolidated financial statements included elsewhere in this Quarterly Report on
Form 10-Q. Scotts Miracle-Gro’s Annual Report on Form 10-K, as amended by Form
10-K/A (Amendment No. 1), for the fiscal year ended September 30, 2008 includes
additional information about us, our operations, our financial condition, our
critical accounting policies and accounting estimates, and should be read in
conjunction with this Quarterly Report on Form 10-Q.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market
risks have not changed significantly from those disclosed in Scotts
Miracle-Gro’s Annual Report on Form 10-K, as amended by Form 10-K/A (Amendment
No. 1), for the fiscal year ended September 30, 2008.
ITEM 4.
CONTROLS AND PROCEDURES
With the
participation of the Company’s principal executive officer and principal
financial officer, Scotts Miracle-Gro’s management has evaluated the
effectiveness of Scotts Miracle-Gro’s disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”)), as of the end of the fiscal quarter covered by this
Quarterly Report on Form 10-Q. Based upon that evaluation, Scotts Miracle-Gro’s
principal executive officer and principal financial officer have concluded
that:
(A) information
required to be disclosed by Scotts Miracle-Gro in this Quarterly Report on Form
10-Q and the other reports that Scotts Miracle-Gro files or submits under the
Exchange Act has been accumulated and communicated to Scotts Miracle-Gro’s
management, including its principal executive officer and principal financial
officer, as appropriate to allow timely decisions regarding required
disclosure;
(B) information
required to be disclosed by Scotts Miracle-Gro in this Quarterly Report on Form
10-Q and the other reports that Scotts Miracle-Gro files or submits under the
Exchange Act has been recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms; and
(C) Scotts
Miracle-Gro’s disclosure controls and procedures were effective as of the end of
the fiscal quarter covered by this Quarterly Report on Form 10-Q.
In
addition, there were no changes in Scotts Miracle-Gro’s internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that
occurred during Scotts Miracle-Gro’s fiscal quarter ended March 28, 2009 that
have materially affected, or are reasonably likely to materially affect, Scotts
Miracle-Gro’s internal control over financial reporting.
PART II -
OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
Other
than as discussed in “NOTE 10. CONTINGENCIES” to the accompanying condensed,
consolidated financial statements, pending material legal proceedings have not
changed significantly since those disclosed in Scotts Miracle-Gro’s Annual
Report on Form 10-K, as amended by Form 10-K/A (Amendment No. 1), for the fiscal
year ended September 30, 2008.
ITEM IA.
RISK FACTORS
Cautionary
Statement on Forward-Looking Statements
We have
made and will make “forward-looking statements” within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 in this Quarterly Report on Form 10-Q and in other contexts relating to
future growth and profitability targets and strategies designed to increase
total shareholder value. Forward-looking statements also include, but are not
limited to, information regarding our future economic and financial condition,
the plans and objectives of our management and our assumptions regarding our
performance and these plans and objectives.
The
Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for
forward-looking statements to encourage companies to provide prospective
information, so long as those statements are identified as forward-looking and
are accompanied by meaningful cautionary statements identifying important
factors that could cause actual results to differ materially from those
discussed in the forward-looking statements. We desire to take advantage of the
“safe harbor” provisions of that Act.
Some
forward-looking statements that we make in this Quarterly Report on Form 10-Q
and in other contexts represent challenging goals for the Company, and the
achievement of these goals is subject to a variety of risks and assumptions and
numerous factors beyond our control. Important factors that could cause actual
results to differ materially from the forward-looking statements we make are
included in Part I, “ITEM 1A. RISK FACTORS” in Scotts Miracle-Gro’s Annual
Report on Form 10-K, as amended by Form 10-K/A (Amendment No. 1), for the fiscal
year ended September 30, 2008. All forward-looking statements attributable to us
or persons working on our behalf are expressly qualified in their entirety by
those cautionary statements.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
|
(c)
|
Issuer
Purchases of Equity Securities
|
The
following table shows the purchases of common shares of Scotts Miracle-Gro
(“Common Shares”) made by or on behalf of Scotts Miracle-Gro or any “affiliated
purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange
Act of 1934, as amended) of Scotts Miracle-Gro for each fiscal month in the
three months ended March 28, 2009:
Period
|
|
Total Number of
Common Shares
Purchased(1)
|
|
|
Average Price
Paid
per Common
Share
|
|
|
Total Number of
Common Shares
Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
Maximum Number of
Common Shares That
May Yet Be
Purchased Under the
Plans or Programs
|
December
28, 2008 through January 24, 2009
|
|
|
486 |
|
|
$ |
29.92 |
|
|
|
0 |
|
Not applicable
|
January
25 through February 21, 2009
|
|
|
1,721 |
|
|
$ |
31.03 |
|
|
|
0 |
|
Not applicable
|
February
22 through March 28, 2009
|
|
|
21 |
|
|
$ |
35.98 |
|
|
|
0 |
|
Not applicable
|
Total
|
|
|
2,228 |
|
|
$ |
30.84 |
|
|
|
0 |
|
Not applicable
|
(1)
|
Amounts
in this column represent Common Shares purchased by the trustee of the
rabbi trust established by the Company as permitted pursuant to the terms
of The Scotts Company LLC Executive Retirement Plan (the “ERP”). The ERP
is an unfunded, non-qualified deferred compensation plan which, among
other things, provides eligible employees the opportunity to defer
compensation above specified statutory limits applicable to The Scotts
Company LLC Retirement Savings Plan and with respect to any Executive
Management Incentive Pay, Performance Award (each as defined in the ERP)
or other bonus awarded to such eligible employees. Pursuant to the terms
of the ERP, each eligible employee has the right to elect an investment
fund, including a fund consisting of Common Shares (the “Scotts
Miracle-Gro Common Stock Fund”), against which amounts allocated to such
employee’s accounts under the ERP will be benchmarked (all ERP accounts
are bookkeeping accounts only and do not represent a claim against
specific assets of the Company). Amounts allocated to employee accounts
under the ERP represent deferred compensation obligations of the Company.
The Company established the rabbi trust in order to assist the Company in
discharging such deferred compensation obligations. When an eligible
employee elects to benchmark some or all of the amounts allocated to such
employee’s accounts against the Scotts Miracle-Gro Common Stock Fund, the
trustee of the rabbi trust purchases the number of Common Shares
equivalent to the amount so benchmarked. All Common Shares purchased by
the trustee are purchased on the open market and are held in the rabbi
trust until such time as they are distributed pursuant to the terms of the
ERP. All assets of the rabbi trust, including any Common Shares purchased
by the trustee, remain, at all times, assets of the Company, subject to
the claims of its creditors. The terms of the ERP do not provide for a
specified limit on the number of Common Shares that may be purchased by
the trustee of the rabbi trust.
|
None of
the Common Shares purchased during the three months ended March 28, 2009 were
purchased pursuant to a publicly announced plan or program.
ITEM 6.
EXHIBITS
See Index
to Exhibits at page 34 for a list of the exhibits included
herewith.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
THE
SCOTTS MIRACLE-GRO COMPANY
|
|
|
Date:
May 6, 2009
|
/s/ DAVID C. EVANS
|
|
|
David
C. Evans
|
|
Executive
Vice President and Chief Financial Officer
|
|
(Principal
Financial and Principal Accounting Officer)
|
|
(Duly
Authorized Officer)
|
THE
SCOTTS MIRACLE-GRO COMPANY
QUARTERLY
REPORT ON FORM 10-Q
FOR THE
QUARTERLY PERIOD ENDED MARCH 28, 2009
INDEX TO
EXHIBITS
EXHIBIT
NO.
|
|
DESCRIPTION
|
|
LOCATION
|
10.1
|
|
Specimen
form of Deferred Stock Unit Award Agreement for Nonemployee Directors
(with Related Dividend Equivalents) used to evidence grants of Deferred
Stock Units which may be made under The Scotts Miracle-Gro Company Amended
and Restated 2006 Long-Term Incentive Plan (post-January 22, 2009
version)
|
|
*
|
|
|
|
|
|
10.2
|
|
Summary
of Compensation for Nonemployee Directors of The Scotts Miracle-Gro
Company, effective as of January 23, 2009
|
|
*
|
|
|
|
|
|
10.3
|
|
Employment
Agreement, effective as of October 1, 2007, between The Scotts
Company LLC and Barry Sanders (executed by Mr. Sanders on
November 16, 2007 and on behalf of The Scotts Company LLC on
November 19, 2007)
|
|
Incorporated
herein by reference to the Annual Report on Form 10-K of The Scotts
Miracle-Gro Company (the “Registrant”) for the fiscal year ended
September 30, 2007 (File No. 1-11593) [Exhibit
10(m)]
|
|
|
|
|
|
10.4
|
|
First
Amendment to Employment Agreement, effective as of January 14, 2009, by
and between The Scotts Company LLC and Barry Sanders
|
|
Incorporated
herein by reference to the Registrant’s Current Report on Form 8-K
dated January 20, 2009 (File No. 1-11593) [Exhibit
10.2]
|
|
|
|
|
|
10.5
|
|
Master
Accounts Receivable Purchase Agreement, dated as of May 1, 2009, by and
among The Scotts Company LLC as the Company, The Scotts Miracle-Gro
Company as the Parent and Calyon New York Branch as the
Bank
|
|
Incorporated
herein by reference to the Registrant’s Current Report on Form 8-K filed
May 6, 2009 (File No. 1-11593) [Exhibit 10.1]
|
|
|
|
|
|
31.1
|
|
Rule
13a-14(a)/15d-14(a) Certifications (Principal Executive
Officer)
|
|
*
|
|
|
|
|
|
31.2
|
|
Rule
13a-14(a)/15d-14(a) Certifications (Principal Financial
Officer)
|
|
*
|
|
|
|
|
|
32
|
|
Section
1350 Certifications (Principal Executive Officer and Principal Financial
Officer)
|
|
*
|
* Filed
herewith