1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
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 1-13292
THE SCOTTS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 31-1414921
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
41 SOUTH HIGH STREET, SUITE 3500, COLUMBUS, OHIO 43215
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(614) 719-5500
(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 |X| No |_|
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
28,597,387 Outstanding at May 7, 2001
Common Shares, voting, no par value
2
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed, Consolidated Statements of Operations - Three and six month
periods ended March 31, 2001 and April 1, 2000........................................... 3
Condensed, Consolidated Statements of Cash Flows - Six month periods
ended March 31, 2001 and April 1, 2000................................................... 4
Condensed, Consolidated Balance Sheets - March 31, 2001,
April 1, 2000 and September 30, 2000..................................................... 5
Notes to Condensed, Consolidated Financial Statements ................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................................ 40
Item 5. Other Information........................................................................ 40
Item 6. Exhibits and Reports on Form 8-K......................................................... 41
Signatures ......................................................................................... 42
Exhibit Index ......................................................................................... 43
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MARCH 31, APRIL 1, MARCH 31, APRIL 1
2001 2000 2001 2000
---- ---- ---- ----
Net sales.............................................................. $ 740.0 $ 693.9 $ 889.1 $ 880.0
Cost of sales.......................................................... 420.9 407.3 535.4 524.5
--------- --------- --------- --------
Gross profit .................................................... 319.1 286.6 353.7 355.5
Gross commission earned from agency agreement ......................... 16.6 9.0 16.5 9.2
Costs associated with agency agreement ................................ 4.6 2.1 9.1 5.7
--------- --------- --------- --------
Net commission earned from agency agreement ..................... 12.0 6.9 7.4 3.5
Operating expenses:
Advertising and promotion .......................................... 68.2 71.4 80.8 89.6
Selling, general and administrative ................................ 89.0 84.4 164.7 153.1
Amortization of goodwill and other intangibles...................... 7.4 7.7 14.2 13.8
Other expense (income), net ........................................... (1.4) (2.5) (2.5) (1.9)
--------- --------- --------- --------
Income from operations ................................................ 167.9 132.5 103.9 104.4
Interest expense ...................................................... 26.1 25.9 47.4 49.6
--------- --------- --------- --------
Income before income taxes ............................................ 141.8 106.6 56.5 54.8
Income taxes .......................................................... 57.0 43.2 22.9 22.2
--------- --------- --------- --------
Net income ............................................................ 84.8 63.4 33.6 32.6
Payments to preferred shareholders .................................... -.- -.- -.- 6.4
--------- --------- --------- --------
Income applicable to common shareholders............................... $ 84.8 $ 63.4 $ 33.6 $ 26.2
========= ========= ========= ========
Basic earnings per share............................................... $ 3.01 $ 2.27 $ 1.19 $ 0.94
========= ========= ========= ========
Diluted earnings per share............................................. $ 2.80 $ 2.15 $ 1.12 $ 0.88
========= ========= ========= ========
Common shares used in basic earnings per share calculation ............ 28.2 27.9 28.2 28.0
========= ========= ========= ========
Common shares and potential common shares used in diluted
earnings per share calculation...................................... 30.3 29.5 30.0 29.8
========= ========= ========= ========
See notes to condensed, consolidated financial statements
3
4
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN MILLIONS)
SIX MONTHS ENDED
----------------
MARCH 31, APRIL 1,
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................................................... $ 33.6 $ 32.6
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization..................................................... 31.9 32.6
Net change in certain components of working capital............................... (364.4) (271.4)
Net change in other assets and liabilities and other adjustments.................. (7.9) (8.1)
----------- -----------
Net cash used in operating activities.......................................... (306.8) (214.3)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property, plant and equipment....................................... (26.7) (20.1)
Investment in acquired businesses, net of cash acquired .......................... (12.2) (0.8)
Other, net........................................................................ -.- 1.8
----------- -----------
Net cash used in investing activities.......................................... (38.9) (19.1)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under revolving and bank lines of credit .......................... 376.3 286.5
Gross borrowings under term loans................................................. 260.0 -.-
Gross repayments under term loans................................................. (304.3) (12.4)
Financing and issuance fees....................................................... (1.4) -.-
Payments to preferred shareholders................................................ -.- (6.4)
Repurchase of treasury shares..................................................... -.- (23.9)
Cash received from the exercise of stock options.................................. 10.4 1.0
Other, net ....................................................................... (10.4) (10.4)
----------- -----------
Net cash provided by financing activities...................................... 330.6 234.4
----------- -----------
Effect of exchange rate changes on cash.............................................. (0.1) (1.6)
----------- -----------
Net decrease in cash................................................................. (15.2) (0.6)
Cash and cash equivalents at beginning of period .................................... 33.0 30.3
----------- -----------
Cash and cash equivalents at end of period........................................... $ 17.8 $ 29.7
=========== ===========
See notes to condensed, consolidated financial statements
4
5
THE SCOTTS COMPANY
CONDENSED, CONSOLIDATED BALANCE SHEETS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
UNAUDITED
MARCH 31, APRIL 1, SEPTEMBER 30,
2001 2000 2000
---- ---- ----
ASSETS
Current assets:
Cash and cash equivalents.................................................... $ 17.8 $ 29.7 $ 33.0
Accounts receivable, less allowances of $18.9,
$14.7 and $11.7, respectively............................................. 693.0 649.3 216.0
Inventories, net ............................................................ 402.0 366.3 307.5
Current deferred tax asset .................................................. 27.6 26.5 25.1
Prepaid and other assets .................................................... 67.1 63.6 62.3
---------- ---------- ----------
Total current assets ..................................................... 1,207.5 1,135.4 643.9
Property, plant and equipment, net ............................................. 297.0 258.1 290.5
Intangible assets, net ......................................................... 770.0 796.2 743.1
Other assets ................................................................... 72.4 80.2 83.9
---------- ---------- ----------
Total assets ............................................................. $ 2,346.9 $ 2,269.9 $ 1,761.4
========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt ............................................................. $ 132.5 $ 183.2 $ 49.4
Accounts payable ............................................................ 303.7 281.7 153.0
Accrued liabilities ......................................................... 266.0 287.6 207.4
---------- ---------- ----------
Total current liabilities ................................................ 702.2 752.5 409.8
Long-term debt ................................................................. 1,075.7 1,014.7 813.4
Other liabilities .............................................................. 49.8 61.6 60.3
---------- ---------- ----------
Total liabilities ........................................................ 1,827.7 1,828.8 1,283.5
========== ========== ==========
Commitments and contingencies
Shareholders' equity:
Class A Convertible Preferred Stock, no par value ........................... - - -
Common shares, no par value per share, $.01 stated value per share, issued 31.3,
31.4 and 31.3, respectively .............................................. 0.3 0.3 0.3
Capital in excess of par value .............................................. 390.6 388.1 389.3
Retained earnings ........................................................... 230.4 156.3 196.8
Treasury stock, 2.9, 3.5, and 3.4 shares, respectively, at cost ............. (74.6) (85.1) (83.5)
Accumulated other comprehensive expense ..................................... (27.5) (18.5) (25.0)
---------- ---------- ----------
Total shareholders' equity ............................................. 519.2 441.1 477.9
---------- ---------- ----------
Total liabilities and shareholders' equity ..................................... $ 2,346.9 $ 2,269.9 $ 1,761.4
========== ========== ==========
See notes to condensed, consolidated financial statements
5
6
NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(ALL AMOUNTS ARE IN MILLIONS EXCEPT PER SHARE DATA OR AS OTHERWISE NOTED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Scotts Company is engaged in the manufacture and sale of lawn care
and garden products. The Company's major customers include mass
merchandisers, home improvement centers, large hardware chains,
independent hardware stores, nurseries, garden centers, food and drug
stores, lawn and landscape service companies, commercial nurseries and
greenhouses, and specialty crop growers. The Company's products are sold
in the United States, Canada, the European Union, the Caribbean, South
America, Southeast Asia, the Middle East, Africa, Australia, New
Zealand, Mexico, Japan, and several Latin American countries.
ORGANIZATION AND BASIS OF PRESENTATION
The condensed, consolidated financial statements include the accounts of
The Scotts Company and its subsidiaries, (collectively, the "Company").
All material intercompany transactions have been eliminated.
The condensed, consolidated balance sheets as of March 31, 2001 and
April 1, 2000, and the related condensed, consolidated statements of
operations for the three and six month periods then ended and of cash
flows for the six month period then ended, are unaudited; however, in
the opinion of management, such financial statements contain all
adjustments necessary for the fair presentation of the Company's
financial position and results of operations. Interim results reflect
all normal 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 financial
statements and accompanying notes in Scotts' fiscal 2000 Annual Report
on Form 10-K.
REVENUE RECOGNITION
Revenue is recognized when products are shipped and when title and risk
of loss transfer to the customer. For certain large multi-location
customers, products may be shipped to third-party warehousing locations.
Revenue is not recognized until the customer places orders against that
inventory and acknowledges in writing ownership of the goods. Provisions
for estimated returns and allowances are recorded at the time of
shipment based on historical rates of return as a percentage of sales.
ADVERTISING AND PROMOTION
The Company advertises its branded products through national and
regional media, and through cooperative advertising programs with
retailers. Retailers are also offered pre-season stocking and in-store
promotional allowances. Certain products are also promoted with direct
consumer rebate programs. Advertising and promotion costs (including
allowances and rebates) incurred during the year are expensed ratably to
interim periods in relation to revenues. All advertising and promotion
costs, except for production costs, are expensed within the fiscal year
in which such costs are incurred. Production costs for advertising
programs are deferred until the period in which the advertising is first
aired.
DERIVATIVE INSTRUMENTS
In the normal course of business, the Company is exposed to fluctuations
in interest rates and the value of foreign currencies. The Company has
established policies and procedures that govern the management of these
exposures through the use of a variety of financial instruments. The
Company employs various financial instruments, including forward
exchange contracts, and swap agreements, to manage certain of the
exposures when practical. By policy, the
6
7
Company does not enter into such contracts for the purpose of
speculation or use leveraged financial instruments. The Company's
derivatives activities are managed by the chief financial officer and
other senior management of the Company in consultation with the Finance
Committee of the Board of Directors. These activities include
establishing the Company's risk-management philosophy and objectives,
providing guidelines for derivative-instrument usage and establishing
procedures for control and valuation, counterparty credit approval and
the monitoring and reporting of derivative activity. The Company's
objective in managing its exposure to fluctuations in interest rates and
foreign currency exchange rates is to decrease the volatility of
earnings and cash flows associated with changes in the applicable rates
and prices. To achieve this objective, the Company primarily enters into
forward exchange contracts and swap agreements whose values change in
the opposite direction of the anticipated cash flows. Derivative
instruments related to forecasted transactions are considered to hedge
future cash flows, and the effective portion of any gains or losses are
included in other comprehensive income until earnings are affected by
the variability of cash flows. Any remaining gain or loss is recognized
currently in earnings. The cash flows of the derivative instruments are
expected to be highly effective in achieving offsetting cash flows
attributable to fluctuations in the cash flows of the hedged risk. If it
becomes probable that a forecasted transaction will no longer occur, the
derivative will continue to be carried on the balance sheet at fair
value, and gains and losses that were accumulated in other comprehensive
income will be recognized immediately in earnings.
To manage certain of its cash flow exposures, the Company has entered
into forward exchange contacts and interest rate swap agreements. The
forward exchange contracts are designated as hedges of the Company's
foreign currency exposure associated with future cash flows. Amounts
payable or receivable under forward exchange contracts are recorded as
adjustments to selling, general and administrative expense. The interest
rate swap agreements are designated as hedges of the Company's interest
rate risk associated with certain variable rate debt. Amounts payable or
receivable under the swap agreements are recorded as adjustments to
interest expense. Gains or losses resulting from valuing these swaps at
fair value are recorded in other comprehensive income.
The Company adopted FAS 133 as of October 2000. Since adoption, there
were no gains or losses recognized in earnings for hedge ineffectiveness
or due to excluding a portion of the value from measuring effectiveness.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated
financial statements and accompanying disclosures. The most significant
of these estimates are related to the allowance for doubtful accounts,
inventory valuation reserves, expected useful lives assigned to
property, plant and equipment and goodwill and other intangible assets,
legal and environmental accruals, post-retirement benefits, promotional
and consumer rebate liabilities, income taxes and contingencies.
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.
RECLASSIFICATIONS
Certain reclassifications have been made in prior periods' financial
statements to conform to fiscal 2001 classifications.
2. AGENCY AGREEMENT
Effective September 30, 1998, the Company entered into an agreement with
Monsanto Company ("Monsanto", now known as Pharmacia Corporation) for
exclusive domestic and international marketing and agency rights to
Monsanto's consumer Roundup(R) herbicide products. Under the terms of
the agreement, the Company is entitled to receive an annual commission
from Monsanto in consideration for the performance of its duties as
agent. The annual commission is calculated as a percentage of the actual
earnings before interest and income taxes (EBIT), as defined in the
agreement, of the Roundup(R) business. Each year's percentage varies in
accordance with the terms of the agreement based on the achievement of
two earnings thresholds and commission rates that vary by threshold and
program year.
7
8
The agreement also requires the Company to make fixed annual payments to
Monsanto as a contribution against the overall expenses of the
Roundup(R) business. The annual fixed payment is defined as $20 million.
However, portions of the annual payments for the first three years of
the agreement are deferred. No payment was required for the first year
(fiscal 1999), a payment of $5 million was required for the second year
and a payment of $15 million is required for the third year so that a
total of $40 million of the contribution payments are deferred.
Beginning in the fifth year of the agreement, the annual payments to
Monsanto increase to at least $25 million, which include per annum
charges at 8%. The annual payments may be increased above $25 million if
certain significant earnings targets are exceeded. If all of the
deferred contribution amounts are paid prior to 2018, the annual
contribution payments revert to $20 million. Regardless of whether the
deferred contribution amounts are paid, all contribution payments cease
entirely in 2018.
The Company is recognizing a charge each year associated with the annual
contribution payments equal to the required payment for that year. The
Company is not recognizing a charge for the portions of the contribution
payments that are deferred until the time those deferred amounts are
paid. The Company considers this method of accounting for the
contribution payments to be appropriate after consideration of the
likely term of the agreement, the Company's ability to terminate the
agreement without paying the deferred amounts, and the fact that
approximately $18.6 million of the deferred amount is never paid, even
if the agreement is not terminated prior to 2018, unless significant
earnings targets are exceeded.
The express terms of the agreement permit the Company to terminate the
agreement only upon Material Breach, Material Fraud or Material Willful
Misconduct by Monsanto, as such terms are defined in the agreement, or
upon the sale of the Roundup(R) business by Monsanto. In such instances,
the agreement permits the Company to avoid payment of any deferred
contribution and related per annum charge. The Company's basis for not
recording a financial liability to Monsanto for the deferred portions of
the annual contribution and per annum charge is based on management's
assessment and consultations with the Company's legal counsel and the
Company's independent accountants. In addition, the Company has obtained
a legal opinion from The Bayard Firm, P.A., which concluded, subject to
certain qualifications, that if the matter were litigated, a Delaware
court would likely conclude that the Company is entitled to terminate
the agreement at will, with appropriate prior notice, without incurring
significant economic penalty, and avoid paying the unpaid deferred
amounts. The Company has concluded that, should the Company elect to
terminate the agreement at any balance sheet date, it will not incur
significant economic consequences as a result of such action.
The Bayard Firm was special Delaware counsel retained during fiscal 2000
solely for the limited purpose of providing a legal opinion in support
of the contingent liability treatment of the agreement previously
adopted by the Company and has neither generally represented or advised
the Company nor participated in the preparation or review of the
Company's financial statements or any SEC filings. The terms of such
opinion specifically limit the parties who are entitled to rely on it.
The Company's conclusion is not free from challenge and, in fact, would
likely be challenged if the Company were to terminate the agreement. If
it were determined that, upon termination, the Company must pay any
remaining deferred contribution amounts and related per annum charges,
the resulting charge to earnings could have a material impact on the
Company's results of operations and financial position. At March 31,
2001, contribution payments and related per annum charges of
approximately $42.1 million had been deferred under the agreement. This
amount is considered a contingent obligation and has not been reflected
in the financial statements as of and for the three and six months then
ended.
Monsanto has disclosed that it is accruing the $20 million fixed
contribution fee per year beginning in the fourth quarter of Monsanto's
fiscal year 1998, plus interest on the deferred portion.
The agreement has a term of seven years for all countries within the
European Union (at the option of both parties, the agreement can be
renewed for up to 20 years for the European Union countries). For
countries outside of the European Union, the agreement continues
indefinitely unless terminated by either party. The agreement provides
Monsanto with the right to terminate the agreement for an event of
default (as defined in the agreement) by the Company or a change in
control of Monsanto or sale of the Roundup(R) business. The agreement
provides the Company with the right to terminate the agreement in
certain circumstances including an event of default by Monsanto or the
sale of the Roundup(R) business. Unless Monsanto terminates the
8
9
agreement for 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 $150 million for each of the first five program
years, gradually declines to $100 million by year ten of the program
and then declines to a minimum of $16 million if the program continues
for years 11 through 20.
In consideration for the rights granted to the Company under the
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 agreement and is amortizing
the balance over ten years, which is the estimated likely term of the
agreement.
In accordance with SEC Staff Accounting Bulletin No. 101, "Revenue
Recognition in Financial Statements", the Company will not recognize
commission income until actual Roundup EBIT reaches the first commission
threshold for that year. The annual contribution payment, if any, is
recognized ratably throughout the year.
3. ACQUISITIONS
On January 1, 2001, the Company acquired the Substral(R) brand and
consumer plant care business from Henkel KgaA. Substral is a leading
consumer fertilizer brand in many European countries including Germany,
Austria, Belgium, France and the Nordics. Under the terms of the Asset
Purchase Agreement, the Company acquired specified working capital and
intangible assets associated with the Substral business. The purchase
price will be determined based on the value of the working capital
assets acquired and the performance of the business for the period from
June 15, 2000 to December 31, 2000. Management estimates that the final
purchase price will be approximately $40-$45 million. On December 29,
2000 the Company advanced $6.9 million to Henkel KgaA toward the
Substral purchase price.
4. INVENTORIES
Inventories, net of provisions for slow moving and obsolete inventory of $21.6
million, $27.8 million, and $20.1 million, respectively, consisted of:
MARCH 31, APRIL 1, SEPTEMBER 30,
2001 2000 2000
---- ---- ----
Finished goods............................................................ $ 312.2 $ 281.7 $ 232.9
Raw materials............................................................. 89.1 83.6 73.7
------------ ------------ ------------
FIFO cost................................................................. 401.3 365.3 306.6
LIFO reserve.............................................................. 0.7 1.0 0.9
------------ ------------ ------------
Total .................................................................... $ 402.0 $ 366.3 $ 307.5
============ ============ ============
5. INTANGIBLE ASSETS, NET
MARCH 31, APRIL 1, SEPTEMBER 30,
2001 2000 2000
---- ---- ----
Goodwill.................................................................. $ 282.0 $ 526.2 $ 280.4
Trademarks................................................................ 323.8 192.8 331.1
Other .................................................................... 164.2 77.2 131.6
------------ ------------ ------------
Total .................................................................... $ 770.0 $ 796.2 $ 743.1
============ ============ ============
9
10
6. LONG-TERM DEBT
MARCH 31, APRIL 1, SEPTEMBER 30,
2001 2000 2000
---- ---- ----
Revolving loans under credit facility..................................... $ 402.8 $ 349.5 $ 37.3
Term loans under credit facility.......................................... 404.7 481.4 452.2
Senior Subordinated Notes................................................. 319.9 318.6 319.2
Notes due to sellers ..................................................... 59.5 36.6 36.4
Amounts due to the State of Ohio.......................................... 7.8 - 7.9
Foreign bank borrowings and term loans.................................... 12.0 9.6 7.1
Capital lease obligations and other ...................................... 1.5 2.2 2.7
------------ ------------ ------------
1,208.2 1,197.9 862.8
Less current portions..................................................... 132.5 183.2 49.4
------------ ------------ ------------
$ 1,075.7 $ 1,014.7 $ 813.4
============ ============ ============
The Company's credit facility provides for borrowings in the aggregate
principal amount of $1.1 billion and consists of term loan facilities in
the aggregate amount of $525 million and a revolving credit facility in
the amount of $575 million. Financial covenants included as part of the
facility include, amongst others, minimum net worth, interest coverage
and net leverage ratios.
In December 2000, the Company entered into an Amended and Restated
Credit Agreement (the "Amended Agreement"). Under the terms of the
Amended Agreement, the Company entered into a new Tranche B Term Loan
Facility with an aggregate principal amount of $260 million, the
proceeds of which repaid the then outstanding principal amount of the
original Tranche B and C facilities. The new Tranche B Term Loan
Facility will be repaid in quarterly installments of $0.25 million
beginning June 30, 2001 through December 31, 2006, quarterly
installments of $63.5 million beginning March 31, 2007 through September
30, 2007 and a final quarterly installment of $63.8 million on December
31, 2007. The new Tranche B Term Loan Facility bears interest at a
variable rate that is less than the rates on the original Tranche B and
C facilities. Under the terms of the Amended Agreement, the Revolving
Credit Facility was increased from $500 million to $575 million and the
net worth covenant under the original credit facility was amended to be
measured only during the Company's second through fourth fiscal
quarters. At the time the Company entered into the Amended Agreement,
the amounts outstanding under the original Tranche B and C facilities
were prepayable without penalty.
In January 1999, the Company completed an offering of $330 million of 8
5/8% Senior Subordinated Notes ("the Notes") due 2009. The net proceeds
from the offering, together with borrowings under the Company's credit
facility, were used to fund the Ortho acquisition and to repurchase
approximately 97% of Scotts $100.0 million outstanding 9 7/8% Senior
Subordinated Notes due August 2004. In August 1999, the Company
repurchased the remaining $2.9 million of the 9 7/8% Senior Subordinated
Notes.
The Company entered into two interest rate locks in fiscal 1998 to hedge
its anticipated interest rate exposure on the Notes offering. The total
amount paid under the interest rate locks of $12.9 million has been
recorded as a reduction of the Notes' carrying value and is being
amortized over the life of the Notes as interest expense.
In conjunction with the acquisitions of the Substral business,
Rhone-Poulenc Jardin and Sanford Scientific, Inc., notes were issued for
certain portions of the total purchase price or other consideration that
are to be paid in annual installments over a two to four-year period.
The present value of the remaining note payments at March 31, 2001 is
$30.4 million, $16.6 million and $4.3 million, respectively. The Company
is imputing interest on the non-interest bearing notes using an interest
rate prevalent for similar instruments at the time of acquisition
(approximately 5.5%, 9% and 8%, respectively).
In conjunction with other recent acquisitions, notes were issued for
certain portions of the total purchase price that are to be paid in
annual installments over periods ranging from four to five years. The
present value of the remaining note
10
11
payments is $8.2 million at March 31, 2001. The Company is imputing
interest on the non-interest bearing notes using an interest rate
prevalent for similar instruments at the time of the acquisitions
(approximating 8%).
In May 2000, the Company sold its North American headquarters and
research facilities to the State of Ohio for approximately $8.0 million
and leased these facilities back from the State of Ohio through lease
agreements extending through June 2020. The proceeds of the sale were
used to fund the expansion of the North American headquarters facility.
The foreign term loans of $3.0 million issued on December 12, 1997, have
an 8-year term and bear interest at 1% below LIBOR. The loans are
denominated in Pounds Sterling and can be redeemed, on demand, by the
note holder. The foreign bank borrowings of $9.0 million at March 31,
2001 represent lines of credit for foreign operations and are primarily
denominated in French Francs.
7. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic
and diluted earnings per common share ("EPS").
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
Net income............................................................. $ 84.8 $ 63.4 $ 33.6 $ 32.6
Payments to preferred shareholders .................................... -.- -.- -.- (6.4)
------- ------- ------- -----
Income applicable to common shareholders............................... $ 84.8 $ 63.4 $ 33.6 $ 26.2
Weighted-average common shares outstanding during the period .......... 28.2 27.9 28.2 28.0
------- ------- ------- ------
Basic earnings per common share........................................ $ 3.01 $ 2.27 $ 1.19 $ 0.94
======= ======= ======= ======
Weighted-average common shares outstanding and potential
common shares....................................................... 30.3 29.5 30.0 29.8
------- ------- ------- ------
Diluted earnings per common share...................................... $ 2.80 $ 2.15 $ 1.12 $ 0.88
======= ======= ======= ======
8. STATEMENT OF COMPREHENSIVE INCOME
The components of other comprehensive income and total comprehensive
income for the three and six months ended March 31, 2001 and April 1,
2000 are as follows:
FOR THE FOR THE
THREE MONTHS ENDED SIX MONTHS ENDED
------------------ ----------------
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
Net income............................................................. $ 84.8 $ 63.4 $ 33.6 $ 32.6
Other comprehensive income (expense):
Foreign currency translation adjustments ............................ (0.2) (2.2) 3.2 (5.6)
Change in valuation of derivative instruments........................ (1.2) -.- (0.7) -.-
------ ------- ------ ------
Comprehensive income .................................................. $ 83.4 $ 61.2 $ 36.1 $ 27.0
======= ======= ======= ======
11
12
9. CONTINGENCIES
Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of
business, product and general liabilities, property losses and other
fiduciary liabilities for which the Company is self-insured. 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 future quarterly or annual operating results will not
be materially affected by final resolution of these matters. The
following matters are the more significant of the Company's identified
contingencies.
OHIO ENVIRONMENTAL PROTECTION AGENCY
The Company has assessed and addressed environmental issues regarding
the wastewater treatment plants which had operated at the Marysville
facility. The Company decommissioned the old wastewater treatment plants
and has connected the facility's wastewater system with the City of
Marysville's municipal treatment system. Additionally, the Company has
been assessing, under Ohio's Voluntary Action Program ("VAP"), the
possible remediation of several discontinued on-site waste disposal
areas dating back to the early operations of its Marysville facility.
In February 1997, the Company learned that the Ohio Environmental
Protection Agency was referring matters relating to environmental
conditions at the Company's Marysville site, including the existing
wastewater treatment plants and the discontinued on-site waste disposal
areas, to the Ohio Attorney General's Office. Representatives from the
Ohio Environmental Protection Agency, the Ohio Attorney General and the
Company continue to meet to discuss these issues.
In June 1997, the Company received formal notice of an enforcement
action and draft Findings and Orders from the Ohio Environmental
Protection Agency. The draft Findings and Orders elaborated on the
subject of the referral to the Ohio Attorney General alleging: potential
surface water violations relating to possible historical sediment
contamination possibly impacting water quality; inadequate treatment
capabilities of the Company's existing and currently permitted
wastewater treatment plants; and that the Marysville site is subject to
corrective action under the Resource Conservation Recovery Act ("RCRA").
In late July 1997, the Company received a draft judicial consent order
from the Ohio Attorney General which covered many of the same issues
contained in the draft Findings and Orders including RCRA corrective
action. As a result of on-going discussions, the Company received a
revised draft of a judicial consent order from the Ohio Attorney General
in late April 1999. Subsequently, the Company replied to the Ohio
Attorney General with another revised draft. Comments on that draft were
received from the Ohio Attorney General in February 2000, and the
Company replied with another revised draft in March 2000. Since July
2000, the parties have been engaged in settlement discussions resulting
in various revisions to the March 2000 draft, as they seek to resolve
this matter.
The Company is continuing to meet with the Ohio Attorney General and the
Ohio Environmental Protection Agency in an effort to complete
negotiations of an amicable resolution of these issues. Negotiations
have narrowed the unresolved issues between the Company and the Ohio
Attorney General/Ohio Environmental Protection Agency, and the parties
anticipate concluding negotiations on an agreed Consent Order, shortly.
The parties have agreed to a civil penalty cash payment subject to the
successful completion of negotiations on the remaining provisions of a
judicial consent order. The Company believes that it has viable defenses
to the State's enforcement action, including that it had been proceeding
under VAP to address specified environmental issues, and will assert
those defenses should an amicable resolution of the State's enforcement
action not be reached.
In accordance with the Company's past efforts to enter into Ohio's VAP,
the Company submitted to the Ohio Environmental Protection Agency a
"Demonstration of Sufficient Evidence of VAP Eligibility Compliance" on
July 8, 1997. Among other issues contained in the VAP submission was a
description of the Company's ongoing efforts to assess potential
environmental impacts of the discontinued on-site waste disposal areas
as well as potential remediation efforts. Under the statutes covering
VAP, an eligible participant in the program is not subject to State
enforcement actions for those environmental matters being addressed. On
October 21, 1997, the Company received a letter from the
12
13
Director of the Ohio Environmental Protection Agency denying VAP
eligibility based upon the timeliness of and completeness of the
submittal. The Company has appealed the Director's action to the
Environmental Review Appeals Commission. No hearing date has been set
and the appeal remains pending. While negotiations continue, the Company
has been voluntarily addressing a number of the historical on-site waste
disposal areas with the knowledge of the Ohio Environmental Protection
Agency. Interim measures have been implemented, which consist of capping
two on-site waste disposal areas, closing of several ponds, and partial
removal of sediment from a small, adjacent watercourse.
Since receiving the notice of enforcement action in June 1997,
management has continually assessed the potential costs that may be
incurred to satisfactorily remediate the Marysville site and to pay any
penalties sought by the State. Because the Company and the Ohio
Environmental Protection Agency have not agreed as to the extent of any
possible contamination and an appropriate remediation plan, the Company
has developed and initiated an action plan to remediate the site based
on its own assessments and consideration of specific actions which the
Ohio Environmental Protection Agency will likely require. Because the
extent of the ultimate remediation plan is uncertain, management is
unable to predict with certainty the costs that will be incurred to
remediate the site and to pay any penalties. As of March 31, 2001,
management estimates that the range of possible loss that could be
incurred in connection with this matter is $6 million to $10 million.
The Company has accrued for the amount it considers to be the most
probable within that range and believes the outcome will not differ
materially from the amount reserved. Many of the issues raised by the
State of Ohio are already being investigated and addressed by the
Company during the normal course of conducting business.
LAFAYETTE
In July 1990, the Philadelphia District of the U.S. Army Corps of
Engineers ("Corps") directed that peat harvesting operations be
discontinued at Hyponex's Lafayette, New Jersey facility, based on its
contention that peat harvesting and related activities result in the
"discharge of dredged or fill material into waters of the United States"
and, therefore, require a permit under Section 404 of the Clean Water
Act. In May 1992, the United States filed suit in the U.S. District
Court for the District of New Jersey seeking a permanent injunction
against such harvesting, and civil penalties in an unspecified amount.
The Company is defending this suit and is asserting a right to recover
its economic losses resulting from the government's actions. The suit
was placed in administrative suspension during fiscal 1996 in order to
allow the Company and the government an opportunity to negotiate a
settlement, and it remains suspended while the parties develop, exchange
and evaluate technical data. In July 1997, the Company's wetlands
consultant submitted to the government a draft remediation plan.
Comments were received and a revised plan was submitted in early 1998.
Further comments from the government were received during 1998 and 1999.
The Company believes agreement on the remediation plan has essentially
been reached. Before this suit can be fully resolved, however, the
Company and the government must reach agreement on the government's
civil penalty demand and other terms of the consent order proposed by
the government in April 2001. The Company has reserved for its estimate
of the probable loss to be incurred under this proceeding as of March
31, 2001. Furthermore, management believes the Company has sufficient
raw material supplies available such that service to customers will not
be materially adversely affected by the planned permanent closure of
this facility.
BRAMFORD
In the United Kingdom, major discharges of waste to air, water and land
are regulated by the Environment Agency. The Scotts (UK) Ltd. fertilizer
facility in Bramford (Suffolk), United Kingdom, is subject to
environmental regulation by this Agency. Two manufacturing processes at
this facility require process authorizations and previously required a
waste management license (discharge to a licensed waste disposal lagoon
having ceased in July 1999). The Company expects to surrender the waste
management license in consultation with the Environment Agency. In
connection with the renewal of an authorization, the Environment Agency
has identified the need for remediation of the lagoon, and the potential
for remediation of a former landfill at the site. The Company intends to
comply with the reasonable remediation concerns of the Environment
Agency. The Company previously installed an environmental enhancement to
the facility to reduce emissions to both air and ground water.
Additional work is being undertaken to further reduce emissions to
groundwater and surface water. The Company believes that it has
adequately addressed the environmental
13
14
concerns of the Environment Agency regarding emissions to air and
groundwater. The Scotts Company (UK) Ltd. has retained an environmental
consulting firm to research remediation designs. The Company and the
Environment Agency are in discussions over the final plan for
remediating the lagoon and the landfill. The Company has reserved for
its estimate of the probable loss to be incurred in connection with this
matter as of March 31, 2001.
OTHER ENVIRONMENTAL MATTERS
The Company has determined that quantities of cement containing asbestos
material at certain manufacturing facilities in the United Kingdom
should be removed. The Company has reserved for the estimate of costs to
be incurred for this matter as of March 31, 2001.
The Company has accrued $6.3 million at March 31, 2001 for the
environmental matters described in Note 9. The significant components of
the accrual are: (i) costs for site remediation of $4.0 million; (ii)
costs for asbestos abatement of $1.8 million; and (iii) fines and
penalties of $0.5 million. The significant portion of the costs accrued
as of March 31, 2001 are expected to be paid in fiscal 2001 and 2002;
however, payments are expected to be made through fiscal 2003 and
possibly for a period thereafter.
The Company believes that the amounts accrued as of March 31, 2001 are
adequate to cover its known environmental expenses based on current
facts and estimates of likely outcome. However, the adequacy of these
accruals is based on several significant assumptions:
(i) that the Company has identified all of the significant sites
that must be remediated;
(ii) that there are no significant conditions of potential
contamination that are unknown to the Company;
(iii) that potentially contaminated soil can be remediated in place
rather than having to be removed; and
(iv) that only specific stream sediment sites with unacceptable
levels of potential contaminant will be remediated.
If there is a significant change in the facts and circumstances
surrounding these assumptions, it could have a material impact on the
ultimate outcome of these matters and the Company's results of
operations, financial position and cash flows.
14
15
AGREVO ENVIRONMENTAL HEALTH, INC.
On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which is
reported to have changed its name to Aventis Environmental Health
Science USA LP) filed a complaint in the U.S. District Court for the
Southern District of New York (the "New York Action"), against the
Company, a subsidiary of the Company and Monsanto (now Pharmacia)
seeking damages and injunctive relief for alleged antitrust violations
and breach of contract by the Company and its subsidiary and antitrust
violations and tortious interference with contract by Monsanto. The
Company purchased a consumer herbicide business from AgrEvo in May 1998.
AgrEvo claims in the suit that the Company's subsequent agreement to
become Monsanto's exclusive sales and marketing agent for Monsanto's
consumer Roundup(R) business violated the federal antitrust laws. AgrEvo
contends that Monsanto attempted to or did monopolize the market for
non-selective herbicides and conspired with the Company to eliminate the
herbicide the Company previously purchased from AgrEvo, which competed
with Monsanto's Roundup(R), in order to achieve or maintain a monopoly
position in that market. AgrEvo also contends that the Company's
execution of various agreements with Monsanto, including the Roundup(R)
marketing agreement, as well as the Company's subsequent actions,
violated the purchase agreements between AgrEvo and the Company.
AgrEvo is requesting unspecified damages as well as affirmative
injunctive relief, and seeking to have the court invalidate the
Roundup(R) marketing agreement as violative of the federal antitrust
laws. On September 20, 1999, the Company filed an answer denying
liability and asserting counterclaims that it was fraudulently induced
to enter into the agreement for the purchase of the consumer herbicide
business and the related agreements, and that AgrEvo breached the
representations and warranties contained in these agreements. On October
1, 1999, the Company moved to dismiss the antitrust allegations against
it on the ground that the claims fail to state claims for which relief
may be granted. On October 12, 1999, AgrEvo moved to dismiss the
Company's counterclaims. On May 5, 2000, AgrEvo amended its complaint to
add a claim for fraud and to incorporate the Delaware Action described
below. Thereafter, the Company moved to dismiss the new claims, and the
defendants renewed their pending motions to dismiss. On June 2, 2000,
the court (i) granted the Company's motion to dismiss the fraud claim
AgrEvo had added to its complaint; (ii) granted AgrEvo's motion to
dismiss the Company's fraudulent-inducement counterclaim; (iii) denied
AgrEvo's motion to dismiss the Company's counterclaims related to breach
of representations and warranties; and (iv) denied defendants' motion to
dismiss the antitrust claims. On July 14, 2000, the Company served an
answer to AgrEvo's amended complaint and re-pleaded its fraud
counterclaim. Under the indemnification provisions of the Roundup(R)
marketing agreement, Monsanto and the Company each have requested that
the other indemnify against any losses arising from this lawsuit.
On June 29, 1999, AgrEvo also filed a complaint in the Superior Court of
the State of Delaware (the "Delaware Action") against two of the
Company's subsidiaries seeking damages for alleged breach of contract.
AgrEvo alleges that, under the contracts by which a subsidiary of the
Company purchased a herbicide business from AgrEvo in May 1998, two of
the Company's subsidiaries have failed to pay AgrEvo approximately $0.6
million. AgrEvo is requesting damages in this amount, as well as pre-
and post-judgment interest and attorneys' fees and costs. The Company's
subsidiaries have moved to dismiss or stay this action. On January 31,
2000, the Delaware court stayed AgrEvo's action pending the resolution
of a motion to amend the New York Action, and the resolution of the New
York Action. The Company's subsidiaries intend to vigorously defend the
asserted claims.
If the above actions are determined adversely to the Company, the result
could have a material adverse effect on the Company's results of
operations, financial position and cash flows.
15
16
CENTRAL GARDEN & PET COMPANY
The Company is currently engaged in several litigation matters with
Central Garden & Pet Company ("Central Garden"). These cases are
summarized below.
Scotts v. Central Garden, Southern District of Ohio
On June 30, 2000, the Company filed suit against Central Garden in the
U.S. District Court for the Southern District of Ohio to recover
approximately $17 million in its outstanding accounts receivable from
Central Garden with respect to the Company's 2000 fiscal year. The
Company's complaint was later amended to seek approximately $24 million
in accounts receivable and additional damages for other breaches of
duty.
On April 13, 2001 Central Garden filed an answer and counterclaim in
the Ohio action. On April 24, 2001, Central Garden filed an amended
counterclaim. Central Garden's counterclaims include allegations that
the Company and Central Garden had entered into an oral agreement in
April 1998 whereby the Company would allegedly share with Central
Garden the benefits and liabilities of any future business integration
between the Company and Pharmacia Corporation (formerly the Monsanto
Company). Based on these allegations, Central Garden has asserted
several causes of action, including breach of oral contract and
fraudulent misrepresentation, and seeks damages in excess of $900
million. In addition, Central Garden asserts various other causes of
action, including breach of written contract and quantum valebant, and
seeks damages in excess of $76 million for those claims.
Pharmacia Corporation v. Central Garden, Circuit Court of St. Louis,
Missouri
On June 30, 2000, Pharmacia Corporation filed suit against Central
Garden in Missouri state court, seeking unspecified damages allegedly
due Pharmacia under a four-year Alliance Agreement between Pharmacia
and Central. The Company was, for a short time, an assignee of this
Alliance Agreement, which it has reassigned to Pharmacia. Accordingly,
on January 18, 2001, Pharmacia joined the Company as a nominal
defendant in the Missouri state court action.
On January 29, 2001, Central Garden filed its answer and cross-claims
and counterclaims in the Missouri action. In its cross-claims, Central
Garden seeks an unspecified amount of damages for alleged contractual
breaches by the Company with respect to the agreements which are the
subject of the Missouri and Ohio actions described above. In addition,
Central Garden has included cross-claims under Section 17200 of the
California Business and Professions Code on behalf of the general
public and/or third party purchasers of the Company's products. Central
Garden seeks injunctive and restitutionary relief pursuant to this
newly added purported consumer representative action. On February 8,
2001, the Company filed a motion to stay Central Garden's cross-claims
based on the pendency of the prior filed actions in the Ohio and
California federal courts that involve the same subject matter. At a
hearing on March 20, 2001, the Missouri state court stayed all
cross-claims pending before it against the Company. The trial date for
the Missouri state action has been set for December 2001.
Central Garden v. Scotts & Pharmacia, Northern District of California
On July 7, 2000, Central Garden filed suit against the Company and
Pharmacia in the U.S. District Court for the Northern District of
California (San Francisco Division) alleging various claims, including
breach of contract and violations of federal antitrust laws, and
seeking an unspecified amount of damages and injunctive relief. On
October 26, 2000, after a noticed hearing, the District Court dismissed
all of Central Garden's breach of contract claims for lack of subject
matter jurisdiction. On November 17, 2000, Central Garden filed an
amended complaint in the District Court, re-alleging various claims for
violations of federal antitrust laws and also alleging state antitrust
claims under the Cartwright Act, Section 16726 of the California
Business and Professions Code. The trial date for the California
federal action has been set for July 2002.
16
17
Central Garden v. Scotts & Pharmacia, Contra Costa Superior Court
On October 31, 2000, Central Garden filed a complaint against the
Company and Pharmacia in the California Superior Court for Contra Costa
County. That complaint seeks to assert the breach of contract claims
previously dismissed by the District Court and additional claims under
Section 17200 of the California Business and Professions Code. On
December 4, 2000, the Company and Pharmacia jointly filed a motion to
stay this action based on the pendency of prior lawsuits (including the
two described above) that involve the same subject matter. By order
dated February 23, 2001, the Superior Court stayed the action pending
before it.
On April 6, 2001, Central Garden filed a motion to lift the stay of the
Contra Costa County action. The Company and Pharmacia filed a joint
opposition to Central Garden's motion. On May 4, 2001, the Court issued
a tentative ruling denying Central Garden's motion to lift the stay of
the action. Central Garden did not challenge the tentative ruling,
which accordingly became the ruling of the court. Consequently, all
claims in the Contra Costa action remain stayed.
The Company believes that all of Central Garden's federal and state
claims are entirely without merit and it intends to vigorously defend
against them.
10. NEW ACCOUNTING STANDARDS
In May 2000, the Emerging Issues Task Force (EITF) reached consensus on
Issue 00-14 "Accounting for Certain Sales Incentives". This issue
requires certain sales incentives (e.g., discounts, rebates, coupons)
offered by the Company to distributors, retail customers and consumers
to be classified as a reduction of sales revenue. Like many other
consumer products companies, the Company has historically classified
these costs as advertising, promotion, or selling expenses. The Company
has adopted the guidance for the first quarter of fiscal 2001 and does
not anticipate that the new accounting policy will impact fiscal 2001
results of operations.
In January 2001, the EITF reached consensus on Issue 00-22 "Accounting
for Points and Certain Other Time or Volume-Based Sales Incentive
Offers". This issue requires certain allowances and discounts (e.g.,
volume discounts) paid to distributors and retail customers to be
classified as a reduction of sales revenue. Like many other consumer
products companies, the Company has historically classified these costs
as advertising, promotion, or selling expenses. The Company adopted
this guidance for the second quarter of fiscal 2001. The Company does
not anticipate that the new accounting policy will impact fiscal 2001
results of operations.
In April 2001, the EITF reached consensus on Issue 00-25 "Accounting
for Consideration from a Vendor to a Retailer in Connection with the
Purchase or Promotion of the Vendor's Products". This issue requires
that certain consideration from a vendor to a retailer be classified as
a reduction of sales revenue. Like many other consumer products
companies, the Company has historically classified these costs as
advertising, promotion, or selling expenses. The guidance is effective
for the Company's first quarter of fiscal 2002. The Company does not
anticipate that the new accounting policy will impact fiscal 2001
results of operations.
11. SEGMENT INFORMATION
The Company is divided into three reportable segments - North American
Consumer, Global Professional and International Consumer. The North
American Consumer segment consists of the Lawns, Gardens, Growing
Media, Ortho, Lawn Service and Canadian business units. These segments
differ from those used in the prior year due to the sale of the
Company's professional turfgrass business in May 2000 and the resulting
change in management reporting structure.
The North American Consumer segment specializes in dry, granular
slow-release lawn fertilizers, lawn fertilizer combination and lawn
control products, grass seed, spreaders, water-soluble and
controlled-release garden and indoor
17
18
plant foods, plant care products, and potting soils, barks, mulches and
other growing media products, and pesticide products. Products are
marketed to mass merchandisers, home improvement centers, large
hardware chains, nurseries and garden centers.
The Global Professional segment is focused on a full line of
horticulture products including controlled-release and water-soluble
fertilizers and plant protection products, grass seed, spreaders,
custom application services and growing media. Products are sold to
lawn and landscape service companies, commercial nurseries and
greenhouses and specialty crop growers. Prior to June 2000, this
segment also included the Company's North American professional turf
business, which was sold in May 2000.
The International Consumer segment provides products similar to those
described above for the North American Consumer segment to consumers in
countries other than the United States and Canada.
The following table presents segment financial information in
accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". Pursuant to that statement, 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). Certain prior year
amounts have been restated to conform with the Company's current
segment presentation.
North American Global International Other/
(In Millions) Consumer Professional Consumer Corporate Total
- ------------- -------------- ------------ ------------- --------- -----
SALES:
2001 YTD.................................. $ 648.0 $ 92.7 $ 148.4 $ -- $ 889.1
2000 YTD.................................. $ 640.5 $ 89.8 $ 149.7 $ -- $ 880.0
2001 Q2................................... $ 574.1 $ 57.5 $ 108.4 $ -- $ 740.0
2000 Q2................................... $ 537.6 $ 54.4 $ 101.9 $ -- $ 693.9
OPERATING INCOME (LOSS):
2001 YTD.................................. $ 123.4 $ 12.5 $ 11.8 $ (43.8) $ 103.9
2000 YTD.................................. $ 126.8 $ 12.9 $ 13.9 $ (49.2) $ 104.4
2001 Q2................................... $ 158.8 $ 11.9 $ 20.5 $ (23.3) $ 167.9
2000 Q2................................... $ 130.4 $ 9.9 $ 17.6 $ (25.4) $ 132.5
OPERATING MARGIN:
2001 YTD.................................. 19.0% 13.5% 8.0% nm 11.7%
2000 YTD.................................. 19.8% 14.4% 9.3% nm 11.9%
2001 Q2................................... 27.7% 20.7% 18.9% nm 22.7%
2000 Q2................................... 24.3% 18.2% 17.3% nm 19.1%
TOTAL ASSETS:
2001 TYD.................................. $ 1,526.4 $ 166.6 $ 539.6 $ 114.3 $ 2,346.9
2000 YTD.................................. $ 1,519.3 $ 132.5 $ 514.8 $ 103.3 $ 2,269.9
nm Not meaningful.
Operating income reported for the Company's three operating segments
represents earnings before amortization of intangible assets, interest
and taxes, since this is the measure of profitability used by
management. Accordingly, corporate operating income for the three and
six months ended March 31, 2001 and April 1, 2000 includes amortization
of certain intangible assets, corporate general and administrative
expenses, and certain "other" income/expense not allocated to the
business segments.
Total assets reported for the Company's operating segments include the
intangible assets for the acquired business within those segments.
Corporate assets primarily include deferred financing and debt issuance
costs, corporate fixed assets as well as deferred tax assets.
18
19
12. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
In January 1999, the Company issued $330 million of 8 5/8% Senior
Subordinated Notes due 2009 to qualified institutional buyers under the
provisions of Rule 144A of the Securities Act of 1933. During the first
quarter of fiscal 2001, the Company completed the registration of an
exchange offer for these Notes under the Securities Act.
The Notes are general obligations of the Company and are guaranteed by
all of the existing wholly-owned, domestic subsidiaries and all future
wholly-owned, significant (as defined in Regulation S-X) domestic
subsidiaries of the Company. These subsidiary guarantors jointly and
severally guarantee the Company's obligations under the Notes. The
guarantees represent full and unconditional general obligations of each
subsidiary that are subordinated in right of payment to all existing
and future senior debt of that subsidiary but are senior in right of
payment to any future junior subordinated debt of that subsidiary.
The following unaudited information presents consolidating statements
of operations, statements of cash flows and balance sheets for the
three and six-month periods ended March 31, 2001 and April 1, 2000.
Separate unaudited financial statements of the individual guarantor
subsidiaries have not been provided because management does not believe
they would be meaningful to investors.
19
20
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales.......................................... $ 467.7 $ 122.3 $ 150.0 $ 740.0
Cost of sales...................................... 289.4 44.6 86.9 420.9
----------- ----------- ----------- -----------
Gross profit....................................... 178.3 77.7 63.1 319.1
Gross commission earned from agency agreement...... 14.9 -.- 1.7 16.6
Costs associated with agency agreement............. 4.6 -.- -.- 4.6
----------- ----------- ----------- -----------
Net commission.................................. 10.3 -.- 1.7 12.0
Operating expenses:
Advertising and promotion....................... 50.7 2.4 15.1 68.2
Selling, general and administrative............. 54.2 7.4 27.4 89.0
Amortization of goodwill and other intangibles.. -.- 4.8 2.6 7.4
Equity income in subsidiaries...................... (49.4) -.- -.- 49.4 -.-
Intracompany allocations........................... 2.6 (4.9) 2.3 -.-
Other (income) expense, net ....................... (1.0) (0.4) -.- (1.4)
----------- ----------- ----------- ----------- -----------
Income (loss) from operations...................... 131.5 68.4 17.4 (49.4) 167.9
Interest (income) expense.......................... 22.8 (3.7) 7.0 26.1
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.................. 108.7 72.1 10.4 (49.4) 141.8
Income taxes....................................... 23.9 28.9 4.2 57.0
----------- ----------- ----------- ----------- -----------
Net income (loss).................................. $ 84.8 $ 43.2 $ 6.2 $ (49.4) $ 84.8
=========== =========== =========== ============ ===========
FOR THE SIX MONTHS ENDED MARCH 31, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales.......................................... $ 517.9 $ 162.8 $ 208.4 $ 889.1
Cost of sales...................................... 316.6 95.6 123.2 535.4
----------- ----------- ----------- -----------
Gross profit....................................... 201.3 67.2 85.2 353.7
Gross commission earned from agency agreement...... 14.5 -.- 2.0 16.5
Costs associated with agency agreement............. 9.1 -.- -.- 9.1
----------- ----------- ----------- -----------
Net commission.................................. 5.4 -.- 2.0 7.4
Operating expenses:
Advertising and promotion....................... 56.7 3.4 20.7 80.8
Selling, general and administrative............. 98.2 12.9 53.6 164.7
Amortization of goodwill and other intangibles.. 2.2 7.1 4.9 14.2
Equity income in subsidiaries...................... (27.7) -.- -.- 27.7 -.-
Intracompany allocations........................... (1.1) (3.2) 4.3 -.-
Other (income) expense, net ....................... (1.7) (0.8) -.- (2.5)
----------- ----------- ----------- ----------- -----------
Income (loss) from operations...................... 80.1 47.8 3.7 (27.7) 103.9
Interest (income) expense.......................... 42.6 (7.4) 12.2 47.4
----------- ----------- ----------- ----------- -----------
Income (loss) before income taxes.................. 37.5 55.2 (8.5) (27.7) 56.5
Income taxes....................................... 3.9 22.4 (3.4) 22.9
----------- ----------- ----------- ----------- -----------
Net income (loss).................................. $ 33.6 $ 32.8 $ (5.1) $ (27.7) $ 33.6
=========== =========== =========== ============ ===========
20
21
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED MARCH 31, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................... $ 33.6 $ 32.8 $ (5.1) $ (27.7) $ 33.6
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depreciation and amortization..................... 10.6 13.0 8.3 31.9
Equity income in subsidiaries..................... (27.7) 27.7
Net change in certain components of
working capital................................ (177.5) (102.2) (84.7) (364.4)
Net changes in other assets and
liabilities and other adjustments.............. 3.0 (11.7) 0.8 -.- (7.9)
--------- --------- ---------- ---------- ---------
Net cash used in operating activities................ (158.0) (68.1) (80.7) -.- (306.8)
--------- --------- ---------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.......... (20.4) (3.3) (3.0) (26.7)
Investments in acquired businesses, net
of cash acquired.................................. (0.4) (0.1) (11.7) (12.2)
--------- --------- ---------- ---------- ---------
Net cash used in investing activities................ (20.8) (3.4) (14.7) -.- (38.9)
--------- --------- ---------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings and repayments under
revolving and bank lines of credit................ 228.5 147.8 376.3
Gross borrowings under term loans.................... 260.0 260.0
Gross repayments under term loans.................... (257.5) (46.8) (304.3)
Financing and issuance fees.......................... (1.4) (1.4)
Cash received from exercise of stock options......... 10.4 10.4
Intracompany financing............................... (66.6) 68.7 (2.1) -.-
Other, net........................................... -.- (1.8) (8.6) (10.4)
--------- --------- ---------- ---------- ---------
Net cash provided by financing activities............ 173.4 66.9 90.3 -.- 330.6
--------- --------- ---------- ---------- ---------
Effect of exchange rate changes on cash.............. -.- -.- (0.1) -.- (0.1)
--------- --------- ---------- ---------- ---------
Net decrease in cash ................................ (5.4) (4.6) (5.2) (15.2)
Cash and cash equivalents, beginning of period....... 16.0 4.7 12.3 -.- 33.0
--------- --------- ---------- ---------- ---------
Cash and cash equivalents, end of period............. $ 10.6 $ 0.1 $ 7.1 $ -.- $ 17.8
========= ========= ========== ========== =========
21
22
THE SCOTTS COMPANY
BALANCE SHEET
AS OF MARCH 31, 2001 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents............................ $ 10.6 $ 0.1 $ 7.1 $ 17.8
Accounts receivable, net............................. 367.8 112.8 212.4 693.0
Inventories, net..................................... 241.0 78.6 82.4 402.0
Current deferred tax asset .......................... 28.1 0.4 (0.9) 27.6
Prepaid and other assets ............................ 46.1 2.3 18.7 67.1
--------- --------- ---------- ----------
Total current assets ............................. 693.6 194.2 319.7 1,207.5
Property, plant and equipment, net .................. 185.4 73.7 37.9 297.0
Intangible assets, net .............................. 30.2 462.7 277.1 770.0
Other assets ........................................ 56.2 6.3 9.9 72.4
Investment in affiliates............................. 868.1 -.- -.- (868.1) -.-
Intracompany assets.................................. -.- 121.9 -.- (121.9) -.-
--------- --------- ---------- -------- ----------
Total assets...................................... $ 1,833.5 $ 858.8 $ 644.6 $ (990.0) $ 2,346.9
========= ========= ========== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................... $ 104.9 $ 2.4 $ 25.2 $ $ 132.5
Accounts payable..................................... 147.3 57.5 98.9 303.7
Accrued liabilities ................................. 187.7 24.6 53.7 266.0
--------- --------- ---------- ----------
Total current liabilities ........................ 439.9 84.5 177.8 702.2
Long-term debt ...................................... 711.2 4.1 360.4 1,075.7
Other liabilities ................................... 34.5 -.- 15.3 49.8
Intracompany liabilities............................. 107.9 -.- 14.0 (121.9) -.-
--------- --------- ---------- -------- ----------
Total liabilities................................. 1,293.5 88.6 567.5 (121.9) 1,827.7
--------- --------- ---------- -------- ----------
Commitments and contingencies
Shareholders' equity:
Investment from parent............................... 488.4 60.1 (548.5) -.-
Common shares, no par value per share, $.01 stated
value per share................................... 0.3 0.3
Capital in excess of par value....................... 390.6 390.6
Retained earnings.................................... 230.4 284.8 34.8 (319.6) 230.4
Treasury stock, 3.4 shares at cost................... (74.6) (74.6)
Accumulated other comprehensive expense.............. (6.8) (3.0) (17.8) (27.5)
--------- --------- ---------- -------- ----------
Total shareholders' equity........................... 540.0 770.2 77.1 (868.1) 519.2
--------- --------- ---------- -------- ----------
Total liabilities and shareholders' equity........... $ 1,833.5 $ 858.8 $ 644.6 $ (990.0) $ 2,346.9
========= ========= ========== ======== ==========
22
23
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED APRIL 1, 2000 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales............................................ $ 421.5 $ 133.2 $ 139.2 $ $ 693.9
Cost of sales ....................................... 252.8 73.6 80.9 407.3
--------- --------- ---------- ---------- ----------
Gross profit ........................................ 168.7 59.6 58.3 286.6
Gross commission earned from agency agreement ....... 8.7 -.- 0.3 9.0
Costs associated with agency agreement ............. 2.1 -.- -.- 2.1
--------- --------- ---------- ---------- ----------
Net commission.................................... 6.6 -.- 0.3 -.- 6.9
Operating expenses:
Advertising and promotion ........................ 44.6 11.6 15.2 71.4
Selling, general and administrative............... 53.9 6.5 24.0 84.4
Amortization of goodwill and other intangibles ... 3.8 1.6 2.3 7.7
Equity income in subsidiaries........................ (28.2) 28.2 -.-
Intracompany allocations............................. (10.2) 5.4 4.8 -.-
Other (income) expense, net ......................... 0.3 (2.8) -.- (2.5)
--------- --------- ---------- ---------- ----------
Income (loss) from operations........................ 111.1 37.3 12.3 (28.2) 132.5
Interest (income) expense ........................... 23.7 (3.6) 5.8 25.9
--------- --------- ---------- ---------- ----------
Income (loss) before income taxes.................... 87.4 40.9 6.5 (28.2) 106.6
Income taxes ........................................ 24.0 16.6 2.6 43.2
--------- --------- ---------- ---------- ----------
Net income (loss).................................... $ 63.4 $ 24.3 $ 3.9 $ (28.2) $ 63.4
========= ========= ========== ========== ==========
FOR THE SIX MONTHS ENDED APRIL 1, 2000 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net sales............................................ $ 499.5 $ 174.2 $ 206.3 $ $ 880.0
Cost of sales ....................................... 303.8 101.6 119.1 524.5
--------- --------- ---------- ---------- ----------
Gross profit ........................................ 195.7 72.6 87.2 355.5
Gross commission earned from agency agreement ....... 8.9 -.- 0.3 9.2
Costs associated with agency agreement ............. 5.7 -.- -.- 5.7
--------- --------- ---------- ---------- ----------
Net commission.................................... 3.2 -.- 0.3 -.- 3.5
Operating expenses:
Advertising and promotion ........................ 52.3 13.9 23.4 89.6
Selling, general and administrative............... 93.4 12.5 47.2 153.1
Amortization of goodwill and other intangibles ... 5.5 3.7 4.6 13.8
Equity income in subsidiaries........................ (22.7) 22.7 -.-
Intracompany allocations............................. (12.1) 6.1 6.0 -.-
Other (income) expense, net ......................... 1.9 (3.6) (0.2) (1.9)
--------- --------- ---------- ---------- ----------
Income (loss) from operations........................ 80.6 40.0 6.5 (22.7) 104.4
Interest (income) expense ........................... 41.3 (3.7) 12.0 49.6
--------- --------- ---------- ---------- ----------
Income (loss) before income taxes.................... 39.3 43.7 (5.5) (22.7) 54.8
Income taxes ........................................ 6.7 17.7 (2.2) 22.2
--------- --------- ---------- ---------- ----------
Net income (loss).................................... $ 32.6 $ 26.0 $ (3.3) $ (22.7) $ 32.6
========= ========= ========== ========== ==========
23
24
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE SIX MONTH PERIOD ENDED APRIL 1, 2000 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
Net income........................................... $ 32.6 $ 26.0 $ (3.3) $ (22.7) $ 32.6
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization .................... 17.3 7.7 7.6 32.6
Loss on sale of property
Equity income..................................... (22.7) 22.7 -.-
Net change in certain components
of working capital ............................... (155.3) (79.9) (36.2) (271.4)
Net changes in other assets and
liabilities and other adjustments................. (4.5) (4.6) (1.0) -.- (8.1)
--------- --------- ---------- ---------- ----------
Net cash used in operating activities................ (132.6) (50.8) (30.9) -.- (214.3)
--------- --------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment.......... (12.2) (2.4) (5.5) -.- (20.1)
Investment in acquired businesses, net of cash
acquired.......................................... (0.8) (0.8)
Other, net .......................................... 0.1 1.7 1.8
--------- --------- ---------- ---------- ----------
Net cash used in investing activities................ (12.1) (2.4) (4.6) -.- (19.1)
--------- --------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving
and bank lines of credit ...................... 248.4 1.2 36.9 286.5
Gross repayments under term loans................. (1.0) (11.4) (12.4)
Payments to preferred shareholders................ (6.4) (6.4)
Repurchase of treasury shares..................... (23.9) (23.9)
Intracompany financing ........................... (58.4) 49.3 9.1 -.-
Cash received from the exercise of stock options.. 1.0 1.0
Other, net........................................ (4.4) -.- (6.0) -.- (10.4)
--------- --------- ---------- ---------- ----------
Net cash provided by financing activities ........... 155.3 50.5 28.6 -.- 234.4
--------- --------- ---------- ---------- ----------
Effect of exchange rate changes on cash.............. -.- -.- (1.6) -.- (1.6)
--------- --------- ---------- ---------- ----------
Net increase (decrease) in cash...................... 10.6 (2.7) (8.5) (0.6)
Cash and cash equivalents, beginning of period....... 8.5 3.1 18.7 -.- 30.3
--------- --------- ---------- ---------- ----------
Cash and cash equivalents, end of period............. $ 19.1 $ 0.4 $ 10.2 $ -.- $ 29.7
========= ========= ========== ========== ==========
24
25
THE SCOTTS COMPANY
BALANCE SHEET
AS OF APRIL 1, 2000 (IN MILLIONS)
(UNAUDITED)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ---------- ---------- ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents......................... $ 19.1 $ 0.4 $ 10.2 $ 29.7
Accounts receivable, net ......................... 362.0 107.1 180.2 649.3
Inventories, net ................................. 207.2 82.9 76.2 366.3
Current deferred tax asset........................ 28.1 0.5 (2.1) 26.5
Prepaid and other assets.......................... 33.2 0.5 29.9 -.- 63.6
--------- --------- ---------- ---------- ----------
Total current assets........................... 649.6 191.4 294.4 -.- 1,135.4
Property, plant and equipment, net .................. 159.9 58.0 40.2 258.1
Intangible assets, net .............................. 262.3 269.3 264.6 796.2
Other assets ........................................ 65.0 2.4 12.8 80.2
Investment in affiliates............................. 739.1 (739.1) 0.0
Intracompany assets ................................. -.- 290.9 -.- (290.9)
--------- --------- ---------- ---------- ----------
Total assets................................... $ 1,875.9 $ 812.0 $ 612.0 $ (1,030.0) $ 2,269.9
========= ========= ========== ========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt................................... $ 161.8 $ 2.1 $ 19.3 $ $ 183.2
Accounts payable.................................. 144.4 41.6 95.7 281.7
Accrued liabilities............................... 126.8 99.4 61.4 -.- 287.6
--------- --------- ---------- ---------- ----------
Total current liabilities...................... 433.0 143.1 176.4 -.- 752.5
Long-term debt....................................... 698.8 5.1 310.8 1,014.7
Other liabilities.................................... 42.1 0.1 19.4 61.6
Intracompany liabilities............................. 246.7 -.- 44.2 (290.9) -.-
--------- --------- ---------- ---------- ----------
Total liabilities.............................. 1,420.6 148.3 550.8 (290.9) 1,828.8
--------- --------- ---------- ---------- ----------
Commitments and contingencies
Shareholders' equity:
Investment from parent............................ 488.6 60.0 (548.6) -.-
Common shares, no par value per share,
$.01 stated value per share.................... 0.3 0.3
Capital in excess of par value.................... 388.1 388.1
Class A Convertible Preferred Stock, no par value
Retained earnings.............................. 156.3 177.1 13.4 (190.5) 156.3
Treasury stock, 2.8 shares at cost................ (85.1) -.- -.- (85.1)
Accumulated other comprehensive expense........... (4.3) (2.0) (12.2) (18.5)
--------- --------- ---------- ---------- ----------
Total shareholders' equity........................... 455.3 663.7 61.2 (739.1) 441.1
--------- --------- ---------- ---------- ----------
Total liabilities and shareholders' equity........... $ 1,875.9 $ 812.0 $ 612.0 $ (1,030.0) $ 2,269.9
========= ========= ========== ========== ==========
25
26
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(ALL AMOUNTS ARE IN MILLIONS EXCEPT PER SHARE DATA OR AS OTHERWISE NOTED)
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded products for
lawn and garden care and professional horticulture in the United States and
Europe. Our operations are divided into three business segments: North American
Consumer, Global Professional and International Consumer. The North American
Consumer segment includes the Lawns, Gardens, Growing Media, Ortho, Lawn Service
and Canadian business groups.
As a leading consumer branded lawn and garden company, we focus on our consumer
marketing efforts, including advertising and consumer research, to create demand
to pull product through the retail distribution channels. During fiscal 2000, we
spent $209.1 million on advertising and promotional activities, which was a
significant increase over fiscal 1999 spending levels of $189.0 million. We have
applied this consumer marketing focus over the past several years, and we
believe that Scotts continues to receive a significant return on these increased
marketing expenditures. For example, sales in our North American Consumer Lawns
business group increased 13.2% from fiscal 1999 to fiscal 2000, after having
experienced double-digit percentage increases in sales during the prior two
years. We believe that this dramatic sales growth resulted primarily from our
increased consumer-oriented marketing efforts. We expect that we will continue
to focus our marketing efforts toward the consumer and to increase consumer
marketing expenditures in the future to drive market share and sales growth.
Scotts' sales are seasonal in nature and are susceptible to global weather
conditions, primarily in North America and Europe. For instance, periods of wet
weather can slow fertilizer sales but can create increased demand for pesticide
sales. Periods of dry, hot weather can have the opposite effect on fertilizer
and pesticide sales. We believe that the acquisitions we have made over the past
several years diversify both our product line risk and geographic risk to
weather conditions.
Scotts has entered into a long-term marketing agreement with Monsanto for its
consumer Roundup(R) herbicide products. Under the marketing agreement, Scotts
and Monsanto are jointly developing global consumer and trade marketing programs
for Roundup(R), while Scotts is responsible for sales support, merchandising,
distribution, logistics and certain administrative functions. In addition, in
January 1999 Scotts purchased from Monsanto the assets of its worldwide consumer
lawn and garden businesses, exclusive of the Roundup(R) business. These
transactions with Monsanto further our strategic objective of significantly
enhancing our position in the pesticides segment of the consumer lawn and garden
category. These businesses make up the Ortho business group within the North
American Consumer segment.
We believe that these transactions provided us with several strategic benefits
including immediate market penetration into new categories, geographic
expansion, brand leveraging opportunities, and the achievement of substantial
cost savings. With the Ortho acquisition, we believe we are currently a leader
by market share in all five segments of the consumer lawn and garden category in
North America: lawn fertilizer, garden fertilizer, growing media, grass seeds
and pesticides. We believe that we are now positioned as the only company with a
complete offering of consumer lawn and garden products in the United States.
Over the past several years, we have made other acquisitions to strengthen our
global market position in the lawn and garden category, including Rhone-Poulenc
Jardin, Asef Holding B.V. and, most recently, Substral. These acquisitions
provided a significant addition to our then existing European platform and
strengthened our foothold in the continental European consumer lawn and garden
market. Through these acquisitions, we have established a strong presence in
France, Germany, Austria, and the Benelux countries. These acquisitions may also
mitigate, to a certain extent, our susceptibility to weather conditions by
expanding the regions in which we operate.
26
27
The following discussion and analysis of the consolidated results of operations
and financial position should be read in conjunction with our Condensed,
Consolidated Financial Statements included elsewhere in this report. Scotts'
Annual Report on Form 10-K for the fiscal year ended September 30, 2000 includes
additional information about the Company, our operations, and our financial
position, and should be read in conjunction with this Quarterly Report on Form
10-Q.
RESULTS OF OPERATIONS
The following table sets forth sales by business segment for the three and six
months ended March 31, 2001 and April 1, 2000. Sales figures for all periods
presented reflect the reclassification of certain rebates and allowances in
accordance with accounting guidance adopted by the Company in the second quarter
of fiscal 2001.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
North American Consumer:
Lawns......................................... $ 301.9 $ 263.8 $ 319.2 $ 306.1
Gardens....................................... 63.0 67.3 70.7 81.0
Growing Media................................. 97.7 96.1 118.0 115.3
Ortho......................................... 82.3 82.5 98.6 100.5
Lawn Service.................................. 4.4 2.6 9.2 5.4
Canada........................................ 13.2 13.8 14.2 15.2
Other......................................... 11.6 11.5 18.1 17.0
-------------- -------------- -------------- ---------------
Total...................................... 574.1 537.6 648.0 640.5
International Consumer.......................... 108.4 101.9 148.4 149.7
Global Professional............................. 57.5 54.4 92.7 89.8
-------------- -------------- -------------- ---------------
Consolidated.................................... $ 740.0 $ 693.9 $ 889.1 $ 880.0
============== ============== ============== ===============
27
28
The following table sets forth the components of income and expense as a
percentage of sales for the three and six months ended March 31, 2001 and April
1, 2000:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- ------------------------
MARCH 31, APRIL 1, MARCH 31, APRIL 1,
2001 2000 2001 2000
---- ---- ---- ----
Net sales....................................... 100.0% 100.0% 100.0% 100.0%
Cost of sales................................... 56.9 58.7 60.2 59.6
------------- ----------- ----------- ------------
Gross profit.................................... 43.1 41.3 39.8 40.4
Net commission earned from agency agreement..... 1.6 1.0 0.8 0.4
Operating expenses:
Advertising and promotion.................... 9.2 10.3 9.1 10.2
Selling, general and administrative.......... 12.0 12.2 18.5 17.4
Amortization of goodwill and
other intangibles......................... 1.0 1.1 1.6 1.6
Other expense (income), net.................. (0.2) (0.4) (0.3) (0.2)
------------- ----------- ----------- ------------
Income from operations.......................... 22.7 19.1 11.7 11.8
Interest expense................................ 3.5 3.7 5.3 5.6
------------- ----------- ----------- ------------
Income before income taxes...................... 19.2 15.4 6.4 6.2
Income taxes.................................... 7.7 6.2 2.6 2.5
------------- ----------- ----------- ------------
Net income...................................... 11.5 9.2 3.8 3.7
Payments to preferred shareholders.............. 0.0 0.0 0.0 0.7
------------- ----------- ----------- ------------
Income available to common
shareholders.................................. 11.5% 9.2% 3.8% 3.0%
============= =========== =========== ============
THREE MONTHS ENDED MARCH 31, 2001 VERSUS THREE MONTHS ENDED APRIL 1, 2000
Sales for the second quarter ended March 31, 2001 were $740.0 million, an
increase of 6.6% over the second quarter ended April 1, 2000 of $693.9 million.
The increase in sales was driven primarily by an increase in sales in the North
American Consumer segment as discussed below.
North American Consumer segment sales were $574.1 million in the second quarter
of fiscal 2001, an increase of $36.5 million, or 6.8%, over sales for the second
quarter of fiscal 2000 of $537.6 million. Sales in the Consumer Lawns business
group within this segment increased $38.1 million, or 14.4%, from fiscal 2000 to
fiscal 2001. Beginning in fiscal 2001, the Company has significantly changed the
selling and distribution model for the Lawns, Gardens and Ortho business groups
in North America. The products in these groups are now being sold by an
integrated sales force, as opposed to separate sales forces in prior years, and
the majority of these products are now being sold directly to retail customers
rather than through distribution. The impact of these changes is that sales are
recognized generally later in the season than they were in prior years, which
contributed to the increase in second quarter sales for the Lawns group compared
to the prior year. Sales in the Consumer Gardens business group decreased $4.3
million, or 6.4%, from the second quarter of fiscal 2000 to fiscal 2001. As a
result of the change in distribution described above, it is anticipated that
shipments for products in the Gardens business group have been delayed in the
season closer to the time of sale to the consumer or into our third and fourth
quarters. Sales for the other business groups in the North America Consumer
segment did not vary significantly in the second quarter of fiscal 2001 compared
to the second quarter of fiscal 2000.
Sales for the International Consumer segment of $108.4 million in the second
quarter of fiscal 2001 were $6.5 million, or 6.4% higher than sales for the
second quarter of fiscal 2000 of $101.9 million. Excluding the adverse impact of
changes in exchange rates, sales for the International Consumer segment
increased approximately 15% compared to the prior year period. The increase in
sales is primarily due to the successful sell-in of a new line of fertilizer
products under the Substral(R) brand name.
28
29
Sales for the Global Professional segment of $57.5 million in the second quarter
of fiscal 2001 were $3.1 million, or 5.7% higher than the second quarter of
fiscal 2000 sales of $54.4 million. Excluding the unfavorable impact of changes
in foreign exchange rates, Global Professional segment sales increased
approximately 10% quarter over quarter. The increase in sales is due to new
product introductions and increased growing media sales.
Gross profit increased to $319.1 million in the second quarter of fiscal 2001,
an increase of 11.3% over fiscal 2000 gross profit of $286.6 million. As a
percentage of sales, gross profit was 43.1% of sales for fiscal 2001 compared to
41.3% of sales for the second quarter of fiscal 2000. This increase in
profitability on sales was driven by a successful shift to direct distribution,
higher production levels and improved efficiencies in the Company's production
plants, and a continued shift in sales mix toward higher margin products,
particularly within the Consumer Lawns and Consumer Growing Media business
groups, which offset increases in raw material and energy costs.
The net commission earned from agency agreement in the second quarter of fiscal
2001 was $12.0 million compared to $6.9 million in the second quarter of fiscal
2000. The increase in net commission reflects a significant increase in gross
commission for the quarter, reflecting the successful introduction of new and
improved formulations, partially offset by an increase in contribution expenses
as specified in the agreement with Monsanto. Scotts does not recognize
commission income under the agency agreement until minimum earnings thresholds
in the agreement are achieved, which is generally in our second quarter.
Advertising and promotion expenses for the second quarter of fiscal 2001 were
$68.2 million, a decrease of $3.2 million, or 4.5% over fiscal 2000 advertising
and promotion expenses of $71.4 million. This decrease reflects the impact of
improved media buying efficiencies and lower advertising rates compared to the
prior year.
Selling, general and administrative expenses in the second quarter of fiscal
2001 were $89.0 million, an increase of $4.6 million, or 5.5% over similar
expenses in the second quarter of fiscal 2000 of $84.4 million. As a percentage
of sales, selling, general and administrative expenses were 12.0% for the second
quarter of fiscal 2001, unchanged from the same quarter in the prior year. The
increase in selling, general and administrative expenses from the prior year is
partially due to an increase in selling expenses as a result of the change in
the selling and distribution model for the North American business described
above. The increase in selling, general and administrative expenses is also due
to an increase in information technology expenses from the prior year as a
result of the cost of many information technology resources being capitalized
toward the cost of our enterprise resource planning system a year ago. Most of
these information technology resources have assumed a system support function
that is now being expensed as incurred.
Other income for the second quarter of fiscal 2001 was $1.4 million compared to
other income of $2.5 million in the prior year. The decrease in other income was
primarily due to a significant royalty payment recorded in the second quarter of
fiscal 2000 that did not recur in fiscal 2001.
Income from operations for the second quarter of fiscal 2001 was $167.9 million
compared to $132.5 million for the second quarter of fiscal 2000. The increase
was primarily due to the increase in sales and gross margin, and an increase in
the net Roundup(R) commission described above.
Interest expense for the second quarter of fiscal 2001 was $26.1 million, a
slight increase over fiscal 2000 interest expense of $25.9 million. Average
borrowings for the second quarter of fiscal 2001 were slightly lower than the
second quarter of fiscal 2000; however, this was offset by slightly increased
interest rates quarter over quarter.
Income tax expense was $57.0 million for the second quarter of fiscal 2001
compared to $43.2 million for the same quarter in the prior year due to an
increase in pre-tax income recognized in the second quarter of fiscal 2001. The
Company's effective tax rate did not change significantly from fiscal 2000 to
fiscal 2001.
Scotts reported net income of $84.8 million for the second quarter of fiscal
2001, or $2.80 per common share on a diluted basis, compared to net income of
$63.4 million for fiscal 2000, or $2.15 per common share on a diluted basis.
29
30
SIX MONTHS ENDED MARCH 31, 2001 VERSUS SIX MONTHS ENDED APRIL 1, 2000
Net sales for the six months ended March 31, 2001 were $889.1 million, an
increase of 1.0% over the six months ended April 1, 2000 of $880.0 million. The
slight increase in sales was driven primarily by increases in sales in the North
American Consumer segment as discussed below.
North American Consumer segment sales were $648.0 million for the six months of
fiscal 2001, an increase of $7.5 million, or 1.2%, over sales for the six months
of fiscal 2000 of $640.5 million. Sales in the Consumer Lawns business group
within this segment increased $13.1 million, or 4.3%, from fiscal 2000 to fiscal
2001, primarily due to the introduction of a new line of grass seed products.
Sales for the Consumer Garden business group decreased $10.3 million, or 12.7%,
for the first six months of fiscal 2001 compared to the same period in the prior
year due to the changes in the North American selling and distribution model
described above. Sales for the other business groups in the North American
Consumer segment did not vary significantly for the six months ended March 31,
2001 compared to the same period in the prior year. Certain of the business
groups have realized price increases from the prior year of up to 2%.
Sales for the International Consumer segment of $148.4 million for the first six
months of fiscal 2001 were slightly lower than sales for the first six months of
fiscal 2000 of $149.7 million. Excluding the adverse impact of changes in
exchange rates, sales for the International Consumer segment increased
approximately 9% compared to the prior year period. The increase in sales is
primarily due to the successful sell-in of a new line of fertilizer products
under the Substral(R) brand name.
Sales for the Global Professional segment of $92.7 million for the first six
months of fiscal 2001 were $2.9 million, or 3.2%, higher than the first six
months of fiscal 2000 sales of $89.8 million. Excluding the unfavorable impact
of changes in foreign exchange rates, Global Professional segment sales
increased approximately 8% year over year. The increase in sales is due to new
product introductions and increased growing media sales.
Gross profit for the first six months of fiscal 2001 was $353.7 million, down
slightly from fiscal 2000 gross profit of $355.5 million. As a percentage of
sales, gross profit was 39.8% of sales for the first six months of fiscal 2001
compared to 40.4% of sales for the first six months of fiscal 2000.
The net commission earned from agency agreement in the first six months of
fiscal 2001 was $7.4 million, compared to $3.5 million in the first six months
of fiscal 2000. The increase in net commission reflects a significant increase
in gross commission for the six-month period, reflecting the successful
introduction of new and improved formulations, partially offset by an increase
in contribution expenses as specified in the agreement with Monsanto. Scotts
does not recognize commission income under the agency agreement until minimum
earnings thresholds in the agreement are achieved, which is generally in our
second quarter.
Advertising and promotion expenses for the first six months of fiscal 2001 were
$80.8 million compared to fiscal 2000 advertising and promotion expenses of
$89.6 million. This decrease reflects the impact of improved media buying
efficiencies and lower advertising rates compared to the prior year.
Selling, general and administrative expenses in the first six months of fiscal
2001 were $164.7 million, an increase of $11.5 million, or 7.5%, over similar
expenses in the first six months of fiscal 2000 of $153.1 million. As a
percentage of sales, selling, general and administrative expenses were 18.5% for
the first six months of fiscal 2001 compared to 17.4% for fiscal 2000. The
increase in selling, general and administrative expenses from the prior year is
partially due to an increase in selling expenses as a result of the change in
the selling and distribution model for the North American business described
above. The increase in selling, general and administrative expenses is also due
to an increase in information technology expenses from the prior year as a
result of the cost of many information technology resources being capitalized
toward the cost of our enterprise resource planning system a year ago. Most of
these information technology resources have assumed a system support function
that is now being expensed as incurred.
Amortization of goodwill and other intangibles was $14.2 million for the first
six months of fiscal 2001, compared to $13.8 million in the prior year, due to
adjustments made to the estimated purchase price for the Ortho acquisition made
during the prior year.
30
31
Other income for the first six months of fiscal 2001 was $2.5 million compared
to other income of $1.9 million in the prior year. The increase in income was
primarily due to losses on the sale of miscellaneous assets that were incurred
in the prior year.
Income from operations for the first six months of fiscal 2001 was $103.9
million compared to $104.4 million for the first six months of fiscal 2000. The
slight decrease was the result of the slight decline in gross margin and
increased selling, general and administrative costs, partially offset by
increased net commission under the agency agreement and lower advertising and
promotion expense.
Interest expense for the first six months of fiscal 2001 was $47.4 million, a
decrease of $2.2 million from fiscal 2000 interest expense of $49.6 million. The
decrease in interest expense was due to decreased average borrowings year over
year, which more than offset an increase in interest rates for the period.
Income tax expense was $22.9 million for the first six months of fiscal 2001
compared to $22.2 million in the prior year due to a slight increase in pre-tax
income for fiscal 2001 over the prior year. The provisions for income taxes
reflect an estimated rate of 40.5% for the first six months of both fiscal 2001
and 2000.
Scotts reported net income of $33.6 million for the first six months of fiscal
2001, or $1.12 per common share on a diluted basis, compared to net income of
$32.6 million for fiscal 2000, or $0.88 per common share on a diluted basis. The
diluted earnings per share for the first six months of fiscal 2000 is net of a
one-time reduction of $0.21 per share resulting from the early conversion of
preferred stock in October 1999.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities was $306.8 million for the six months ended
March 31, 2001 compared to a use of cash of $214.3 million for the six months
ended April 1, 2000. The seasonal nature of our operations generally requires
cash to fund significant increases in working capital (primarily inventory and
accounts receivable) during the first and second quarters. The third fiscal
quarter is a period for collecting accounts receivable and liquidating inventory
levels. The increase in cash required to fund operating activities for the first
six months of fiscal 2001 compared to the prior year was due to higher levels of
accounts receivable and inventory at March 31, 2001 compared to April 1, 2000,
due, in part, to the change in the selling and distribution model for North
America in fiscal 2001 described above and the trend by major retailers to delay
inventory purchases later in season in fiscal 2001 compared to fiscal 2000.
Cash used in investing activities was $38.9 million for the first six months of
fiscal 2001 compared to $19.1 million in the prior year. The additional cash
used for investing activities in fiscal 2001 was primarily due to an increase in
capital expenditures for the period, the $6.9 million payment toward the
purchase of the Substral business discussed in Note 3 to the quarterly financial
statements and payments made toward several lawn service acquisitions during the
first six months of fiscal 2001.
Financing activities provided cash of $330.6 million for the first six months of
fiscal 2001 compared to providing $234.4 million in the prior year. The increase
in cash from financing activities was primarily due to an increase in borrowings
under the Company's revolving credit facility to fund operations and investing
activities during the first six months of fiscal 2001.
Total debt was $1,208.2 million as of March 31, 2001, an increase of $10.3
million compared with debt at April 1, 2000 of $1,197.9. The increase in debt
compared to the prior year was primarily due to additional borrowings to fund
operations and investing activities as discussed above.
Our primary sources of liquidity are funds generated by operations and
borrowings under our credit facility. The credit facility provides for
borrowings in the aggregate principal amount of $1.1 billion and consists of
term loan facilities in the aggregate amount of $525 million and a revolving
credit facility in the amount of $575 million.
31
32
In July 1998, our Board of Directors authorized the repurchase of up to $100
million of our common shares on the open market or in privately negotiated
transactions on or prior to September 30, 2001. As of March 31, 2001, 1,106,295
common shares (or $40.6 million) have been repurchased under this repurchase
program limit.
In October 2000, the Board of Directors approved cancellation of the third year
commitment of $50 million under the share repurchase program. The Board did
authorize repurchasing the amount still outstanding under the second year
repurchase commitment (approximately $9.0 million) through September 30, 2001.
Any repurchase will also be subject to the covenants contained in our credit
facility as well as our other debt instruments. The repurchased shares will be
held in treasury and will thereafter be used for the exercise of employee stock
options and for other valid corporate purposes.
In our opinion, cash flows from operations and capital resources will be
sufficient to meet debt service and working capital needs during fiscal 2001,
and thereafter for the foreseeable future. However, we cannot ensure that our
business groups will generate sufficient cash flow from operations, that
currently anticipated cost savings and operating improvements will be realized
on schedule or at all, 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. We cannot ensure that we will be able to
refinance any indebtedness, including our credit facility, on commercially
reasonable terms, or at all.
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign environmental protection
laws and regulations with respect to our business operations and believe we are
operating in substantial compliance with, or taking actions aimed at ensuring
compliance with, such laws and regulations. We are involved in several legal
actions with various governmental agencies related to environmental matters.
While it is difficult to quantify the potential financial impact of actions
involving 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; however, there can be
no assurance that the resolution of these matters will not materially affect
future quarterly or annual operating results. Additional information on
environmental matters affecting us is provided in Note 9 to the Company's
unaudited Condensed, Consolidated Financial Statements as of and for the six
months ended March 31, 2001 and in the fiscal 2000 Annual Report on Form 10-K
under the "ITEM 1. BUSINESS -- ENVIRONMENTAL AND REGULATORY CONSIDERATIONS" and
"ITEM 3. LEGAL PROCEEDINGS" sections.
ENTERPRISE RESOURCE PLANNING ("ERP")
In July 1998, we announced a project designed to bring our information system
resources in line with our current strategic objectives. The project includes
the redesign of certain key business processes in connection with the
installation of new software. SAP was selected as the primary software provider
for this project. As of October 1, 2000, all of the North American businesses
with the exception of Canada were operating under the new system. Through March
31, 2001, we spent approximately $55.1 million on the project, approximately 75%
of which has been capitalized and will be amortized over a period of four to
eight years. We are currently evaluating when, and to what extent, the new
information systems and applications will be implemented at our international
locations.
EURO
A new currency called the "euro" has been introduced in certain Economic and
Monetary Union (EMU) countries. During 2002, all EMU countries are expected to
be operating with the euro as their single currency. Uncertainty exists as to
the effects the euro currency will have on the marketplace. We are assessing the
impact the EMU formation and euro implementation will have on our internal
systems and the sale of our products. We are in the process of developing our
plans and contracts for work to be performed to implement utilization of the
euro as required at our operations in continental Europe. We expect that a
significant portion of the costs associated with this work will be incurred
during fiscal 2001; however, some costs will likely be incurred in
32
33
the first quarter of fiscal 2002 as well. We estimate that the cost related to
addressing this issue will be $1.5-$2.0 million; however, there can be no
assurance that the ultimate costs related to this issue will not exceed this
estimate.
33
34
MANAGEMENT'S OUTLOOK
Results for the first six months of fiscal 2001 are in line with management's
expectations and we believe we are well positioned to continue our trend of
significant sales and earnings growth. We are coming off a very strong fiscal
2000 as we reported record sales of $1.76 billion, grew diluted earnings per
share by at least 20% for the fourth consecutive year (on a pro forma basis,
excluding extraordinary items and the impact of the early conversion of the
Class A Convertible Preferred Stock) and established or maintained what we
believe to be the number one market share position in most of the significant
lawn and garden categories across the world. The performance in fiscal 2000
reflected the successful continuation of our emphasis on consumer-oriented
marketing efforts to pull demand through distribution channels.
Looking forward, we maintain the following broad tenets to our strategic plan:
(1) Promote and capitalize on the strengths of the Scotts(R),
Miracle-Gro(R), Hyponex(R) and Ortho(R) industry-leading
brands, as well as our portfolio of powerful brands in our
international markets. This involves a commitment to our retail
partners that we will support these brands through advertising
and promotion unequaled in the lawn and garden consumables
market. In the Professional categories, it signifies a
commitment to customers to provide value as an integral element
in their long-term success;
(2) Commit to continuously study and improve knowledge of the
market, the consumer and the competition;
(3) Simplify product lines and business processes, to focus on
those that deliver value, evaluate marginal ones and eliminate
those that lack future prospects; and
(4) Achieve world leadership in operations, leveraging technology
and know-how to deliver outstanding customer service and
quality.
Scotts anticipates that we will continue to deliver significant revenue and
earnings growth through emphasis on executing our strategic plan. We believe
that we can continue to generate annual sales growth of 6% to 8% in our core
businesses and annual earnings growth of at least 15%. In addition, we have
targeted improving our return on invested capital. We believe that we can
achieve our goal of realizing a return of 13.5% on our invested capital (our
estimate of the average return on invested capital for our consumer products
peer group) in the next four years. We expect to achieve this goal by reducing
our overhead spending, tightening capital spending controls, implementing return
on capital measures into our incentive compensation plans and accelerating
operating performance and gross margin improvements utilizing our new Enterprise
Resource Planning capabilities in North America.
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 our Annual Report, Forms 10-K and 10-Q and in other
contexts relating to future growth and profitability targets, and strategies
designed to increase total shareholder value. Forward-looking statements
include, but are not limited to, information regarding our future economic
performance 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.
The forward-looking statements that we make in our Annual Report, Forms 10-K and
10-Q and in other contexts represent challenging goals for our 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
34
35
forward-looking statements we make are described below. All forward-looking
statements attributable to us or persons working on our behalf are expressly
qualified in their entirety by the following cautionary statements:
- ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT OUR FINANCIAL
RESULTS.
Weather conditions in North America and Europe have a
significant impact on the timing of sales in the spring selling
season and overall annual sales. Periods of wet weather can
slow fertilizer sales, while periods of dry, hot weather can
decrease pesticide sales. In addition, an abnormally cold
spring throughout North America and/or Europe could adversely
affect both fertilizer and pesticides sales and therefore our
financial results.
- OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO MAKE
INTEREST PAYMENTS ON INDEBTEDNESS.
Because our products are used primarily in the spring and
summer, our business is highly seasonal. For the past two
fiscal years, approximately 70% to 75% of our sales have
occurred in the second and third fiscal quarters combined. Our
working capital needs and our borrowings peak during our first
fiscal quarter because we are generating fewer revenues while
incurring expenditures in preparation for the spring selling
season. If cash on hand is insufficient to cover interest
payments due on our indebtedness at a time when we are unable
to draw on our credit facility, this seasonality could
adversely affect our ability to make interest payments as
required by our indebtedness. Adverse weather conditions could
heighten this risk.
- PUBLIC PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE
NOT SAFE COULD ADVERSELY AFFECT US.
We manufacture and market a number of complex chemical
products, such as fertilizers, herbicides and pesticides,
bearing one of our brands. On occasion, customers allege that
some of these products fail to perform up to expectations or
cause damage or injury to individuals or property. Public
perception that our products are not safe, whether justified or
not, could impair our reputation, damage our brand names and
materially adversely affect our business.
- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS.
Our substantial indebtedness could:
- make it more difficult for us to satisfy our
obligations;
- increase our vulnerability to general adverse economic
and industry conditions;
- limit our ability to fund future working capital,
capital expenditures, research and development costs
and other general corporate requirements;
- require us to dedicate a substantial portion of cash
flow from operations to payments on our indebtedness,
which would reduce the cash flow available to fund
working capital, capital expenditures, research and
development efforts and other general corporate
requirements;
- limit our flexibility in planning for, or reacting to,
changes in our business and the industry in which we
operate;
- place us at a competitive disadvantage compared to our
competitors that have less debt; and
- limit our ability to borrow additional funds.
35
36
If we fail to comply with any of the financial or other
restrictive covenants of our indebtedness, our indebtedness
could become due and payable in full prior to its stated due
date. We cannot be sure that our lenders would waive a default
or that we could pay the indebtedness in full if it were
accelerated.
- TO SERVICE OUR INDEBTEDNESS, WE WILL REQUIRE A SIGNIFICANT
AMOUNT OF CASH, WHICH WE MAY NOT BE ABLE TO GENERATE.
Our ability to make payments on and to refinance our
indebtedness and to fund planned capital expenditures and
research and development efforts will depend on our ability to
generate cash in the future. This, to some extent, is subject
to general economic, financial, competitive, legislative,
regulatory and other factors that are beyond our control. We
cannot assure that our business will generate sufficient cash
flow from operations or that currently anticipated cost savings
and operating improvements will be realized on schedule or at
all. We also cannot assure that future borrowings will be
available to us under our credit facility in amounts sufficient
to enable us to pay our indebtedness or to fund other liquidity
needs. We may need to refinance all or a portion of our
indebtedness, on or before maturity. We cannot assure that we
will be able to refinance any of our indebtedness on
commercially reasonable terms or at all.
- WE MIGHT NOT BE ABLE TO INTEGRATE OUR RECENT ACQUISITIONS INTO
OUR BUSINESS OPERATIONS SUCCESSFULLY.
We have made several substantial acquisitions in the past four
years. The acquisition of the Ortho business represents the
largest acquisition we have ever made. The success of any
completed acquisition depends on our ability to effectively
integrate the acquired business. We believe that our recent
acquisitions provide us with significant cost saving
opportunities. However, if we are not able to successfully
integrate Ortho, Rhone-Poulenc Jardin or our other acquired
businesses, we will not be able to maximize such cost saving
opportunities. Rather, the failure to integrate these acquired
businesses, because of difficulties in the assimilation of
operations and products, the diversion of management's
attention from other business concerns, the loss of key
employees or other factors, could materially adversely affect
our financial results.
- BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF
RETAIL CUSTOMERS, THE LOSS OF ONE OR MORE OF OUR TOP CUSTOMERS
COULD ADVERSELY AFFECT OUR FINANCIAL RESULTS.
Our top 10 North American retail customers together accounted
for approximately 56.5% of our fiscal 2000 sales and 41% of our
outstanding accounts receivable as of September 30, 2000. Our
top three customers, Home Depot, Wal*Mart and Kmart represented
approximately 22.9%, 8.9% and 8.2% of our fiscal 2000 sales.
These customers hold significant positions in the retail lawn
and garden market. The loss of, or reduction in orders from,
Home Depot, Wal*Mart, Kmart or any other significant customer
could have a material adverse effect on our business and our
financial results, as could customer disputes regarding
shipments, fees, merchandise condition or related matters. Our
inability to collect accounts receivable from any of these
customers could also have a material adverse affect.
- IF MONSANTO OR WE WERE TO TERMINATE THE MARKETING AGREEMENT FOR
CONSUMER ROUNDUP(R) PRODUCTS, WE WOULD LOSE A SUBSTANTIAL
SOURCE OF FUTURE EARNINGS.
If we were to commit a serious default under the marketing
agreement with Monsanto for consumer Roundup(R) products,
Monsanto may have the right to terminate the agreement. If
Monsanto were to terminate the marketing agreement rightfully,
or if we were to terminate the agreement without appropriate
cause, we would not be entitled to any termination fee, and we
would lose all, or a significant portion, of the significant
source of earnings we believe the marketing agreement provides.
Monsanto may also terminate the marketing agreement within a
given region, including North America, without paying us a
termination fee if sales to consumers in that region decline:
36
37
- Over a cumulative period of three fiscal years; or
- By more than 5% for each of two consecutive fiscal
years.
Monsanto may not terminate the marketing agreement,
however, if we can demonstrate that the sales decline
was caused by a severe decline of general economic
conditions or a severe decline in the lawn and garden
market in the region rather than by our failure to
perform our duties under the agreement.
- THE EXPIRATION OF PATENTS RELATING TO ROUNDUP(R) AND THE SCOTTS
TURF BUILDER(R) LINE OF PRODUCTS COULD SUBSTANTIALLY INCREASE
OUR COMPETITION IN THE UNITED STATES.
Glyphosate, the active ingredient in Roundup(R), is covered by
a patent in the United States that expired in September 2000.
Scotts cannot predict the success of Roundup(R) now that
glyphosate is no longer patented. Substantial new competition
in the United States could adversely affect Scotts. Glyphosate
is no longer subject to patent in Europe and is not subject to
patent in Canada. While sales of Roundup(R) in such countries
have continued to increase despite the lack of patent
protection, sales in the United States may decline as a result
of increased competition. Any such decline in sales would
adversely affect Scott's financial results through the
reduction of commissions as calculated under the Roundup(R)
marketing agreement.
Our methylene-urea product composition patent, which covers
Scotts Turf Builder(R), Scotts Turf Builder(R) with Plus 2(TM)
Weed Control and Scotts Turf Builder(R) with Halts(R) Crabgrass
Preventer, is due to expire in July 2001, which could also
result in increased competition. Any decline in sales of Turf
Builder(R) products after the expiration of the methylene-urea
product composition patent could adversely affect our financial
results.
- THE INTERESTS OF THE FORMER MIRACLE-GRO SHAREHOLDERS COULD
CONFLICT WITH THOSE OF OUR OTHER SHAREHOLDERS.
The former shareholders of Stern's Miracle-Gro Products, Inc.,
through Hagedorn Partnership, L.P., beneficially own
approximately 42% of the outstanding common shares of Scotts on
a fully diluted basis. The former Miracle-Gro shareholders have
sufficient voting power to significantly control the election
of directors and the approval of other actions requiring the
approval of our shareholders. The interests of the former
Miracle-Gro shareholders could conflict with those of our other
shareholders.
- COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH
REGULATIONS COULD INCREASE OUR COST OF DOING BUSINESS.
Local, state, federal and foreign laws and regulations relating
to environmental matters affect us in several ways. All
products containing pesticides must be registered with the U.S.
Environmental Protection Agency ("USEPA") and, in many cases,
with similar state and/or foreign agencies before they can be
sold. The inability to obtain or the cancellation of any
registration could have an adverse effect on us. The severity
of the effect would depend on which products were involved,
whether another product could be substituted and whether our
competitors were similarly affected. We attempt to anticipate
regulatory developments and maintain registrations of, and
access to, substitute chemicals. We may not always be able to
avoid or minimize these risks.
The Food Quality Protection Act, enacted by the U.S. Congress
in August 1996, establishes a standard for food-use pesticides,
which is that a reasonable certainty of no harm will result
from the cumulative effect of pesticide exposures. Under this
act, the USEPA is evaluating the cumulative risks from dietary
and non-dietary exposures to pesticides. The pesticides in
Scotts' products, which are also used on foods, will be
evaluated by the USEPA as part of this non-dietary exposure
risk assessment. It is possible that the USEPA or the active
37
38
ingredient registrant may decide that a pesticide Scotts uses
in its products would be limited or made unavailable to Scotts.
We cannot predict the outcome or the severity of the effect of
the USEPA's continuing evaluations. We believe that we should
be able to obtain substitute ingredients if selected pesticides
are limited or made unavailable, but there can be no assurance
that we will be able to do so for all products.
Regulations regarding the use of some pesticide and fertilizer
products may include requirements that only certified or
professional users apply the product or that the products be
used only in specified locations. Users may be required to post
notices on properties to which products have been or will be
applied and may be required to notify individuals in the
vicinity that products will be applied in the future. Even if
we are able to comply with all such regulations and obtain all
necessary registrations, we cannot assure that our products,
particularly pesticide products, will not cause injury to the
environment or to people under all circumstances. The costs of
compliance, remediation or products liability have adversely
affected operating results in the past and could materially
affect future quarterly or annual operating results.
The harvesting of peat for our growing media business has come
under increasing regulatory and environmental scrutiny. In the
United States, state regulations frequently require us to limit
our harvesting and to restore the property to its intended use.
In some locations we have been required to create water
retention ponds to control the sediment content of discharged
water. In the United Kingdom, our peat extraction efforts are
also the subject of legislation, and in the European Union, are
the subject of conservation proposals. Since 1990, we have been
involved in litigation with the Philadelphia District of the
U.S. Army Corps of Engineers involving our peat harvesting
operations at Hyponex's Lafayette, New Jersey facility. The
Corps of Engineers is seeking a permanent injunction against
harvesting and civil penalties in an unspecified amount.
The European Commission's Habitat Directive ("the Directive")
provides that each European Member State must compile a list
of areas containing habitats and species of European interest,
and sets out scientific criteria for identifying such areas.
Lists of proposed areas are submitted by Member States to the
European Commission as candidate Special Areas of Conservation
(SAC). If ultimately accepted by the Commission, an area will
be designated by its Member State. In August 2000, the nature
conservation advisory body to the U.K. Government notified
Scotts' U.K. subsidiary that three of its peat harvesting
sites in the U.K. were under consideration as candidate SAC's
because of their European interest as "degraded raised peat
bogs capable of natural regeneration". Management is
challenging consideration of our peat harvesting sites as
potential candidate SAC's, since we believe they do not meet
the scientific criteria laid out in the Directive. The Company
has recently submitted a scientific report to the nature
conservation advisory body of the U.K. Government detailing
objections to such proposals. If our objections are not
resolved through a process of consultation, the U.K.
Government may decide to submit the sites to the European
Commission. Upon submission, the sites become candidate SAC's
under U.K. law. The peat harvesting sites in the U.K. are
operated under mineral planning consents issued by local
planning authorities. Following possible submission by the
U.K. Government of the harvesting sites as candidate SAC's,
these local planning authorities will be required to review
the impact of activities likely to affect these areas. If
these authorities determine that harvesting activity will
damage the features of European interest on the sites, then
they may modify or revoke the mineral planning consents. Where
a planning consent is altered or revoked by a local planning
authority, legislation requires compensation to be paid to
those affected.
In addition to the regulations already described, local, state,
federal, and foreign agencies regulate the disposal, handling
and storage of waste, air and water discharges from our
facilities. In June 1997, the Ohio Environmental Protection
Agency ("EPA") gave us formal notice of an enforcement action
concerning our old, decommissioned wastewater treatment plants
that had once operated at our Marysville facility. The Ohio EPA
action alleges surface water violations relating to possible
historical sediment contamination, inadequate treatment
capabilities at our existing and currently permitted wastewater
treatment plants and the need for
38
39
corrective action under the Resource Conservation Recovery Act.
We are continuing to meet with the Ohio EPA and the Ohio
Attorney General's office to negotiate an amicable resolution
of these issues. We are currently unable to predict the
ultimate outcome of this matter.
During fiscal 2000, we made approximately $1.2 million in
environmental capital expenditures and $1.8 million in other
environmental expenses, compared with approximately $1.1
million in environmental capital expenditures and $5.9 million
in other environmental expenses in fiscal 1999. Management
anticipates that environmental capital expenditures and other
environmental expenses for fiscal 2001 will not differ
significantly from those incurred in fiscal 2000. If we are
required to significantly increase our actual environmental
capital expenditures and other environmental expenses, it could
adversely affect our financial results.
- THE IMPLEMENTATION OF THE EURO CURRENCY IN SOME EUROPEAN
COUNTRIES COULD ADVERSELY AFFECT US.
In January 1999, the "euro" was introduced in some Economic and
Monetary Union (EMU) countries and by 2002, all EMU countries
are expected to be operating with the euro as their single
currency. Uncertainty exists as to the effects the euro
currency will have on the market place. Additionally, the
European Commission has not yet defined and finalized all of
the rules and regulations with regard to the euro currency. We
are still assessing the impact the EMU formation and euro
implementation will have on our internal systems and the sale
of our products. We expect to take appropriate actions based on
the results of our assessment. We estimate that the cost
related to addressing this issue will be $1.5-$2.0 million;
however, there can be no assurance that the ultimate costs
related to this issue will not exceed this estimate.
- OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US MORE
SUSCEPTIBLE TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO
THE COSTS OF INTERNATIONAL REGULATION.
We currently operate manufacturing, sales and service
facilities outside of North America, particularly in the
United Kingdom, Germany and France. Our international
operations have increased with the acquisitions of Levington,
Miracle Garden, Ortho, Rhone-Poulenc Jardin and Substral and
with the marketing agreement for consumer Roundup(R)
products. In fiscal 2000, international sales accounted for
approximately 21% of our total sales. Accordingly, we are
subject to risks associated with operations in foreign
countries, including:
- fluctuations in currency exchange rates;
- limitations on the conversion of foreign currencies
into U.S. dollars;
- limitations on the remittance of dividends and other
payments by foreign subsidiaries;
- additional costs of compliance with local regulations;
and
- historically, higher rates of inflation than in the
United States.
The costs related to our international operations could
adversely affect our operations and financial results in the
future.
39
40
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As noted in Note 9 to the Company's unaudited Condensed,
Consolidated Financial Statements as of and for the period
ended March 31, 2001, the Company is involved in several
pending legal and environmental matters. Pending other material
legal proceedings are as follows:
Rhone-Poulenc, S.A., Rhone-Poulenc Agro S.A. and Hoechst, A.G.
On October 15, 1999, the Company began arbitration proceedings
before the International Court of Arbitration of the
International Chamber of Commerce (the "ICA") against
Rhone-Poulenc S.A. and Rhone-Poulenc Agro S.A. (collectively,
"Rhone-Poulenc") under arbitration provisions contained in
contracts relating to the purchase by the Company of
Rhone-Poulenc's European lawn and garden business,
Rhone-Poulenc Jardin, in 1998. The Company alleged that the
combination of Rhone-Poulenc and Hoechst Schering AgrEvo GmbH
("AgrEvo") into a new entity, Aventis S.A., would result in the
violation of non-compete and other provisions in the contracts
mentioned above.
On October 9, 2000, the ICA issued a First Partial Award by the
Tribunal which, inter alia, (i) found that Rhone-Poulenc
breached its duty of good faith under French law by not
disclosing to the Company the contemplated combination of
Rhone-Poulenc and AgrEvo, (ii) directed that the parties
re-negotiate a non-compete provision, and (iii) ruled that a
research and development agreement entered into ancillary to
the purchase of Rhone-Poulenc Jardin is binding upon both
Rhone-Poulenc and its post-merger successor. On February 12,
2001, because of the parties' failure to agree on revisions to
the non-compete provision, the ICA issued a Second Partial
Award by the Tribunal revising that provision. A damages
hearing has been scheduled to begin July 2, 2001.
Also on October 15, 1999, the Company filed a complaint styled
The Scotts Company, et al. v. Rhone-Poulenc, S.A.,
Rhone-Poulenc Agro S.A. and Hoechst, A.G. in the Court of
Common Pleas for Union County, Ohio, seeking injunctive relief
maintaining the status quo in aid of the arbitration
proceedings as well as an award of damages against Hoechst for
Hoechst's tortious interference with the Company's contractual
rights. On October 19, 1999, the defendants removed the Union
County action to the United States District Court for the
Southern District of Ohio. On December 8, 1999, the Company
requested that this action be stayed pending the outcome of the
arbitration proceedings.
Scotts v. AgrEvo USA Company
The Company filed suit against AgrEvo USA Company on August 8,
2000 in the Court of Common Pleas for Union County, Ohio,
alleging breach of contract relating to an Agreement dated June
22, 1998 entitled "Exclusive Distributor Agreement -
Horticulture". The action seeks an unspecified amount of
damages resulting from AgrEvo's breaches of the Agreement, an
order of specific performance directing AgrEvo to comply with
its obligations under the Agreement, a declaratory judgment
that the Company's future performance under the Agreement is
waived as a result of AgrEvo's failure to perform, and such
other relief to which the Company might be entitled. This
action was dismissed without prejudice on February 6, 2001,
pending the outcome of settlement discussions.
The Company is involved in other lawsuits and claims which
arise in the normal course of its business. In the opinion of
management, these claims individually and in the aggregate are
not expected to result in a material adverse effect on the
Company's financial position or operations.
ITEM 5. OTHER INFORMATION
On May 10, 2001, the Company's Board of Directors elected James
Hagedorn as the Company's President and Chief Executive
Officer. Mr. Hagedorn succeeds Charles M. Berger as CEO, who
will continue to serve as Chairman of the Board. Mr. Hagedorn
had served as the Company's President and Chief Operating
Officer since April 2001, and is also a member of the Company's
Board of Directors.
40
41
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) See Exhibit Index at page 43 for a list of the
exhibits included herewith.
(b) The Registrant filed no Current Reports on Form 8-K
during the quarter covered by this Report.
41
42
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 COMPANY
/S/ CHRISTOPHER L. NAGEL
--- --------------------
Date: May 15th, 2001 Principal Accounting Officer,
Vice President and Corporate
Controller
42
43
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED MARCH 31, 2001
EXHIBIT INDEX
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- ------ ----------- ------
10(w) Letter Agreement dated March 21, 2001, pertaining to:
amendment to Employment Agreement, dated as of
August 7, 1998, between the Registrant and Charles M.
Berger; and employment of Mr. Berger through
January 16, 2003 *
* Filed herewith
43