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 June 29, 1996
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 0-19768
THE SCOTTS COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-1199481
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14111 Scottslawn Road
Marysville, Ohio 43041
(Address of principal executive offices)
(Zip Code)
(513) 644-0011
(Registrant's telephone number, including area code)
No change
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
18,575,021 Outstanding at August 5, 1996
- --------------------------------------------- -----------------------------
Common Shares, voting, no par value
Page 1 of 19 pages
Exhibit Index at page 17
<PAGE>
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income - Three month and nine
month periods ended July 1, 1995 and June 29, 1996 ............... 3
Consolidated Statements of Cash Flows - Nine month
periods ended July 1, 1995 and June 29, 1996 ..................... 4
Consolidated Balance Sheets - July 1, 1995,
June 29, 1996 and September 30, 1995 ............................. 5
Notes to Consolidated Financial Statements ...................... 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ................... 11-14
Part II. Other Information:
Item 6. Exhibits and Reports on Form 8K ............................ 15
Signatures ............................................................ 16
Exhibit Index ......................................................... 17
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except per share data)
<TABLE>
Three Months Ended Nine Months Ended
------------------- -------------------
July 1 June 29 July 1 June 29
1995 1996 1995 1996
------ ------- ------ -------
<S> <C> <C> <C> <C>
Net sales .......................... $ 229,028 $ 247,965 $ 563,139 $ 617,117
Cost of sales ...................... 120,515 133,122 297,925 332,671
--------- --------- --------- ---------
Gross profit ....................... 108,513 114,843 265,214 284,446
--------- --------- --------- ---------
Marketing .......................... 34,627 44,805 95,537 116,530
Distribution ....................... 35,714 32,748 80,733 77,939
General and administrative ......... 7,344 7,785 20,308 24,811
Research and development ........... 2,515 2,420 8,243 7,988
Amortization of goodwill and ....... 1,571 2,199 3,798 6,607
other intangibles
Other income ....................... (511) (291) (185) (886)
Unusual expenses ................... -- 3,322 -- 8,553
--------- --------- --------- ---------
Income from operations ............. 27,253 21,855 56,780 42,904
Interest expense ................... 6,838 6,911 20,646 21,630
--------- --------- --------- ---------
Income before income taxes ......... 20,415 14,944 36,134 21,274
Income taxes ....................... 7,389 7,338 13,912 10,212
--------- --------- --------- ---------
Net income ......................... 13,026 7,606 22,222 11,062
Preferred stock dividend ........... 1,122 2,438 1,122 7,313
--------- --------- --------- ---------
Income available to common ......... $ 11,904 $ 5,168 $ 21,100 $ 3,749
shareholders ..................... ======== ==== ======== ======
Income per common share (Note 7) ... $ .55 $ .26 $ 1.09 $ .20
========= ========= ========= =========
Common shares used in net
income per common share computation 23,580 29,352 20,380 19,068
========= ========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
Page 3
<PAGE>
<TABLE>
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
-----------------
July 1 June 29
1995 1996
------ -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ........................................... $ 22,222 $ 11,062
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization .................. 18,427 22,067
Equity in income of affiliates ................. -- (349)
Postretirement benefits ........................ 242 135
Unusual charges, net ........................... -- 6,734
Net increase (decrease) in certain
components of working capital .............. (15,036) 30,294
Net change in other assets and
liabilities and other adjustments .......... (203) 6,384
--------- --------
Net cash provided by operating activities 25,652 76,327
--------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment, net ............... (15,697) (10,972)
Investment in Affiliate (250)
Cash acquired in merger with Miracle-Gro ............. 6,448
-------- --------
Net cash used in investing activities ... (9,499) (10,972)
--------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term debt ........................... 113,500 --
Payments on term and other debt ...................... (1,353) (276)
Revolving lines of credit and bank line of credit, net (128,121) (49,657)
Purchase of Common Shares ............................ -- (4,176)
Issuance of Common Shares ............................ -- 7,406
Deferred financing costs incurred .................... (473) --
Dividends on preferred stock ......................... (1,122) (7,313)
--------- --------
Net cash used in financing activities ... (17,569) (54,016)
--------- --------
Effect of exchange rate changes on cash ................ 1,393 (1,458)
--------- --------
Net (decrease) increase in cash ........................ (23) 9,881
Cash at beginning of period ............................ 10,695 7,028
--------- --------
Cash at end of period .................................. $ 10,672 $ 16,909
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount capitalized ............. $ 17,610 $ 18,158
Income taxes paid .................................... 10,855 3,799
Detail of Miracle-Gro merger transactions:
Fair value of assets acquired ...................... 235,564 --
Liabilities assumed ................................ (39,875) --
Class A Convertible Preferred Stock issued
in Miracle-Gro merger transactions ............. (177,255) --
Warrants issued in Miracle-Gro merger transactions . (14,434) --
See Notes to Consolidated Financial Statements
</TABLE>
Page 4
<PAGE>
<TABLE>
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
Unaudited
--------------
July 1 June 29 September 30
1995 1996 1995
------ ------- ------------
<S> <C> <C> <C>
Current Assets:
Cash ................................................... $ 10,672 $ 16,909 $ 7,028
Accounts receivable, less allowances
of $4,313, $5,153 and $3,406, respectively ........... 142,309 124,290 176,525
Inventories, net ....................................... 155,550 157,495 143,953
Prepaid and other assets ............................... 20,838 21,958 23,354
--------- --------- ---------
Total current assets ................................. 329,369 320,652 350,860
--------- --------- --------
Property, plant and equipment, net ....................... 145,721 143,331 148,754
Trademarks ............................................... 89,469 87,561 89,250
Other intangibles, net ................................... 25,932 20,812 24,421
Goodwill ................................................. 185,810 181,380 179,988
Other assets ............................................. 20,858 14,244 15,772
--------- --------- ---------
Total Assets ......................................... $ 797,159 $ 767,980 $ 809,045
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line .................................. $ 14,545 $ 1,811 $ 97
Current portion of term debt ........................... 508 -- 421
Accounts payable ....................................... 62,820 54,019 63,207
Accrued liabilities .................................... 38,874 47,087 41,409
Accrued taxes .......................................... 17,925 26,092 18,728
--------- --------- ---------
Total current liabilities ............................ 134,672 129,009 123,862
--------- --------- ---------
Term debt, less current portion .......................... 243,041 220,799 272,025
Postretirement benefits other than pensions .............. 27,256 27,324 27,159
Other liabilities ........................................ 7,929 5,036 5,209
--------- --------- ---------
Total Liabilities .................................... 412,898 382,168 428,255
--------- ---------- ---------
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value ...... 177,255 177,255 177,255
Common Shares, no par value ............................ 211 211 211
Capital in excess of par value ......................... 207,569 207,572 207,551
Retained earnings ...................................... 34,975 36,423 32,672
Cumulative translation adjustments ..................... 5,692 2,110 4,082
Treasury stock, 2,415 shares on
July 1, 1995, 2,184 shares on
June 29, 1996 and 2,388 shares
on September 30, 1995 at cost ........................ (41,441) (37,759) (40,981)
--------- ---------- --------
Total Shareholders' Equity ........................... 384,261 385,812 380,790
--------- ---------- --------
Total Liabilities and Shareholders' Equity ........... $ 797,159 $ 767,980 $ 809,045
========= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
Page 5
<PAGE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
The Scotts Company ("Scotts") and its wholly owned subsidiaries,
Hyponex Corporation ("Hyponex"), Republic Tool and Manufacturing Corp.
("Republic"), Scotts-Sierra Horticultural Products Company ("Sierra") and
Scotts' Miracle-Gro Products, Inc. ("Miracle-Gro"), (collectively, the
"Company"), are engaged in the manufacture and sale of lawn care and
garden products. All material intercompany transactions have been
eliminated.
The consolidated balance sheets as of July 1, 1995 and June 29,
1996, the related consolidated statements of income for the three and
nine month periods ended July 1, 1995 and June 29, 1996 and the related
consolidated statements of cash flows for the nine month periods ended
July 1, 1995 and June 29, 1996 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, results of
operations and cash flows. 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 Exchange Act of 1934, and
should be read in conjunction with the financial statements and
accompanying notes in the Company's fiscal 1995 Annual Report on Form
10-K/A.
2. Inventories
(in thousands)
Inventories, net of allowances of $5,736, $6,782 and $6,711,
consisted of:
July 1 June 29 September 30
1995 1996 1995
------ ------- ------------
Raw materials $ 66,246 $ 51,318 $ 71,431
Finished products 89,304 106,177 72,522
-------- ------- --------
Total Inventories $155,550 $157,495 $143,953
======= ======= =======
3. Foreign Exchange Instruments
The Company enters into forward foreign exchange and currency
options contracts to hedge its exposure to fluctuations in foreign
currency exchange rates. These contracts generally involve the exchange
of one currency for a second currency at some future date. Counterparties
to these contracts are major financial institutions. Gains and losses on
these contracts generally offset gains and losses on the assets,
liabilities and transactions being hedged.
Realized and unrealized foreign exchange gains and losses are
recognized and offset foreign exchange gains or losses on the underlying
exposure. Unrealized gains and losses that are designated and effective
as hedges on such transactions are deferred and recognized in income in
the same period as the hedged transactions. The net unrealized gain
deferred totaled $190,812 at June 29, 1996.
At June 29, 1996, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch Guilder.
These currencies are: the Australian Dollar, Belgian Franc, German Mark,
Spanish Peseta, Italian Lira, French Franc, British Pound and the U. S.
Dollar. The Company's U. S. operations have foreign exchange rate risk in
the Canadian Dollar, the Dutch Guilder and the British Pound which are
tied to the U. S. Dollar.
Page 6
<PAGE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of June 29, 1996, the Company had outstanding forward foreign
exchange contracts with a contract value of approximately $12.8 million
and outstanding purchased currency options with a contract value of
approximately $2.0 million. These contracts have maturity dates ranging
from July 3, 1996 to October 2, 1996.
4. Acquisitions
Effective May 19, 1995, the Company completed the merger
transactions with Stern's Miracle-Gro Products, Inc. and affiliated
companies (the "Miracle-Gro Companies"). The ultimate surviving
corporation is now known as Scotts' Miracle-Gro Products, Inc.
("Miracle-Gro"). Miracle-Gro is engaged in the marketing and distribution
of plant foods and lawn and garden products primarily in the United
States, Canada and Europe.
The following pro forma results of operations give effect to the
Miracle-Gro Companies merger transactions as if they had occurred on
October 1, 1994.
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
July 1, July 1,
1995 1995
------ ------
Net sales $ 257,874 $ 651,491
======= =======
Net income $ 14,992 $ 32,809
======= =======
Income per common share $ .51 $ 1.13
======= =======
For purposes of computing net income per common share, Scotts' Class
A Convertible Preferred Stock is considered a common stock equivalent.
Pro forma primary net income per common share for the three months and
nine months ended July 1, 1995 are calculated using the weighted average
common shares outstanding of 29,282,000 and 29,098,000, respectively.
The pro forma information provided does not purport to be indicative
of actual results of operations if the merger transactions with the
Miracle-Gro Companies had occurred as of October 1, 1994, and is not
intended to be indicative of future results or trends.
5. Accounting Issues
In December 1995, the Financial Accounting Standards Board issued
SFAS No. 123, "Accounting for Stock-Based Compensation" which changes the
measurement, recognition and disclosure standards for stock-based
compensation. Management is currently evaluating the provisions of SFAS
No. 123 and at this time, the effects of adoption of SFAS No. 123 and the
related disclosures have not been determined.
6. Unusual Items
For the nine months ended June 29, 1996, the Company recorded
unusual charges of $8.6 million, of which $4.5 million was related to the
closure of idle facilities and asset write-downs, and $4.1 million was
employee severance expenses. These non-recurring charges arose as a
direct result of management's commitment to reduce costs and achieve more
profitable growth. As of June 29, 1996 approximately $2.2 million
remained in accrued liabilities related to these charges. It is currently
anticipated the remaining balance will be expended by the end of fiscal
1996.
Page 7
<PAGE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<TABLE>
7. Earnings Per Share Computation
The following table presents information necessary to calculate net
income per common share.
Three Months Ended Nine Months Ended
(in thousands except per share data) July 1, June 29, July 1, June 29,
1995 1996 1995 1996
------- -------- ------- --------
<S> <C> <C> <C> <C>
Net income ............................. $13,026 $ 7,606 $22,222 $11,062
Class A Convertible Preferred
Stock dividend ..................... 7,313
------- ------- ------- -------
Income used in net income per
common share calculation ........... $13,026 $ 7,606 $22,222 $ 3,749
======= ======= ======= =======
Weighted average common shares
outstanding during the period ...... 18,667 18,941 18,667 18,832
Assuming conversion of Class A
Convertible Preferred Stock ........ 4,562 10,263 1,520 --
Assuming exercise of options
using the Treasury Stock ........... 351 148 193 236
------- ------- ------- -------
Method
Weighted average number of common
shares outstanding as adjusted ..... 23,580 29,352 20,380 19,068
======= ======= ======= =======
Income per common share ............... $ .55 $ .26 $ 1.09 $ .20
======= ======= ======= =======
</TABLE>
The earnings per share computation is based on the weighted average
number of common shares and common share equivalents (stock options,
Class A Convertible Preferred Stock and warrants) outstanding each
period. The shares of Class A Convertible Preferred Stock were issued in
connection with the Miracle-Gro merger transactions on May 19, 1995.
These shares were not considered in the earnings per share computation
for the nine months ended June 29, 1996 because they were antidilutive
for such period.
Fully diluted net income per common share is not materially different
from primary net income per common share.
8. Common Stock Purchase
In May 1996, the Board of Directors authorized the purchase of up to
550,000 of the Company's common shares in the open market. The common
shares will be held as treasury shares and will be used for the exercise
of employee stock options. As of June 29, 1996, 227,300 common shares
have been repurchased for an aggregate price of $4.2 million. The
additional 322,700 common shares were purchased by July 24, 1996.
Page 8
<PAGE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. Contingencies
Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of business.
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 details the more significant of the Company's
identified contingencies.
In September 1991, the Company was identified by the Ohio Environmental
Protection Agency (the "Ohio EPA") as a Potentially Responsible Party
("PRP") with respect to a site in Union County, Ohio (the "Hershberger
site") that has allegedly been contaminated by hazardous substances whose
transportation, treatment or disposal the Company allegedly arranged.
Pursuant to a consent order with the Ohio EPA, the Company, together with
four other PRP's identified to date, investigated the extent of
contamination in the Hershberger site. The results of the investigation
were that the site presents a low degree of risk and that the chemical
compounds which contribute to the risk are not compounds used by the
Company. As a result of the joint and several liability of PRP's, the
Company may be subject to financial participation in the costs of the
remediation plan, if any. However, management does not believe any such
obligations would have a significant adverse effect on the Company's
results of operations or financial condition.
In July 1990, the Philadelphia district of the Army Corps of Engineers
directed that peat harvesting operations be discontinued at Hyponex's
Lafayette, New Jersey facility, and the Company complied. In May 1992,
the Department of Justice in the U. S. District Court for the District of
New Jersey, filed suit seeking a permanent injunction against such
harvesting at that facility and civil penalties. The Philadelphia
District of the Corps has taken the position that peat harvesting
activities there require a permit under Section 404 of the Clean Water
Act. If the Corps' position is upheld, it is possible that further
harvesting of peat from this facility would be prohibited. The Company is
defending this suit and is asserting a right to recover its economic
losses resulting from the government's actions. Management does not
believe that the outcome of this case will have a material adverse effect
on the Company's operations or its financial condition. Furthermore,
management believes the Company has sufficient raw material supplies
available such that service to customers will not be adversely affected
by continued closure of this peat harvesting operation.
Sierra is a defendant in a private cost-recovery action relating to the
Novak Sanitary Landfill, located near Allentown, Pennsylvania. By
agreement with W. R. Grace-Conn., Sierra's liability is limited to a
maximum of $200,000 with respect to this site. The Company's management
does not believe that the outcome of this proceeding will have a material
adverse effect on its financial condition or results of operations.
On January 30, 1996, the United States Environmental Protection Agency
(the "U. S. EPA") served a Complaint and Notice of Opportunity for
Hearing upon Sierra's wholly-owned subsidiary, Scotts-Sierra Crop
Protection Company ("Crop Protection"). The Complaint alleged labeling
violations under the Federal Insecticide, Fungicide and Rodenticide Act
("FIFRA") during 1992 and 1993 and proposed penalties totaling $785,000,
the maximum allowable under FIFRA according to management's calculations.
On April 18, 1996, an EPA Administrative Law judge dismissed the EPA's
complaint without prejudice, due to deficiencies in the pleadings.
However, on April 30, 1996, the U.S. EPA filed a second amended complaint
correcting such deficiencies. Based upon Crop Protection's good faith
Page 9
<PAGE>
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
compliance actions and FIFRA's provisions for "gravity-based" penalty
reductions, management believes Crop Protection's maximum liability in
this action to be $200,000. The Company does not believe that the outcome
of this proceeding will have a material adverse effect on its financial
condition or results of operations.
During 1993 and 1994, Stern's Miracle-Gro Products, Inc. ("Miracle-Gro
Products") discussed with Pursell Industries, Inc. ("Pursell") the
feasibility of forming a joint venture to produce and market a line of
slow-release lawn food, and in October 1993, signed a non-binding "heads
of agreement." After the merger transactions between the Company and the
Miracle-Gro Companies were announced, Pursell demanded that Miracle-Gro
Products reimburse it for monies allegedly spent by Pursell in connection
with the proposed project. Because Miracle-Gro Products did not believe
that any such monies were due or that any such joint venture ever was
formed, on February 10, 1995, it instituted an action in the Supreme
Court of the State of New York, Stern's Miracle-Gro Products, Inc. v.
Pursell Industries, Inc. Index No. 95-004131 (Nassau Co.) (the "New York
Action"), seeking declarations that, among other things, Miracle-Gro
Products owed no monies to Pursell relating to the proposed project and
that no joint venture was formed. Pursell moved to dismiss the New York
Action in favor of the Alabama action described below, which motion was
granted August 7, 1995.
On March 2, 1995, Pursell instituted an action in the United States
District Court for the Northern District of Alabama, Pursell Industries,
Inc. v. Stern's Miracle-Gro Products, Inc., CV-95-C-0524-S (the "Alabama
Action"), alleging, among other things, that a joint venture was formed,
that Miracle-Gro Products breached an alleged joint venture contract,
committed fraud, and breached an alleged fiduciary duty owed Pursell by
not informing Pursell of negotiations concerning the merger transactions.
On December 18, 1995, Pursell filed an amended complaint in the Alabama
Action in which Scotts was named as an additional party defendant. The
amended complaint contains a number of allegations and seeks compensatory
damages in excess of $10 million, punitive damages of $20 million, treble
damages as allowed by law and injunctive relief with respect to the
advertising and trade dress allegations. The Company does not believe
that the amended complaint has any merit and intends to vigorously defend
that action.
On April 14, 1996, in response to discussions with Scotts regarding the
possible infringement upon certain Scotts' patents by one or several of
Pursell's controlled-release fertilizers, Pursell instituted a second
action in the United States District Court for the Northern District of
Alabama, Pursell Industries, Inc. v. The Scotts Company, CV-96-AR-931-S
(the "Patent Action"). Pursell has alleged, among other things, that
Scotts' marking of its Poly-S fertilizers with Scotts' patents
constitutes false marking under 35 U.S.C. Sec. 292 and that Scotts'
conduct constitutes unfair competition. The complaint seeks declarations
that, among other things, Scotts' patents are invalid and that Pursell
has not infringed any of Scotts' patents. It further seeks that Scotts be
enjoined from bringing a patent infringement suit against Pursell and
requests that Pursell be awarded its costs of the action and such other
relief as deemed proper. The Company does not believe that this action
has merit and intends to vigorously defend it and to possibly bring
counterclaims against Pursell.
Page 10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company included elsewhere in this
report.
<TABLE>
NET SALES BY BUSINESS GROUP
(in thousands)
Three Months Ended
----------------------------------------------
July 1,1995 June 29, 1996 % Change
----------- ------------- --------
<S> <C> <C> <C>
Consumer Lawn $ 152,326 $ 143,796 (5.6)%
Consumer Garden 20,761 47,819 130.3 %
Professional 39,265 36,903 (6.0)%
International 16,676 19,447 16.6 %
-------- --------
Consolidated $ 229,028 $ 247,965 8.3 %
======= =======
(in thousands)
Nine Months Ended
----------------------------------------------
July 1,1995 June 29, 1996 % Change
----------- ------------- --------
Consumer Lawn $ 380,139 $ 355,277 (6.5)%
Consumer Garden 29,891 107,136 258.4 %
Professional 101,244 98,234 (3.0)%
International 51,865 56,470 8.9 %
-------- --------
Consolidated $ 563,139 $ 617,117 9.6 %
======= =======
</TABLE>
Results of Operations
Three Months Ended June 29, 1996, versus Three Months Ended
July 1, 1995
Net sales increased 8.3% to $248.0 million. The increase is primarily
attributable to the inclusion of Miracle-Gro, partially offset by the
unfavorable impact of a cool, wet spring on all Business Groups and a Consumer
Lawn Business Group promotion program incentivizing retailers to purchase
their spring 1996 requirements in the latter part of 1995 and the first
quarter of 1996. On a pro forma basis, assuming the Miracle-Gro merger
transactions occurred October 1, 1994, net sales decreased by $9.9 million or
3.8%.
The Consumer Lawn Business Group had net sales of $143.8 million, a decrease
of 5.6%. The decrease is attributable to the cool, wet spring and the retailer
promotion program incentivizing early purchases. The retailer promotion
resulted in large trade inventories entering the 1996 selling season. Sales
decreases in fertilizers and organics were partially offset by increased seed
sales. The Consumer Garden Business Group had net sales of $47.8 million, an
increase of 130.3% due principally to the inclusion of Miracle-Gro for the
full period in 1996. Professional Business Group net sales decreased 6.0% to
$36.9 million due to poor weather in its major markets, resulting in decreased
volume. International sales increased 16.6% to $19.4 million, primarily from
increased volume.
Cost of sales represented 53.7% of net sales, up 1.1% compared to 52.6% of net
sales last year. The increase was attributable to higher raw material costs
and higher manufacturing unit costs resulting from lower sales volumes.
Page 11
<PAGE>
Operating expenses increased approximately 14.4% due partially to the
inclusion of Miracle-Gro. Marketing expenses increased 29.4% as a result of
the inclusion of Miracle-Gro, increased national brand advertising and
additional investment in the International business, partially offset by lower
retailer promotions. Distribution expenses decreased 8.3% as a result of a
sales mix including Miracle-Gro, which has a proportionately lower
distribution cost. General and administrative expenses increased 6% due to the
inclusion of Miracle-Gro. Other income decreased 43.1% principally due to net
foreign exchange losses. Amortization of goodwill and other intangibles
increased as a result of the merger with Miracle-Gro. Unusual expenses of $3.3
million were recorded for facility closings and asset write-downs.
The Company's effective tax rate increased from 36.2% to 49.1%. This resulted
from the combination of lower income before taxes and an increase in
nondeductible amortization of goodwill and intangible assets in 1996.
Additionally, the prior year's tax rate included a one-time benefit associated
with the disposition of the Peter's consumer water soluble fertilizer business
in 1995.
Net income of $7.6 million decreased $5.4 million from 1995. Among the
significant items impacting 1996 results were the positive impact of
Miracle-Gro, offset by lower Consumer Lawn and Professional sales volumes,
$3.3 million of charges for the facility closing and asset write-downs and
higher effective tax rate.
Nine Months Ended June 29, 1996 versus Nine Months Ended July 1, 1995
Net sales increased to $617.1 million, up 9.6%. The increase is primarily
attributable to the inclusion of Miracle-Gro, partially offset by the
unfavorable impact of the extended cool, wet spring on all Business Groups, a
Consumer Lawn Business Group promotion program which incentivized retailers to
purchase spring requirements in the latter part of 1995 and the first quarter
of 1996, and the divestiture of the Peter's U.S. consumer water soluble
fertilizer business. On a pro forma basis, net sales decreased by $34.4
million or 5.3%.
Consumer Lawn Business Group had net sales of $355.3 million, a decrease of
6.5%. The decrease is attributable to the retailer promotion program which
resulted in unusually large trade inventories entering the 1996 selling season
and unfavorable spring weather in most parts of the country. Sales decreases
in fertilizers, spreaders and organics were partially offset by sales
increases in seed. The Consumer Garden Business Group had net sales of $107.1
million, an increase of 258.4% due to the inclusion of Miracle-Gro, partially
offset by the divestiture of the Peter's U.S. consumer water soluble
fertilizer business. Professional Business Group net sales decreased 3.0% due
to lower volume as a result of the poor weather in its major markets.
International sales increased 8.9% to $56.5 million, primarily from increased
volume.
Cost of sales represented 53.9% of net sales, up 1% compared to 52.9% of net
sales last year. The increase was principally attributable to higher raw
material costs and higher manufacturing unit costs resulting from lower sales
volumes.
Operating expenses increased 15.9% partially due to the inclusion of
Miracle-Gro. Marketing expenses increased 22.0% due to the inclusion of
Miracle-Gro, increased national advertising and additional investment in the
International business, partially offset by lower promotions to retailers.
Distribution costs decreased 3.5% as a result of a sales mix, including
Miracle-Gro, which has a proportionately lower distribution cost. General and
administrative costs increased 22.2% due to the inclusion of Miracle-Gro and
increased bad debt expense. Other income increased 378.9% principally due to
an increase in income of unconsolidated businesses. Amortization of goodwill
and other intangibles increased as a result of the merger transactions with
Miracle-Gro. Unusual expenses of $8.6 million were recorded for restructuring
charges related to personnel reductions, facilities closings and asset
write-downs.
Interest expense increased 4.8%. The increase was caused primarily by an
increase in borrowing levels in the first quarter.
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<PAGE>
The Company's effective tax rate increased from 38.5% to 48.0% in 1996. This
resulted from the combination of lower income before taxes and an increase in
nondeductible amortization of goodwill and intangible assets, and the one-time
benefit in 1995 of the sale of the Peter's consumer water soluble fertilizer
business.
Net income of $11.1 million decreased by $11.2 million from 1995. Among the
significant items impacting the 1996 results were the positive impact from
Miracle-Gro, offset by lower sales volumes in the Consumer Lawn and
Professional Business Groups, a $8.6 million charge for unusual items and the
higher effective tax rate.
Financial Position as of June 29, 1996
Current assets of $320.7 million decreased by $30.2 million compared with
current assets at September 30, 1995 and by $8.7 million compared with current
assets at July 1, 1995. At September 30, 1995 receivables were higher than
normal due to the promotional program which incentivized retailers to purchase
their spring 1996 requirements early. As of June 29, 1996 the majority of
those receivables had been collected. Compared to September 30, 1995,
inventories as of June 30, 1996 were higher due to the seasonal nature of the
Company's business. Compared to July 1, 1995, current assets decreased
principally as a result of the impact of the unfavorable spring weather on
sales and receivables.
Current liabilities of $129.0 increased by $5.1 million from September 30,
1995 and decreased by $5.7 million as compared with current liabilities at
July 1, 1995. The increase compared with September 30, 1995 is due to higher
accrued expenses resulting from accrued severance and higher seasonal average
borrowings which increased accrued interest. Accrued taxes increased as a
result of the higher effective tax rate and the timing of tax payments. The
increases were partially offset by lower trade payables. The decrease compared
with July 1, 1995 is caused by decreased short-term borrowings and trade
payables partially offset by increased accrued expenses and taxes.
Long-term debt decreased by $51.2 million compared with long-term debt at
September 30, 1995 and by $22.2 million compared with long-term debt at July
1, 1995. The decrease compared with September 30, 1995 is principally the
result of cash generated from operations during the first nine months of 1996
offset by capital expenditures and preferred stock dividends.
Shareholders' equity at June 29, 1996 increased by $5.0 million compared with
shareholders' equity at September 30, 1995 and by $1.6 million compared with
shareholders' equity at July 1, 1995. The increase compared with September 30,
1995 reflects net income for the nine months of $11.1 million and the issuance
of treasury stock for options exercised of $7.4 million, offset by Class A
Convertible Preferred Stock dividends of $7.3 million, repurchase of treasury
stock of $4.2 million and the change in the cumulative foreign currency
adjustment of $2.0 million. The increase compared with July 1, 1995 reflects
net income for the twelve months ended June 29, 1996 of $11.2 million and the
issuance of treasury stock for options exercised of $7.8 million, offset by
Class A Convertible Preferred Stock dividends of $9.8 million, repurchase of
treasury stock of $4.2 million and the change in the cumulative foreign
currency adjustment of $3.6 million.
Capital expenditures for the year ended September 30, 1996 are expected to be
approximately $20.0 million. The Company's Credit Agreement restricts the
amount the Company may spend on capital expenditures to $50 million per year
for fiscal 1996 and each year thereafter. Fiscal 1996 capital expenditures are
expected to be financed with cash provided by operations and utilization of
available credit facilities.
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<PAGE>
The Company has foreign exchange rate risk related to international earnings
and cash flows. During fiscal 1995, a management program was designed to
minimize the exposure to adverse currency impacts on the cash value of the
Company's non-local currency receivables and payables, as well as the
associated earnings impact. The Company has entered into forward foreign
exchange contracts and purchased currency options tied to the economic value
of receivables, payables and expected cash flows denominated in non-local
foreign currencies. Management anticipates that these financial instruments
will act as an effective hedge against the potential adverse impact of
exchange rate fluctuations on the Company's results of operations, financial
condition and liquidity. It is recognized, however, that the program is
intended to minimize but cannot completely eliminate the Company's exposure to
adverse foreign currency movements.
As of June 29, 1996, the Company's European operations had foreign exchange
risk in various currencies tied to the Dutch Guilder. These currencies include
the Australian Dollar, Belgian Franc, German Mark, Spanish Peseta, Italian
Lira, French Franc, British Pound and the U.S. Dollar. The Company's U.S.
operations had foreign exchange rate risk in the Canadian Dollar, Dutch
Guilder and the British Pound which are tied to the U.S. Dollar. As of June
29, 1996, outstanding foreign exchange forward contracts had a contract value
of approximately $12.8 million and outstanding purchased currency options had
a contract value of approximately $2.0 million. These contracts have maturity
dates ranging from July 3, 1996 to October 2, 1996.
The primary sources of liquidity for the Company are funds generated by
operations and borrowings under the Company's Credit Agreement. As amended,
the Credit Agreement provides, up to $375 million through March 31, 2000, and
does not contain a term loan facility.
In the opinion of the Company's management, cash flows from operations and
capital resources will be sufficient to meet debt service and working capital
needs during the 1996 fiscal year.
Inflation
The Company is subject to the effect of changing prices. The Company has,
however, generally been able to pass along inflationary increases in its costs
by increasing the prices of its products.
Selective price increases for products which contain urea became effective at
the beginning of 1996. The price increases offset higher urea prices
experienced by the Company. In addition, the Company has entered into a supply
agreement through the year 2000, under which the Company is required to
purchase set tonnage of urea at a set price.
Accounting Issues
In December 1995, the Financial Accounting Standards Board issued SFAS No. 123
"Accounting for Stock-Based Compensation" which changes the measurement,
recognition and disclosure standards for stock-based compensation. Management
is currently evaluating the provisions of SFAS No. 123 and at this time, the
effect of adopting SFAS No. 123 on the results of operations and the method of
disclosure has not been determined.
Contingencies
The Company's management continually evaluates the Company's contingencies,
including various lawsuits and claims which arise in the normal course of
business. In the opinion of management, its assessment of contingencies is
reasonable and the 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.
Additional information with respect to the more significant of these matters
is described in footnote number 9 to the Company's Consolidated Financial
Statements.
Page 14
<PAGE>
PART II - OTHER INFORMATION
Item 1 Legal Proceedings
Please see the information provided in Footnote 9 to the Company's
Consolidated Financial Statements on pages 9 and 10 of this Report,
which information is incorporated herein by reference.
Items 2-3
Not applicable.
Item 4
Not applicable.
Item 5 - Other Information
On August 7, 1996, the Company issued a press release, attached hereto
as Exhibit 99, regarding the election of Charles M. Berger as the
Company's Chairman of the Board, President and Chief Executive
Officer. Mr. Berger succeeds Tadd C. Seitz as Chairman and filled the
President and CEO position that Mr. Seitz had resumed on an interim
basis, at the Board's request, in February 1996.
Item 6 - Exhibits and Reports on Form 8-K.
(a) See Exhibit Index at page 17 for a list of the exhibits
included herewith.
(b) No reports on Form 8-K were filed during the fiscal quarter
ended June 29, 1996.
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<PAGE>
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
Date August 9, 1996 /s/ Paul D. Yeager
__________________________
Paul D. Yeager
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 16
<PAGE>
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED JUNE 29, 1996
EXHIBIT INDEX
Exhibit Page
Number Description Number
- --------- --------------- --------
27 Financial Data Schedule .............................. 18
99 Press Release ........................................ 19
Page 17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet at June 29, 1996 and statement of income for the
nine months ended June 29, 1996 of The Scotts Company and its subsidiaries and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> JUN-29-1996
<EXCHANGE-RATE> 1
<CASH> 16,909
<SECURITIES> 0
<RECEIVABLES> 129,443
<ALLOWANCES> 5,153
<INVENTORY> 157,495
<CURRENT-ASSETS> 320,652
<PP&E> 236,446
<DEPRECIATION> 93,115
<TOTAL-ASSETS> 767,980
<CURRENT-LIABILITIES> 129,009
<BONDS> 0
0
177,255
<COMMON> 211
<OTHER-SE> 208,346
<TOTAL-LIABILITY-AND-EQUITY> 767,980
<SALES> 617,117
<TOTAL-REVENUES> 617,533
<CGS> 332,671
<TOTAL-COSTS> 575,099
<OTHER-EXPENSES> (470)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,630
<INCOME-PRETAX> 21,274
<INCOME-TAX> 10,212
<INCOME-CONTINUING> 11,062
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,062
<EPS-PRIMARY> .20
<EPS-DILUTED> .20
</TABLE>
Scotts Names Charles M. Berger
New Chairman, President and CEO
Marysville, Ohio, August 7,1996 - The Scotts Company (NYSE; SMG) announced
that its Board of Directors has elected Charles M. Berger as the Company's
Chairman of the Board, President and Chief Executive Officer, effective today,
August 7. Berger succeeds Tadd C. Seitz as Chairman as well as filling the
President and CEO position that Seitz had resumed on an interim basis in
February at the Board's request.
Seitz, who had been Scotts' President and CEO from 1983 to April 1995 and
Chairman since 1989, said, "The Board of Directors was diligent in its search
for the right person to lead The Scotts Company. We found that person in Chuck
Berger."
Berger comes to Scotts from H. J. Heinz Company where he served as Chairman,
President and CEO of Weight Watchers International. During his term as the
Heinz affiliate's CEO from 1978 to 1991, he grew primary and franchisee sales
from $200 million to $1 billion. Berger was most recently Chairman and CEO of
Heinz India Pvt. Ltd. (Bombay) and previously served as Director of Corporate
Planning at Heinz World Headquarters. During his 32-year career at Heinz, he
also held the positions of Product Manager for Heinz Ketchup; General Manager,
Marketing, for all Heinz grocery products; and Managing Director of Heinz
Italy, the largest Heinz affiliate in Europe. He is also a former Director of
Stern's Miracle-Gro Products, Inc., which merged with Scotts in May 1995.
"Chuck Berger brings to The Scotts Company an ideal combination of consumer
brand experience - both domestic and international - and a clear understanding
of shareholder value," noted Horace Hagedorn, founder of Miracle-Gro and Vice
Chairman of The Scotts Board.
Berger stated that he is "eager to build on the solid foundation of the Scotts
and Miracle-Gro brands as well as the legacy that Tadd Seitz and Horace
Hagedorn have created in the merger of these two great companies."
Headquartered in Marysville, Ohio, for more than 125 years, The Scotts Company
is the world's leading producer and marketer of products for do-it-yourself
lawn care and gardening, professional turf care and horticulture. The
Company's industry-leading brands include Scotts(R), Turf Builder(R),
Miracle-Gro(R) and Osmocote(R). Scotts products are sold in the United States,
Canada, the United Kingdom, Continental Europe, Southeast Asia, the Middle
East, Australia, New Zealand and several Latin American countries.
# # #
For more information, please contact
Kerry Bierman
THE SCOTTS COMPANY
513/644-0011
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