<PAGE> 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 July 4, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-11593
THE SCOTTS COMPANY
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-1199481
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14111 Scottslawn Road
Marysville, Ohio 43041
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(937) 644-0011
----------------------------------------------------
(Registrant's telephone number, including area code)
No change
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
18,679,023 Common Shares, voting, no par value Outstanding at August 6, 1998
- ---------------------------------------------- -----------------------------
Exhibit Index at page 25
<PAGE> 2
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations - Three and nine month
periods ended July 4, 1998 and June 28, 1997 3
Consolidated Statements of Cash Flows - Nine month periods
ended July 4, 1998 and June 28, 1997 4
Consolidated Balance Sheets -
July 4, 1998, June 28, 1997, and September 30, 1997 5
Notes to Consolidated Financial Statements 6-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-22
Part II. Other Information
Item 1. Legal Proceedings 23
Item 5. Other Information 23
Item 6. Exhibits 23
Signatures 24
Exhibit Index 25
</TABLE>
Page 2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
----------------------- ----------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $367.5 $299.0 $923.2 $745.4
Cost of sales 235.7 188.3 578.8 463.7
------ ------ ------ ------
Gross profit 131.8 110.7 344.4 281.7
------ ------ ------ ------
Advertising and promotion 32.9 26.5 93.9 77.9
Selling, general and administrative 43.8 37.1 121.9 95.9
Amortization of goodwill and other intangibles 3.5 2.7 9.7 7.6
Other expense (income), net 1.3 (0.7) 2.7 2.8
------ ------ ------ ------
Income from operations 50.3 45.1 116.2 97.5
Interest expense 9.7 7.6 27.0 21.5
------ ------ ------ ------
Income before income taxes 40.6 37.5 89.2 76.0
Income taxes 16.2 16.4 36.9 33.0
------ ------ ------ ------
Income before extraordinary item 24.4 21.1 52.3 43.0
Extraordinary loss on early extinguishment of
debt, net of income tax benefit - - 0.7 -
------ ------ ------- ------
Net income 24.4 21.1 51.6 43.0
Preferred Stock dividends 2.4 2.4 7.3 7.3
------ ------ ------ ------
Income applicable to common shareholders $ 22.0 $ 18.7 $ 44.3 $ 35.7
====== ====== ====== ======
Basic earnings per share:
Before extraordinary loss $ 1.18 $ 1.01 $ 2.41 $ 1.92
Extraordinary loss, net of income tax benefit - - 0.04 -
------ ------ ------ ------
Basic earnings per share $ 1.18 $ 1.01 $ 2.37 $ 1.92
====== ====== ====== ======
Diluted earnings per share:
Before extraordinary loss $ 0.80 $ 0.71 $ 1.72 $ 1.47
Extraordinary loss, net of income tax benefit - - 0.02 -
------ ------ ------ ------
Diluted earnings per share $ 0.80 $ 0.71 $ 1.70 $ 1.47
====== ====== ====== ======
Common shares used in basic
earnings per share computation 18.7 18.6 18.7 18.6
====== ====== ====== ======
Common shares and common stock
equivalents used in diluted
earnings per share computation 30.6 29.9 30.3 29.3
====== ====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
Page 3
<PAGE> 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
<TABLE>
<CAPTION>
Nine Months Ended
--------------------------
July 4, June 28,
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 51.6 $ 43.0
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 27.6 24.0
Extraordinary loss, net of income tax benefit 0.7 -
Net change in certain components of
working capital 13.4 27.3
Net change in other assets and liabilities and
other adjustments (0.3) (1.1)
------- --------
Net cash provided by operating activities 93.0 93.2
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment, net (21.7) (9.4)
Acquisitions, net of cash acquired (146.4) (47.1)
------- -------
Net cash used in investing activities (168.1) (56.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Revolving lines of credit and bank line of credit, net 101.4 (12.1)
Dividends on Preferred Stock (7.3) (7.3)
Other, net (2.3) 1.1
-------- -------
Net cash provided by (used in) financing activities 91.8 (18.3)
------- -------
Effect of exchange rate changes on cash (0.1) (0.6)
------- -------
Net increase in cash 16.6 17.8
Cash at beginning of period 13.0 10.6
------- -------
Cash at end of period $ 29.6 $ 28.4
======= =======
SUPPLEMENTAL CASH FLOW INFORMATION
Businesses Acquired:
Fair value of assets acquired $ 213.4 $ 115.9
Liabilities assumed and minority interest (45.9) (69.2)
Debt issued $ 164.5 $ 44.9
</TABLE>
See Notes to Consolidated Financial Statements.
Page 4
<PAGE> 5
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
Unaudited
---------
July 4, June 28, September 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash $ 29.6 $ 28.4 $ 13.0
Accounts receivable, less allowances
of $5.5, $5.9 and $5.7, respectively 164.6 141.6 104.3
Inventories, net 165.3 152.6 146.1
Prepaid and other assets 29.9 21.5 22.4
-------- -------- --------
Total current assets 389.4 344.1 285.8
-------- -------- --------
Property, plant and equipment, net 187.7 135.6 146.1
Goodwill, net 297.4 218.0 215.6
Other intangibles, net 138.2 140.3 136.6
Other assets 6.4 1.5 3.5
-------- -------- --------
Total Assets $1,019.1 $ 839.5 $ 787.6
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line and other short-term debt $ 3.4 $ 1.6 $ 1.5
Accounts payable 77.8 53.8 54.1
Accrued liabilities 98.2 73.1 57.8
Accrued taxes 36.4 37.3 25.9
-------- -------- --------
Total current liabilities 215.8 165.8 139.3
-------- -------- --------
Term debt, less current portion 327.6 239.8 219.8
Other liabilities 45.6 37.5 39.3
-------- -------- --------
Total Liabilities 589.0 443.1 398.4
-------- -------- --------
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value 177.3 177.3 177.3
Common shares, no par value, $.01 stated
value per share, issued 21.1 shares 0.2 0.2 0.2
Capital in excess of par value 208.3 207.2 207.8
Retained earnings 94.4 56.1 50.1
Cumulative foreign currency translation account (6.2) (2.3) (4.3)
Treasury stock, 2.4, 2.4, and 2.4 common shares,
respectively, at cost (43.9) (42.1) (41.9)
-------- -------- --------
Total Shareholders' Equity 430.1 396.4 389.2
-------- -------- --------
Total Liabilities and Shareholders' Equity $1,019.1 $ 839.5 $ 787.6
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
Page 5
<PAGE> 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(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, golf courses,
professional sports stadiums, 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 consolidated financial statements include the accounts of The Scotts
Company ("Scotts") and its wholly-owned subsidiaries, Hyponex Corporation
("Hyponex"), Earthgro, Inc. ("Earthgro"), Republic Tool and Manufacturing
Corp. ("Republic"), Scotts-Sierra Horticultural Products Company
("Sierra"), Scotts' Miracle-Gro Products, Inc. ("Miracle-Gro"), Miracle
Holdings Limited ("Miracle Holdings"), and Levington Group Limited
("Levington"), (collectively, the "Company"). All material intercompany
transactions have been eliminated.
The consolidated balance sheets as of July 4, 1998 and June 28, 1997, and
the related consolidated statements of operations for the three and nine
month periods, and cash flows for the nine month periods, ended July 4,
1998 and June 28, 1997 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 1997 Annual Report on Form 10-K.
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.
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. Costs for these advertising and promotional programs are
generally expensed ratably over the year in relation to revenues or
related performance measures.
Page 6
<PAGE> 7
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(all amounts are in millions except per share data or as otherwise noted)
Reclassifications
Certain reclassifications have been made in prior periods' financial
statements to conform to fiscal 1998 classifications.
2. Acquisitions
Effective February 1998, the Company acquired all the shares of Earthgro,
Inc., a regional organics company located in Glastonbury, Connecticut, for
$47.0, including deal costs and refinancing of certain assumed debt.
Effective December 1997, the Company acquired all the shares of Levington,
a leading producer of consumer and professional lawn fertilizer and
growing media in the U.K, for $93.7, including deal costs and refinancing
of certain assumed debt.
A final allocation of the purchase price to acquired net assets is pending
for both Earthgro and Levington. The excess of the purchase price over the
net book value of acquired assets is currently recorded on the balance
sheet as goodwill.
Effective January 1997, the Company acquired the approximately two-thirds
interest in Miracle Holdings which the Company did not already own, for
$46.6. Miracle Holdings owns Miracle Garden Care Limited ("MGC"), a
manufacturer and distributor of lawn and garden products in the U.K.
During fiscal 1998 the Company also invested in or acquired other entities
relative to its long term strategic plan. These investments include Scotts
Lawn Service, Sanford Scientific, Inc. (genetics) and the U.S. Home and
Garden Consumer Products Business of AgrEvo Environmental Health, Inc.
(pesticides).
Each of the above acquisitions was accounted for under the purchase method
of accounting. Due to the materiality of Levington, Earthgro and Miracle
Holdings, the following pro forma results of operations are provided and
give effect to these acquisitions as if they had occurred October 1, 1996.
Nine Months Ended
----------------------------
July 4, June 28,
1998 1997
---- ----
Net sales $945.3 $864.2
====== ======
Net income $ 50.3 $ 44.0
====== ======
Basic earnings per share:
Before extraordinary loss $ 2.34 $ 1.97
Extraordinary loss, net of income
tax benefit 0.04 -
------ ------
Basic earnings per share $ 2.30 $ 1.97
====== ======
Diluted earnings per share:
Before extraordinary loss $ 1.68 $ 1.50
Extraordinary loss, net of income
tax benefit 0.02 -
------ ------
Diluted earnings per share $ 1.66 $ 1.50
====== ======
The pro forma information does not purport to be indicative of actual
results of operations if the Earthgro, Levington and Miracle Holdings
acquisitions had occurred as of October 1, 1996, and is not intended to be
indicative of future results or trends.
Page 7
<PAGE> 8
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (all
amounts are in millions except per share data or as otherwise noted)
3. Inventories
Inventories, net of provisions of $8.7, $9.1 and $12.3, respectively,
consisted of:
<TABLE>
<CAPTION>
July 4, June 28, September 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Finished goods $108.7 $102.9 $102.8
Raw materials 56.6 49.7 43.3
------ ------ ------
$165.3 $152.6 $146.1
====== ====== ======
</TABLE>
4. Long-Term Debt
<TABLE>
July 4, June 28, September 30,
1998 1997 1997
---- ---- ----
<S> <C> <C> <C>
Revolving credit line $225.7 $141.9 $121.8
9 7/8% Senior Subordinated Notes
$100.0 face amount (net of
unamortized discount) 99.5 99.4 99.4
Capital lease obligations and other 5.8 0.1 0.1
------ ------ ------
331.0 241.4 221.3
Less current portions 3.4 1.6 1.5
------ ------ ------
$327.6 $239.8 $219.8
====== ====== ======
</TABLE>
Maturities of term debt and capital leases for the next five fiscal years
are as follows:
1998 $2.4
1999 1.3
2000 1.1
2001 1.1
2002 0.2
Thereafter 325.4
On February 26, 1998, the Company replaced its existing credit facility
with a senior unsecured revolving credit facility with The Chase Manhattan
Bank ("Chase") and various participating banks. The new facility provides
up to $550 to the Company, an increase of $125 over the previous facility,
and establishes a $200 sub-tranche available in U.K. Pounds Sterling and a
$50 sub-tranche available in other foreign currencies in which the Company
transacts business. Interest pursuant to the competitive advance facility
is determined by auction. Interest pursuant to the revolving credit
facility is at a floating rate initially equal, at the Company's option,
to the Alternate Base Rate, as defined, without additional margin, or the
Eurodollar Rate, as defined, plus a margin of .30% per annum, which margin
may be decreased to .20% or increased up to .50% based on the unsecured
debt ratings of the Company. The new facility provides for the payment of
a facility fee of .15% per annum, which fee may be reduced to .10% or
increased up to .375% based on the unsecured debt ratings of the Company.
The agreement contains certain financial and operating covenants,
including maintenance of interest coverage and leverage ratios, as well as
restrictions on capital expenditures. All other provisions of the credit
facility remain substantially the same as the extinguished facility.
In conjunction with the early extinguishment of the existing credit
facility, the Company recorded an extraordinary loss of $1.2 ($0.7 after
tax) related to the write-off of unamortized deferred financing costs.
Page 8
<PAGE> 9
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements (all
amounts are in millions except per share data or as otherwise noted)
5. Net Income Per Common Share
Effective the first quarter of fiscal 1998, the Company adopted Statement
of Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS
128"), which establishes standards for computing and presenting earnings
per share ("EPS"). FAS 128 requires the presentation of basic and diluted
EPS. Basic EPS is computed by dividing income applicable to common
shareholders by the weighted average number of common shares outstanding
during the period. Diluted EPS is computed by dividing net income by the
weighted-average number of common shares outstanding and dilutive common
share equivalents.
The following table presents information necessary to calculate basic and
diluted earnings per common share.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------------- --------------------------
July 4, June 28, July 4, June 28,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income before extraordinary item $ 24.4 $ 21.1 $ 52.3 $ 43.0
Extraordinary loss on early
extinguishment of debt, net of
income tax benefit -- -- 0.7 --
-------- -------- -------- --------
Net income 24.4 21.1 51.6 43.0
Preferred Stock dividends 2.4 2.4 7.3 7.3
-------- -------- -------- --------
Income applicable to common
shareholders $ 22.0 $ 18.7 $ 44.3 $ 35.7
======== ======== ======== ========
Weighted-average common
shares outstanding during
the period 18.7 18.6 18.7 18.6
Assuming conversion of Class A
Convertible Preferred Stock 10.3 10.3 10.3 10.3
Assuming exercise of warrants 0.9 0.2 0.6 0.1
Assuming exercise of options 0.7 0.8 0.7 0.3
-------- -------- -------- --------
Weighted-average number of
common shares outstanding
and dilutive common share
equivalents 30.6 29.9 30.3 29.3
======== ======== ======== ========
Basic earnings per share:
Before extraordinary loss $ 1.18 $ 1.01 $ 2.41 $ 1.92
Extraordinary loss, net of
income tax benefit -- -- 0.04 --
-------- -------- --------- ---------
Basic earnings per share $ 1.18 $ 1.01 $ 2.37 $ 1.92
======== ======== ========= =========
Diluted earnings per share:
Before extraordinary loss $ 0.80 $ 0.71 $ 1.72 $ 1.47
Extraordinary loss, net of income
tax benefit -- -- 0.02 --
-------- -------- --------- ---------
Diluted earnings per share $ 0.80 $ 0.71 $ 1.70 $ 1.47
======== ======== ========= =========
</TABLE>
Page 9
<PAGE> 10
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(all amounts are in millions except per share data or as otherwise noted)
6. 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 are the more significant of the Company's
identified contingencies.
OHIO ENVIRONMENTAL PROTECTION AGENCY
The Company has been assessing and, as required, addressing certain
environmental issues regarding the wastewater treatment plants currently
operating at the Marysville facility. The company is proceding with plans
to connect the facility's wastewater system with the City of Marysville's
municipal treatment system. Additionally, the Company has been assessing,
under Ohio's new 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 ("OEPA") was referring certain 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 ("OAG").
Representatives from the OEPA, the OAG and the Company subsequently met on
several occasions, and continue to meet, to discuss these issues.
In June 1997, the Company received formal notice of an enforcement action
and draft Findings and Orders ("F&O") from the OEPA. The draft F&O
elaborated on the subject of the referral to the OAG 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 OAG
which covers many of the same issues contained in the draft F&O including
RCRA corrective action.
In accordance with the Company's past efforts to enter into Ohio's VAP,
the Company submitted to the OEPA 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. Pursuant to 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 Director of the OEPA 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 for the appeal.
The Company is continuing to meet with the OAG and the OEPA in an effort
to negotiate an amicable resolution of these issues but is unable at this
stage to predict the outcome of the negotiations. The Company believes
that it has viable defenses to the State's enforcement action, including
that it had been proceeding under VAP to address certain environmental
issues, and will assert those defenses in any such action.
Page 10
<PAGE> 11
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(all amounts are in millions except per share data or as otherwise noted)
The Company does not believe the ultimate outcome of any proceedings which
may result from the OEPA's referral of these matters to the OAG will have
a material adverse effect on the business or the financial condition of
the Company but is unable, at this stage, to predict the outcome of the
issues. Many of the issues raised by the State 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. 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. The suit was placed in administrative suspense
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 immaterial comments from the government were
received in June 1998, and final agreement is expected in September, 1998.
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
materially adversely affected by continued closure of this peat harvesting
operation.
HERSHBERGER
In September 1991, the Company was identified by the OEPA as a Potentially
Responsible Party ("PRP") with respect to a site in Union County, Ohio
(the "Hershberger site"), because the Company allegedly arranged for the
transportation, treatment or disposal of waste that allegedly contained
hazardous substances, at the Hershberger site. Effective February 1998,
the Company and four other named PRPs executed an Administrative Order on
Consent ("AOC") with the OEPA, by which the named PRPs will fund remedial
action at the Hershberger site. After construction of the leachate
collection system and reconstruction of the landfill cap, which is
anticipated to be completed by August 1998, the Company expects its
obligation thereafter to consist primarily of its share of annual
operating and maintenance expenses. Management does not believe that its
obligations under the AOC will have a material adverse effect on the
Company's results of operations or financial condition.
YEAR 2000
The Company is addressing exposures related to the Year 2000 issue. Key
financial, information and operational systems have been assessed and
plans developed in order to mitigate the Year 2000 issue. These plans
include conversion of in-house developed software, upgrades to purchased
software
Page 11
<PAGE> 12
and confirmation with trading partners as to their Year 2000 state of
readiness. The Company engaged outside consultants to review the Company's
plans for addressing the Year 2000 issue and, as a result, established
executive sponsorship and a Program Office to oversee Company-wide efforts.
Such efforts are currently in various stages of completion. The Company
estimates the cost of mitigating the entire Year 2000 issue to be in the
range of $5 to $7 million, the majority of which will be recorded as
expense. Through the third quarter of fiscal 1998, the Company has spent
approximately $1 million toward these efforts.
Management believes its plans will adequately address the Year 2000 issue.
However, if such conversions and upgrades are not adequately made or timely
completed, the Year 2000 issue could have a material impact on the
operations of the Company and its financial results.
EURO
Beginning in January 1999, a new currency called the "euro" is scheduled to
be 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. Additionally, all of the final rules
and regulations have not yet been defined and finalized by the European
Commission with regard to the euro currency. The Company is still assessing
the impact the EMU formation will have on its internal systems and the sale
of its products. The Company expects to take appropriate actions based on
the results of such assessment. The Company has not yet determined the cost
related to addressing this issue and there can be no assurance that this
issue and its related costs will not have a materially adverse effect on
the Company's business, operating results and financial condition.
7. New Accounting Standards
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information". In February 1998, the FASB issued SFAS No. 132,
"Employers' Disclosure about Pensions and Other Postretirement Benefits."
In August 1998, the FASB issued SFAS No. 133, "Accounting For Derivative
Instruments and Hedging Activities." SFAS No. 130, 131 and 132 are
effective for financial statements for fiscal years beginning after
December 15, 1997. SFAS NO. 133 is effective for fiscal years beginning
after June 15, 1999.
SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and
losses). SFAS No. 130 requires that all items that are required to be
recognized under accounting standards as components of comprehensive income
be reported in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income is defined
as the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. It
includes all changes in equity during a period except those resulting from
investments by owners and distributions to owners. The Company believes the
only significant differences between comprehensive income and currently
reported income will be the impact of foreign currency translation. The
Company plans to adopt SFAS No. 130 in fiscal 1999.
SFAS No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to
shareholders. This statement defines business segments as components of an
enterprise about which separate financial information is available and used
internally for evaluating segment performance and decision making on
resource allocations. SFAS No. 131 requires reporting a measure of segment
profit or loss, certain specific revenue and expense items, and segment
assets; and other reporting about geographic and customer matters. The
Company plans to adopt SFAS No. 131 in the first quarter of fiscal 1999;
however, the Company believes that the business segments identified and set
forth in Note 14 to the Company's fiscal 1997 Annual Report on Form 10-K
are in substantial compliance with SFAS No. 131.
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SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or
recognition of those plans. It standardizes the disclosure requirements
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and
fair values of plan assets that will facilitate financial analysis, and
eliminates certain disclosures that are no longer useful. The Company
plans to adopt SFAS No. 132 in fiscal 1999.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity
recognize all derivatives as either assets or liabilities in the statement
of financial position and measure those instruments at fair value. The
Company has not yet determined the impact this statement will have on its
operating results. The Company plans to adopt SFAS No. 133 in fiscal 2000.
8. Subsequent Events
On June 25, 1998, the Company signed a letter of intent with Monsanto
Company to acquire the assets of Monsanto's consumer lawn and garden
businesses, exclusive of the RoundUp(R) business, for approximately $300
million. The acquired businesses include the Ortho(R) line of pesticides
which encompasses brands such as Weed-B-Gone(R), Rose Pride(R) and Home
Defense(R). As part of the agreement, the Company would also acquire Green
Cross(R), a leading pesticides business in Canada. Separately, the Company
signed a letter of intent with Monsanto for exclusive international
marketing and agency rights to Monsanto's consumer RoundUp(R) herbicide
products. The proposed agreement would cover most major consumer lawn and
garden markets in the world, including the U.S., Canada, Germany, France,
other parts of continental Europe, and Australia. The Company expects to
consummate the transactions contemplated by the agreements in the first
quarter of fiscal 1999.
On July 10, 1998, the Company announced that it agreed to purchase
Rhone-Poulenc Jardin, continental Europe's largest consumer lawn and
garden products company, from Rhone-Poulenc. Separately, the Company
announced that it had agreed to acquire ASEF, a privately-held
Netherlands-based lawn and garden products company. The combined purchase
price for these two separate transactions is approximately $220 million.
The Company expects to consummate the transactions contemplated by the
agreements late in the fourth quarter of fiscal 1998 or the first quarter
of fiscal 1999.
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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)
The following discussion and analysis of the consolidated results of operations,
cash flows and financial position of the Company should be read in conjunction
with the Consolidated Financial Statements of the Company included elsewhere in
this report. Scotts' Annual Report on Form 10-K for the fiscal year ended
September 30, 1997 includes additional information about the Company, its
operations, and its 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 for the third quarter and first nine months
of fiscal 1998 and 1997:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
-------------------- Period to ------------------ Period to
July 4, June 28, Period July 4, June 28, Period
1998 1997 % Change 1998 1997 % Change
----- -------- -------- ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
Consumer Lawns $ 89.6 $ 79.1 13.3% $312.1 $269.3 15.9%
Consumer Gardens 57.2 52.2 9.6 123.5 114.4 8.0
Consumer Organics 116.3 88.7 31.1 203.1 159.2 27.6
------ ------ ------ ------
Domestic Consumer 263.1 220.0 19.6 638.7 542.9 17.7
Professional 44.3 41.9 5.7 121.4 110.1 10.3
International 60.1 37.1 62.0 163.1 92.4 76.5
------ ------ ------ ------
Consolidated $367.5 $299.0 22.9% $923.2 $745.4 23.9%
====== ====== ====== ======
</TABLE>
The following table sets forth the components of income and expense for the
third quarter and first nine months of fiscal 1998 and 1997 on a
percent-of-sales basis:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------ Period to ----------------- Period to
July 4, June 28, Period July 4, June 28, Period
1998 1997 % Change 1998 1997 % Change
----- -------- -------- ----- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Net sales 100.0% 100.0% 22.9% 100.0% 100.0% 23.9%
Cost of sales 64.1 63.0 25.2 62.7 62.2 24.8
----- ----- ----- -----
Gross profit 35.9 37.0 19.1 37.3 37.8 22.3
Operating expenses:
Advertising and promotion 9.0 8.9 24.2 10.2 10.5 20.5
Selling, general and
administrative 11.9 12.4 18.1 13.2 12.9 27.1
Amortization of goodwill
and other intangibles 1.0 0.9 29.6 1.1 1.0 27.6
Other expense, net 0.4 (0.3) (285.7) 0.2 0.3 (3.6)
----- ------ ----- -----
Income from operations 13.6 15.1 11.5 12.6 13.1 19.2
Interest expense 2.6 2.5 27.6 2.9 2.9 25.6
----- ----- ----- -----
Income before income taxes 11.0 12.5 8.3 9.7 10.2 17.4
Income taxes 4.4 5.5 (1.2) 4.0 4.4 11.8
----- ----- ----- -----
Income before extraordinary
item 6.6 7.1 15.6 5.7 5.8 21.6
Extraordinary loss on early
extinguishment of debt,
net of income tax benefit 0.0 0.0 nm 0.1 0.0 nm
----- ----- ----- -----
Net income 6.6 7.1 15.6 5.6 5.8 20.0
Preferred stock dividends 0.7 0.8 0.0 0.8 1.0 0.0
----- ----- ----- -----
Income applicable to
common shareholders 6.0% 6.3% 17.6% 4.8% 4.8% 24.1%
===== ===== ===== =====
</TABLE>
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Three Months Ended July 4, 1998 versus the Three Months Ended June 28, 1997:
Net sales for the three months ended July 4, 1998 totaled $367.5, an increase of
$68.5, or 22.9%, over prior year. On a pro forma basis, assuming Earthgro,
Levington, and the remaining two-thirds interest in Miracle Holdings were
acquired at the beginning of fiscal 1997, sales increased 4.2%. Excluding the
effects of currency translation, pro forma sales would have been 4.4% higher
than the prior year.
Consumer segment sales totaled $263.1, an increase of 19.6% over prior year. The
increase reflects improvements of 13.3%, 9.6% and 31.1% in the Consumer Lawns,
Consumer Gardens and Consumer Organics operating groups, respectively. The
increase in the Consumer Lawns group is primarily due to an 18.4% improvement in
sales of granular lawn products (primarily through the Home Depot(R) and
WalMart(R) chains) driven by successful advertising programs. Sales of the
Consumer Gardens group are up 9.6% due primarily to an 8.1% increase in sales of
Miracle-Gro(R) products and strong demand for Osmocote(R) products. Sales for
the Consumer Organics group reflect the acquisition of Earthgro effective
February 1998. On a pro forma basis, sales for the group were up 0.8% compared
to the prior year. Results for the continuing Organics business were driven by
an 18.1% increase in sales of value-added products carrying the Scotts(R) and
Miracle-Gro(R) brand names, offset by lower commodity sales as a result of the
Company's deemphasis on sales of such products.
Professional segment sales increased 5.7% to $44.3 in the third quarter of
fiscal 1998. The increase is primarily due to the introduction of the new
Contec(TM) fertilizer, as well as improved volume in the Poly-S(R) golf course
segments.
International segment sales increased to $60.1, or 62.0%, in the third quarter
of fiscal 1998. On a pro forma basis, sales for the third quarter of fiscal 1998
decreased 6.3%, primarily due to an 18.3% decrease in sales in the Pacific Rim
resulting from the weak Asian economy and a 6.5% decrease in consumer sales in
the United Kingdom stemming from poor weather conditions and the timing of the
third quarter cut-off which had the impact of shifting fiscal 1998 sales into
the second quarter. Excluding the effects of currency translation, International
segment pro forma sales would have only been 5.1% lower than the third quarter
of the prior year.
Gross profit decreased to 35.9% of sales in the third quarter of fiscal 1998, a
decrease of 1.1% compared to 37.0% in the prior year. Factors contributing to
the decrease were start-up costs associated with the upgrade of certain domestic
manufacturing facilities, demolition costs associated with the removal of
certain old manufacturing facilities, unplanned outsourcing of certain
production and unfavorable inventory adjustments. The aggregate impact of these
items, approximately $2.8, was partially offset by improved prices of key raw
materials. Changes in selling prices had no material impact on gross profit for
the quarter.
Advertising and promotion expenses increased $6.4, or 24.2%, to $32.9 for the
third quarter of 1998 primarily due to a $1.7 increase in advertising and
promotion by both the Consumer Lawns and core International groups, as well as
the impact of the Earthgro and Levington acquisitions of $2.1. As a percentage
of sales, advertising and promotion increased slightly to 9.0% over the prior
year level of 8.9%.
Selling, general and administrative expense ("SG&A") increased $6.7, or 18.1%,
to $43.8. As a percentage of sales, SG&A expense decreased to 11.9% from 12.4%
in the prior year. On a pro forma basis, SG&A expense increased approximately
$1.8. The increase for continuing businesses is primarily due to costs
associated with addressing the Year 2000 issue of approximately $0.6,
feasibility studies relating to an enterprise resource planning initiative
called "Project Catalyst" of $0.5, and incremental incentives associated with
the fiscal 1998 sales and profits.
Amortization of goodwill and other intangibles increased $0.8 as a result of
the inclusion of Earthgro and Levington in the third quarter of fiscal 1998.
Other expense, net, changed unfavorably by $2.0 primarily due to litigation
settlement charges of $0.5, costs associated with post-acquisition integration
activities of $0.4 and foreign exchange losses of $0.6.
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Primarily as a result of strong results for the Consumer Lawns and Consumer
Gardens Groups, as well as the inclusion of Levington and Earthgro, income from
operations improved to $50.3 in the third quarter of fiscal 1998, compared to
$45.1 in the prior year. On a percentage of sales basis, however, results for
the third quarter of 1998 decreased to 13.7% from 15.1% primarily due to
non-recurring items noted previously. On a pro forma basis, income from
operations was $50.3, or 13.7% of sales, in the third quarter of 1998, compared
to $51.3, or 14.5% of sales, in the prior year.
Interest expense increased $2.1, or 27.6% in the third quarter of 1998.
Excluding borrowings associated with the Earthgro and Levington acquisitions,
interest expense decreased approximately $0.8, primarily due to a $36.7
reduction in average borrowings for the quarter.
The Company's effective tax rate was 40.0% and 43.6% in the third quarter of
1998 and 1997, respectively. The Company's effective tax rate has historically
been higher than statutory rates due to non-tax deductible amortization of
goodwill and certain intangibles in the U.S. The effective tax rate for fiscal
1998 is lower than the 1997 rate due primarily to the resolution of
uncertainties related to tax positions taken in prior years and state tax
planning initiatives.
During the third quarter of fiscal 1998, the Company reported net income of
$24.4, or $0.80 diluted earnings per common share, compared with net income of
$21.1, or $0.71 diluted earnings per common share for the third quarter of
fiscal 1997. Had Levington and Earthgro been fully consolidated in both the
third quarter of fiscal 1998 and 1997, net income on a pro forma basis would
have been $24.4 in fiscal 1998 compared to $23.1 for fiscal 1997, with diluted
earnings per common share of $0.80 and $0.77, respectively.
Nine Months Ended July 4, 1998 versus the Nine Months Ended June 29, 1997:
Net sales for the nine months ended July 4, 1998 totaled $923.2, an increase of
$177.8, or 23.9%, over the prior year. On a pro forma basis, sales for the nine
months of fiscal 1998 were $945.3, an increase of $81.1 or 9.4% over pro forma
sales for the nine months of fiscal 1997. Excluding the effects of currency
translation, pro forma sales would have been 9.7% higher than the nine months of
fiscal 1997.
Consumer segment sales totaled $638.7, an increase of 17.7% over prior year. The
increase reflects improvements of 15.9%, 8.0% and 27.6% in the Consumer Lawns,
Consumer Gardens and Consumer Organics operating groups, respectively. The
increase in the Consumer Lawns group is primarily due to an 18.5% improvement in
sales of granular lawn products, driven by successful advertising programs.
Sales of the Consumer Gardens group are up $9.1 primarily due to a $6.2 increase
in sales of Miracle-Gro(R) products and strong demand for Osmocote(R) products.
Sales for the Consumer Organics group reflect the acquisition of Earthgro
effective February 1998. On a pro forma basis, sales for the group were up 5.5%
compared to the prior year. Results for the continuing Organics businesses were
driven by a 21.5% increase in sales of value-added products carrying the
Scotts(R) and Miracle-Gro(R) brand names, partially offset by a 7.3% reduction
in commodity sales as a result of the Company's deemphasis on sales of such
products.
Professional segment sales increased 10.3% to $121.4 in the nine months of
fiscal 1998. The increase is primarily due to the introduction of the new
Contec(TM) fertilizer in the second quarter as well as strong sales volume for
Osmocote (R) products. Professional sales also benefited from a change in
selling programs, to better match customer requirements, that had the impact of
shifting certain sales into the first quarter of fiscal 1998 from the fourth
quarter of fiscal 1997.
International segment sales increased to $163.1, or 76.5%, in the nine months of
fiscal 1998. On a pro forma basis, sales for the nine months of fiscal 1998
increased 4.0%. Excluding the effects of foreign currency translation, pro forma
sales would have increased 5.8%.
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<PAGE> 17
Gross profit decreased to 37.3% of sales from 37.8% from the first nine months
of 1997. The results for the nine months of fiscal 1998 include start-up costs
associated with the upgrade of certain domestic manufacturing facilities,
demolition costs associated with the removal of certain old manufacturing
facilities, and unplanned outsourcing of certain production. The aggregate
impact of these items, approximately $6.9, was partially offset by improved
prices of key raw materials. Changes in selling prices had no material impact on
gross profit for the nine months of either period.
Advertising and promotion expense increased $16.0, or 20.5%, to $93.9 for the
nine months of fiscal 1998, primarily due to a $5.1 and $4.6 increase in
advertising and promotion by the Consumer Lawns and core International groups,
respectively, and the impact of the Earthgro and Levington acquisitions of $5.0.
SG&A increased $26.0, or 27.1%, to $121.9 for the nine months of 1998. As a
percentage of sales, SG&A increased to 13.2% from 12.9% in the prior year. On a
pro forma basis, SG&A increased approximately $13.3, primarily due to the
following factors: selling costs of continuing businesses of $2.3, incremental
incentives associated with fiscal 1998 sales and profits of $1.0, costs
associated with addressing the Year 2000 issue of $1.0, Project Catalyst
feasibility studies of $0.5, research and development by continuing businesses
of $2.8 and other marketing and administrative increases.
Amortization of goodwill and other intangibles increased $2.1, as a result of
the inclusion of Levington, Earthgro and a full nine months of Miracle Holdings
in fiscal 1998.
Other expense, net, changed favorably by $0.1 primarily due to royalty
agreements in place for a full nine months in fiscal 1998 and a lower level of
asset write-offs in the nine months of fiscal 1998, offset by higher litigation
settlement costs and foreign exchange losses.
Primarily as a result of the Earthgro and Levington acquisitions, as well as
strong performance in the Consumer Lawns and Consumer Gardens groups, income
from operations improved to $116.2 for the nine months of fiscal 1998, compared
to $97.5 in the prior year. On a percentage of sales basis, however, income from
operations declined from 13.1% to 12.6%, primarily due to non-recurring items
noted previously. On a pro forma basis, income from operations would have been
$116.5, or 12.3% of sales, for the nine months of fiscal 1998 compared to
$108.4, or 12.5% of sales, in the prior year.
Interest expense increased $5.5, or 25.6%, for the nine months of fiscal 1998.
Excluding borrowings associated with the Earthgro, Levington and Miracle
Holdings acquisitions, interest expense decreased $2.0, primarily due to a $41.6
reduction in average borrowings for the nine months of fiscal 1998.
The Company's effective tax rate was 41.4% and 43.4% for the nine months of
fiscal 1998 and 1997, respectively. The Company's effective tax rate has
historically been higher than statutory rates due to non-tax deductible
amortization of goodwill and certain intangibles in the U.S. The effective tax
rate for fiscal 1998 is lower than the 1997 rate due primarily to the resolution
of uncertainties related to tax positions taken in prior years and state tax
planning initiatives. The Company anticipates the effective tax rate for all of
fiscal 1998 to remain at 41.4%.
For the first nine months of fiscal 1998, the Company reported net income of
$51.6, or $1.70 diluted earnings per common share (after a $0.7, or $0.02 per
share, extraordinary loss on the early extinguishment of debt), compared with
net income of $43.0, or $1.47 diluted earnings per share for the nine months of
fiscal 1997. Net income on a pro forma basis was $50.3 for fiscal 1998 compared
to $44.0 for fiscal 1997, with diluted earnings per share of $1.66 and $1.50,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $93.0 for the nine-month period
ended July 4, 1998 compared to $93.2 in the prior year. The seasonal nature of
the Company's operations results in a significant increase in certain components
of working capital (primarily accounts receivable and inventory) during the
first and second quarters. The third fiscal quarter is a significant period for
collecting accounts receivable.
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<PAGE> 18
Cash used in investing activities for the nine months of fiscal 1998 totaled
$168.1 compared to $56.5 in the prior year. This increase is primarily
attributable to net cash used for the acquisition of Levington and Earthgro of
approximately $88.8 and $42.4, respectively. Capital investments were $22.0 in
the first nine months of fiscal 1998, a $12.6 increase in comparison to the
prior year. This increase is primarily attributable to the construction of a
warehouse facility and the installation of new packaging lines, both in
Marysville, as well as the acquisition of additional warehousing space in the
Netherlands.
Financing activities provided $91.8 for the first nine months of fiscal 1998
compared to a usage of $18.3 in the prior year. Financing activities are
principally supported by the Company's Credit Agreement. Approximately $88.8 and
$42.4 of the increase from the prior year relates to financing the Levington and
Earthgro acquisitions, respectively.
Total debt was $331.0 as of July 4, 1998, an increase of $109.7 compared with
debt at September 30, 1997 and an increase of $89.6 compared with debt levels at
June 28, 1997. Borrowings associated with the Levington and Earthgro
acquisitions were approximately $88.8 and $42.4, respectively. The remaining
decrease compared to both September 30, 1997 and June 28, 1997 is attributable
to strong operating cash flows, partially offset by capital expenditures and
preferred stock dividends.
Shareholders' equity as of July 4, 1998 was $430.1, representing a $40.9
increase compared to September 30, 1997 and a $33.7 increase compared to June
28, 1997. The increase compared to September 30, 1997 is attributable to net
income of $51.6, Convertible Preferred Stock dividends of $7.3, an unfavorable
change in cumulative foreign currency translation of $1.9 and treasury stock
activity of $1.5. The increase compared to June 28, 1997 is attributable to net
income for the twelve month period ended July 4, 1998 of $48.2, Convertible
Preferred Stock dividends of $9.8, unfavorable changes in cumulative foreign
currency translation of $3.9 and treasury stock activity of $0.8.
The Company has foreign exchange risk related to international operations and
cash flows. The Company has historically entered into forward foreign exchange
contracts and purchased currency options to hedge its exposure to fluctuations
in foreign currency exchange rates. The Company has reassessed its foreign
exchange policy and taken actions internally to reduce such exposure, thus
reducing its use of foreign exchange contracts.
As of July 4, 1998, the Company's European operations had foreign exchange risk
in various European currencies tied to the Dutch Guilder. These currencies
include the Belgian Franc, Spanish Peseta, French Franc, British Pound, Italian
Lire, Australian Dollar 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.
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 fiscal 1998. The Company expects to finance announced business
combinations through the use of debt instruments.
ENVIRONMENTAL MATTERS
The Company is subject to local, state, federal and foreign environmental
protection laws and regulations with respect to its business operations and
believes it is operating in substantial compliance with, or taking action aimed
at ensuring compliance with, such laws and regulations. The Company is involved
in several environmental related legal actions with various governmental
agencies. 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 the Company's financial position; however,
there can be no assurance that future quarterly or annual operating results will
not be materially affected by the resolution of these matters.
Page 18
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Additional information on environmental matters affecting the Company is
provided in Note 6 to the Company's Consolidated Financial Statements and in the
Annual Report on Form 10-K to the Securities and Exchange Commission for the
year ended September 30, 1997 under the "Business - Environmental and Regulatory
Considerations" section.
NEW ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information". In February 1998, the FASB issued SFAS No. 132, "Employers'
Disclosure about Pensions and Other Postretirement Benefits." In August 1998,
the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 130, 131 and 132 are effective for financial statements
for fiscal years beginning after December 15, 1997. SFAS NO. 133 is effective
for fiscal years beginning after June 15, 1999.
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses). SFAS No. 130
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. Comprehensive income is defined as the change in equity of a
business enterprise during a period from transactions and other events and
circumstances from non-owner sources. It includes all changes in equity during a
period except those resulting from investments by owners and distributions to
owners. The Company believes the only significant differences between
comprehensive income and currently reported income will be the impact of foreign
currency translation. The Company plans to adopt SFAS No. 130 in fiscal 1999.
SFAS No. 131 establishes standards for the way that public business enterprises
report information about operating segments in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. This statement
defines business segments as components of an enterprise about which separate
financial information is available and used internally for evaluating segment
performance and decision making on resource allocations. SFAS No. 131 requires
reporting a measure of segment profit or loss, certain specific revenue and
expense items, and segment assets; and other reporting about geographic and
customer matters. The Company plans to adopt SFAS No. 131 in the first quarter
of fiscal 1999; however, the Company believes that the business segments
identified and set forth in Note 14 to the Scotts' fiscal 1997 Annual Report on
Form 10-K are in substantial compliance with SFAS No. 131.
SFAS No. 132 revises employers' disclosures about pension and other
postretirement benefit plans. It does not change the measurement or recognition
of those plans. It standardizes the disclosure requirements for pensions and
other postretirement benefits to the extent practicable, requires additional
information on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain disclosures that
are no longer useful. The Company plans to adopt SFAS No. 132 in fiscal 1999.
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments and for hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company has not yet
determined the impact this statement will have on its operating results. The
Company plans to adopt SFAS No. 133 in fiscal 2000.
ENTERPRISE RESOURCE PLANNING
In July 1998, the Company announced an initiative ("Project Catalyst") designed
to bring its information system resources in line with the Company's current
growth patterns. The project will include reengineering of certain key processes
and the installation of SAP software on a world-wide basis over the course of
the next two fiscal years, with an estimated cost of $48.0. The Company
currently estimates that of the total costs, $36.0 and $12.0 will be capitalized
and expensed, respectively. SAP has been selected as the primary software
provider for this project. As this project is not scheduled for completion prior
to January 1, 2000, the Company is addressing the Year 2000 issue separately
from the ERP project.
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<PAGE> 20
YEAR 2000
The Company is addressing exposures related to the Year 2000 issue. Key
financial, information and operational systems have been assessed and plans
developed in order to mitigate the Year 2000 issue. These plans include
conversion of in-house developed software, upgrades to purchased software and
confirmation with trading partners as to their Year 2000 state of readiness. The
Company engaged outside consultants to review the Company's plans for addressing
the Year 2000 issue and, as a result, established executive sponsorship and a
Program Office to oversee Company-wide efforts. Such efforts are currently in
various stages of completion. The Company estimates the cost of mitigating the
entire Year 2000 issue to be in the range of $5 to $7 million, the majority of
which will be recorded as expense. Through the third quarter of fiscal 1998, the
Company has spent approximately $1 million towards these efforts.
Management believes its plans will adequately address the Year 2000 issue.
However, if such conversions and upgrades are not adequately made or timely
completed, the Year 2000 issue could have a material impact on the operations of
the Company and its financial results.
EURO
Beginning in January 1999, a new currency called the "euro" is scheduled to be
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. Additionally, all of the final rules and regulations
have not yet been defined and finalized by the European Commission with regard
to the euro currency. The Company is still assessing the impact the EMU
formation will have on its internal systems and the sale of its products. The
Company expects to take appropriate actions based on the results of such
assessment. The Company has not yet determined the cost related to addressing
this issue and there can be no assurance that this issue and its related costs
will not have a materially adverse effect on the Company's business, operating
results and financial condition.
RECENT DEVELOPMENTS
On June 25, 1998, the Company signed a letter of intent with Monsanto Company to
acquire the assets of Monsanto's consumer lawn and garden businesses, exclusive
of the RoundUp(R) business, for approximately $300 million. The acquired
businesses include Ortho(R) line of pesticides which encompasses brands such as
Weed-B-Gone(R), Rose Pride(R) and Home Defense(R). As part of the agreement, the
Company would also acquire Green Cross(R), a leading pesticides business in
Canada. Separately, the Company signed a letter of intent with Monsanto for
exclusive international marketing and agency rights to Monsanto's consumer
RoundUp(R) herbicide products. The proposed agreement would cover most major
consumer lawn and garden markets in the world, including the U.S., Canada,
Germany, France, other parts of continental Europe, and Australia. The Company
expects to consummate the transactions contemplated by the agreements in the
first quarter of fiscal 1999.
On July 10, 1998, the Company announced that it had agreed to purchase
Rhone-Poulenc Jardin, continental Europe's largest consumer lawn and garden
products company, from Rhone-Poulenc. Separately, the Company announced that it
had agreed to acquire ASEF, a privately-held Netherlands-based lawn and garden
products company. The combined purchase price for these two separate
transactions is approximately $220 million. The Company expects to consummate
the transactions contemplated by the agreement late in the fourth quarter of
fiscal 1998 or the first quarter of fiscal 1999.
Page 20
<PAGE> 21
MANAGEMENT'S OUTLOOK
The strong financial results for the first nine months of fiscal 1998 represent
the second year in the Company's long-term strategy for profitable growth.
Management believes the Company is on course towards fulfilling the following
tenets which it established as part of its strategic plan:
(1) Promote and capitalize on the strengths of the Scotts(R), Miracle-Gro(R)
and Hyponex(R) industry-leading brands. This involves a commitment to our
investors and retail partners that we will support these brands through
advertising and promotion unequaled in the lawn and garden consumables
market. In the Professional categories of our business, it signifies a
commitment to our customers to provide value and an integral element in
their long-term success;
(2) A commitment to continuously study and improve our knowledge of the market,
the consumer and the competition;
(3) Simplification of our 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.
The acquisitions of Levington and Earthgro, as well as other business
initiatives such as Scotts Lawn Service, Sanford Scientific, Inc., the U.S. Home
and Garden Consumer Products Business of AgrEvo Environmental Health, Inc. and
recently announced business combinations are symbolic of the Company's intention
to consider acquisition opportunities in related or new markets. Within the
Company's four-year strategic plan, management has established challenging, but
realistic, financial goals, including:
(1) Sales growth of 6% to 8% in core businesses;
(2) An aggregate operating margin improvement of at least 2% over the next
four years; and
(3) Minimum compounded annual EPS growth of 15%.
FORWARD-LOOKING STATEMENTS
The Company has made and will make certain forward-looking statements in its
Annual Report, Form 10-Q and in other contexts relating to future growth and
profitability targets, and strategies designed to increase total shareholder
value. The Private Securities Litigation Reform Act of 1995 (the "Act") 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. The Company
desires to take advantage of the "safe harbor" provisions of the Act.
These forward-looking statements represent challenging goals for the Company,
and the achievement thereof is subject to a variety of risks and assumptions.
These forward-looking statements include, but are not limited to, information
regarding the future economic performance and financial condition of the
Company, the plans and objectives of the Company's management, and the Company's
assumptions regarding such performance and plans. Therefore, it is possible that
the Company's future actual financial results may differ materially from those
expressed in these forward-looking statements due to a variety of factors,
including:
o Weather conditions in North America and Europe which have a
significant impact on the timing of sales in the Spring selling
season and overall annual sales;
o Continued marketplace acceptance of the Company's Consumer Lawns
and Consumer Gardens groups' "pull" advertising marketing
strategies, particularly in the Consumer Lawns group which
refocused its general marketing strategy beginning in fiscal 1996;
o The Company's ability to maintain profit margins on its products,
to produce its products on a timely basis, and to maintain and
develop additional production capacity as necessary to meet
demand;
Page 21
<PAGE> 22
o Competition among lawn and garden care product producers
supplying the consumer and professional markets, both in North
America and Europe;
o Competition between and the recent consolidation within the
retail outlets selling lawn and garden care products produced by
the Company;
o Public perceptions regarding the safety of the products produced
and marketed by the Company;
o Inherent risks of international development, including currency
exchange rates, the implementation of the euro, economic
conditions and regulatory and cultural difficulties or delays in
the Company's development outside the United States;
o Changes in economic conditions in the United States and the impact
of changes in interest rates;
o The ability of the Company to improve its processes and business
practices to keep pace with the economic, competitive and
technological environment, including successfully addressing the
Year 2000 issues and completing Project Catalyst on a timely
basis; and
o The ability to obtain financing for, and successfully integrate
acquired companies.
Page 22
<PAGE> 23
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
See Footnote 6 to the Consolidated Financial Statements.
Item 5. Other Information
As discussed in the Company's Proxy Statement for the 1998 Annual
Meeting of Shareholders, any qualified shareholder of the Company who
intends to submit a proposal to the Company at the 1999 Annual Meeting
of Shareholders (the "1999 Annual Meeting") must submit such proposal
to the Company not later than September 14, 1998 to be considered for
inclusion in the Company's Proxy Statement and form of Proxy (the
"Proxy Materials") relating to that meeting. If a shareholder intends
to present a proposal at the 1999 Annual Meeting of Shareholders, but
has not sought the inclusion of such proposal in the Company's Proxy
Materials, such proposal must be received by the Company prior to
November 28, 1998 or the Company's management proxies for the 1999
Annual Meeting will be entitled to use their discretionary voting
authority should such proposal then be raised, without any discussion
of the matter in the Company's Proxy Materials.
Item 6. Exhibits
(a) See Exhibit Index at page 25 for a list of the exhibits included
herewith.
Page 23
<PAGE> 24
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 17, 1998 /s/ JEAN H. MORDO
------------------------- -----------------------------
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 24
<PAGE> 25
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED July 4, 1998
EXHIBIT INDEX
Exhibit Page
Number Description Number
------ ----------- ------
27 Financial Data Schedule *
- ------------------------
*Filed herewith
Page 25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
SCOTTS COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FORM 10-Q
FOR THE QUARTER ENDED JULY 4, 1998.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> JUL-4-1998
<EXCHANGE-RATE> 1
<CASH> 29,600,000
<SECURITIES> 0
<RECEIVABLES> 170,100,000
<ALLOWANCES> 5,500,000
<INVENTORY> 165,300,000
<CURRENT-ASSETS> 389,400,000
<PP&E> 315,000,000
<DEPRECIATION> 127,300,000
<TOTAL-ASSETS> 1,019,100,000
<CURRENT-LIABILITIES> 215,800,000
<BONDS> 0
0
177,300,000
<COMMON> 200,000
<OTHER-SE> 252,600,000
<TOTAL-LIABILITY-AND-EQUITY> 1,019,100,000
<SALES> 923,200,000
<TOTAL-REVENUES> 923,200,000
<CGS> 578,800,000
<TOTAL-COSTS> 225,500,000
<OTHER-EXPENSES> 2,700,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,000,000
<INCOME-PRETAX> 89,200,000
<INCOME-TAX> 36,900,000
<INCOME-CONTINUING> 52,300,000
<DISCONTINUED> 0
<EXTRAORDINARY> 700,000
<CHANGES> 0
<NET-INCOME> 51,600,000
<EPS-PRIMARY> 2.37
<EPS-DILUTED> 1.70
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
SCOTTS COMPANY AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO FORM 10-Q FOR
THE QUARTER ENDED JULY 4, 1998.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1998 SEP-30-1997 SEP-30-1997
<PERIOD-START> APR-05-1998 OCT-01-1996 MAR-30-1997
<PERIOD-END> JUL-04-1998 JUN-28-1997 JUN-28-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 29,600,000 28,400,000 28,400,000
<SECURITIES> 0 0 0
<RECEIVABLES> 170,100,000 147,500,000 147,500,000
<ALLOWANCES> 5,500,000 5,900,000 5,900,000
<INVENTORY> 165,300,000 152,600,000 152,600,000
<CURRENT-ASSETS> 389,400,000 344,100,000 344,100,000
<PP&E> 315,000,000 239,300,000 239,300,000
<DEPRECIATION> 127,300,000 103,700,000 103,700,000
<TOTAL-ASSETS> 1,019,100,000 839,500,000 839,500,000
<CURRENT-LIABILITIES> 215,800,000 165,800,000 165,800,000
<BONDS> 0 0 0
0 0 0
177,300,000 177,300,000 177,300,000
<COMMON> 200,000 200,000 200,000
<OTHER-SE> 252,600,000 218,900,000 218,900,000
<TOTAL-LIABILITY-AND-EQUITY> 1,019,100,000 839,500,000 839,500,000
<SALES> 367,500,000 745,400,000 299,000,000
<TOTAL-REVENUES> 367,500,000 745,400,000 299,000,000
<CGS> 235,700,000 463,700,000 188,300,000
<TOTAL-COSTS> 80,200,000 181,400,000 66,300,000
<OTHER-EXPENSES> 1,300,000 2,800,000 (700,000)
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 9,700,000 21,500,000 7,600,000
<INCOME-PRETAX> 40,600,000 76,000,000 37,500,000
<INCOME-TAX> 16,200,000 33,000,000 16,400,000
<INCOME-CONTINUING> 24,400,000 43,000,000 21,100,000
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<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 24,400,000 43,000,000 21,100,000
<EPS-PRIMARY> 1.18 1.92 1.01
<EPS-DILUTED> 0.80 1.47 0.71
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