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 June 28, 1997
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
incorporation or organization) Identification No.)
14111 Scottslawn Road
Marysville, Ohio 43041
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(937) 644-0011
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(Registrant's telephone number, including area code)
No change
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(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.
18,656,313 Outstanding at August 1, 1997
----------------------------------- -----------------------------
Common Shares, voting, no par value
Page 1 of 25 pages
Exhibit Index at page 24
2
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
Page No.
--------
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations - Three month and nine
month periods ended June 28, 1997 and June 29, 1996 3
Consolidated Statements of Cash Flows - Nine month periods
ended June 28, 1997 and June 29, 1996 4
Consolidated Balance Sheets -
June 28, 1997, June 29, 1996 and September 30, 1996 5
Notes to Consolidated Financial Statements 6-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-20
Part II. Other Information
Item 1. Legal Proceedings 21
Item 6. Exhibits and Reports on Form 8-K 21
Signatures 22
Exhibit Index 23
Page 2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in millions except per share amounts)
Three Months Ended Nine Months Ended
---------------------- ------------------
June 28 June 29 June 28 June 29
1997 1996 1997 1996
------- ------- ------- -------
Net sales $299.0 $247.9 $745.4 $617.1
Cost of sales 188.3 165.9 463.7 410.6
------ ------ ------ ------
Gross profit 110.7 82.0 281.7 206.5
Selling, general and administrative 37.1 27.8 95.9 86.9
Advertising and promotion 26.5 27.1 77.9 62.4
Amortization of goodwill and other intangibles 2.7 2.2 7.6 6.6
Other (income) expenses, net (0.7) 3.1 2.8 7.7
------ ------ ------ ------
Income from operations 45.1 21.8 97.5 42.9
Interest expense 7.6 6.9 21.5 21.6
------ ------ ------ ------
Income before income taxes 37.5 14.9 76.0 21.3
Income taxes 16.4 7.3 33.0 10.2
------ ------ ------ ------
Net income 21.1 7.6 43.0 11.1
Preferred stock dividends 2.4 2.4 7.3 7.3
------ ------ ------ ------
Income applicable to common shareholders $ 18.7 $ 5.2 $ 35.7 $ 3.8
====== ====== ====== ======
Income per common share $ 0.71 $ 0.26 $ 1.47 $ 0.20
====== ====== ====== ======
Common shares used in per common
share computation 29.9 29.4 29.3 19.1
====== ====== ====== ======
See Notes to Consolidated Financial Statements
Page 3
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THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in millions)
Nine Months Ended
--------------------------
June 28 June 29
1997 1996
------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 43.0 $ 11.1
Adjustments to reconcile net income to net cash
used in operating activities:
Depreciation and amortization 24.0 22.1
Equity in income of unconsolidated business (0.1) (0.4)
Postretirement benefits 0.1 0.1
Unusual charges, net -- 6.7
Net decrease in certain components of
working capital 27.3 30.3
Net decrease in other assets and
liabilities and other adjustments 4.1 6.4
------ ------
Net cash provided by operating activities 98.4 76.3
------ ------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment, net (9.4) (11.0)
Acquisition (47.1) --
------ ------
Net cash used in investing activities (56.5) (11.0)
------ ------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on term and other debt -- (0.3)
Revolving lines of credit and bank line of credit, net (12.1) (49.6)
Purchase of Common Shares -- (4.2)
Issuance of Common Shares 1.3 7.4
Deferred financing costs incurred (0.2) --
Dividends on preferred stock (7.3) (7.3)
------ ------
Net cash used in financing activities (18.3) (54.0)
------ ------
Effect of exchange rate changes on cash (5.8) (1.4)
------ ------
Net increase in cash 17.8 9.9
Cash at beginning of period 10.6 7.0
------ ------
Cash at end of period $ 28.4 $ 16.9
====== ======
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount capitalized $ 16.3 $ 18.2
Income taxes paid $ 16.3 $ 3.8
Business acquired:
Fair value of assets acquired 103.5
Liabilities assumed 45.3
Net cost of acquisition 58.2
See Notes to Consolidated Financial Statements
Page 4
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THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in millions)
ASSETS
June 28 June 29 September 30
1997 1996 1996
------- ------- ------------
Current Assets:
Cash $ 28.4 $ 16.9 $ 10.6
Accounts receivable, less allowances
of $6.0, $5.2, and $4.1, respectively 141.6 124.3 110.4
Inventories 152.6 157.5 148.8
Prepaid and other assets 21.5 22.0 22.1
------ ------ ------
Total current assets 344.1 320.7 291.9
------ ------ ------
Property, plant and equipment, net 135.6 143.3 139.5
Trademarks 85.3 87.6 87.0
Other intangibles 16.0 20.8 19.5
Goodwill 250.3 181.4 180.2
Other assets 1.4 14.2 13.6
------ ------ ------
Total Assets $832.7 $768.0 $731.7
====== ====== ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line $ 1.6 $ 1.8 $ 2.0
Current portion of term debt -- -- 0.2
Accounts payable 53.8 54.0 46.3
Accrued liabilities 70.6 47.1 42.6
Accrued taxes 37.3 26.1 19.7
------ ------ ------
Total current liabilities 163.3 129.0 110.8
------ ------ ------
Term debt, less current portion 239.8 220.8 223.1
Postretirement benefits other than pensions 27.3 27.3 27.2
Other liabilities 5.9 5.1 6.3
------ ------ ------
Total Liabilities 436.3 382.2 367.4
------ ------ ------
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value 177.3 177.3 177.3
Common Shares, $.01 stated value, issued 21.1
shares in 1997 and 1996 0.2 0.2 0.2
Capital in excess of par value 207.2 207.6 207.6
Retained earnings 56.1 36.4 20.4
Cumulative foreign currency translation adjustments (2.3) 2.1 2.2
Treasury stock, 2.4 shares on June 28, 1997,
2.5 shares on September 30, 1996, and
2.1 shares on June 29, 1996, at cost (42.1) (37.8) (43.4)
------ ------ ------
Total Shareholders' Equity 396.4 385.8 364.3
------ ------ ------
Total Liabilities and Shareholders' Equity $832.7 $768.0 $731.7
====== ====== ======
See Notes to Consolidated Financial Statements
Page 5
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THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. ORGANIZATION AND BASIS OF PRESENTATION
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 United Kingdom, continental Europe, Southeast Asia, the
Middle East, Africa, Australia, New Zealand, and several Latin American
countries. The Company's business is highly seasonal with 70% to 75% of
sales occurring in the second and third fiscal quarters.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Scotts
Company ("Scotts") and its wholly-owned subsidiaries, Hyponex Corporation
("Hyponex"), Republic Tool and Manufacturing Corp. ("Republic"),
Scotts-Sierra Horticultural Products Company ("Sierra"), Scotts'
Miracle-Gro Products, Inc. ("Miracle-Gro"), and Miracle Holdings Limited
("Miracle Holdings") (collectively, the "Company"). All material
intercompany transactions have been eliminated.
The consolidated balance sheets as of June 28, 1997 and June 29, 1996,
the related consolidated statements of operations for the three and nine
month periods ended June 28, 1997 and June 29, 1996 and the related
consolidated statements of cash flows for the nine month periods ended
June 28, 1997 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 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 1996 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, marketing 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.
RECLASSIFICATION
Certain reclassifications have been made to the prior year's financial
statements to conform to fiscal 1997 classifications.
ADVERTISING COSTS
In the quarter ended March 29, 1997, the Company changed its method of
accounting for advertising expenses in interim periods. The newly adopted
method assigns anticipated advertising costs to interim periods based on
projected sales of advertised product categories
Page 6
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THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
and has been applied retroactive to the beginning of fiscal 1997 (October
1, 1996). This change impacts interim periods only; all current year
advertising costs will be expensed within the fiscal year. Management
believes this method of interim accounting for advertising costs provides
better matching of revenues and expenses in interim periods, and is
consistent with companies in the consumer packaged goods industry.
This change in interim accounting had the effect of increasing
advertising expense for the first and second quarters of fiscal 1997 by
$3.3 million and $4.6 million, respectively. Third quarter 1997
advertising expense decreased by $8.4 million. Net income for the first
and second quarters of fiscal 1997 decreased by $1.9 million or $0.10 per
share and $2.6 million or $0.09 per share, respectively. Net income for
the third quarter increased $4.8 million or $0.16 per share. For the nine
months ended June 28, 1997, advertising expense decreased by $0.5
million, resulting in an increase in net income of $0.3 million or $.01
per share.
On a pro forma basis, assuming the new method of accounting for interim
advertising had been applied to fiscal 1996, first and second quarter
1996 advertising expense would have increased $3.9 million and $2.0
million, respectively. Third quarter 1996 advertising expense would have
decreased $7.4 million. Net income for the first and second quarters of
fiscal 1996 would have decreased by $2.2 million or $0.12 per share and
$1.2 million or $0.04 per share. Net income for the third quarter would
have increased $4.2 million or $0.14 per share. For the nine months ended
June 29, 1996, advertising expense would have decreased by $1.5 million,
resulting in an increase in net income of $0.8 million or $0.03 per
share.
2. ACQUISITIONS
Effective January 3, 1997, the Company acquired the approximately
two-thirds interest in Miracle Holdings which the Company did not already
own. Miracle Holdings owns Miracle Garden Care Limited, a manufacturer
and distributor of lawn and garden products in the United Kingdom.
The following pro forma results of operations give effect to the Miracle
Holdings acquisition as if it had occurred on October 1, 1995.
(in millions, except per share amounts)
Nine Months Ended
---------------------------------------
June 28 June 29
1997 1996
------- -------
Net sales $756.8 $664.6
====== ======
Net income $ 42.8 $ 4.5
====== ======
Income per common share $ 1.46 $ .24
====== ======
Pro forma primary net income per common share for the nine months ended
is calculated using the weighted average common shares and common share
equivalents outstanding at June 28, 1997 of 29.3 million and at June 29,
1996 of 19.1 million.
The pro forma information provided does not purport to be indicative of
actual results of operations if the Miracle Holdings acquisition had
occurred as of October 1, 1995, and is not intended to be indicative of
future results or trends.
Page 7
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THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. INVENTORIES
(in millions)
Inventories, net of provisions of $9.1, $6.8 and $8.7, consisted of:
June 28 June 29 September 30
1997 1996 1996
------- ------- ------------
Finished Goods $102.9 $ 51.3 $ 96.7
Raw Materials 49.7 106.2 52.1
------ ------ ------
$152.6 $157.5 $148.8
====== ====== ======
4. LONG-TERM DEBT
(in millions)
June 28 June 29 September 30
1997 1996 1996
------- ------- ------------
Revolving Credit Line $141.9 $123.0 $125.7
9 7/8% Senior
Subordinated Notes
$100 million face
amount due 2004 99.4 99.4 99.4
Capital lease
obligations and other 0.1 0.2 0.2
------ ------ ------
241.4 222.6 225.3
Less current portions 1.6 1.8 2.2
------ ------ ------
Long-term debt $239.8 $220.8 $223.1
====== ====== ======
Maturities of term debt for the next five calendar years are as follows:
1997 1.6
1998 0
1999 0
2000 139.8
2001 0
Thereafter 100.0
On December 23, 1996, the Company entered into an amendment to the Fourth
Amended and Restated Credit Agreement with Chase Manhattan Bank and
various participating banks. The amendment provides, on an unsecured
basis, up to $425 million to the Company, which represents an increase of
$50 million to the revolving credit facility, and establishes a $100
million sub-tranche to be available in U.K. Pounds Sterling.
5. FOREIGN EXCHANGE INSTRUMENTS
The Company enters into forward foreign exchange contracts and purchases
currency options 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. Effective in the second
quarter of 1997, the Company significantly reduced this program.
Page 8
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THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Realized and unrealized foreign exchange gains and losses are recognized
and offset foreign exchange gains or losses on the underlying exposures.
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.
At June 28, 1997, the Company's European operations had foreign exchange
risk in various European currencies tied to the Dutch Guilder. These
currencies are the Belgian Franc, German Mark, Spanish Peseta, Italian
Lire, French Franc, British Pound, Australian Dollar and U.S. Dollar.
The Company's U.S. operations had foreign exchange rate risk in the
Canadian Dollar, the Dutch Guilder and the British Pound which are tied
to the U.S. Dollar.
6. ACCOUNTING ISSUES
In October 1995, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123, "Accounting for Stock-Based Compensation," effective for
financial statements for fiscal years beginning after December 15, 1995.
SFAS No. 123 provides for, but does not require, a fair value method of
accounting for stock-based compensation arrangements rather than the
intrinsic value method previously required. Alternatively, entities that
retain the intrinsic value method are required to disclose in the notes
to the financial statements pro forma net income and earnings per share
information as if the fair value method had been applied. The Company
does not intend to adopt the fair value method of SFAS No. 123;
therefore, this standard will not have a material effect on the Company's
consolidated financial statements.
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", each standard is effective for financial
statements for fiscal years beginning after December 15, 1997.
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-owners
sources; it includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners.
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 is evaluating each of these recent pronouncements. Although
additional disclosures may be required, they are not anticipated to have
a material impact on the Company's currently reported statement of
operations or its financial position.
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THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
7. OTHER (INCOME) EXPENSES, NET
(in millions)
Other (income) expenses, net consisted of the following:
Three Months Ended Nine Months Ended
---------------------- -------------------
June 28 June 29 June 28 June 29
1997 1996 1997 1996
-------- ------- ------- -------
Foreign currency (gain) loss $(0.2) $ 0.1 $ 0.1 $ 0.6
Royalty income (0.6) (0.1) (1.7) (0.4)
Asset valuation charges -- 3.3 4.3 4.1
Restructuring/severance -- -- -- 4.5
Equity in income of
unconsolidated business -- (0.2) (0.1) (0.4)
Other, net 0.1 -- 0.2 (0.7)
----- ----- ----- -----
Total $(0.7) $ 3.1 $ 2.8 $ 7.7
===== ===== ===== =====
8. INCOME PER COMMON SHARE
Income per common share 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 following table presents information necessary to calculate income
per common share.
(in millions, except per share amounts)
Three Months Ended Nine Months Ended
-------------------------- ------------------------
June 28 June 29 June 28 June 29
1997 1996 1997 1996
-------- -------- -------- -------
Net income $21.1 $ 7.6 $43.0 $11.1
Class A Convertible Preferred
Stock dividend na na na 7.3
----- ----- ----- -----
Income used in
income per common
share calculation $21.1 $ 7.6 $43.0 $ 3.8
===== ===== ===== =====
Weighted average common
shares outstanding during
the period 18.6 18.9 18.6 18.8
Assuming conversion of Class A
Convertible Preferred Stock 10.3 10.3 10.3 --
Assuming exercise of warrants 0.2 -- 0.1 --
Assuming exercise of options
using the Treasury Stock
Method 0.8 0.2 0.3 0.3
----- ----- ----- -----
Weighted average number of
common shares outstanding
as adjusted 29.9 29.4 29.3 19.1
===== ===== ===== =====
Income per common
share $0.71 $0.26 $1.47 $0.20
===== ===== ===== =====
Fully diluted income per common share is considered to be the same as
primary income per common share.
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THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
("FAS 128"). FAS 128 establishes standards for computing and presenting
earnings per share ("EPS"). FAS 128 replaces the presentation of primary
EPS with a presentation of basic EPS which excludes dilution and is
computed by dividing income available to common shareholders by the
weighted-average number of common shares outstanding during the period.
This statement also requires dual presentation of basic EPS and diluted
EPS on the face of the income statement for all periods presented. FAS
128 is effective for financial statements issued for periods ending after
December 15, 1997, including interim periods. The Company plans to adopt
FAS 128 in the first quarter of 1998 for the year ended September 30,
1998. If FAS 128 had been adopted at June 28, 1997, basic and diluted
earnings per share would be:
Three Months Ended Nine Months Ended
----------------------- -----------------------
June 28 June 29 June 28 June 29
1997 1996 1997 1996
-------- ------- ------- -------
Basic earnings per share $1.01 $.27 $1.92 $.20
===== ==== ===== ====
Diluted earnings per share $ .71 $.26 $1.47 $.20
===== ==== ===== ====
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 are the more significant of the Company's
identified contingencies.
HERSHBERGER
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. However, as a result of the joint and several liability of
PRP's, the Company may choose to participate in voluntary remediation
efforts which might occur at the site. Management does not believe any
such obligations would have a material adverse effect on the Company's
results of operations or financial condition.
LAFAYETTE
In July 1990, the Philadelphia District of the U.S. Army Corps of
Engineers directed that peat harvesting operations be discontinued at
Hyponex's Lafayette, NJ 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; however, based on other market considerations, the Company
might not resume harvesting from this facility in any event. 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 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. 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 supplied available such that service to customers will not
be adversely affected by continued closure of this peat harvesting
operation.
Page 11
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THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
FIFRA
In January 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. In
February 1997, the U.S. EPA's Motion for Accelerated Decision was granted
on the issue of liability, with the amount of the civil penalty to be
resolved at hearing. Based upon Crop Protection's good faith compliance
actions and U.S. EPA's policies regarding penalty reductions, management
believes Crop Protection's liability in this action is substantially less
than the maximum. 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.
OHIO EPA
The Company has been assessing and, as required, addressing certain
environmental issues regarding the wastewater treatment plants currently
operating at the Marysville facility. Specifically, it has been
considering whether to upgrade the existing treatment plants or to
undertake to tie the facility's wastewater system into 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. To this
end, in early July 1997, the Company submitted written documentation to
the Ohio EPA, to demonstrate VAP eligibility compliance.
In February 1997, the Company learned that the Ohio EPA was referring
certain environmental matters relating to the Company's wastewater
treatment plants and on-site disposal areas to the Ohio Attorney
General's Office for possible enforcement action. Representatives from
the Ohio EPA, the Ohio Attorney General's Office and the Company have
subsequently met on several occasions to discuss resolution of these
issues. As part of these ongoing discussions, in June 1997, the Company
received draft Findings and Orders ("F&O") and communications from the
Ohio EPA which elaborated on the subject of the referral to include,
among other items: potential surface water violations relating to
sediment contamination possibly impacting water quality; and potential
contamination relating to the existence of former underground storage
tanks. In addition, the draft F&O would require that the Company's
Marysville site be subject to corrective action under the Resource
Conservation Recovery Act ("RCRA"). The Company received a draft Consent
Order from the Ohio Attorney General's Office in late July 1997 which
reflects most of the issues contained in the draft F&O, including
corrective action. The Company continues its discussions and is
undertaking to negotiate an amicable resolution of these issues with the
Ohio EPA and Attorney General over the course of the next several months.
The Company also continues its ongoing efforts to address many of these
issues under VAP.
The Company does not believe that any proceedings which may result from
the Ohio EPA's referral of these matters to the Ohio Attorney General
will be material to the business or financial condition of the Company
but is unable, at this early stage, to predict the outcome of these
issues.
Page 12
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. The Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 1996 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
Before reviewing the details of the Company's third quarter and nine month
results, the reader should keep in mind the following matters.
In the quarter ended March 29, 1997, the Company changed its method of
accounting for advertising expenses in interim periods. The newly adopted
method assigns anticipated advertising costs to interim periods based on
projected sales of advertised product categories and has been applied
retroactive to the beginning of fiscal 1997 (October 1, 1996). This change
impacts interim periods only; all current year advertising costs will be
expensed within the fiscal year. Management believes this method of interim
accounting for advertising costs provides better matching of revenues and
expenses in interim periods, and is consistent with companies in the consumer
packaged goods industry.
This change in interim accounting had the effect of increasing advertising
expense for the first and second quarters of fiscal 1997 by $3.3 million and
$4.6 million, respectively. Third quarter 1997 advertising expense decreased by
$8.4 million. Net income for the first and second quarters of fiscal 1997
decreased by $1.9 million or $0.10 per share and $2.6 million or $0.09 per
share, respectively. Net income for the third quarter increased $4.8 million or
$0.16 per share. For the nine months ended June 28, 1997, advertising expense
decreased by $0.5 million, resulting in an increase in net income of $0.3
million or $0.01 per share.
On a pro forma basis, assuming the new method of accounting for interim
advertising had been applied to fiscal 1996, first and second quarter 1996
advertising expense would have increased $3.9 million and $2.0 million,
respectively. Third quarter 1996 advertising expense would have decreased $7.4
million. Net income for the first and second quarters of fiscal 1996 would have
decreased by $2.2 million or $0.12 per share and $1.2 million or $0.04 per
share. Net income for the third quarter of 1996 would have increased $4.2
million or $0.14 per share. For the nine months ended June 29, 1996,
advertising expense would have decreased by $1.5 million, resulting in an
increase in net income of $0.8 million or $0.03 per share.
Effective with the second quarter of fiscal 1997, the Company has made the
following changes in its financial statement presentation. First, the Company
reclassified its statement of operations as follows:
(1) Distribution expense is included in cost of sales;
(2) Selling, general and administrative expenses are combined (including
research and development); and
(3) Advertising and promotion expenses are shown separately.
Second, the business unit net sales breakdowns have been updated to include
Canadian net sales as part of the North American business units in which they
are managed. Canadian net sales had previously been disclosed as part of
International. Annual Canadian net sales have been approximately $10.0 million
or less historically.
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The following table sets forth the components of income and expense for the
third quarter and first nine months of fiscal 1997 and 1996 on a
percentage-of-net sales basis:
Three Months Ended Nine Months Ended
-------------------- Period to -------------------- Period to
June 28 June 29 Period June 28 June 29 Period
1997 1996 % Change 1997 1996 % Change
------ ------- --------- ------- ------- ---------
Net sales 100.0% 100.0% 20.6% 100.0% 100.0% 20.8%
Cost of sales 63.0 66.9 13.5 62.2 66.5 12.9
----- ----- ----- -----
Gross profit 37.0 33.1 35.0 37.8 33.5 36.4
Selling, general and
administrative 12.4 11.2 33.5 12.9 14.1 10.4
Advertising and promotion 8.9 10.9 (2.2) 10.5 10.1 24.8
Amortization of goodwill
and other intangibles 0.9 0.9 22.7 1.0 1.1 15.2
Other (income) expense (0.3) 1.3 nm 0.3 1.3 nm
----- ----- ----- -----
Income from operations 15.1 8.8 106.9 13.1 6.9 127.3
Interest expense 2.6 2.8 10.1 2.9 3.5 (0.5)
----- ----- ----- -----
Income before taxes 12.5 6.0 151.7 10.2 3.4 256.8
Income taxes 5.4 2.9 124.7 4.4 1.6 223.5
----- ----- ----- -----
Net income 7.1 3.1 177.6% 5.8 1.8 287.4%
Preferred stock dividends 0.8 1.0 nm 1.0 1.2 nm
----- ----- ----- -----
Income applicable to
common shareholders 6.3% 2.1% nm 4.8% 0.6% nm
===== ===== ===== =====
The following table sets forth the sales by business unit for the third quarter
and first nine months of fiscal 1997 and 1996 (in millions).
% Change v. % Change v.
-------------- First Nine -------------------------
Q3 1996 1996 Months Fiscal 1996 1996
1997 Actual As Adjusted(1) 1997 Actual As Adjusted(1)
---- ------ --------------- ------------- ------ --------------
Consumer Lawns $ 77.3 33.5% 3.8% $263.4 31.5% 6.3%
Consumer Gardens 54.0 13.0 120.3 12.3
Organics 88.7 2.4 159.2 0.9
------ ------
Domestic Consumer 220.0 14.4 5.2 542.9 16.7 5.9
Professional 41.9 7.7 110.1 6.9
International 37.1 122.2 9.5 92.4 89.0 7.7
------ ------
Consolidated $299.0 20.6% 6.1% $745.4 20.8% 6.3%
====== ======
(1) The period-to-period sales change for Consumer Lawns is presented on an
"adjusted" basis to give effect to management's estimate of the impact that
the fiscal 1995 retailer "early purchase" incentives had on fiscal 1996
sales. This estimate is based on management's judgment as to how fiscal 1996
Consumer Lawns sales would have occurred if programs similar to the 1997
retailer selling programs had been in effect during fiscal 1996.
The period-to-period sales change for International presented in the "1996
adjusted" column reflects the change in International Business Group sales
if Miracle Holdings had been fully consolidated since October 1, 1995. Under
this assumption, exchange rates had an immaterial net impact on year-to-year
sales comparisons.
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THREE MONTHS ENDED JUNE 28, 1997 VERSUS THE THREE MONTHS ENDED JUNE 29, 1996
Net sales for the three months ended June 28, 1997 totaled $299.0 million, an
increase of $51.1 million or 20.6%. Management estimates that approximately
$16.7 million (7.6%) of this increase was due to the 1995 Consumer Lawns
retailer early purchase program that had the effect of depressing sales in the
second and third quarters of fiscal 1996. The January 3, 1997 acquisition of
the remaining two-thirds interest in Miracle Holdings (which owns Miracle
Garden Care Limited, a manufacturer and distributor of lawn and garden products
in the United Kingdom, herein after referred to as "MGC") increased third
quarter sales by $20.0 million or 7.6%. The remaining 5.4% increase in third
quarter 1997 sales was primarily attributable to aggregate business unit sales
volume increases of 6.0%, partially offset by unfavorable exchange rate
impacts. Including MGC sales on a pro forma basis from October 1, 1995 and
adjusting for the Consumer Lawns 1995 early purchase program, management
estimates the fiscal 1997 third quarter sales increase was approximately 6.1%.
Consumer Lawns Group net sales increased $19.4 million or 33.5% to $77.3
million, primarily as a result of volume increases. Management estimates that
approximately $16.7 million (29.7%) of this quarterly sales increase is
attributable to the discontinuance of the 1995 early purchase program that
encouraged retailers to build their inventories well in advance of the second
and third quarters of 1996. After adjusting for this program change, management
estimates that the Consumer Lawns Group quarterly net sales increase was 3.8%.
Consumer Gardens Group net sales increased $6.2 million or 13.0% to $54.0
million. Consumer Gardens Group net sales increased primarily as a result of
volume, including the inclusion of grass seed into the Group's distribution
network starting in fiscal 1997. Organics Business Group net sales increased
$2.1 million or 2.4% to $88.7 million, in line with this group's focus on
profitability, not revenues. Professional Business Group net sales increased
$3.0 million or 7.7% to $41.9 million, as this Group's customers move more to
just-in-time inventory management. International Business Group net sales
increased $20.4 million or 122.2% to $37.1 million. MGC contributed $20.0
million of this net sales increase. Excluding the impact of MGC, International
Business Group net sales increased $0.4 million or 2.5%, with a volume increase
of approximately 9.6% largely offset by unfavorable exchange rate movements
that resulted in a 7.1% quarter-to-quarter reduction in International net sales
after translation to U.S. dollars. Including MGC on a pro forma basis from
October 1, 1995, International group net sales for the third quarter of fiscal
1997 would have increased $3.2 million or 9.5%, and exchange rate fluctuations
would have had an immaterial impact on year-to-year comparisons.
Cost of sales were 63.0% of net sales for the three months ended June 28, 1997,
a 3.9 percentage point improvement compared to 66.9% in the same period of the
prior year. This improvement is attributable to the discontinuance of
promotional programs to drive out-of-season sales, the discontinuance of lower
margin professional and consumer products, and manufacturing and distribution
efficiencies.
Operating expenses increased $5.4 million or 9.0% to $65.6 million. Operating
expenses were 21.9% of net sales compared to 24.3% in the prior year.
Selling, general and administrative expenses increased $9.3 million or 33.5% to
$37.1 million. This increase reflects the inclusion of MGC ($3.2 million) for
the first time, increased salesforce and general management incentives, and
increased emphasis on in-store merchandising, partially offset by cost savings
generated by restructuring efforts in 1996. As a percentage of net sales,
selling, general and administrative expenses increased from 11.2% to 12.4%.
Advertising and promotion expenses decreased by $0.6 million or 2.2% to $26.5
million. As a percentage of net sales, advertising and promotion expenses
decreased to 8.9% from 10.9%. Adjusting advertising and promotion in the third
quarter of 1996 for the change in interim accounting for advertising previously
discussed, third quarter 1997 advertising and promotion expense increased $6.8
million or 34.5%. After adjusting for the change in accounting for advertising
in interim periods, third quarter 1997 advertising and promotion expenses
increased due to higher media advertising ($2.6 million), higher trade
promotions and cooperative advertising ($1.6 million) and the inclusion of MGC
in 1997 ($2.6 million).
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Amortization of goodwill and other intangibles increased as a result of the
inclusion of MGC.
Other (income) expense, net for the third quarter of 1997 is principally
comprised of royalty income from new and ongoing agreements that license the
use of the Scotts(R) logo. The third quarter of 1996 included $3.3 million
asset valuation adjustments.
Primarily as a result of higher sales volumes, improved manufacturing and
distribution efficiencies, other cost improvements and a quarterly expense
shift resulting from the change in accounting for advertising in interim
periods, income from operations increased by $23.3 million or 106.9% to $45.1
million. Income from operations increased to 15.1% from 8.8% on a percentage
of sales basis.
Interest expense increased $0.7 million or 10.1%. Excluding the impact of MGC
related borrowings, interest expense decreased by approximately $0.8 million or
11.6%, principally due to a $74.6 million reduction in average borrowings for
the third quarter compared to the same period last year. MGC related interest
expense was approximately $1.5 million for the quarter, reflecting both
acquisition debt and seasonal working capital requirements.
The Company's effective tax rate was 43.7% compared to 49.0% in the prior year.
During the third quarter of fiscal 1997, the Company reported net income of
$21.1 million or $0.71 per common share compared with prior year net income of
$7.6 million or $0.26 per common share. The quarterly improvement reflects the
positive impact of the change in retailer selling programs for the Consumer
Lawns group. Other favorable factors influencing this quarter's results of
operations include sales volume increases, improved manufacturing and
distribution efficiencies, ongoing cost control efforts, lower average
borrowings and the full consolidation of MGC's results.
NINE MONTHS ENDED JUNE 28, 1997 VERSUS NINE MONTHS ENDED JUNE 29, 1996
Net sales for the nine months ended June 28, 1997 totaled $745.4 million, an
increase of $128.3 million or 20.8%. Management estimates that approximately
$47.5 million (8.6%) of this increase was due to the 1995 Consumer Lawns
retailer early purchase program that had the effect of depressing sales in the
second and third quarters of 1996. The January 3, 1997 acquisition of the
remaining two-thirds interest in MGC increased net sales of the nine months by
$41.3 million or 6.7%. The remaining 5.5% increase in net sales for the first
nine months of fiscal 1997 was primarily attributable to aggregate business
unit sales volume increases of 5.9%, partially offset by unfavorable exchange
rate movements. Including MGC sales on a pro forma basis from October 1, 1995
and adjusting for the Consumer Lawns 1995 early purchase program, management
estimates sales for the nine months ended June 28, 1997 increased approximately
6.3%.
Consumer Lawns Group net sales increased $63.1 million or 31.5% to $263.4
million, primarily as a result of volume increases. Management estimates that
approximately $47.5 million (25.2%) of this nine month sales increase is
attributable to the discontinuance of the 1995 early purchase program. After
adjusting for this program change, management estimates that the Consumer Lawns
Group nine month net sales increase was 6.3%. Consumer Gardens Group net sales
increased $13.2 million or 12.3% to $120.3 million. Consumer Gardens Group net
sales increased primarily as a result of volume, including the inclusion of
grass seed into their distribution network starting in fiscal 1997. Organics
Business Group net sales increased $1.4 million or 0.9% to $159.2 million, in
line with this Group's focus on profitability, not revenues. Professional
Business Group net sales increased $7.1 million or 6.9% to $110.1 million, as
this Group's customers move more to just-in-time inventory management.
International Business Group net sales increased $43.5 million or 89.0% to
$92.4 million. MGC contributed $41.3 million of this net sales increase.
Excluding the impact of MGC, International Business Group net sales increased
$2.2 million or 4.5%, with volumes up approximately 9.8%, largely offset by
unfavorable exchange rate movements that resulted in a 5.3% year-to-date
reduction in International group net sales after translation to U.S. dollars.
Including MGC on a pro forma basis, from October 1, 1995,
Page 16
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International sales for the first nine months of fiscal 1997 would have
increased $7.4 million or 7.7%, and exchange rate fluctuations would have had
an immaterial impact on year-to-date comparisons.
Cost of sales were 62.2% of net sales for the nine months ended June 28, 1997,
a 4.3 percentage point improvement compared to 66.5% in the same period of the
prior year. This improvement is attributable to the discontinuance of
promotional programs to drive out-of-season sales, the discontinuance of lower
margin professional and consumer products, and manufacturing and distribution
efficiencies.
Operating expenses increased $20.6 million or 12.6% to $184.2 million. Operating
expenses were 24.7% of net sales compared to 26.6% in the prior year.
Selling, general and administrative expenses increased $9.0 million or 10.4% to
$95.9 million. This increase reflects the inclusion of MGC ($5.0 million) for
the first time, increased salesforce and general management incentives, and
increased emphasis on in-store merchandising, partially offset by cost savings
generated by restructuring efforts in 1996. As a percentage of sales, selling,
general and administrative expenses decreased from 14.1% to 12.9%.
Advertising and promotion expenses increased by $15.5 million or 24.8% to $77.9
million. As a percentage of net sales, advertising and promotion expenses
increased to 10.5% from 10.1%. Adjusting the first nine months of fiscal 1996
for the change in accounting for advertising in interim periods, advertising
and promotion costs for the first nine months of 1997 increased $17.0 million
or 27.9%. After adjusting for this change in interim period accounting,
advertising and promotion expenses for the first nine months of fiscal 1997
increased due to higher media advertising ($7.1 million), higher trade
promotions and cooperative advertising ($4.1 million) and the inclusion of MGC
in 1997 ($5.7 million). The Company believes retailer promotions and
cooperative advertising are an integral part of the consumer lawn and garden
business, but to a lesser extent than that practiced in prior years.
Amortization of goodwill and other intangibles increased as a result of the
inclusion of MGC.
Other (income) expense, net for the first nine months of 1997 includes
approximately $4.3 million of charges related to various productive assets
which are pending sale or whose values are impaired as a result of changes in
management plans and business conditions. These charges were partially offset
by royalty income from new and ongoing agreements that license the use of the
Scotts(R) logo. The first nine months of fiscal 1996 included $4.5 million of
severance charges and $0.8 million of asset valuation adjustments.
Primarily as a result of higher sales volumes, improved manufacturing and
distribution efficiencies, and other cost improvements, income from operations
increased by $54.6 million or 127.3% to $97.5 million. Income from operations
increased to 13.1% from 6.9% on a percentage of sales basis.
Interest expense decreased $0.1 million or 0.5% for the nine months ended June
28, 1997. Excluding MGC related borrowings, interest expense decreased by
approximately $3.1 million or 14.8%, principally due to a $69.9 million
reduction in average borrowings for the first nine months compared to the same
period last year. MGC related interest expense was approximately $3.0 million,
reflecting both acquisition debt and seasonal working capital requirements.
The Company's effective tax rate was 43.4% compared to 47.9% in the prior year.
During the first nine months of fiscal 1997, the Company reported net income of
$43.0 million or $1.47 per common share compared with prior year net income of
$11.1 million or $0.20 per common share. The year-to-date improvement reflects
the positive impact of the change in retailer selling programs for the Consumer
Lawns Group. Other favorable factors influencing year-to-date results of
operations include sales volume increases, improved manufacturing and
distribution efficiencies, ongoing cost control efforts, lower average
borrowings and full consolidation of MGC's results.
Page 17
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LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities totaled $98.4 million for the nine month
period ended June 28, 1997 compared to $76.3 million in the prior year. The
seasonal nature of the Company's operations results in a significant increase
in working capital (primarily inventory and accounts receivable) during the
first and second fiscal quarters. The third fiscal quarter is a significant
period for collecting accounts receivable. The higher level of cash generated
by operating activities for the first nine months of 1997 is principally due to
higher net income and improved working capital management.
Cash used in investing activities totaled $56.5 million compared to $11.0
million in the prior year. This increase is attributable to the acquisition of
the remaining two-thirds interest in MGC for approximately $47.1 million
effective January 3, 1997. The Company estimates that fiscal 1997 capital
investments will be $25.0 million to $28.0 million compared to $18.2 million in
fiscal 1996. These capital investments will be financed with cash provided by
operations and utilization of available credit facilities. The largest project
will be an approximately $9.0 million expansion of the Company's Marysville
distribution facility, estimated to generate annual distribution expense
savings of at least $1.5 million beginning in fiscal 1998. The Company's Fourth
Amended and Restated Credit Agreement (the "Credit Agreement") restricts annual
capital investments to $50.0 million.
Financing activities used $18.3 million for the nine month period ended June
28, 1997 compared to $54.0 million in the prior year. Financing activities are
principally supported by the Company's Credit Agreement. The lower level of
debt repayment in the first nine months of fiscal 1997 compared to the prior
year is primarily a result of the MGC transaction, partially offset by lower
capital investment.
Total debt increased by $16.1 million compared with debt at September 30, 1996
and increased by $18.8 million compared with total debt at June 29, 1996. The
increase in both comparisons is attributable to borrowings associated with the
MGC acquisition, offset by cash provided by operating activities.
Shareholders' equity as of June 28, 1997 was $396.4 million, a $32.1 million
increase compared to September 30, 1996 and a $10.6 million increase compared
to June 29, 1996. The increase compared to September 30, 1996 was due to the
net income of $43.0 million, Convertible Preferred Stock dividends of $7.3
million, an unfavorable change in the cumulative foreign currency adjustment of
$4.5 million and net treasury stock activity of $0.9 million. The increase
compared to June 29, 1996 was due to the net income for the twelve month period
ended June 28, 1997 of $29.5 million offset by Convertible Preferred Stock
dividends of $9.8 million, net treasury stock purchases of $4.7 million and an
unfavorable change in the cumulative foreign currency adjustment of $4.4
million.
The primary sources of liquidity for the Company are funds generated by
operations and borrowings under the Company's Credit Agreement. The Credit
Agreement was last amended in December 1996. The most recent amendment provides
for an increase in the available line-of-credit from $375 million to $425
million, and provides that up to the equivalent of $100 million of the
available credit may be borrowed in U.K. Pounds Sterling.
The Company has foreign exchange rate risk related to international operations
and cash flows. The Company enters into forward foreign exchange contracts and
purchases currency options 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. Effective in the second quarter of 1997, the Company
significantly reduced this program.
Realized and unrealized foreign exchange gains and losses are recognized and
offset foreign exchange gains or losses on the underlying exposures. 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.
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As of June 28, 1997, the Company's European operations had foreign exchange
risk in various European currencies tied to the Dutch Guilder. These currencies
include the Belgian Franc, German Mark, Spanish Peseta, French Franc, British
Pound, Italian Lire, and the Australian Dollar and 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 the remainder of fiscal 1997.
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.
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.
Additional information on environmental matters affecting the Company is
provided in Note 9 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, 1996 under the "Business" and "Legal Proceedings"
sections.
ACCOUNTING ISSUES
In October 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation", effective for financial statements
for fiscal years beginning after December 15, 1995. SFAS No. 123 provides for,
but does not require, a fair value method of accounting for stock-based
compensation arrangements rather than the intrinsic value method previously
required. Alternatively, entities that retain the intrinsic value method are
required to disclose in the notes to the financial statements pro forma net
income and earnings per share information as if the fair value method had been
applied. The Company does not intend to adopt the fair value method of SFAS No.
123; therefore, this standard will not have a material effect on the Company's
consolidated financial statements.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("FAS 128"). FAS
128 establishes standards for computing and presenting earnings per share
("EPS"). FAS 128 replaces the presentation of primary EPS with a presentation
of basic EPS which excludes dilution and is computed by dividing income
available to common shareholders by the weighted-average number of common
shares outstanding during the period. This statement also requires dual
presentation of basic EPS and diluted EPS on the face of the income statement
for all periods presented. FAS 128 is effective for financial statements issued
for periods ending after December 15, 1997, including interim periods. The
Company plans to adopt FAS 128 in the first quarter of 1998 for the year ended
September 30, 1998. If FAS 128 had been adopted at June 28, 1997, basic and
diluted earnings per share would be:
Three Months Ended Nine Months Ended
---------------------- -------------------
June 28 June 29 June 28 June 29
1997 1996 1997 1996
-------- -------- -------- ------
Basic earnings per share $1.01 $.27 $1.92 $.20
===== ==== ===== ====
Diluted earnings per share $ .71 $.26 $1.47 $.20
===== ==== ===== ====
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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", each standard is effective for financial statements for fiscal
years beginning after December 15, 1997.
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-owners sources; it includes all changes in equity during
a period except those resulting from investments by owners and distributions to
owners.
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 is evaluating each of these recent pronouncements and has not yet
determined the ultimate impact of these pronouncements on its future financial
statements.
OUTLOOK FOR THE REMAINDER OF 1997
Looking forward to the final three months of fiscal 1997, management expects to
maintain the return to profitability demonstrated in the first nine months of
the year, although the fourth quarter is anticipated to generate a small net
loss. The primary factors contributing to 1997's improvement over 1996 include
the discontinuance of the Consumer Lawns Group's retailer early purchase
program; alignment of the business groups to provide better focus on, and
accountability for performance; the positive impacts of fiscal 1996
restructuring efforts; and positive cash flow from operations, which has
reduced average borrowings and interest expense (before the impact on
borrowings related to the MGC transaction).
As noted in previous reports, the Consumer Lawns Group's marketing strategy has
been refocused on consumer directed, "pull" advertising and less on retailer
directed, "push" promotional programs heavily relied upon in recent years.
Management believes results for the first nine months of fiscal 1997 indicate
general marketplace acceptance of this strategy. However, weather conditions in
North America and in Northern Europe have a significant impact on the quarterly
timing of sales of the Company's products, especially in the spring selling
season. After adjustment for the 1995 early purchase program, the Company has
historically generated 66% to 68% of its annual revenues in its second and
third fiscal quarters. Management expects this relationship to be in the range
of 70% to 75% for 1997 reflecting the change in the Consumer Lawns marketing
and promotional programs, and the trend in both its consumer and professional
markets toward "just-in-time" product purchasing.
Management expects to maintain the improvement in gross profit margins over
1996 as a result of the recovery of the relatively higher margin consumer lawns
business, higher volumes increasing manufacturing and distribution
efficiencies, and the discontinuance of certain lower margin products. In the
last quarter of 1997, the Company plans to change over to plastic packaging for
its key consumer lawns products and update the technology of one of its key
manufacturing lines. These planned changes, along with the general direction
toward simplifying its product lines, may put temporary downward pressure on
gross profit margins during the transition period as new processes start up and
old products are phased out.
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The Company expects a lower effective tax rate in 1997 in the range of 43%
to 44%, principally as a result of the anticipated return to profitability.
The Company has made and will make certain forward-looking statements in this
quarterly report and in other contexts regarding future economic performance
and finances, plans and objectives of management, among others. In some cases,
information regarding certain important factors that could cause actual results
to differ materially from any such forward-looking statement appear together
with such statements. The following factors, however, in addition to other
possible factors not listed, could affect the Company's actual results and
cause such results to differ materially from those expressed in forward-looking
statements. These factors include weather conditions in North America and in
Northern Europe which have a significant impact on timing of sales in the
spring selling season and overall annual sales; continued marketplace
acceptance of the Company's Consumer Lawns and Consumer Gardens Groups' "pull"
advertising marketing strategies, especially in the Consumer Lawn's Group which
refocused its general marketing strategy beginning in fiscal 1996; competition
among lawn and garden product producers supplying the consumer and professional
markets, both domestically and internationally; competition between retail
outlets selling lawn and garden products produced by the Company; public
perceptions regarding the safety of products produced and supplied by the
Company; continued changes in economic conditions; risks inherent in
international development; and other factors set forth in the Company's letters
to shareholders and analysts, press releases and filings with the Securities
and Exchange Commission.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company has been assessing and, as required, addressing certain
environmental issues regarding the wastewater treatment plants currently
operating at the Marysville facility. Specifically, it has been
considering whether to upgrade the existing treatment plants or to
undertake to tie the facility's wastewater system into 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. To this
end, in early July 1997, the Company submitted written documentation to
the Ohio EPA, to demonstrate VAP eligibility compliance.
In February 1997, the Company learned that the Ohio EPA was referring
certain environmental matters relating to the Company's wastewater
treatment plants and on-site disposal areas to the Ohio Attorney
General's Office for possible enforcement action. Representatives from
the Ohio EPA, the Ohio Attorney General's Office and the Company have
subsequently met on several occasions to discuss resolution of these
issues. As part of these ongoing discussions, in June 1997, the Company
received draft Findings and Orders ("F&O") and communications from the
Ohio EPA which elaborated on the subject of the referral to include,
among other items: potential surface water violations relating to
sediment contamination possibly impacting water quality; and potential
contamination relating to the existence of former underground storage
tanks. In addition, the draft F&O would require that the Company's
Marysville site be subject to corrective action under the Resource
Conservation Recovery Act ("RCRA"). The Company received a draft Consent
Order from the Ohio Attorney General's Office in late July 1997 which
reflects most of the issues contained in the draft F&O, including
corrective action. The Company continues its discussions and is
undertaking to negotiate an amicable resolution of these issues with the
Ohio EPA and Attorney General over the course of the next several months.
The Company also continues its ongoing efforts to address many of these
issues under VAP.
The Company does not believe that any proceedings which may result from
the Ohio EPA's referral of these matters to the Ohio Attorney General
will be material to the business or financial condition of the Company
but is unable, at this early stage, to predict the outcome of these
issues.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index at page 23 for a list of the exhibits included
herewith.
(b) No reports on Form 8-K were filed during the fiscal quarter ended
June 28, 1997.
Page 22
23
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 /s/ Jean H. Mordo
------------------------- -------------------------------
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 23
24
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED June 28, 1997
EXHIBIT INDEX
Exhibit Page
Number Description Number
------- ----------- ------
27 Financial Data Schedule 24
Page 24
5
1000000
U.S DOLLARS
9-MOS
SEP-30-1997
OCT-01-1996
JUN-28-1997
1
28
0
147
6
152
344
239
103
832
163
0
0
177
0
218
832
745
747
463
647
4
0
21
76
33
43
0
0
0
43
1.47
1.47
