FORM 10-Q/A
AMENDMENT NUMBER 1
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 1, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-19768
THE SCOTTS COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-1199481
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14111 Scottslawn Road
Marysville, Ohio 43041
(Address of principal executive offices)
(Zip Code)
(513) 644-0011
(Registrant's telephone number, including area code)
No change
(Former name, former address and former fiscal year, if changed since
last report.)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
18,672,064 Outstanding at August 9, 1995
- --------------------------------------------- -----------------------------
Common Shares, voting, no par value
Page 1 of 18 pages
Exhibit Index at page 16
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
Page No.
Part I. Financial Information:
Item 1. Financial Statements (unaudited)
Consolidated Statements of Income - Three month and nine month
periods ended July 2, 1994 and July 1, 1995 3
Consolidated Statements of Cash Flows - Nine month periods
ended July 2, 1994 and July 1, 1995 4
Consolidated Balance Sheets - July 2, 1994,
July 1, 1995 and September 30, 1994 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-13
Signatures 14
Exhibit Index 15
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands except per share data)
Three Months Ended Nine Months Ended
July 2 July 1 July 2 July 1
1994 1995 1994 1995
==== ==== ==== ====
Net sales ................................. $200,915 $229,028 $476,665 $563,139
Cost of sales ............................. 104,539 120,515 251,003 297,925
-------- -------- --------
Gross profit .............................. 96,376 108,513 225,662 265,214
-------- -------- --------
Marketing ................................. 32,765 34,627 78,676 95,537
Distribution .............................. 30,730 35,714 66,594 80,733
General and administrative ................ 7,781 7,344 22,122 20,308
Research and development .................. 2,814 2,515 7,752 8,243
Other expenses, net ....................... 950 1,060 1,754 3,613
- ------------------------------------------- -------- -------- -------- --------
Income from operations .................... 21,336 27,253 48,764 56,780
Interest expense ....................... 4,749 6,838 12,306 20,646
-------- -------- -------- --------
Income before taxes ....................... 16,587 20,415 36,458 36,134
Income taxes ........................... 7,182 7,389 15,597 13,912
-------- -------- -------- --------
Net income ................................ $ 9,405 $ 13,026 $ 20,861 $ 22,222
======== ======== ========
Net income per common share ............... $ .50 $ .55 $ 1.11 $1.09
======== ======== ========
Weighted average number of
common shares outstanding ................. 18,811 23,580 18,840 20,380
======== ======== ========
See Notes to Consolidated Financial Statements
Page 3
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended
July 2 July 1
1994 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................ $ 20,861 $ 22,222
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ................... 16,424 18,427
Postretirement benefits ......................... 96 242
Net increase in certain components of
working capital ............................. (13,388) (15,036)
Net change in other assets and
liabilities and other adjustments ........... (4,465) (203)
------ ----
Net cash provided by operating activities 19,528 25,652
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in plant and equipment, net ................ (21,655) (15,098)
Investment in other assets ............................ -- (599)
Investment in Affiliate ............................... -- (250)
Acquisition of Sierra, net of cash acquired ........... (118,986) --
Cash acquired in merger with Miracle-Gro .............. -- 6,448
--------- ---------
Net cash used in investing activities .... (140,641) (9,499)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings under term debt ............................ 125,000 113,500
Payments on term and other debt ....................... (5,691) (1,353)
Revolving lines of credit and bank line of credit, net 7,208 (128,121)
Issuance of Class A Common Stock ...................... 160 --
Deferred financing costs incurred ..................... -- (473)
Dividends on preferred stock .......................... -- (1,122)
------- ------
Net cash provided by (used in) financing . 126,677 (17,569)
activities............................. ------- -------
Effect of exchange rate changes on cash ................. 925 1,393
--------- ---------
Net increase (decrease) in cash ......................... 6,489 (23)
Cash at beginning of period ............................. 2,323 10,695
--------- ---------
Cash at end of period ................................... $ 8,812 $ 10,672
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount capitalized .............. $ 7,430 $ 17,610
Income taxes paid ..................................... 14,229 10,855
Detail of entities acquired:
Fair value of assets acquired ....................... 144,501 235,564
Liabilities assumed ................................. (25,515) (39,875)
Net cash paid for acquisition of Sierra ............. 118,986 --
Preferred stock issued for acquisition of Miracle-Gro 177,255
Warrants issued for acquisition of Miracle-Gro ...... 14,434
See Notes to Consolidated Financial Statements
Page 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
ASSETS
July 2 July 1 September 30
1994 1995 1994
Current Assets:
Cash ....................................... $ 8,812 $ 10,672 $ 10,695
Accounts receivable, less allowances
of $3,442, $4,313 and $2,933, respectively 90,468 142,309 115,772
Inventories, net ........................... 106,444 155,550 106,636
Prepaid and other assets ................... 16,379 20,838 17,151
--------- --------- ---------
Total current assets ..................... 222,103 329,369 250,254
--------- --------- ---------
Property, plant and equipment, net ........... 131,812 145,721 140,105
Trademarks and other intangibles, net ........ 31,308 115,401 28,880
Goodwill ..................................... 106,453 185,810 104,578
Other assets ................................. 4,736 20,858 4,767
--------- --------- ---------
Total Assets ............................. $ 496,412 $ 797,159 $ 528,584
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line ...................... $ 913 $ 14,545 $ 23,416
Current portion of term debt ............... 20,403 508 3,755
Accounts payable ........................... 37,387 62,820 46,967
Accrued liabilities ........................ 32,559 38,874 31,167
Accrued taxes .............................. 8,687 17,925 4,383
--------- --------- ---------
Total current liabilities ................ 99,949 134,672 109,688
--------- --------- ---------
Term debt, less current portion .............. 198,000 243,041 220,130
Postretirement benefits other than pensions .. 26,742 27,256 27,014
Other liabilities ............................ 5,979 7,929 3,592
--------- --------- ---------
Total Liabilities ........................ 330,670 412,898 360,424
--------- --------- ---------
Shareholders' Equity:
Preferred stock ............................ -- 177,255 --
Common Shares, no par value ................ 211 211 211
Capital in excess of par value ............. 193,724 207,569 193,450
Retained earnings .......................... 11,853 34,975 13,875
Cumulative translation adjustments ......... 1,395 5,692 2,065
Treasury stock, 2,415 shares at cost ....... (41,441) (41,441) (41,441)
--------- --------- ---------
Total Shareholders' Equity ............... 165,742 384,261 168,160
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 496,412 $ 797,159 $ 528,584
========= ========= =========
See Notes to Consolidated Financial Statements
Page 5
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Organization and Basis of Presentation
The Scotts Company ("Scotts") and its wholly owned subsidiaries,
Hyponex Corporation ("Hyponex"), Republic Tool and Manufacturing Corp.
("Republic"), Scotts-Sierra Horticultural Products Company ("Sierra") and
Scotts Miracle-Gro Products, Inc. ("Miracle-Gro"), (collectively, the
"Company"), are engaged in the manufacture and sale of lawn care and
garden products. The Company's business is highly seasonal with
approximately 70% of sales occurring in the second and third fiscal
quarters.
The consolidated balance sheets as of July 2, 1994 and July 1, 1995,
the related consolidated statements of income for the three and nine
month periods ended July 2, 1994 and July 1, 1995 and the related
consolidated statements of cash flows for the nine month periods ended
July 2, 1994 and July 1, 1995 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 Exchange Act of 1934, and should be read
in conjunction with the financial statements and accompanying notes in
the Company's fiscal 1994 Annual Report on Form 10-K.
The financial statements included in this Form 10-Q/A, Amendment No.
1 have been revised to reflect a change in the timing of expense
recognition related to a promotional allowance offered to retail
customers introduced for the first time in fiscal 1995. The impact of
this revision is on timing of marketing promotional expense recognition
in the first three quarters of the Company's fiscal year and did not
impact the full fiscal year results of operations.
2. Mergers and Acquisitions
Effective December 16, 1993 the Company completed the acquisition of
Grace-Sierra Horticultural Products Company now known as Scotts-Sierra
Horticultural Products Company (all further references will be made as
"Sierra"). Sierra is a leading international manufacturer and marketer of
specialty fertilizers and related products for the nursery, greenhouse,
golf course and consumer markets. Sierra manufactures controlled-release
fertilizers in the United States and the Netherlands, as well as
water-soluble fertilizers and specialty organics in the United States.
Approximately one-quarter of Sierra's net sales are derived from European
and other international markets; approximately one-quarter of Sierra's
assets are internationally based.
Effective May 19, 1995, the Company completed the merger with
Stern's Miracle-Gro Products, Inc. and affiliated companies for an
aggregate purchase price of approximately $195,689,000. The merger cost
was comprised of $195,000,000 face amount of convertible preferred stock
of Scotts with a fair value of $177,255,000, warrants to purchase
3,000,000 common shares of Scotts with a fair value of $14,434,000 and
$4,000,000 of estimated transaction costs. The preferred stock has a
dividend yield of 5.0% and is convertible into common shares of Scotts at
$19.00 per share. The warrants are exercisable for 1,000,000 common
shares at $21.00 per share, 1,000,000 common shares at $25.00 per share
and 1,000,000 common shares at $29.00 per share. The fair value of the
warrants has been included in capital in excess of par value in the
Company's July 1, 1995 balance sheet.
Miracle-Gro is engaged in the marketing and distribution of plant
foods and lawn and garden products primarily in the United States and
Canada and Europe. On December 31, 1994, Miracle-Gro Products Limited
("MG Limited"), a subsidiary of Miracle-Gro, entered into an agreement
Page 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
to exchange its equipment and a license for distribution of
Miracle-Gro products in certain areas of Europe for a 32.5% equity
interest in a U.K. based garden products company. The initial period of
the license is five years and may be extended up to twenty years from
January 1, 1995, under certain circumstances set forth in the license
agreement.
MG Limited is entitled to annual royalties for the first five years
of the license. The Company accounts for this investment on the equity
method.
The Federal Trade Commission ("FTC"), in granting permission for the
Miracle-Gro acquisition, required that the Company divest its Peters line
of consumer water soluble fertilizers. See Note 8.
The merger has been accounted for using the purchase method.
Accordingly, the purchase price has been allocated to the assets acquired
and liabilities assumed based on their estimated fair values at the date
of the acquisition. The excess of purchase price over the estimated fair
values of the net assets acquired ("goodwill") of approximately
$83,506,000 is being amortized on a straight-line basis over 40 years.
Miracle-Gro's results of operations have been included in the
Consolidated Statements of Income from the acquisition date of May 19,
1995.
The following pro forma results of operations give effect to the
above Sierra acquisition as if it had occurred on October 1, 1992 and the
Miracle-Gro acquisition as if it had occurred on October 1, 1993.
Nine Months Ended
(in thousands, except per share amounts)
July 2 July 1
1994 1995
==== ====
Net sales ....................$ 591,409 $651,491
======= =======
Net income ...................$ 34,815 $ 32,809
======== ========
Net income per common share ..$ 1.20 $ 1.13
========== ==========
Miracle-Gro contributes net sales of $103,459 and $93,918, net
income of $12,600 and $14,066 and net income per common share of $.43 and
$.48 for the nine months ended July 1, 1995 and July 2, 1994,
respectively. For purposes of computing earnings per share, the
convertible preferred stock is considered a common stock equivalent. Pro
forma primary earnings per share for the nine months ended July 1, 1995
and July 2, 1994 are calculated using the weighted average common shares
outstanding for Scotts of 18,860 and 18,840, respectively and the common
shares that would have been issued assuming conversion of preferred stock
at the beginning of the year to 10,263 common shares. The computation of
pro forma primary earnings per share assuming reduction of earnings for
preferred dividends and no conversion of preferred stock was
anti-dilutive.
The pro forma information provided does not purport to be indicative
of actual results of operations if the Miracle-Gro acquisition had
occurred as of October 1, 1993, and is not intended to be indicative of
future results or trends.
3. Reclassifications
Certain reclassifications have been made to the prior periods'
financial statements to conform to July 1, 1995 presentation.
Page 7
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
4. Inventories
(in thousands)
Inventories consisted of the following:
July 2 July 1 September 30
1994 1995 1994
Raw material ...................... $ 35,332 $ 66,246 $ 51,656
Finished products ................. 71,112 89,304 54,980
-------- -------- --------
Total Inventories ............ $106,444 $155,550 $106,636
======== ======== ========
5. Long-Term Debt
(in thousands)
July 2 July 1 September 30
1994 1995 1994
Revolving Credit Line ............. $ 28,913 $158,045 $ 53,416
Senior Subordinated Notes
($100 million face amount) ........ 99,287 99,221
Term Loan ......................... 190,000 -- 93,598
Capital Lease Obligations ......... 6,382 762 1,066
-------- -------- --------
225,295 258,094 247,301
Less current portions ............. 21,316 15,053 27,171
-------- -------- --------
$203,979 $243,041 $220,130
======== ======== ========
On March 17, 1995, the Company entered into the Fourth Amended and
Restated Credit Agreement ("Agreement") with Chemical Bank ("Chemical")
and various participating banks. The Agreement provides, on an unsecured
basis, up to $375 million to the Company, comprised of an uncommitted
commercial paper/competitive advance facility and a committed revolving
credit facility through the scheduled termination date of March 31, 2000.
The Agreement contains a requirement limiting the maximum amount borrowed
to $225 million for a minimum of 30 consecutive days each fiscal year.
Expenses expected to be incurred related to the Agreement were
approximately $500,000 and were deferred.
Interest pursuant to the commercial paper/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 in the Agreement without
additional margin or the Eurodollar Rate as defined in the Agreement plus
a margin of .3125% per annum, which margin may be decreased to .25% or
increased up to .625% based on the changes in the unsecured debt ratings
of the Company. Applicable interest rates for the facilities ranged from
6.29% to 9.00% at July 1, 1995. The Agreement provides for the payment of
an annual administration fee of $100,000 and a facility fee of .1875% per
annum, which fee may be reduced to .15% or increased up to .375% based on
the changes in the unsecured debt ratings of the Company.
The Agreement contains certain financial and operating covenants,
including maintenance of interest coverage ratios, maintenance of
consolidated net worth, and restrictions on additional indebtedness and
capital expenditures. The Company was in compliance with all required
covenants at July 1, 1995.
Miracle-Gro maintains a secured line of credit facility with the
Chase Manhattan Bank for up to $25,000,000. This line bears interest at a
rate of prime less 1/4% (8.75% as of July 1, 1995) and expires on July
31, 1995. Miracle-Gro also has outstanding debt with an entity owned by
its shareholders,The Hagedorn Family Fund, of $1,600,000 at July 1, 1995.
Page 8
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Maturities of term debt for the next five years are as follows: (in
thousands)
Fiscal Year
1995 $ 14,629
1996 440
1997 158
1998 79
1999 -
2000 and thereafter 243,500
6. Income Taxes
The Company's effective tax rate for the quarter and the
year-to-date has been adjusted to reflect the anticipated annual
effective tax rate. The principal difference in the effective tax rate
from prior quarters relate to the effects of goodwill in the Miracle-Gro
acquisition and the effect of the disposition of the Peters line of
consumer water soluble fertilizers. See Note 8.
7. Foreign Exchange Instruments
The Company enters into forward foreign exchange and currency
options contracts to hedge its exposure to fluctuations in foreign
currency exchange rates. These contracts generally involve the exchange
of one currency for a second currency at some future date. Counterparties
to these contracts are major financial institutions. Gains and losses on
these contracts generally offset gains and losses on the assets,
liabilities and transactions being hedged.
Realized and unrealized foreign exchange gains and losses are
recognized and offset foreign exchange gains or losses on the underlying
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. The net unrealized gain
deferred totaled $264,000 at July 1, 1995.
At July 1, 1995, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch guilder.
These currencies are: the Australian Dollar, Belgian Franc, German Mark,
Spanish Peseta, French Franc, British Pound and the U. S. Dollar. The
Company's U. S. operations have foreign exchange rate risk in the
Canadian Dollar, the Dutch Guilder and the British Pound which are tied
to the U. S. Dollar. As of July 1, 1995, the Company had outstanding
forward foreign exchange contracts with a contract value of approximately
$8.2 million and outstanding purchased currency options with a contract
value of approximately $1.2 million. These contracts have maturity dates
ranging from July 13, 1995 to August 1, 1995.
8. Subsequent Event
On July 28, 1995, the Company divested its Peters U. S. consumer
water-soluble fertilizer business for approximately $10 million. The
transaction is pursuant to a FTC consent order which the Company entered
into in connection with its merger with Miracle-Gro.
9. Contingencies
The Company is involved in various lawsuits and claims which arise
in the normal course of business. In the opinion of management, these
claims individually and in the aggregate are not expected to result in a
material adverse effect on the Company's financial position or result of
Page 9
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
operations, however, there can be no assurance that future quarterly
or annual operating results will not be materially affected by final
resolution of these matters. The following details the more significant
of these matters.
The Company has been involved in studying a landfill to which it is
believed some of the Company's solid waste had been hauled in the 1970s.
In September 1991, the Company was named by the Ohio Environmental
Protection Agency ("Ohio EPA") as a Potentially Responsible Party ("PRP")
with respect to this landfill. Pursuant to a consent order with the Ohio
EPA, the Company together with four other PRPs identified to date, is
investigating the extent of contamination at the landfill and developing
a remediation program.
In July 1990, the Company was directed by the Army Corps of
Engineers (the "Corps") to cease peat harvesting operations at its New
Jersey facility. The Corps has alleged that the peat harvesting
operations were in violation of the Clean Water Act ("CWA"). The United
States Department of Justice has commenced a legal action to seek a
permanent injunction against peat harvesting at this facility and to
recover civil penalties under the CWA. This action had been suspended
while the parties engaged in discussion to resolve the dispute. Those
discussions have not resulted in a settlement and accordingly the action
has been reinstated. The Company intends to defend the action vigorously
but if the Corps' position is upheld the Company could be prohibited from
further harvesting of peat at this location and penalties could be
assessed against the Company. In the opinion of management, the outcome
of this action will not have a material adverse effect on the Company's
financial position or results of operations. Furthermore, management
believes the Company has sufficient raw material supplies available such
that service to customers will not be adversely affected by continued
closure of this peat harvesting operation.
Sierra has been named as a Potentially Responsible Party ("PRP") in
an environmental contamination action in connection with a landfill near
Allentown, Pennsylvania. By agreement with W. R. Grace-Conn., Sierra's
liability is limited to a maximum of $200,000 with respect to this site.
Based on estimates of the clean-up costs and that the Company denies any
liability in connection with this matter, management believes that the
ultimate outcome will not have a material impact on the financial
position or results of operations of the Company.
Sierra is subject to potential fines in connection with certain EPA
labeling violations under the Federal Insecticide, Fungicide and
Rodenticide Act ("FIFRA"). The fines for such violations are based upon
formulas as stated in FIFRA. As determined by these formulas, Sierra's
maximum exposure for the violations is approximately $810,000. The
formulas allow for certain reductions of the fines based upon achievable
levels of compliance. Based upon management's anticipated levels of
compliance, they estimate Sierra's liability to be $200,000, which has
been accrued in the financial statements.
An action was commenced against Miracle-Gro on March 2, 1995 in a U.
S. District Court in Alabama by Pursell Industries. This action alleges,
among other things, that Miracle-Gro breached an alleged joint venture
contract with the Plaintiff, committed fraud and breached an alleged
fiduciary duty owed to the Plaintiff by not informing it of the
negotiations concerning the merger with The Scotts Company described in
Note 2. The Plaintiff seeks compensatory and punitive damages in excess
of $10 million. Prior to that, Miracle-Gro had filed suit in New York
seeking a declatory judgment there was no enforceable joint venture
agreement. The cases are presently in discovery and there are several
motions pending. The Company does not believe the Alabama action has any
merit and intends to defend it vigorously. The financial statements do
not include any adjustments that might result from the outcome of this
litigation.
Page 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
THREE MONTHS ENDED JULY 1, 1995, VERSUS THREE MONTHS ENDED JULY 2, 1994
Net sales increased 14% to $229,028,000 primarily due to increased
volume. The increase included $15,107,000 of sales from Miracle-Gro which
merged with the Company on May 19, 1995. Net sales for the Consumer Business
Group increased by 5.2% to $157,980,000 due to sales volume increases
primarily in the organics product line. Commercial Business Group (previously
referred to as the Professional Business Group) sales of $39,265,000 increased
by approximately 8.1% resulting from sales volume increases in all product
lines. International sales increased 15.3% to $16,576,000 due to increased
volume (approximately 6.1%) reflecting the introduction of Scotts products in
the international distribution network. In addition, International sales
increased approximately 9.2% due to favorable exchange rates.
Cost of sales for the three months ended July 1, 1995 was 52.6% of net
sales, a slight increase over cost of sales for the three months ended July 2,
1994, which was 52% of net sales. The increase was partially attributable to
sales mix which reflected increased volume in lower margin organic products.
Operating expenses increased by approximately 8.3% partially due to the
inclusion of Miracle-Gro operating expenses in the 1995 quarter (5.2% of the
overall 8.3% increase). Distribution costs increased 16.2% due to increased
sales volume, higher warehousing and storage costs and to a lesser extent
higher freight rates. Marketing costs increased 5.7% primarily as a result of
higher sales. These increases were partially offset by lower general and
administrative expenses (5.6%) and research and development expenses (10.6%)
primarily due to synergies achieved from the integration of Sierra.
Interest expense increased approximately 44%. The increase was
attributable to higher interest rates (29%) and higher borrowings (15%).
Net income of $13,026,000 increased by $3,621,000 or approximately 38.5%,
partially attributable to the inclusion of Miracle-Gro income, operating
synergies of the Sierra acquisition and a lower effective tax rate as
discussed in Footnote No. 6 to the Company's Consolidated Financial Statements
on page 9.
NINE MONTHS ENDED JULY 1, 1995 VERSUS NINE MONTHS ENDED JULY 2, 1994
Net sales increased to $563,139,000, up approximately 18.1%. Net sales
included net sales for Sierra, which was acquired by Scotts on December 16,
1993. On a pro forma basis, including net sales of Sierra from October 1,
1993, net sales for the nine months ended July 1, 1995 would have increased by
$65,648,000 or approximately 13.2%. The net sales increase also included
$15,107,000 of sales from Miracle-Gro which merged with the Company on May 19,
1995. Consumer Business Group net sales increased by approximately 12.3% to
$395,703,000 resulting primarily from increased sales volume. Increased demand
in lawn fertilizers and organics and to a lesser extent, demand for seed and
spreaders contributed to the increase. Commercial Business Group sales of
$101,781,000 increased by 13.2%, due to the inclusion of net sales for Sierra.
International sales increased by 47.2% to $50,548,000 due to gains in these
markets combined with positive impact resulting from the introduction of
Scotts products into the international distribution network (approximately
17.6%), the inclusion of Sierra net sales for the full period in 1995 (23.3%)
and favorable exchange rates (approximately 6.3%).
Page 11
Cost of sales represents 52.9% of net sales, a slight increase compared
to cost of sales for the nine months ended July 2, 1994 which represented
52.7% of net sales.
Operating expenses increased approximately 17.8% which was proportional
to the sales increase. The increase was partially due to the inclusion of
operating expenses of the acquired companies (approximately 7.7%). Marketing
cost increased 21.4% due to increased marketing spending for promotion
programs reflecting a continuing commitment to supporting the Scotts brand and
increased sales volume. Distribution expenses increased 21.2% related to
higher sales volume, higher warehousing and storage costs, and slightly higher
freight rates. These increases were partially offset by lower general and
administrative expenses, and research and development expenses due to
synergies achieved from the integration of Sierra. These synergies were
partially offset by the full year-to-date amortization of Sierra intangibles
and goodwill.
Interest expense increased approximately 67.8%. The increase was caused
by higher interest rates on the floating-rate bank debt and the 9 7/8% Senior
Subordinated notes compared with the floating rate bank debt the notes
replaced (42.0%), borrowings to fund the Sierra acquisition (12.2%), which
were outstanding for the full nine months ended July 1, 1995 compared to six
and one-half months for the previous period, and an increase in borrowing
levels (13.6%) principally to support higher working capital and capital
expenditures.
Net income of $22,222,000 increased by $1,361,000 partially attributable
to the inclusion of Miracle-Gro income, operating synergies of the Sierra
acquisition and a lower effective tax rate as discussed in Footnote No. 6 to
the Company's Consolidated Financial Statements on page 9, partially offset by
higher marketing and distribution costs and increased interest expense.
FINANCIAL POSITION AS OF JULY 1, 1995
Cash flow from operations was $25,652,000, an increase of 31.4% over the
1994 period.
Current assets of $329,369,000 increased by $79,115,000 compared with
September 30, 1994, and by $107,266,000 compared with July 2, 1994. The
increase was partially attributable to the inclusion of Miracle-Gro's current
assets this year which amounted to $36,098,000. The increase was also caused
by higher accounts receivable associated with year-to-year sales increases and
higher inventory levels due in part to favorable raw material purchasing
opportunities and production of finished goods to support fall sales plans.
Current liabilities of $134,672,000 increased by $24,984,000 compared
with September 30, 1994 and by $34,723,000 compared with July 2, 1994. The
increase was partially attributable to the inclusion of Miracle-Gro's current
liabilities this year which amounted to $27,707,000. The increase was also
caused by higher levels of trade payables reflecting business growth. The
increase was primarily offset by a decrease in short-term debt due to the
terms of the Fourth Amended and Restated Credit Agreement ("the Agreement")
dated as of March 17, 1995 entered into by the Company with Chemical Bank and
various participating banks which requires the Company to reduce revolving
credit borrowing to no more than $225,000,000 for 30 consecutive days each
year as compared to $30,000,000 prior to the amendment.
Capital expenditures for the year ending September 30, 1995 are expected
to be approximately $23,000,000, including capital expenditures of
Miracle-Gro, which will be financed with cash provided by operations and
utilization of existing credit facilities.
Long-term debt increased by $22,911,000 compared with September 30, 1994
and increased by $45,041,000 compared with July 2, 1994. The increase compared
with September 30, 1994 was primarily caused by the change in terms of
borrowings under the amended credit agreement discussed above. The increase
compared with July 2, 1994 is due to the change in borrowing terms and an
increase in borrowings to support increased working capital and capital
expenditures.
Page 12
Shareholders' equity increased $216,101,000 compared with September 30,
1994 due to the issuance of convertible preferred stock with a fair value of
$177,255,000 and warrants with a fair value of $14,434,000 for the merger with
Miracle-Gro, as discussed in Footnote No. 2 to the Company's Consolidated
Financial Statements on pages 6 and 7, net income of $22,222,000 for the nine
months ended July 1, 1995, partially offset by convertible preferred stock
dividends of $1,122,000 and to the change in the cumulative foreign currency
adjustment related to the translation of the assets and liabilities of foreign
subsidiaries to U. S. dollars. Shareholders equity increased $218,519,000
compared with July 2, 1994 due to the issuance of convertible preferred stock
and warrants as discussed above and income of $24,244,000 reduced by
convertible preferred stock dividends of $1,122,000 and the change in the
cumulative foreign currency adjustment related to the translation of the
assets and liabilities of foreign subsidiaries to U. S. dollars.
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 amended in March 1995. As amended, the Credit Agreement
provides, on an unsecured basis, up to $375 million through March 31, 2000,
and does not contain a term loan facility. Additional information on the
Credit Agreement is described in Footnote No. 5 on page 8 of this report.
The Company has foreign exchange rate risk related to international
earnings and cash flows. A management program was designed to minimize the
exposure to adverse currency impacts on the cash value of the Company's
non-local currency receivables and payables, as well as the associated
earnings impact. Beginning in January 1995, the Company entered into forward
foreign exchange contracts and purchased currency options tied to the economic
value of receivables and payables and expected cash flows denominated in
non-local foreign currencies. Management anticipates that these financial
instruments will act as an effective hedge against the potential adverse
impact of exchange rate fluctuations on the Company's results of operations,
financial condition and liquidity. It is recognized, however, that the program
will minimize but not completely eliminate the Company's exposure to adverse
currency movements.
As of July 1, 1995, the Company's European operations had foreign
exchange risk in various European currencies tied to the Dutch guilder. These
currencies are: the Australian Dollar, Belgian Franc, German Mark, Spanish
Peseta, French Franc, British Pound and the U. S. Dollar. The Company's U.S.
operations have foreign exchange rate risk in the Canadian Dollar, Dutch
Guilder and the British Pound which are tied to the U.S. Dollar. As of July 1,
1995, outstanding foreign exchange forward contracts had a contract value of
approximately $8.2 million and outstanding purchased currency options had a
contract value of approximately $1.2 million. These contracts have maturity
dates ranging from July 13, 1995 to August 1, 1995.
The merger with Miracle-Gro and its affiliated companies is described in
Footnote No. 2 to the Company's Consolidated Financial Statements on pages 6
and 7 of this Report. Any additional working capital needs resulting from this
transaction are expected to be financed through funds available under the
amended credit agreement.
In the opinion of the Company's management, cash flows from operations
and capital resources will be sufficient to meet future debt service and
working capital needs.
ACCOUNTING ISSUES
In March 1995 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 121, "Accounting for the
Impairment of Long Lived Assets and for Long Lived Assets to be Disposed of"
which establishes accounting standards for the impairment of long lived
assets, certain identifiable intangibles and goodwill related to those assets
to be held and used for long lived assets and certain identifiable intangibles
to be disposed of. The Company's current policies are in accordance with SFAS
No. 121.
Page 13
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: December 27, 1995 /s/ Paul D. Yeager
Paul D. Yeager
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 14
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED JULY 1, 1995
EXHIBIT INDEX
Exhibit Page
Number Description Number
11 Computation of Net Income Per Common Share 16
27 Financial Data Schedule 17
Page 15
Exhibit 11(a)
THE SCOTTS COMPANY
Computation of Net Income Per Common Share
Primary (Unaudited)
(Dollars in thousands except per share amounts)
For the Three Months Ended For the Nine Months Ended
July 2 July 1 July 2 July 1
1994 1995 1994 1995
------ ------ ------ -----
Net income for computing net
income per common share:
Net income $ 9,405 $ 13,026 $ 20,861 $ 22,222
Net income per common share:
Net income per common share $ .50 $ .55 $ 1.11 $ 1.09
Computation of Weighted Average Number
of Common Shares Outstanding (Unaudited)
For the Three Months Ended For the Nine Months Ended
July 2 July 1 July 2 July 1
1994 1995 1994 1995
------ ------ ------ -----
Weighted average common shares
outstanding during the period 18,667,064 18,667,064 18,661,667 18,667,064
Assuming conversion of preferred stock 4,561,404 1,520,468
Assuming exercise of options using the
Treasury Stock Method 143,719 351,254 178,562 192,725
------------ ------------ ------------ ------------
Weighted average number of common
shares outstanding as adjusted 18,810,783 23,579,722 18,840,229 20,380,257
========== ========== ========== ==========
Fully diluted weighted average shares outstanding were not materially
different than primary weighted average shares outstanding for the periods
presented.
(1) The convertible preferred stock is considered to be a common stock
equivalent since its effective yield is less than 66 2/3% of the average
Aa corporate bond yield.
Page 16
5
1000
U.S. DOLLARS
9-MOS
SEP-30-1995
OCT-01-1994
JUL-01-1995
1
10,672
0
146,622
4,313
155,550
329,369
224,749
79,028
797,159
134,672
0
211
0
0
384,050
797,159
563,139
564,177
297,925
502,746
4,651
0
20,646
36,134
13,912
22,222
0
0
0
22,222
1.09
1.09
