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 December 28, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-11593
THE SCOTTS COMPANY
_____________________________________________________________
(Exact name of registrant as specified in its charter)
OHIO 31-1199481
_______________________________ ____________________________________
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
14111 Scottslawn Road
Marysville, Ohio 43041
_____________________________________________________________
(Address of principal executive offices)
(Zip Code)
(937) 644-0011
_____________________________________________________________
(Registrant's telephone number, including area code)
No Change
_____________________________________________________________
(Former name, former address and former
fiscal year, if changed since last report.)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes __X__ No _____
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of the latest practicable date.
18,575,293 Outstanding at February 5, 1997
_________________________________________ _______________________________
Common Shares, voting, no par value
Page 1 of 19 pages
Exhibit Index at page 18
THE SCOTTS COMPANY AND SUBSIDIARIES
INDEX
PAGE NO.
Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Operations - Three month periods ended
December 30, 1995 and December 28, 1996 3
Consolidated Statements of Cash Flows - Three month periods
ended December 30, 1995 and December 28, 1996 4
Consolidated Balance Sheets -
December 30, 1995, December 28, 1996 and September 30, 1996 5
Notes to Consolidated Financial Statements 6-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11-15
Part II. Other Information
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands except per share amounts)
Three Months Ended
------------------------------
December 30 December 28
1995 1996
----------- -----------
Net sales $ 117,928 $ 100,184
Cost of sales 64,714 53,842
--------- ---------
Gross profit 53,214 46,342
--------- ---------
Marketing 27,590 21,830
Distribution 16,465 13,688
General and administrative 8,057 7,293
Research and development 2,663 2,664
Amortization of goodwill and other intangibles 2,172 2,233
Other expenses, net 193 267
Unusual charges 2,104 --
--------- ---------
Loss from operations (6,030) (1,633)
Interest expense 6,601 5,573
--------- ---------
Loss before income taxes (12,631) (7,206)
Income tax benefit (5,457) (3,113)
--------- ---------
Net loss (7,174) (4,093)
Preferred stock dividends 2,436 2,437
--------- ---------
Loss applicable to common shareholders $ (9,610) $ (6,530)
========= =========
Net loss per common share $ (.51) $ (.35)
========= =========
Common shares used in net loss per
common share computation 18,689 18,575
========= =========
See Notes to Consolidated Financial Statements
Page 3
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Three Months Ended
--------------------------
December 30 December 28
1995 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (7,174) $ (4,093)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 7,280 7,363
Equity in income of unconsolidated business (191) (90)
Postretirement benefits 45 45
Net increase in certain components of
working capital (81,432) (66,529)
Net increase (decrease) in other assets and
liabilities and other adjustments 291 (599)
-------- --------
Net cash used in operating activities (81,181) (63,903)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment, net (3,593) (1,257)
-------- --------
Net cash used in investing activities (3,593) (1,257)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments on term and other debt (182) --
Revolving lines of credit and bank line of credit, net 88,474 62,955
Deferred financing costs incurred - (184)
Dividends on preferred stock (2,436) (2,437)
-------- --------
Net cash provided by financing activities 85,856 60,334
-------- --------
Effect of exchange rate changes on cash (207) 82
-------- --------
Net increase (decrease) in cash 875 (4,744)
Cash at beginning of period 7,028 10,598
-------- --------
Cash at end of period $ 7,903 $ 5,854
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of amount capitalized $ 3,343 $ 2,456
Income taxes paid $ 1,364 $ 322
See Notes to Consolidated Financial Statements
Page 4
THE SCOTTS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands)
ASSETS
December 30 December 28 September 30
1995 1996 1996
----------- ----------- ------------
Current Assets:
Cash $ 7,903 $ 5,854 $ 10,598
Accounts receivable, less allowances
of $3,381, $4,209 and $4,114, respectively 196,373 121,648 110,426
Inventories 184,629 195,454 148,836
Prepaid and other assets 22,637 22,342 22,101
--------- --------- ---------
Total current assets 411,542 345,298 291,961
--------- --------- ---------
Property, plant and equipment, net 147,787 136,076 139,488
Trademarks 88,688 86,433 86,997
Other intangibles 23,513 18,421 19,455
Goodwill 178,794 178,899 180,154
Other assets 15,883 13,551 13,630
--------- --------- ---------
Total Assets $ 866,207 $ 778,678 $ 731,685
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Revolving credit line $ 36,071 $ 1,736 $ 2,000
Current portion of term debt 417 139 197
Accounts payable 54,414 44,921 46,288
Accrued liabilities 36,485 40,761 42,603
Accrued taxes 11,058 14,431 19,670
--------- --------- ---------
Total current liabilities 138,445 101,988 110,758
--------- --------- ---------
Term debt, less current portion 324,368 286,405 223,128
Postretirement benefits other than pensions 27,204 27,202 27,157
Other liabilities 5,152 6,064 6,341
--------- --------- ---------
Total Liabilities 495,169 421,659 367,384
--------- --------- ---------
Commitments and Contingencies
Shareholders' Equity:
Class A Convertible Preferred Stock, no par value 177,255 177,255 177,255
Common Shares, $.01 stated value, issued 21,082
shares in 1995 and 1996 211 211 211
Capital in excess of par value 207,557 207,579 207,650
Retained earnings 23,062 13,862 20,392
Cumulative foreign currency translation adjustments 3,934 1,470 2,151
Treasury stock, 2,388 shares in 1995 and 2,507 shares
in 1996, at cost (40,981) (43,358) (43,358)
--------- --------- ---------
Total Shareholders' Equity 371,038 357,019 364,301
--------- --------- ---------
Total Liabilities and Shareholders' Equity $ 866,207 $ 778,678 $ 731,685
========= ========= =========
See Notes to Consolidated Financial Statements
Page 5
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 approximately 70% 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") and Scotts'
Miracle-Gro Products, Inc. ("Miracle-Gro"), (collectively, the "Company").
All material intercompany transactions have been eliminated.
The consolidated balance sheets as of December 30, 1995 and December 28,
1996, the related consolidated statements of operations for the three
month periods ended December 30, 1995 and December 28, 1996 and the
related consolidated statements of cash flows for the three month periods
ended December 30, 1995 and December 28, 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.
2. INVENTORIES
(in thousands)
Inventories, net of provisions of $6,189, $9,867 and $8,666, consisted of:
December 30 December 28 September 30
1995 1996 1996
----------- ----------- ------------
Finished Goods $112,981 $137,865 $ 96,722
Raw Materials 71,648 57,589 52,114
-------- -------- --------
$184,629 $195,454 $148,836
======== ======== ========
Page 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. LONG-TERM DEBT
(in thousands)
December 30 December 28 September 30
1995 1996 1996
----------- ----------- ------------
Revolving Credit Line $261,071 $188,736 $125,750
9 7/8% Senior
Subordinated Notes
$100 million face
amount due 2004 99,325 99,405 99,378
Capital lease
obligations and other 460 139 197
-------- -------- --------
360,856 288,280 225,325
Less current portions 36,488 1,875 2,197
-------- -------- --------
$324,368 $286,405 $223,128
======== ======== ========
Maturities of term debt for the next five calendar years are as follows:
1997 1,875
1998 0
1999 0
2000 187,000
2001 0
Thereafter 100,000
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.
4. 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.
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 December 28, 1996, 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 Lira, French Franc, British Pound and the 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. As of December 28, 1996, the Company had
outstanding forward foreign exchange contracts with a contract value of
approximately $18.3 million. These contracts have maturity dates ranging
from January 28, 1997 to June 24, 1997.
Page 7
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. 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.
6. OTHER EXPENSES, NET
Other expenses, net consisted of the following for the three months ended:
December 30 December 28
1995 1996
----------- -----------
Foreign currency loss $ 180 $ 267
Royalty (income) expense (142) 23
Equity in income of
unconsolidated businesses (191) (90)
Other 346 67
------ -------
Total $ 193 $ 267
===== ======
7. NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted average number of
common shares outstanding each period.
The following table presents information necessary to calculate net loss
per common share.
Three Months Ended
------------------------------
(in thousands) December 30 December 28
1995 1996
----------- -----------
Net loss $ (7,174) $ (4,093)
Preferred Stock dividends (2,436) (2,437)
------- -------
Loss applicable to common
shareholders $ (9,610) $ (6,530)
======= =======
Common shares outstanding:
Common shares used in net loss
per share computation 18,689 18,575
====== ======
Net loss per common share $ (.51) $ (.35)
========= =========
Fully diluted net loss per common share is considered to be the same as
primary net loss per common share as it was not materially different from
primary net loss per common share.
Page 8
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
8. SUBSEQUENT EVENT
On January 13, 1997, the Company acquired the approximately two-thirds
interest in Miracle Holdings Limited ("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.
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.
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.
In July 1990, the Philadelphia district of the Army Corps of Engineers
directed that peat harvesting operations be discontinued at Hyponex's
Lafayette, New Jersey facility, and the Company complied. In May 1992, the
Department of Justice in the U. S. District Court for the District of New
Jersey, filed suit seeking a permanent injunction against such harvesting
at that facility and civil penalties. The Philadelphia District of the
Corps has taken the position that peat harvesting activities there require
a permit under Section 404 of the Clean Water Act. If the Corps' position
is upheld, it is possible that further harvesting of peat from this
facility would be prohibited. The Company is defending this suit and is
asserting a right to recover its economic losses resulting from the
government's actions. Management does not believe that the outcome of this
case will have a material adverse effect on the Company's operations or
its financial condition. Furthermore, management believes the Company has
sufficient raw material supplies available such that service to customers
will not be adversely affected by continued closure of this peat
harvesting operation.
On January 30, 1996, the United States Environmental Protection Agency
(the "U. S. EPA") served a Complaint and Notice of Opportunity for Hearing
upon Sierra's wholly-owned subsidiary, Scotts-Sierra Crop Protection
Company ("Crop Protection"). The Complaint alleged labeling violations
under the Federal Insecticide, Fungicide and Rodenticide Act ("FIFRA")
during 1992 and 1993 and proposed penalties totaling $785,000, the maximum
allowable under FIFRA according to management's calculations. Presently
pending is the U.S. EPA's Motion for an Accelerated Decision. Based upon
Crop Protection's good faith compliance actions and FIFRA's provisions for
"gravity-based" penalty reductions, management believes Crop Protection's
maximum liability in this action to be $200,000. The Company does not
believe that the outcome of this proceeding will have a material adverse
effect on its financial condition or results of operations.
Page 9
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
During 1993 and 1994, Miracle-Gro Products discussed with Pursell
Industries, Inc. ("Pursell") the feasibility of forming a joint venture to
produce and market a line of slow-release lawn food, and in October 1993,
signed a non-binding "heads of agreement." On March 2, 1995, Pursell
instituted an action in the United States District Court for the Northern
District of Alabama, PURSELL INDUSTRIES, INC. V. STERN'S MIRACLE-GRO
PRODUCTS, INC., (the "Alabama Action"), which alleged, among other things,
that a joint venture was formed, that Miracle-Gro Products breached an
alleged joint venture contract, committed fraud, and breached an alleged
fiduciary duty owed Pursell by not informing Pursell of negotiations
concerning the merger transactions. On December 18, 1995, Pursell filed an
amended complaint in which Scotts was named as an additional party
defendant. The amended complaint contained a number of allegations and
sought compensatory damages in excess of $10 million, punitive damages of
$20 million, treble damages as allowed by law and injunctive relief with
respect to the advertising and trade dress allegations.
On April 14, 1996, in response to communications from Scotts that Pursell
was infringing the Company's Poly-S patents, Pursell instituted a second
action in the United States District Court for the Northern District of
Alabama, PURSELL INDUSTRIES, INC. V. THE SCOTTS COMPANY (THE "PATENT
ACTION"). The complaint sought declaration that, among other things,
Scotts' patents were invalid and that Pursell had not infringed any of
Scotts' patents. Pursell also alleged unfair competition in relation to
Scotts' working of its products with its Poly-S patents.
On January 16, 1997, Pursell and the Company settled both the Alabama
Action and the Patent Action pursuant to a confidential Settlement
Agreement and Release (the "Settlement Agreement"). Under the terms of the
Settlement Agreement, both actions have been dismissed with prejudice.
Full and complete releases were exchanged by the parties, and the Company
granted to Pursell a fully paid-up, non-exclusive license under the
Company's Poly-S patents. The settlement is not expected to have a
material impact on operating results.
Page 10
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 Scotts 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
THREE MONTHS ENDED DECEMBER 28, 1996 VERSUS THE THREE MONTHS ENDED
DECEMBER 30, 1995
The following table sets forth the components of income and expense for the
first quarter of fiscal 1997 and 1996 on a percent-of-net sales basis:
For The Three Months Ended Period to
December 30 December 28 Period
1995 1996 % Change
----------- ----------- ---------
Net sales 100.0% 100.0% (15.1)%
Cost of sales 54.9 53.7 (16.8)
----- -----
Gross profit 45.1 46.3 (12.9)
----- -----
Operating expenses:
Marketing 23.4 21.8 (20.9)
Distribution 14.0 13.7 (16.9)
General and administrative 6.8 7.2 (9.5)
Research and development 2.3 2.7 --
Amortization of goodwill and other intangibles 1.8 2.2 2.8
Other expenses .2 .3 10.3
Unusual items 1.7 -- NM
----- -----
Total operating expenses 50.2 47.9 (19.0)
Loss from operations (5.1) (1.6) 72.9
----- -----
Interest expense 5.6 5.6 (15.6)
----- -----
Loss before income taxes (10.7) (7.2) 42.9
----- -----
Income tax benefit (4.6) (3.1) (43.0)
----- -----
Net loss (6.1) (4.1) 42.9
Preferred stock dividends 2.1 2.4 NM
----- -----
Loss applicable to common shareholders (8.2)% (6.5)% 32.0%
===== =====
Net sales for the three months ended December 28, 1996 totaled $100.2 million, a
decrease of $17.7 million or 15.1% compared to prior year. Management estimates
that $13.7 million (11.6%) of this decrease was attributable to the
discontinuance of the consumer lawns retailer early purchase program that
encouraged retailers to build their inventories substantially in advance of the
spring selling season. The remaining change in sales was attributable to lower
domestic shipments ($5.3 million or 4.5%) due principally to customer demand
moving closer to seasonal needs, partially offset by higher international sales
of $1.3 million or 1.0%.
Page 11
Consumer Lawns Group net sales decreased $15.1 million or 31.2% to $33.4
million, primarily as a result of the discontinuance of the retailer early
purchase program (approximately 28.2%). Consumer Gardens Group net sales
decreased $1.5 million or 12.3% to $10.8 million. To take advantage of the
gardens group distribution channels, the Company will be distributing grass seed
through this group for the first time in fiscal 1997. This change resulted in a
delay of overall gardens group shipments in order to optimize the in-season
shelf life of grass seed products. Organics Business Group net sales decreased
$1.2 million or 7.7% to $14.4 million, principally due to decreased emphasis on
promotional discounting to drive volume. As anticipated, Professional Business
Group net sales decreased $1.2 million or 4.5% to $25.0 million, due to the
discontinuance of marginal products and customer arrangements. International
Business Group net sales increased $1.3 million or 8.3% to $16.6 million,
principally due to volume gains in the Asia/Pacific and Latin American regions.
Cost of sales were 53.7% of net sales for the three months ended December 28,
1996, a 1.2 percentage point decrease compared to 54.9% 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, a higher proportion of international
sales with higher average margins and manufacturing efficiencies.
Operating expenses decreased $11.3 million or 19.0% to $48.0 million. Operating
expenses were 47.9% of net sales, compared to 50.2% in the prior year. Excluding
unusual items in the first quarter of fiscal 1996, operating expenses decreased
$9.2 million or 16.1% and represented 48.5% of net sales in the prior period.
Marketing expense decreased from 23.4% to 21.8% of net sales or 20.9% compared
to the prior period, reflecting the 15.1% decrease in net sales and the more
cost-effective marketing programs. While the Company anticipates that marketing
expense will be slightly lower as a percentage of sales for all of fiscal 1997,
the strategy to emphasize consumer directed media will concentrate a greater
proportion of the Company's annual marketing expense in the second and third
quarters.
Distribution expense decreased from 14.0% to 13.7% of net sales or 16.9%
compared to the prior period, principally due to lower sales volumes and to a
lesser extent more efficient distribution of higher margin products. All major
expense categories, including General and Administrative expense (down by 9.5%)
reflected the favorable impact of restructuring moves taken in 1996 and ongoing
cost control efforts.
Due to the seasonal nature of its operations, the Company experienced an
operating loss of $1.6 million for the three months ended December 28, 1996.
Including unusual items in the prior year, this was a $4.4 million or 72.9%
improvement; excluding unusual items in the prior year, this was a $2.3 million
or 58.9% improvement.
Interest expense decreased $1.0 million or 15.6%, principally due to a $55.2
million reduction in average borrowings for the three month period ended
December 28, 1996 compared to the same period in the prior year.
The Company's effective tax rate was 43.2% in both periods. The Company's
effective tax rate is slightly higher than statutory rates due to non-tax
deductible amortization of goodwill and certain intangibles in the U. S.
During the three month period ended December 28, 1996, the Company reported a
net loss of $4.1 million or $.35 per common share compared with a net loss of
$7.2 million or $.51 per common share. Excluding unusual items, the prior year
net loss would have been approximately $6.0 million or $.45 per common share.
The improvement made in first quarter results reflects the positive impact of
changes in selling programs, improved gross margins, ongoing cost control
efforts and lower average borrowings, partially offset by the impact of lower
sales. The Company's results of operations for the three months ended December
28, 1996 are in line with management's expectations.
Page 12
Liquidity and Capital Resources
Cash used in operating activities totaled $63.9 million for the three month
period ended December 28, 1996 compared to $81.2 million in the prior period.
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 lower level of cash used in
operating activities in the current period is principally attributable to the
discontinuance of the consumer lawns retailer promotional program, which reduced
first quarter sales, and to better inventory management.
Cash used in investing activities totaled $1.3 million compared to $3.6 in the
prior year. This decrease is principally due to the timing of capital projects.
The Company estimates that fiscal 1997 capital investments will be $25 million
to $30 million compared to $18.2 million in the prior year. 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 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 million.
Financing activities provided $60.3 million for the three month period ended
December 28, 1996 compared to $85.9 million in the prior period. Financing
activities are principally supported by the Company's Credit Agreement. The
lower level of incremental borrowings in the first quarter of fiscal 1997
compared to the prior year is a result of lower working capital requirements.
Total debt increased by $63.0 million compared with debt at September 30, 1996
and decreased by $73.0 million compared with total debt at December 30, 1995.
The increase as compared to September 30, 1996 was to support increased working
capital and capital expenditures. The decrease compared to December 30, 1995 was
attributable to positive cash flow generated in fiscal 1996 and lower overall
working capital increases in the current period versus the prior year.
Shareholders' equity as of December 28, 1996 was $357.0 million representing a
$7.3 million decrease compared to September 30, 1996 and a $14.0 million
decrease compared to December 30, 1995. The decrease compared to September 30,
1996 was due to the net loss of $4.1 million, Convertible Preferred Stock
dividends of $2.4 million and an unfavorable change in the cumulative foreign
currency adjustment of $0.8 million. The decrease compared to December 30, 1995
was due to the net income for the twelve month period ended December 28, 1996 of
$0.6 million offset by Convertible Preferred Stock dividends of $9.8 million,
net treasury stock purchases of $2.4 million and an unfavorable change in the
cumulative foreign currency adjustment of $2.4 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 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 British pounds sterling.
The Company has foreign exchange rate risk related to international operations
and cash flows. The Company utilizes a program which is designed to minimize the
exposure to adverse currency impacts on the cash value of the Company's
non-local currency receivables and payables, as well as the associated earnings
impact. The Company enters into forward foreign exchange contracts and purchase
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.
Page 13
As of December 28, 1996, 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. As of December
28, 1996, there were outstanding forward foreign exchange contracts with a value
of approximately $18.3 million. These contracts had maturity dates ranging from
January 28, 1997 to June 24, 1997.
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 1997 fiscal year.
Inflation
The Company is subject to the effects 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.
Page 14
Recent Developments
On January 13, 1997, the Company acquired the approximately two-thirds interest
in Miracle Holdings Limited ("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.
Outlook for the remainder of 1997
Looking forward to the remainder of 1997, management expects the discontinuance
of the consumer lawns retailer early purchase program, the realignment of the
business groups designed to provide better focus on and accountability for
performance, and the positive impacts of the recent restructurings will return
the Company to profitability in 1997. However, these changes, along with
inherent risks of a seasonal business, present several challenges for 1997.
The Consumer Lawns Group's marketing strategy has been refocused on consumer
directed, "pull" advertising and less on the retailer directed, "push"
promotional programs heavily relied upon in recent years. Although presentations
to retailers indicate encouraging acceptance of these new marketing and
promotional programs, the success thereof and the impact of the change in the
pre-season selling programs is unknown. On a pro forma basis, the Company has
historically generated 66% to 68% of its annual revenues in its second and third
fiscal quarters. Management expects this relationship to continue or to become
slightly more pronounced with the change in the consumer lawns marketing and
promotional programs. Spring weather conditions in North America are also a
significant factor impacting sales of the Company's products, especially in the
early spring selling season.
Management expects 1997 gross profit margins to continue to show improvement
over 1996 as a result of the anticipated recovery of the relatively higher
margin consumer lawns business, higher volumes increasing manufacturing
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.
The Company expects a lower effective tax rate in 1997 in the range of 42% to
44%, principally as a result of the anticipated return to profitability.
___________________
Safe Harbor Statement under the Private Securities Litigation Act of 1995. The
statements contained in this report which are not historical fact are "forward
looking statements" that involve various important risks, uncertainties, and
other factors which could cause the Company's actual results for 1997 and beyond
to differ materially from those expressed in such forward looking statements.
These important factors include, without limitation, the risks and factors set
forth above in "Outlook for the remainder of 1997" as well as other risks
previously disclosed in the Company's letters to shareholders and analysts,
press releases and filings with the Securities and Exchange Commission.
Page 15
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
On January 16, 1997, Pursell and the Company settled two lawsuits
pursuant to a confidential Settlement Agreement and Release (the
"Settlement Agreement"). Under the terms of the Settlement Agreement,
both actions have been dismissed with prejudice. Full and complete
releases were exchanged by the parties, and the Company granted to
Pursell a fully paid-up, non-exclusive license under the Company's
Poly-S patents. See Note 9 to Consolidated Financial Statements.
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index at page 18 for a list of the exhibits included
herewith.
(b) No reports on Form 8-K were filed during the fiscal quarter ended
December 28, 1996.
Page 16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE SCOTTS COMPANY
/s/ Jean H. Mordo
Date February 7, 1997 __________________________
Jean H. Mordo
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
Page 17
THE SCOTTS COMPANY
QUARTERLY REPORT ON FORM 10-Q FOR
FISCAL QUARTER ENDED DECEMBER 28, 1996
EXHIBIT INDEX
Exhibit Page
Number Description Number
------- -------------- ------
27 Financial Data Schedule 19
Page 18
5
1000
US DOLLARS
3-MOS
SEP-30-1997
OCT-01-1996
DEC-28-1996
1
5,854
0
125,857
4,209
195,454
345,298
235,115
(99,039)
778,678
101,988
0
0
177,255
211
179,553
778,678
100,184
100,184
53,842
101,550
267
0
5,573
(7,206)
(3,113)
(4,093)
0
0
0
(4,093)
(.35)
(.35)
