FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 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
Part II. Other Information
Item 1. Legal Proceedings 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
Exhibit Index 16
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 38,867 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 23,013 48,764 56,780
Interest expense 4,749 6,838 12,306 20,646
Income before taxes 16,587 16,175 36,458 36,134
Income taxes 7,182 5,630 15,597 13,912
Net income $ 9,405 $ 10,545 $ 20,861 $ 22,222
Net income per common share $ .50 $ .45 $ 1.11 $ 1.09
Weighted average number of
common shares 18,811 23,580 18,840 20,380
outstanding
See Notes to Consolidated Financial Statements
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 (4,465) (203)
adjustments
Net cash provided by operating 19,528 25,652
activities
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 (118,986) -
acquired
Cash acquired in merger with Miracle-Gro - 6,448
Net cash used in investing (140,641) (9,499)
activities
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 7,208 (128,121)
of credit, net
Issuance of Class A Common Stock 160 -
Deferred financing costs incurred - (473)
Dividends on preferred stock - (1,122)
Net cash provided by (used in) 126,677 (17,569)
financing 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 177,255
of Miracle-Gro
Warrants issued for acquisition of 14,434
Miracle-Gro
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 90,468 142,309 115,772
of $3,442, $4,313 and $2,933,
respectively
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, 131,812 145,721 140,105
net
Trademarks and other 31,308 115,401 28,880
intangibles, net
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 26,742 27,256 27,014
than pensions
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 1,395 5,692 2,065
adjustments
Treasury stock, 2,415 shares at (41,441) (41,441) (41,441)
cost
Total Shareholders' Equity 165,742 384,261 168,160
Total Liabilities and $ 496,412 $ 797,159 $ 528,584
Shareholders' Equity
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.
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 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.
Page 6
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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 $ 34,934 $ 33,262
Net income per $ 1.20 $ 1.14
common share
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 99,287 99,221
($100 million face
amount)
Term Loan 190,000 - 93,598
Capital Lease 6,382 762 1,066
Obligations
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
Page 9
THE SCOTTS COMPANY AND SUBSIDIARIES
Notes to Consolidated Financial Statements
result of 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 13.9%
partially due to the inclusion of Miracle-Gro operating
expenses in the 1995 quarter (5.2% of the overall 13.9%
increase). Marketing cost increased 18.6% due to increased
spending for promotion programs to support the Scotts brand
and increased sales volume. Distribution costs increased
16.2% due to increased sales volume, higher warehousing and
storage costs and to a lesser extent higher freight rates.
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 $10,545,000 increased by $1,140,000 or
approximately 12.1%, 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
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Please see the information provided in Footnote 9 on
pages 9-10 of this Report, which information is
incorporated by reference.
Item 2-4.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index at page 16 for a list of the exhibits
included herewith.
(b) On June 2, 1995 Scotts filed a Form 8-K to report the
acquisition of Miracle-Gro. On August 2, 1995 Scotts
filed a Form 8-K/A to include the financial statements
specified by Rules 3-05 and 11-01 of Regulation S-X and
Items 7(a) and 7(b) of Form 8-K.
Page 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
THE SCOTTS COMPANY
Date: August 15, 1995
/s/ Paul D. Yeager
Paul D. Yeager
Executive Vice President
Chief Financial Officer
Principal Accounting Officer
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 17
Common Share
27 Financial Data Schedule 18
Page 16
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 For the Nine Months
Ended 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 $ 10,545 $ 20,861 $ 22,222
Net income per common share:
Net income per common $ .50 $ .45 $ 1.11 $ 1.09
share
Computation of Weighted Average Number
of Common Shares Outstanding (Unaudited)
For the Three Months For the Nine Months
Ended Ended
July 2 July 1 July 2 July 1
1994 1995 1994 1995
Weighted average common
shares outstanding 18,667,064 18,667,064 18,661,667 18,667,064
during the period
Assuming conversion of 4,561,404 1,520,468
preferred stock
Assuming exercise of
options using the 143,719 351,254 178,562 192,725
Treasury Stock Method
Weighted average number
of common shares 18,810,783 23,579,722 18,840,229 20,380,257
outstanding as adjusted
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.
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
177,255
206,795
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
