Reconciliation of Non-GAAP Disclosure Items for the Twelve

Months Ended September 30, 2008 and September 30, 2007

Note: See Notes 3, 4 and 5 to the Accompanying Footnotes on Page 11

 

		Twelve Months Ended September 30, 2008												Twelve Months Ended September 30, 2007
		As Reported			Product  Registrations/ Recalls			Impairment			Adjusted			As Reported			Costs related to  refinancings			Impairment			Adjusted			Pro Forma  Adjustments			Pro Forma  Adjusted
Net sales		$	2,981.8		$	(22.3	)	$	-		$	3,004.1		$	2,871.8		$	-		$	-		$	2,871.8		$	-		$	2,871.8
Cost of sales			1,999.9			(11.1	)		-			2,011.0			1,867.3			-			-		$	1,867.3			-			1,867.3
Cost of sales - product registrations/recalls			27.2			27.2			-			-			-			-			-			-			-			-
Gross profit			954.7			(38.4	)		-			993.1			1,004.5			-			-			1,004.5			-			1,004.5
% of sales			32.0	%								33.1	%		35.0	%								35.0	%					35.0	%
Operating expenses:
Selling, general and administrative			717.6			-			-			717.6			700.9			-			-			700.9			-			700.9
Impairment and product registrations/recalls			149.5			12.7			136.8			-			38.0			-			38.0			-			-			-
Other income, net			(10.4	)		-			-			(10.4	)		(11.5	)		-			-			(11.5	)		-			(11.5	)
Total operating expenses			856.7			12.7			136.8			707.2			727.4			-			38.0			689.4			-			689.4
Income from operations			98.0			(51.1	)		(136.8	)		285.9			277.1			-			(38.0	)		315.1			-			315.1
% of sales			3.3	%								9.5	%		9.6	%								11.0	%					11.0	%
Costs related to refinancings			-			-			-			-			18.3			18.3			-			-			-			-
Interest expense			82.2			-			-			82.2			70.7			-			-			70.7			23.6			94.3
Income before taxes			15.8			(51.1	)		(136.8	)		203.7			188.1			(18.3	)		(38.0	)		244.4			(23.6	)		220.8
Income tax expense			26.7			(17.9	)		(25.0	)		69.6			74.7			(6.5	)		(4.4	)		85.6			(8.3	)		77.3
Net income (loss)		$	(10.9	)	$	(33.2	)	$	(111.8	)	$	134.1		$	113.4		$	(11.8	)	$	(33.6	)	$	158.8		$	(15.3	)	$	143.5
Basic income (loss) per share		$	(0.17	)	$	(0.51	)	$	(1.73	)	$	2.08		$	1.74		$	(0.18	)	$	(0.52	)	$	2.44		$	(0.18	)	$	2.26
Diluted income (loss) per share		$	(0.17	)	$	(0.51	)	$	(1.71	)	$	2.05		$	1.69		$	(0.18	)	$	(0.50	)	$	2.37		$	(0.18	)	$	2.19
Common shares used in basic income (loss) per share calculation			64.5			64.5			64.5			64.5			65.2			65.2			65.2			65.2						63.4
Common shares and potential common shares used in diluted income (loss) per share calculation			65.4			65.4			65.4			65.4			67.0			67.0			67.0			67.0						65.4
Net income (loss)		$	(10.9	)										$	113.4
Income tax expense			26.7												74.7
Interest expense			82.2												70.7
Costs related to refinancing			-												18.3
Depreciation			53.9												51.4
Amortization, including marketing fees			16.4												16.1
Impairment of assets			136.8												38.0
Product registrations/recalls, non-cash portion			13.3												-
Adjusted EBITDA		$	318.4											$	382.6
Net income (loss)		$	(10.9	)										$	113.4
Depreciation			53.9												51.4
Amortization, including marketing fees			16.4												16.1
Impairment of assets			136.8												38.0
Stock-based compensation			12.5												13.3
Costs related to refinancing			-												18.3
Changes in working capital and other			(7.8	)											(3.9	)
Investment in property, plant and equipment			(56.1	)											(54.0	)
Investment in intellectual property			(4.1	)											-
Free cash flow		$	140.7											$	192.6

10

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THE SCOTTS MIRACLE-GRO COMPANY

Footnotes to Preceding Financial Statements

(in millions, except per share data)

 

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Results of Operations

(1)	Basic income (loss) per common share is calculated by dividing net income (loss) by average common shares outstanding during the period.

(2)

Diluted income (loss) per share is calculated by dividing net income (loss) by the average common shares and dilutive potential common shares (common stock options, stock appreciation rights, and restricted stock) outstanding during the period. If there is a loss for any period, diluted shares are equal to basic shares as dilutive potential common shares are anti-dilutive.

(3)

"Adjusted EBITDA" is defined as net income (loss) before interest, taxes, depreciation and amortization as well as certain other items such as the impact of discontinued operations, the cumulative effect of changes in accounting, costs associated with debt refinancing and other non-recurring, non-cash items effecting net income (loss). Adjusted EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles and should not be used as an alternative to net income (loss) as an indicator of operating performance or to cash flow as a measure of liquidity.

 

(4)	The Reconciliation of non-GAAP Disclosure Items includes the following non-GAAP financial measures:

Adjusted net income and adjusted diluted income per share - These measures exclude charges or credits relating to refinancings, impairments, restructurings, product registration and recall matters, and other unusual items such as costs or gains relate to discrete projects or transactions that are apart from and not indicative of the results of the operations of the business.

Pro forma adjusted net income and pro forma adjusted diluted income per share - These measures include interest expense and diluted shares which have been computed as if the recapitalization transactions were completed as described in Note 5 below.

 

Adjusted EBITDA - The presentation of adjusted EBITDA is provided as a convenience to the Company's lenders because adjusted EBITDA is a component of certain debt covenants.

Free cash flow - This annual measure is often used by analysts and creditors as a measure of a company’s ability to service debt, reinvest in the business beyond normal capital expenditures, and return cash to shareholders. Free cash flow is equivalent to cash provided by operating activities as defined by generally accepted accounting principles less capital expenditures.

The Company believes that the disclosure of these non-GAAP financial measures provides useful information to investors or other users of the financial statements, such as lenders.

(5)

During the second quarter of fiscal 2007, Scotts Miracle-Gro completed a significant recapitalization plan. The objective of this plan, announced on December 12, 2006, was to return $750 million to the Company's shareholders. This was accomplished via a share repurchase that totaled $245.5 million, or 4.5 million shares, which was completed via a modified Dutch auction tender offer on February 14, 2007, and a special one-time cash dividend of $8.00 per share, totaling $508.0 million, which was paid on March 5, 2007 to shareholders of record as of February 26, 2007.

In order to fund these transactions, the Company entered into new credit facilities aggregating to $2.15 billion. As part of this debt restructuring, the Company launched a successful tender offer for all of its $200 million 6 5/8% senior subordinated notes, which were retired in the second quarter of fiscal 2007.

   

Subsequent to the completion of this recapitalization, the Company's interest expense has been and will be significantly higher as a result of the borrowings incurred to fund the cash returned to shareholders and related expenses. The following pro forma incremental interest expense has been determined as if the Company had completed these recapitalization transactions as of October 1, 2006 for fiscal 2007. Borrowing rates in effect as of March 30, 2007 were used to compute this pro forma interest expense. As the recapitalization involved a share repurchase, pro forma diluted shares are also provided.

 

		Fiscal 2007
		Q1			Q2
Incremental interest on recapitalization borrowings		$	13.1		$	8.7
New credit facility interest rate differential			1.0			0.5
Incremental amortization of new credit facility fees			0.2			0.1
Pro forma incremental interest from recapitalization		$	14.3		$	9.3
Year-to-date incremental interest					$	23.6

 

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