SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported: April 16, 2004
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The Scotts Company
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(Exact name of registrant as specified in its charter)
Ohio 1-11593 31-1414921
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(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
14111 Scottslawn Road, Marysville, OH 43041
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (937) 644-0011
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Not Applicable
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(Former name or former address, if changed since last report.)
ITEM 5. OTHER EVENTS AND REGULATION FD DISCLOSURE
As previously reported in our report on Form 10-Q for the quarter ended
December 28, 2003, The Scotts Company (the "Company") changed its reportable
segments of our Annual Report on Form 10-K for the fiscal year ended September
30, 2003. These new segments differ from those used in the prior year due to the
absorption of the Global Professional group into the North America and
International segments based on geography. This new division of reportable
segments, respectively, is consistent with how the segments report to and are
managed by senior management of the Company.
Certain minor reclassifications have been made to fiscal 2003 and prior
years' financial statements to conform to fiscal 2004 classifications reflected
in our first quarter report on Form 10-Q for fiscal 2004. In addition, Note 19,
New Accounting Standards, has been revised to conform with the updated
disclosure regarding FASB Interpretation No. 46 presented in our first quarter
report on Form 10-Q for fiscal 2004.
Item 6, "Selected Financial Data," of our Annual Report on Form 10-K
for the fiscal year ended September 30, 2003, Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," of our Annual
Report on Form 10-K for the fiscal year ended September 30, 2003 and Note 21,
"Segment Information," to the Consolidated Financial Statements included in Item
8, "Financial Statements and Supplementary Data" in our Annual Report on Form
10-K for the fiscal year ended September 30, 2003, have been revised and are
included in this Form 8-K to reflect the new basis of segment reporting.
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ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR SUMMARY
FOR THE FISCAL YEAR ENDED SEPTEMBER 30,
(IN MILLIONS EXCEPT PER SHARE AMOUNTS)
2003(1) 2002(1) 2001(1)(2) 2000(1) 1999(3)
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OPERATING RESULTS:
Net sales(6) $ 1,910.1 $ 1,748.7 $ 1,670.4 $ 1,656.2 $ 1,550.6
Gross profit(6)(4) 690.8 634.9 596.4 603.8 563.3
Income from operations(4) 232.5 239.2 116.4 210.2 196.1
Income before extraordinary items
and cumulative effect of change
in accounting 103.8 101.0 15.5 73.1 69.1
Income applicable to common
shareholders 103.8 82.5 15.5 66.7 53.5
Depreciation and amortization 52.2 43.5 63.6 61.0 56.2
FINANCIAL POSITION:
Working capital 364.4 278.3 249.1 234.1 274.8
Property, plant and equipment, net 338.2 329.2 310.7 290.5 259.4
Total assets 2,030.3 1,914.1 1,854.8 1,771.0 1,769.6
Total debt 757.6 829.4 887.8 862.8 950.0
Total shareholders' equity 728.2 593.9 506.2 477.9 443.3
CASH FLOWS:
Cash flows from operating activities 218.0 233.6 65.7 171.5 78.2
Investments in property, plant and equipment 51.8 57.0 63.4 72.5 66.7
Cash invested in acquisitions,
including payments on seller notes 57.1 63.0 37.6 19.3 506.2
RATIOS:
Operating margin 12.2% 13.7% 7.0% 12.7% 12.6%
Current ratio 1.8 1.6 1.5 1.6 1.7
Total debt to total book capitalization 51.0% 58.3% 63.7% 64.3% 68.2%
Return on average shareholders'
equity (book value) 15.7% 15.0% 3.1% 14.5% 12.6%
PER SHARE DATA:
Basic earnings per common share(7) $ 3.36 $ 2.81 $ 0.55 $ 2.39 $ 2.93
Diluted earnings per common share(7) 3.23 2.61 0.51 2.25 2.08
Stock price to diluted earnings
per share, end of period 16.9 16.0 66.9 14.9 16.6
Stock price at year-end 54.70 41.69 34.10 33.50 34.63
Stock price range -- High 57.70 50.35 47.10 42.00 47.63
Stock price range -- Low 43.54 34.45 28.88 29.44 26.63
OTHER:
EBITDA(5) 284.7 282.7 180.0 271.2 252.3
EBITDA margin(5) 14.9% 16.2% 10.8% 16.4% 16.3%
Interest coverage
(EBITDA/interest expense)(5) 4.1 3.7 2.1 2.9 3.2
Average common shares outstanding 30.9 29.3 28.4 27.9 18.3
Common shares used in diluted
earnings per common share
calculation 32.1 31.7 30.4 29.6 30.5
Dividends on Class A Convertible
Preferred Stock $ 0.0 $ 0.0 $ 0.0 $ 6.4 $ 9.7
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NOTE: Prior year presentations have been changed to conform to fiscal 2003
presentation; these changes did not impact net income.
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(1) Includes Scotts LawnService(R) acquisitions from dates acquired.
(2) Includes Substral(R) brand acquired from Henkel KGaA from January 2001.
(3) Includes Rhone-Poulenc Jardin (nka Scotts France SAS) from October
1998, ASEF Holding BV from December 1998 and the non-Roundup(R)
("Ortho") business from January 1999.
(4) Income from operations for fiscal 2003, 2002 and 2001 includes $17.1,
$8.1 and $75.7 of restructuring and other charges, respectively. Gross
profit for fiscal 2003, 2002 and 2001 includes $9.1, $1.7 and $7.3 of
restructuring and other charges, respectively.
(5) EBITDA is defined as income from operations, plus depreciation and
amortization. We believe that EBITDA provides additional information
for determining our ability to meet debt service requirements. EBITDA
does not represent and should not be considered as an alternative to
net income or cash flow from operations as determined by generally
accepted accounting principles, and EBITDA does not necessarily
indicate whether cash flow will be sufficient to meet cash
requirements. EBITDA margin is calculated as EBITDA divided into net
sales. Our measure of EBITDA may not be similar to other similarly
titled captions used by other companies. A numeric reconciliation of
EBITDA to income from operations is as follows:
For the fiscal year ended September 30,
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2003 2002 2001 2000 1999
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Income from operations $ 232.5 $ 239.2 $ 116.4 $ 210.2 $ 196.1
Depreciation and amortization 52.2 43.5 63.6 61.0 56.2
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EBITDA $ 284.7 $ 282.7 $ 180.0 $ 271.2 $ 252.3
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(6) For fiscal 2002, we adopted EITF 00-25, "Accounting for Consideration
from a Vendor to a Retailer in Connection with the Purchase or
Promotion of the Vendor's Products" which requires that certain
consideration from a vendor to a retailer be classified as a reduction
in sales. As had many other companies, we had historically classified
these as advertising and promotion costs. The information for all
periods presented reflects this new method of presentation. Also,
certain expenses previously recorded as advertising were reclassified
to marketing within selling, general and administrative expenses.
(7) Basic and diluted earnings per share would have been as follows if the
accounting change for intangible assets adopted in the fiscal year
beginning October 1, 2001, had been adopted as of October 1, 1999:
For the fiscal
year ended
September 30,
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2001 2000
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Income available to common shareholders $ 32.1 $ 83.4
Basic earnings per share 1.13 2.98
Diluted earnings per share 1.05 2.81
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Scotts is a leading manufacturer and marketer of consumer branded
products for lawn and garden care and professional horticulture in North America
and Europe. We also have a presence in Australia, the Far East, Latin America
and South America. Also, in the United States, we operate the second largest
residential lawn service business, Scotts LawnService(R). In fiscal 2003, our
operations were divided into four business segments: North American Consumer,
Scotts LawnService(R), Global Professional, and International Consumer. The
North American Consumer segment included the Lawns, Gardening Products, Ortho(R)
and Canadian business groups. We are also
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Monsanto's exclusive agent for the marketing and distribution of consumer
Roundup(R) non-selective herbicide within the United States and other
contractually specified countries.
In fiscal 2004, the Company changed its reportable segments to absorb
the Global Professional segment into the North America and International
segments based on geography. The Management's Discussion and Analysis of
Financial Condition and Results of Operations which follows was derived from our
Annual Report on Form 10-K for the fiscal year ended September 30, 2003 and
revised to reflect our reportable segments for fiscal 2004.
In fiscal 2003, we continued the rapid expansion of our Scotts
LawnService(R) business. Through acquisitions and internal growth, revenues
increased from approximately $42 million in fiscal 2001 to over $110 million in
fiscal 2003. We completed $30 million of lawn care acquisitions in fiscal 2003
and expect to continue to make selective acquisitions in fiscal 2004 and beyond,
although at a somewhat slower pace.
As a leading consumer branded lawn and garden company, we focus our
consumer marketing efforts, including advertising and consumer research, on
creating consumer demand to pull products through the retail distribution
channels. In the past three years, we have spent approximately 5% of our net
sales annually on media advertising to support and promote our products and
brands. We have applied this consumer marketing focus for the past several
years, and we believe that Scotts receives a significant return on these
marketing expenditures. We expect that we will continue to focus our marketing
efforts toward the consumer and make additional significant investments in
consumer marketing expenditures in the future to continue to drive market share
and sales growth. In fiscal 2004, we expect to increase advertising spending as
we deliver a new media message for the Ortho(R) line, increase our advertising
spending on selected brands in Europe and continue to have the largest share of
voice in our lawn and garden categories in North America.
Our sales are susceptible to global weather conditions, primarily in
North America and Europe. For instance, periods of wet weather like we
experienced this past spring in the United States adversely impacted fertilizer
sales but increased demand for certain pesticide products. We believe that our
past acquisitions have somewhat diversified both our product line risk and
geographic risk to weather conditions.
Historically, the majority of our shipments to retailers have occurred
in the second and third fiscal quarters. However, over the past two years,
retailers have reduced their pre-season inventories by relying on vendors to
deliver products "in season" when consumers seek to buy our products. This
change in retailer purchasing patterns and the increasing importance of Scotts
LawnService(R) revenues, has caused a sales shift from our second fiscal quarter
to the third and fourth fiscal quarters. Net sales by quarter were 9.5%, 35.4%,
37.2%, and 17.9%, respectively, of fiscal 2003 net sales. Concurrent with this
sales shift, and because of the expansion of Scotts LawnService(R), the Company
has experienced a shift in profitability from the second to third and fourth
fiscal quarters, with the third fiscal quarter now more profitable than the
second fiscal quarter. Results for the Company's fourth fiscal quarter,
historically a loss making quarter, improved substantially in fiscal 2003. We
expect the trend towards stronger third and fourth fiscal quarter sales and
profits to continue in fiscal 2004.
Beginning in fiscal 2003, the Company began expensing prospective
grants of employee stock-based compensation awards in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation", as amended by Statement of Financial Accounting Standards No.
148, "Accounting for Stock-Based Compensation -- Transition and Disclosure -- an
Amendment of SFAS No. 123". The fair value of future awards will be expensed
ratably over the vesting period, which has historically been three years, except
for grants to directors, which have a six-month vesting period. The related
compensation expense recorded in fiscal 2003 was $4.8 million.
In fiscal 2002, we adopted Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets." This standard eliminates the
requirement to amortize indefinite-lived assets and goodwill. It also requires
an initial impairment test on all indefinite-lived assets as of the date of
adoption of this standard and impairment tests done at least annually
thereafter. As a result of adopting the standard as of October 1, 2001,
amortization expense for fiscal 2003 and 2002 was reduced by approximately $21.0
million in each year.
4
We completed our impairment analysis in the second quarter of fiscal
2002, taking into account additional guidance provided by EITF 02-07, "Unit of
Measure for Testing Impairment of Indefinite-Lived Intangible Assets." As a
result, a pre-tax impairment charge related to the value of tradenames in our
German, French and United Kingdom consumer businesses of $29.8 million was
recorded as of October 1, 2001. After income taxes, the net charge was $18.5
million which is recorded as a cumulative effect of a change in accounting
principle. There was no goodwill impairment as of the date of adoption. Upon
completing the annual impairment analysis in the first quarter of fiscal 2003,
it was determined that a charge for impairment was not required.
In fiscal 2002, we announced the International Profit Improvement Plan
to improve the operations and profitability of our European-based consumer and
professional businesses. By the end of 2005, we anticipate spending between $45
million and $55 million in the aggregate on various projects related to this
plan, approximately 25% of which will be capital expenditures. Approximately 75%
of the total spending relates to the reorganization and rationalization of our
European supply chain, increased sales force productivity and a shift to
pan-European category management of our product portfolio. In the fourth quarter
of fiscal 2002, we announced the closure of a manufacturing plant in Bramford,
England. In the fourth quarter of fiscal 2002, $4.0 million of severance and
additional pension costs related to the closure were recorded and reported as
restructuring and other charges. The closure was completed in May 2003 with the
transfer of United Kingdom fertilizer production to our Howden, United Kingdom
facility. For further information concerning the restructuring charges incurred
in fiscal years 2003, 2002 and 2001, see Note 4 to the Consolidated Financial
Statements.
In fiscal 2001, Scotts adopted accounting policies that required
certain amounts payable to customers or consumers related to the purchase of our
products to be recorded as a reduction in net sales rather than as advertising
and promotion expense (e.g., volume rebates and coupons). In fiscal 2002, Scotts
adopted EITF 00-25, "Accounting for Consideration from a Vendor to a Retailer in
Connection with the Purchase or Promotion of the Vendor's Products." This
standard requires Scotts to record certain of its cooperative advertising
expenditures as reductions of net sales rather than as advertising and promotion
expense. Results for prior fiscal years have been reclassified to conform to
this new presentation method for these expenses.
In fiscal 2001, restructuring and other charges of $75.7 million were
recorded for reductions in work force, facility closures, asset writedowns, and
other related costs. Certain costs associated with this restructuring
initiative, including costs related to the relocation of equipment, personnel
and inventory, were not recorded as part of the restructuring costs in fiscal
2001. These costs, which totaled $4.1 million, were recorded as they were
incurred in fiscal 2002 as required under generally accepted accounting
principles in the United States.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following discussion and analysis of the consolidated results of
operations and financial position should be read in conjunction with our
Consolidated Financial Statements included under "ITEM 8. FINANCIAL STATEMENTS
AND SUPPLEMENTARY DATA".
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to customer programs and incentives, product returns, bad debts,
inventories, intangible assets, income taxes, restructuring, environmental
matters, contingencies and litigation. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable
under the circumstances. Actual results may differ from these estimates under
different assumptions or conditions. The estimates that we believe are most
critical to our reporting of results of operations and financial position are as
follows:
- We have significant investments in property and equipment,
intangible assets and goodwill. Whenever changing conditions
warrant, we review the realizability of the assets that may be
impacted. At least annually, we review indefinite-lived
intangible assets for impairment. The review for impairment of
long-
5
lived assets, intangibles and goodwill takes into account
estimates of future cash flows. Our estimates of future cash
flows are based upon budgets and longer-range plans. These
budgets and plans are used for internal purposes and are also
the basis for communication with outside parties about future
business trends. While we believe the assumptions we use to
estimate future cash flows are reasonable, there can be no
assurance that the expected future cash flows will be
realized. As a result, impairment charges that possibly should
have been recognized in earlier periods may not be recognized
until later periods if actual results deviate unfavorably from
earlier estimates.
- We continually assess the adequacy of our reserves for
uncollectible accounts due from customers. However, future
changes in our customers' operating performance and cash flows
or in general economic conditions could have an impact on
their ability to fully pay these amounts which could have a
material impact on our operating results.
- Reserves for product returns are based upon historical data
and current program terms and conditions with our customers.
Changes in economic conditions, regulatory actions or
defective products could result in actual returns being
materially different than the amounts provided for in our
interim or annual results of operations.
- Reserves for excess and obsolete inventory are based on a
variety of factors, including product changes and
improvements, changes in active ingredient availability and
regulatory acceptance, new product introductions and estimated
future demand. The adequacy of our reserves could be
materially affected by changes in the demand for our products
or regulatory actions.
- As described more fully in the Notes to the Consolidated
Financial Statements for the fiscal year ended September 30,
2003, we are involved in significant environmental and legal
matters which have a high degree of uncertainty associated
with them. We continually assess the likely outcomes of these
matters and the adequacy of amounts, if any, provided for
these matters. There can be no assurance that the ultimate
outcomes will not differ materially from our assessment of
them. There can also be no assurance that all matters that may
be brought against us or that we may bring against other
parties are known to us at any point in time.
- We accrue for the estimated costs of customer volume rebates,
cooperative advertising, consumer coupons and other trade
programs as the related sales occur during the year. These
accruals involve the use of estimates as to the total expected
program costs and the expected sales levels. Historical
results are also used to evaluate the accuracy and adequacy of
amounts provided at interim dates and year end. There can be
no assurance that actual amounts paid for these trade programs
will not differ from estimated amounts accrued. However, we
believe any such differences would not be material to our
financial position or results of operations.
- We record income tax liabilities utilizing known obligations
and estimates of potential obligations. A deferred tax asset
or liability is recognized whenever there are future tax
effects from existing temporary differences and operating loss
and tax credit carryforwards. Valuation allowances are used to
reduce deferred tax assets to the balance that is more likely
than not to be realized. We must make estimates and judgments
on future taxable income, considering feasible tax planning
strategies and taking into account existing facts and
circumstances, to determine the proper valuation allowance.
When we determine that deferred tax assets could be realized
in greater or lesser amounts than recorded, the asset balance
and income statement reflects the change in the period such
determination is made. Due to changes in facts and
circumstances and the estimates and judgments that are
involved in determining the proper valuation allowance,
differences between actual future events and prior estimates
and judgments could result in adjustments to this valuation
allowance. The Company uses an estimate of its annual
effective tax rate at each interim period based on the facts
and circumstances available at that time, while the actual
effective tax rate is calculated at year-end.
- Also, as described more fully in the Notes to the Consolidated
Financial Statements, we have not accrued the deferred
contribution under the Roundup(R) marketing agreement with
Monsanto or the per annum charges
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thereon. We consider this method of accounting for the
contribution payments to be appropriate after consideration of
the likely term of the agreement, our ability to terminate the
agreement without paying the deferred amounts, and the fact
that approximately $18.6 million of the deferred amount is
never paid, even if the agreement is not terminated prior to
2018, unless significant earnings targets are exceeded. At
September 30, 2003, contribution payments and related per
annum charges of approximately $49.2 million had been deferred
under the agreement.
NEW ACCOUNTING STANDARDS NOT YET EFFECTIVE
In December, 2003 the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 46 (revised December 2003), "Consolidation of
Variable Interest Entities" (FIN 46R). FIN 46R varies significantly from FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46),
which it supersedes. FIN 46R requires the application of either FIN 46 or FIN
46R by "Public Entities" (as defined in paragraph 395 of FASB Statement No. 123,
"Accounting for Stock-Based Compensation") to all Special Purpose Entities
("SPEs") created prior to February 1, 2003 at the end of the first interim or
annual reporting period ending after December 15, 2003. All entities created
after January 31, 2003 by Public Entities were already required to be analyzed
under FIN 46, and they must continue to do so, unless FIN 46R is adopted early.
FIN 46R will be applicable to all non-SPEs created prior to February 1, 2003 by
Public Entities at the end of the first interim or annual reporting period
ending after March 15, 2004. The Company does not believe that it has any SPEs
as prescribed by FIN 46R. The Company continues to evaluate FIN 46R for
applicability to the Company's Scotts LawnService(R) franchises for adoption
during the second quarter of fiscal 2004.
RESULTS OF OPERATIONS
The following table sets forth the components of income and expense as
a percentage of net sales for the three years ended September 30, 2003:
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2003 2002 2001
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Net sales 100.0% 100.0% 100.0%
Cost of sales 63.3 63.6 63.9
Restructuring and other charges 0.5 0.1 0.4
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Gross profit 36.2 36.3 35.7
Commission earned from marketing agreement, net 0.9 0.9 1.3
Advertising 5.1 4.7 5.3
Selling, general and administrative 17.1 17.0 18.4
Selling, general and administrative -- lawn service business 2.4 1.8 1.0
Restructuring and other charges 0.4 0.4 4.1
Amortization of goodwill and other intangibles 0.4 0.3 1.7
Other income, net (0.5) (0.7) (0.5)
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Income from operations 12.2 13.7 7.0
Interest expense 3.6 4.4 5.3
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Income before income taxes 8.6 9.3 1.7
Income taxes 3.2 3.5 0.8
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Income before cumulative effect of accounting change 5.4 5.8 0.9
Cumulative effect of change in accounting for intangible assets, net of tax (1.1)
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Net income 5.4% 4.7% 0.9%
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The following table sets forth net sales for the three years ended
September 30, 2003 based on our business segments for fiscal 2004:
2003 2002 2001
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($ millions)
North America $ 1,411.3 $ 1,336.9 $ 1,296.3
Scotts LawnService(R) 110.4 75.6 41.1
International 388.4 336.2 333.0
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Consolidated $ 1,910.1 $ 1,748.7 $ 1,670.4
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FISCAL 2003 COMPARED TO FISCAL 2002
Net sales for fiscal 2003 increased 9.2% to $1,910.1 million from
$1,748.7 million in fiscal 2002.
North America segment net sales were $1,411.3 million in fiscal 2003,
an increase of $74.4 million, or 5.6%, from net sales for fiscal 2002 of
$1,336.9 million. Within the North America segment, Lawns net sales in fiscal
2003 increased a robust 11.2% due to strong acceptance of the new Miracle-Gro(R)
lawn fertilizer line at Wal*Mart and continued strong sales of Turf Builder(R)
lawn fertilizer, control products and grass seed. Gardening Products sales,
which include growing media and garden fertilizers, were essentially flat
year-over-year with higher sales of value-added Miracle-Gro(R) potting mix and
garden soils mainly offset by lower sales of commodity growing media products.
Ortho(R)'s net sales increased 2.1% in fiscal 2003, driven largely by strong
sales of selective and non-selective weed control products and continued growth
of the Ortho(R) Home Defense(R) indoor and perimeter pest control product line,
partially offset by lower outdoor insect control sales. Several important
outdoor insect control products are scheduled for re-launch with increased
advertising support in fiscal 2004.
Scotts LawnService(R) net sales increased 46.0% from $75.6 million in
fiscal 2002 to $110.4 million in fiscal 2003. The growth in net sales has been
largely fueled by geographic expansion and acquisitions. Spending on
acquisitions, including seller-financing, reached $30.6 million in fiscal 2003
versus $54.0 million in fiscal 2002. Fiscal 2002 was impacted by a major
acquisition late in the year, representing nearly one-half of fiscal 2002
acquisition spending and favorably impacting fiscal 2003 net sales.
Net sales for the International segment were $388.4 million in fiscal
2003, an increase of $52.2 million, or 15.5%, compared to fiscal 2002. Excluding
the effects of currency fluctuations and non-recurring sales from
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previous supply agreements, net sales increased approximately $5.0 million, or
1.5%, in fiscal 2003. Sales increased in all major countries except Germany
which experienced lower sales due to increased regulatory restrictions and
product line gaps that are being addressed in fiscal 2004.
Selling price changes were not material to net sales in fiscal 2003 or
fiscal 2002.
Gross profit increased $55.9 million in fiscal 2003 compared to fiscal
2002. As a percentage of net sales, gross profit was 36.2% of net sales in
fiscal 2003 compared to 36.3% in fiscal 2002. Favorable impacts were realized
from certain supply chain initiatives and higher volume. These benefits were
offset by unfavorable warehousing and material handling costs and product mix,
particularly in our Lawns business, which was also impacted by higher urea
costs. Lastly, restructuring and other expenses, included in cost of sales,
primarily related to International supply chain initiatives, increased from $1.7
million in fiscal 2002 to $9.1 million in fiscal 2003, reducing gross profit as
a percentage of net sales by 39 basis points.
The net commission earned from the Roundup(R) marketing agreement in
fiscal 2003 was $17.6 million compared to $16.2 million in fiscal 2002. The
increase from the prior year is primarily due to strong underlying growth in
Roundup(R) sales, which drove the gross commission higher, partially offset by a
$5.0 million increase in the contribution payment due to Monsanto, which
increased from $20.0 million in fiscal 2002 to $25.0 million in fiscal 2003.
Advertising expenses in fiscal 2003 were $97.7 million, an increase of
$15.5 million from fiscal 2002. The increase in advertising expenses is
primarily due to the re-launch of television media support for the Ortho(R) line
and media support for new product launches such as Miracle-Gro(R) Shake N'
Feed(R). Foreign currency fluctuations also increased reported advertising
expenses by $2.7 million.
Selling, general and administrative ("SG&A") expenses in fiscal 2003
were $380.4 million compared to $336.0 million for fiscal 2002. Excluding the
expensing of stock-based compensation, infrastructure investment in the Scotts
LawnService(R) and restructuring and other charges, the Company's SG&A expenses
increased $22.6 million, or 7.6%, compared to 2002. This increase is primarily
due to investments to support our expansion into adjacent categories and
channels, investments to expand the functionality and capability of our business
development offices at our largest retailers, and foreign exchange fluctuations.
SG&A expenses for Scotts LawnService(R) increased 50% from $30.8 million in
fiscal 2002 to $46.2 million in fiscal 2003, primarily due to growth in the
branch service network, supporting our plan to rapidly expand to a national
platform. SG&A restructuring and other expenses increased from $6.4 million in
fiscal 2002 to $8.0 million in fiscal 2003, primarily related to the
implementation of the International Profit Improvement Plan.
Amortization of goodwill and intangibles increased from $5.7 million in
fiscal 2002 to $8.6 million in fiscal 2003, primarily due to foreign currency
fluctuations and higher expenses related to the amortization of certain
intangibles, primarily related to customer lists acquired by Scotts
LawnService(R).
Other income, net was $10.8 million in fiscal 2003, compared to $12.0
million in fiscal 2002. The Company realized a net reduction of approximately
$4.0 million from an agreement to cease peat extraction in the United Kingdom.
Increased Scotts LawnService(R) franchise fees and royalty income recorded in
fiscal 2002 partially off-set the reduction related to peat extraction.
Income from operations in fiscal 2003 was $232.5 million, compared to
$239.2 million in fiscal 2002. This decrease in income from operations reflects
higher net sales and gross profit, offset by greater investments in media
advertising and higher SG&A expenses, higher restructuring spending in Europe
(to support our International Profit Improvement Plan) and the adoption of an
accounting change to expense stock-based compensation awards.
For segment reporting purposes, earnings before interest, taxes and
amortization of intangible assets is used as the measure for income from
operations ("operating income"). On that basis, operating income in the North
America segment increased from $278.1 million in fiscal 2002 to $283.7 million
in fiscal 2003, on an increase in net sales from $1,336.9 million in fiscal 2002
to $1,411.3 million in fiscal 2003. Higher sales volume (primarily in the Lawns
9
business) and favorable volume-related manufacturing cost absorption were
largely offset by a decrease in gross profit margin as a percentage of net sales
(due to product mix and increased urea and warehousing costs), and higher media
and SG&A expenses.
Scotts LawnService's(R) operating income decreased from $8.8 million in
fiscal 2002 to $6.2 million in fiscal 2003 due to planned infrastructure
investments and higher field labor and truck costs, largely the result of poor
spring weather that delayed the start of the spring treatment season. These
higher costs more than offset increased margin resulting from higher net sales,
which were driven by geographic expansion and acquisitions.
The International segment's operating income was $23.9 million in
fiscal 2003, compared to $25.3 million in fiscal 2002. The decrease in fiscal
2003 operating income is largely due to planned restructuring expenses, as
outlined in the Company's International Profit Improvement Plan, and a
non-recurring peat transaction gain recognized in fiscal 2002. Foreign currency
fluctuations also favorably impacted operating income.
Interest expense decreased from $76.3 million in fiscal 2002 to $69.2
million in fiscal 2003. The decrease in interest expense was primarily due to
debt repayments and strong operating cash flow, which resulted in lower average
borrowing levels as compared to the prior year, and lower interest rates on our
credit revolver and variable rate term loans. The weighted average cost of debt
was 7.96% in fiscal 2003 compared to 8.30% in fiscal 2002.
Income tax expense for fiscal 2003 was $59.5 million, compared to $61.9
million in fiscal 2002. This decrease in income tax expense as compared to the
prior year primarily was the result of a reduction in the Company's effective
tax rate from 38.0% in 2002 to 36.4% in 2003, due to an adjustment of state
deferred income taxes resulting from a detailed review of state effective tax
rates, and increased utilization of foreign tax credits in fiscal 2003.
The Company reported income before cumulative effect of accounting
changes of $103.8 million for fiscal 2003, compared to $101.0 million in fiscal
2002. After the charge of $29.8 million ($18.5 million, net of tax) for the
impairment of trade names in our German, French and United Kingdom businesses,
net income for fiscal 2002 was $82.5 million, or $2.61 per diluted share,
compared to net income of $103.8 million, or $3.23 per diluted share, in fiscal
2003.
Average diluted shares outstanding increased from 31.7 million in
fiscal 2002 to 32.1 million in fiscal 2003, due to option and warrant exercises
and the impact on common stock equivalents of a higher average share price in
fiscal 2003.
FISCAL 2002 COMPARED TO FISCAL 2001
Net sales for fiscal 2002 increased 4.7% to $1,748.7 million from
$1,670.4 million in fiscal 2001.
North America segment net sales were $1,336.9 million in fiscal 2002,
an increase of $40.6 million, or 3.1%, from net sales for fiscal 2001 of
$1,296.3 million. Within the North America segment, Lawns net sales increased in
fiscal 2002 over 5.5% due to strong acceptance of our new SummerGuard(R) product
and continued strong sales of Turf Builder(R) lawn fertilizer, control products
and grass seed; Gardening Products net sales increased over 11% due to continued
strong performance of our value-added line of Miracle-Gro(R) potting mix and
garden soil with an off-setting decline of 5.5% in our garden fertilizers due
primarily to a colder and wetter May (the business peak sales month) in the
Midwest and Eastern portions of the United States. Ortho(R) net sales were down
slightly in fiscal 2002. Despite an increase in consumer purchases of certain
product lines, overall Ortho(R) net sales declined slightly in fiscal 2002 as we
reduced national television advertising support to reassess our campaign for
this line and prepared for a new campaign in fiscal 2003.
Scotts LawnService(R) net sales increased over 83% from $41.1 million
in fiscal 2001 to $75.6 million in fiscal 2002. The growth in net sales reflects
the growth in the business from the acquisitions completed in fiscal 2002, new
branch openings in late winter of 2001 and the growth in customers from our
spring 2002 and fall 2001 marketing campaigns. Spending on acquisitions,
including seller-financing, increased from nearly $18.0 million in fiscal 2001
10
to over $54.0 million in fiscal 2002. Due to one major acquisition, nearly
one-half of fiscal 2002's acquisition spending occurred in August 2002 resulting
in only a minor contribution to fiscal 2002's revenue growth.
Net sales for the International segment were $336.2 million in fiscal
2002, which were $3.2 million, or 1.0%, higher than net sales for fiscal 2001.
Excluding the effects of currency fluctuations, net sales declined by $1.0
million from fiscal 2001 to fiscal 2002. Efforts by retailers to reduce their
inventory investment and more closely time their purchases to consumer purchases
contributed to the year over year sales decrease.
Selling price changes were not material to net sales in fiscal 2002 or
fiscal 2001.
Gross profit increased $38.5 million in fiscal 2002 from fiscal 2001.
As a percentage of net sales, gross profit was 36.3% of net sales in fiscal 2002
compared to 35.7% in fiscal 2001. In North America, cost savings from our supply
chain and purchasing initiatives to reduce manufacturing costs were partially
offset by lower absorption of fixed costs due to lower production levels.
Production levels were lowered in order to reduce North American inventory
levels, which declined over $92 million from the end of fiscal 2001 to the end
of fiscal 2002. Other factors affecting margins were better product mix,
particularly in our Lawns and Gardening Products businesses, and the increasing
contribution of our rapidly growing Scotts LawnService(R) business which has
higher margins than our other business units. Lastly, restructuring expenses
included in cost of sales declined from $7.3 million in fiscal 2001 to $1.7
million in fiscal 2002 which improved gross profit as a percentage of net sales
by 32 basis points.
The net commission earned from the Roundup(R) marketing agreement in
fiscal 2002 was $16.2 million, compared to $20.8 million in fiscal 2001. The
decrease from the prior year is primarily due to a $5.0 million increase in the
contribution payment due to Monsanto to $20.0 million in fiscal 2002 from $15.0
million in fiscal 2001.
Advertising expenses in fiscal 2002 were $82.2 million, a decrease of
$6.9 million from advertising expenses in fiscal 2001 of $89.1 million. The
decrease in advertising expenses from the prior year is primarily due to
efficiencies from improved media buying and lower rates and reduced media
spending on the Ortho(R) line which was replaced with more in-store promotional
support, which is a marketing expense included in SG&A expenses.
SG&A expenses in fiscal 2002 were $336.0 million, compared to $392.5
million for fiscal 2001. The reduction is primarily due to restructuring and
other charges of $68.4 million in fiscal 2001 compared to only $6.4 million in
fiscal 2002. Excluding restructuring expenses in both fiscal years, the $3.0
million environmental charge in fiscal 2002 and SG&A expenses of the Scotts
LawnService(R) business from both fiscal 2002 and 2001 results, SG&A expenses
were $295.8 million, or 16.9% of net sales, in fiscal 2002 compared to $307.9
million, or 18.4%, of net sales in fiscal 2001 which reflects the benefits in
fiscal 2002 from the cost reduction efforts undertaken in 2001 through reduction
in workforce and other restructuring activities even though other costs such as
litigation-related legal expenses and information systems support expenses
increased in fiscal 2002 from fiscal 2001.
Fiscal 2002 includes $1.7 million of restructuring charges in costs of
sales related to the redeployment of inventory from closed plants and warehouses
and $2.4 million in SG&A expenses related to the relocation of personnel for the
restructuring activities initiated in fiscal 2001. Under generally accepted
accounting principles in the United States, these costs have been expensed in
the period incurred. Also, in the fourth quarter of fiscal 2002, approximately
$4.0 million in restructuring charges, primarily severance and pension costs,
related to the announced closure of a plant in Bramford, England were recorded.
In fiscal 2001, $7.3 million of restructuring and other charges were recorded in
cost of sales and $68.4 million in SG&A costs.
Amortization of goodwill and intangibles in fiscal 2002 declined to
$5.7 million from $27.7 million in fiscal 2001, primarily due to the adoption of
SFAS No. 142 in fiscal 2002.
Other income was $12.0 million for fiscal 2002, compared to $8.5
million in fiscal 2001. The increase is primarily due to the gain and other
income from the agreement for the cessation of peat extraction in the United
Kingdom of approximately $6.6 million. This gain was partially offset by lower
royalty income due to the phase out
11
in 2002 of a lawn mower program at a major North American retailer and a
one-time insurance settlement gain in fiscal 2001.
Income from operations for fiscal 2002 was $239.2 million, compared
with $116.4 million for fiscal 2001. The increase in income from operations over
the prior year is the result of lower restructuring expenses, increased gross
margin from the increase in net sales, lower advertising spending, lower SG&A
expenses, and the effect of the change in accounting for amortization of
indefinite-lived assets.
Operating income in the North America segment increased from $258.9
million for fiscal 2001 to $278.1 million for fiscal 2002 on an increase in net
sales from $1,296.3 million in fiscal 2001 to $1,336.9 million in fiscal 2002.
Gross margin improvement from supply chain cost reductions, improved product
sales mix in Lawns and Gardening Products, and reduced media spending levels
were partially offset by lower overhead absorption due to reduced production
levels, a reduction in the Roundup(R) commission and decreased licensing
royalties.
Scotts LawnService's(R) operating income increased from $4.7 million in
fiscal 2001 to $8.8 million in fiscal 2002 due to the over 80% increase in net
sales driven by internal growth and acquisitions.
International operating income was $25.3 million for fiscal 2002,
compared to $0.5 million for fiscal 2001 on a net sales increase to $336.2
million from $333.0 million during the periods. Operating income increased due
to the peat transaction with English Nature, lower spending on SG&A, and lower
restructuring charges which declined from $13.3 million in fiscal 2001 to $4.5
million in fiscal 2002.
Interest expense for fiscal 2002 was $76.3 million, a decrease of $11.4
million from interest expense for fiscal 2001 of $87.7 million. The decrease in
interest expense was primarily due to a reduction in average borrowings as
compared to the prior year due to increased profitability and lower working
capital, and lower interest rates on our debt. The weighted average cost of debt
was 8.30% in fiscal 2002 compared to 8.47% in fiscal 2001.
Income tax expense for fiscal 2002 was $61.9 million, compared with
income tax expense for fiscal 2001 of $13.2 million. The increase in income tax
expense from the prior year is the result of higher pre-tax income in fiscal
2002 for the reasons noted above. The lower estimated income tax rate for fiscal
2002 of 38% compared to 46% for fiscal 2001 is primarily due to effect of the
elimination of amortization expense for book purposes that was not deductible
for tax purposes and higher earnings in fiscal 2002.
The Company reported income before cumulative effect of accounting
changes of $101.0 million for fiscal 2002, compared to $15.5 million for fiscal
2001. After the charge of $29.8 million ($18.5 million, net of tax) for the
impairment of tradenames in our German, French and United Kingdom businesses,
net income for fiscal 2002 was $82.5 million, or $2.61 per diluted share,
compared to net income of $15.5 million, or $.51 per diluted share, in fiscal
2001. If SFAS No. 142 had been adopted as of the beginning of fiscal 2001
diluted earnings per share for fiscal 2001 would have been $1.05 excluding
impairment charges, if any, that would have been recorded upon adoption at
October 1, 2000. Diluted earnings per share in fiscal 2002 would have been $3.19
per share if the impairment charge was excluded.
Average diluted shares outstanding increased from 30.4 million in
fiscal 2001 to 31.7 million in fiscal 2002 due to option and warrant exercises,
and the impact on common stock equivalents of a higher average share price in
fiscal 2002.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $218.0 million for fiscal
2003, compared to $233.6 million for fiscal 2002. Following a record year for
cash flow generation in fiscal 2002, cash flow provided by operating activities
was again very strong in fiscal 2003 due principally to increased profitability,
lower cash expenditures for restructuring and a reduction in taxes paid due to a
change in the tax treatment of trade programs from a cash to accrual basis. Cash
flow from operating activities in fiscal 2002 benefited from a $99 million
one-time reduction in domestic inventory levels from unusually high levels at
the end of fiscal 2001. The seasonal nature of our operations
12
generally requires cash to fund significant increases in working capital
(primarily inventory) during the first half of the year. Receivables and
payables also build substantially in the second quarter in line with increasing
sales as the season begins. These balances liquidate during the June through
September period as the lawn and garden season winds down.
As of the end of fiscal 2003, accounts receivable increased by $34.0
million, in line with reported fourth quarter net sales growth. Net sales in the
fourth quarter of fiscal 2003 were $343.1 million compared to $299.7 million in
the fourth fiscal quarter of 2002. Inventories increased $5.3 million in fiscal
2003 as compared to a $99.4 million reduction in fiscal 2002 as discussed above.
Accounts payable increased $43.8 million in fiscal 2003 due principally to
global cash management initiatives and to foreign currency fluctuations, which
increased reported payables by approximately $11 million.
The funded status of our pension plan decreased slightly in fiscal 2003
with improved investment performance being essentially offset by higher benefit
obligations, due to the effect of a 75 basis point decline in the interest rates
used to discount future benefit obligations, and the impact of foreign currency
translation on our international benefits plans. The unfunded status of our
curtailed defined benefit plans in the United States increased slightly from a
deficit of $29.2 million at September 30, 2002 to a deficit of $29.5 million at
September 30, 2003. Our International plans went from a deficit of $50.2 million
in fiscal 2002 to a deficit of $55.4 million in fiscal 2003. Employer
contributions to the plans in fiscal 2004 are not expected to increase
appreciably from fiscal 2003 contributions of $12.1 million.
Cash used in investing activities was $108.9 million in fiscal 2003,
roughly comparable to $113.0 million in the prior year. Payments on seller notes
increased because of required payments made on Scotts LawnService(R) deferred
purchase obligations in fiscal 2003. Cash payments on acquisitions decreased to
$20.4 million in fiscal 2003 from $31.0 million in fiscal 2002. Cash payments
related to Scotts LawnService(R) acquisitions were $17.2 million in fiscal 2003.
The total value of acquisitions by Scotts LawnService(R), including property and
equipment obtained in the acquisitions, in fiscal 2003 was $30.6 million,
compared to $54.8 million in fiscal 2002.
Financing activities used cash of $59.0 million in fiscal 2003,
compared to a cash usage of $41.8 million the prior year. The increase in cash
used in financing activities was primarily due to mandatory repayments of
borrowings on our term loans in fiscal 2003. Proceeds from the exercises of
stock options increased to $21.4 million in fiscal 2003 from $19.7 million in
fiscal 2002. In addition to option exercises in fiscal 2003, 1.8 million
warrants were exercised by Hagedorn Partnership, L.P. in exchange for the
issuance of 1.0 million shares in a series of non-cash transactions.
Our primary sources of liquidity are funds generated by operations and
borrowings under our credit agreement. The credit agreement provided for
borrowings in the aggregate principal amount of $1.1 billion consisting of term
loan facilities in the aggregate amount of $525 million and a revolving credit
facility in the amount of $575 million. Due to paydowns on our term loans, the
amount remaining under the term loan facilities had been reduced to
approximately $326.5 million as of September 30, 2003. Also, as of September 30,
2003, approximately $6.9 million of the $575 million revolving credit facility
was committed for letters of credit; the balance of approximately $568.1 million
is available for use.
Total debt was $757.6 million as of September 30, 2003, a decrease of
$71.8 million compared to total debt at September 30, 2002 of $829.4 million.
The decrease in debt compared to the prior year was primarily due to scheduled
debt repayments on our term loans during fiscal 2003 and payments made on Scotts
LawnService(R) seller notes. There were no borrowings on our revolver as of
September 30, 2003 or September 30, 2002 due to significantly improved cash
flows from operating activities in both years.
At September 30, 2003, we were in compliance with all debt covenants.
The credit agreement contains covenants on interest coverage and leverage. The
credit agreement and the 8 5/8% Senior Subordinated Note indenture agreement
also contain numerous negative covenants which we were also in compliance with
in fiscal 2003. There are no rating triggers in our credit agreement or the
Subordinated Note indenture agreement.
13
In October 2003, The Scotts Company completed a refinancing of its
credit agreement and its $400 million 8 5/8% Senior Subordinated Notes in a
series of transactions. The new credit agreement was entered into with a
syndicate of commercial banks and institutional lenders. The new credit
agreement consists of a $700 million multi-currency revolving credit commitment,
expiring on October 22, 2008, and a $500 million term loan B facility, expiring
on September 30, 2010. Repayment of the term loan B commences on March 31, 2004,
with minimum quarterly principal payments through June 30, 2010, followed by a
balloon maturity on September 30, 2010. Also, as part of the refinancing, $200
million of 6 5/8% Senior Subordinated Notes due October 2013 were issued at par,
with interest payable semi-annually on May 15 and November 15.
Total cash was $155.9 million at September 30, 2003, an increase of
$56.2 million from September 30, 2002. Due to restrictions in our debt
agreements on voluntary prepayments of indebtedness, we elected not to use the
cash on hand at September 30, 2003 to paydown indebtedness because voluntary
paydowns permanently reduce the total borrowing commitment available under the
credit facility. A mandatory excess cash flow prepayment of $24.4 million was
made in early fiscal 2003 based upon fiscal 2002's results of operations and
cash flows. Our year end cash effectively serves to reduce our average
indebtedness by reducing borrowings under the revolving credit facility to fund
our seasonal working capital needs.
We did not repurchase any treasury shares in fiscal 2003 or fiscal
2002. We have not paid dividends on the common shares in the past and do not
presently plan to pay dividends on the common shares. It is presently
anticipated that earnings will be retained and reinvested to support the growth
of our business or to pay down indebtedness. The payment of future dividends, if
any, on common shares will be determined by the Board of Directors of Scotts in
light of conditions then existing, including our earnings, financial condition
and capital requirements, restrictions in financing agreements, business
conditions and other factors.
All of our off balance sheet financing is in the form of operating
leases which are disclosed in the Notes to the Consolidated Financial
Statements. As of September 30, 2003, we had $11.4 million of outstanding
guarantees, primarily related to deferred purchase obligations on Scotts
LawnService(R) acquisitions. All material intercompany transactions are
eliminated in our consolidated financial statements. Certain transactions with
executive officers are fully described and disclosed in our proxy statement.
Such transactions pertain primarily to office space provided to and
administrative services provided by Hagedorn Partnership, L.P. and do not exceed
$150,000 per annum.
In July 2002, The Scotts Company's Board of Directors approved the
International Profit Improvement Plan designed to significantly improve the
profitability of the international consumer and professional businesses. The
plan includes implementation of an SAP platform throughout Europe, as well as
efforts to optimize operations in the United Kingdom, France and Germany,
including the creation of a global supply chain. We now estimate that cash
outlays of between $45 million and $55 million will be required by the end of
fiscal 2005, of which approximately 25% will be capital expenditures, and
approximately 75% will be recorded as expenses to implement this plan. For
further information concerning the restructuring charges incurred in fiscal
years 2003, 2002 and 2001, see Note 4 to the Consolidated Financial Statements.
We are party to various pending judicial and administrative
proceedings, including those discussed in Note 16 to the Consolidated Financial
Statements. These include, among others, proceedings based on accidents or
product liability claims and alleged violations of environmental laws. We have
reviewed our pending environmental and legal proceedings, including the probable
outcomes, reasonably anticipated costs and expenses, availability and limits of
our insurance coverage and have established what we believe to be appropriate
reserves. We do not believe that any liabilities that may result from these
proceedings are reasonably likely to have a material adverse effect on our
liquidity, financial condition or results of operations.
14
The following table summarizes our future cash outflows for contractual
obligations as of September 30, 2003 (in millions):
Payments Due by Period
-----------------------------------------------------------
Contractual Cash Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
---------------------------- ---------- ---------------- ---------- ---------- -------------
Debt $ 770.3 $ 60.7 $ 60.1 $ 240.6 $ 408.9
Operating leases 90.8 24.4 30.9 10.1 25.4
Unconditional purchase obligations 151.4 80.7 58.8 11.9
Fixed interest payments 3.1 2.6 0.5
Annual contribution payment
under 10 year term of
marketing agreement 125.0 25.0 50.0 50.0
---------- ---------- ---------- ---------- ----------
Total contractual cash obligations $ 1,140.6 $ 193.4 $ 200.3 $ 312.6 $ 434.3
========== ========== ========== ========== ==========
In our opinion, cash flows from operating activities and capital
resources will be sufficient to meet debt service and working capital needs
during fiscal 2004, and thereafter for the foreseeable future. However, we
cannot ensure that our business groups will generate sufficient cash flows from
operating activities or that future borrowings will be available under our
credit facilities in amounts sufficient to pay indebtedness or fund other
liquidity needs. Actual results of operations will depend on numerous factors,
many of which are beyond our control.
ENVIRONMENTAL MATTERS
We are subject to local, state, federal and foreign environmental
protection laws and regulations with respect to our business operations and
believe we are operating in substantial compliance with, or taking actions aimed
at ensuring compliance with, such laws and regulations. We are involved in
several legal actions with various governmental agencies related to
environmental matters. 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 our financial position. However,
there can be no assurance that the resolution of these matters will not
materially affect future quarterly or annual results of operations, financial
condition or cash flows of the Company. Additional information on environmental
matters affecting us is provided in "ITEM 1. BUSINESS -- Environmental and
Regulatory Considerations", "ITEM 1. BUSINESS -- Regulatory Actions" and "ITEM
3. LEGAL PROCEEDINGS".
MANAGEMENT'S OUTLOOK
We are very pleased with the Company's performance in fiscal 2003.
Despite generally cool and wet spring weather conditions that delayed the start
of the lawn and garden season, and planned savings from the outsourcing of
transportation and logistics management that were not achieved, the Company
reported record net sales and earnings in fiscal 2003.
We set several challenging goals for fiscal 2003, including aggressive
sales growth and share gains within our core North American lawn and garden
categories, continued rapid expansion of Scotts LawnService(R) and
implementation of the International Profit Improvement Plan. We also set
aggressive goals to improve customer service levels in our order processing and
supply chain organizations by moving to "real-time" consumer-based replenishment
of store inventory levels. We were successful in strengthening our relationships
with key accounts by focusing on improving in-season execution and by driving
more consumers to retailers' stores to purchase lawn and garden products. We
also had a second consecutive year of strong cash flow generation due to our
continuing focus on working capital management and capital expenditures.
While we continued the rapid expansion of Scotts LawnService(R), the
business fell considerably short of its aggressive sales and earnings growth
targets. Poor spring weather, which delayed the start of the spring treatment
season, was clearly a contributing factor.
15
However, the business also experienced customer service, infrastructure
and business integration challenges, due to its rapid growth, that are a primary
area of focus in the year ahead. Consequently, the pace of expansion will be
slower in fiscal 2004 and we anticipate making selective, but fewer,
acquisitions.
Our strong results in fiscal 2003 set the stage for another successful
year in fiscal 2004. We are committed to the continued improvement of our
International segment. We are progressing on the International Profit
Improvement Plan, which is a three-year plan to invest in systems and to
reorganize our International operations to drive sustainable, profitable growth.
We anticipate continued strong execution from our global supply chain
organization on several important purchasing, logistics and manufacturing
initiatives. We also plan to continue to invest aggressively in media
advertising and in-store merchandising and promotional initiatives to drive
sales growth and profitability in fiscal 2004. Our strategy is also to develop
new distribution channels, and to leverage our strong brands to enter
complementary adjacent product categories.
We believe fiscal 2004 will be another year of profitable growth, with
continued focus on improving our return on invested capital and strong cash flow
generation.
FORWARD-LOOKING STATEMENTS
We have made and will make "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 in our 2003 Annual Report on Form 10-K and
in other contexts relating to future growth and profitability targets and
strategies designed to increase total shareholder value. Forward-looking
statements also include, but are not limited to, information regarding our
future economic and financial condition, the plans and objectives of our
management and our assumptions regarding our performance and these plans and
objectives.
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information, so long as those statements are identified as
forward-looking and are accompanied by meaningful cautionary statements
identifying important factors that could cause actual results to differ
materially from those discussed in the forward-looking statements. We desire to
take advantage of the "safe harbor" provisions of that Act.
Some forward-looking statements that we make in our 2003 Annual Report
on Form 10-K and in other contexts represent challenging goals for our company,
and the achievement of these goals is subject to a variety of risks and
assumptions and numerous factors beyond our control. Important factors that
could cause actual results to differ materially from the forward-looking
statements we make are described below. All forward-looking statements
attributable to us or persons working on our behalf are expressly qualified in
their entirety by the following cautionary statements.
- OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR
FINANCIAL HEALTH AND PREVENT US FROM FULFILLING OUR
OBLIGATIONS.
We have a significant amount of debt. Our substantial
indebtedness could have important consequences. For example,
it could:
- make it more difficult for us to satisfy our
obligations under outstanding indebtedness
and otherwise;
- increase our vulnerability to general
adverse economic and industry conditions;
- require us to dedicate a substantial portion
of cash flows from operating activities to
payments on our indebtedness, which would
reduce the cash flows available to fund
working capital, capital expenditures,
advertising, research and development
efforts and other general corporate
requirements;
16
- limit our flexibility in planning for, or
reacting to, changes in our business and the
industry in which we operate;
- place us at a competitive disadvantage
compared to our competitors that have less
debt;
- limit our ability to borrow additional
funds; and
- expose us to risks inherent in interest rate
fluctuations because some of our borrowings
are at variable rates of interest, which
could result in higher interest expense in
the event of increases in interest rates.
Our ability to make payments on and to refinance our
indebtedness and to fund planned capital expenditures and
acquisitions will depend on our ability to generate cash in
the future. This, to some extent, is subject to general
economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control.
We cannot provide assurance that our business will generate
sufficient cash flow from operating activities or that future
borrowings will be available to us under our Second Amended
and Restated Credit Agreement (the "New Credit Agreement") in
amounts sufficient to enable us to pay our indebtedness or to
fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness, on or before maturity. We
cannot assure you that we would be able to refinance any of
our indebtedness on commercially reasonable terms or at all.
- RESTRICTIVE COVENANTS MAY ADVERSELY AFFECT US.
The New Credit Agreement and the indenture governing our 6
5/8% Senior Subordinated Notes (the "New Indenture") contain
restrictive covenants and cross default provisions that
require us to maintain specified financial ratios. Our ability
to satisfy those financial ratios can be affected by events
beyond our control, and we cannot assure you that we will
satisfy those ratios. A breach of any of these financial ratio
covenants or other covenants in the New Credit Agreement or
the New Indenture could result in a default under the New
Credit Agreement and/or the New Indenture. Upon the occurrence
of an event of default under the New Credit Agreement and/or
the New Indenture, the lenders and/or noteholders could elect
to declare the applicable outstanding indebtedness to be
immediately due and payable and, in the case of our lenders
under the New Credit Agreement, terminate all commitments to
extend further credit. We cannot be sure that our lenders or
the noteholders would waive a default or that we could pay the
indebtedness in full if it were accelerated.
- ADVERSE WEATHER CONDITIONS COULD ADVERSELY IMPACT FINANCIAL
RESULTS.
Weather conditions in North America and Europe have a
significant impact on the timing of sales in the spring
selling season and overall annual sales. An abnormally cold
spring throughout North America and/or Europe could adversely
affect both fertilizer and pesticide sales and, therefore, our
financial results.
- OUR HISTORICAL SEASONALITY COULD IMPAIR OUR ABILITY TO PAY
OBLIGATIONS AS THEY COME DUE IN ADDITION TO OUR OPERATING
EXPENSES.
Because our products are used primarily in the spring and
summer, our business is highly seasonal. For the past two
fiscal years, more than 70% of our net sales have occurred in
the second and third fiscal quarters combined. Our working
capital needs and our borrowings peak near the middle of our
second fiscal quarter because we are generating fewer revenues
while incurring expenditures in preparation for the spring
selling season. If cash on hand is insufficient to pay our
obligations as they come due, including interest payments on
our indebtedness, or our operating expenses, at a time when we
are unable to draw on our credit facility, this seasonality
could have a material adverse effect on our ability to conduct
our business. Adverse weather conditions could heighten this
risk.
17
- PERCEPTIONS THAT THE PRODUCTS WE PRODUCE AND MARKET ARE NOT
SAFE COULD ADVERSELY AFFECT US.
We manufacture and market a number of complex chemical
products, such as fertilizers, growing media, herbicides and
pesticides, bearing one of our brand names. On occasion,
allegations are made that some of our products have failed to
perform up to expectations or have caused damage or injury to
individuals or property. Based on reports of contamination at
a third party supplier's vermiculite mine, the public may
perceive that some of our products manufactured in the past
using vermiculite are or may also be contaminated. Public
perception that our products are not safe, whether justified
or not, could impair our reputation, involve us in litigation,
damage our brand names and have a material adverse affect our
business.
- THE NATURE OF CERTAIN OF OUR PRODUCTS AND OUR BUSINESS SUCCESS
CONTRIBUTE TO THE RISK THAT THE COMPANY WILL BE SUBJECTED TO
LAWSUITS.
The nature of certain of our products and our business success
contribute to the risk that the Company will be subjected to
lawsuits. The following are among the factors that contribute
to this litigation risk:
- We manufacture and market a number of complex
chemical products bearing our brand names, including
fertilizers, growing media, herbicides and
pesticides. There is a portion of the population that
perceives all chemical products as potentially
hazardous. This perception, regardless of its merits,
enhances the risk that the Company will be subjected
to product liability claims that allege harm from
exposure to our products. Product liability claims
are brought against the Company from time to time.
- A third party vendor supplied contaminated
vermiculite ore to the Company. Although our use of
vermiculite ore from the contaminated source ended
over twenty years ago, our former relationship with
this supplier enhances the risk that the Company will
be subjected to personal injury and product liability
claims relating to the use of vermiculite in some of
our products.
- We are a significant competitor in many of the
markets in which we compete. Our success in our
markets enhances the risk that the Company will be
targeted by plaintiffs' lawyers, consumer groups,
competitors and others asserting antitrust claims.
Antitrust claims are brought against the Company from
time to time. The Company believes that the antitrust
claims of which it is aware are without merit.
Please see "ITEM 3. LEGAL PROCEEDINGS" and Note 16 to the
Consolidated Financial Statements.
- BECAUSE OF THE CONCENTRATION OF OUR SALES TO A SMALL NUMBER OF
RETAIL CUSTOMERS, THE LOSS OF ONE OR MORE OF, OR SIGNIFICANT
DECLINE IN ORDERS FROM, OUR TOP CUSTOMERS COULD ADVERSELY
AFFECT OUR FINANCIAL RESULTS.
North America net sales represent approximately 74% of our
worldwide net sales in fiscal 2003. Our top three North
American retail customers together accounted for 69% of our
North America fiscal 2003 net sales and 79% of our outstanding
accounts receivable as of September 30, 2003. Home Depot,
Wal*Mart and Lowe's represented approximately 37%, 19% and
13%, respectively, of our fiscal 2003 North American net
sales. The loss of, or reduction in orders from, Home Depot,
Wal*Mart, Lowe's or any other significant customer could have
a material adverse effect on our business and our financial
results, as could customer disputes regarding shipments, fees,
merchandise condition or related matters. Our inability to
collect accounts receivable from any of these customers could
also have a material adverse affect.
We do not have long-term sales agreements or other contractual
assurances as to future sales to any of our major retail
customers. In addition, continued consolidation in the retail
industry has resulted in an increasingly concentrated retail
base. To the extent such concentration continues to occur, our
net sales and income from operations may be increasingly
sensitive to a deterioration in the financial condition of, or
other adverse developments involving our relationship with,
one or more customers.
18
- THE HIGHLY COMPETITIVE NATURE OF THE COMPANY'S MARKETS COULD
ADVERSELY AFFECT THE ABILITY OF THE COMPANY TO GROW OR
MAINTAIN REVENUES.
Each of our segments participates in markets that are highly
competitive. Many of our competitors sell their products at
prices lower than ours, and we compete primarily on the basis
of product quality, product performance, value, brand
strength, supply chain competency and advertising. Some of our
competitors have significant financial resources and research
departments. The strong competition that we face in all of our
markets may prevent us from achieving our revenue goals, which
may have a material adverse affect on our financial condition
and results of operations.
- IF MONSANTO WERE TO TERMINATE THE MARKETING AGREEMENT FOR
CONSUMER ROUNDUP(R)PRODUCTS WITHOUT BEING REQUIRED TO PAY ANY
TERMINATION FEE, WE WOULD LOSE A SUBSTANTIAL SOURCE OF FUTURE
EARNINGS.
If we were to commit a serious default under the marketing
agreement with Monsanto for consumer Roundup(R) products,
Monsanto may have the right to terminate the agreement. If
Monsanto were to terminate the marketing agreement for cause,
we would not be entitled to any termination fee, and we would
lose all, or a significant portion, of the significant source
of earnings and overhead expense absorption the marketing
agreement provides. Monsanto may also be able to terminate the
marketing agreement within a given region, including North
America, without paying us a termination fee if sales to
consumers in that region decline:
- over a cumulative three fiscal year period; or
- by more than 5% for each of two consecutive fiscal
years.
- HAGEDORN PARTNERSHIP, L.P. BENEFICIALLY OWNS APPROXIMATELY 34%
OF OUR OUTSTANDING COMMON SHARES.
Hagedorn Partnership, L.P. beneficially owns approximately 34%
of our outstanding common shares and has sufficient voting
power to significantly influence the election of directors and
the approval of other actions requiring the approval of our
shareholders.
- COMPLIANCE WITH ENVIRONMENTAL AND OTHER PUBLIC HEALTH
REGULATIONS COULD INCREASE OUR COST OF DOING BUSINESS.
Local, state, federal and foreign laws and regulations
relating to environmental matters affect us in several ways.
In the United States, all products containing pesticides must
be registered with the U.S. EPA and, in many cases, similar
state agencies before they can be sold. The inability to
obtain or the cancellation of any registration could have an
adverse effect on our business. The severity of the effect
would depend on which products were involved, whether another
product could be substituted and whether our competitors were
similarly affected. We attempt to anticipate regulatory
developments and maintain registrations of, and access to,
substitute chemicals. We may not always be able to avoid or
minimize these risks.
The Food Quality Protection Act, enacted by the U.S. Congress
in August 1996, establishes a standard for food-use
pesticides: that a reasonable certainty of no harm will result
from the cumulative effect of pesticide exposures. Under this
Act, the U.S. EPA is evaluating the cumulative risks from
dietary and non-dietary exposures to pesticides. The
pesticides in our products, certain of which may be used on
crops processed into various food products, continue to be
evaluated by the U.S. EPA as part of this exposure risk
assessment. It is possible that the U.S. EPA or a third party
active ingredient registrant may decide that a pesticide we
use in our products will be limited or made unavailable to us.
For example, in June 2000, DowAgroSciences, an active
ingredient registrant, voluntarily agreed to a gradual
phase-out of residential uses of chlorpyrifos, an active
ingredient used in our lawn and garden products. In December
2000, the U.S. EPA reached agreement with various parties,
including manufacturers of the active ingredient diazinon,
regarding a phased withdrawal from retailers by December 2004
of residential uses of products containing diazinon, also used
in
19
our lawn and garden products. We cannot predict the outcome or
the severity of the effect of the U.S. EPA's continuing
evaluations of active ingredients used in our products.
The use of certain pesticide and fertilizer products is
regulated by various local, state, federal and foreign
environmental and public health agencies. Regulations
regarding the use of some pesticide and fertilizer products
may include requirements that only certified or professional
users apply the product, that the products be used only in
specified locations or that certain ingredients not be used.
Users may be required to post notices on properties to which
products have been or will be applied and may be required to
notify individuals in the vicinity that products will be
applied in the future. Even if we are able to comply with all
such regulations and obtain all necessary registrations, we
cannot assure you that our products, particularly pesticide
products, will not cause injury to the environment or to
people under all circumstances. The costs of compliance,
remediation or products liability have adversely affected
operating results in the past and could materially affect
future quarterly or annual operating results.
The harvesting of peat for our growing media business has come
under increasing regulatory and environmental scrutiny. In the
United States, state regulations frequently require us to
limit our harvesting and to restore the property to an
agreed-upon condition. In some locations, we have been
required to create water retention ponds to control the
sediment content of discharged water. In the United Kingdom,
our peat extraction efforts are also the subject of
legislation.
In addition to the regulations already described, local,
state, federal and foreign agencies regulate the disposal,
handling and storage of waste, air and water discharges from
our facilities. In June 1997, the Ohio EPA initiated an
enforcement action against us with respect to alleged surface
water violations and inadequate treatment capabilities at our
Marysville facility and is seeking corrective action under the
Resource Conservation Recovery Act. We have met with the Ohio
EPA and the Ohio Attorney General's office to negotiate an
amicable resolution of these issues. On December 3, 2001, an
agreed judicial Consent Order was submitted to the Union
County Common Pleas Court and was entered by the court on
January 25, 2002.
In fiscal 2003, we made $1.5 million in environmental
expenditures compared with approximately $0.3 million in
environmental capital expenditures and $5.4 million in other
environmental expenses in fiscal 2002. We expect spending on
environmental matters in fiscal 2004 will not vary materially
from the amount spent in fiscal 2003.
The adequacy of these estimated future expenditures is based
on our operating in substantial compliance with applicable
environmental and public health laws and regulations and
several significant assumptions:
- that we have identified all of the significant sites
that must be remediated;
- that there are no significant conditions of potential
contamination that are unknown to us; and
- that with respect to the agreed judicial Consent
Order in Ohio, that potentially contaminated soil can
be remediated in place rather than having to be
removed and only specific stream segments will
require remediation as opposed to the entire stream.
If there is a significant change in the facts and
circumstances surrounding these assumptions or if we are found
not to be in substantial compliance with applicable
environmental and public health laws and regulations, it could
have a material impact on future environmental capital
expenditures and other environmental expenses and our results
of operations, financial position and cash flows.
- OUR SIGNIFICANT INTERNATIONAL OPERATIONS MAKE US SUSCEPTIBLE
TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES AND TO THE COSTS OF
INTERNATIONAL REGULATION.
20
We currently operate manufacturing, sales and service
facilities outside of North America, particularly in the
United Kingdom, Germany, France and the Netherlands. In fiscal
2003, international sales accounted for approximately 20% of
our total sales. Accordingly, we are subject to risks
associated with operations in foreign countries, including:
- fluctuations in currency exchange rates;
- limitations on the conversion of foreign currencies
into U.S. dollars;
- limitations on the remittance of dividends and other
payments by foreign subsidiaries;
- additional costs of compliance with local
regulations; and
- historically, in certain countries, higher rates of
inflation than in the United States.
In addition, our operations outside the United States are
subject to the risk of new and different legal and regulatory
requirements in local jurisdictions, potential difficulties in
staffing and managing local operations and potentially adverse
tax consequences. The costs related to our international
operations could adversely affect our operations and financial
results in the future.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page
----
Consolidated Financial Statements of The Scotts Company and Subsidiaries:
Report of Management.................................................................................... 23
Report of Independent Auditors.......................................................................... 24
Consolidated Statements of Operations for the fiscal years ended September 30, 2003, 2002 and 2001...... 25
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2003, 2002 and 2001...... 26
Consolidated Balance Sheets at September 30, 2003 and 2002.............................................. 27
Consolidated Statements of Changes in Shareholders' Equity and Comprehensive Income for the fiscal
years ended September 30, 2003, 2002 and 2001......................................................... 28
Notes to Consolidated Financial Statements................................................................ 30
Schedules Supporting the Consolidated Financial Statements:
Report of Independent Auditors on Financial Statement Schedule.......................................... 71
Valuation and Qualifying Accounts for the fiscal years ended September 30, 2003, 2002 and 2001.......... 72
Schedules other than those listed above are omitted since they are not
required or are not applicable, or the required information is shown in the
Consolidated Financial Statements or Notes thereto.
22
REPORT OF MANAGEMENT
Management of The Scotts Company is responsible for the preparation,
integrity and objectivity of the financial information presented in this Annual
Report on Form 10-K. The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the United States of
America appropriate in the circumstances and, accordingly, include some amounts
that are based on management's best judgments and estimates.
Management is responsible for maintaining a system of accounting and
internal controls which it believes is adequate to provide reasonable assurance
that assets are safeguarded against loss from unauthorized use or disposition
and that the financial records are reliable for preparing financial statements.
The selection and training of qualified personnel, the establishment and
communication of accounting and administrative policies and procedures and a
program of internal audits are important elements of these control systems.
The financial statements have been audited by PricewaterhouseCoopers
LLP, independent auditors selected by the Board of Directors. The independent
auditors conduct a review of internal accounting controls to the extent required
by generally accepted auditing standards and perform such tests and related
procedures as they deem necessary to arrive at an opinion on the fairness of the
financial statements in accordance with generally accepted accounting principles
in the United States of America.
The Board of Directors, through its Audit Committee consisting solely
of non-management directors, meets periodically with management, internal audit
personnel and the independent auditors to discuss internal accounting controls
and auditing and financial reporting matters. The Audit Committee reviews with
the independent auditors the scope and results of the audit effort. Both
internal audit personnel and the independent auditors have access to the Audit
Committee with or without the presence of management.
23
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
The Scotts Company:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and
comprehensive income and cash flows present fairly, in all material respects,
the financial position of The Scotts Company and its subsidiaries at September
30, 2003, and September 30, 2002, and the results of their operations and their
cash flows for each of the three years in the period ended September 30, 2003,
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 6 to the financial statements, effective October
1, 2001, the Company adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets". Also, as discussed in Note 1 to the
financial statements, effective October 1, 2002, the Company adopted the
prospective method of recognizing the fair value of stock-based compensation in
accordance with Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation".
/s/ PRICEWATERHOUSECOOPERS LLP
Columbus, Ohio
December 5, 2003, except for Note 21, as to which the date is April 9, 2004
24
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(IN MILLIONS, EXCEPT PER SHARE DATA)
2003 2002 2001
---------- ---------- ----------
Net sales $ 1,910.1 $ 1,748.7 $ 1,670.4
Cost of sales 1,210.2 1,112.1 1,066.7
Restructuring and other charges 9.1 1.7 7.3
---------- ---------- ----------
Gross profit 690.8 634.9 596.4
Gross commission earned from marketing agreement 45.9 39.6 39.1
Contribution expenses under marketing agreement 28.3 23.4 18.3
---------- ---------- ----------
Net commission earned from marketing agreement 17.6 16.2 20.8
Operating expenses:
Advertising 97.7 82.2 89.1
Selling, general and administrative 321.4 298.8 307.9
Selling, general and administrative -- lawn service business 46.2 30.8 16.2
Stock-based compensation 4.8
Restructuring and other charges 8.0 6.4 68.4
Amortization of goodwill and other intangibles 8.6 5.7 27.7
Other income, net (10.8) (12.0) (8.5)
---------- ---------- ----------
Income from operations 232.5 239.2 116.4
Interest expense 69.2 76.3 87.7
---------- ---------- ----------
Income before income taxes 163.3 162.9 28.7
Income taxes 59.5 61.9 13.2
---------- ---------- ----------
Income before cumulative effect of accounting change 103.8 101.0 15.5
Cumulative effect of change in accounting for intangible assets, net of tax (18.5)
---------- ---------- ----------
Net income $ 103.8 $ 82.5 $ 15.5
========== ========== ==========
Basic earnings per share:
Weighted-average common shares outstanding during the period 30.9 29.3 28.4
Basic earnings per common share:
Before cumulative effect of accounting change $ 3.36 $ 3.44 $ 0.55
Cumulative effect of change in accounting for intangible assets, net of tax (0.63)
---------- ---------- ----------
After cumulative effect of accounting change $ 3.36 $ 2.81 $ 0.55
========== ========== ==========
Diluted earnings per share:
Weighted-average common shares outstanding during the period 32.1 31.7 30.4
Diluted earnings per common share:
Before cumulative effect of accounting change $ 3.23 $ 3.19 $ 0.51
Cumulative effect of change in accounting for intangible assets, net of tax (0.58)
---------- ---------- ----------
After cumulative effect of accounting change $ 3.23 $ 2.61 $ 0.51
========== ========== ==========
See Notes to Consolidated Financial Statements.
25
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(IN MILLIONS)
2003 2002 2001
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 103.8 $ 82.5 $ 15.5
Adjustments to reconcile net income to net cash provided by operating activities:
Cumulative effect of change in accounting for intangible assets, pre-tax 29.8
Stock-based compensation expense 4.8
Depreciation 40.3 34.4 32.6
Amortization 11.9 9.1 31.0
Deferred taxes 48.3 21.2 (19.9)
Restructuring and other charges 27.7
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable (27.3) (28.9) (15.7)
Inventories (5.3) 99.4 (68.5)
Prepaid and other current assets 3.7 (3.6) 30.6
Accounts payable 26.3 (22.0) (5.0)
Accrued taxes and liabilities 6.6 17.5 (18.2)
Restructuring reserves (7.1) (27.9) 37.3
Other assets 3.7 (4.5) 6.1
Other liabilities (3.4) 33.6 7.6
Other, net 11.7 (7.0) 4.6
---------- ---------- ----------
Net cash provided by operating activities 218.0 233.6 65.7
---------- ---------- ----------
CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES
Investment in property, plant and equipment (51.8) (57.0) (63.4)
Investments in acquired businesses, net of cash acquired (20.4) (31.0) (26.5)
Payments on sellers notes (36.7) (32.0) (11.1)
Other, net 7.0
---------- ---------- ----------
Net cash used in investing activities (108.9) (113.0) (101.0)
---------- ---------- ----------
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES
Net borrowings (repayments) under revolving and bank lines of credit (17.6) (97.6) 61.7
Gross borrowings under term loans 260.0
Gross repayments under term loans (62.4) (31.9) (315.7)
Issuance of 8 5/8% senior subordinated notes, net of issuance fees 70.2
Financing and issuance fees (0.4) (2.2) (1.6)
Cash received from exercise of stock options 21.4 19.7 17.0
---------- ---------- ----------
Net cash provided by (used in) financing activities (59.0) (41.8) 21.4
Effect of exchange rate changes on cash 6.1 2.2 (0.4)
---------- ---------- ----------
Net increase (decrease) in cash 56.2 81.0 (14.3)
Cash and cash equivalents, beginning of period 99.7 18.7 33.0
---------- ---------- ----------
Cash and cash equivalents, end of period $ 155.9 $ 99.7 $ 18.7
========== ========== ==========
See Notes to Consolidated Financial Statements.
26
THE SCOTTS COMPANY
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2003 AND 2002
(IN MILLIONS EXCEPT PER SHARE DATA)
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents $ 155.9 $ 99.7
Accounts receivable, less allowance for uncollectible accounts
of $20.0 in 2003 and $33.2 in 2002 290.5 262.4
Inventories, net 276.1 269.1
Current deferred tax asset 56.9 74.6
Prepaid and other assets 33.2 37.0
---------- ----------
Total current assets 812.6 742.8
Property, plant and equipment, net 338.2 329.2
Goodwill and intangible assets, net 835.5 791.7
Other assets 44.0 50.4
---------- ----------
Total assets $ 2,030.3 $ 1,914.1
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of debt $ 55.4 $ 98.2
Accounts payable 149.0 122.7
Accrued liabilities 234.3 230.4
Accrued taxes 9.5 13.2
---------- ----------
Total current liabilities 448.2 464.5
Long-term debt 702.2 731.2
Other liabilities 151.7 124.5
---------- ----------
Total liabilities 1,302.1 1,320.2
---------- ----------
Commitments and contingencies (Notes 15 and 16)
Shareholders' equity:
Common shares, no par value per share, $.01 stated value per
share, shares issued of 32.0 in 2003 and 31.3 in 2002 and 2001 0.3 0.3
Capital in excess of stated value 390.1 398.6
Retained earnings 398.6 294.8
Treasury stock (41.8)
Accumulated other comprehensive loss (60.8) (58.0)
---------- ----------
Total shareholders' equity 728.2 593.9
---------- ----------
Total liabilities and shareholders' equity $ 2,030.3 $ 1,914.1
========== ==========
See Notes to Consolidated Financial Statements.
27
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND
COMPREHENSIVE INCOME
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(IN MILLIONS)
Common Shares Capital in Treasury Stock
-------------------- Excess of Retained ------------------
Shares Amount Stated Value Earnings Shares Amount
------ -------- ------------ ------------ ------ --------
Balance, September 30, 2000 31.3 $ 0.3 $ 389.3 $ 196.8 (3.4) $ (83.5)
Net income 15.5
Foreign currency translation
Unrecognized loss on derivatives
Minimum pension liability
Comprehensive income
Issuance of common shares held in treasury 9.0 0.8 13.5
------ -------- ------------ ------------ ------ --------
Balance, September 30, 2001 31.3 0.3 398.3 212.3 (2.6) (70.0)
Net income 82.5
Foreign currency translation
Unrecognized loss on derivatives
Minimum pension liability
Comprehensive income
Issuance of common shares held in treasury 0.3 1.4 28.2
------ -------- ------------ ------------ ------ --------
Balance, September 30, 2002 31.3 0.3 398.6 294.8 (1.2) (41.8)
Net income 103.8
Foreign currency translation
Unrecognized gain on derivatives
Minimum pension liability
Comprehensive income
Issuance of common shares 0.7 (8.5)
Issuance of common shares held in treasury 1.2 41.8
------ -------- ------------ ------------ ------ --------
Balance, September 30, 2003 32.0 $ 0.3 $ 390.1 $ 398.6 0.0 $ 0.0
====== ======== ============ ============ ====== ========
28
THE SCOTTS COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME (CONTINUED)
FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 2003, 2002 AND 2001
(IN MILLIONS)
Accumulated Other
Comprehensive Income
--------------------------------------------------------
Minimum Pension Foreign
Liability Currency
Derivatives Adjustment Translation Total
----------- --------------- ------------ -------------
Balance, September 30, 2000 $ $ (5.1) $ (19.9) $ 477.9
---------- ------------ ------------ -------------
Net income 15.5
Foreign currency translation
Unrecognized loss on derivatives (1.5)(b) (1.5)
Minimum pension liability (8.2)(a) (8.2)
-------------
Comprehensive income 5.8
Issuance of common shares held in treasury 22.5
---------- ------------ ------------ -------------
Balance, September 30, 2001 $ (1.5) $ (13.3) $ (19.9) $ 506.2
---------- ------------ ------------ -------------
Net income 82.5
Foreign currency translation 1.7 1.7
Unrecognized loss on derivatives (0.6)(b) (0.6)
Minimum pension liability (24.4)(a) (24.4)
-------------
Comprehensive income 59.2
Issuance of common shares held in treasury 28.5
---------- ------------ ------------ -------------
Balance, September 30, 2002 $ (2.1) $ (37.7) $ (18.2) $ 593.9
========== ============ ============ =============
Net income 103.8
Foreign currency translation (2.8) (2.8)
Unrecognized gain on derivatives 0.8(b) 0.8
Minimum pension liability (0.8)(a) (0.8)
-------------
Comprehensive income 101.0
Issuance of common shares (8.5)
Issuance of common shares held in treasury 41.8
---------- ------------ ------------ -------------
Balance, September 30, 2003 $ (1.3) $ (38.5) $ (21.0) $ 728.2
========== ============ ============ =============
- ----------
(a) Net of tax benefits of $1.3, $14.8, and $5.5 for fiscal 2003, 2002 and 2001,
respectively.
(b) Net of tax (expense) benefits of $(0.6), $0.3 and $1.1 for fiscal 2003, 2002
and 2001.
See Notes to Consolidated Financial Statements.
29
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
The Scotts Company and its subsidiaries (collectively "Scotts" or the
"Company") are engaged in the manufacture, marketing and sale of lawn and garden
care products. The Company's major customers include home improvement centers,
mass merchandisers, large hardware chains, independent hardware stores,
nurseries, garden centers, food and drug stores, commercial nurseries and
greenhouses, and specialty crop growers. The Company's products are sold
primarily in North America and the European Union. We also operate the Scotts
LawnService(R) business which provides lawn and tree and shrub fertilization,
insect control and other related services in the United States.
ORGANIZATION AND BASIS OF PRESENTATION
The Company's consolidated financial statements are presented in
accordance with accounting principles generally accepted in the United States of
America. The consolidated financial statements include the accounts of The
Scotts Company and all wholly-owned and majority-owned subsidiaries. All
intercompany transactions and accounts are eliminated in consolidation. The
Company's criteria for consolidating entities are based on majority ownership
(as evidenced by a majority voting interest in the entity) and an objective
evaluation and determination of effective management control.
REVENUE RECOGNITION
Revenue is recognized when products are shipped and when title and risk
of loss transfer to the customer. Provisions for estimated returns and
allowances are recorded at the time of shipment based on historical rates of
returns as a percentage of sales and are periodically adjusted for known changes
in return levels. Scotts LawnService(R) revenues are recognized at the time
service is provided to the customer.
Under the terms of the Marketing Agreement between The Scotts Company
and Monsanto, the Company in its role as exclusive agent performs certain
functions, such as sales support, merchandising, distribution and logistics on
behalf of Monsanto, and incurs certain costs in support of the consumer
Roundup(R) business. The actual costs incurred by Scotts on behalf of Roundup(R)
are recovered from Monsanto through the agency management and are treated solely
as a recovery of incurred costs. Revenue is not recognized in the Company's
consolidated financial statements for the recovery of these costs since the
services rendered are solely in support of the agency arrangement and not a part
of any principal line of business.
PROMOTIONAL ALLOWANCES
The Company promotes its branded products through cooperative
advertising programs with retailers. Retailers are also offered in-store
promotional allowances and rebates based on sales volumes. Certain products are
also promoted with direct consumer rebate programs and special purchasing
incentives. Promotion costs (including allowances and rebates) incurred during
the year are expensed to interim periods in relation to revenues and are
recorded as a reduction of net sales.
ADVERTISING
The Company advertises its branded products through national and
regional media. All advertising costs, except for external production costs, are
expensed within the fiscal year in which such costs are incurred. External
production costs for advertising programs are deferred until the period in which
the advertising is first aired.
Scotts LawnService(R) promotes its service offerings through direct
response mail campaigns. The external costs associated with these campaigns are
deferred and recognized ratably and recorded as advertising expense in
proportion to revenues as advertising costs over a period not in excess of one
year. The costs deferred at September 30, 2003 and 2002 are $1.0 million and
$0.9 million, respectively.
30
FRANCHISE OPERATIONS
The Company's Scotts LawnService(R) segment consists of 68
company-operated locations serving 44 metropolitan markets, with an additional
70 independent franchise locations at September 30, 2003. In fiscal 2002, there
were 60 company-operated and 45 franchised locations. Franchise fee income and
royalties are not material to total income from operations.
RESEARCH AND DEVELOPMENT
All costs associated with research and development are charged to
expense as incurred. Expense for fiscal 2003, 2002 and 2001 was $30.4 million,
$26.2 million and $24.7 million, respectively.
ENVIRONMENTAL COSTS
The Company recognizes environmental liabilities when conditions
requiring remediation are identified. The Company determines its liability on a
site by site basis and records a liability at the time when it is probable and
can be reasonably estimated. Expenditures which extend the life of the related
property or mitigate or prevent future environmental contamination are
capitalized. Environmental liabilities are not discounted or reduced for
possible recoveries from insurance carriers.
INTERNAL USE SOFTWARE
The Company accounts for the costs of internal use software in
accordance with Statement of Position 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". Accordingly, costs
other than reengineering costs are expensed or capitalized depending on whether
they are incurred in the preliminary project stage, application development
stage or the post-implementation/operation stage. As of September 30, 2003 and
2002, the Company had $43.3 million and $35.8 million, respectively, in
unamortized capitalized internal use computer software costs. Amortization of
these costs was $9.0 million, $5.8 million and $4.3 million during fiscal 2003,
2002 and 2001, respectively.
EARNINGS PER COMMON SHARE
Basic earnings per common share is based on the weighted-average number
of common shares outstanding each period. Diluted earnings per common share is
based on the weighted-average number of common shares and dilutive potential
common shares (stock options, stock appreciation rights and warrants)
outstanding each period.
INVENTORIES
Inventories are stated at the lower of cost or market, principally
determined by the FIFO method; however, certain growing media inventories are
accounted for by the LIFO method. At September 30, 2003 and 2002, approximately
6% and 7% of inventories, respectively, are valued at the lower of LIFO cost or
market. Inventories include the cost of raw materials, labor and manufacturing
overhead. The Company makes provisions for obsolete or slow-moving inventories
as necessary to properly reflect inventory value. Reserves for excess and
obsolete inventories were $22.0 million and $25.9 million at September 30, 2003
and 2002, respectively.
LONG-LIVED ASSETS
Property, plant and equipment, including significant improvements, are
stated at cost. Expenditures for maintenance and repairs are charged to expense
as incurred. When properties are retired or otherwise disposed of, the cost of
the asset and the related accumulated depreciation are removed from the accounts
with the resulting gain or loss being reflected in results of operations.
31
Depreciation of other property, plant and equipment is provided on the
straight-line method and is based on the estimated useful economic lives of the
assets as follows:
Land improvements 10 - 25 years
Buildings 10 - 40 years
Machinery and equipment 3 - 15 years
Furniture and fixtures 6 - 10 years
Software 3 - 8 years
Interest is capitalized on all significant capital projects. The
Company capitalized $1.4 million, $1.1 million and $3.1 million of interest
costs during fiscal 2003, 2002 and 2001, respectively.
Management assesses the recoverability of property and equipment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable from its future undiscounted cash flows. If it
is determined that an impairment has occurred, an impairment loss is recognized
for the amount by which the carrying amount of the asset exceeds its estimated
fair value.
Management also assesses the recoverability of goodwill, tradenames and
other intangible assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable from its discounted
future cash flows. Goodwill and unamortizable intangible assets are reviewed for
impairment at least annually during the first fiscal quarter. If it is
determined that an impairment of intangible assets has occurred, an impairment
loss is recognized for the amount by which the carrying value of the asset
exceeds its estimated fair value.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments with
original maturities of three months or less to be cash equivalents. The Company
maintains cash deposits in banks which from time to time exceed the amount of
deposit insurance available. Management periodically assesses the financial
condition of the institutions and believes that any potential credit loss is
minimal.
FOREIGN EXCHANGE INSTRUMENTS
Gains and losses on foreign currency transaction hedges are recognized
in income and offset the foreign exchange gains and losses on the underlying
transactions. Gains and losses on foreign currency firm commitment hedges are
deferred and included in the basis of the transactions underlying the
commitments.
All assets and liabilities in the balance sheets of foreign
subsidiaries whose functional currency is other than the U.S. dollar are
translated into U.S. dollar equivalents at year-end exchange rates. Translation
gains and losses are accumulated as a separate component of other comprehensive
income and included in shareholders' equity. Income and expense items are
translated at the twelve month average of the month end exchange rates. Foreign
currency transaction gains and losses are included in the determination of net
income.
DERIVATIVE INSTRUMENTS
In the normal course of business, the Company is exposed to
fluctuations in interest rates and the value of foreign currencies. The Company
has established policies and procedures that govern the management of these
exposures through the use of a variety of financial instruments. The Company
employs various financial instruments, including forward exchange contracts and
swap agreements, to manage certain of the exposures when practical. By policy,
the Company does not enter into such contracts for the purpose of speculation or
use leveraged financial instruments. The Company's derivative activities are
managed by the Chief Financial Officer and other senior management of the
Company in consultation with the Finance Committee of the Board of Directors.
These
32
activities include establishing a risk-management philosophy and objectives,
providing guidelines for derivative-instrument usage and establishing procedures
for control and valuation, counterparty credit approval and the monitoring and
reporting of derivative activity. The Company's objective in managing its
exposure to fluctuations in interest rates and foreign currency exchange rates
is to decrease the volatility of earnings and cash flows associated with changes
in the applicable rates and prices. To achieve this objective, the Company
primarily enters into forward exchange contracts and swap agreements whose
values change in the opposite direction of the anticipated cash flows.
Derivative instruments related to forecasted transactions are considered to
hedge future cash flows, and the effective portion of any gains or losses is
included in other comprehensive income until earnings are affected by the
variability of cash flows. Any remaining gain or loss is recognized currently in
earnings. The cash flows of the derivative instruments are expected to be highly
effective in achieving offsetting cash flows attributable to fluctuations in the
cash flows of the hedged risk. If it becomes probable that a forecasted
transaction will no longer occur, the derivative will continue to be carried on
the balance sheet at fair value, and gains and losses that were accumulated in
other comprehensive income will be recognized immediately in earnings.
To manage certain of its cash flow exposures, the Company has entered
into forward exchange contracts and interest rate swap agreements. The forward
exchange contracts are designated as hedges of the Company's foreign currency
exposure associated with future cash flows. The change in the value of the
amounts payable or receivable under forward exchange contracts are recorded as
adjustments to other income or expense. The interest rate swap agreements are
designated as hedges of the Company's interest rate risk associated with certain
variable rate debt. The change in the value of the amounts payable or receivable
under the swap agreements are recorded as adjustments to interest expense.
Unrealized gains or losses resulting from valuing these swaps at fair
value are recorded in other comprehensive income.
The Company adopted Statement of Financial Accounting Standards No.
133, which is amended by Statement of Financial Accounting Standards No. 149,
"Amendment of Statement 133 on Derivative Instruments and Hedging Activities",
as of October 2000. Since adoption, there have been no gains or losses
recognized in earnings for hedge ineffectiveness or due to excluding a portion
of the value from measuring effectiveness.
STOCK-BASED COMPENSATION AWARDS
Beginning in fiscal 2003, the Company began expensing prospective
grants of employee stock-based compensation awards in accordance with Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" as amended by Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation -- Transition and Disclosure -- an
Amendment of SFAS No. 123". The fair value of future awards will be expensed
ratably over the vesting period, which has historically been three years, except
for grants to members of the Board of Directors, which have a six month vesting
period.
In fiscal 2003, the Company granted 404,500 options to officers and
other key employees, 63,000 options to members of the Board of Directors and
239,000 stock appreciation rights to executive officers. The exercise price for
the option awards and the stated price for the stock appreciation rights awards
were determined by the closing price of the Company's common shares on the date
of grant. The related compensation expense recorded in fiscal 2003 was $4.8
million.
The Black-Scholes value of options granted in fiscal 2001 and fiscal
2002 was $10.0 million and $10.7 million, respectively. The Black-Scholes value
of all stock-based compensation grants awarded during fiscal 2003 was $13.1
million. Had compensation expense been recognized for the periods ended
September 30, 2003, 2002 and 2001 in accordance with the recognition provisions
of SFAS No. 123, the Company would have recorded net income and net income per
share as follows:
33
For the years ended
September 30,
2003 2002 2001
---------- ---------- ----------
($ millions,
except per share data)
Net income $ 103.8 $ 82.5 $ 15.5
Stock-based compensation expense included in reported net income, net of tax 2.9
Total stock-based employee compensation expense determined under fair value
based method for all awards, net of tax (7.0) (4.9) (6.7)
---------- ---------- ----------
Net income, as adjusted $ 99.7 $ 77.6 $ 8.8
========== ========== ==========
Net income per share:
Basic $ 3.36 $ 2.81 $ 0.55
Diluted $ 3.23 $ 2.61 $ 0.51
Net income per share, as adjusted:
Basic $ 3.23 $ 2.65 $ 0.31
Diluted $ 3.11 $ 2.45 $ 0.29
The pro forma amounts shown above are not necessarily representative of
the impact on net income in future periods.
Prior to fiscal 2003, the Company accounted for stock options under APB
25, "Accounting for Stock Issued to Employees" and, as allowable, adopted only
the disclosure provisions of SFAS No. 123.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying disclosures. 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior years' financial
statements to conform to fiscal 2003 classifications.
NOTE 2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
2003 2002
-------- --------
($ millions)
INVENTORIES, NET:
Finished goods $ 203.7 $ 196.6
Raw materials 72.4 72.5
-------- --------
Total $ 276.1 $ 269.1
======== ========
34
2003 2002
-------- --------
($ millions)
PROPERTY, PLANT AND EQUIPMENT, NET:
Land and improvements $ 37.4 $ 38.0
Buildings 127.7 120.9
Machinery and equipment 316.9 289.9
Furniture and fixtures 38.9 33.1
Software 70.1 47.6
Construction in progress 17.7 45.7
Less: accumulated depreciation (270.5) (246.0)
-------- --------
Total $ 338.2 $ 329.2
======== ========
2003 2002
-------- --------
($ millions)
ACCRUED LIABILITIES:
Payroll and other compensation accruals $ 53.5 $ 53.2
Advertising and promotional accruals 107.1 87.0
Restructuring accruals 4.5 11.2
Other 69.2 79.0
-------- --------
Total $ 234.3 $ 230.4
======== ========
2003 2002
-------- --------
($ millions)
OTHER NON-CURRENT LIABILITIES:
Accrued pension and postretirement liabilities $ 108.1 $ 101.6
Legal and environmental reserves 6.8 8.2
Restructuring accruals 0.8
Other 36.8 13.9
-------- --------
Total $ 151.7 $ 124.5
======== ========
NOTE 3. MARKETING AGREEMENT
Effective September 30, 1998, the Company entered into an agreement
with Monsanto Company ("Monsanto") for exclusive domestic and international
marketing and agency rights to Monsanto's consumer Roundup(R) herbicide
products. Under the terms of the agreement, the Company is entitled to receive
an annual commission from Monsanto in consideration for the performance of its
duties as agent. The annual commission is calculated as a percentage of the
actual earnings before interest and income taxes (EBIT), as defined in the
agreement, of the Roundup(R) business. Each year's percentage varies in
accordance with the terms of the agreement based on the achievement of two
earnings thresholds and on commission rates that vary by threshold and program
year.
The agreement also requires the Company to make fixed annual payments
to Monsanto as a contribution against the overall expenses of the Roundup(R)
business. The annual fixed payment is defined as $20 million. However, portions
of the annual payments for the first three years of the agreement are deferred.
No payment was required for the first year (fiscal 1999), a payment of $5
million was required for the second year and a payment of $15 million was
required for the third year so that a total of $40 million of the contribution
payments were deferred. Beginning in the fifth year of the agreement (fiscal
2003), the annual payments to Monsanto increase to at least $25 million, which
include per annum interest charges at 8%. The annual payments may be increased
above $25 million if certain significant earnings targets are exceeded. If all
of the deferred contribution amounts are paid prior to 2018, the annual
contribution payments revert to $20 million. Regardless of whether the deferred
contribution amounts are paid, all contribution payments cease entirely in 2018.
The Company is recognizing a charge each year associated with the
annual contribution payments equal to the required payment for that year. The
Company is not recognizing a charge for the portions of the contribution
payments that are deferred until the time those deferred amounts are paid. The
Company considers this method of accounting for the contribution payments to be
appropriate after consideration of the likely term of the agreement, the
Company's ability to terminate the agreement without paying the deferred
amounts, and the fact that
35
approximately $18.6 million of the deferred amount is never paid, even if the
agreement is not terminated prior to 2018, unless significant earnings targets
are exceeded.
The express terms of the agreement permit the Company to terminate the
agreement only upon Material Breach, Material Fraud or Material Willful
Misconduct by Monsanto, as such terms are defined in the agreement, or upon the
sale of the Roundup(R) business by Monsanto. In such instances, the agreement
permits the Company to avoid payment of any deferred contribution and related
per annum charge. The Company's basis for not recording a financial liability to
Monsanto for the deferred portions of the annual contribution and per annum
charge is based on our assessment and consultations with our legal counsel and
the Company's independent accountants. In addition, the Company has obtained a
legal opinion from The Bayard Firm, P.A., which concluded, subject to certain
qualifications, that if the matter were litigated, a Delaware court would likely
conclude that the Company is entitled to terminate the agreement at will, with
appropriate prior notice, without incurring significant penalty, and avoid
paying the unpaid deferred amounts. We have concluded that, should the Company
elect to terminate the agreement at any balance sheet date, it will not incur
significant economic consequences as a result of such action.
The Bayard Firm was special Delaware counsel retained during fiscal
2000 solely for the limited purpose of providing a legal opinion in support of
the contingent liability treatment of the agreement previously adopted by the
Company and has neither generally represented or advised the Company nor
participated in the preparation or review of the Company's financial statements
or any SEC filings. The terms of such opinion specifically limit the parties who
are entitled to rely on it.
The Company's conclusion is not free from challenge and, in fact, would
likely be challenged if the Company were to terminate the agreement. If it were
determined that, upon termination, the Company must pay any remaining deferred
contribution amounts and related per annum charges, the resulting charge to
earnings could have a material impact on the Company's results of operations and
financial position. At September 30, 2003, contribution payments and related per
annum charges of approximately $49.2 million had been deferred under the
agreement. This amount is considered a contingent obligation and has not been
reflected in the financial statements as of and for the year then ended.
Monsanto has disclosed that it is accruing the $20 million fixed
contribution fee per year beginning in the fourth quarter of Monsanto's fiscal
year 1998, plus interest on the deferred portion.
The agreement has a term of seven years for all countries within the
European Union (at the option of both parties, the agreement can be renewed for
up to 20 years for the European Union countries). For countries outside of the
European Union, the agreement continues indefinitely unless terminated by either
party. The agreement provides Monsanto with the right to terminate the agreement
for an event of default (as defined in the agreement) by the Company or a change
in control of Monsanto or the sale of the Roundup(R) business. The agreement
provides the Company with the right to terminate the agreement in certain
circumstances including an event of default by Monsanto or the sale of the
Roundup(R) business. Unless Monsanto terminates the agreement for an event of
default by the Company, Monsanto is required to pay a termination fee to the
Company that varies by program year. The termination fee is $150 million for
each of the first five program years, gradually declines to $100 million by year
ten of the program and then declines to a minimum of $16 million if the program
continues for years 11 through 20.
In consideration for the rights granted to the Company under the
agreement for North America, the Company was required to pay a marketing fee of
$32 million to Monsanto. The Company has deferred this amount on the basis that
the payment will provide a future benefit through commissions that will be
earned under the agreement and is amortizing the balance over ten years, which
is the estimated likely term of the agreement.
36
NOTE 4. RESTRUCTURING AND OTHER CHARGES
2003 CHARGES
During fiscal 2003, the Company recorded $17.1 million of restructuring
and other charges.
Costs of $5.3 million for warehouse lease buyouts and relocation of
inventory associated with exiting certain warehouses in North America, and $3.8
million related to a plan to optimize our international supply chain were
included in cost of sales. Severance and consulting costs of $5.3 million for
the continued European integration efforts that began in the fourth quarter of
fiscal 2002, and $2.7 million of administrative facility exit costs in North
America were charged to selling, general and administrative expense. The
severance costs incurred in fiscal 2003 are related to the reduction of 78
administrative and production employees.
2002 CHARGES
During fiscal 2002, the Company recorded $8.1 million of restructuring
and other charges.
During the fourth quarter of fiscal 2002, the Company recorded $4.0
million of restructuring and other charges associated with reductions of
headcount from the closure of a manufacturing facility in Bramford, England.
This charge is included in selling, general and administrative costs in the
Consolidated Statement of Operations and consists of severance and pension
related costs. Closure of the Bramford facility was completed in May 2003 with
the transfer of United Kingdom fertilizer production to our Howden, United
Kingdom facility. Severance costs incurred in fiscal 2002 are related to the
reduction of 37 administrative and production employees.
Under accounting principles generally accepted in the United States of
America, certain restructuring costs related to relocation of personnel,
equipment and inventory are to be expensed in the period the costs are actually
incurred. During fiscal 2002, inventory relocation costs of approximately $1.7
million were incurred and paid and were recorded as restructuring and other
charges in cost of sales. Approximately $2.4 million of employee relocation and
related costs were also incurred and paid in fiscal 2002 and were recorded as
restructuring and other charges in operating expenses. These relocation charges
related to a plan to optimize the North American supply chain that was initiated
in the third and fourth quarters of fiscal 2001.
2001 CHARGES
During the third and fourth quarters of fiscal 2001, the Company
recorded $75.7 million of restructuring and other charges, primarily associated
with reductions in headcount and the closure or relocation of certain
manufacturing and administrative facilities. The $75.7 million in charges is
segregated in the Consolidated Statements of Operations in two components: (i)
$7.3 million included in cost of sales for the write-off of inventory that was
rendered unusable as a result of the restructuring activities and (ii) $68.4
million included in selling, general and administrative costs. Included in the
$68.4 million charge in selling, general and administrative costs is $20.4
million to write-down to fair value certain property and equipment and other
assets; $5.8 million of facility exit costs; $27.0 million of severance costs;
and $15.2 million in other restructuring and other costs. The severance costs
related to the reduction in force initiatives, facility closures and
consolidations in North America and Europe covered approximately 340
administrative, production, selling and other employees. Most severance costs
were paid in fiscal 2002 with the balance substantially completed in 2003. All
other fiscal 2001 restructuring related activities and costs were completed by
the end of fiscal 2002.
37
The following is a rollforward of the cash portion of the restructuring
and other charges accrued in fiscal 2003, 2002 and 2001. The balance of the
accrued charges at September 30, 2003 are included in accrued liabilities on the
Consolidated Balance Sheets.
September, September,
2002 2003
---------- ----------
Description Type Classification Balance Payment Accrual Balance
----------- ---- -------------- ---------- ----------------------------- ----------
($ millions)
Severance Cash SG&A $ 6.8 $ (5.4) $ 0.2 $ 1.6
Facility exit costs Cash SG&A 3.5 (2.6) 0.9
Other related costs Cash SG&A 1.7 (1.3) 1.6 2.0
---------- ---------- --------- --------
Total cash $ 12.0 $ (9.3) $ 1.8 $ 4.5
========== ========== ========= ========
NOTE 5. ACQUISITIONS AND DIVESTITURES
During fiscal 2003, the Company's Scotts LawnService(R) segment
acquired 22 individual lawn service entities for a total cost of $30.6 million.
Of the total purchase price, $17.2 million was paid in cash, with notes being
issued for the remaining $13.4 million. Goodwill attributable to the fiscal 2003
acquisitions was $22.3 million, of which $20.4 million was deductible for tax
purposes. Other intangible assets, primarily customer accounts and non-compete
agreements, of $6.2 million, and working capital and property, plant and
equipment of $2.1 million were also recorded.
The Company's North American segment acquired two entities to enter the
pottery business in fiscal 2003. The aggregate purchase price for these two
entities was $3.2 million, all of which was paid in cash. Goodwill of $0.8
million pertaining to these acquisitions is tax deductible. Other intangible
assets, primarily customer accounts of $1.0 million, and inventory of $1.4
million were also recorded.
During fiscal 2002, the Company's Scotts LawnService(R) segment
acquired 17 individual lawn service entities for a total cost of $54.8 million.
Of this total, $33.9 million was paid in cash, with notes being issued for the
remaining $20.9 million. Three of the entities acquired were responsible for
approximately $44 million of the total acquisition costs. Goodwill related to
these acquisitions of $42.7 million was recorded in fiscal 2002, all tax
deductible. Other intangible assets of $8.7 million and working capital and
property, plant and equipment of $3.4 million were also recorded.
On January 1, 2001, the Company acquired the Substral(R) brand and
consumer plant care business from Henkel KGaA. Substral(R) is a leading consumer
fertilizer brand in many European countries including Germany, Austria, Belgium,
France and the Nordics. Under the terms of the asset purchase agreement, the
Company acquired specified working capital and intangible assets associated with
the Substral(R) business. The final purchase price, determined based on the
value of the assets acquired and the performance of the business for the period
from June 15, 2000 to December 31, 2000, was $34.0 million.
The Substral(R) acquisition was made in exchange for cash and notes
payable to seller and was accounted for under the purchase method of accounting.
Accordingly, Substral's results have been included from the date of its
acquisition and the purchase price has been allocated to the assets acquired and
liabilities assumed based on their estimated fair values at the date of
acquisition. Intangible assets associated with the purchase were $34.0 million.
The following unaudited pro forma results of operations give effect to
the fiscal 2002 and fiscal 2001 Scotts LawnService(R) acquisitions and
Substral(R) brand acquisition as if they had occurred on October 1, 2000. The
fiscal 2003 acquisitions were deemed immaterial to include in the table below.
38
Fiscal Year Ended
September 30,
-----------------------
2002 2001
---------- ----------
($ millions,
except per share data)
Net sales $ 1,779.6 $ 1,726.5
Income before cumulative effect of accounting change 93.8 15.2
Net income 75.3 15.2
Basic earnings per share:
Before cumulative effect of accounting change $ 3.20 $ .54
After cumulative effect of accounting change 2.57 .54
Diluted earnings per share:
Before cumulative effect of accounting change $ 2.96 $ .50
After cumulative effect of accounting change 2.38 .50
NOTE 6. GOODWILL AND INTANGIBLE ASSETS, NET
Effective October 1, 2001, Scotts adopted Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets". In
accordance with this standard, goodwill and certain other intangible assets,
primarily tradenames, have been classified as indefinite-lived assets no longer
subject to amortization. Indefinite-lived assets are subject to impairment
testing upon adoption of SFAS No. 142 and at least annually thereafter. The
initial impairment analysis was completed in the second quarter of fiscal 2002,
taking into account additional guidance provided by EITF 02-07, "Unit of Measure
for Testing Impairment of Indefinite-Lived Intangible Assets". The value of all
indefinite-lived tradenames as of October 1, 2001 was determined using a
"royalty savings" methodology that was employed when the businesses associated
with these tradenames were acquired but using updated estimates of sales and
profitability. As a result, a pre-tax impairment loss of $29.8 million was
recorded for the writedown of the value of the tradenames in our International
businesses in Germany, France and the United Kingdom. This transitional
impairment charge was recorded as a cumulative effect of accounting change, net
of tax, as of October 1, 2001. After completing this initial valuation and
impairment of tradenames, an initial assessment for goodwill impairment was
performed. It was determined that a goodwill impairment charge was not required.
Intangible assets include patents, tradenames and other intangible
assets which are valued at acquisition through independent appraisals where
material, or through other valuation techniques. Patents, trademarks and other
intangible assets are being amortized on a straight-line basis over periods
varying from 7 to 40 years. The useful lives of intangible assets still subject
to amortization were not revised as a result of the adoption of SFAS No. 142.
Management assesses the recoverability of goodwill, tradenames and
other intangible assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable from its discounted
future cash flows. Goodwill and unamortizable intangible assets are reviewed for
impairment at least annually. If it is determined that an impairment of
intangible assets has occurred, an impairment loss is recognized for the amount
by which the carrying value of the asset exceeds its estimated fair value.
In the first quarter of fiscal 2003, the Company completed its annual
impairment analysis and determined that a charge for annual impairment was not
required.
39
The following table presents goodwill and intangible assets as of the
end of each period presented. The September 30, 2002 balances reflect the
impairment charge recorded as of October 1, 2001.
September 30, 2003 September 30, 2002
----------------------------------- -----------------------------------
Weighted Gross Net Gross Net
Average Carrying Accumulated Carrying Carrying Accumulated Carrying
Life Amount Amortization Amount Amount Amortization Amount
- ------------------------------------------------------------------------------------------------------------------------
($ millions)
Amortizable intangible assets:
Technology 21 $ 66.9 $ (22.7) $ 44.2 $ 61.9 $ (18.8) $ 43.1
Customer accounts 7 42.3 (6.0) 36.3 33.2 (3.5) 29.7
Tradenames 16 11.3 (3.0) 8.3 11.3 (2.3) 9.0
Other 15 54.6 (37.9) 16.7 50.6 (34.0) 16.6
-------- --------
Total amortizable intangible
assets, net 105.5 98.4
Unamortizable intangible assets:
Tradenames 320.3 312.7
Other 3.2 3.1
-------- --------
Total intangible assets, net 429.0 414.2
Goodwill 406.5 377.5
-------- --------
Total goodwill and
intangible assets, net $ 835.5 $ 791.7
======== ========
The changes to the net carrying value of goodwill by segment for the
fiscal year ended September 30, 2003 are as follows (in millions):
North Scotts
America LawnService(R) International Total
--------- ------------- ------------- ---------
Balance as of September 30, 2002 $ 204.6 $ 68.5 $ 104.4 $ 377.5
Increases due to acquisitions 0.8 22.3 23.1
Reduction of final purchase of previous
acquisition (1.6) (1.6)
Other (reclassifications and cumulative
translation) (0.4) 0.6 7.3 7.5
--------- ------- ------- ---------
Balance as of September 30, 2003 $ 203.4 $ 91.4 $ 111.7 $ 406.5
========= ======= ======= =========
The following table represents a reconciliation of recorded net income
to adjusted net income and related earnings per share data as if the provision
of SFAS No. 142 relating to non-amortization of indefinite-lived intangible
assets had been adopted as of the beginning of the earliest period presented.
This presentation does not take into account the impairment charge, if any, that
may have been recorded if SFAS 142 had been adopted in the earlier periods
presented. Basic and diluted earnings per share would have been $3.44 and $3.19,
respectively in fiscal 2002 excluding the impairment charge.
40
For the year ended
September 30,
2001
------------------
($ millions,
except per share
data)
Net income
Reported net income $ 15.5
Goodwill amortization 11.2
Tradename amortization 10.1
Taxes (4.7)
--------
Net income as adjusted $ 32.1
========
Basic EPS
Reported net income $ 0.55
Goodwill amortization .39
Tradename amortization .36
Taxes (0.17)
--------
Net income as adjusted $ 1.13
========
Diluted EPS
Reported net income $ 0.51
Goodwill amortization .37
Tradename amortization .33
Taxes (0.16)
--------
Net income as adjusted $ 1.05
========
The total amortization expense for the years ended September 30, 2003,
2002 and 2001 was $8.6 million, $5.7 million and $27.7 million, respectively.
Estimated amortization expense for the existing amortizable intangible
assets for the years ended September 30, is as follows:
($ millions)
2004 $9.6
2005 9.2
2006 8.9
2007 8.6
2008 8.6
NOTE 7. RETIREMENT PLANS
The Company offers a defined contribution profit sharing and 401(k)
plan for substantially all U.S. employees. The majority of full and part-time
employees may participate in the plan on the first day of the month after being
hired, with a portion of the workforce being required to wait 60 days and until
the first of the next month. The plan allows participants to contribute up to
75% of their compensation in the form of pre-tax contributions, not to exceed
the annual Internal Revenue Service (IRS) maximum deferral amount. The Company
provides a matching contribution equivalent to 100% of participants' initial 3%
contribution and 50% of the participants' remaining contribution up to 5%.
Participants are immediately vested in employee contributions, the Company's
matching contributions and the investment return on those monies. The Company
also provides a base contribution to employees' accounts regardless of whether
employees are active in the plan. The base contribution is 2% of compensation up
to 50% of the Social Security taxable wage base plus 4% of compensation in
excess of 50% of the Social Security taxable wage base. Domestic employees of
the Company are eligible to receive base contributions on the first day of the
month following the date of hire with a portion of the workforce eligible to
receive base contributions on the first day of the month after completing one
year of service. Participants become fully vested in the Company's base
contribution after three years of service. The Company recorded charges of $9.6
million, $7.3 million and $10.3 million under the plan in fiscal 2003, 2002 and
2001, respectively.
41
In conjunction with the decision to offer the expanded defined
contribution profit sharing and 401(k) plan to domestic Company associates,
management decided to freeze benefits under certain defined benefit pension
plans as of December 31, 1997. These pension plans covered substantially all
full-time U.S. associates who had completed one year of eligible service and
reached the age of 21. The benefits under these plans are based on years of
service and the associates' average final compensation or stated amounts. The
Company's funding policy, consistent with statutory requirements and tax
considerations, is based on actuarial computations using the Projected Unit
Credit method. The Company also curtailed its non-qualified supplemental pension
plan which provides for incremental pension payments from the Company so that
total pension payments equal amounts that would have been payable from the
Company's pension plans if it were not for limitations imposed by income tax
regulations.
The Company also sponsors the following pension plans associated with
the international businesses it has acquired: Scotts International BV, ASEF BV
(Netherlands), The Scotts Company (United Kingdom) Ltd., Miracle Garden Care,
Scotts France SAS, Scotts Celaflor GmbH (Germany) and Scotts Celaflor HG
(Austria). These plans generally cover all associates of the respective
businesses and retirement benefits are generally based on years of service and
compensation levels. The pension plans for Scotts International BV, ASEF BV
(Netherlands), The Scotts Company (United Kingdom) Ltd., and Miracle Garden Care
are funded plans. The remaining international pension plans are not funded by
separately held plan assets.
In connection with reduction in force initiatives implemented in fiscal
2001, curtailment (gains) or losses of ($0.2) million and $2.7 million were
recorded as components of restructuring expense for the international and
domestic defined benefit pension plans, respectively. In connection with the
closure of a manufacturing plant in Bramford, England, completed in May 2003,
special termination benefits of $1.5 million were recorded as a component of
restructuring expense in September 2002.
The following tables present information about benefit obligations,
plan assets, annual expense and other assumptions about the Company's defined
benefit pension plans (in millions):
42
Curtailed Curtailed
Defined International Supplemental
Benefit Plan Benefit Plans Plan
---------------------- ------------------------ -------------------
2003 2002 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 77.0 $ 67.2 $ 101.2 $ 76.1 $ 2.0 $ 1.9
Service cost 4.0 3.1
Interest cost 4.9 5.1 5.8 4.5 0.1 0.1
Plan participants' contributions 0.7 0.7
Curtailment loss 1.5
Actuarial loss 9.7 9.6 1.5 12.0 0.2 0.2
Benefits paid (5.0) (4.9) (3.8) (3.1) (0.2) (0.2)
Foreign currency translation 9.6 6.4
-------- -------- ---------- ---------- -------- --------
Benefit obligation at end of year $ 86.6 $ 77.0 $ 119.0 $ 101.2 $ 2.1 $ 2.0
======== ======== ========== ========== ======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year 49.8 56.9 51.0 51.8
Actual return on plan assets 7.7 (6.2) 6.1 (5.2)
Employer contribution 6.7 4.0 5.2 3.7 0.2 0.1
Plan participants' contributions 0.7 0.7
Benefits paid (5.0) (4.9) (3.8) (3.1) (0.2) (0.1)
Foreign currency translation 4.4 3.1
-------- -------- ---------- ---------- -------- --------
Fair value of plan assets at end of year $ 59.2 $ 49.8 $ 63.6 $ 51.0
======== ======== ========== ========== ======== ========
AMOUNTS RECOGNIZED IN THE STATEMENT OF
FINANCIAL POSITION CONSIST OF:
Funded status (27.4) (27.2) (55.4) (50.2) (2.1) (2.0)
Unrecognized losses 35.6 31.7 38.3 39.9 0.6 0.5
-------- -------- ---------- ---------- -------- --------
Net amount recognized $ 8.2 $ 4.5 $ (17.1) $ (10.3) $ (1.5) $ (1.5)
======== ======== ========== ========== ======== ========
Weighted average assumptions:
Discount rate 6.00% 6.75% 5.25% 5.5% 6.00% 6.75%
Expected return on plan assets 8.00% 8.00% 6.0-8.0% 7.0-8.0% n/a n/a
Rate of compensation increase n/a n/a 3.0-4.0% 3.0-4.0% n/a n/a
2003 2002 2001 2003 2002 2001 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
COMPONENTS OF NET PERIODIC
BENEFIT COST
Service cost $ $ $ $ 4.0 $ 3.1 $ 3.6 $ $ $
Interest cost 4.9 5.1 4.6 5.8 4.5 4.0 0.1 0.1 0.1
Expected return on plan assets (3.8) (4.4) (4.3) (4.0) (4.0) (4.8)
Net amortization and deferral 1.9 0.7 0.3 2.2 0.7
Curtailment loss (gain) 2.7 (0.2)
------- ------- ------- ------- ------- ------- ------ ------ ------
Net periodic benefit cost $ 3.0 $ 1.4 $ 3.3 $ 8.0 $ 4.3 $ 2.6 $ 0.1 $ 0.1 $ 0.1
======= ======= ======= ======= ======= ======= ====== ====== ======
(income)
NOTE 8. ASSOCIATE BENEFITS
The Company provides comprehensive major medical benefits to certain of
its retired associates and their dependents. Substantially all of the Company's
domestic associates who were hired before January 1, 1998 become eligible for
these benefits if they retire at age 55 or older with more than ten years of
service. The plan requires certain minimum contributions from retired associates
and includes provisions to limit the overall cost increases the Company is
required to cover. The Company funds its portion of retiree medical benefits on
a pay-as-you-go basis.
Prior to October 1, 1993, the Company effected several changes in plan
provisions, primarily related to current and ultimate levels of retiree and
dependent contributions. Retirees as of October 1, 1993 are entitled to benefits
existing prior to these plan changes. These plan changes resulted in a reduction
in unrecognized prior service cost, which is being amortized over future years.
43
In connection with the reduction in force in fiscal 2001, the plan
incurred a curtailment expense of $3.7 million which was included in
restructuring expense.
The following table sets forth the information about the retiree
medical plan:
2003 2002
- ---------------------------------------------------------------------------------------------------------
($ millions)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year $ 20.8 $ 22.5
Service cost 0.4 0.3
Interest cost 1.9 1.4
Plan participants' contributions 0.5 0.3
Actuarial (gain) loss 10.4 (2.2)
Benefits paid (2.2) (1.5)
-------- --------
Benefit obligation at end of year $ 31.8 $ 20.8
======== ========
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $ $
Employer contribution 1.7 1.2
Plan participants' contributions 0.5 0.3
Benefits paid (2.2) (1.5)
-------- --------
Fair value of plan assets at end of year $ $
======== ========
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Funded status $ (31.8) $ (20.8)
Unrecognized prior service costs (0.4) (1.1)
Unrecognized prior (gain) loss 7.9 (2.3)
-------- --------
Net amount recognized $ (24.3) $ (24.2)
======== ========
The discount rates used in determining the accumulated postretirement
benefit obligation were 6.00% and 6.75% in fiscal 2003 and 2002, respectively.
For measurement purposes, annual rate of increase in per capita cost of covered
retiree medical benefits assumed for fiscal 2003 was 8.5% for participants under
65 years of age and 9.5% for those over 65, and 9.5% for all participants in
fiscal 2002. The rate was assumed to decrease gradually to 5.5% by the year 2011
and remain at that level thereafter. A 1% increase in health cost trend rate
assumptions would increase the accumulated postretirement benefit obligation
(APBO) as of September 30, 2003 and 2002 by $2.5 million and $1.6 million,
respectively. A 1% decrease in health cost trend rate assumptions would decrease
the APBO as of September 30, 2003 and 2002 by $2.2 million and $1.4 million,
respectively. A 1% increase or decrease in the same rate would not have a
material effect on service or interest costs.
The Company is self-insured for certain health benefits up to $0.2
million per occurrence per individual. The cost of such benefits is recognized
as expense in the period the claim is incurred. This cost was $15.4 million,
$15.8 million, and $14.7 million in fiscal 2003, 2002 and 2001, respectively.
NOTE 9. DEBT
September 30,
---------------------
2003 2002
- -----------------------------------------------------------------------------------------------------------
($ millions)
Revolving loans under credit agreement $ $
Term loans under credit agreement 326.5 375.5
Senior subordinated notes 393.1 391.8
Notes due to sellers 21.6 43.4
Foreign bank borrowings and term loans 6.3 7.0
Capital lease obligations and other 10.1 11.7
-------- ---------
757.6 829.4
Less current portions 55.4 98.2
-------- ---------
$ 702.2 $ 731.2
======== =========
44
Maturities of short- and long-term debt, including capital leases for the
next five fiscal years and thereafter are as follows:
Capital Leases Other
and Other Debt
- -----------------------------------------------------------------------------------------------------------
($ millions)
2004 $ 3.2 $ 57.5
2005 1.4 55.2
2006 0.9 2.6
2007 0.8 179.2
2008 0.8 59.8
Thereafter 8.6 400.3
------- ---------
$ 15.7 $ 754.6
Less: amounts representing future interest (5.6) (7.1)
------- ---------
$ 10.1 $ 747.5
======= =========
The revolving credit facility under the Credit Agreement ("Credit
Agreement") provides for borrowings of up to $575 million, which are available
on a revolving basis over a term of 6 1/2 years ending June 30, 2005. A portion
of the revolving credit facility not to exceed $100 million is available for the
issuance of letters of credit. A portion of the facility not to exceed $360
million is available for borrowings in optional currencies, provided that the
outstanding revolving loans in other currencies do not exceed $200 million
except for British Pounds Sterling, which cannot exceed $360 million. The
outstanding principal amount of all revolving credit loans may not exceed $150
million for at least 30 consecutive days during any calendar year.
Spreads on rates and commitment fees under the Credit Agreement vary
according to the Company's leverage ratios, and interest rates also vary within
tranches. The weighted-average interest rate on the Company's borrowings under
the Credit Agreement for the years ended September 30, 2003 and 2002 was 4.88%
and 6.26%, respectively. Administrative fees paid in fiscal 2003 for the Credit
Agreement totaled $0.4 million.
Financial covenants include interest coverage and net leverage ratios.
Other covenants include limitations on indebtedness, liens, mergers,
consolidations, liquidations and dissolutions, sale of assets, leases,
dividends, capital expenditures, and investments. The Scotts Company and all of
its domestic subsidiaries pledged substantially all of their personal, real and
intellectual property assets as collateral for the borrowings under the Credit
Agreement. The Scotts Company and its subsidiaries also pledged the stock in
foreign subsidiaries that borrow under the Credit Agreement.
The term loan facilities under the Credit Agreement consist of two
tranches. The Tranche A Term Loan Facility consists of three sub-tranches of
Euros and British Pounds Sterling in the aggregate principal amount of $265
million, which are to be repaid quarterly over a 6 -1/2 year period ending June
30, 2005. The Tranche B Loan Facility has an aggregate principal amount of $260
million and is to be repaid quarterly over a 6 1/2 year period ending December
31, 2007. At September 30, 2003, the outstanding balances of the Tranche A and
Tranche B Term loan Facilities are $86.0 million and $240.5 million,
respectively. Minimum required repayments by fiscal years are as follows:
For the fiscal years ending September 30,
2004 2005 2006 2007 2008
----------------------------------------------------------
($ millions)
Tranche A $ 37.7 $ 48.3 $ -- $ -- $ --
Tranche B 0.9 0.9 0.9 178.4 59.4
These future payments are presented at foreign exchange rates in effect
at September 30, 2003.
The term loan facilities have a variable interest rate which was 3.98%
at September 30, 2003.
45
Approximately $17.3 million of financing costs associated with the
Credit Agreement have been deferred as of September 30, 2003 and are being
amortized over a period which ends June 30, 2005. The unamortized balance
September 30, 2003 was $5.8 million.
In January 2002, The Scotts Company completed an offering of $70
million of 8 5/8% Senior Subordinated Notes due 2009. The net proceeds from the
offering were used to pay down borrowings on our revolving credit facility. The
notes were issued at a premium of $1.8 million. The effective interest rate for
the notes is 8 3/8%. The issuance costs associated with the offering totaled
$1.6 million. Both the premium and the issuance costs are being amortized over
the life of the notes.
In January 1999, The Scotts Company completed an offering of $330
million of 8 5/8% Senior Subordinated Notes due 2009. The Scotts Company entered
into two interest rate locks in fiscal 1998 to hedge its anticipated interest
rate exposure on the 8 5/8% Notes offering. The total amount paid under the
interest rate locks of $12.9 million has been recorded as a reduction of the 8
5/8% Notes' carrying value and is being amortized over the life of the 8 5/8%
Notes as interest expense. Approximately $11.8 million of issuance costs
associated with the 8 5/8% Notes were deferred and are being amortized over the
term of the Notes. The effective interest rate for the notes including the cost
of the interest rate locks is 9.24%.
In October 2003, The Scotts Company completed a refinancing of its
Credit Agreement and its $400 million 8 5/8% Senior Subordinated Notes in a
series of transactions. See Note 23 to the Consolidated Financial Statements.
In conjunction with previous acquisitions, notes were issued for
certain portions of the total purchase price that are to be paid in future
periods. The present value of the remaining note payments is $21.6 million, of
which $15.5 million pertains to lawnservice business acquisitions. The Company
is imputing interest on the notes using the stated interest rate or an interest
rate prevalent for similar instruments at the time of acquisition on the
non-interest bearing notes.
Foreign notes of $6.0 million issued on December 12, 1997, have an
8-year term and bear interest at 1% below LIBOR. The present value of these
loans at September 30, 2003 and 2002 was $0.6 million and $2.6 million,
respectively. The loans are denominated in British Pounds Sterling and can be
redeemed, on demand, by the note holder. The foreign bank borrowings of $5.7
million at September 30, 2003 and $4.4 million at September 30, 2002 represent
lines of credit for foreign operations and are primarily denominated in Euros.
NOTE 10. SHAREHOLDERS' EQUITY
2003 2002
- -------------------------------------------------------------------------------------------------------------
(in millions)
STOCK
Preferred shares, no par value:
Authorized 0.2 shares 0.2 shares
Issued 0.0 shares 0.0 shares
Common shares, no par value
Authorized 100.0 shares 100.0 shares
Issued 32.0 shares 31.3 shares
Class A Convertible Preferred Stock ("Preferred Shares") with a
liquidation preference of $195.0 million was issued in conjunction with the 1995
Miracle-Gro merger transactions. These Preferred Shares had a 5% dividend yield
and were convertible upon shareholder demand into common shares at any time and
at The Scotts Company's option after May 2000 at $19.00 per common share. The
conversion feature associated with the Preferred Shares issued in connection
with the Miracle-Gro merger transactions was negotiated as an integral part of
the overall transaction. The conversion price exceeded the fair market value of
The Scotts Company's common shares on the date the two companies reached
agreement and, therefore, the Preferred Shares did not provide for a beneficial
conversion feature. Additionally, warrants to purchase 3.0 million common shares
of The Scotts Company were issued as part of the purchase price. As of September
30, 2003, all warrants have been exercised by the issuance of
46
1,527,551 common shares in a series of non-cash transactions. The fair value of
the warrants at issuance has been included in capital in excess of par value in
the Company's Consolidated Balance Sheets.
In fiscal 1999, certain of the Preferred Shares were converted into 0.2
million common shares at the holder's option. In October 1999, all of the then
outstanding Preferred Shares were converted into 10.0 million common shares. In
exchange for the early conversion, The Scotts Company paid the holders of the
Preferred Shares $6.4 million. That amount represents the dividends on the
Preferred Shares that otherwise would have been payable from the conversion date
through May 2000, the month during which the Preferred Shares could first be
redeemed by The Scotts Company. In addition, The Scotts Company agreed to
accelerate the termination of many of the standstill provisions in the
Miracle-Gro merger agreement that would otherwise have terminated in May 2000.
These standstill provisions include the provisions related to the Board of
Directors and voting restrictions, as well as restrictions on transfer.
Therefore, the former shareholders of Stern's Miracle-Gro Products, Inc.,
including Hagedorn Partnership, L.P., may vote their common shares freely in the
election of directors and generally on all matters brought before The Scotts
Company's shareholders. Following the conversion and the termination of the
standstill provisions described above, the former shareholders of Miracle-Gro
owned approximately 34% as of September 30, 2003 of The Scotts Company's
outstanding common shares and, thus, have the ability to significantly influence
the election of directors and approval of other actions requiring the approval
of The Scotts Company's shareholders.
In January 2001, the Amended Articles of Incorporation of The Scotts
Company were amended to change the authorized preferred stock from 195,000
shares of Class A Convertible Preferred Stock to 195,000 preferred shares, each
without par value.
The limitations on the ability of the former shareholders of
Miracle-Gro to acquire additional voting securities of The Scotts Company
contained in the merger agreement terminated as of October 1, 1999, except for
the restriction under which the former shareholders of Miracle-Gro may not
acquire, directly or indirectly, beneficial ownership of Voting Stock (as that
term is defined in the Miracle-Gro merger agreement) representing more than 49%
of the total voting power of the outstanding Voting Stock, except pursuant to a
tender offer for 100% of that total voting power, which tender offer is made at
a price per share which is not less than the market price per share on the last
trading day before the announcement of the tender offer and is conditioned upon
the receipt of at least 50% of the Voting Stock beneficially owned by
shareholders of The Scotts Company other than the former shareholders of
Miracle-Gro and their affiliates and associates.
Under The Scotts Company 1992 Long Term Incentive Plan (the "1992
Plan"), stock options and performance share awards were granted to officers and
other key employees of the Company. The 1992 Plan also provided for the grant of
stock options to non-employee directors of Scotts. The maximum number of common
shares that may be issued under the 1992 Plan is 1.7 million, plus the number of
common shares surrendered to exercise options (other than non-employee director
options) granted under the 1992 Plan, up to a maximum of 1.0 million surrendered
common shares. Vesting periods under the 1992 Plan vary and were determined by
the Compensation and Organization Committee of the Board of Directors.
Under The Scotts Company 1996 Stock Option Plan (the "1996 Plan"),
stock awards may be granted to officers and other key employees of the Company
and non-employee directors of The Scotts Company. The maximum number of common
shares that may be issued under the 1996 Plan is 5.5 million. Vesting periods
under the 1996 Plan vary. Generally, a 3-year cliff vesting schedule is used
unless decided otherwise by the Compensation and Organization Committee of the
Board of Directors. The Company also has a phantom option plan for certain
management employees which is payable in cash based on the increase in the
Company's share price over a three-year vesting period.
Under The Scotts Company 2003 Stock Option and Incentive Equity Plan
(the "2003 Plan"), which was approved by the Board Directors at the annual
meeting in January 2003, stock awards may be granted to officers and other key
employees of the Company and non-employee directors of The Scotts Company. The
maximum number of common shares that may be issued under the 2003 Plan is 3.5
million. Vesting periods under the 2003 Plan vary.
47
Generally a three-year cliff vesting schedule is used unless decided otherwise
by the Compensation and Organization Committee of the Board of Directors.
Aggregate stock award activity consists of the following (shares in
millions):
Fiscal Year ended September 30,
-------------------------------------------------------------------------------
2003 2002 2001
------------------------ ---------------------- -----------------------
Weighted Weighted Weighted
Number of Avg. Number of Avg. Number of Avg.
Common Exercise Common Exercise Common Exercise
Shares Price Shares Price Shares Price
- -----------------------------------------------------------------------------------------------------------------
Beginning balance 4.2 $ 31.25 4.6 $ 27.94 4.9 $ 26.67
Awards granted 0.7 $ 49.07 0.6 $ 40.69 0.9 $ 30.88
Awards exercised (0.7) $ 27.14 (0.9) $ 21.45 (0.8) $ 21.24
Awards canceled (0.1) $ 36.43 (0.1) $ 28.78 (0.4) $ 27.96
------- ------ --------
Ending balance 4.1 $ 35.00 4.2 $ 31.25 4.6 $ 27.94
------- ------ --------
Exercisable at September 30 2.4 $ 31.31 2.8 $ 29.01 3.0 $ 24.96
The following summarizes certain information pertaining to stock awards
outstanding and exercisable at September 30, 2003 (shares in millions):
Awards Outstanding Awards Exercisable
------------------------------------- -----------------------
WTD. Avg. WTD. Avg. WTD. Avg.
Range of No. of Remaining Exercise No. of Exercise
Exercise Price Options Life Price Options Price
- ---------------------------------------------------------------------------------------------------------------
$15.00 - $20.00 0.4 2.88 $ 18.58 0.4 $ 18.58
$20.00 - $25.00 0.1 2.31 21.54 0.1 21.54
$25.00 - $30.00 0.2 4.01 26.65 0.2 26.65
$30.00 - $35.00 1.3 5.99 30.92 0.7 31.12
$35.00 - $40.00 1.3 6.97 37.96 0.7 36.55
$40.00 - $45.00 0.1 6.04 40.57 0.1 40.57
$45.00 - $52.15 0.7 9.16 48.88 0.2 49.24
---- --------- ------ --------
4.1 $ 35.00 2.4 $ 31.31
==== ========= ====== ========
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, "Accounting for Stock-Based Compensation," which changes the
measurement, recognition and disclosure standards for stock-based compensation.
The Company, as allowable, had originally adopted SFAS No. 123 for disclosure
purposes only. However, effective October 1, 2002, the Company began expensing
options granted after that date in accordance with the SFAS No. 123 recognition
and measurement provisions as amended by SFAS No. 148.
The fair value of each award granted has been estimated on the grant
date using the Black-Scholes option-pricing model based on the following
weighted average assumptions for those granted in fiscal 2003, 2002 and 2001:
(1) expected market-price volatility of 30.1%, 29.7% and 29.5%, respectively;
(2) risk-free interest rates of 3.5%, 3.35% and 4.4%, respectively; and (3)
expected life of options of 7 years for fiscal 2003 and fiscal 2002 and 6 years
for fiscal 2001. Awards are generally granted with a ten-year term. The
estimated weighted-average fair value per share of options granted during fiscal
2003, 2002 and 2001 was $19.35, $15.83 and $11.74, respectively.
48
NOTE 11. EARNINGS PER COMMON SHARE
The following table presents information necessary to calculate basic
and diluted earnings per common share. Basic earnings per common share are
computed by dividing net income by the weighted average number of common shares
outstanding. Options to purchase 0.1 million, 0.1 million and 0.2 million shares
of common stock for the years ended September 30, 2003, 2002 and 2001,
respectively, were not included in the computation of diluted earnings per
common share. These options were excluded from the calculation because the
exercise price of these options was greater than the average market price of the
common shares in the respective periods, and therefore, they were anti-
dilutive.
Year ended September 30,
---------------------------------
2003 2002 2001
- ------------------------------------------------------------------------------------------------------------------
(in millions, except per share data)
BASIC EARNINGS PER COMMON SHARE:
Net income before cumulative effect of accounting change $ 103.8 $ 101.0 $ 15.5
Cumulative effect of change in accounting for intangible assets, net of
tax (18.5)
-------- -------- -------
Net income 103.8 82.5 15.5
Weighted-average common shares outstanding during the period 30.9 29.3 28.4
Basic earnings per common share
Before cumulative effect of accounting change $ 3.36 $ 3.44 $ 0.55
Cumulative effect of change in accounting for intangible assets, net of
tax (0.63)
-------- -------- -------
After cumulative effect of accounting change $ 3.36 $ 2.81 $ 0.55
======== ======== =======
DILUTED EARNINGS PER COMMON SHARE:
Net income used in diluted earnings per common share calculation $ 103.8 $ 82.5 $ 15.5
Weighted-average common shares outstanding during the period 30.9 29.3 28.4
Potential common shares:
Assuming exercise of options 1.2 1.1 0.9
Assuming exercise of warrants 1.3 1.1
-------- -------- -------
Weighted-average number of common shares outstanding and dilutive
potential common shares 32.1 31.7 30.4
Diluted earnings per common share
Before cumulative effect of accounting change $ 3.23 $ 3.19 $ 0.51
Cumulative effect of change in accounting for intangible assets, net of
tax (0.58)
-------- -------- -------
After cumulative effect of accounting change $ 3.23 $ 2.61 $ 0.51
======== ======== =======
NOTE 12. INCOME TAXES
The provision for income taxes consists of the following:
Year ended September 30,
----------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
($ millions)
Currently payable:
Federal $ 8.2 $ 35.1 $ 29.9
State 0.9 3.7 2.9
Foreign 5.3 1.9 0.3
Deferred:
Federal 41.3 19.4 (18.1)
State 3.8 1.8 (1.8)
------- ------- --------
Income tax expense $ 59.5 $ 61.9 $ 13.2
======= ======= ========
49
The domestic and foreign components of income before taxes are as
follows:
Year ended September 30,
-----------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
($ millions)
Domestic $ 151.6 $ 160.8 $ 30.3
Foreign 11.7 2.1 (1.6)
--------- --------- --------
Income before taxes $ 163.3 $ 162.9 $ 28.7
========= ========= ========
A reconciliation of the federal corporate income tax rate and the
effective tax rate on income before income taxes is summarized below:
Year ended September 30,
---------------------------
2003 2002 2001
- ---------------------------------------------------------------------------------------------------------
Statutory income tax rate 35.0% 35.0% 35.0%
Effect of foreign operations (0.1) 0.2 2.6
Goodwill amortization and other effects resulting from purchase
accounting 7.5
State taxes, net of federal benefit 1.9 2.2 2.5
Change in deferred state effective tax rate (1.8)
Change in valuation allowance 0.6
Other 0.8 0.6 (1.6)
---- ---- ----
Effective income tax rate 36.4% 38.0% 46.0%
==== ==== ====
The net current and non-current components of deferred income taxes
recognized in the Consolidated Balance Sheets at September 30 are:
September 30,
--------------------
2003 2002
- ------------------------------------------------------------------------------------------------------------
($ millions)
Net current assets $ 56.9 $ 74.6
Net non-current liabilities (33.0) (2.4)
-------- --------
Net assets $ 23.9 $ 72.2
======== ========
The components of the net deferred tax asset are as follows:
September 30,
---------------------
2003 2002
- ----------------------------------------------------------------------------------------------------------
($ millions)
ASSETS
Inventories $ 13.3 $ 18.2
Accrued liabilities 32.9 44.7
Postretirement benefits 36.1 34.7
Foreign net operating losses 0.2
Accounts receivable 10.7 11.7
Other 15.9 11.0
-------- ---------
Gross deferred tax assets 108.9 120.5
Valuation allowance (1.0)
-------- ---------
Deferred tax assets 107.9 120.5
LIABILITIES
Property, plant and equipment (45.3) (29.7)
Intangible assets (35.2) (17.7)
Other (3.5) (0.9)
-------- ---------
Deferred tax liability (84.0) (48.3)
-------- ---------
Net deferred tax asset $ 23.9 $ 72.2
======== =========
50
Net operating loss carryforwards in foreign jurisdictions were $0.6
million at September 30, 2002. The use of these acquired carryforwards is
subject to limitations imposed by the tax laws of each applicable country.
State net operating loss carryforwards were $4.4 million and $0.5
million at September 30, 2003 and 2002, respectively. Any losses not previously
utilized will begin to expire starting in fiscal 2011.
State tax credits were $2.8 million at September 30, 2003. Any credits
not previously utilized will begin to expire starting in fiscal 2005.
A valuation allowance of $1.0 million at September 30, 2003 was
established to offset the potential tax benefits of capital losses for which the
benefits are not expected to be realized.
Deferred taxes have not been provided on unremitted earnings of certain
foreign subsidiaries and foreign corporate joint ventures that arose in fiscal
years ending on or before September 30, 2003 in accordance with APB 23 since
such earnings have been permanently reinvested.
NOTE 13. FINANCIAL INSTRUMENTS
A description of the Company's financial instruments and the methods
and assumptions used to estimate their fair values is as follows:
LONG-TERM DEBT
At September 30, 2003 and 2002, Scotts had $400 million outstanding, of
8 5/8% Senior Subordinated Notes due 2009. The fair value of these notes was
estimated based on recent trading information. Variable rate debt outstanding at
September 30, 2003 and 2002 consisted of term loans under the Company's credit
agreement and local bank borrowings for certain of the Company's foreign
operations. The carrying amounts of these borrowings are considered to
approximate their fair values.
INTEREST RATE SWAP AGREEMENTS
At September 30, 2003 and 2002, Scotts had five and six interest rate
swaps outstanding, respectively, with major financial institutions that
effectively convert variable-rate debt to a fixed rate. The swaps have notional
amounts between $10 million and $25 million ($75 million and $95 million in
total, respectively) with three, four or five-year terms commencing in January
1999. Under the terms of these swaps, the Company pays swap rates ranging from
3.75% to 5.18% plus a spread based on the pricing grid contained in the credit
agreement and receives three-month LIBOR in return.
Scotts enters into interest rate swap agreements as a means to hedge
its interest rate exposure on debt instruments. Since the interest rate swaps
have been designated as hedging instruments, their fair values are reflected in
the Company's Consolidated Balance Sheets. Net amounts to be received or paid
under the swap agreements are reflected as adjustments to interest expense.
Unrealized gains or losses resulting from valuing these swaps at fair value are
recorded in other comprehensive income. The fair value of the swap agreements
was determined based on the present value of the estimated future net cash flows
using implied rates in the applicable yield curve as of the valuation date.
INTEREST RATE LOCKS
Scotts entered into the interest rate locks to hedge its interest rate
exposure on the offering of the 8 5/8% Senior Subordinated Notes due 2009. The
net amount paid under the interest rate locks is reflected as an adjustment to
the carrying amount of the 8 5/8% Senior Subordinated Notes.
The estimated fair values of the Company's financial instruments are as
follows for the fiscal years ended September 30:
51
2003 2002
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
($ millions)
Revolving and term loans under Credit Agreement $ 326.5 $ 326.5 $ 375.5 $ 375.5
Senior Subordinated Notes 400.0 393.1 400.0 391.8
Foreign bank borrowings and term loans 6.3 6.3 7.0 7.0
Interest rate swap agreements (2.1) (2.1) (3.6) (3.6)
Excluded from the fair value table above are the following items that
are included in the Company's total debt balances at September 30, 2003 and
2002:
2003 2002
------ ------
($ millions)
Amounts paid to settle treasury locks $ (6.9) $ (8.2)
Notes due to sellers 21.6 43.4
Capital lease obligations and other 10.1 11.7
The fair value of the non-interest bearing notes is not considered
determinable since there is no established market for notes with similar
characteristics and since they represent notes that were negotiated between the
Company and the seller as part of transactions to acquire businesses.
NOTE 14. OPERATING LEASES
The Company leases buildings, land and equipment under various
noncancellable lease agreements for periods of two to fourteen years. The lease
agreements generally provide that the Company pay taxes, insurance and
maintenance expenses related to the leased assets. Certain lease agreements
contain purchase options. At September 30, 2003, future minimum lease payments
were as follows:
($ millions)
2004 $ 24.4
2005 18.6
2006 12.3
2007 6.5
2008 3.6
Thereafter 25.4
------
Total minimum lease payments $ 90.8
======
The Company also leases transportation and production equipment under
various one-year operating leases, which provide for the extension of the
initial term on a monthly or annual basis. Total rental expenses for operating
leases were $40.8 million, $33.6 million and $22.0 million for fiscal 2003, 2002
and 2001, respectively.
NOTE 15. COMMITMENTS
The Company has entered into the following purchase commitments:
SEED: The Company is obligated to make future purchases based on
estimated yields and other market purchase commitments. At September 30, 2003,
estimated annual seed purchase commitments were as follows:
($ millions)
2004 $ 55.4
2005 39.0
2006 19.8
2007 8.2
2008 3.7
52
The Company made purchases of $53.9 million, $51.6 million and $53.9
million under this obligation in fiscal 2003, 2002 and 2001, respectively.
MEDIA ADVERTISING. As of September 30, 2003, the Company has committed
to purchase $25.3 million of airtime for both national and regional television
advertising in fiscal 2004.
NOTE 16. CONTINGENCIES
Management continually evaluates the Company's contingencies, including
various lawsuits and claims which arise in the normal course of business,
product and general liabilities, worker's compensation, property losses and
other fiduciary liabilities for which the Company is self-insured or retains a
high exposure limit. Insurance reserves are established within an actuarially
determined range. 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
matters are the more significant of the Company's identified contingencies.
ENVIRONMENTAL MATTERS
In June 1997, the Ohio EPA initiated an enforcement action against us
with respect to alleged surface water violations and inadequate treatment
capabilities at our Marysville facility and seeking corrective action under the
federal Resource Conservation and Recovery Act. The action relates to several
discontinued on-site disposal areas which date back to the early operations of
the Marysville facility that we had already been assessing and, in some cases,
remediating, on a voluntary basis. On December 3, 2001, an agreed judicial
Consent Order was submitted to the Union County Common Pleas Court and was
entered by the court on January 25, 2002.
Now that the Consent Order has been entered, we have paid a $275,000
fine and must satisfactorily remediate the Marysville site. We have continued
our remediation activities with the knowledge and oversight of the Ohio EPA. We
completed an updated evaluation of our expected liability related to this matter
based on the fine paid and remediation actions that we have taken and expect to
take in the future. As a result, we accrued an additional $3.0 million in the
third quarter of fiscal 2002 to increase our reserve based on the latest
estimates.
In addition to the dispute with the Ohio EPA, we are negotiating with
the Philadelphia District of the U.S. Army Corps of Engineers regarding the
terms of site remediation and the resolution of the Corps' civil penalty demand
in connection with our prior peat harvesting operations at our Lafayette, New
Jersey facility. We are also addressing remediation concerns raised by the
Environment Agency of the United Kingdom with respect to emissions to air and
groundwater at our Bramford (Suffolk), United Kingdom facility. We have reserved
for our estimates of probable losses to be incurred in connection with each of
these matters.
At September 30, 2003, $6.8 million was accrued for the environmental
and regulatory matters described herein. The most significant component of this
accrual are estimated costs for site remediation of $4.5 million. Most of the
costs accrued as of September 30, 2003, are expected to be paid in fiscal 2004
and 2005; however, payments could be made for a period thereafter.
We believe that the amounts accrued as of September 30, 2003 are
adequate to cover our known environmental exposures based on current facts and
estimates of likely outcome. However, the adequacy of these accruals is based on
several significant assumptions:
- that we have identified all of the significant sites that must
be remediated;
- that there are no significant conditions of potential
contamination that are unknown to us; and
53
- that with respect to the agreed judicial Consent Order in
Ohio, that potentially contaminated soil can be remediated in
place rather than having to be removed and only specific
stream segments will require remediation as opposed to the
entire stream.
If there is a significant change in the facts and circumstances
surrounding these assumptions, it could have a material impact on the ultimate
outcome of these matters and our results of operations, financial position and
cash flows.
During fiscal 2003, we made approximately $1.5 million in environmental
expenditures, compared with approximately $0.3 million in environmental capital
expenditures and $5.4 million in environmental expenditures for fiscal 2002.
Included in the $5.4 million is the $3.0 million increase in the accrual for
future costs related to site remediation as described above.
AGREVO ENVIRONMENTAL HEALTH, INC.
On June 3, 1999, AgrEvo Environmental Health, Inc. ("AgrEvo") (which
subsequently changed its name to Aventis Environmental Health Science USA LP)
filed a complaint in the U.S. District Court for the Southern District of New
York (the "New York Action"), against Scotts, a subsidiary of Scotts and
Monsanto seeking damages and injunctive relief for alleged antitrust violations
and breach of contract by Scotts and its subsidiary and antitrust violations and
tortious interference with contract by Monsanto. Scotts purchased a consumer
herbicide business from AgrEvo in May 1998. AgrEvo claims in the suit that
Scotts' subsequent agreement to become Monsanto's exclusive sales and marketing
agent for Monsanto's consumer Roundup(R) business violated the federal antitrust
laws. AgrEvo contends that Monsanto attempted to or did monopolize the market
for non-selective herbicides and conspired with Scotts to eliminate the
herbicide Scotts previously purchased from AgrEvo, which competed with
Monsanto's Roundup(R). AgrEvo also contends that Scotts' execution of various
agreements with Monsanto, including the Roundup(R) marketing agreement, as well
as Scotts' subsequent actions, violated agreements between AgrEvo and Scotts.
AgrEvo is requesting unspecified damages as well as affirmative
injunctive relief, and seeking to have the court invalidate the Roundup(R)
marketing agreement as violative of the federal antitrust laws. Under the
indemnification provisions of the Roundup(R) marketing agreement, Monsanto and
Scotts each have requested that the other indemnify against any losses arising
from this lawsuit.
On June 29, 1999, AgrEvo also filed a complaint in the Superior Court
of the State of Delaware against two of Scotts' subsidiaries seeking damages for
alleged breach of contract. AgrEvo alleges that, under the contracts by which a
subsidiary of Scotts purchased a herbicide business from AgrEvo in May 1998, two
of Scotts' subsidiaries have failed to pay AgrEvo approximately $0.6 million.
AgrEvo is requesting damages in this amount, as well as pre- and post-judgment
interest and attorneys' fees and costs. Scotts' subsidiaries have moved to
dismiss or stay this action. On January 31, 2000, the Delaware court stayed
AgrEvo's action pending the resolution of a motion to amend the New York Action,
and the resolution of the New York Action.
On May 15, 2002, AgrEvo filed an additional, duplicative complaint that
makes the same claims that are made in the amended complaint in the New York
Action, described above. On June 6, 2002, Scotts moved to dismiss this
duplicative complaint as procedurally improper. There has been no ruling by the
court on Scotts' motion.
On January 10, 2003, Scotts filed a supplemental counterclaim against
AgrEvo for breach of contract. Scotts alleges that AgrEvo owes Scotts for
amounts that Scotts overpaid to AgrEvo. Scotts' counterclaim is now part of the
underlying litigation.
Scotts believes that AgrEvo's claims in these matters are without merit
and intends to vigorously defend against them. If the above actions are
determined adversely to Scotts, the result could have a material adverse effect
on Scotts' results of operations, financial position and cash flows. Any
potential exposure that Scotts may face cannot be reasonably estimated.
Therefore, no accrual has been established related to these matters.
54
CENTRAL GARDEN & PET COMPANY
SCOTTS V. CENTRAL GARDEN, SOUTHERN DISTRICT OF OHIO
On June 30, 2000, Scotts filed suit against Central Garden & Pet
Company ("Central Garden") in the U.S. District Court for the Southern District
of Ohio (the "Ohio Action") to recover approximately $24 million in accounts
receivable and additional damages for other breaches of duty.
Central Garden filed counterclaims including allegations that Scotts
and Central Garden had entered into an oral agreement in April 1998 whereby
Scotts would allegedly share with Central Garden the benefits and liabilities of
any future business integration between Scotts and Monsanto. The court has
dismissed a number of Central Garden's counterclaims as well as Scotts' claims
that Central Garden breached other duties owed to Scotts. On April 22, 2002, a
jury returned a verdict in favor of Scotts of $22.5 million and for Central
Garden on its remaining counterclaims in an amount of approximately $12.1
million. Various post-trial motions were filed. As a result of those motions,
the trial court has reduced Central Garden's verdict by $750,000, denied Central
Garden's motion for a new trial on two of its counterclaims and granted the
parties pre-judgment interest on their respective verdicts. On September 22,
2003, the court entered a final judgment, which provided for a net award to
Scotts of approximately $14 million, together with interest at 2.31% through the
date of payment. Central Garden has appealed and Scotts has cross-appealed from
that final judgment.
Two counterclaims that the court permitted Central Garden to add on the
eve of trial were subsequently settled.
CENTRAL GARDEN V. SCOTTS & PHARMACIA, NORTHERN DISTRICT OF CALIFORNIA
On July 7, 2000, Central Garden filed suit against Scotts and Pharmacia
in the U.S. District Court for the Northern District of California (San
Francisco Division) alleging various claims, including breach of contract and
violations of federal antitrust laws, and seeking an unspecified amount of
damages and injunctive relief. On April 15, 2002, Scotts and Central Garden each
filed summary judgment motions in this action. On June 26, 2002, the court
granted summary judgment in favor of Scotts and dismissed all of Central
Garden's then remaining claims. The case is now pending on appeal in the United
States Court of Appeals.
CENTRAL GARDEN V. SCOTTS & PHARMACIA, CONTRA COSTA SUPERIOR COURT
On October 31, 2000, Central Garden filed a complaint against Scotts
and Pharmacia in the California Superior Court for Contra Costa County. That
complaint seeks to assert breach of contract claims and claims under Section
17200 of the California Business and Professions Code. On December 4, 2000,
Scotts and Pharmacia jointly filed a motion to stay this action based on the
pendency of prior lawsuits that involve the same subject matter. By order dated
February 23, 2001, the Superior Court stayed the action pending before it. The
Court recently granted Scotts' motion to lift the stay and is considering a
motion to dismiss filed by Scotts. Central Garden and Pharmacia have settled
their claims relating to this action.
Although Scotts has prevailed consistently and extensively in the
litigation with Central Garden, the decisions in Scotts' favor are subject to
appeal. If, upon appeal or otherwise, the above actions are determined adversely
to Scotts, the result could have a material adverse affect on Scotts' results of
operations, financial position and cash flows. Scotts believes that it will
continue to prevail in the Central Garden matters and that any potential
exposure that Scotts may face cannot be reasonably estimated. Therefore, no
accrual has been established related to the claims brought against Scotts by
Central Garden, except for amounts ordered paid to Central Garden in the Ohio
Action. Scotts believes it has adequate reserves recorded for the amounts it may
ultimately be required to pay.
NOTE 17. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentration of credit risk consist principally of trade accounts receivable.
The Company sells its consumer products to a wide variety of retailers,
including mass merchandisers, home centers, independent hardware stores,
nurseries, garden outlets, warehouse clubs and local and
55
regional chains. Professional products are sold to commercial nurseries,
greenhouses, landscape services, and growers of specialty agriculture crops.
At September 30, 2003, 68% of the Company's accounts receivable was due
in North America, with 7% related to on-going litigation documented in Note 16
to the Consolidated Financial Statements. Approximately 85% of the North
American receivables were generated from the Company's North American segment.
The most significant concentration of receivables within this segment was from
our top 3 customers, which accounted for 79% of the total.
The remaining 15% of North American accounts receivable was generated
from customers of the Scotts LawnService(R).
The 32% of accounts receivable generated outside of North America was
due from retailers, distributors, nurseries and growers. No concentrations of
customers or individual customers within this group account for more than 10% of
the Company's accounts receivable balance at September 30, 2003.
At September 30, 2003, the Company's concentrations of credit risk were
similar to those existing at September 30, 2002.
The Company's two largest customers accounted for the following
percentage of net sales in each respective period:
Largest 2nd Largest
Customer Customer
-------- -----------
2003 24.8% 13.9%
2002 25.8% 13.2%
2001 24.3% 12.5%
Sales to the Company's two largest customers are reported within
Scotts' North American segment. No other customers accounted for more than 10%
of fiscal 2003, 2002 or 2001 net sales.
NOTE 18. OTHER EXPENSE (INCOME)
Other expense (income) consisted of the following for the fiscal years
ended September 30:
2003 2002 2001
--------- --------- --------
($ millions)
Royalty income................................... $ (3.5) $ (3.1) $ (4.9)
Legal and insurance settlements.................. (3.6)
Gain on sale of assets........................... (0.3)
Gain from peat transaction....................... (2.4) (6.3)
Asset valuation and write-off charges............ 0.1
Foreign currency (gains) losses.................. (0.2) 0.2 0.5
Other, net....................................... (4.4) (2.8) (0.6)
--------- --------- --------
Total............................................ $ (10.8) $ (12.0) $ (8.5)
========= ========= ========
NOTE 19. NEW ACCOUNTING STANDARDS (UNAUDITED)
In December, 2003 the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 46 (revised December 2003), "Consolidation of
Variable Interest Entities" (FIN 46R). FIN 46R varies significantly from FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities" (FIN 46),
which it supersedes. FIN 46R requires the application of either FIN 46 or FIN
46R by "Public Entities" (as defined in paragraph 395 of FASB Statement No. 123,
"Accounting for Stock-Based Compensation") to all Special Purpose Entities
("SPEs") created prior to February 1, 2003 at the end of the first interim or
annual reporting period ending after December 15, 2003. All entities created
after January 31, 2003 by Public Entities were already required to be analyzed
under FIN 46, and
56
they must continue to do so, unless FIN 46R is adopted early. FIN 46R will be
applicable to all non-SPEs created prior to February 1, 2003 by Public Entities
at the end of the first interim or annual reporting period ending after March
15, 2004. The Company does not believe that it has any SPEs as prescribed by FIN
46R. The Company continues to evaluate FIN 46R for applicability to the
Company's Scotts LawnService(R) franchises for adoption during the second
quarter of fiscal 2004.
NOTE 20. SUPPLEMENTAL CASH FLOW INFORMATION
2003 2002 2001
--------- --------- ---------
($ millions)
Interest paid (net of amount capitalized) $ 66.7 $ 68.1 $ 86.5
Income taxes paid 19.5 33.4 47.2
Businesses acquired:
Fair value of assets acquired, net of cash 33.8 51.9 53.5
Cash paid (20.4) (31.0) (26.5)
Notes issued to sellers 13.4 20.9 27.0
NOTE 21. SEGMENT INFORMATION
For fiscal 2003, the Company was originally divided into four
reportable segments--North American Consumer, Scotts LawnService(R), Global
Professional and International Consumer.
For fiscal 2004, the Company is divided into three reportable segments
- - North America, Scotts LawnService(R) and International. The North America
segment primarily consists of the Lawns, Gardening Products, Ortho(R), Canada
and North American Professional business groups. These segments differ from
those identified in fiscal 2003 due to the absorption of the Global Professional
segment into the North America and International segments based on geography.
This new division of reportable segments is consistent with how the segments
report to and are managed by senior management of the Company. The segment
information which follows for periods prior to fiscal 2004 has been reclassified
to conform with the segments identified in fiscal 2004.
The North America segment manufactures, markets and sells dry, granular
slow-release lawn fertilizers, combination lawn fertilizer and control products,
grass seed, spreaders, water-soluble and controlled-release garden and indoor
plant foods, plant care products, potting soils, pottery, barks, mulches and
other growing media products, pesticide products and a full line of horticulture
products. Products are marketed to mass merchandisers, home improvement centers,
large hardware chains, nurseries and gardens centers and specialty crop growers
in the United Sates, Canada, Latin America and South America.
The Scotts LawnService(R) segment provides lawn fertilization, insect
control and other related services such as core aeration primarily to
residential consumers through company-owned branches and franchises. In most
Company markets, Scotts LawnService(R) also offers tree and shrub fertilization,
disease and insect control treatments and, in our larger branches, we also offer
an exterior barrier pest control service.
The International segment provides products similar to those described
above for the North America segment to consumers outside of the United States,
Canada, Latin America and South America.
The following table presents segment financial information in
accordance with Statement of Financial Accounting Standards No. 131,
"Disclosures about Segments of an Enterprise and Related Information". Pursuant
to SFAS No. 131, the presentation of the segment financial information is
consistent with the basis used by management (i.e., certain costs not allocated
to business segments for internal management reporting purposes are not
allocated for purposes of this presentation).
57
North Scotts
America LawnService(R) International Corporate Total
----------- -------------- ------------- ----------- -----------
($ millions)
(restated)
Net Sales:
Q1 $ 104.6 $ 15.3 $ 60.9 $ $ 180.8
Q2 521.0 11.5 143.7 676.2
Q3 547.1 40.5 122.4 710.0
Q4 238.6 43.1 61.4 343.1
----------- --------- ---------- ----------- -----------
2003 $ 1,411.3 $ 110.4 $ 388.4 $ - $ 1,910.1
=========== ========= ========== =========== ===========
Q1 $ 98.3 $ 8.7 $ 54.4 $ $ 161.4
Q2 475.9 7.4 115.2 598.5
Q3 549.8 28.7 110.6 689.1
Q4 212.9 30.8 56.0 299.7
----------- --------- ---------- ----------- -----------
2002 $ 1,336.9 $ 75.6 $ 336.2 $ - $ 1,748.7
=========== ========= ========== =========== ===========
Q1 $ 82.6 $ 4.9 $ 53.5 $ $ 141.0
Q2 570.0 4.4 131.4 705.8
Q3 479.5 15.2 97.0 591.7
Q4 164.2 16.6 51.1 231.9
----------- --------- ---------- ----------- -----------
2001 $ 1,296.3 $ 41.1 $ 333.0 $ - $ 1,670.4
=========== ========= ========== =========== ===========
Income (loss) from
Operations:
Q1 $ (29.7) $ (4.8) $ (1.7) $ (20.7) $ (56.9)
Q2 128.4 (12.4) 22.5 (17.0) 121.5
Q3 154.8 10.4 16.4 (18.5) 163.1
Q4 30.2 13.0 (13.3) (16.5) 13.4
----------- --------- ---------- ----------- -----------
2003 $ 283.7 $ 6.2 $ 23.9 $ (72.7) $ 241.1
=========== ========= ========== =========== ===========
Q1 $ (28.9) $ (2.1) $ (7.3) $ (17.7) $ (56.0)
Q2 128.2 (8.0) 21.3 (12.6) 128.9
Q3 163.7 7.1 23.1 (19.2) 174.7
Q4 15.1 11.8 (11.8) (17.8) (2.7)
----------- --------- ---------- ----------- -----------
2002 $ 278.1 $ 8.8 $ 25.3 $ (67.3) $ 244.9
=========== ========= ========== =========== ===========
Q1 $ (34.5) $ 0.2 $ (9.1) $ (13.8) $ (57.2)
Q2 169.5 (4.6) 26.1 (15.7) 175.3
Q3 127.4 2.9 8.3 (28.7) 109.9
Q4 (3.5) 6.2 (24.8) (61.8) (83.9)
----------- --------- ---------- ----------- -----------
2001 $ 258.9 $ 4.7 $ 0.5 $ (120.0) $ 144.1
=========== ========= ========== =========== ===========
Operating Margin:
Q1 (28.4%) (31.3%) (2.8%) nm (31.5%)
Q2 24.6% (107.8%) 15.7% nm 18.0%
Q3 28.3% 25.6% 13.4% nm 23.0%
Q4 12.7% 30.2% (21.7%) nm 3.9%
2003 20.1% 5.6% 6.2% nm 12.6%
Q1 (29.4%) (24.1%) (13.5%) nm (34.7%)
Q2 26.9% (108.1%) 18.5% nm 21.5%
Q3 29.8% 24.8% 20.9% nm 25.4%
Q4 7.1% 38.4% (21.0%) nm (0.9%)
2002 20.8% 11.6% 7.5% nm 14.0%
Q1 (41.7%) 4.1% (17.0%) nm (40.6%)
Q2 29.7% (104.5%) 19.8% nm 24.8%
Q3 26.6% 19.3% 8.5% nm 18.6%
Q4 (2.2%) 37.3% (48.6%) nm (36.2%)
2001 20.0% 11.4% 0.2% nm 8.6%
58
North Scotts
America LawnService(R) International Corporate Total
----------- -------------- ------------- ----------- -----------
Depreciation and
Amortization:
2003 $ 26.2 $ 3.5 $ 8.1 $ 14.4 $ 52.2
2002 20.9 2.1 8.5 12.0 43.5
2001 37.2 1.9 14.2 10.3 63.6
Capital Expenditures:
2003 $ 24.7 $ 0.8 $ 13.3 $ 13.0 $ 51.8
2002 41.4 2.4 4.2 9.0 57.0
2001 32.0 1.1 6.7 23.6 63.4
Long-Lived Assets:
2003 $ 753.9 $ 106.5 $ 262.9 $ 50.4 $ 1,173.7
2002 756.9 80.8 235.0 48.2 1,120.9
Total Assets:
2003
Q1 $ 1,308.2 $ 83.4 $ 428.2 $ 133.4 $ 1,953.2
Q2 1,680.9 94.2 549.8 129.0 2,453.9
Q3 1,504.3 104.9 489.0 126.8 2,225.0
Q4 1,387.1 115.5 418.1 109.6 2,030.3
2002
Q1 $ 1,378.1 $ 26.4 $ 395.6 $ 109.0 $ 1,909.1
Q2 1,613.7 52.6 471.2 103.4 2,240.9
Q3 1,451.5 60.2 457.5 100.4 2,069.6
Q4 1,293.5 87.6 401.6 131.4 1,914.1
- -----------------
nm -- Not meaningful
Income (loss) from operations reported for Scotts' three segments
represents earnings before amortization of intangible assets, interest and
taxes, since this is the measure of profitability used by management.
Accordingly, the Corporate loss from operations for the fiscal years ended
September 30, 2003, 2002 and 2001 includes amortization of certain intangible
assets, unallocated corporate general and administrative expenses, certain other
income/expense not allocated to the segments and North America restructuring
charges. International restructuring charges of approximately $9.1 million, $4.5
million and $13.3 million are included in International's income (loss) from
operations in fiscal 2003, 2002 and 2001, respectively.
Long-lived assets reported for Scotts' segments include goodwill and
intangible assets as well as property, plant and equipment within each segment.
Total assets reported for Scotts' segments include the intangible
assets for the acquired businesses within those segments. Corporate assets
primarily include deferred financing and debt issuance costs, corporate
intangible assets as well as deferred tax assets.
59
NOTE 22. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of
operations for fiscal 2003 and 2002.
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Full Year
--------- --------- --------- --------- ---------
(in millions, except per share data)
FISCAL 2003
Net sales $ 180.8 $ 676.2 $ 710.0 $ 343.1 $ 1,910.1
Gross profit 37.2 257.9 280.8 114.9 690.8
Net income (loss) (46.8) 62.5 91.2 (3.1) 103.8
Basic earnings (loss) per common share $ (1.55) $ 2.04 $ 2.93 $ (0.10) $ 3.36
Common shares used in basic EPS calculation 30.2 30.7 31.1 31.6 30.9
Diluted earnings (loss) per common share $ (1.55) $ 1.94 $ 2.81 $ (0.10) $ 3.23
Common shares and dilutive potential
common shares used in diluted EPS
calculation 30.2 32.2 32.4 31.6 32.1
Amended
1st Qtr 2nd Qtr 3rd Qtr 4th Qtr Full Year
--------- --------- --------- --------- ---------
(in millions, except per share data)
FISCAL 2002
Net sales $ 161.4 $ 598.5 $ 689.1 $ 299.7 $ 1,748.7
Gross profit 31.1 239.9 270.6 93.3 634.9
Net income (loss) before cumulative
effect of accounting change (47.0) 64.9 95.8 (12.7) 101.0
Cumulative effect of change in
accounting for intangible assets,
net of tax (18.5) (18.5)
--------- --------- --------- --------- ---------
Net income (loss) (65.5) 64.9 95.8 (12.7) 82.5
Basic earnings (loss) per common
share before effect of accounting change $ (1.63) $ 2.23 $ 3.25 $ (0.43) $ 3.44
Cumulative effect of change in
accounting for intangible assets,
net of tax (0.64) (0.63)
--------- --------- --------- --------- ---------
Basic earnings (loss) per common share (2.27) 2.23 3.25 (0.43) 2.81
Common shares used in basic EPS calculation 28.8 29.1 29.5 29.8 29.3
Diluted earnings (loss) per common
share before cumulative effect of
accounting change $ (1.63) $ 2.06 $ 3.02 $ (0.43) $ 3.19
Cumulative effect of change in
accounting for intangible assets, net of tax (0.64) (0.58)
--------- --------- --------- --------- ---------
Diluted earnings (loss) per common share (2.27) 2.06 3.02 (0.43) 2.61
Common shares and dilutive potential
common shares used in diluted EPS
calculation 28.8 31.5 31.8 29.8 31.7
Common stock equivalents, such as stock awards and warrants, are
excluded from the diluted loss per share calculation in periods where there is a
net loss because their effect is anti-dilutive.
Scotts' business is highly seasonal with over 70% of sales occurring in
the second and third fiscal quarters combined.
NOTE 23. SUBSEQUENT EVENT
In October 2003, the Company substantially completed a refinancing of
the former Credit Agreement and its $400 million 8 5/8% Senior Subordinated
Notes ("8 5/8% Notes") in a series of transactions. The refinancing began on
October 8, 2003 with the issuance by The Scotts Company of $200 million 6 5/8%
Senior Subordinated Notes due November 15, 2013 ("6 5/8% Notes"). Next,
substantially all of the outstanding 8 5/8% Notes were tendered on
60
October 21, 2003 within the terms of the original agreement. Finally, the Former
Credit Agreement was replaced with a Second Amended and Restated Credit
Agreement ("New Credit Agreement") on October 22, 2003 which contains less
restrictive terms and conditions than the Former Agreement.
The 6 5/8% Notes were issued in accordance with Rule 144A and
Regulation S under the Securities Act of 1933. The 6 5/8% Notes were sold at
par, pay interest semi-annually on May 15 and November 15, have a ten-year
maturity with a five-year no-call provision, and are guaranteed by the current
and future domestic restricted subsidiaries of The Scotts Company. Such
guarantees are unsecured senior subordinated obligations of the Company. The
covenants contained in the 6 5/8% Notes indenture are less restrictive than
those contained in the 8 5/8% Notes indenture.
The Scotts Company called the 8 5/8% Notes at 106.05% per $1,000 Note
resulting in a principal tendered amount of approximately $386.8 million on
October 21, 2003. On November 21, 2003, the Company delivered notice to the
trustee to redeem the outstanding $13.2 million 8 5/8% Notes effective on the
first call date of January 15, 2004 at 104.313% per $1,000 Note plus accrued
interest. The expected loss on the extinguishment of the former Credit Agreement
is $44.3 million, of which $19.4 million is related to the write-off of deferred
fees, $24.0 million of premiums paid and $0.9 million in transaction fees.
The New Credit Agreement was entered into with a syndicate of
commercial banks and institutional lenders on October 22, 2003. The New Credit
Agreement consists of a $700 million multi-currency revolving credit commitment
and a $500 million term loan B facility. Financial covenants consist of a
minimum interest coverage ratio and a maximum leverage ratio along with other
negative covenants similar to the previous Credit Agreement.
The revolving credit facilities under the New Credit Agreement provide
for a five-year $700 million commitment expiring on October 22, 2008 and allow
for borrowings in U.S. Dollars and optional currencies including, but not
limited to, Euros, British Pounds Sterling, Canadian Dollars and Australian
Dollars. A portion of the revolving credit facilities of an amount not exceeding
$65 million may be used for letters of credit. Interest rate spreads under the
New Credit Agreement will be determined by a pricing grid corresponding to a
quarterly calculation of the Company's leverage ratio comprised of averaged
components for the most recent four quarters.
The $500 million term loan B facility expires on September 30, 2010.
Repayment of the term loan B commences on March 31, 2004 with minimum quarterly
principal payments through June 30, 2010 followed by a balloon maturity on
September 30, 2010.
Collateral for the borrowings under the New Credit Agreement consists
of pledges by the Company and all of its domestic subsidiaries of substantially
all of their personal, real and intellectual property assets. The Company and
its subsidiaries also pledged a majority of the stock in foreign subsidiaries
that borrow under the New Credit Agreement.
On November 28, 2003, The Scotts Company entered into five new interest
swaps with major financial institutions that effectively convert variable-rate
debt related to the New Credit Agreement dated October 22, 2003 to a fixed rate.
The swaps have notional amounts between $10 million and $50 million ($125
million in total) with three, four and five-year terms. Under the terms of these
swaps, the Company pays swap rates ranging from 2.76% to 3.56%, plus a spread
based on the pricing grid contained in the credit agreement and receives
three-month LIBOR in return.
NOTE 24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
In October, 2003, The Scotts Company issued $200 million of 6 5/8%
Series A Senior Subordinated Notes due November 15, 2013 (the "Original Notes")
to a group of initial purchasers who in turn resold the Original Notes under the
provisions of Rule 144A and Regulation S under the Securities Act of 1933 (the
"Securities Act"). In January 2004, The Scotts Company will file a Registration
Statement on Form S-4 with the Securities and Exchange Commission pursuant to
which The Scotts Company will offer to exchange the Original Notes for an equal
principal
61
amount of its 6 5/8% Series B Senior Subordinated Notes due November 15, 2013
which have been registered under the Securities Act (the "Exchange Notes").
The Original Notes and the Exchange Notes (collectively, the "Notes")
are guaranteed by all of The Scotts Company's existing and future domestic
restricted subsidiaries, except for Custom Lawn Care Service, Inc., Sanford
Scientific, Inc. and future domestic restricted subsidiaries which do not meet a
materiality threshold set forth in the indenture governing the Notes. These
subsidiary guarantors jointly and severally guarantee The Scotts Company's
obligations under the Notes.
The Notes and the subsidiary guarantees are full and unconditional
general obligations of The Scotts Company and each subsidiary guarantor. The
Notes and the subsidiary guarantees are senior subordinated obligations and are
(1) subordinated in right of payment to all existing and future senior debt of
The Scotts Company and the subsidiary guarantors except trade payables, (2)
senior in right of payment to any future junior subordinated debt of The Scotts
Company and the subsidiary guarantors and (3) equal in right of payment with The
Scotts Company's existing 8 5/8% senior subordinated notes due 2009.
The following information presents consolidating Statements of
Operations and Statements of Cash Flows for the three years ended September 30,
2003 and consolidated Balance Sheets as of September 30, 2003 and 2002
displaying the aggregation of subsidiary guarantors and non-guarantors as
delineated under the indenture governing the Notes. Separate audited financial
statements of the individual subsidiary guarantors have not been provided
because management does not believe they would be meaningful to investors.
62
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
(IN MILLIONS)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------------------
Net sales $ 962.0 $ 526.5 $ 421.6 $ $ 1,910.1
Cost of sales 612.1 325.1 273.0 1,210.2
Restructuring and other charges 5.2 3.9 9.1
----------------------------------------------------------------------------
Gross profit 344.7 201.4 144.7 690.8
Gross commission earned from marketing agreement 43.4 2.5 45.9
Contribution expenses under marketing agreement 28.3 28.3
----------------------------------------------------------------------------
Net commission earned from marketing agreement 15.1 2.5 17.6
Advertising 68.7 7.3 21.7 97.7
Selling, general and administrative 232.5 45.0 94.9 372.4
Restructuring and other charges 2.7 0.8 4.5 8.0
Amortization of intangible assets 0.5 3.9 4.2 8.6
Equity (income) loss in subsidiaries (100.1) 100.1
Intercompany allocations (18.8) 6.0 12.8
Other income, net (2.3) (5.0) (3.5) (10.8)
----------------------------------------------------------------------------
Income (loss) from operations 176.6 143.4 12.6 (100.1) 232.5
Interest (income) expense 70.6 (15.4) 14.0 69.2
----------------------------------------------------------------------------
Income (loss) before income taxes 106.0 158.8 (1.4) (100.1) 163.3
Income taxes 2.2 57.8 (0.5) 59.5
----------------------------------------------------------------------------
Net income (loss) $ 103.8 $ 101.0 $ (0.9) $ (100.1) $ 103.8
============================================================================
63
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
(IN MILLIONS)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 103.8 $ 101.0 $ (0.9) $ (100.1) $ 103.8
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of change in accounting for
intangible assets, pre-tax
Stock-based compensation expense 4.8 4.8
Depreciation 25.3 10.7 4.3 40.3
Amortization 3.8 3.9 4.2 11.9
Deferred taxes 48.3 48.3
Equity income in subsidiaries (100.1) 100.1
Changes in assets and liabilities, net of acquired
businesses:
Accounts receivable (6.0) (12.7) (8.6) (27.3)
Inventories 2.1 (7.5) 0.1 (5.3)
Prepaid and other current assets 0.8 0.4 2.5 3.7
Accounts payable 10.1 10.0 6.2 26.3
Accrued taxes and liabilities (0.5) (2.2) 9.3 6.6
Restructuring reserves (4.0) (3.1) (7.1)
Other assets (3.9) 0.6 7.0 3.7
Other liabilities 8.7 (1.3) (10.8) (3.4)
Other, net 12.4 (0.7) 11.7
--------------------------------------------------------------------
Net cash provided by operating activities 105.6 102.9 9.5 218.0
--------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (19.3) (20.0) (12.5) (51.8)
Investments in acquired businesses, net of cash
acquired (3.8) (16.6) (20.4)
Payments on seller notes (11.5) (10.4) (14.8) (36.7)
Other, net
--------------------------------------------------------------------
Net cash used in investing activities (34.6) (47.0) (27.3) (108.9)
--------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under revolving and bank lines of
credit (17.6) (17.6)
Net repayments under term loans (18.0) (44.4) (62.4)
Issuance of 8 5/8% senior subordinated notes, net
of issuance fees
Financing and issuance fees (0.4) (0.4)
Cash received from exercise of stock options 21.4 21.4
Intercompany financing 3.4 (56.7) 53.3
--------------------------------------------------------------------
Net cash provided by (used in) financing activities 6.4 (56.7) (8.7) (59.0)
Effect of exchange rate changes on cash 6.1 6.1
--------------------------------------------------------------------
Net increase (decrease) in cash 77.4 (0.8) (20.4) 56.2
Cash and cash equivalents, beginning of period 54.7 2.0 43.0 99.7
--------------------------------------------------------------------
Cash and cash equivalents, end of period $ 132.1 $ 1.2 $ 22.6 $ $ 155.9
====================================================================
64
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2003
(IN MILLIONS)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 132.1 $ 1.2 $ 22.6 $ $ 155.9
Accounts receivable, net 103.3 99.8 87.4 290.5
Inventories, net 143.6 50.4 82.1 276.1
Current deferred tax asset 56.8 0.4 (0.3) 56.9
Prepaid and other assets 16.2 3.2 13.8 33.2
--------------------------------------------------------------------
Total current assets 452.0 155.0 205.6 812.6
Property, plant and equipment, net 206.8 90.6 40.8 338.2
Goodwill and intangible assets, net 26.3 576.1 233.1 835.5
Other assets 44.8 1.5 (2.3) 44.0
Investment in affiliates 1,066.3 (1,066.3)
Intracompany assets 275.2 (275.2)
--------------------------------------------------------------------
Total assets $1,796.2 $ 1,098.4 $ 477.2 $ (1,341.5) $ 2,030.3
====================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of debt $ 38.9 $ 9.9 $ 6.6 $ $ 55.4
Accounts payable 70.0 27.0 52.0 149.0
Accrued liabilities 111.4 25.8 97.1 234.3
Accrued taxes 7.6 2.3 (0.4) 9.5
--------------------------------------------------------------------
Total current liabilities 227.9 65.0 155.3 448.2
Long-term debt 603.8 9.7 88.7 702.2
Other liabilities 137.2 14.5 151.7
Intracompany liabilities 99.1 176.1 (275.2)
--------------------------------------------------------------------
Total liabilities 1,068.0 74.7 434.6 (275.2) 1,302.1
--------------------------------------------------------------------
Shareholders' Equity:
Investment from parent 510.7 65.3 (576.0)
Common shares, no par value per share, $.01 stated
value per share, 32.0 shares issued in 2003 0.3 0.3
Capital in excess of stated value 390.1 390.1
Retained earnings 398.6 514.8 2.8 (517.6) 398.6
Accumulated other comprehensive income (60.8) (1.8) (25.5) 27.3 (60.8)
--------------------------------------------------------------------
Total shareholders' equity 728.2 1,023.7 42.6 (1,066.3) 728.2
--------------------------------------------------------------------
Total liabilities and shareholders' equity $1,796.2 $ 1,098.4 $ 477.2 $ (1,341.5) $ 2,030.3
====================================================================
65
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
(IN MILLIONS)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------
Net sales $ 899.4 $ 448.5 $ 400.8 $ $ 1,748.7
Cost of sales 611.0 230.5 270.6 1,112.1
Restructuring and other charges 1.5 0.2 1.7
--------------------------------------------------------------------
Gross profit 286.9 218.0 130.0 634.9
Gross commission earned from marketing agreement 37.2 2.4 39.6
Contribution expenses under marketing agreement 23.4 23.4
--------------------------------------------------------------------
Net commission earned from marketing agreement 13.8 2.4 16.2
Advertising 47.1 16.2 18.9 82.2
Selling, general and administrative 198.9 47.7 83.0 329.6
Restructuring and other charges 1.9 0.6 3.9 6.4
Amortization of intangible assets 0.4 1.7 3.6 5.7
Equity (income) loss in subsidiaries (71.0) 71.0
Intercompany allocations (21.7) 13.3 8.4
Other income, net (1.2) (5.3) (5.5) (12.0)
--------------------------------------------------------------------
Income (loss) from operations 146.3 143.8 20.1 (71.0) 239.2
Interest (income) expense 73.0 (14.3) 17.6 76.3
--------------------------------------------------------------------
Income (loss) before income taxes 73.3 158.1 2.5 (71.0) 162.9
Income taxes 2.1 58.9 0.9 61.9
--------------------------------------------------------------------
Income (loss) before cumulative effect of
accounting change 71.2 99.2 1.6 (71.0) 101.0
Cumulative effect of change in accounting
for intangible assets, net of tax 11.3 (3.3) (26.5) (18.5)
--------------------------------------------------------------------
Net income (loss) $ 82.5 $ 95.9 $ (24.9) $ (71.0) $ 82.5
====================================================================
66
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
(IN MILLIONS)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
--------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 82.5 $ 95.9 $ (24.9) $ (71.0) $ 82.5
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Cumulative effect of change in accounting for
intangible assets, pre-tax 3.3 26.5 29.8
Depreciation 18.3 9.2 6.9 34.4
Amortization 3.8 1.7 3.6 9.1
Deferred taxes 21.2 21.2
Equity income in subsidiaries (71.0) 71.0
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable (3.9) (27.3) 2.3 (28.9)
Inventories 92.8 3.7 2.9 99.4
Prepaid and other current assets (0.3) (0.4) (2.9) (3.6)
Accounts payable (15.3) (2.4) (4.3) (22.0)
Accrued taxes and liabilities 1.3 9.5 6.7 17.5
Restructuring reserves (20.5) 0.7 (8.1) (27.9)
Other assets (14.9) 4.1 6.3 (4.5)
Other liabilities 32.4 0.2 1.0 33.6
Other, net (10.6) (0.4) 4.0 (7.0)
--------------------------------------------------------------------
Net cash provided by operating activities 115.8 97.8 20.0 233.6
--------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (34.1) (17.3) (5.6) (57.0)
Investments in acquired businesses, net of cash
acquired (31.0) (31.0)
Payments on seller notes (2.1) (18.5) (11.4) (32.0)
Other, net 7.0 7.0
--------------------------------------------------------------------
Net cash used in investing activities (36.2) (66.8) (10.0) (113.0)
--------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net repayments under revolving and bank lines of
credit (1.8) (95.8) (97.6)
Net repayments under term loans (1.0) (30.9) (31.9)
Issuance of 8 5/8% senior subordinated notes, net
of issuance fees 70.2 70.2
Financing and issuance fees (2.2) (2.2)
Cash received from exercise of stock options 19.7 19.7
Intercompany financing (113.2) (30.0) 143.2
--------------------------------------------------------------------
Net cash provided by (used in) financing
activities (28.3) (30.0) 16.5 (41.8)
Effect of exchange rate changes on cash 2.2 2.2
--------------------------------------------------------------------
Net increase (decrease) in cash 51.3 1.0 28.7 81.0
Cash and cash equivalents, beginning of period 3.4 1.0 14.3 18.7
--------------------------------------------------------------------
Cash and cash equivalents, end of period $ 54.7 $ 2.0 $ 43.0 $ $ 99.7
====================================================================
67
THE SCOTTS COMPANY
BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(IN MILLIONS)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
-------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 54.7 $ 2.0 $ 43.0 $ $ 99.7
Accounts receivable, net 97.3 86.3 78.8 262.4
Inventories, net 144.1 42.8 82.2 269.1
Current deferred tax asset 74.6 74.6
Prepaid and other assets 17.0 3.7 16.3 37.0
------------------------------------------------------------------
Total current assets 387.7 134.8 220.3 742.8
Property, plant and equipment, net 212.7 72.3 44.2 329.2
Goodwill and intangible assets, net 26.4 534.6 230.7 791.7
Other assets 43.6 2.1 4.7 50.4
Investment in affiliates 941.6 (941.6)
Intracompany assets 182.1 204.4 (386.5)
------------------------------------------------------------------
Total assets $ 1,794.1 $ 948.2 $ 499.9 $ (1,328.1) $ 1,914.1
==================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current portion of debt $ 65.1 $ 9.5 $ 23.6 $ $ 98.2
Accounts payable 59.9 17.0 45.8 122.7
Accrued liabilities 111.7 27.9 90.8 230.4
Accrued taxes 14.2 2.4 (3.4) 13.2
------------------------------------------------------------------
Total current liabilities 250.9 56.8 156.8 464.5
Long-term debt 606.0 7.7 117.5 731.2
Other liabilities 97.9 1.3 25.3 124.5
Intracompany liabilities 245.4 141.1 (386.5)
------------------------------------------------------------------
Total liabilities 1,200.2 65.8 440.7 (386.5) 1,320.2
------------------------------------------------------------------
Shareholders' Equity:
Investment from parent 471.0 77.4 (548.4)
Common shares, no par value per share, $.01
stated value per share, 31.3 shares
issued in 2002 0.3 0.3
Capital in excess of stated value 398.6 398.6
Retained earnings 294.8 413.8 3.7 (417.5) 294.8
Treasury stock (41.8) (41.8)
Accumulated other comprehensive income (loss) (58.0) (2.4) (21.9) 24.3 (58.0)
------------------------------------------------------------------
Total shareholders' equity 593.9 882.4 59.2 (941.6) 593.9
------------------------------------------------------------------
Total liabilities and shareholders' equity $ 1,794.1 $ 948.2 $ 499.9 $ (1,328.1) $ 1,914.1
==================================================================
68
THE SCOTTS COMPANY
STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------------------------------------------------------------
Net sales $ 894.2 $ 421.3 $ 354.9 $ $ 1,670.4
Cost of sales 608.4 238.8 219.5 1,066.7
Restructuring and other charges 2.5 1.0 3.8 7.3
--------------------------------------------------------------
Gross profit 283.3 181.5 131.6 596.4
Gross commission earned from marketing agreement 34.6 4.5 39.1
Contribution expenses under marketing agreement 16.9 1.4 18.3
--------------------------------------------------------------
Net commission earned from marketing agreement 17.7 3.1 20.8
Advertising 59.9 2.6 26.6 89.1
Selling, general and administrative 194.5 38.5 91.1 324.1
Restructuring and other charges 47.5 11.0 9.9 68.4
Amortization of intangible assets 1.7 16.4 9.6 27.7
Equity (income) loss in subsidiaries (61.7) 61.7
Intercompany allocations 1.0 (9.1) 8.1
Other (income) expense, net (3.5) (3.8) (1.2) (8.5)
--------------------------------------------------------------
Income (loss) from operations 61.6 125.9 (9.4) (61.7) 116.4
Interest (income) expense 78.4 (14.2) 23.5 87.7
--------------------------------------------------------------
Income (loss) before income taxes (16.8) 140.1 (32.9) (61.7) 28.7
Income taxes (benefit) (32.3) 60.5 (15.0) 13.2
--------------------------------------------------------------
Net income (loss) $ 15.5 $ 79.6 $ (17.9) $ (61.7) $ 15.5
==============================================================
69
THE SCOTTS COMPANY
STATEMENT OF CASH FLOWS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)
SUBSIDIARY NON-
PARENT GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 15.5 $ 79.6 $ (17.9) $ (61.7) $ 15.5
Adjustments to reconcile net income (loss) to net
cash (used in) provided by operating activities:
Cumulative effect of change in accounting for
intangible assets, pre-tax
Depreciation 15.5 9.1 8.0 32.6
Amortization 1.9 16.4 12.7 31.0
Deferred taxes (19.9) (19.9)
Equity income in subsidiaries (61.7) 61.7
Restructuring and other charges 13.2 14.5 27.7
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable 0.4 (13.1) (3.0) (15.7)
Inventories (48.9) (6.3) (13.3) (68.5)
Prepaid and other current assets 28.7 (2.0) 3.9 30.6
Accounts payable (6.5) (3.2) 4.7 (5.0)
Accrued taxes and liabilities 32.6 (72.1) 21.3 (18.2)
Restructuring reserves 13.3 11.4 12.6 37.3
Other assets (3.9) 13.3 (3.3) 6.1
Other liabilities 1.6 (10.9) 16.9 7.6
Other, net 10.4 0.4 (6.2) 4.6
-----------------------------------------------------------------
Net cash (used in) provided by operating activities (7.8) 37.1 36.4 65.7
-----------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property, plant and equipment (41.8) (13.5) (8.1) (63.4)
Investments in acquired businesses, net of cash acquired (26.5) (26.5)
Payments on seller notes (1.9) (9.2) (11.1)
-----------------------------------------------------------------
Net cash used in investing activities (41.8) (41.9) (17.3) (101.0)
-----------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings under revolving and bank lines of credit 59.5 2.2 61.7
Net repayments under term loans (55.7) (55.7)
Issuance of 8 5/8% senior subordinated notes, net
of issuance fees
Financing and issuance fees (1.6) (1.6)
Cash received from exercise of stock options 17.0 17.0
Intercompany financing 17.8 5.9 (23.7)
-----------------------------------------------------------------
Net cash provided by (used in) financing activities 37.0 5.9 (21.5) 21.4
Effect of exchange rate changes on cash (0.4) (0.4)
-----------------------------------------------------------------
Net increase (decrease) in cash (12.6) 1.1 (2.8) (14.3)
Cash and cash equivalents, beginning of period 16.0 (0.1) 17.1 33.0
-----------------------------------------------------------------
Cash and cash equivalents, end of period $ 3.4 $ 1.0 $ 14.3 $ $ 18.7
=================================================================
70
REPORT OF INDEPENDENT AUDITORS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders of The Scotts Company
Our audits of the consolidated financial statements referred to in our
report dated December 5, 2003 appearing in Item 15(a)(1) of this Annual Report
on Form 10-K, also included an audit of the financial statement schedule listed
in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PRICEWATERHOUSECOOPERS LLP
- ------------------------------
Columbus, Ohio
December 5, 2003
71
THE SCOTTS COMPANY
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2003
(IN MILLIONS)
Column A Column B Column C Column D Column E Column F
- -------- --------- -------- --------- ---------- ---------
Balance Additions Deductions
at Charged Credited Balance
Beginning Reserves to and at End
Classification of Period Acquired Expense Write-Offs of Period
- -----------------------------------------------------------------------------------------------
Valuation and qualifying accounts
deducted from the assets to which
they apply:
Inventory reserve $ 25.9 $ $ 5.1 $ (9.0) $ 22.0
Allowance for doubtful accounts 33.2 3.2 (16.4) 20.0
Income tax valuation allowance 1.0 1.0
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
(IN MILLIONS)
Column A Column B Column C Column D Column E Column F
- -------- --------- -------- --------- ---------- ---------
Balance Additions Deductions
at Charged Credited Balance
Beginning Reserves to and at End
Classification of Period Acquired Expense Write-Offs of Period
- -----------------------------------------------------------------------------------------------
Valuation and qualifying accounts
deducted from the assets to which
they apply:
Inventory reserve $ 22.3 $ $ 17.4 $ (13.8) $ 25.9
Allowance for doubtful accounts 27.4 12.0 (6.2) 33.2
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2001
(IN MILLIONS)
Column A Column B Column C Column D Column E Column F
- -------- --------- -------- --------- ---------- ---------
Balance Additions Deductions
at Charged Credited Balance
Beginning Reserves to and at End
Classification of Period Acquired Expense Write-Offs of Period
- -----------------------------------------------------------------------------------------------
Valuation and qualifying accounts
deducted from the assets to which
they apply:
Inventory reserve $ 20.1 $ $ 10.5 $ (8.3) $ 22.3
Allowance for doubtful accounts 11.7 0.2 24.4 (8.9) 27.4
72
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed by the undersigned
hereunto duly authorized.
Date: April 16, 2004 THE SCOTTS COMPANY
/S/ CHRISTOPHER L. NAGEL
------------------------
Christopher L. Nagel
Executive Vice President and
Chief Financial Officer,
(Principal Financial and
Principal Accounting Officer)
