Scotts Company (SMG)

Our sales are susceptible to global weather conditions. For instance, periods of wet weather can adversely impact sales of certain products, while increasing demand for other products. We believe that our diversified product line provides some mitigation to this risk. We also believe that our broad geographic diversification further reduces this risk.

 

 

Due to the nature of our lawn and garden business, significant portions of our products ship to our retail customers during the second and third fiscal quarters. Our annual sales are further concentrated in the second and third fiscal quarters by retailers who increasingly rely on our ability to deliver products “in season” when consumers buy our products, thereby reducing their inventories.

 

Management focuses on a variety of key indicators and operating metrics to monitor the health and performance of our business. These metrics include consumer purchases (point-of-sale data), market share, net sales (including volume, pricing, product mix and foreign exchange movements), gross profit margins, income from operations, net income and earnings per share. To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges, which management believes are not indicative of the ongoing earnings capabilities of our businesses. We also focus on measures to optimize cash flow and return on invested capital, including the management of working capital and capital expenditures.

 

Given the Company’s historical performance and consistent cash flows, the Company has undertaken a number of actions over the past several years to return cash to our shareholders. We began paying a quarterly cash dividend of 12.5 cents per share in the fourth quarter of fiscal 2005. In fiscal 2006, the Company launched a five-year, $500 million share repurchase program pursuant to which we repurchased 2.0 million common shares for an aggregate purchase price of $87.9 million during fiscal 2006. In December 2006, the Company announced a recapitalization plan to return $750 million to the Company’s shareholders. This plan expanded and accelerated the previously announced five-year, $500 million share repurchase program (which was canceled). Pursuant to the recapitalization plan, in February 2007, the Company repurchased 4.5 million of the Company’s common shares for an aggregate purchase price of $245.5 million ($54.50 per share) and paid a special one-time cash dividend of $8.00 per share ($508 million in the aggregate) in early March 2007.

 

In order to fund this recapitalization, the Company entered into credit facilities totaling $2.15 billion and terminated its prior credit facility. Please refer to “NOTE 11. DEBT” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information as to the credit facilities and the repayment and termination of the Company’s prior credit facility and the Company’s 65/8% senior subordinated notes.

 

 

We are dedicated to delivering strong, consistent financial
results and outstanding shareholder returns by providing
products of superior quality and value in order to enhance
consumers’ outdoor living environments. We are a leading
manufacturer and marketer of consumer branded products for lawn
and garden care and professional horticulture in North America
and Europe. We are Monsanto’s exclusive agent for the
marketing and distribution of consumer
Roundup^®

non-selective herbicide products within the United States and
other contractually specified countries. We have a presence in
similar consumer branded and professional horticulture products
in Australia, the Far East, Latin America and South America. In
the United States, we operate Scotts
LawnService^®,

the second largest residential lawn care service business, and
Smith &
Hawken^®,

a leading brand in the outdoor living and garden lifestyle
category. In fiscal 2008, our operations were divided into the
following reportable segments: Global Consumer, Global
Professional, Scotts
LawnService^®

and Corporate & Other. The Corporate & Other
segment consists of the Smith &
Hawken^®

business and corporate general and administrative expenses.

 

As a leading consumer branded lawn and garden company, our
marketing efforts are largely focused on building brand and
product level awareness to inspire consumers and create retail
demand. We have successfully applied this consumer marketing
focus for a number of years, consistently investing
approximately 5% of our annual net sales in advertising to
support and promote our products and brands. We continually
explore new and innovative ways to communicate with consumers.
We believe that we receive a significant return on these
marketing expenditures and anticipate a similar level of
advertising and marketing investments in the future, with the
continuing objective of driving category growth and increasing
market share.

 

29

Our sales are susceptible to global weather conditions. For
instance, periods of wet weather can adversely impact sales of
certain products, while increasing demand for other products. We
believe that our diversified product line provides some
mitigation to this risk. We also believe that our broad
geographic diversification further reduces this risk.

 

 

Due to the nature of our lawn and garden business, significant
portions of our products ship to our retail customers during the
second and third fiscal quarters. Our annual sales are further
concentrated in the second and third fiscal quarters by
retailers who increasingly rely on our ability to deliver
products “in season” when consumers buy our products,
thereby reducing their inventories.

 

Management focuses on a variety of key indicators and operating
metrics to monitor the health and performance of our business.
These metrics include consumer purchases (point-of-sale data),
market share, net sales (including volume, pricing, product mix
and foreign exchange movements), gross profit margins, income
from operations, net income and earnings per share. To the
extent applicable, these measures are evaluated with and without
impairment, restructuring and other charges, which management
believes are not indicative of the ongoing earnings capabilities
of our businesses. We also focus on measures to optimize cash
flow and return on invested capital, including the management of
working capital and capital expenditures.

 

Given the Company’s historical performance and consistent
cash flows, the Company has undertaken a number of actions over
the past several years to return cash to our shareholders. We
began paying a quarterly cash dividend of 12.5 cents per share
in the fourth quarter of fiscal 2005. In fiscal 2006, the
Company launched a five-year, $500 million share repurchase
program pursuant to which we repurchased 2.0 million common
shares for an aggregate purchase price of $87.9 million
during fiscal 2006. In December 2006, the Company announced a
recapitalization plan to return $750 million to the
Company’s shareholders. This plan expanded and accelerated
the previously announced five-year, $500 million share
repurchase program (which was canceled). Pursuant to the
recapitalization plan, in February 2007, the Company repurchased
4.5 million of the Company’s common shares for an
aggregate purchase price of $245.5 million ($54.50 per
share) and paid a special one-time cash dividend of $8.00 per
share ($508 million in the aggregate) in early March 2007.

 

In order to fund this recapitalization, the Company entered into
credit facilities totaling $2.15 billion and terminated its
prior credit facility. Please refer to “NOTE 11.
DEBT” to the Consolidated Financial Statements included in
this Annual Report on
Form 10-K
for further information as to the credit facilities and the
repayment and termination of the Company’s prior credit
facility and the Company’s
65/8% senior
subordinated notes.

 

our diversified product line provides some mitigation to this risk. We also believe that our broad geographic diversification further reduces this risk.

 

 

Due to the nature of our lawn and garden business, significant portions of our products ship to our retail customers during the second and third fiscal quarters. Our annual sales are further concentrated in the second and third fiscal quarters by retailers who increasingly rely on our ability to deliver products “in season” when consumers buy our products, thereby reducing their inventories.

 

Management focuses on a variety of key indicators and operating metrics to monitor the health and performance of our business. These metrics include consumer purchases (point-of-sale data), market share, net sales (including volume, pricing, product mix and foreign exchange movements), gross profit margins, income from operations, net income and earnings per share. To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges, which management believes are not indicative of the ongoing earnings capabilities of our businesses. We also focus on measures to optimize cash flow and return on invested capital, including the management of working capital and capital expenditures.

 

Given the Company’s historical performance and consistent cash flows, the Company has undertaken a number of actions over the past several years to return cash to our shareholders. We began paying a quarterly cash dividend of 12.5 cents per share in the fourth quarter of fiscal 2005. In fiscal 2006, the Company launched a five-year, $500 million share repurchase program pursuant to which we repurchased 2.0 million common shares for an aggregate purchase price of $87.9 million during fiscal 2006. In December 2006, the Company announced a recapitalization plan to return $750 million to the Company’s shareholders. This plan expanded and accelerated the previously announced five-year, $500 million share repurchase program (which was canceled). Pursuant to the recapitalization plan, in February 2007, the Company repurchased 4.5 million of the Company’s common shares for an aggregate purchase price of $245.5 million ($54.50 per share) and paid a special one-time cash dividend of $8.00 per share ($508 million in the aggregate) in early March 2007.

 

In order to fund this recapitalization, the Company entered into credit facilities totaling $2.15 billion and terminated its prior credit facility. Please refer to “NOTE 11. DEBT” to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information as to the credit facilities and the repayment and termination of the Company’s prior credit facility and the Company’s 65/8% senior subordinated notes.

 

 

We are dedicated to delivering strong, consistent financial
results and outstanding shareholder returns by providing
products of superior quality and value in order to enhance
consumers’ outdoor living environments. We are a leading
manufacturer and marketer of consumer branded products for lawn
and garden care and professional horticulture in North America
and Europe. We are Monsanto’s exclusive agent for the
marketing and distribution of consumer
Roundup^®

non-selective herbicide products within the United States and
other contractually specified countries. We have a presence in
similar consumer branded and professional horticulture products
in Australia, the Far East, Latin America and South America. In
the United States, we operate Scotts
LawnService^®,

the second largest residential lawn care service business, and
Smith &
Hawken^®,

a leading brand in the outdoor living and garden lifestyle
category. In fiscal 2008, our operations were divided into the
following reportable segments: Global Consumer, Global
Professional, Scotts
LawnService^®

and Corporate & Other. The Corporate & Other
segment consists of the Smith &
Hawken^®

business and corporate general and administrative expenses.

 

As a leading consumer branded lawn and garden company, our
marketing efforts are largely focused on building brand and
product level awareness to inspire consumers and create retail
demand. We have successfully applied this consumer marketing
focus for a number of years, consistently investing
approximately 5% of our annual net sales in advertising to
support and promote our products and brands. We continually
explore new and innovative ways to communicate with consumers.
We believe that we receive a significant return on these
marketing expenditures and anticipate a similar level of
advertising and marketing investments in the future, with the
continuing objective of driving category growth and increasing
market share.

 

Our sales are susceptible to global weather conditions. For
instance, periods of wet weather can adversely impact sales of
certain products, while increasing demand for other products. We
believe that

 

28

our diversified product line provides some mitigation to this
risk. We also believe that our broad geographic diversification
further reduces this risk.

 

 

Due to the nature of our lawn and garden business, significant
portions of our products ship to our retail customers during the
second and third fiscal quarters. Our annual sales are further
concentrated in the second and third fiscal quarters by
retailers who increasingly rely on our ability to deliver
products “in season” when consumers buy our products,
thereby reducing their inventories.

 

Management focuses on a variety of key indicators and operating
metrics to monitor the health and performance of our business.
These metrics include consumer purchases (point-of-sale data),
market share, net sales (including volume, pricing, product mix
and foreign exchange movements), gross profit margins, income
from operations, net income and earnings per share. To the
extent applicable, these measures are evaluated with and without
impairment, restructuring and other charges, which management
believes are not indicative of the ongoing earnings capabilities
of our businesses. We also focus on measures to optimize cash
flow and return on invested capital, including the management of
working capital and capital expenditures.

 

Given the Company’s historical performance and consistent
cash flows, the Company has undertaken a number of actions over
the past several years to return cash to our shareholders. We
began paying a quarterly cash dividend of 12.5 cents per share
in the fourth quarter of fiscal 2005. In fiscal 2006, the
Company launched a five-year, $500 million share repurchase
program pursuant to which we repurchased 2.0 million common
shares for an aggregate purchase price of $87.9 million
during fiscal 2006. In December 2006, the Company announced a
recapitalization plan to return $750 million to the
Company’s shareholders. This plan expanded and accelerated
the previously announced five-year, $500 million share
repurchase program (which was canceled). Pursuant to the
recapitalization plan, in February 2007, the Company repurchased
4.5 million of the Company’s common shares for an
aggregate purchase price of $245.5 million ($54.50 per
share) and paid a special one-time cash dividend of $8.00 per
share ($508 million in the aggregate) in early March 2007.

 

In order to fund this recapitalization, the Company entered into
credit facilities totaling $2.15 billion and terminated its
prior credit facility. Please refer to “NOTE 11.
DEBT” to the Consolidated Financial Statements included in
this Annual Report on
Form 10-K
for further information as to the credit facilities and the
repayment and termination of the Company’s prior credit
facility and the Company’s
65/8% senior
subordinated notes.

 

 

Due to the nature of our lawn and garden business, significant portions of our shipments occur in the second and third fiscal quarters. Retailers continue to place reliance on our ability to deliver products “in season” when consumer demand is the highest in order to help mitigate the need to carry large seasonal inventories.

 

Management focuses on a variety of key indicators and operating metrics to monitor the health and performance of our business. These metrics include consumer purchases (point-of-sale data), category growth, market share, net sales (including volume, pricing and foreign exchange), gross profit margin rates, income from operations, net income and earnings per share. To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges. We also focus on measures to optimize cash flow and return on invested capital, including the management of working capital and capital expenditures.

 

Our consumer International business was a strength during fiscal 2007 with improved performance in every major market. Over the past several years, we have reorganized and rationalized our European supply chain and increased sales force productivity. Current efforts are focused on improving our competitive position, continuing to reduce supply chain and SG&A costs within this segment, and realigning the organization to better leverage our knowledge of the marketplace and the consumer. We are working towards pan-European category management of our consumer product portfolio. Now that we have shown we can succeed in Europe, we intend to make necessary investments to continue to win with consumers and our retail partners.

 

We view strategic acquisitions as a means to enhance our strong core businesses, and were successful in completing several such acquisitions during fiscal 2006. Rod McLellan Company (“RMC”), a leading branded producer and marketer of soil and landscape products in the western U.S., was acquired and integrated into our existing Growing Media business. Gutwein, a leader in the growing North America wild bird food category, also was acquired. Gutwein’s Morning Song^® products are sold at leading mass retailers, grocery, pet and general merchandise stores. This acquisition marked our entry into the wild bird food category that we believe has exciting growth opportunities. Lastly, two additional acquisitions were consummated that have strengthened the Company’s overall global position in the turfgrass seed category. First, we acquired certain assets, including brands, turfgrass varieties and intellectual property, from Oregon-based Turf-Seed, Inc. (“Turf-Seed”), a leading producer of quality commercial turfgrasses for the professional seed business. The transaction included a 49% equity interest in Turf-Seed Europe, which distributes Turf-Seed’s grass varieties throughout the European Union and other countries in the region. We also acquired certain assets of Oregon-based Landmark Seed Company, a leading producer and distributor of quality professional seed and turfgrasses, including its brands, turfgrass varieties and intellectual property.

 

Given Scotts Miracle-Gro’s strong performance and consistent cash flows, our Board of Directors undertook several actions over the past two years to return cash to our shareholders. We began paying a quarterly cash dividend of 12.5 cents per share in the fourth quarter of fiscal 2005. In fiscal 2006, our Board launched a five-year $500 million share repurchase program pursuant to which we repurchased 2.0 million common shares for $87.9 million during fiscal 2006. Most recently, on December 12, 2006, we launched a recapitalization plan to return $750 million to the Company’s shareholders. This plan expanded and accelerated the previously announced five-year $500 million share repurchase program (which was canceled). Pursuant to the recapitalization plan, on February 14, 2007, we completed a modified “Dutch auction” tender offer, resulting in the repurchase of 4.5 million of our common shares for an aggregate purchase price of $245.5 million ($54.50 per share). On February 16, 2007, our Board of Directors declared a special one-time cash dividend of $8.00 per share ($508 million in the aggregate) which was paid on March 5, 2007, to shareholders of record on February 26, 2007.

 

25

In order to fund the recapitalization, we entered into new credit facilities effective February 2007, aggregating $2.15 billion and terminated our prior credit facility. As part of this debt restructuring, we also conducted a cash tender offer for all of our outstanding 65/8% senior subordinated notes in an aggregate principal amount of $200 million. Reference should be made to Note 10 to the Consolidated Financial Statements included in this Annual Report on Form 10-K for further information as to the new credit facilities and the repayment and termination of the prior credit facility and the 65/8% senior subordinated notes.

 

The actions described above reflect management’s confidence in the continued growth of the Company. Strong and consistent cash flows can support the higher levels of debt necessary to finance these actions, as discussed in the Liquidity and Capital Resources section of this MD&A. Even with an increase in borrowings as a result of the fiscal 2007 recapitalization transactions, we believe we will maintain the capacity to pursue targeted, strategic acquisitions that leverage our core competencies.