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SCOTTS MIRACLE-GRO CO 10-K 2008 Documents found in this filing:
Table of Contents
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
(Exact name of registrant as
specified in its charter)
Registrant’s telephone number, including area
code: 937-644-0011
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ
No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K
or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in
Rule 12b-2
of the Exchange Act.
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
The aggregate market value of Common Shares (the only common
equity of the registrant) held by non-affiliates of the
registrant computed by reference to the price at which Common
Shares were last sold as of the last business day of the
registrant’s most recently completed second fiscal quarter
(March 28, 2008) was approximately $1,410,465,487.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable date: The number of Common Shares of the registrant
outstanding as of November 21, 2008 was 65,373,940.
Portions of the definitive Proxy Statement for
Registrant’s 2009 Annual Meeting of Shareholders to be held
January 22, 2009, are incorporated by reference into
Part III hereof.
Table of Contents
PART I
The Scotts Miracle-Gro Company, an Ohio corporation
(“Scotts Miracle-Gro” and, together with its
subsidiaries, the “Company”), traces its roots to two
businesses launched by entrepreneurs. In 1868, Civil War veteran
O.M. Scott started a seed business in Marysville, Ohio, based on
the conviction that “farmers shall have clean, weed-free
fields.” Beginning in 1907, The Scotts Company expanded its
reach by selling grass seed to consumers and eventually exited
the agricultural market. By 1988 — through innovation
and acquisition — The Scotts Company had become a
leading marketer of lawn fertilizer, grass seed and growing
media products within the United States.
Separately, Horace Hagedorn and his partner Otto Stern launched
Stern’s Miracle-Gro Products, Inc. in 1951 in New York.
Their easy-to-use plant food quickly revolutionized the
gardening category. Through innovative marketing,
Miracle-Gro®
eventually became the leading plant food product in the
gardening industry. In 1995, The Scotts Company and Stern’s
Miracle-Gro Products, Inc. merged, marking the start of a
significant evolution for the Company.
In the late 1990’s, the Company launched both a geographic
and a category expansion. It acquired companies with
industry-leading brands in France, Germany and the United
Kingdom. In fiscal 1999, the Company acquired the
Ortho®
brand in the United States and exclusive rights for the
marketing and distribution of consumer
Roundup®*
brand products within the United States and other specified
countries, thereby adding industry-leading weed, insect and
disease control products to its portfolio. The Company expanded
into the lawn care service industry with the launch of Scotts
LawnService®
in 1998. Since fiscal 2001, the Company has invested nearly
$125 million in acquisitions of local and regional lawn
care businesses to provide a platform for rapid expansion
throughout the United States. Most recently, the Company entered
the North American wild bird food category in fiscal 2006 with
the acquisition of Gutwein & Co., Inc.
(“Gutwein”) and its Morning
Song®
brand of bird food.
As the Company celebrates more than 100 years of selling
products to consumers, we own the leading brands in nearly every
category of the lawn and garden industry. A list of some of our
North American leading consumer brands is as follows:
In addition, we have the following significant brands in Europe:
Miracle-Gro®
plant fertilizers,
Weedol®
and
Pathclear®
herbicides,
EverGreen®
lawn fertilizers and
Levington®
growing media in the United Kingdom;
KB®
and
Fertiligène®
in France;
Celaflor®,
Nexa
Lotte®
and
Substral®
in Germany and Austria; and
ASEF®,
KB®
and
Substral®
in Belgium, the Netherlands and Luxembourg.
Roundup®
is also a significant brand in the United Kingdom, France,
Germany and other European markets.
For fiscal 2008, the Company divided its businesses into the
following segments:
* Roundup®
is a registered trademark of Monsanto Technology LLC, a company
affiliated with Monsanto Company.
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These segments were changed entering fiscal 2008 and differ from
the segments used in the prior year due to the realignment of
the North America and International segments into the Global
Consumer and Global Professional segments. This division of
reportable segments is consistent with how the segments report
to and are managed by senior management of the Company.
Financial information about these current segments for the three
years ended September 30, 2008 is presented in
“NOTE 21. SEGMENT INFORMATION” to the
Consolidated Financial Statements included in this Annual Report
on
Form 10-K.
In our Global Consumer segment, the Company manufactures and
markets products that provide easy, reliable and effective
assistance to homeowners who seek beautiful, weed and pest-free
lawns, gardens and indoor plants. These products incorporate
many of the latest technologies available. The Global Consumer
segment sells products in the following categories:
Lawns: A
complete line of granular lawn fertilizer and combination
products, including fertilizer and crabgrass control, weed
control or pest control, is sold under the
Scotts®
and Turf
Builder®
brand names. The Turf
Builder®
line of products in the United States is designed to make it
easy for do-it-yourself consumers to select and properly apply
the right product in the right quantity for their lawns. A
similar range of products is available in the United Kingdom
under the
EverGreen®
brand.
Gardens: A
complete line of plant foods is marketed under the
Miracle-Gro®
brand name. In fiscal 2006, we introduced
Miracle-Gro®
LiquaFeed®,
an innovative product that allows consumers to easily feed and
water their outdoor plants simultaneously. The
Miracle-Gro®
brand is marketed primarily in North America and the United
Kingdom, although it has been introduced into other Western
European markets in recent years. In addition to our
high-quality granular and liquid water-soluble plant foods, we
have continuous-release plant foods for extended feeding and
convenience, which we market under the
Osmocote®
brand as well as the Shake ’n
Feed®
sub-brand. The Company also markets an extensive line of plant
food products under the
Substral®
brand name in Germany, Austria, the Nordic countries and
throughout Eastern Europe, and under the
Fertiligéne®
brand name in France.
Growing
Media: A
complete line of growing media products for indoor and outdoor
uses is marketed under the
Miracle-Gro®,
Scotts®,
Hyponex®,
Earthgro®
and
SuperSoil®
brand names in the United States, as well as other labels. These
products include potting mix, garden soils, seeding soil,
topsoil, manures, sphagnum peat and decorative barks and
mulches. The addition of the
Miracle-Gro®
and
Scotts®
brand names plus plant food to higher quality potting mixes,
garden soils and seeding soil has turned previously low-margin
commodity products into value-added category leaders. The
introduction of the Moisture
Control®,
Organic
Choice®
and Nature
Scapes®
line extensions has provided further innovation and
differentiation of our products in the marketplace. This same
strategy is being employed in Europe, where the
Miracle-Gro®
brand, as well as the
Levington®,
Fertiligène®,
KB®
and
Substral®
brands, are being used to market growing media products.
Grass
Seed: We
offer a broad line of grass seed products for consumers. Our
leading grass seed products are sold under the
Scotts®
Pure
Premium®,
Classic®,
Turf
Builder®
and
PatchMaster®
brand names in the consumer market.
Controls: A
broad line of weed control, indoor and outdoor pest control and
plant disease control products is marketed under the
Ortho®
brand name in the United States.
Ortho®
products are available in aerosol, ready-to-use liquid,
concentrated, granular and dust forms.
Ortho®
control products include Weed-B-Gon
MAX®,
Bug-B-Gon
MAX®,
Home Defense
MAX®,
Ortho
MAX®,
GroundClear®,
RosePride®,
and
Orthene®
Fire Ant Killer. In Europe, the Company markets an extensive
line of control products under a variety of brand names,
including
Weedol®,
Pathclear®,
KB®,
Fertiligéne®,
Celaflor®
and Nexa
Lotte®.
In fiscal 1999, the Company entered into a long-term marketing
agreement with Monsanto Company (“Monsanto”) and
became Monsanto’s exclusive agent for the marketing and
distribution of
Roundup®
non-selective herbicide products in the consumer lawn and garden
market within the United States and other specified countries,
including Australia, Austria, Belgium, Canada, France, Germany,
the Netherlands and the United Kingdom. (See the
“Roundup®
Marketing Agreement” discussion later in this Item 1
for a more detailed explanation of the Company’s agreement
with Monsanto.)
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Wild Bird
Food: In
November 2005, the Company acquired Gutwein and its Morning
Song®
brand of products. Morning
Song®
products are sold at leading mass retailers, grocery, pet and
general merchandise stores. The Company launched a
Scotts®
branded line of wild bird food in fiscal 2007, with premium
blends and innovative packaging.
Other Consumer
Products: The
Company also manufactures and markets several lines of
high-quality lawn spreaders under the
Scotts®
brand name - Deluxe
EdgeGuard®
spreaders,
AccuGreen®
drop spreaders and Handy
Green®II
handheld spreaders. We sell a line of hose-end applicators for
water-soluble plant foods such as
Miracle-Gro®
products, and lines of applicators under the
Ortho®
and Dial ’N
Spray®
trademarks for the diluted application of control products sold
in the concentrated form.
The Global Consumer segment also includes our Canadian consumer
operations. In Canada, we believe we are the leading marketer of
branded consumer lawn and garden products. We sell a full range
of lawn and garden fertilizer, control products, grass seed,
spreaders, and value-added growing media products under the
Scotts®,
Turf
Builder®,
EcoSense®,
Miracle-Gro®,
Ortho®,
Killex®
and
Roundup®
brands.
The Global Professional business sells professional products to
commercial nurseries, greenhouses and specialty crop growers
primarily in North America, Europe, the Middle East, Africa,
Latin America, Australia, New Zealand and throughout the Far
East. Our professional products include a broad line of
sophisticated controlled-release fertilizers, water-soluble
fertilizers, plant protection products, wetting agents, growing
media and grass seed that are sold under brand names that
include
Osmocote®,
Sierrablen
Plus®,
Peters
Professional®,
Peters
Excel®,
Agroblen®,
Agrocote®,
Rout®,
OH2®,
Scotts®
Professional Seed,
Scotts®
Turfseedtm
and
Scotts®
Landmarktm.
The Scotts
LawnService®
segment provides residential lawn care, lawn aeration, tree and
shrub care and external pest control services in the United
States. As of September 30, 2008, Scotts
LawnService®
had 81 company-operated locations serving 46 metropolitan
markets and 76 independent franchises primarily operating in
secondary markets.
The Corporate & Other segment includes Smith &
Hawken®,
a leading brand in the outdoor living and gardening lifestyle
category. Smith &
Hawken®
products, which include high-end outdoor furniture, pottery,
garden tools, gardening containers and live goods, are sold in
the United States through its 57 retail stores, catalog and
Internet sales, and other trade and wholesale relationships.
While the Company maintains a bias for divesting the business,
current market conditions are not advantageous. As a result, the
Company is now simultaneously pursuing other options.
Our major customers include home centers, mass merchandisers,
warehouse clubs, large hardware chains, independent hardware
stores, nurseries, garden centers, food and drug stores,
commercial nurseries and greenhouses and specialty crop growers.
Each of our segments participates in markets that are highly
competitive and many of our competitors sell their products at
prices lower than ours. The Company attributes its market
leadership and continued success in the lawn and garden category
to our industry-leading brands, innovative products,
award-winning advertising, supply chain excellence, highly
effective field sales and merchandising organization and the
strength of our relationships with major retailers in our
product categories.
In the North American Global Consumer do-it-yourself lawn and
garden and pest control markets, we compete primarily against
“private label” products as well as branded products.
“Private label” products are those sold under a
retailer-owned label or a supplier-owned label, which are sold
exclusively at a specific retail chain. Recently, the
Company’s largest North American competitor, Spectrum
Brands, announced it would cease competing in the lawn
fertilizer, grass seed and growing media categories. As a
result, some of our retail partners have approached us regarding
the possibility of providing private label solutions for them in
these product categories. We believe such an opportunity, if
executed, could be beneficial to both the Company and our retail
partners.
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The Company continues to compete with Spectrum Brands in other
lawn and garden categories. We also compete with Bayer AG,
Central Garden & Pet Company, Enforcer Products, Inc.,
Green Light Company and Lebanon Seaboard Corporation. In
addition, we face competition from regional competitors who
compete primarily on the basis of price for commodity growing
media business.
Internationally, we face strong competition in the consumer
do-it-yourself lawn and garden market, particularly in Europe.
Our competitors in the European Union include Bayer AG, Compo
GmbH, a subsidiary of K&S Aktiengesellschaft (which owns
the
Compo®,
Sem®
and
Algoflash®
brands), Westland Horticulture and a variety of local companies.
In the North American Global Professional horticulture markets,
we face a broad range of competition from numerous companies
such as Agrium, Inc., Haifa Chemicals Ltd., Chisso Asahi
Fertilizer Co. Ltd., Syngenta AG and Bayer AG. Some of these
competitors have significant financial resources and research
departments.
The international Global Professional horticulture markets in
which we compete are also very competitive, particularly the
markets for controlled-release and water-soluble fertilizer
products. We have numerous U.S. and European competitors in
these international markets, including Pursell Industries, Inc.,
Compo GmbH, a subsidiary of K&S Aktiengesellschaft, Norsk
Hydro ASA, Haifa Chemicals Ltd. and Kemira Oyj.
We have the second largest market share position in the
fragmented U.S. do-it-for-me lawn care service market. We
compete against
TruGreen-ChemLawn®,
a division of ServiceMaster, which has the leading market share
in the U.S. lawn care service market and has a
substantially larger share of this market than Scotts
LawnService®,
as well as numerous regional and local lawn care services
operations.
Approximately 75% of our worldwide net sales in fiscal 2008 were
made by our Global Consumer segment. Within the Global Consumer
segment, approximately 28% of our net sales in fiscal 2008 were
made to Home Depot, 18% to Lowe’s and 18% to Walmart. We
face strong competition for the business of these significant
customers. The loss of any of these customers or a substantial
decrease in the volume or profitability of our business with any
of these customers could have a material adverse effect on our
earnings and cash flows.
Competitive
Strengths
The Company considers its industry-leading brands to be its
single largest competitive advantage, though hardly its only
advantage. The Company believes it has the leading market share
in every major U.S. category in which its Global Consumer
business competes. The Company also owns many of the leading
brands in the European marketplace.
The Company has helped to build awareness of its brands through
consistently investing in advertising and marketing. As a
result, consumer awareness of the Company’s key
brands — especially in the United States —
rivals that of nearly any other consumer products company. The
strength of the
Scotts®
brand, in particular, has been a critical aspect of the success
of Scotts
LawnService®.
The Company considers its brands, patents and licenses all to be
key competitive advantages. We pursue a vigorous brand
protection strategy consisting of registration and maintenance
of key trademarks and proactive monitoring and enforcement
activities to protect against infringement. The
Scotts®,
Miracle-Gro®,
Ortho®,
Scotts
LawnService®,
Smith &
Hawken®,
Osmocote®,
Hyponex®
and
Earthgro®
brand names and logos, as well as a number of product
trademarks, including Turf
Builder®,
Organic
Choice®,
Home Defense
Max®
and Weed-B-Gon
Max®,
are federally
and/or
internationally registered and are considered material to our
business.
As of September 30, 2008, we held 95 issued patents in the
United States covering fertilizer, chemical and growing media
compositions and processes; grass varieties; and mechanical
dispensing devices such as applicators, spreaders and sprayers.
Similar patents have also been issued or are pending
internationally, bringing our total worldwide patent portfolio
to 406 patents and applications.
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The issued patents provide protection generally extending to
20 years from the date of filing, subject to the payment of
applicable governmental maintenance and annuity fees.
Accordingly, many of our patents will extend well into the next
decade.
In addition, we continue to file new patent applications each
year covering new, commercially significant developments
conceived by our research and development associates. Currently,
we have 205 pending patent applications worldwide, including 35
pending U.S. applications. We also hold exclusive and
non-exclusive patent licenses and supply arrangements,
permitting the use and sale of additional patented fertilizers,
pesticides and mechanical devices.
During fiscal 2008, we were granted four U.S. and 21
foreign national patents, including patents for the design of an
improved spraying device and for various hybrid varieties of
turfgrass. We continue to extend patent coverage of our core
technologies nationally and in our Canadian, European,
Asia/Pacific and South American markets.
No significant U.S. or foreign patents expired in fiscal
2008.
Because the Company sells a substantial majority of its products
to a small number of retail customers, it is critical to
maintain strong relationships with these partners. We believe
our supply chain and sales force are major competitive
advantages that have allowed us to build unrivaled relationships
with our key retail partners.
Major investments in technology have allowed the Company’s
supply chain to be a more efficient supplier to its key retail
accounts. The Company considers its order fill rate —
which measures the accuracy of shipments — to be an
important measure of customer service. In fiscal 2008, the
Company achieved a global order fill rate of 99.0 percent.
Additionally, the supply chain has helped the Company to improve
its inventory turns over the past several years, as well as
those of its retail partners. The Company has made substantial
investments to lower the cost structure of its supply chain
operations in Europe while simultaneously improving customer
service levels.
The Company’s U.S. sales force is another major
competitive advantage. By increasing the size of the sales force
over several years, the Company has taken a more proactive role
in helping our retail partners merchandise the lawn and garden
department and maximize the productivity of this space. In
addition to working closely with retailers, our nearly
2,000 person full-time and seasonal U.S. in-store
sales force also provides the Company with an opportunity to
interact face-to-face with consumers at-the-shelf. By helping
consumers answer their lawn and garden questions, we believe we
can drive higher sales of our products.
The Company views its commitment to innovation as a competitive
advantage. Consequently, we continually invest in research and
development and consumer research to improve and develop
existing and new products, manufacturing processes and packaging
and delivery systems. Spending on research and development was
$44.7 million, $38.8 million and $35.1 million in
fiscal 2008, 2007 and 2006, including product registration costs
of $9.8 million, $9.3 million and $8.2 million,
respectively. The Company’s long-standing commitment to
innovation is evidenced by a worldwide portfolio of patents. In
addition to the benefits of our own research and development, we
actively seek ways to leverage the research and development
activities of our suppliers.
Our research and development worldwide headquarters is located
at the Dwight G. Scott Research Center in Marysville, Ohio. We
also have research and development facilities in the United
Kingdom, France, the Netherlands and Sydney, Australia, as well
as several research field stations located throughout the United
States. In these combined locations, the Company employs
approximately 30 PhD scientists.
The Company’s biotechnology program is evidence of its
commitment to responsible research and to developing more
effective and easier-to-use products that are preferred by
consumers and are better for the environment. As part of this
program, the Company is currently employing technology already
proven in agriculture to develop new turf varieties that could
one day require less maintenance, less water and fewer chemical
inputs to resist insects, weeds and disease.
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The Company is Monsanto’s exclusive agent for the marketing
and distribution of consumer
Roundup®
products (with additional rights to new products containing
glyphosate or other similar non-selective herbicides) in the
consumer lawn and garden market within the United States and
other specified countries, including Australia, Austria,
Belgium, Canada, France, Germany, the Netherlands and the United
Kingdom. Under the terms of the Amended and Restated Exclusive
Agency and Marketing Agreement (the “Marketing
Agreement”) between us and Monsanto, we and Monsanto are
jointly responsible for developing global consumer and trade
marketing programs for consumer
Roundup®.
We have assumed responsibility for sales support, merchandising,
distribution and logistics for consumer
Roundup®.
Monsanto continues to own the consumer
Roundup®
business and provides significant oversight of its brand. In
addition, Monsanto continues to own and operate the agricultural
Roundup®
business.
We are compensated under the Marketing Agreement based on the
success of the consumer
Roundup®
business in the markets covered by the Marketing Agreement. We
receive a graduated commission to the extent that the earnings
before interest and taxes of the consumer
Roundup®
business in the included markets exceed specified thresholds.
Regardless of these earnings, we are required to make an annual
contribution payment against the overall expenses of the
consumer
Roundup®
business. The minimum annual contribution payment is
$20 million until 2018 or the earlier termination of the
Marketing Agreement.
The gross commission earned under the Marketing Agreement, the
contribution payments to Monsanto and the amortization of the
initial marketing fee paid to Monsanto are included in the
calculation of net sales in the Company’s Consolidated
Statements of Operations. For fiscal 2008, 2007 and 2006, the
net amount earned under the Marketing Agreement was
$44.3 million, $41.9 million and $39.9 million,
respectively. For further details, see “NOTE 7.
MARKETING AGREEMENT” to the Consolidated Financial
Statements included in this Annual Report on
Form 10-K.
The Marketing Agreement has no definite term except as it
relates to the European Union countries (the “EU
term”). The EU term had previously been extended through
September 30, 2008 and, on March 28, 2008, the parties
agreed to further extend the EU term through September 30,
2011, with up to two additional automatic renewal periods of two
years each, subject to non-renewal only upon the occurrence of
certain performance defaults.
The Marketing Agreement provides Monsanto with the right to
terminate the Marketing Agreement upon an event of default (as
defined in the Marketing Agreement) by the Company, a change in
control of Monsanto or the sale of the consumer
Roundup®
business. The Marketing Agreement provides the Company with the
right to terminate the Marketing Agreement in certain
circumstances, including an event of default by Monsanto or the
sale of the consumer
Roundup®
business. Unless Monsanto terminates the Marketing Agreement due
to 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 calculated as a percentage of the
value of the
Roundup®
business exceeding a certain threshold, but in no event will the
termination fee be less than $16 million. If Monsanto were
to terminate the Marketing Agreement due to an event of default
by the Company, however, the Company would not be entitled to
any termination fee, and it would lose all, or a substantial
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 a
termination fee if unit volume sales to consumers in that region
decline: (1) over a cumulative three-fiscal-year period; or
(2) by more than 5% for each of two consecutive years.
Monsanto has agreed to provide us with notice of any proposed
sale of the consumer
Roundup®
business, allow us to participate in the sale process and
negotiate in good faith with us with respect to any such
proposed sale. In the event we acquire the consumer
Roundup®
business in such a sale, we would receive as a credit against
the purchase price the amount of the termination fee that would
have been paid to us if Monsanto had exercised its right to
terminate the Marketing Agreement in connection with a sale to
another party. If Monsanto decides to sell the consumer
Roundup®
business to another party, we must let Monsanto know whether we
intend to terminate the Marketing Agreement and forfeit any
right to a termination fee or whether we will agree to continue
to perform under the Marketing Agreement on behalf of the
purchaser.
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Our strategic plan is focused on leveraging our key competitive
advantages in a way that fuels growth, reduces costs, distances
us from the competition and drives shareholder value. We are
currently involved in several initiatives designed to meet this
criteria:
We also continue to execute a strategy focused on better
understanding the needs and attitudes of our consumers. We have
historically demonstrated the ability to use customer feedback
to develop improved products and packaging that drives increased
consumer demand.
In 2008, these strategies helped us succeed with new products
such as
Roundup®
Pump `N
Go®
in the United States, as well as a full line of natural and
organic lawn and garden products in Europe. In 2009, insights
gained from consumers will be critical as we navigate a
challenging economic environment. Our research will help us more
effectively communicate to consumers that our products cost more
because they are worth more.
“Simple” means that products must be easy for the
consumer to buy, easy to use and easy to store. In addition,
they should reduce the amount of time it takes to accomplish a
task and should give the consumer improved results. Being
“sustainable” means products must be designed with
consumer safety and environmental impacts in mind.
“Significant” products should have strong margin
potential, generate possible cost savings, present a global
opportunity and be proprietary whenever possible.
We believe this strategy will result in the successful launch of
several new products in 2009, including Turf
Builder®
Water
Smarttm
Grass Seed and EZ
Seedtm
Grass Seed. The former includes a full line of premium grass
seed products that provide consumers high-performance seed
wrapped in a super-absorbent coating. The patented coating
allows every seed to absorb up to 40% more water than ordinary
seed. As a result, the seed needs to be watered less frequently,
which enables consumers to more easily succeed in growing a
healthy lawn. EZ
Seedtm
is a seed mix which includes premium grass seed, fertilizer and
a proprietary growing material. Our proprietary technology
absorbs water, expanding to surround the seed in a moist
protective layer. The protective layer continues to care for the
seed, infusing it with water and nutrients, so it builds strong
roots that survive tough conditions.
In 2009, we will employ more merchandisers and expert product
counselors and significantly increase the number of hours we
spend in the stores of our major retail partners. We are
rebalancing our sales force in a cost neutral way that allows us
to spend more time helping our retailers and consumers and less
time on administrative activities.
We believe this strategy will provide a more flexible cost
structure that helps maximize the return on our investment and
allows us to better meet the needs and timing of local markets.
It also allows us to quickly deploy more labor in those regions
where business is particularly strong and reduce spending in
regions where sales may be lower than expected due to poor
weather, economic concerns or other factors.
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Today, the majority of our lawn fertilizer products in the
United States are shipped from our plant in Marysville, Ohio to
one of 11 warehouses across the country. From those warehouses,
the fertilizer products are then shipped — along with
controls, plant food, grass seed and durable
products — directly to home center stores. These
products are often shipped on less-than-full trucks, making
their distribution less efficient than we would like.
Meanwhile, growing media products are shipped direct-to-store
through a network of 26 manufacturing facilities. Because these
shipments go shorter distances on full trucks, they are more
efficient.
Our strategy for a future model — which is being
rolled out in the Southeastern United States in 2009 —
allows fertilizer products to be shipped into these growing
media facilities, instead of to warehouses. From there, the
fertilizer and growing media products are co-distributed
directly to the stores. Once deployed across the entire country,
nearly all fertilizer products for home center customers will be
shipped through these growing media facilities, significantly
improving our product distribution efficiency.
Within five years, it is anticipated that up to half of our
third-party warehouse square footage could be eliminated. With
fertilizer and growing media products shipping together to home
center retailers, most of the remaining cased goods would be
shipped from the warehouses to our retail partners’
distribution centers on fully-loaded trucks.
These strategic efforts not only present a significant economic
benefit to the Company, but our retail partners will benefit as
well, through more frequent store replenishment, improved
inventory turns and reduced order lead times. As such, we
believe our partners can maximize their retail point-of-sale
opportunities without compromising the customer service rates
they have come to expect.
We continue to believe in the long-term growth potential of our
Global Consumer business internationally. In order to maximize
shareholder value in this business, we have sharpened our focus
by: (i) reducing costs in the business to improve
profitability and to allow for marketing investments;
(ii) aligning the organization by category rather than by
geography to better leverage our knowledge of the marketplace
and the consumer; and (iii) better leveraging the
Company’s innovation competencies. We have implemented a
global supply chain to provide our smaller, international market
segments with the benefits of the larger Company, such as lower
packaging costs and the ability to source products from any
Company-owned plant globally. The first steps of the
organizational realignment have taken place, and as part of a
broader corporate initiative, they will continue to evolve in
fiscal 2009 and beyond. Finally, we are combining global scale
with locally tailored products to streamline our technology
platform in the international Global Consumer business. As an
example, when the Company introduced
LiquaFeed®
Plant Food to a variety of European countries in fiscal 2008,
each label carried the same design and branding while the claims
and instructions were displayed in the local language. At the
same time, the European business doubled sales of natural
products in fiscal 2008 by launching
Naturen®
sub-branded products as a locally driven effort.
The number of homeowners who want to maintain their lawns and
gardens but do not want to do it themselves represents a
significant portion of the total lawn and garden market. We
recognize that our portfolio of well-known brands provides us
with a unique ability to extend our business into lawn and
garden services and that the strength of our brands provides us
with a competitive advantage in acquiring new customers. We have
spent the past several years developing our Scotts
LawnService®
business model and the business has grown significantly, from
revenues of $41.2 million in fiscal 2001 to revenues of
$247.4 million in fiscal 2008. This growth has come from
geographic expansion, acquisitions and organic growth fueled by
our direct marketing programs. Although acquisition activity was
negligible in fiscal 2008 and $22.5 million in fiscal 2007,
we anticipate continuing to make selective acquisitions in
fiscal 2009 and beyond. We will also continue to invest in the
Scotts
LawnService®
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business infrastructure in order to continually improve customer
service throughout the organization and leverage economies of
scale as we continue to grow.
Our business is highly seasonal, with 70% to 75% of our annual
net sales occurring in our combined second and third fiscal
quarters. Our annual sales are further concentrated in our
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.
We anticipate significant orders for the upcoming spring season
will start to be received late in the winter and continue
through the spring season. Historically, substantially all
orders are received and shipped within the same fiscal year with
minimal carryover of open orders at the end of the fiscal year.
We purchase raw materials for our products from various sources
that we presently consider to be adequate to supply the needs of
each of our segments and our business as a whole. We are subject
to market risk from fluctuating prices of certain raw materials,
including urea, resins, fuel, grass seed and wild bird food
components. Our objectives surrounding the procurement of these
materials are to ensure continuous supply and to minimize costs.
We seek to achieve these objectives through negotiation of
contracts with favorable terms directly with vendors. When
appropriate, we will procure a certain percentage of our needs
in advance of the season to secure pre-determined prices. We
also hedge certain commodities to improve predictability and
control costs.
We manufacture products for our Global Consumer business in
North America at our facilities in Marysville, Ohio,
Fort Madison, Iowa, Albany, Oregon and Temecula,
California, as well as at a number of third-party contract
packer facilities in the United States and Canada. In addition,
the Company manufactures growing media products in 27 regional
facilities located throughout North America. We also own five
production facilities for our wild bird food operations in
Indiana, South Dakota, South Carolina and Texas. The primary
distribution centers for our Global Consumer business in North
America are managed by the Company and strategically placed
across the United States.
We manufacture the non-growing media products for our Global
Consumer business internationally at our facilities in Howden,
the United Kingdom and Bourth, France. We also utilize a number
of third-party contract packers. The primary distribution
centers for our Global Consumer business internationally are
located in the United Kingdom, France and Germany and are
managed by a logistics provider.
The growing media products for our international Global Consumer
business are produced at our facilities in Hatfield and Sutton
Bridge, both in the United Kingdom, and Hautmont, France, and at
a number of third-party contract packer facilities. These
growing media products are generally shipped direct without
passing through a distribution center.
We also manufacture horticultural products for our Global
Professional business at a leased fertilizer manufacturing
facility in Charleston, South Carolina and a Company-owned site
in Heerlen, the Netherlands. The remaining products for our
Global Professional businesses are produced at other
Company-owned facilities and subcontractors in the United States
and Europe.
The majority of shipments to customers are made via common
carriers or through distributors in the United States and
through a network of public warehouses and distributors in
Europe. We are subject to market risk from fluctuating market
prices of diesel fuel, which our common carriers pass on to the
Company in the form of fuel surcharges. When appropriate, the
Company will hedge a portion of these indirect fuel costs to
improve predictability and control costs.
As of September 30, 2008, we employed 5,303 full-time
employees in the United States and an additional
1,075 full-time employees located outside the United
States. During peak sales and production periods, we utilize
seasonal and temporary labor.
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None of our
U.S.-based
employees are members of a union. Approximately 35 of our
full-time U.K.-based employees are members of the Transport and
General Workers Union and have full collective bargaining
rights. An undisclosed number of our full-time employees at our
office in Ecully, France are members of the Confederation
Francaise Democratique du Travail and Confederation Generale du
Travail, participation in which is confidential under French
law. In addition, a number of union and non-union full-time
employees are members of works councils at three sites in
Bourth, Hautmont and Ecully, France, and a number of non-union
employees are members of works councils in Ingelheim, Germany.
In the Waardenburg office and in the Heerlen Plant in the
Netherlands, approximately 10 employees are members of a
workers union, but we are not responsible for collective
bargaining negotiations with this union. In the Netherlands, we
are governed by the Works Councils Act with respect to the
union. Works councils represent employees on labor and
employment matters and manage social benefits.
We believe we have good relationships with our employees in the
United States, and both unionized and non-unionized
international employees.
Local, state, federal and foreign laws and regulations affect
the sale of our products in several ways.
In the United States, all products containing pesticides must
comply with the Federal Insecticide, Fungicide, and Rodenticide
Act of 1947, as amended (“FIFRA”), and be registered
with the U.S. Environmental Protection Agency (the
“U.S. EPA”) (and similar state agencies) before
they can be sold or distributed. The inability to obtain or
maintain such compliance, or the cancellation of any such
registration, could have an adverse effect on our business, the
severity of which would depend on the products 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 active ingredients, but there can be no assurance
that we will continue to be able to avoid or minimize these
risks.
Fertilizer and growing media products are subject to state and
foreign labeling regulations. Our manufacturing operations are
subject to waste, water and air quality permitting and other
regulatory requirements of federal and state agencies. The
Company’s wild bird food business is subject to regulation
by the U.S. Food and Drug Administration and our grass seed
products are regulated by the Federal Seed Act and various state
regulations.
Pursuant to the Food Quality Protection Act, the U.S. EPA
is evaluating the cumulative risks from dietary and non-dietary
exposures to pesticides. The pesticides in our products are
typically manufactured by independent third parties and as a
result of the U.S. EPA’s continuing risk assessment, a
decision by the U.S. EPA or the third party registrant may
restrict our access to the pesticides. We cannot predict the
outcome or the severity of the effect of these continuing
evaluations.
The use of certain pesticide and fertilizer products is
regulated by various local, state, federal and foreign
environmental and public health agencies. These regulations may
include requirements that only certified or professional users
apply the product or that certain products be used only on
certain types of locations (such as “not for use on sod
farms or golf courses”), may require users to post notices
on properties to which products have been or will be applied,
may require notification to individuals in the vicinity that
products will be applied in the future or may ban the use of
certain ingredients. We believe we are operating in substantial
compliance with, or taking action aimed at ensuring compliance
with, these laws and regulations.
State, federal and foreign authorities generally require growing
media facilities to obtain permits (sometimes on an annual
basis) in order to harvest peat and to discharge storm water
run-off or water pumped from peat deposits. The permits
typically specify the condition in which the property must be
left after the peat is fully harvested, with the residual use
typically being natural wetland habitats combined with open
water areas. We are generally required by these permits to limit
our harvesting and to restore the property consistent with the
intended residual use. In some locations, these facilities have
been required to create water retention ponds to control the
sediment content of discharged water.
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In April 2008, the Company learned that a former associate
apparently deliberately circumvented the Company’s policies
and U.S. EPA regulations under FIFRA by failing to obtain
valid registrations for products
and/or
causing invalid product registration forms to be submitted to
regulators. Since that time, we have been cooperating with the
U.S. EPA in its civil investigation into pesticide product
registration issues involving the Company and with the
U.S. EPA and the U.S. Department of Justice (the
“U.S. DOJ”) in a related criminal investigation.
In late April of 2008, in connection with the
U.S. EPA’s investigation, the Company was required to
conduct a consumer-level recall of certain consumer lawn and
garden products and a Scotts
LawnService®
product. Subsequently, the Company and the U.S. EPA agreed
upon a Compliance Review Plan for conducting a comprehensive,
independent review of our product registration records. Pursuant
to the Compliance Review Plan, an independent third-party firm,
Quality Associates Incorporated (“QAI”), has been
reviewing all of the Company’s U.S. pesticide product
registration records, some of which are historical in nature and
no longer support sales of our products. The Company has
identified approximately 132 of the registrations under review
as relating to products for which there was sales activity in
the period generally representing the Company’s 2008 fiscal
year (“Active Registrations”). These Active
Registrations supported products which accounted for
approximately $680 million of the Company’s net sales
in the period. The U.S. EPA investigation and QAI review
process identified several issues affecting Active Registrations
which resulted in the issuance of a number of Stop Sale, Use or
Removal Orders by the U.S. EPA and caused the Company to
temporarily suspend sales and shipments of affected products. In
addition, as the QAI review process or our internal review has
identified a FIFRA registration issue or a potential FIFRA
registration issue (some of which appear unrelated to the former
associate), we have endeavored to stop selling or distributing
the affected products until the issue could be resolved with the
U.S. EPA.
To date, QAI has completed a review of the registration records
for substantially all of the Company’s Active
Registrations. Based on such review, and with the cooperation
and prompt attention of the U.S. EPA, the Company believes
it has restored the ability to sell and distribute products
representing over 90% of the sales associated with Active
Registrations; and we are hopeful that we will be able to
satisfactorily resolve most, if not all, of the remaining issues
prior to the start of the 2009 lawn and garden season. The QAI
review process is expected to continue with a focus on reviewing
advertising and related promotional support of our registered
pesticide products. For more information with respect to
additional risks and uncertainties the Company may face in
connection with the ongoing investigation and for a discussion
of the related costs and expenses, see “NOTE 2.
PRODUCT REGISTRATION AND RECALL MATTERS” to the
Consolidated Financial Statements included in this Annual Report
on
Form 10-K.
On September 26, 2008, the Company, doing business as
Scotts
LawnService®,
was named as a defendant in a purported class action filed in
the U.S. District Court for the Eastern District of
Michigan relating to certain pesticide products. In the suit,
Mark Baumkel, on behalf of himself and the purported classes,
seeks an unspecified amount of damages, plus costs and attorney
fees, for alleged claims involving breach of contract, unjust
enrichment and violation of the Michigan consumer protection
act. Given the preliminary stages of the proceedings, no
reserves have been booked at this time, and the Company intends
to vigorously contest the plaintiff’s assertions.
In addition, in fiscal 2008 the Company conducted a voluntary
recall of most of its wild bird food products due to a
formulation issue. The wild bird food products had been treated
with pest control additives to avoid insect infestation,
especially at retail stores. While the pest control additives
had been labeled for use on certain stored grains that can be
processed for human
and/or
animal consumption, they were not labeled for use on wild bird
food products. This voluntary recall was completed prior to the
end of fiscal 2008.
In 1997, the Ohio Environmental Protection Agency (the
“Ohio EPA”) initiated an enforcement action against us
with respect to alleged surface water violations and inadequate
wastewater treatment capabilities at our Marysville, Ohio
facility and sought corrective action under the Federal Resource
Conservation and Recovery Act. The action related to discharges
from on-site
waste water treatment and several discontinued
on-site
disposal areas that date back to the early operations of the
Marysville facility, which we had already been assessing and, in
some cases, remediating, on a voluntary basis. We
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are remediating the Marysville site under the terms of a
judicial consent order under the oversight of the Ohio EPA.
We completed negotiations 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. A final consent decree
was entered into on October 18, 2004 that required us to
perform five years of wetland monitoring, and the completion of
additional actions if after five years, the monitoring indicates
the wetlands have not developed satisfactorily.
At September 30, 2008, $3.8 million was accrued for
these non-FIFRA compliance-related environmental actions, the
majority of which is for site remediation. Most of the costs
accrued as of September 30, 2008 are expected to be paid in
fiscal 2009; however, payments could be made for a period
thereafter. During fiscal 2008, 2007 and 2006, we expensed
approximately $1.4 million, $1.5 million, and
$2.4 million for non-FIFRA compliance-related environmental
matters. There were no material capital expenditures during the
last three fiscal years related to environmental or regulatory
matters.
The Company maintains a website at
http://investor.scotts.com
(this uniform resource locator, or URL, is an inactive textual
reference only and is not intended to incorporate our website
into this Annual Report on
Form 10-K).
We file reports with the Securities and Exchange Commission (the
“SEC”) and make available, free of charge, on or
through our website, our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended, as well as our proxy and information
statements, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the
SEC.
For certain information concerning our international revenues
and long-lived assets, see “NOTE 21. SEGMENT
INFORMATION” to the Consolidated Financial Statements
included in this Annual Report on
Form 10-K.
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 this Annual Report on
Form 10-K,
in our 2008 Annual Report to Shareholders (our “2008 Annual
Report”) 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 2008 Annual
Report, in this Annual Report on
Form 10-K
and in other contexts represent challenging goals for our
Company, the achievement of which 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. Updates
to our risk factors as a result of our 2008 product recalls and
the related governmental investigation are included below.
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Our products that contain pesticides must comply with FIFRA and
be registered with the U.S. EPA (and similar state
agencies) before they can be sold or distributed. In April 2008,
we became aware that a former associate apparently deliberately
circumvented Company policies and U.S. EPA regulations
under FIFRA by failing to obtain valid registrations for
products
and/or
causing invalid product registration forms to be submitted to
regulators. Since that time, we have been cooperating with the
U.S. EPA in its civil investigation into pesticide product
registration issues involving the Company and with the
U.S. EPA and the U.S. DOJ in a related criminal
investigation.
In connection with the registration investigation and FIFRA
compliance review process, we have recorded, and in the future
may record, charges and costs, based on our most recent
estimates, of retailer inventory returns, consumer returns and
replacement costs, costs to rework existing products, inventory
write-downs, associated legal and professional fees and costs
associated with administration of the registration investigation
and compliance review process. Because these current and
expected future charges are based on estimates, they may
increase as a result of numerous factors, many of which are
beyond our control, including the amount of products that may be
returned by consumers and retailers, the number and type of
legal or regulatory proceedings relating to the registration
investigation and FIFRA compliance review process and regulatory
or judicial orders or decrees that may require us to take
certain actions in connection with the registration
investigation and FIFRA compliance review process or to pay
civil or criminal fines
and/or
penalties at the state
and/or
federal level.
There can be no assurance that the ultimate outcome of the
investigation will not result in further action against us,
whether administrative, civil or criminal, by the U.S. EPA,
U.S. DOJ, state regulatory agencies or private litigants,
and any such action, in addition to the costs we have incurred
and would continue to incur in connection therewith, could
materially and adversely affect our financial condition, results
of operations and cash flows. In particular, a significant fine,
penalty or judgment assessed against us could result in a charge
to earnings or an increase in debt which materially affects our
ability to remain in compliance with the financial covenants of
our credit facilities, potentially causing us to have to seek an
amendment or waiver from our lending group. While we believe we
have good relationships with our banking group, given the
adverse conditions currently present in the global credit
markets, we can provide no assurance that such a request would
be likely to result in a modified or replacement credit facility
on reasonable terms, if at all.
Product recalls, our inability to ship, sell or transport
affected products and the on-going governmental investigation
may harm our reputation and acceptance of our products by our
retail customers and consumers, which may materially and
adversely affect our business operations, decrease sales and
increase costs. Moreover, the FIFRA compliance issues we have
disclosed throughout fiscal 2008, together with the
corresponding governmental investigation by the U.S. EPA
and U.S. DOJ, have resulted in coverage critical of us in
the press and media. While we believe that these compliance
issues are primarily the result of the misguided actions of a
former associate who misled us, some of the issues identified
appear unrelated to the former associate. And although we
believe we have acted promptly, responsibly and in the public
interest, these compliance issues may nevertheless harm our
reputation and the acceptance of our products by consumers and
our retailer customers. Our retailer customers may be less
willing to purchase our products or to provide marketing support
for those products, such as shelf space, promotions and
advertising, or may impose additional requirements that could
materially and adversely affect our business operations,
decrease sales and increase costs.
On September 26, 2008, the Company, doing business as
Scotts
LawnService®,
was named as a defendant in a purported class action filed in
the U.S. District Court for the Eastern District of
Michigan relating to certain pesticide products. In the suit,
Mark Baumkel, on behalf of himself and the purported classes,
seeks an unspecified amount of damages, plus costs and attorney
fees, for alleged claims involving breach of contract, unjust
enrichment and violation of the Michigan consumer protection
act. Given the preliminary stages of the proceedings, no
reserves have been booked at this time, and the Company intends
to vigorously contest the plaintiff’s assertions.
Our ability to manage our cost structure can be adversely
affected by movements in commodity and other raw material
prices, such as those experienced in both fiscal 2008 and 2007.
Market conditions may limit the Company’s ability to raise
selling prices to offset increases in our input and distribution
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costs. The uniqueness of our technologies can limit our ability
to locate or utilize alternative inputs for certain products.
For certain inputs, new sources of supply may have to be
qualified under regulatory standards, which can require
additional investment and delay bringing a product to market.
Each of our segments participates in markets that are highly
competitive. Many of our competitors sell their products at
prices lower than ours. The most price sensitive segment of our
category may be more likely to trade down to lower price point
products in a more challenging economic environment. We compete
primarily on the basis of product innovation, product quality,
product performance, value, brand strength, supply chain
competency, field sales support and advertising. Some of our
competitors have significant financial resources. 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, results of operations
and cash flows.
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 comply
with FIFRA and be registered with the U.S. EPA (and similar
state agencies) before they can be sold or distributed. The
inability to obtain or maintain such compliance, or the
cancellation of any registration, could have an adverse effect
on our business, the severity of which would depend on the
products 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 active ingredients, but there can
be no assurance that we will continue to be able to avoid or
minimize these risks. In the EU, the European Parliament is
considering the adoption of certain regulations, the effect of
which would substantially restrict or eliminate our ability to
market and sell certain of our pesticide products. If these
regulations were to be adopted in their current form in the EU,
the resulting impact on our consumer and professional European
controls businesses could be materially adversely impacted. In
addition, there are provincially-driven regulations pending
across Canada that, depending on the timing and scope of final
issuance, could substantially restrict or eliminate our ability
to market and sell certain of our consumer pesticide products
there.
Under the Food Quality Protection Act, enacted by the U.S.
Congress in 1996, food-use pesticides are evaluated to determine
whether there is reasonable certainty that no harm will result
from the cumulative effects 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, are typically manufactured by
independent third parties and continue to be evaluated by the
U.S. EPA as part of this exposure risk assessment. The
U.S. EPA or the third party registrant may decide that a
pesticide we use in our products will be limited or made
unavailable to us. For example, 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, which was also used in our
lawn and garden products. We cannot predict the outcome or the
severity of the effect of continuing evaluations.
In addition, the use of certain pesticide and fertilizer
products is regulated by various local, state, federal and
foreign environmental and public health agencies. These
regulations may include requirements that only certified or
professional users apply the product or that certain products be
used only on certain types of locations, may require users to
post notices on properties to which products have been or will
be applied, may require notification to individuals in the
vicinity that products will be applied in the future or may ban
the use of certain ingredients. Even if we are able to comply
with all such regulations and obtain all necessary
registrations, we cannot provide assurance 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
adversely affect future quarterly or annual operating results.
Perceptions that the products we produce and market are not safe
could adversely affect us and contribute to the risk we will be
subjected to legal action. We manufacture and market a number of
complex chemical products, such as fertilizers, certain growing
media, herbicides and pesticides. On
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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 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 on our
business.
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.
The adequacy of our current non-FIFRA compliance related
environmental reserves and future provisions is based on our
operating in substantial compliance with applicable
environmental and public health laws and regulations and several
significant assumptions:
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 adverse
impact on future environmental capital expenditures and other
environmental expenses and our results of operations, financial
position and cash flows.
We use a combination of internal and outsourced facilities to
manufacture our products. We are subject to the inherent risks
in such activities, including product quality, safety, licensing
requirements and other regulatory issues, environmental events,
loss or impairment of key manufacturing sites, disruptions in
logistics, labor disputes and industrial accidents. Furthermore,
we are subject to natural disasters and other factors over which
the Company has no control.
Global Consumer net sales represented approximately 75% of our
worldwide net sales in fiscal 2008. Our top three North American
retail customers together accounted for 64% of our Global
Consumer segment fiscal 2008 net sales and 34% of our
outstanding accounts receivable as of September 30, 2008.
Home Depot, Lowe’s and Walmart represented approximately
28%, 18% and 18%, respectively, of our fiscal 2008 Global
Consumer net sales. The loss of, or reduction in orders from,
Home Depot, Lowe’s, Walmart 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 on our
financial condition and results of operations.
We do not have long-term sales agreements with, 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 deterioration in the financial
condition of, or other adverse developments involving our
relationship with, one or more of our customers.
Weather conditions in North America and Europe can have a
significant impact on the timing of sales in the spring selling
season and overall annual sales. An abnormally wet
and/or cold
spring
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throughout North America or Europe could adversely affect both
fertilizer and pesticide sales and, therefore, our financial
results. Because our products are used primarily in the spring
and summer, our business is highly seasonal. For the past three
fiscal years, 70% to 75% of our annual net sales have occurred
in the second and third fiscal quarters combined. Our working
capital needs and borrowings typically peak during the initial
weeks of our third fiscal quarter because we are incurring
expenditures in preparation for the spring selling season, while
the majority of our revenue collections occur later in our third
fiscal quarter. If cash on hand is insufficient to pay our
obligations as they come due, including interest payments or
operating expenses, at a time when we are unable to draw on our
credit facilities, this seasonality could have a material
adverse effect on our ability to conduct our business. Adverse
weather conditions could heighten this risk.
We have a significant amount of debt that could adversely affect
our financial health and prevent us from fulfilling our
obligations. Our substantial indebtedness could have important
consequences. For example, it could:
Our ability to make payments and to refinance our indebtedness,
to fund planned capital expenditures and acquisitions and to pay
dividends 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 credit facilities
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
be sure that we would be able to refinance any of our
indebtedness on commercially reasonable terms or at all.
Our credit facilities 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 be
assured we will satisfy those ratios. A breach of any of these
financial ratio covenants or other covenants could result in a
default. Upon the occurrence of an event of default, the lenders
could elect to declare the applicable outstanding indebtedness
due immediately and payable and terminate all commitments to
extend further credit. We cannot be sure that our lenders would
waive a default or that we could pay the indebtedness in full if
it were accelerated.
We currently operate manufacturing, sales and service facilities
outside of the United States, particularly in Canada, France,
the United Kingdom, Germany and the Netherlands. In fiscal 2008,
international net sales, including Canada, accounted for
approximately 24% of our total net sales. Accordingly, we are
subject to risks associated with operating in foreign countries,
including:
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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 and
Canadian operations could adversely affect our operations and
financial results in the future.
We make strategic acquisitions from time to time, including the
June 2006 acquisition of certain assets of Landmark Seed
Company, the May 2006 acquisition of certain assets of
Turf-Seed, Inc., the November 2005 acquisition of Gutwein
(Morning
Song®),
the October 2005 acquisition of Rod McLellan Company and the
October 2004 acquisition of Smith &
Hawken®.
Acquisitions have inherent risks, such as obtaining necessary
regulatory approvals, retaining key personnel, integration of
the acquired business and achievement of planned synergies and
projections. We have approximately $745 million of goodwill
and intangible assets as of September 30, 2008. Uncertainty
regarding the future performance of the acquired businesses
could also result in future impairment charges related to the
associated goodwill and intangible assets, such as the
impairment charges recorded in fiscal 2006, 2007 and 2008.
If we were to commit a serious default under the Marketing
Agreement with Monsanto for consumer
Roundup®
products, Monsanto may have the right to terminate the Marketing
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 substantial 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 unit volume
sales to consumers in that region decline: (1) over a
cumulative three-fiscal-year period; or (2) by more than 5%
for each of two consecutive years.
Hagedorn Partnership, L.P. beneficially owned approximately 31%
of our outstanding common shares as of November 21, 2008,
and has sufficient voting power to significantly influence the
election of directors and the approval of other actions
requiring the approval of our shareholders.
None.
The Company owns or leases, as appropriate, numerous facilities
throughout the world to support each of its respective business
segments.
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The Company also leases warehouse space throughout North America
and continental Europe as needed.
We believe that our facilities are adequate to serve their
intended purposes and that our property leasing arrangements are
satisfactory.
As noted in the discussion in “ITEM 1.
BUSINESS — Regulatory Considerations,”
“ITEM 1. BUSINESS — FIFRA Compliance, the
Corresponding Governmental Investigation and Related
Matters” and “ITEM 1. BUSINESS — Other
Regulatory Matters,” we are involved in several pending
environmental and regulatory matters. We believe that our
assessment of contingencies is reasonable and that related
reserves, in the aggregate, are adequate; however, there can be
no assurance that the final resolution of these matters will not
have a material adverse affect on our results of operations,
financial position and cash flows.
Pending significant legal proceedings are as follows:
The Company’s products that contain pesticides must comply
with the Federal Insecticide, Fungicide, and Rodenticide Act of
1947, as amended (“FIFRA”), and be registered with the
U.S. Environmental Protection Agency
(“U.S. EPA”) (and similar state agencies) before
they can be sold or distributed. In April 2008, the Company
became aware that a former associate apparently deliberately
circumvented the Company’s policies and U.S. EPA
regulations under FIFRA by failing to obtain valid registrations
for products
and/or
causing invalid product registration forms to be submitted to
regulators. Since that
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time, the Company has been cooperating with the U.S. EPA in
its civil investigation into product registration issues
involving the Company and with the U.S. EPA and the
U.S. DOJ in a related criminal investigation. In late April
of 2008, in connection with the U.S. EPA’s
investigation, the Company was required to conduct a
consumer-level recall of certain consumer lawn and garden
products and a Scotts
LawnService®
product. Subsequently, the Company and the U.S. EPA agreed
upon a Compliance Review Plan for conducting a comprehensive,
independent review of the Company’s product registration
records. Pursuant to the Compliance Review Plan, an independent
third party firm, Quality Associates Incorporated
(“QAI”), has been reviewing all of the Company’s
U.S. pesticide product registration records. The
U.S. EPA investigation and QAI review process have resulted
in the issuance of a number of Stop Sale, Use or Removal Orders
by the U.S. EPA that resulted in the Company’s
temporarily being unable to ship or sell several products. In
addition, as the QAI review process or the Company’s
internal review has indicated a FIFRA registration issue or a
potential FIFRA registration issue (some of which appear
unrelated to the former associate), the Company has endeavored
to stop shipping or selling the affected products until the
issue could be resolved with the U.S. EPA.
The U.S. EPA investigation or the compliance review process
may result in future state or federal action or private rights
of action with respect to additional product registration
issues. Until such investigation and compliance review process
is complete, the Company cannot fully quantify the extent of
additional issues. While the Company continues to evaluate the
financial impact of the registration and recall matters, the
Company currently expects total fiscal year 2008 and 2009 costs
related to the recalls and known registration issues to be
limited to approximately $65 million, exclusive of
potential fines, penalties
and/or
judgments, of which approximately $51.1 million was
incurred during fiscal 2008. No reserves have been established
with respect to any potential fines, penalties and/or judgments
at the state and/or federal level related to the product
registration issues as the scope and magnitude of such amounts
are not currently estimable. However, it is possible that such
fines, penalties
and/or
judgments could be material and have an adverse effect on the
Company’s financial condition, results of operations and
cash flows.
On September 26, 2008, the Company, doing business as
Scotts
LawnService®,
was named as a defendant in a purported class action filed in
the U.S. District Court for the Eastern District of
Michigan relating to certain pesticide products. In the suit,
Mark Baumkel, on behalf of himself and the purported classes,
seeks an unspecified amount of damages, plus costs and attorney
fees, for alleged claims involving breach of contract, unjust
enrichment and violation of the Michigan consumer protection
act. Given the preliminary stages of the proceedings, no
reserves have been booked at this time, and the Company intends
to vigorously contest the plaintiff’s assertions.
On November 5, 2004, U.S. Horticultural Supply, Inc.
(“Geiger”) filed suit against the Company in the
U.S. District Court for the Eastern District of
Pennsylvania. The complaint alleges that the Company conspired
with another distributor, Griffin Greenhouse Supplies, Inc., to
restrain trade in the horticultural products market, in
violation of Section 1 of the Sherman Antitrust Act. On
June 2, 2006, the Court denied the Company’s motion to
dismiss the complaint. Fact discovery and expert discovery are
closed. Geiger’s damages expert quantifies Geiger’s
alleged damages at approximately $3.3 million, which could
be trebled under antitrust laws. Geiger also seeks recovery of
attorneys’ fees and costs. The Company has moved for
summary judgment requesting dismissal of Geiger’s claims.
The Company continues to vigorously defend against Geiger’s
claims and believes that Geiger’s claims are without merit.
While no accrual has been established related to this matter,
the Company cannot predict the ultimate outcome with certainty.
The Company had previously sued and obtained a judgment against
Geiger on April 25, 2005, based on Geiger’s default on
obligations to the Company. The Company is proceeding to collect
that judgment.
On October 25, 2006, The Scotts Company LLC (“Scotts
LLC”), as successor to The Scotts Company
(“Scotts”), the public company predecessor of Scotts
Miracle-Gro, sued Liberty Mutual Insurance Company
(“Liberty Mutual”) in the U.S. District Court for
the Southern District of Ohio. In the suit, Scotts LLC sought
damages and the rescission of a 2000 agreement between Scotts
and Liberty Mutual that purports to be a complete buyout by
Scotts of any insurance policies that Liberty Mutual might have
issued to Scotts (the “2000 Agreement”).
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As alleged in Scotts LLC’s complaint, in 1998, Scotts
tendered certain claims to Liberty Mutual, one of its
primary-layer insurers, in connection with costs incurred by
Scotts for environmental liabilities. Scotts believed that it
had coverage from Liberty Mutual for at least 10 years
beginning in 1958, but could only locate a single policy from
1967. Liberty Mutual responded to Scotts’ tender by stating
that, after conducting an internal search, Liberty Mutual did
not have sufficient evidence to establish that it had ever
insured Scotts before 1967. Based on Liberty Mutual’s
representations and Scotts’ inability to locate any
additional Liberty Mutual policies in Scotts’ own files,
Scotts eventually entered into the 2000 Agreement. According to
the complaint, in Fall 2006, Scotts discovered evidence
confirming that, contrary to its representations during the
negotiations leading to the 2000 Agreement, Liberty Mutual
provided liability insurance to Scotts beginning in at least
1958 and, in fact, paid claims to third parties on Scotts’
behalf during that period.
The complaint seeks rescission of the 2000 Agreement and seeks
damages based on Liberty Mutual’s breach of fiduciary duty,
fraud, breach of the implied covenant of good faith and fair
dealing and bad faith denial of coverage. Scotts LLC intends to
prosecute these claims vigorously. Liberty Mutual has filed an
answer that denies the complaint’s allegations and has
moved for summary judgment against Scotts LLC’s claims. The
Court has not set a trial date.
The Company has been named as a defendant in a number of cases
alleging injuries that the lawsuits claim resulted from exposure
to asbestos-containing products, apparently based on the
Company’s historic use of vermiculite in certain of its
products. The complaints in these cases are not specific about
the plaintiffs’ contacts with the Company or its products.
The Company in each case is one of numerous defendants and none
of the claims seek damages from the Company alone. The Company
believes that the claims against it are without merit and is
vigorously defending against them. It is not currently possible
to reasonably estimate a probable loss, if any, associated with
the cases and, accordingly, no accrual or reserves have been
recorded in the Company’s consolidated financial
statements. There can be no assurance that these cases, whether
as a result of adverse outcomes or as a result of significant
defense costs, will not have a material adverse effect on the
Company’s financial condition, results of operations and
cash flows.
The Company is reviewing agreements and policies that may
provide insurance coverage or indemnity as to these claims and
is pursuing coverage under some of these agreements and
policies, although there can be no assurance of the results of
these efforts.
On April 27, 2007, the Company received a proposed Order On
Consent from the New York State Department of Environmental
Conservation (the “Proposed Order”) alleging that,
during calendar year 2003, the Company and James Hagedorn,
individually and as Chairman of the Board and Chief Executive
Officer of the Company, unlawfully donated to a Port Washington,
New York youth sports organization forty bags of
Scotts®
LawnPro®
Annual Program Step 3 Insect Control Plus Fertilizer which,
while federally registered, was allegedly not registered in the
state of New York. The Proposed Order requests penalties
totaling $695,000. The Company has made its position clear to
the New York State Department of Environmental Conservation and
is awaiting a response.
We are involved in other lawsuits and claims which arise in the
normal course of our business. In our opinion, these claims
individually and in the aggregate are not expected to result in
a material adverse effect on our results of operations,
financial position and cash flows.
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There were no matters submitted to a vote of the security
holders of Scotts Miracle-Gro during the fourth quarter of
fiscal 2008.
SUPPLEMENTAL
ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Scotts Miracle-Gro, their positions
and, as of November 21, 2008, their ages and years with
Scotts Miracle-Gro (and its predecessors) are set forth below.
Executive officers serve at the discretion of the Board of
Directors of Scotts Miracle-Gro and pursuant to employment
agreements or other arrangements.
The business experience of each of the individuals listed above
during at least the past five years is as follows:
Mr. Hagedorn was named Chairman of the Board of Scotts in
January 2003 and named Chief Executive Officer of Scotts in May
2001. He served as President of Scotts Miracle-Gro (or its
predecessor) from November 2006 until October 2008 and from May
2001 until December 2005. Mr. Hagedorn serves on the
Company’s Board of Directors, a position he has held since
1995. He also serves as a director for Farms For City Kids
Foundation, Inc., Nurse Family Partnership, The CDC Foundation,
Embry-Riddle Aeronautical University, North Shore University
Hospital (New York), Scotts Miracle-Gro Foundation and the
Intrepid Sea-Air-Space Museum, all charitable organizations.
Mr. Hagedorn is the brother of Katherine Hagedorn
Littlefield, a director of Scotts Miracle-Gro.
Mr. Baker was named President and Chief Operating Officer
of Scotts Miracle-Gro in October 2008, and continues to serve on
the Company’s Board of Directors, a role he has held since
2004. From September 2002 until October 2008, Mr. Baker
served as Chief Executive Officer of Gander Mountain Company, an
outdoor retailer specializing in hunting, fishing and camping
gear. He served as President of Gander Mountain Company from
February 2004 until October 2008 and as a director of Gander
Mountain Company from April 2004 until October 2008.
Dr. Kelty was named Executive Vice President of Scotts
Miracle-Gro in October 2008. He served as Vice Chairman and
Executive Vice President of Scotts Miracle-Gro (or its
predecessor) from May 2001 until his retirement in November
2005. After his retirement, Dr. Kelty served as an hourly
consultant to the Company at various times, most recently
beginning in October 2007.
Mr. Evans was named Executive Vice President and Chief
Financial Officer of Scotts Miracle-Gro on September 14,
2006. From October 2005 to September 2006, he served as Senior
Vice President, Finance and Global Shared Services of Scotts
LLC. From March 2005 to September 2005, he served as Senior Vice
President, North America of Scotts LLC, and from October 2003 to
March 2005, he served in
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the same capacity for Scotts. From June 2001 to September 2003,
he served as Vice President, Finance, North America Sales of
Scotts.
Mr. Lukemire was named Executive Vice President, Global
Technologies and Operations of Scotts Miracle-Gro in June
2008. From August 2007 until June 2008, Mr. Lukemire served
as Senior Vice President, Global Technologies and Operations of
Scotts LLC. From March 2005 until August 2007, he served as
Senior Vice President, Global Supply Chain of Scotts LLC, and
from October 2003 to March 2005, he served in the same capacity
for Scotts.
Ms. Stump was named Executive Vice President, Global Human
Resources of Scotts in February 2003. She was named Senior
Vice President, Global Human Resources of Scotts in
October 2002. From July 2001 until October 2002,
Ms. Stump served as Vice President, Human Resources North
America of Scotts. From September 2000 until July 2001,
Ms. Stump served as Vice President, Human Resources
Technology and Operations of Scotts.
Mr. Sanders was named Executive Vice President, North
America of Scotts Miracle-Gro in September 2007. From
January 25, 2005 until September 2007, he served as
Executive Vice President of Global Technologies and Operations
of Scotts Miracle-Gro (or its predecessor), and was responsible
for the Company’s supply chain and information systems as
well as research and development efforts. He previously led the
North American and global supply chain organizations as well as
the North American sales force. In 2005, he ran the
Smith &
Hawken®
business on an interim basis. Prior to joining the Company in
2001, he was a partner with CapGemini/Ernst & Young.
Mr. Lopez was named Executive Vice President, International
and Chief Marketing Officer of Scotts Miracle-Gro in
October 2007. Mr. Lopez leads marketing for all global
consumer-facing business. He also has leadership responsibility
for the Company’s Global Professional and Pro Seed
businesses. He served as Senior Vice President, International
and Chief Marketing Officer of the Company from September 2007
until October 2007. From December 2004 until September 2007,
Mr. Lopez served as Senior Vice President, International of
the Company. From the time Mr. Lopez joined the Company in
2001 until December 2004, he served as general manager of the
Company’s French business.
Mr. Brockman was named Executive Vice President, General
Counsel and Corporate Secretary of Scotts Miracle-Gro in January
2008. From February 2007 until January 2008, he served as Senior
Vice President, Chief Ethics and Compliance Officer and Chief
Administrative Officer of Scotts LLC. He served as Chief
Administrative Officer of Scotts LLC from 2006 until February
2007. From March 2005 until February 2007, he served as Chief
Ethics and Compliance Officer of Scotts LLC, and from 2004 until
March 2005, he served in the same capacity for Scotts. He served
as Vice President and Assistant General Counsel of Scotts from
2002 until 2004.
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The common shares of The Scotts Miracle-Gro Company
(“Scotts Miracle-Gro” and, together with its
subsidiaries, the “Company”) trade on the New York
Stock Exchange under the symbol “SMG.” The quarterly
high and low sale prices, which have not been adjusted for the
special one-time cash dividend of $8.00 per share described
below, for the fiscal years ended September 30, 2008 and
2007 were as follows:
On June 22, 2005, the Company announced that its Board of
Directors had approved the establishment of a quarterly cash
dividend. The $0.50 per share (adjusted for the
2-for-1
stock split distributed November 9, 2005) annual
dividend has been paid in quarterly increments since the fourth
quarter of fiscal 2005. In addition, the Company paid a special
one-time cash dividend of $8.00 per share on March 5, 2007.
The payment of future dividends, if any, on the common shares
will be determined by the Board of Directors of Scotts
Miracle-Gro in light of conditions then existing, including the
Company’s earnings, financial condition and capital
requirements, restrictions in financing agreements, business
conditions and other factors. Future dividend payments are
currently restricted to $55 million annually under our
existing credit facilities. See discussion regarding the
recapitalization plan executed in the second quarter of fiscal
2007 in “ITEM 7. MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS — Executive Summary.” See
“NOTE 11. DEBT” to the Consolidated Financial
Statements included in this Annual Report on
Form 10-K
for further discussion regarding the restrictions on dividend
payments.
As of November 21, 2008, there were approximately
29,000 shareholders, including holders of record and our
estimate of beneficial holders.
The following table shows the purchases of common shares of
Scotts Miracle-Gro (“Common Shares”) made by or on
behalf of Scotts Miracle-Gro or any “affiliated
purchaser” (as defined in
Rule 10b-18(a)(3)
under the Securities Exchange Act of 1934, as amended) of Scotts
Miracle-Gro for each of the three fiscal months in the quarter
ended September 30, 2008:
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Recent Sales of
Unregistered Securities
The Company has determined that, during a period between
August 6, 2008 and October 16, 2008, the trustee of
The Scotts Company LLC Retirement Savings Plan (the
“RSP”) allocated to certain RSP participants’
accounts a total of 84,701 Common Shares that were not
registered in accordance with the Securities Act of 1933, as
amended (the “Securities Act”). The RSP is a qualified
defined contribution plan that enables participants to defer
some portion of their current compensation for later
distribution pursuant to the terms of the RSP and to direct that
such deferrals and other contributions made on such
participants’ behalves be invested in one or more
investment funds administered pursuant to the terms of the RSP,
including the Scotts Miracle-Gro Common Stock Fund. The
Securities Act requires Scotts Miracle-Gro to register Common
Shares for use in connection with the RSP prior to such Common
Shares being allocated to the accounts of those RSP participants
who elect to invest some or all of their deferral and other
contribution amounts in the Scotts Miracle-Gro Common Stock Fund.
To satisfy obligations under the RSP with respect to amounts
invested in the Scotts Miracle-Gro Common Stock Fund, the
trustee of the RSP purchases previously issued Common Shares on
the open market. Although Common Shares purchased on the open
market were registered with the Securities and Exchange
Commission (the “SEC”) in accordance with the
Securities Act at the time they were originally issued, such
registration was effective only with respect to the original
issuance of the Common Shares, and, unless an exemption from the
registration requirements of the Securities Act is available,
the purchased Common Shares must again be registered under the
Securities Act before they can be allocated to participant
accounts under the RSP. While Scotts Miracle-Gro had previously
filed two Registration Statements on
Form S-8
with the SEC in order to register Common Shares for use in
connection with the RSP, the trustee of the RSP had allocated
all available registered Common Shares to RSP participant
accounts by August 6, 2008. Accordingly, Common Shares
allocated to RSP participant accounts between August 6,
2008 and October 16, 2008 were not registered in accordance
with the Securities Act. On October 16, 2008, Scotts
Miracle-Gro filed a third Registration Statement on
Form S-8
with the SEC in order to register an additional 2,500,000 Common
Shares for use in connection with the RSP, and all Common Shares
allocated to the RSP participant accounts after that date were
registered.
Because the Common Shares allocated to RSP participant accounts
between August 6, 2008 and October 16, 2008 were not
registered, those RSP participants to whose accounts Common
Shares were allocated during that period may have a right to
rescind purchases made on their behalf through the RSP. Given an
average daily closing price of $24.50 per Common Share during
the period at issue, and a
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closing price of $26.38 per Common Share on November 21,
2008, the Company does not intend to make a rescission offer to
participants in the RSP.
Five-Year
Summary(1)
For the fiscal year ended September 30, (in millions, except per share amounts)
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A numeric reconciliation of net income (loss) to Adjusted EBITDA
is as follows:
The purpose of this discussion is to provide an understanding of
the financial condition and results of operations of The Scotts
Miracle-Gro Company (“Scotts Miracle-Gro”) and its
subsidiaries (collectively the “Company”), by focusing
on changes in certain key measures from
year-to-year.
Management’s Discussion and Analysis
(“MD&A”) is divided into the following sections:
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
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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.
In April 2008, the Company learned that a former associate
apparently deliberately circumvented the Company’s policies
and U.S. Environmental Protection Agency
(“U.S. EPA”) regulations under the Federal
Insecticide, Fungicide, and Rodenticide Act of 1947, as amended
(“FIFRA”), by failing to obtain valid registrations
for products
and/or
causing invalid product registration forms to be submitted to
regulators. Since that time, the Company has been cooperating
with the U.S. EPA in its civil investigation into pesticide
product registration issues involving the Company and with the
U.S. EPA and the U.S. Department of Justice (the
“U.S. DOJ”) in a related criminal investigation.
In late April of 2008, in connection with the
U.S. EPA’s investigation, the Company was required to
conduct a consumer-level recall of certain consumer lawn and
garden products and a Scotts
LawnService®
product. Subsequently, the Company and the U.S. EPA agreed
upon a Compliance Review Plan for conducting a comprehensive,
independent review of the Company’s product registration
records. Pursuant to the Compliance Review Plan, an independent
third-party firm, Quality Associates Incorporated
(“QAI”), has been reviewing all of the Company’s
U.S. pesticide product registration records, some of which are
historical in nature and no longer support sales of the
Company’s products. The Company has identified
approximately 132 of the registrations under review as relating
to products for which there was sales activity in the period
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generally representing the Company’s 2008 fiscal year
(“Active Registrations”). These Active Registrations
supported products which accounted for approximately
$680 million of the Company’s net sales in the period.
The U.S. EPA investigation and QAI review process
identified several issues affecting Active Registrations which
resulted in the issuance of a number of Stop Sale, Use or
Removal Orders by the U.S. EPA and caused the Company to
temporarily suspend sales and shipments of affected products. In
addition, as the QAI review process or the Company’s
internal review has identified a FIFRA registration issue or a
potential FIFRA registration issue (some of which appear
unrelated to the former associate), the Company has endeavored
to stop selling or distributing the affected products until the
issue could be resolved with the U.S. EPA.
To date, QAI has completed a review of the registration records
for substantially all of the Company’s Active
Registrations. Based on such review, and with the cooperation
and prompt attention of the U.S. EPA, the Company believes
it has restored the ability to sell and distribute products
representing over 90% of the sales associated with Active
Registrations; and the Company is hopeful that it will be able
to satisfactorily resolve most, if not all, of the remaining
issues prior to the start of the 2009 lawn and garden season.
The QAI review process is expected to continue with a focus on
reviewing advertising and related promotional support of our
registered pesticide products.
While the Company believes it has made substantial progress
toward completing the FIFRA compliance review process, the
process continues and may result in future state or federal
action with respect to additional product registration issues.
Until such investigation is complete, the Company cannot fully
quantify the extent of additional issues. Furthermore, the
Company may be subject to civil or criminal fines and/or
penalties or private rights of action at the state
and/or
federal level as a result of the product registration issues. At
this time, management cannot reasonably determine the scope or
magnitude of possible liabilities that could result from known
or potential additional product registration issues, and no
reserves for these claims have been established as of
September 30, 2008. However, it is possible that such
fines, penalties
and/or
judgments could be material and have an adverse effect on the
Company’s financial condition, results of operations and
cash flows.
On September 26, 2008, the Company, doing business as
Scotts
LawnService®,
was named as a defendant in a purported class action filed in
the U.S. District Court for the Eastern District of
Michigan relating to certain pesticide products. In the suit,
Mark Baumkel, on behalf of himself and the purported classes,
seeks an unspecified amount of damages, plus costs and attorney
fees, for alleged claims involving breach of contract, unjust
enrichment and violation of the Michigan consumer protection
act. Given the preliminary stages of the proceedings, no
reserves have been booked at this time, and the Company intends
to vigorously contest the plaintiff’s assertions.
In addition, in fiscal 2008 the Company conducted a voluntary
recall of most of its wild bird food products due to a
formulation issue. The wild bird food products had been treated
with pest control additives to avoid insect infestation,
especially at retail stores. While the pest control additives
had been labeled for use on certain stored grains that can be
processed for human
and/or
animal consumption, they were not labeled for use on wild bird
food products. This voluntary recall was completed prior to the
end of fiscal 2008.
As a result of these registration and recall matters, the
Company has reversed sales associated with estimated returns of
affected products, recorded an impairment estimate for affected
inventory and recorded other registration and recall-related
costs. The cumulative impact of these adjustments reduced income
from operations by $51.1 million for the fiscal year ended
September 30, 2008. While the Company continues to evaluate
the financial impact of the registration and recall matters, the
Company currently expects total fiscal year 2008 and 2009 costs
related to the recalls and known registration issues to be
limited to approximately $65 million, exclusive of
potential fines, penalties
and/or
judgments.
Scotts Miracle-Gro is committed to providing its customers and
consumers with products of superior quality and value to enhance
their lawns, gardens and overall outdoor living environments. We
believe consumers have come to trust our brands based on the
superior quality and value they deliver, and that trust is
highly valued. We are also committed to conducting business with
the highest degree of ethical standards and in adherence to the
law. While we are disappointed in these recent events, we
believe we have made significant progress in addressing the
issues and restoring customer and consumer confidence in our
products.
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The following table sets forth the components of income and
expense as a percentage of net sales for the three years ended
September 30, 2008:
Consolidated net sales for fiscal 2008 increased 3.8% to
$2.98 billion from $2.87 billion in fiscal 2007, while
for fiscal 2007, net sales increased 6.3% to $2.87 billion
from $2.70 billion in fiscal 2006. Significantly impacting
the rate of sales growth in both years were the following items:
Excluding the impact of pricing, Global Consumer adjusted net
sales declined by 2.5% for the year. We believe this was a
result of a number of factors, including the overall economic
climate in the United States, as well as unfavorable early
spring weather conditions. Adjusted net sales in our Global
Professional segment grew 9.3% excluding the impact of pricing,
driven by strong demand for the proprietary technology used in
that segment. Despite a reduction in customer count, Scotts
LawnService®
experienced adjusted net sales growth of 1.2%, excluding the
impact of pricing. Corporate & Other adjusted net sales
decreased 13.8%, primarily driven by declines across all
channels of the Smith &
Hawken®
business.
The adjusted net sales increase of 3.4% in fiscal 2007 was
reflective of the weather related challenges in the largest part
of our business, the Global Consumer segment. Extreme cold and
wet weather in April 2007 discouraged consumer usage during this
key retail selling period, and these lost opportunities were not
recovered as the weather improved later in the spring. While we
saw strong growth in the gardening category, in our Scotts
LawnService®
business, and our in Global Professional segment, the adverse
impact of weather on the important lawns business in North
America overshadowed these successes.
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As a percentage of net sales, gross profit was 31.5% of net
sales for fiscal 2008 compared to 35.0% for fiscal 2007. The
decrease in gross profit margin percentage was primarily driven
by increased commodity costs, which unfavorably impacted all
operating segments. Product registration and recall matters and
impairment charges unfavorably impacted gross profit rates for
fiscal 2008 by 90 basis points and 50 basis points,
respectively.
As a percentage of net sales, gross profit was 35.0% of net
sales for fiscal 2007 compared to 35.4% for fiscal 2006. This
decline in gross profit was driven primarily by the Global
Consumer segment, due almost entirely to unfavorable product
mix. Strong net sales growth in the lower margin wild bird food
and growing media businesses, coupled with a net sales decline
in our higher margin lawns business, were the drivers behind
this decrease. Offsetting this decline were gross profit
improvements in our Scotts
LawnService®,
Smith &
Hawken®
and the Global Professional businesses.
Selling, General
and Administrative Expenses (in millions)
Advertising expenses in fiscal 2008 were $142.4 million, a
decrease of $8.5 million or 5.6% from fiscal 2007. Fiscal
2007 advertising expenses were $150.9 million, an increase
of $13.6 million or 9.9% from fiscal 2006. On a percentage
of net sales basis, advertising expenses were 4.8% of net sales
in fiscal 2008, 5.3% in fiscal 2007 and 5.1% in fiscal 2006. The
fiscal 2008 decrease as a percent of net sales was principally
the result of a shift from media to consumer promotions and
other trade expense, the costs of which are netted against sales
rather than classified as SG&A. The fiscal 2007 increase as
a percent of net sales was due to an effort to drive consumer
interest and reinvigorate the lawns category following weak net
sales performance in April 2007.
In fiscal 2008, other SG&A spending increased
$27.9 million or 5.4% from fiscal 2007. The Company’s
increased investments were focused principally within the sales
force, research and development and marketing areas
($14.2 million). The increase from fiscal 2007 to fiscal
2008 was largely driven by increased investments within the
North America portion of the Global Consumer segment. The
adverse impact of foreign exchange rates on spending outside of
the United States represented the majority of the remaining
increase ($11.3 million). In fiscal 2007, other SG&A
spending increased $50.5 million or 10.8% from fiscal 2006.
An increase in Scotts
LawnService®
infrastructure ($20.4 million), the adverse effect of
foreign exchange rates on spending outside the United States
($11.3 million), and a nonrecurring benefit in fiscal 2006
($10.1 million) for an insurance recovery relating to past
legal costs incurred in our defense of lawsuits regarding our
use of vermiculite were the primarily drivers behind the
increase from fiscal 2006 to fiscal 2007.
The majority of our stock-based awards vest over three years,
with the associated expense recognized ratably over the vesting
period. The decrease in stock-based compensation expense in
fiscal 2008 as compared to fiscal 2007 was primarily
attributable to a change in the Board of Directors equity
compensation plan effective in February 2008, which resulted in
the majority of associated expense being recognized ratably over
the Board of Directors’ service period, compared to
previous years’ grants where the associated expense was
recorded entirely in the year of the grant. Additionally, the
decrease in the Company’s share price during fiscal 2008
resulted in a reduction of expense for the equity awards that
are expensed based on the Company’s share price.
Amortization expense of $15.6 million in fiscal 2008 is
comparable to $15.3 million in fiscal 2007 and
$15.2 million in fiscal 2006.
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Impairment,
Restructuring and Other Charges (in millions)
During the third quarter of fiscal 2007, the Company changed the
timing of its SFAS 142, “Goodwill and Other Intangible
Assets” annual goodwill impairment testing from the last
day of our first fiscal quarter to the first day of our fourth
fiscal quarter. Moving the timing of our annual goodwill
impairment testing better aligns with the seasonal nature of our
business and the timing of our annual strategic planning
process. In addition, the Company also changed the date of its
annual indefinite life intangible impairment testing to the
first day of our fourth fiscal quarter. Management engages an
independent valuation firm to assist in its impairment
assessment reviews.
As a result of a significant decline in the market value of the
Company’s common shares during the latter half of the third
fiscal quarter ended June 28, 2008, the Company’s
market value of invested capital was approximately 60% of the
comparable impairment metric used in our fourth quarter fiscal
2007 annual impairment testing. Management determined this was
an indicator of possible goodwill impairment and, therefore,
interim impairment testing was performed as of June 28,
2008.
The Company’s third quarter fiscal 2008 interim impairment
review resulted in a non-cash charge of $123.3 million to
reflect the decline in the fair value of certain goodwill and
other assets evidenced by the decline in the Company’s
common shares. No further adjustments to the goodwill portion of
this impairment charge were required as a result of the
completion of the SFAS 142 Step 2 evaluation in the fourth
quarter of fiscal 2008. However, an additional impairment charge
of $13.5 million was recorded in the fourth quarter of
fiscal 2008, primarily related to leasehold improvements of
Smith &
Hawken®.
In total, the fiscal 2008 impairment charges comprise
$80.8 million for goodwill, $19.0 million related to
indefinite-lived tradenames and $37.0 million for
SFAS 144 long-lived assets. Of the $37.0 million
impairment charge recorded for SFAS 144 long-lived assets,
$15.1 million was recorded in cost of sales. On a
reportable segment basis, $64.5 million of the impairment
was in Global Consumer, $38.4 million was in Global
Professional, with the remaining $33.9 million in
Corporate & Other.
The Company recorded $12.7 million of SG&A-related
product registration and recall costs during fiscal 2008 which
primarily relate to third-party compliance review, legal and
consulting fees.
Our fourth quarter fiscal 2007 impairment review resulted in a
non-cash goodwill and intangible asset impairment charge of
$35.3 million. Partially as a result of the disappointing
2007 lawn and garden season, management completed a
comprehensive strategic update of its business initiatives in
the fourth quarter of fiscal 2007. One outcome of this update
was a decision to increase the focus of Company resources on our
core consumer lawn and garden do-it-yourself businesses. This
process also involved a re-evaluation of the strategy and cash
flow projections surrounding our Smith &
Hawken®
business, which has consistently performed below expectations
since it was acquired in early fiscal 2005. We revised our
Smith &
Hawken®
strategy to reflect a scaled back retail expansion plan, with an
increased focus on aggressively expanding the wholesale aspect
of this business. This resulted in a decrease in our prior cash
flow projections for this business, resulting in a
$24.6 million goodwill impairment charge and a
$4.6 million impairment charge for an indefinite-lived
tradename. The Company finalized the fourth quarter fiscal 2007
SFAS 142 impairment evaluation of the Smith &
Hawken®
goodwill during the first quarter of fiscal 2008 and there was
no change to the related impairment charge recorded in the
fourth quarter of fiscal 2007.
Our fiscal 2007 fourth quarter strategic update also encompassed
other areas. We remain strongly committed to the development of
turfgrass varieties that could one day require less mowing, less
water and fewer treatments to resist insects, weeds and disease.
Our efforts to develop such turfgrass varieties include
conventional breeding programs as well as research and
development involving biotechnology. Our efforts to develop
turfgrass varieties involving biotechnology have yielded
positive results; however, the required regulatory approval
process is taking longer than anticipated, impacting our ability
to
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commercialize our innovations. As a result of our fiscal 2007
fourth quarter strategic update, we recorded a $2.2 million
goodwill impairment charge related to our turfgrass
biotechnology program. Similarly, a strategic update of certain
information technology initiatives in our Scotts
LawnService®
segment resulted in a $3.9 million impairment charge.
Other charges in fiscal 2007 related to ongoing monitoring and
remediation costs associated with our turfgrass biotechnology
program. Restructuring activities in fiscal 2006 related
primarily to organizational reductions associated with Project
Excellence, initiated in the third quarter of fiscal 2005. As a
result of this program, approximately 110 associates accepted
early retirement or were severed during fiscal 2006.
Other income, net was $10.4 million for fiscal 2008,
$11.5 million for fiscal 2007 and $9.2 million for
fiscal 2006. Royalty income was the most significant component
of other income, approximating $9.6 million,
$9.9 million and $6.8 million in fiscal 2008, 2007 and
2006, respectively.
Income from operations in fiscal 2008 was $98.0 million
compared to $277.1 million in fiscal 2007, a decrease of
$179.1 million. Fiscal 2008 was negatively impacted by
impairment charges ($136.8 million) and product
registration and recall costs ($51.1 million) that, when
excluded, result in income from operations of
$285.9 million. Fiscal 2007 was negatively impacted by
impairment and other charges ($38.0 million) that, when
excluded, result in income from operations of
$315.1 million. Excluding the impairment and other charges
and product registration and recall costs, income from
operations declined by $29.2 million in 2008, primarily
driven by increased commodity costs which more than offset price
increases passed onto our customers.
Income from operations in fiscal 2007 was $277.1 million
compared to $252.5 million in fiscal 2006, an increase of
$24.6 million. Both years were negatively impacted by
impairment, restructuring and other charges that, when excluded,
result in a decline of $13.1 million of income from
operations in fiscal 2007 as compared to fiscal 2006. The
adverse effects of weather on net sales growth coupled with a
40 basis point decline in gross profit and SG&A
spending increases were the drivers behind this decline.
Interest expense in fiscal 2008 was $82.2 million compared
to $70.7 million and $39.6 million in fiscal 2007 and
2006, respectively. The increase in interest expense is
primarily attributable to an increase in borrowings resulting
from the recapitalization transactions that were consummated
during the second quarter of fiscal 2007. We also recorded
$18.3 million in costs in fiscal 2007 related to the
refinancing undertaken to facilitate the recapitalization
transactions.
The effective tax rate for fiscal 2008 was 168.6% compared to
39.7% in fiscal 2007 and 37.7% in fiscal 2006. The increase in
the effective tax rate for fiscal 2008 and fiscal 2007 was due
to goodwill impairment charges ($80.8 million,
$26.8 million and $1.8 million in fiscal 2008, 2007
and 2006, respectively), which are not fully deductible for tax
purposes. The fiscal 2008 income tax expense also includes
$16.9 million of charges to fully reserve for deferred tax
assets that originated as a result of impairments of the
Smith &
Hawken®
business in fiscal 2008 and fiscal 2007. The Company has
concluded that it is probable that we will not receive any
future benefit from these deferred tax assets.
The Company reported a net loss of $10.9 million or $0.17
per diluted share in fiscal 2008 compared to net income of
$113.4 million or $1.69 per diluted share in fiscal 2007.
The Company recorded $136.8 million in impairment charges,
as well as $51.1 million in costs related to product
registration and recall matters, in fiscal 2008. Challenging
weather conditions in March 2008 negatively impacted net sales
for the largest part of our business, the Global Consumer
segment. Additionally, commodity costs increased significantly
in fiscal 2008. Diluted weighted-average common shares
outstanding decreased from 67.0 million in fiscal 2007 to
64.5 million in fiscal 2008, due to the
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4.5 million common shares repurchased as part of the
recapitalization consummated during the second quarter of fiscal
2007, weighted for the period outstanding, and offset by common
shares issued upon the exercise of share-based awards and the
vesting of restricted stock. Furthermore, 0.9 million
potential common shares were excluded from the diluted loss per
share calculation for fiscal 2008 because their effect is
anti-dilutive. The number of potential common shares declined in
fiscal 2008 as a result of a lower average market price for our
common shares.
While income from operations increased $24.6 million in
fiscal 2007 over fiscal 2006, net income decreased from
$132.7 million or $1.91 per diluted share in fiscal 2006 to
$113.4 million or $1.69 per diluted share in fiscal 2007.
Adverse weather conditions negatively impacted net sales in the
Global Consumer segment, particularly during the important month
of April. Costs related to the refinancing, increased levels of
debt and a higher weighted average interest rate resulting from
the recapitalization transactions coupled with a higher
effective tax rate also contributed to the decline. Diluted
weighted-average common shares outstanding decreased from
69.4 million in fiscal 2006 to 67.0 million in fiscal
2007 due to the repurchase of 4.5 million of our common
shares, weighted for the period outstanding, as part of the
recapitalization transactions consummated in the second quarter
of fiscal 2007.
The Company is divided into the following segments: Global
Consumer, Global Professional, Scotts
LawnService®
and Corporate & Other. These segments differ from
those used in the prior year due to the realignment of the North
America and International segments into the Global Consumer and
Global Professional segments. The Corporate & Other
segment consists of Smith &
Hawken®
and corporate general and administrative expenses. The prior
year amounts have been reclassified to conform to the fiscal
2008 segments. Segment performance is evaluated based on several
factors, including income from operations before amortization,
product registration and recall costs, and impairment,
restructuring and other charges, which are not generally
accepted accounting principles (“GAAP”) measures.
Management uses this measure of operating profit to gauge
segment performance because we believe this measure is the most
indicative of performance trends and the overall earnings
potential of each segment.
Net Sales by
Segment (in millions)
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Income from
Operations by Segment (in millions)
Global Consumer segment net sales were $2.25 billion in
fiscal 2008 compared to $2.18 billion in fiscal 2007, an
increase of 3.4%. Within Global Consumer, North America consumer
sales increased by 2.0%. Net sales of our gardening products,
which consist of plant foods and growing media, increased by
0.7%, with growth driven by growing media products, where
consumers continue to trade up for branded, value-added
solutions. Net sales of our lawn products, comprised of
fertilizers, grass seed, and durables, increased by 0.8% as the
season got off to a late start, with unseasonable March weather
resulting in reduced sales of higher priced lawn fertilizer
combination products.
Ortho®
net sales decreased by 3.4% in fiscal 2008, while the net sales
in the wild bird food category have increased by 20.0% primarily
due to pricing, and net sales in Canada increased by 9.3%
excluding the effect of foreign exchange rates. International
consumer sales increased by 10.8% in 2008. Excluding foreign
exchanges rates, international consumer net sales increased 2.0%
driven by growth in France and Central Europe as the result of
improved marketing programs and new products. This growth offset
the decreased net sales in the United Kingdom where the economic
environment is more challenging and competition has been more
aggressive.
Global Consumer segment operating income decreased by
$34.6 million or 9.1% in fiscal 2008. The decrease in
operating income was driven primarily by a decrease in gross
margin rates of 160 basis points. The decrease in gross
margin rates was largely the result of higher commodity costs,
which more than offset price increases. SG&A spending,
including media advertising, increased 3.7% in fiscal 2008
primarily related to higher selling and R&D costs.
For fiscal 2007, Global Consumer segment net sales were
$2.18 billion, an increase of $86.6 million or 4.1%
compared to fiscal 2006. In the North American consumer
business, adverse weather conditions for much of the core
selling season disproportionately impacted the lawns business,
resulting in a 5.6% decline in net sales. The other core
businesses were less impacted by the weather, with net sales in
the gardening category up 7.4% and
Ortho®
up 2.9%. Net sales in our wild bird food business improved by
13.5%. International consumer net sales increased by 5.5%
excluding foreign exchange rates, driven by growth in our two
largest markets, France and the United Kingdom. The increase in
net sales for the segment did not generate the gross margin
improvement needed to offset the growth in advertising and other
SG&A spending, with the result being a decline in segment
operating income of $13.3 million or 3.4% compared to
fiscal 2006.
Global Professional segment net sales increased
$66.9 million or 23.7% in fiscal 2008. Excluding the effect
of exchange rates, net sales increased by 17.2%. Strong demand
for our proprietary technology drove the sales growth of 9.3% in
fiscal 2008, excluding pricing actions. The segment operating
income increased by $2.4 million in fiscal 2008 as the
strong growth in net sales was partially offset by increased
commodity costs and SG&A spending, primarily related to
selling costs.
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Global Professional segment net sales increased
$48.5 million or 20.8% in fiscal 2007, driven by the impact
of foreign exchange rates as well as organic growth in the
international professional business. The segment operating
income increased by $4.0 million or 14.7% in fiscal 2007
driven by a steady gross margin on higher net sales as well as
tight control over growth in SG&A spending.
Compared to fiscal 2007, Scotts
LawnService®
net sales increased 7.3% to $247.4 million in fiscal 2008.
The increase for fiscal 2008 was the result of acquisition
growth of 3.3%, pricing of 2.8% and organic growth of 1.2%.
Despite macroeconomic pressures that have reduced customer
count, the business has grown partially due to increased
penetration on tree, shrub and insect services, a reduction in
new customer cancel rates and reduced cancels due to issues with
service or results. Additionally, the shifting of late season
lawn treatments to the first quarter of fiscal 2008 positively
impacted net sales. The Scotts
LawnService®
segment operating income is flat compared to fiscal 2007 as the
net sales and gross margin growth were offset by an increase in
SG&A spending.
Compared to fiscal 2006, segment net sales increased 12.1% to
$230.5 million for fiscal 2007. This revenue growth was
primarily attributable to an increase in average customer count.
Approximately 3.6% of the revenue increase came from
acquisitions completed in fiscal 2006 and fiscal 2007. Operating
income decreased from $15.6 million in fiscal 2006 to
$11.3 million in fiscal 2007. The decrease in operating
income was primarily attributable to higher planned SG&A
spending to support higher volume and continued service
improvements. Improved labor productivity helped to offset
higher fertilizer and fuel costs, but revenue growth was not
adequate to cover the higher levels of SG&A spending due to
adverse weather conditions during the important late
winter/early spring period.
Net sales for the Corporate & Other segment, which
pertain primarily to Smith &
Hawken®,
decreased $25.4 million or 13.8% in fiscal 2008. Net sales
decreased across all channels of Smith &
Hawken®.
Additionally, the first half of fiscal 2007 benefited from
initial
start-up
activity with
Starbucks®.
The operating loss for Corporate & Other decreased by
$3.3 million in fiscal 2008 primarily due to lower
net Corporate spending.
Net sales for the Corporate & Other segment increased
$14.8 million or 8.7% in fiscal 2007 due largely to the
business-to-business channel, including the initial
start-up
activity with
Starbucks®.
The operating loss for Corporate & Other decreased by
$0.5 million in fiscal 2007. Spending at the Corporate
level declined more than the numbers indicate for fiscal 2007,
as fiscal 2006 benefited from a $10.1 million insurance
recovery.
Entering fiscal 2009, we expected net income and earnings per
share, excluding impairment charges and product registration and
recall costs, to be in line with the results we reported in
fiscal 2008. We anticipated net sales to be flat compared to
2008, as average price increases of eight percent would be
largely offset by unfavorable foreign exchange rate movements
and unit volume declines. We also anticipated that gross margin
rates would be in line with 2008 and that SG&A would likely
grow at a minimal level.
In the early weeks of fiscal 2009, however, key commodity costs
continued to trend more favorably than expected. Subsequently,
several retail partners approached the Company about possibly
providing private label products for them in fiscal 2009 after a
major competitor unexpectedly exited the category. While we are
hopeful that favorable commodity price trends will continue and
that we will ultimately be successful in securing additional
volume from the private label opportunities, we are mindful of
the continually deteriorating outlook for consumer spending.
Given the seasonality of our business (which results in a
concentration of sales in the second and third fiscal quarters),
it is difficult for us to predict what impact the current
economic volatility will have on upcoming consumer lawn and
garden spending. Nevertheless, we believe that we have more
opportunity than not to exceed the financial expectations we had
entering fiscal 2009.
The Company remains focused on maintaining its free cash flow
and return on invested capital, both of which the Company
believes are important drivers of shareholder value. Our regular
quarterly
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dividend will allow us to continue to return funds to
shareholders while maintaining our targeted capital structure.
For certain information concerning our risk factors, see
“ITEM 1A. RISK FACTORS.”
Liquidity and
Capital Resources
Cash provided by operating activities decreased from
$246.6 million in fiscal 2007 to $200.9 million in
fiscal 2008. Net income (loss) plus non-cash impairment charges,
non-cash costs related to refinancing, stock-based compensation
expense, depreciation and amortization declined by
$41.8 million from $250.5 million in fiscal 2007 to
$208.7 million in fiscal 2008, primarily due to product
registration and recall costs of approximately
$51.1 million.
Cash provided by operating activities increased from
$182.4 million in fiscal 2006 to $246.6 million in
fiscal 2007. Net income plus non-cash impairment charges,
non-cash costs related to refinancing, stock-based compensation
expense, depreciation and amortization declined by
$31.3 million from $281.8 million in fiscal 2006 to
$250.5 million in fiscal 2007, primarily due to higher
interest expense after our February 2007 recapitalization and
lower operating income in our Global Consumer segment. Fiscal
2006 operating cash flows were unfavorably impacted by inventory
and accounts receivable increases, which did not impact fiscal
2007. Furthermore, fiscal 2006 reflects a $43.0 million
usage of cash to fund the
Roundup®
deferred contribution payment in October 2005.
The seasonal nature of our operations 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 of the
year in line with the timing of sales to support our
retailers’ spring selling season. These balances liquidate
during the June through September period as the lawn and garden
season unwinds. Unlike our core retail business, Scotts
LawnService®
typically has its highest receivables balances in the fourth
quarter because of the seasonal timing of customer applications
and extra service revenues.
Cash used in investing activities was $59.1 million and
$72.2 million for fiscal 2008 and 2007, respectively.
Capital spending increased from $54.0 million in fiscal
2007 to $60.2 million in fiscal 2008. Capital spending in
fiscal 2008 included a $4.1 million investment in
intellectual property rights to certain organically derived
herbicides, repellants and insecticides. For the three years
ended September 30, 2008, the Company’s capital
spending was allocated as follows: 50% for expansion and
maintenance of Global Consumer productive assets; 12% for new
productive assets supporting our Global Consumer business; 9%
primarily for leasehold improvements associated with new
Smith &
Hawken®
retail stores; 5% for expansion and upgrades of Scotts
LawnService®
facilities; 16% to expand our information technology
capabilities; and 8% for other corporate assets. Acquisition
activity in fiscal 2007 was restricted to our Scotts
LawnService®
business, approximating $18.7 million. There was no
acquisition activity in fiscal 2008.
Financing activities used cash of $123.0 million and
$158.8 million in fiscal 2008 and 2007, respectively. In
fiscal 2008, the cash used was primarily the result of net
repayments on outstanding debt of $99.9 million and
dividends paid of $32.5 million, offset by cash of
$9.2 million received from the exercise of stock options.
Fiscal 2007 included the recapitalization plan that returned
$750 million to shareholders in addition to the repurchase
of all of our
65/8% senior
subordinated notes in an aggregate principal amount of
$200 million. These actions were financed by replacing,
effective February 7, 2007, our prior revolving credit
facility with senior secured $2.15 billion multicurrency
credit facilities that provide for revolving credit and term
loans through February 7, 2012.
Our primary sources of liquidity are cash generated by
operations and borrowings under our credit agreements. In
connection with the recapitalization transactions discussed in
“NOTE 5. RECAPITALIZATION” to the Consolidated
Financial Statements included in this Annual Report on
Form 10-K,
in February
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2007, Scotts Miracle-Gro and certain of its subsidiaries entered
into the following loan facilities totaling up to
$2.15 billion in the aggregate: (a) a senior secured
five-year term loan facility in the principal amount of
$560 million and (b) a senior secured five-year
revolving loan facility in the aggregate principal amount of up
to $1.59 billion. Borrowings may be made in various
currencies including U.S. dollars, Euros, British pounds,
Australian dollars and Canadian dollars. These
$2.15 billion senior secured credit facilities replaced the
Company’s former $1.05 billion senior credit facility.
In addition, we used proceeds from these senior secured credit
facilities to repurchase all of our then outstanding
65/8% senior
subordinated notes in an aggregate principal amount of
$200 million. Under our current structure, we may request
an additional $200 million in revolving credit
and/or term
credit commitments, subject to approval from our lenders. As of
September 30, 2008, there was $1.19 billion of
availability under our senior secured credit facilities.
“NOTE 11. DEBT” to the Consolidated Financial
Statements included in this Annual Report on
Form 10-K
provides additional information pertaining to our borrowing
arrangements. Although we were in compliance with all of our
debt covenants throughout fiscal 2008, please see
“ITEM 1A. RISK FACTORS — FIFRA Compliance,
the Corresponding Governmental Investigation and Related
Matters” for a discussion of the potential negative impact
of such issues on our compliance with certain covenants
contained in our credit agreements.
On April 11, 2007, the Company entered into a one-year
Master Accounts Receivable Purchase Agreement (the
“Original MARP Agreement”). On April 9, 2008, the
Company terminated the Original MARP Agreement and entered into
a new Master Accounts Receivable Purchase Agreement (the
“New MARP Agreement”) with a stated termination date
of April 8, 2009, or such later date as may be extended by
mutual agreement of the Company and its lenders. The terms of
the New MARP Agreement are substantially the same as the
Original MARP Agreement. The New MARP Agreement provides an
interest rate savings of 40 basis points as compared to
borrowing under our senior secured credit facilities. The New
MARP Agreement provides for the sale, on a revolving basis, of
accounts receivable generated by specified account debtors, with
seasonally adjusted monthly aggregate limits ranging from
$10 million to $300 million. The New MARP Agreement
also provides for specified account debtor sublimit amounts,
which provide limits on the amount of receivables owed by
individual account debtors that can be sold to the banks.
Borrowings under the New MARP Agreement at September 30,
2008 were $62.1 million.
At September 30, 2008, the Company had outstanding interest
rate swaps with major financial institutions that effectively
converted a portion of our variable-rate debt denominated in
Euros, British pounds and U.S. dollars to a fixed rate. The
swap agreements had a total U.S. dollar equivalent notional
amount of $711.4 million at September 30, 2008. The
term, expiration date and rates of these swaps are shown in the
table below.
Our primary sources of liquidity are cash generated by
operations and borrowings under our credit facilities. As of
September 30, 2008, there was $1.19 billion of
availability under our credit facilities and we were in
compliance with all debt covenants. Our credit facilities
contain, among other obligations, an affirmative covenant
regarding the Company’s leverage ratio, calculated as
indebtedness relative to our earnings before taxes, depreciation
and amortization. Under the terms of the credit facilities, the
permissible leverage ratio is 4.25 as of September 30,
2008, which is scheduled to decrease to 3.75 on
September 30, 2009. Management continues to monitor the
Company’s compliance with the leverage ratio and other
covenants contained in the credit facilities and, based upon the
Company’s current operating assumptions, the Company
expects to remain in compliance with the permissible leverage
ratio throughout fiscal 2009. However, an unanticipated charge
to earnings or an increase in debt could materially affect our
ability to remain in compliance with the financial covenants of
our credit facilities, potentially causing us to have to seek an
amendment or waiver from our lending group. While we believe we
have good relationships with our banking group, given the
adverse conditions currently present in
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the global credit markets, we can provide no assurance that such
a request would be likely to result in a modified or replacement
credit facility on reasonable terms, if at all.
We are party to various pending judicial and administrative
proceedings arising in the ordinary course of business. 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, and the availability and limits
of our insurance coverage and have established what we believe
to be appropriate reserves. Apart from the proceedings
surrounding the FIFRA compliance matters, which are discussed
separately, we do not believe that any liabilities that may
result from pending judicial and administrative proceedings are
reasonably likely to have a material adverse effect on our
liquidity, financial condition or results of operations;
however, there can be no assurance that future quarterly or
annual operating results will not be materially affected by
final resolution of these matters.
The following table summarizes our future cash outflows for
contractual obligations as of September 30, 2008 (in
millions):
Purchase obligations primarily represent commitments for
materials used in the Company’s manufacturing processes, as
well as commitments for warehouse services, seed and out-sourced
information services which comprise the unconditional purchase
obligations disclosed in “NOTE 17. COMMITMENTS”
to the Consolidated Financial Statements included in this Annual
Report on
Form 10-K.
Other includes actuarially determined retiree benefit payments
and pension funding to comply with local funding requirements.
Pension funding requirements beyond fiscal 2009 are not
currently determinable. The above table excludes interest
payments and insurance accruals as the Company is unable to
estimate the timing of the payment for these items.
The Company has no off-balance sheet financing arrangements.
In our opinion, cash flows from operations and capital resources
will be sufficient to meet debt service and working capital
needs during fiscal 2009, and thereafter for the foreseeable
future. However, we cannot ensure that our business will
generate sufficient cash flow from operations 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.
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. Apart from the
proceedings surrounding the FIFRA compliance matters, which are
discussed separately, 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 these 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
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financial position, results of operations and cash flows.
However, there can be no assurance that the resolution of these
matters will not materially affect our future quarterly or
annual results of operations, financial condition and cash
flows. Additional information on environmental matters affecting
us is provided in “ITEM 1. BUSINESS —
Regulatory Considerations,” “ITEM 1.
BUSINESS — FIFRA Compliance, the Corresponding
Governmental Investigation and Related Matters,”
“ITEM 1. BUSINESS — Other Regulatory
Matters” and “ITEM 3. LEGAL PROCEEDINGS” of
this Annual Report on
Form 10-K.
Our discussion and analysis of financial condition and results
of operations is based upon the Company’s consolidated
financial statements, which have been prepared in accordance
with U.S. GAAP. Certain accounting policies are
particularly significant, including those related to revenue
recognition, goodwill and intangibles, certain employee
benefits, and income taxes. We believe these accounting
policies, and others set forth in “NOTE 1. SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES” to the Consolidated
Financial Statements included in this Annual Report on
Form 10-K,
should be reviewed as they are integral to understanding our
results of operations and financial position. Our critical
accounting policies are reviewed periodically with the Audit
Committee of the Board of Directors of Scotts Miracle-Gro.
The preparation of financial statements requires management to
use judgment and make estimates that affect the reported amounts
of assets, liabilities, revenues and expenses and related
disclosures of contingent assets and liabilities. On an ongoing
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. Although actual results historically have not
deviated significantly from those determined using our
estimates, our results of operations or financial position could
differ, perhaps materially, from these estimates under different
assumptions or conditions.
Most of our revenue is derived from the sale of inventory, and
we recognize revenue when title and risk of loss transfer,
generally when products are received by the customer. Provisions
for payment discounts, product returns and allowances are
recorded as a reduction of sales at the time revenue is
recognized based on historical trends and adjusted periodically
as circumstances warrant. Similarly, reserves for uncollectible
receivables due from customers are established based on
management’s judgment as to the ultimate collectibility of
these balances. We offer sales incentives through various
programs, consisting principally of volume rebates, cooperative
advertising, consumer coupons and other trade programs. The cost
of these programs is recorded as a reduction of sales. The
recognition of revenues, receivables and trade programs requires
the use of estimates. While we believe these estimates to be
reasonable based on the then current facts and circumstances,
there can be no assurance that actual amounts realized will not
differ materially from estimated amounts recorded.
Property, plant and equipment are stated at cost. Depreciation
of property, plant and equipment is provided on the
straight-line method and is based on the estimated useful
economic lives of the assets. Intangible assets with finite
lives, and therefore subject to amortization, include technology
(e.g., patents), customer relationships and certain tradenames.
These intangible assets are being amortized on the straight-line
method over periods typically ranging from 10 to 25 years.
The Company reviews long-lived assets whenever circumstances
change such that the indicated recorded value of an asset may
not be recoverable.
We have significant investments in intangible assets and
goodwill. Whenever changing conditions warrant, we review the
assets that may be affected for recoverability. At least
annually, we review goodwill and indefinite-lived intangible
assets for impairment. As discussed in the Results of Operations
section of this MD&A, during the third quarter of fiscal
2007, the Company changed the timing of its annual goodwill
impairment testing from the last day of our first fiscal quarter
to the first day of our fourth fiscal quarter. The review for
impairment of intangibles and goodwill is primarily based on our
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estimates of discounted future cash flows, which are based upon
budgets and longer-range strategic 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. An
asset’s value is deemed impaired if the discounted cash
flows or earnings projections generated do not substantiate the
carrying value of the asset. The estimation of such amounts
requires management to exercise judgment with respect to revenue
and expense growth rates, changes in working capital and
selection of an appropriate discount rate, as applicable. The
use of different assumptions would increase or decrease
discounted future operating cash flows or earnings projections
and could, therefore, change impairment determinations.
Fair values related to our annual impairment review of
indefinite-lived tradenames and goodwill were determined using
discounted cash flow models involving several assumptions.
Changes in our assumptions could materially impact our fair
value estimates. Assumptions critical to our fair value
estimates were: (i) present value factors used in
determining the fair value of the reporting units and
tradenames; (ii) royalty rates used in our tradename
valuations; (iii) projected average revenue growth rates
used in the reporting unit and tradename models; and
(iv) projected long-term growth rates used in the
derivation of terminal year values. These and other assumptions
are impacted by economic conditions and expectations of
management and will change in the future based on period
specific facts and circumstances.
Inventories are stated at the lower of cost or market, the
majority of which are based on the
first-in,
first-out method of accounting. 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 “NOTE 18.
CONTINGENCIES” to the Consolidated Financial Statements
included in this Annual Report on
Form 10-K,
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 their resolution.
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 currently be brought
against us are known by us at this time.
Our annual effective tax rate is established based on our
pre-tax income (loss), statutory tax rates and the tax impacts
of items treated differently for tax purposes than for financial
reporting purposes. 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 consolidated statement of operations
reflect 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. We use an estimate of our 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.
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We sponsor various post-employment benefit plans. These include
pension plans, both defined contribution plans and defined
benefit plans, and other post-employment benefit
(“OPEB”) plans, consisting primarily of health care
for retirees. For accounting purposes, the defined benefit
pension and OPEB plans are dependent on a variety of assumptions
to estimate the projected and accumulated benefit obligations
determined by actuarial valuations. These assumptions include
the following: discount rate; expected salary increases; certain
employee-related factors, such as turnover, retirement age and
mortality; expected return on plan assets; and health care cost
trend rates. These and other assumptions affect the annual
expense recognized for these plans.
Assumptions are reviewed annually for appropriateness and
updated as necessary. We base the discount rate assumption on
investment yields available at year-end on corporate long-term
bonds rated AA or the equivalent. The salary growth assumption
reflects our long-term actual experience, the near-term outlook
and assumed inflation. The expected return on plan assets
assumption reflects asset allocation, investment strategy and
the views of investment managers regarding the market.
Retirement and mortality rates are based primarily on actual and
expected plan experience. The effects of actual results
differing from our assumptions are accumulated and amortized
over future periods.
Changes in the discount rate and investment returns can have a
significant effect on the funded status of our pension plans and
shareholders’ equity. We cannot predict these discount
rates or investment returns with certainty and, therefore,
cannot determine whether adjustments to our shareholders’
equity for minimum pension liability in subsequent years will be
significant. Subsequent to September 30, 2008, investment
markets have continued to decline. This has put further downward
pressure on the investments of the Company’s pension plans.
Management continues to monitor this situation and the potential
impact on our future pension plan funding requirements and
related expenses. However, we cannot predict future investment
returns, and therefore cannot determine whether future pension
plan funding requirements could materially and adversely affect
our financial condition, results of operations and cash flows.
We maintain insurance for certain risks, including workers’
compensation, general liability and vehicle liability, and are
self-insured for employee-related health care benefits. We
establish reserves for losses based on our claims experience and
industry actuarial estimates of the ultimate loss amount
inherent in the claims, including losses for claims incurred but
not reported. Our estimate of self-insured liabilities is
subject to change as new events or circumstances develop which
might materially impact the ultimate cost to settle these losses.
Other significant accounting policies, primarily those with
lower levels of uncertainty than those discussed above, are also
critical to understanding the consolidated financial statements.
The Notes to the Consolidated Financial Statements included in
this Annual Report on
Form 10-K
contain additional information related to our accounting
policies, including recent accounting pronouncements, and should
be read in conjunction with this discussion.
As part of our ongoing business, we are exposed to certain
market risks, including fluctuations in interest rates, foreign
currency exchange rates and commodity prices. Financial
derivative and other instruments are used to manage these risks.
These instruments are not used for speculative purposes.
Interest Rate
Risk
The Company had variable rate debt instruments outstanding at
September 30, 2008 and 2007 that are impacted by changes in
interest rates. As a means of managing our interest rate risk on
these debt instruments, the Company enters into interest rate
swap agreements to effectively convert certain variable-rate
debt obligations to fixed rates.
At September 30, 2008 and September 30, 2007, the
Company had outstanding interest rate swaps with major financial
institutions that effectively convert a portion of our
variable-rate debt to a fixed rate.
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The swap agreements had a total U.S. dollar equivalent
notional amount of $711.4 million and $720.0 million,
respectively. Under the terms of these swaps, we paid average
fixed rates of 2.98% on Euro denominated swaps, 4.76% on British
pound (“GBP”) denominated swaps and 4.99% on
U.S. Dollar denominated swaps.
The following table summarizes information about our derivative
financial instruments and debt instruments that are sensitive to
changes in interest rates as of September 30, 2008 and
2007. For debt instruments, the table presents principal cash
flows and related weighted-average interest rates by expected
maturity dates. For interest rate swaps, the table presents
expected cash flows based on notional amounts and
weighted-average interest rates by contractual maturity dates.
Weighted-average variable rates are based on implied forward
rates in the yield curve at September 30, 2008 and 2007. A
change in our variable interest rate of 1% would have a
$2.7 million impact on interest expense assuming the
$267.6 million of our variable-rate debt that had not been
hedged via an interest rate swap at September 30, 2008 was
outstanding for the entire fiscal year. The information is
presented in U.S. dollars (in millions):
Excluded from the information provided above are
$20.5 million and $25.6 million at September 30,
2008 and 2007, respectively, of miscellaneous debt instruments.
Our market risk associated with foreign currency rates is not
considered to be material. Through fiscal 2008, we had only
minor amounts of transactions that were denominated in
currencies other than the currency of the country of origin. We
use foreign currency swap contracts to manage the exchange rate
risk associated with intercompany loans with foreign
subsidiaries that are denominated in U.S. dollars. At
September 30, 2008, the notational amount of outstanding
contracts was $86.4 million with a fair value of
($0.4) million. At September 30, 2007, the notional
amount of outstanding contracts was $101.5 million with a
fair value of ($1.3) million.
We are subject to market risk from fluctuating prices of certain
raw materials, including urea, resins, fuel, grass seed and wild
bird food components. Our objectives surrounding the procurement
of these materials are to ensure continuous supply and to
minimize costs. We seek to achieve these objectives through
negotiation of contracts with favorable terms directly with
vendors. In addition, in 2007 we entered into arrangements to
partially mitigate the effect of fluctuating direct and indirect
fuel costs on our Global Consumer and Scotts
LawnService®
businesses and hedged a portion of our urea needs for fiscal
2008. We had outstanding a strip of collars for approximately
0.5 million gallons of fuel at September 30, 2007.
There were no outstanding derivatives for fuel at
September 30, 2008. We also had
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hedging arrangements for 48,500 and 45,000 aggregate tons of
urea at September 30, 2008 and 2007, respectively. The fair
value of the 48,500 aggregate tons at September 30, 2008
was ($8.5) million, while the fair value of the 45,000
aggregate tons at September 30, 2007 was $1.0 million.
The financial statements and other information required by this
Item are contained in the consolidated financial statements,
notes thereto and schedule listed in the “Index to
Consolidated Financial Statements and Financial Statement
Schedule” on page 60 of this Annual Report on
Form 10-K.
None.
With the participation of the principal executive officer and
the principal financial officer of The Scotts Miracle-Gro
Company (the “Registrant”), the Registrant’s
management has evaluated the effectiveness of the
Registrant’s disclosure controls and procedures (as defined
in
Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the “Exchange
Act”)), as of the end of the fiscal year covered by this
Annual Report on
Form 10-K.
Based upon that evaluation, the Registrant’s principal
executive officer and principal financial officer have concluded
that:
The “Annual Report of Management on Internal Control Over
Financial Reporting” required by Item 308(a) of SEC
Regulation S-K
is included on page 61 of this Annual Report on
Form 10-K.
The “Report of Independent Registered Public Accounting
Firm” required by Item 308(b) of
SEC Regulation S-K
is included on page 62 of this Annual Report on
Form 10-K.
There were no changes in the Registrant’s internal control
over financial reporting (as defined in
Rule 13a-15(f)
under the Exchange Act) that occurred during the
Registrant’s fiscal quarter ended September 30, 2008,
that have materially affected, or are reasonably likely to
materially affect, the Registrant’s internal control over
financial reporting.
None.
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PART III
The information required by Item 401 of SEC
Regulation S-K
concerning the directors of The Scotts Miracle-Gro Company
(“Scotts Miracle-Gro” or the “Registrant”)
and the nominees for re-election as directors of Scotts
Miracle-Gro at the Annual Meeting of Shareholders to be held on
January 22, 2009 (the “2009 Annual Meeting”) is
incorporated herein by reference from the disclosure which will
be included under the caption “PROPOSAL NUMBER
1 — ELECTION OF DIRECTORS” in Scotts
Miracle-Gro’s definitive Proxy Statement relating to the
2009 Annual Meeting (“Scotts Miracle-Gro’s Definitive
Proxy Statement”), which will be filed pursuant to SEC
Regulation 14A not later than 120 days after the end
of Scotts Miracle-Gro’s fiscal year ended
September 30, 2008.
The information required by Item 401 of SEC
Regulation S-K
concerning the executive officers of Scotts Miracle-Gro is
incorporated herein by reference from the disclosure included
under the caption “SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF
THE REGISTRANT” in Part I of this Annual Report on
Form 10-K.
The information required by Item 405 of SEC
Regulation S-K
is incorporated herein by reference from the disclosure which
will be included under the caption “SECTION 16(a)
BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in Scotts
Miracle-Gro’s Definitive Proxy Statement.
Information concerning the procedures by which shareholders of
Scotts Miracle-Gro may recommend nominees to Scotts
Miracle-Gro’s Board of Directors is incorporated herein by
reference from the disclosures which will be included under the
captions “CORPORATE GOVERNANCE — Nominations of
Directors” and “MEETINGS AND COMMITTEES OF THE
BOARD — Committees of the Board — Governance
and Nominating Committee” in Scotts Miracle-Gro’s
Definitive Proxy Statement. These procedures have not materially
changed from those described in Scotts Miracle-Gro’s
definitive Proxy Statement for the 2008 Annual Meeting of
Shareholders held on January 31, 2008.
The information required by Items 407(d)(4) and 407(d)(5) of SEC
Regulation S-K is incorporated herein by reference from the
disclosure which will be included under the caption
“MEETINGS AND COMMITTEES OF THE BOARD —
Committees of the Board — Audit Committee” in
Scotts Miracle-Gro’s Definitive Proxy Statement.
The Board of Directors of the Registrant has adopted charters
for each of the Audit Committee, the Governance and Nominating
Committee, the Compensation and Organization Committee, the
Finance Committee and the Innovation & Technology
Committee as well as Corporate Governance Guidelines as
contemplated by the applicable sections of the New York Stock
Exchange Listed Company Manual.
In accordance with the requirements of Section 303A.10 of
the New York Stock Exchange’s Listed Company Manual, the
Board of Directors of the Registrant has adopted a Code of
Business Conduct and Ethics covering the members of the
Registrant’s Board of Directors and associates (employees)
of the Registrant and its subsidiaries, including, without
limitation, the Registrant’s principal executive officer,
principal financial officer and principal accounting officer.
The Registrant intends to disclose the following events, if they
occur, on its Internet website located at
http://investor.scotts.com
within four business days following their occurrence:
(A) the date and nature of any amendment to a provision of
Scotts Miracle-Gro’s Code of Business Conduct and Ethics
that (i) applies to the Registrant’s principal
executive officer, principal financial officer, principal
accounting officer or controller, or persons performing similar
functions, (ii) relates to any element of the code of
ethics definition enumerated in Item 406(b) of SEC
Regulation S-K,
and (iii) is not a technical, administrative or other
non-substantive
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amendment; and (B) a description (including the nature of
the waiver, the name of the person to whom the waiver was
granted and the date of the waiver) of any waiver, including an
implicit waiver, from a provision of the Code of Business
Conduct and Ethics to the Registrant’s principal executive
officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
that relates to one or more of the elements of the code of
ethics definition set forth in Item 406(b) of SEC
Regulation S-K.
The text of the Registrant’s Code of Business Conduct and
Ethics, the Registrant’s Corporate Governance Guidelines,
the Audit Committee charter, the Governance and Nominating
Committee charter, the Compensation and Organization Committee
charter, the Finance Committee charter and the
Innovation & Technology Committee charter are posted
under the “Corporate Governance” link on the
Registrant’s Internet website located at
http://investor.scotts.com.
Interested persons and shareholders of Scotts Miracle-Gro may
also obtain copies of each of these documents without charge by
writing to The Scotts Miracle-Gro Company, Attention: Corporate
Secretary, 14111 Scottslawn Road, Marysville, Ohio 43041. In
addition, a copy of the Code of Business Conduct and Ethics, as
amended on November 2, 2006, is incorporated by reference
in Exhibit 14 to this Annual Report on
Form 10-K.
The information required by Item 402 of SEC
Regulation S-K
is incorporated herein by reference from the disclosures which
will be included under the captions “EXECUTIVE
COMPENSATION” and “NON-EMPLOYEE DIRECTOR
COMPENSATION” in Scotts Miracle-Gro’s Definitive Proxy
Statement.
The information required by Item 407(e)(4) of SEC
Regulation S-K
is incorporated herein by reference from the disclosure which
will be included under the caption “MEETINGS AND COMMITTEES
OF THE BOARD — Compensation and Organization Committee
Interlocks and Insider Participation” in Scotts
Miracle-Gro’s Definitive Proxy Statement.
The information required by Item 407(e)(5) of SEC
Regulation S-K
is incorporated herein by reference from the disclosure which
will be included under the caption “COMPENSATION AND
ORGANIZATION COMMITTEE REPORT” in Scotts Miracle-Gro’s
Definitive Proxy Statement.
The information required by Item 403 of SEC
Regulation S-K
is incorporated herein by reference from the disclosure which
will be included under the caption “BENEFICIAL OWNERSHIP OF
SECURITIES OF THE COMPANY” in Scotts Miracle-Gro’s
Definitive Proxy Statement.
The information required by Item 201(d) of SEC
Regulation S-K
is incorporated herein by reference from the disclosure which
will be included under the caption “EQUITY COMPENSATION
PLAN INFORMATION” in Scotts Miracle-Gro’s Definitive
Proxy Statement.
The information required by Item 404 of SEC
Regulation S-K
is incorporated herein by reference from the disclosures which
will be included under the captions “PROPOSAL
NUMBER 1 — ELECTION OF DIRECTORS,”
“BENEFICIAL OWNERSHIP OF SECURITIES OF THE COMPANY”
and “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS”
in Scotts Miracle-Gro’s Definitive Proxy Statement.
The information required by Item 407(a) of SEC
Regulation S-K
is incorporated herein by reference from the disclosures which
will be included under the captions “CORPORATE
GOVERNANCE — Director Independence” and
“CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” in
Scotts Miracle-Gro’s Definitive Proxy Statement.
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The information required by this Item 14 is incorporated
herein by reference from the disclosures which will be included
under the captions “PROPOSAL NUMBER 2 —
RATIFICATION OF THE SELECTION OF THE INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM — Fees of the Independent
Registered Public Accounting Firm” and “PROPOSAL
NUMBER 2 — RATIFICATION OF THE SELECTION OF THE
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM —
Pre-Approval of Services Performed by the Independent Registered
Public Accounting Firm” in Scotts Miracle-Gro’s
Definitive Proxy Statement.
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1 and 2. Financial Statements and Financial Statement
Schedule:
The response to this portion of Item 15 is submitted as a
separate section of this Annual Report on
Form 10-K.
Reference is made to the “Index to Consolidated Financial
Statements and Financial Statement Schedule” on
page 60 herein.
3. Exhibits:
The exhibits listed on the “Index to Exhibits”
beginning on page 110 of this Annual Report on
Form 10-K
are filed with this Annual Report on
Form 10-K
or incorporated herein by reference as noted in the “Index
to Exhibits.” The following table provides certain
information concerning each management contract or compensatory
plan or arrangement required to be filed as an exhibit to this
Annual Report on
Form 10-K
or incorporated herein by reference.
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MANAGEMENT
CONTRACTS AND COMPENSATORY PLANS AND ARRANGEMENTS
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The exhibits listed on the “Index to Exhibits”
beginning on page 110 of this Annual Report on
Form 10-K
are filed with this Annual Report on
Form 10-K
or incorporated herein by reference as noted in the “Index
to Exhibits.”
The financial statement schedule filed with this Annual Report
on
Form 10-K
is submitted in a separate section hereof. For a description of
such financial statement schedule, see “Index to
Consolidated Financial Statements and Financial Statement
Schedule” on page 60 of this Annual Report on
Form 10-K.
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Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
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David C. Evans,
Attorney-in-Fact
All other financial statement schedules for which provision is
made in the applicable accounting regulations of the Securities
and Exchange Commission are omitted because they are not
required or are not applicable, or the required information has
been presented in the Consolidated Financial Statements or Notes
thereto.
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Management is responsible for establishing and maintaining
adequate internal control over financial reporting to provide
reasonable assurance regarding the reliability of our financial
reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal
control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records
that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of The Scotts
Miracle-Gro Company and our consolidated subsidiaries;
(ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial
statements in accordance with accounting principles generally
accepted in the United States of America, and that receipts and
expenditures of The Scotts Miracle-Gro Company and our
consolidated subsidiaries are being made only in accordance with
authorizations of management and directors of The Scotts
Miracle-Gro Company and our consolidated subsidiaries, as
appropriate; and (iii) provide reasonable assurance
regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the assets of The Scotts
Miracle-Gro Company and our consolidated subsidiaries that could
have a material effect on the consolidated financial statements.
Management, with the participation of our principal executive
officer and principal financial officer, assessed the
effectiveness of our internal control over financial reporting
as of September 30, 2008, the end of our fiscal year.
Management based its assessment on criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission. Management’s assessment included evaluation of
such elements as the design and operating effectiveness of key
financial reporting controls, process documentation, accounting
policies and our overall control environment. This assessment is
supported by testing and monitoring performed under the
direction of management.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluations of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Accordingly, even an effective system of internal control over
financial reporting will provide only reasonable assurance with
respect to financial statement preparation.
Based on our assessment, management has concluded that our
internal control over financial reporting was effective as of
September 30, 2008, to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external reporting
purposes in accordance with accounting principles generally
accepted in the United States of America. We reviewed the
results of management’s assessment with the Audit Committee
of the Board of Directors of The Scotts Miracle-Gro Company.
Our independent registered public accounting firm,
Deloitte & Touche LLP, independently audited our
internal control over financial reporting and has issued their
report which appears herein.
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To the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company Marysville, Ohio
We have audited the accompanying consolidated balance sheets of
The Scotts Miracle-Gro Company and Subsidiaries (the
“Company”) as of September 30, 2008 and 2007, and
the related consolidated statements of operations,
shareholders’ equity, and cash flows for each of the three
years in the period ended September 30, 2008. Our audits
also included the financial statement schedules listed in the
Index to Consolidated Financial Statements and Financial
Statement Schedules. These financial statements and financial
statement schedules are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards 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. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of the
Company as of September 30, 2008 and 2007, and the results
of its operations and its cash flows for each of the three years
in the period ended September 30, 2008, in conformity with
accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 10 to the financial statements, on
September 30, 2007, the Company adopted Statement of
Financial Accounting Standards No. 158, Employers’
Accounting for Defined Benefit Pension and Other Postretirement
Plans.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
Company’s internal control over financial reporting as of
September 30, 2008, based on the criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated November 25, 2008 expressed
an unqualified opinion on the Company’s internal control
over financial reporting.
Columbus, Ohio
November 25, 2008
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To the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company Marysville, Ohio
We have audited the internal control over financial reporting of
The Scotts Miracle-Gro Company and Subsidiaries (the
“Company”) as of September 30, 2008, based on
criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. The Company’s
management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting,
included in the accompanying Annual Report of Management on
Internal Control Over Financial Reporting. Our responsibility is
to express an opinion on the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, assessing the risk
that a material weakness exists, testing and evaluating the
design and operating effectiveness of internal control based on
the assessed risk, and performing such other procedures as we
considered necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a
process designed by, or under the supervision of, the
company’s principal executive and principal financial
officers, or persons performing similar functions, and effected
by the company’s board of directors, management, and other
personnel to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the
effectiveness of the internal control over financial reporting
to future periods are subject to the risk that the controls may
become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may
deteriorate.
In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as
of September 30, 2008, based on the criteria established in
Internal Control — Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission.
We have also audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated financial statements and financial statement
schedules as of and for the year ended September 30, 2008
of the Company and our report dated November 25, 2008
expressed an unqualified opinion on those financial statements
and financial statement schedules and included an explanatory
paragraph relating to the Company’s adoption of Statement
of Financial Accounting Standards No. 158,
Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans on September 30, 2007.
Columbus, Ohio
November 25, 2008
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The Scotts
Miracle-Gro Company
Consolidated Statements of Operations for the fiscal years ended September 30, 2008, 2007 and 2006 (in millions, except per share data)
See Notes to Consolidated Financial Statements.
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The Scotts
Miracle-Gro Company
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2008, 2007 and 2006 (in millions)
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