• Results of operations

• Segment results

• Liquidity and capital resources

• Regulatory matters

• Critical accounting policies and estimates

This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in Scotts Miracle-Gro's Annual Report on Form 10-K for the fiscal year ended September 30, 2012.
EXECUTIVE SUMMARY
We are a leading manufacturer and marketer of consumer branded products for lawn and garden care 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 products in Australia, the Far East and Latin America. We also operate Scotts LawnService®, the second largest lawn care service business in the United States. Our operations are divided into the following reportable segments: Global Consumer and Scotts LawnService®.
As a leading consumer branded lawn and garden company, our product development and marketing efforts are largely focused on providing innovative and differentiated products and on continually increasing brand and product awareness to inspire consumers and create retail demand. We have successfully applied this model for a number of years by focusing on research and development and investing 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 expenditures and anticipate a similar commitment to research and development, advertising and marketing investments in the future, with the continuing objective of driving profitable growth. We are undertaking initiatives in fiscal 2013 to focus on improving profitability while balancing the need to continually build stronger capabilities for future growth. These initiatives include price optimization, product cost-out initiatives and SG&A productivity.
Effective in our fourth quarter of fiscal 2012, we classified our professional seed business as discontinued operations. Prior to being reported as discontinued operations, our professional seed business was included as part of Corporate & Other.
Due to the nature of the lawn and garden business, significant portions of our products ship to our retail customers during our second and third fiscal quarters, as noted in the chart below. Our annual sales are further concentrated in the second and third fiscal quarters by retailers who rely on our ability to deliver products closer to when consumers buy our products, thereby reducing retailers' pre-season inventories.

                      Percent of Net Sales from
                   Continuing Operations by Quarter
                  2012           2011           2010
First Quarter       7.1 %          8.1 %          8.6 %
Second Quarter     41.4 %         40.1 %         36.4 %
Third Quarter      37.3 %         37.4 %         40.6 %
Fourth Quarter     14.2 %         14.4 %         14.4 %

The Scotts Miracle-Gro Board of Directors has authorized the repurchase of up to $700 million of our Common Shares through September 30, 2014. Further, on August 9, 2012, we announced that the Scotts Miracle-Gro Board of Directors had increased our quarterly dividend from $0.30 to $0.325 per Common Share. The decision to increase the amount of cash we intend to return to our shareholders reflects our continued confidence in the business and our desire to maintain a consistent capital structure. From the inception of the share repurchase program in the fourth quarter of fiscal 2010 through the first quarter of fiscal 2013, we have repurchased approximately 7.8 million of our Common Shares in open market transactions for $401.2 million.

RESULTS OF OPERATIONS
We classified our professional seed business as discontinued operations, for all
periods presented, beginning in our fourth quarter of fiscal 2012. As a result,
and unless specifically stated, all discussions regarding results for the three
months ended December 29, 2012 and December 31, 2011, reflect results from our
continuing operations.
The following table sets forth the components of income and expense as a
percentage of net sales:
                                                                   THREE MONTHS ENDED
                                                        DECEMBER 29, 2012       DECEMBER 31, 2011
Net sales                                                      100.0  %                100.0  %
Cost of sales                                                   84.9                    87.2
Gross profit                                                    15.1                    12.8
Operating expenses:
Selling, general and administrative                             60.5                    61.4
Impairment, restructuring and other                             (0.2 )                   1.2
Product registration and recall matters                            -                     0.2
Other income, net                                               (0.5 )                  (0.4 )
Loss from operations                                           (44.7 )                 (49.6 )
Interest expense                                                 6.4                     7.7
Loss from continuing operations before income taxes            (51.1 )                 (57.3 )
Income tax benefit from continuing operations                  (17.9 )                 (20.7 )
Loss from continuing operations                                (33.2 )                 (36.6 )
Income (loss) from discontinued operations, net of tax           0.3                    (0.4 )
Net loss                                                       (32.9 )%                (37.0 )%

Net Sales
Net sales for the three months ended December 29, 2012, were $205.8 million, an
increase of 3.1% from net sales of $199.6 million for the three months ended
December 31, 2011. The change in net sales was attributable to the following:
                        THREE MONTHS ENDED
                        DECEMBER 29, 2012
Volume                            2.7 %
Pricing                             -
Foreign exchange rates            0.3
Acquisitions                      0.1
Net sales increase                3.1 %

The increase in net sales for the three months ended December 29, 2012, was primarily driven by:
• increased volume within our Scotts LawnService® segment due to increased customer count and a weather driven delay of sales from the fourth quarter of fiscal 2012 to the first quarter of 2013;

• increased volume in our Global Consumer segment, driven by an increase in U.S. sales of fertilizers and control products, partially offset by a decline in Europe and wild bird food products;

• favorable impact of foreign exchange rates as a result of a slight weakening of the U.S. dollar relative to other currencies;

• partially offset by a decrease in sales for the three months ended December 29, 2012, related to ICL supply agreements, which were entered into in connection with the sale of Global Pro in February 2011.

Cost of Sales
The following table shows the major components of cost of sales:
                                             THREE MONTHS ENDED
                                  DECEMBER 29, 2012     DECEMBER 31, 2011
                                               (In millions)
Materials                        $        96.0         $              93.7
Manufacturing labor and overhead          26.6                        26.4
Distribution and warehousing              38.4                        36.0
Roundup® reimbursements                   13.7                        17.9
                                 $       174.7         $             174.0

Factors contributing to the change in cost of sales are outlined in the following table:

                         THREE MONTHS ENDED
                          DECEMBER 29, 2012
                            (In millions)
Material costs          $            1.0
Volume and product mix               3.5
Roundup® reimbursements             (4.2 )
Foreign exchange rates               0.4
Change in cost of sales $            0.7

The increase in cost of sales, for the three months ended December 29, 2012, was primarily driven by:
• higher costs resulting from the impact of higher sales volume;

• unfavorable impact of foreign exchange rates as a result of a slight weakening of the U.S. dollar relative to other currencies;

• partially offset by lower reimbursements attributable to our marketing agreement with Monsanto.

Gross Profit
As a percentage of net sales, our gross profit rate was 15.1% and 12.8% for the three months ended December 29, 2012 and December 31, 2011, respectively. Factors contributing to the change in gross profit rate are outlined in the following table:

                                        THREE MONTHS ENDED
                                         DECEMBER 29, 2012
Pricing                                            -  %
Material costs                                  (0.5 )
Product mix and volume:
Roundup® commissions and reimbursements          0.3
Corporate & Other                                0.2
Scotts LawnService®                              2.0
Global Consumer mix and volume                   0.3
Change in gross profit rate                      2.3  %

The increase in the gross profit rate, for the three months ended December 29, 2012, was primarily driven by:
• increased volume within our Scotts LawnService® segment due to increased customer count and a weather driven delay of sales from the fourth quarter of fiscal 2012 to the first quarter of 2013;

• improved sales mix in our Global Consumer segment, primarily the result of increased sales in the U.S. of fertilizer and control products;

• reduced activity attributable to our marketing agreement with Monsanto, which historically does not generate profit until the second quarter;

• decreased sales in the first quarter associated with our supply agreements with ICL, which commenced with the sale of Global Pro in February of 2011 and do not generate gross profit.

Selling, General and Administrative Expenses The following table sets forth the components of selling, general and administrative expenses:

                                                      THREE MONTHS ENDED
                                           DECEMBER 29, 2012     DECEMBER 31, 2011
                                                        (In millions)
Advertising                               $         9.5         $               9.2
Share-based compensation                            1.9                         1.6
Research and development                           10.4                        12.1
Amortization of intangibles                         2.0                         2.1
Other selling, general and administrative         100.7                        97.5
                                          $       124.5         $             122.5

Selling, general and administrative ("SG&A") expenses increased $2.0 million, or 1.6%, to $124.5 million for the first quarter of fiscal 2013 compared to the same period of fiscal 2012. The increase in other SG&A of $3.2 million was driven by an increase in employee related costs, including severance, partially offset by certain cost productivity initiatives. Impairment, Restructuring and Other
For the three months ended December 29, 2012, we recognized income of $4.7 million related to the reimbursement by a vendor of a portion of the costs incurred for the development and commercialization of products including the active ingredient MAT 28 for the Global Consumer segment. We also recognized a $4.3 million asset impairment charge as a result of issues with the commercialization of an insect repellent technology for the Global Consumer segment.

In continuation of the restructuring plan we initiated in fiscal 2011, the Company incurred $2.4 million in restructuring costs in the first quarter of fiscal 2011. These costs consisted primarily of $1.3 million of termination benefits provided to employees who accepted voluntary retirement, $0.5 million of special termination benefits to be provided to certain employees upon future separation and $0.2 million related to curtailment charges for our U.S. defined benefit pension and U.S retiree medical plans. Other Income, net
Other income was $1.1 million for the three months ended December 29, 2012 compared to $0.6 million for the three months ended December 31, 2011. Other income is comprised of activities outside our normal business operations, such as royalty income from the licensing of certain of our brand names, franchise fee income from our Scotts LawnService® business, foreign exchange gains/losses and gains/losses from the sale of non-inventory assets. Interest Expense
Interest expense was $13.2 million for the three months ended December 29, 2012 compared to $15.3 million for the three months ended December 31, 2011. Excluding the impact of foreign exchange rates, average borrowings declined by approximately $48.0 million during the three months ended December 29, 2012, as compared to the same prior year period. Additionally, there was a decline in our weighted average interest rate of 61 basis points associated with the expiration of a 5.20% interest rate swap agreement in the second quarter of fiscal 2012. Income Tax Expense
The effective tax rate related to continuing operations for the three months ended December 29, 2012 was 35.0% compared to 36.0% for the three months ended December 31, 2011. The effective tax rate used for interim purposes was based on management's best estimate of factors impacting the effective tax rate for the full fiscal year. Factors affecting the estimated effective tax rate include assumptions as to income by jurisdiction (domestic and foreign), the availability and utilization of tax credits and the existence of elements of income and expense that may not be taxable or deductible. The estimated effective tax rate is subject to revision in later interim periods and at fiscal year end as facts and circumstances change during the course of the fiscal year. There can be no assurances that the effective tax rate estimated for interim financial reporting purposes will approximate the effective tax rate determined at fiscal year end.

Loss from Continuing Operations
We reported a loss from continuing operations of $68.3 million, or $1.11 per diluted share, for the first quarter of fiscal 2013 compared to $73.1 million, or $1.20 per diluted share, for the first quarter of fiscal 2012. We anticipated a loss in our first fiscal quarter due to the seasonal nature of our business, in which sales are heavily weighted to the spring and summer selling seasons. The decrease in our loss from continuing operations for the first three months of fiscal 2013 was driven primarily by the impact of higher volume, partially offset by higher general and administrative expenses and a reduced tax benefit due to a reduction in the effective tax rate. Diluted average common shares used in the diluted net income per common share calculation were 61.4 million for the first quarter of fiscal 2012 compared to 60.9 million for the same period a year ago.
SEGMENT RESULTS
Our continuing operations are divided into the following reportable segments:
Global Consumer and Scotts LawnService®. This division of reportable segments is consistent with how the segments report to and are managed by the chief operating decision maker of the Company. Corporate & Other consists of revenues and expenses associated with our supply agreements with ICL and amortization related to the Roundup® Marketing Agreement, as well as corporate, general and administrative expenses and certain other income/expense items not allocated to the business segments.
Segment performance is evaluated based on several factors, including income from continuing operations before amortization, product registration and recall costs, and impairment, restructuring and other charges, which is not a measure recognized under GAAP. Senior management uses this measure of operating profit to gauge segment performance because we believe this measure is most indicative of performance trends and the overall earnings potential of each segment. The following table sets forth net sales by segment:

                           THREE MONTHS ENDED
                      DECEMBER 29,      DECEMBER 31,
                          2012              2011
                              (In millions)
Global Consumer     $    153.2         $       149.1
Scotts LawnService®       44.8                  37.6
Segment total            198.0                 186.7
Corporate & Other          7.8                  12.9
Consolidated        $    205.8         $       199.6

The following table sets forth segment loss from continuing operations before income taxes:

                                              THREE MONTHS ENDED
                                         DECEMBER 29,     DECEMBER 31,
                                             2012             2011
                                                 (In millions)
Global Consumer                         $      (68.7 )   $      (69.5 )
Scotts LawnService®                             (0.9 )           (4.6 )
Segment total                                  (69.6 )          (74.1 )
Corporate & Other                              (20.2 )          (19.7 )
Intangible asset amortization                   (2.5 )           (2.5 )
Product registration and recall matters            -             (0.3 )
Impairment, restructuring and other              0.4             (2.4 )
Interest expense                               (13.2 )          (15.3 )
Consolidated                            $     (105.1 )   $     (114.3 )

Global Consumer
Global Consumer segment net sales were $153.2 million in the first quarter of fiscal 2013, an increase of 2.7% from the first quarter of fiscal 2012. For the three months ended December 29, 2012, volume, pricing and foreign exchange rates favorably impacted net sales by 2.1%, 0.3% and 0.3%, respectively. Net sales in the U.S. increased $3.7 million, or 3.6% for the first quarter of fiscal 2013 as compared to the same periods in fiscal 2012. The increase in U.S. net sales was driven by higher sales of fertilizer and control products, partially offset by a decline in wild bird food products and in revenues attributable to our marketing agreement with Monsanto. Excluding the impact of changes in foreign exchange rates, net sales internationally decreased by $0.1 million,

or 0.3% for the first quarter of fiscal 2013. The decrease in sales internationally was primarily driven by a decline in year-to-date net sales in the U.K. and France.
Global Consumer segment operating loss decreased by $0.8 million, or 1.2%, in the first quarter of fiscal 2013, as compared to the same period of fiscal 2012. Excluding the impact of changes in foreign exchange rates, the increase was 0.8% for the first quarter of fiscal 2013. The increase was primarily driven by the impact of the volume increase in the U.S., partially offset by the impact of the volume decline in Europe.
Scotts LawnService®
Scotts LawnService® net sales increased by $7.2 million, or 19.1%, in the first quarter of fiscal 2013, as compared to the same period of fiscal 2012. The increase in net sales was driven by increased customer count and a weather driven delay of sales from the fourth quarter of fiscal 2012 to the first quarter of 2013.
The operating loss for Scotts LawnService® decreased by $3.7 million, or 80.4%, in the first quarter of fiscal 2013, as compared to the same period of fiscal 2012. The improved performance was driven by higher net sales and improved gross margin rate, partially offset by higher SG&A spending. Corporate & Other
The net operating loss for Corporate & Other was $20.2 million and $19.7 million for the three months ended December 29, 2012 and December 31, 2011, respectively. The increased loss was primarily related to employee related costs, including severance, partially offset by cost productivity initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Cash used in operating activities totaled $168.6 million and $201.1 million for the three months ended December 29, 2012 and December 31, 2011, respectively. Cash used by operating activities declined $32.5 million primarily due to a decrease in cash used for working capital of $20.8 million and lower net loss of $6.2 million. The decrease in cash used for working capital was primarily due to reduced inventory levels compared to prior year as a result of improved inventory management.
Investing Activities
Cash used in investing activities totaled $28.1 million for the three months ended December 29, 2012, compared to cash used by investing activities of $16.4 million for the comparable period in fiscal 2012. Cash used for investments in property, plant and equipment during the first three months of fiscal 2013 and fiscal 2012 was $25.0 million and $16.4 million, respectively, primarily related to increasing efficiencies at existing production facilities. Additionally, during the three months ended December 29, 2012, we completed acquisitions of two franchisee businesses within our Scotts LawnService® segment. Financing Activities
Financing activities provided cash of $180.8 million and $214.3 million for the three months ended December 29, 2012 and December 31, 2011, respectively. The decrease in cash provided by financing activities was primarily the result of lower net borrowings under our credit facility of $41.7 million during the first quarter of fiscal 2013, a decrease in net cash received from stock option activity of $8.3 million, partially offset by repurchases of our common shares of $17.5 million.
Cash and Cash Equivalents
Our cash and cash equivalents were held in cash depository accounts with major financial institutions around the world or invested in high quality, short-term liquid investments with a balance of $115.6 million as of December 29, 2012, compared to $127.8 million as of December 31, 2011. The cash and cash equivalents balance at December 29, 2012 included $113.0 million held by controlled foreign corporations. Our current plans do not demonstrate a need to, nor do we have plans to, repatriate the retained earnings from these foreign corporations as the earnings are indefinitely reinvested. However, in the future, if we determine it is necessary to repatriate these funds, or we sell or liquidate any of these foreign corporations, we may be required to pay associated taxes on the repatriation.

Borrowing Agreements
Our primary sources of liquidity are cash generated by operations and borrowings under our credit agreement, which is guaranteed by substantially all of Scotts Miracle-Gro's domestic subsidiaries. On June 30, 2011, Scotts Miracle-Gro and certain of its subsidiaries entered into a second amended and restated senior secured credit facility, providing for revolving loans in the aggregate principal amount of up to $1.7 billion over a five-year term. Borrowings may be made in various currencies including U.S. dollars, Euros, British pounds, Australian dollars and Canadian dollars. Under this credit facility, we may request up to an additional $450 million in revolving and/or term commitments, subject to certain specified conditions, including approval from our lenders. Under our credit facility, we have the ability to issue letter of credit commitments up to $75 million. At December 29, 2012, we had letters of credit in the aggregate face amount of $24.2 million outstanding and $1.1 billion of availability under our credit facility.
On November 15, 2012, we entered into a new Master Accounts Receivable Purchase Agreement (the "2012 MARP Agreement"), with an initial stated termination date of October 30, 2013, or such later date as may be mutually agreed by the Company and the banks party thereto. The 2012 MARP Agreement, which is uncommitted, provides for the discretionary sale by the Company, and the discretionary purchase by the banks, on a revolving basis, of accounts receivable generated by sales to three specified debtors in an aggregate amount not to exceed $400 million, with debtor sublimits ranging from $100 million to $200 million. Under the terms of the 2012 MARP Agreement, the banks have the opportunity, but not the obligation, to purchase those accounts receivable offered by us at a discount (from the agreed base value thereof) effectively equal to the greater of 7-day or 3-month LIBOR plus 0.75%.
We account for the sale of receivables under the 2012 MARP Agreement as short-term debt and continue to carry the receivables on our Consolidated Balance Sheet, primarily as a result of our right to repurchase receivables sold. There were no short-term borrowings under the 2012 MARP Agreement as of December 29, 2012 and $5.4 million as of December 31, 2011.
As of December 29, 2012, we were in compliance with all debt covenants. Our credit facility contains, among other obligations, an affirmative covenant regarding our leverage ratio, calculated as indebtedness relative to our earnings before interest, taxes, depreciation and amortization. Under the terms of the credit facility, the maximum leverage ratio was 3.50 as of December 29, 2012. Our leverage ratio was 2.80 at December 29, 2012. Our credit facility also includes an affirmative covenant regarding our interest coverage. Under the terms of the credit facility, the minimum interest coverage ratio was 3.50 for the twelve months ended December 29, 2012. Our interest coverage ratio was 5.25 for the twelve months ended December 29, 2012.
We continue to monitor our compliance with the leverage ratio, interest coverage ratio and other covenants contained in the credit facility and, based upon our current operating assumptions, we expect to remain in compliance with the permissible leverage ratio and interest coverage ratio throughout fiscal 2013. However, an unanticipated charge to earnings, an increase in debt or other factors could materially affect our ability to remain in compliance with the financial or other covenants of our credit facility, potentially causing us to have to seek an amendment or waiver from our lending group which could result in repricing of our credit facility. While we believe we have good relationships with our banking group, we can provide no assurance that such a request would . . .