Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
SMG > SEC Filings for SMG > Form 10-Q on 7-May-2013All Recent SEC Filings

Show all filings for SCOTTS MIRACLE-GRO CO | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for SCOTTS MIRACLE-GRO CO


7-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, together with Scotts Miracle-Gro, the "Company," "we" or "us") by focusing on changes in certain key measures from year-to-year. Management's Discussion and Analysis is divided into the following sections:
• Executive summary

• 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. For fiscal 2013, the Company expects the percent of total annual net sales from continuing operations for the second and third quarters to be in-line with fiscal 2010 and years prior.

                      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 %


Table of Contents

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 second 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
and six months ended March 30, 2013 and March 31, 2012, 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                     SIX MONTHS ENDED
                                  MARCH 30, 2013     MARCH 31, 2012     MARCH 30, 2013    MARCH 31, 2012
Net sales                             100.0  %            100.0  %           100.0  %          100.0  %
Cost of sales                          62.9                60.6               66.6              64.4
Cost of sales-impairment,
restructuring and other                   -                   -                  -                 -
Cost of sales - product
registration and recall matters           -                   -                  -                 -
Gross profit                           37.1                39.4               33.4              35.6
Operating expenses:
Selling, general and
administrative                         20.3                20.2               27.1              26.3
Impairment, restructuring and
other                                     -                 0.4                  -               0.5
Product registration and recall
matters                                   -                 0.3                  -               0.3
Other income, net                      (0.1 )              (0.1 )             (0.2 )            (0.1 )
Income from operations                 16.9                18.6                6.5               8.6
Interest expense                        1.8                 1.5                2.5               2.4
Income from continuing
operations before income taxes         15.1                17.1                4.0               6.2
Income tax expense from
continuing operations                   5.4                 6.2                1.5               2.3
Income from continuing
operations                              9.7                10.9                2.5               3.9
Income from discontinued
operations, net of tax                    -                 0.1                0.1                 -
Net income                              9.7  %             11.0  %             2.6  %            3.9  %

Net Sales
Net sales for the three months ended March 30, 2013, were $1,019.6 million, a
decrease of 12.9% from net sales of $1,170.4 million for the three months ended
March 31, 2012. Net sales for the six months ended March 30, 2013, were $1,225.4
million, a decrease of 10.6% from net sales of $1,370.0 million for the six
months ended March 31, 2012. The change in net sales was attributable to the
following:
                        THREE MONTHS ENDED     SIX MONTHS ENDED
                          MARCH 30, 2013        MARCH 30, 2013
Volume                         (13.6 )%              (11.3 )%
Pricing                          0.9                   0.8
Foreign exchange rates          (0.3 )                (0.3 )
Acquisitions                     0.1                   0.2
Change in net sales            (12.9 )%              (10.6 )%


Table of Contents

The decrease in net sales for the three months ended March 30, 2013, was primarily driven by:
• decreased volume in our Global Consumer segment, resulting from a decrease in U.S. and international sales within all product categories due to a delay in the start of the spring lawn and garden selling season;

• a decrease in sales related to ICL supply agreements, which were entered into in connection with the sale of Global Pro in February 2011; and

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

The decrease in net sales for the six months ended March 30, 2013, was primarily driven by:
• decreased volume in our Global Consumer segment, driven by a decrease in U.S. and international sales within all product categories due to a delay in the start of the spring lawn and garden selling season;

• a decrease in sales related to ICL supply agreements, which were entered into in connection with the sale of Global Pro in February 2011;

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

• partially offset 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 fiscal 2013.

Cost of Sales
The following table shows the major components of cost of sales:
                                       THREE MONTHS ENDED                         SIX MONTHS ENDED
                              MARCH 30, 2013        MARCH 31, 2012       MARCH 30, 2013       MARCH 31, 2012
                                                              (In millions)
Materials                   $       394.9         $          447.3     $          489.4     $          541.0
Manufacturing labor and
overhead                            117.9                    126.1                146.1                152.5
Distribution and
warehousing                         107.0                    111.8                145.4                147.8
Roundup reimbursements               21.0                     23.3                 34.6                 41.2
                            $       640.8         $          708.5                815.5                882.5
Impairment, restructuring
and other                             0.1                        -                  0.1                    -
Product registration and
recall matters                          -                      0.2                    -                  0.2
                            $       640.9         $          708.7     $          815.6     $          882.7

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

                                         THREE MONTHS ENDED      SIX MONTHS ENDED
                                           MARCH 30, 2013         MARCH 30, 2013
                                                      (In millions)
Material costs                          $             6.5       $            7.6
Volume and product mix                              (69.3 )                (66.0 )
Roundup® reimbursements                              (2.3 )                 (6.5 )
Foreign exchange rates                               (2.5 )                 (2.1 )
Change in cost of sales                 $           (67.7 )                (67.0 )
Impairment, restructuring and other                   0.1                    0.1
Product registration and recall matters              (0.2 )                 (0.2 )
Change in cost of sales                 $           (67.8 )     $          (67.1 )

The decrease in cost of sales, for the three and six months ended March 30, 2013, were primarily driven by:
• decreased volume in our Global Consumer segment, resulting from a delay in the start of the spring lawn and garden selling season;

• lower reimbursements attributable to our marketing agreement with Monsanto;


Table of Contents

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

• partially offset by higher material costs due to increased prices of packaging for products and fertilizer inputs.

Gross Profit
As a percentage of net sales, our gross profit rate was 37.1% and 39.4% for the
three months ended March 30, 2013 and March 31, 2012, respectively. As a
percentage of net sales, our gross profit rate was 33.4% and 35.6% for the six
months ended March 30, 2013 and March 31, 2012, respectively. Factors
contributing to the change in gross profit rate are outlined in the following
table:
                                        THREE MONTHS ENDED     SIX MONTHS ENDED
                                          MARCH 30, 2013        MARCH 30, 2013
Pricing                                          0.7  %               0.6  %
Material costs                                  (0.6 )               (0.6 )
Product mix and volume:
Roundup® commissions and reimbursements         (0.3 )               (0.2 )
Corporate & Other                                  -                 (0.1 )
Scotts LawnService®                             (0.1 )                0.1
Global Consumer mix and volume                  (2.0 )               (2.0 )
Change in gross profit rate                     (2.3 )%              (2.2 )%
Impairment, restructuring and other                -                    -
Product registration and recall matters            -                    -
Change in gross profit rate                     (2.3 )%              (2.2 )%

The decrease in the gross profit rates, for the three and six months ended March 30, 2013, was primarily driven by:
• decreased sales volume in our Global Consumer segment resulting in reduced leverage of fixed manufacturing and warehousing costs;

• increased material costs due to increased prices of packaging for products and fertilizer inputs;

• partially offset by increased pricing for the Global Consumer segment primarily within the U.S.

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

                                      THREE MONTHS ENDED                          SIX MONTHS ENDED
                              MARCH 30, 2013        MARCH 31, 2012       MARCH 30, 2013       MARCH 31, 2012
                                                              (In millions)
Advertising                $         55.8         $           73.5     $           65.3     $           82.7
Share-based compensation              6.6                      7.3                  8.5                  8.9
Research and development             12.3                     12.0                 22.6                 24.2
Amortization of
intangibles                           2.0                      1.6                  3.9                  3.7
Other selling, general and
administrative                      130.3                    142.5                231.2                240.0
                           $        207.0         $          236.9     $          331.5     $          359.5

Selling, general and administrative ("SG&A") expenses decreased $29.9 million, or 12.6%, to $207.0 million for the second quarter of fiscal 2013 compared to the same period of fiscal 2012. The decrease in advertising of $17.7 million was driven by our media purchasing efficiencies and a delay in advertising expense closer to the later start of the lawn and garden season for the current fiscal period. The decrease in other SG&A of $12.2 million was driven by a decrease in outside consulting expenditures and marketing related expenditures due to cost productivity initiatives, partially offset by higher employee related costs, including severance.

SG&A expenses decreased $28.0 million, or 7.8%, to $331.5 million for the first six months of fiscal 2013 compared to the same period of fiscal 2012. The decrease in advertising of $17.4 million was driven by our media purchasing efficiencies and a delay in advertising expense closer to the later start of the lawn and garden season for the current fiscal period. The decrease in


Table of Contents

other SG&A of $8.8 million was driven by a decrease in outside consulting and marketing related expenditures due to cost productivity initiatives, partially offset by higher employee related costs, including severance. Impairment, Restructuring and Other
For the three months ended March 30, 2013, we recognized expense of $0.2 million related to international employee severance within the Global Consumer segment. For the six months ended March 30, 2013, we recognized income of $4.7 million related to the reimbursement by a vendor for a portion of the costs incurred for the development and commercialization of products including the active ingredient MAT 28 in 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. For the six months ended March 31, 2012, in continuation of the 2011 restructuring plan, the Company incurred an additional $1.9 million in restructuring costs related to termination benefits provided to employees who accepted voluntary retirement and special termination benefits provided to certain employees upon future separation as well as $0.2 million related to curtailment charges for its U.S. defined benefit pension and U.S retiree medical plans.
Other Income, net
Other income was $1.5 million for the three months ended March 30, 2013 compared to $0.7 million for the three months ended March 31, 2012. Other income was $2.6 million for the six months ended March 30, 2013 compared to $1.3 million for the six months ended March 31, 2012. 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 $17.9 million for the three months ended March 30, 2013 compared to $17.9 million for the three months ended March 31, 2012. Excluding the impact of foreign exchange rates, average borrowings declined by approximately $99.2 million during the three months ended March 30, 2013, as compared to the same prior year period. The decline in average borrowings was driven by lower working capital needs associated with lower production of inventory. Additionally, there was an increase in our weighted average interest rate of 42 basis points primarily due to an increase in our credit facility rate due to an increase in our leverage ratio.
Interest expense was $31.1 million for the six months ended March 30, 2013 compared to $33.2 million for the six months ended March 31, 2012. Excluding the impact of foreign exchange rates, average borrowings declined by approximately $67.0 million during the six months ended March 30, 2013, as compared to the same prior year period. The decline in average borrowings was primarily driven by lower working capital needs associated with lower production of inventory. Additionally, there was no change in our weighted average interest rate compared to the six months ended March 31, 2012, as the February 2012 expiration of our of 5.2% interest rate swap was offset by higher interest rates on our credit facility.
Income Tax Expense
The effective tax rate related to continuing operations for the three months ended March 30, 2013 was 35.6% compared to 36.5% for the three months ended March 31, 2012. The effective tax rate related to continuing operations for the six months ended March 30, 2013 was 36.9% compared to 37.1% for the six months ended March 31, 2012. 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.


Table of Contents

Income from Continuing Operations
We reported income from continuing operations of $99.9 million, or $1.60 per diluted share, for the second quarter of fiscal 2013 compared to $126.5 million, or $2.04 per diluted share, for the second quarter of fiscal 2012. Income from continuing operations for the first six months of fiscal 2013 was $31.6 million, or $0.51 per diluted share, compared to $53.4 million, or $0.86 per diluted share, for the same period of fiscal 2012. The decrease in our income from continuing operations for the first three and six months ended March 30, 2013 was driven primarily by the impact of lower net sales, offset by lower general and administrative expenses. Diluted average common shares used in the diluted net income per common share calculation were 62.4 million for the second quarter of fiscal 2013 compared to 62.0 million for the same period a year ago. Diluted average common shares used in the diluted net income per common share calculation were 62.3 million for the first six months ended March 30, 2013 compared to 61.7 million for the first six months ended March 31, 2012. The increase in dilutive average common shares for the three and six months ended March 30, 2013 was a result of the exercise and issuance of share-based compensation awards.
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                         SIX MONTHS ENDED
                                MARCH 30, 2013       MARCH 31, 2012       MARCH 30, 2013       MARCH 31, 2012
                                                                (In millions)
Global Consumer               $          974.6     $        1,119.6     $        1,127.8     $        1,268.7
Scotts LawnService®                       32.9                 35.9                 77.7                 73.5
Segment total                          1,007.5              1,155.5              1,205.5              1,342.2
Corporate & Other                         12.1                 14.9                 19.9                 27.8
Consolidated                  $        1,019.6     $        1,170.4     $        1,225.4     $        1,370.0

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

                                       THREE MONTHS ENDED                      SIX MONTHS ENDED
                               MARCH 30, 2013      MARCH 31, 2012     MARCH 30, 2013      MARCH 31, 2012
                                                             (In millions)
Global Consumer               $        220.1      $       275.2      $         151.4     $       205.7
Scotts LawnService®                    (17.0 )            (12.9 )              (17.9 )           (17.5 )
Segment total                          203.1              262.3                133.5             188.2
Corporate & Other                      (27.3 )            (34.6 )              (47.5 )           (54.3 )
Intangible asset amortization           (2.5 )             (2.0 )               (5.0 )            (4.5 )
Product registration and
recall matters                             -               (3.5 )                  -              (3.8 )
Impairment, restructuring and
other                                   (0.2 )             (5.1 )                0.2              (7.5 )
Interest expense                       (17.9 )            (17.9 )              (31.1 )           (33.2 )
Consolidated                  $        155.2      $       199.2      $          50.1     $        84.9

Global Consumer
Global Consumer segment net sales were $974.6 million in the second quarter of fiscal 2013, a decrease of 13.0% from the second quarter of fiscal 2012 sales of $1,119.6 million, and were $1,127.8 million for the first six months of fiscal 2013, a decrease of 11.1% from the first six months of fiscal 2012 sales of $1,268.7 million. For the three months ended March 30, 2013, volume and foreign exchange rates unfavorably impacted net sales by 13.8% and 0.3%, respectively, partially offset by favorable price


Table of Contents

and acquisition impacts of 1.0% and 0.1%, respectively. For the six months ended March 30, 2013, volume and foreign exchange rates unfavorably impacted net sales by 12.0% and 0.3%, respectively, partially offset by favorable price and acquisition impacts of 1.0% and 0.1%, respectively.
Net sales in the U.S. decreased $111.0 million, or 12.1% and $107.3 million, or 10.6%, for the second quarter and first six months of fiscal 2013, respectively, as compared to the same periods in fiscal 2012. The decrease in U.S. net sales for the second quarter and first six months was driven by lower sales within all product categories due to a delay in the start of the spring lawn and garden selling season.
Excluding the impact of changes in foreign exchange rates, net sales internationally decreased by $30.5 million, or 14.8% and $30.6 million, or 12.2%, for the second quarter and first six months of fiscal 2013, respectively. The decrease in sales internationally was primarily driven by lower sales in Europe within all product categories due to a delay in the start of the spring lawn and garden selling season.
Global Consumer segment operating income declined by $55.1 million, or 20.0%, . . .

  Add SMG to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for SMG - All Recent SEC Filings
Sign Up for a Free Trial to the NEW EDGAR Online Pro
Detailed SEC, Financial, Ownership and Offering Data on over 12,000 U.S. Public Companies.
Actionable and easy-to-use with searching, alerting, downloading and more.
Request a Trial      Sign Up Now


Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.