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SMG > SEC Filings for SMG > Form 10-Q on 7-Aug-2013All Recent SEC Filings

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Form 10-Q for SCOTTS MIRACLE-GRO CO


7-Aug-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, and 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 %


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In August 2010, the Scotts Miracle-Gro Board of Directors authorized the repurchase of up to $500 million of Scotts Miracle-Gro's common shares (the "Common Shares") over a four-year period through September 30, 2014. In May 2011, the Scotts Miracle-Gro Board of Directors authorized the repurchase of up to an additional $200 million of the Common Shares, resulting in authority to repurchase up to a total of $700 million of the Common Shares through September 30, 2014. Since inception of the program in the fourth quarter of fiscal 2010 through June 29, 2013, Scotts Miracle-Gro has repurchased 7.8 million Common Shares for $401.2 million to be held in treasury, leaving $298.8 million authorized for repurchases through September 30, 2014.
Further, on August 6, 2013, we announced that the Scotts Miracle-Gro Board of Directors had approved an increase in our quarterly dividend from $0.325 to $0.4375 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.

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 nine months ended June 29, 2013 and June 30, 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                    NINE MONTHS ENDED
                                  JUNE 29, 2013       JUNE 30, 2012     JUNE 29, 2013      JUNE 30, 2012
Net sales                             100.0  %            100.0  %          100.0  %           100.0  %
Cost of sales                          61.4                65.0              64.0               64.7
Cost of sales-impairment,
restructuring and other                 0.1                   -               0.1                  -
Gross profit                           38.5                35.0              35.9               35.3
Operating expenses:
Selling, general and
administrative                         16.5                18.7              21.9               22.9
Impairment, restructuring and
other                                   0.6                   -               0.3                0.3
Product registration and recall
matters                                   -                 0.4                 -                0.3
Other income, net                      (0.4 )              (0.2 )            (0.3 )             (0.1 )
Income from operations                 21.8                16.1              14.0               11.9
Interest expense                        1.5                 1.6               2.0                2.1
Income from continuing
operations before income taxes         20.3                14.5              12.0                9.8
Income tax expense from
continuing operations                   7.4                 5.4               4.4                3.7
Income from continuing
operations                             12.9                 9.1               7.6                6.1
Income from discontinued
operations, net of tax                    -                (0.3 )               -               (0.1 )
Net income                             12.9  %              8.8  %            7.6  %             6.0  %

Net Sales
Net sales for the three months ended June 29, 2013, were $1,148.1 million, an
increase of 8.8% from net sales of $1,054.9 million for the three months ended
June 30, 2012. Net sales for the nine months ended June 29, 2013, were $2,373.5
million, a decrease of 2.1% from net sales of $2,424.9 million for the nine
months ended June 30, 2012. The change in net sales was attributable to the
following:
                       THREE MONTHS ENDED     NINE MONTHS ENDED
                          JUNE 29, 2013         JUNE 29, 2013
Volume                          6.2  %               (3.6 )%
Pricing                         2.8                   1.7
Foreign exchange rates         (0.3 )                (0.3 )
Acquisitions                    0.1                   0.1
Change in net sales             8.8  %               (2.1 )%


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The increase in net sales for the three months ended June 29, 2013, was primarily driven by:
• increased volume in our Global Consumer segment, due to a shift in net sales from the second quarter to the third quarter as a result of the delay in the start of the fiscal 2013 spring lawn and garden selling season;

• favorable impact of increased pricing in the Global Consumer segment, primarily in the U.S.;

• partially offset by a decline in net sales attributable to our marketing agreement with Monsanto; 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 nine months ended June 29, 2013, was primarily driven by:
• decreased volume in our Global Consumer segment, driven by a delay in the start of the fiscal 2013 spring lawn and garden selling season;

• a decline in net sales attributable to our marketing agreement with Monsanto;

• a decrease in net 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 a favorable impact of increased pricing in the Global Consumer segment, primarily in the U.S.; and

• 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                        NINE MONTHS ENDED
                               JUNE 29, 2013        JUNE 30, 2012       JUNE 29, 2013       JUNE 30, 2012
                                                             (In millions)
Materials                   $       434.3         $         416.3     $         923.6     $         957.4
Manufacturing labor and
overhead                            129.7                   117.3               275.9               269.8
Distribution and
warehousing                         123.9                   124.2               269.3               272.0
Roundup® reimbursements              16.9                    27.9                51.5                69.0
                            $       704.8         $         685.7             1,520.3             1,568.2
Impairment, restructuring
and other                             1.5                       -                 1.6                   -
Product registration and
recall matters                          -                     0.2                   -                 0.4
                            $       706.3         $         685.9     $       1,521.9     $       1,568.6

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

                                         THREE MONTHS ENDED      NINE MONTHS ENDED
                                            JUNE 29, 2013          JUNE 29, 2013
                                                       (In millions)
Material costs                          $           (10.2 )     $            (2.6 )
Volume and product mix                               42.5                   (23.5 )
Roundup® reimbursements                             (11.0 )                 (17.5 )
Foreign exchange rates                               (2.2 )                  (4.3 )
Change in cost of sales                 $            19.1                   (47.9 )
Impairment, restructuring and other                   1.5                     1.6
Product registration and recall matters              (0.2 )                  (0.4 )
Change in cost of sales                 $            20.4       $           (46.7 )


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The increase in cost of sales, for the three months ended June 29, 2013, was primarily driven by:
• increased volume in our Global Consumer segment, due to a shift in net sales from the second quarter to the third quarter as a result of the delay in the start of the fiscal 2013 spring lawn and garden selling season;

• partially offset by a decline in our growing media material costs due to our product cost-out initiatives;

• lower reimbursements attributable to our marketing agreement with Monsanto; and

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

The decrease in cost of sales, for the nine months ended June 29, 2013, was primarily driven by:
• decreased volume in our Global Consumer segment, resulting from a delay in the start of the fiscal 2013 spring lawn and garden selling season;

• a decline in our growing media material costs due to our product cost-out initiatives;

• lower reimbursements attributable to our marketing agreement with Monsanto; and

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

Gross Profit
As a percentage of net sales, our gross profit rate was 38.5% and 35.0% for the
three months ended June 29, 2013 and June 30, 2012, respectively. As a
percentage of net sales, our gross profit rate was 35.9% and 35.3% for the nine
months ended June 29, 2013 and June 30, 2012, respectively. Factors contributing
to the change in gross profit rate are outlined in the following table:
                                        THREE MONTHS ENDED     NINE MONTHS ENDED
                                           JUNE 29, 2013         JUNE 29, 2013
Pricing                                          1.7  %                1.1  %
Material costs                                   0.9                   0.1
Product mix and volume:
Roundup® commissions and reimbursements          0.5                   0.2
Corporate & Other                                  -                   0.1
Scotts LawnService®                              0.1                   0.1
Global Consumer mix and volume                   0.4                  (0.9 )
Change in gross profit rate                      3.6  %                0.7  %
Impairment, restructuring and other             (0.1 )                (0.1 )
Change in gross profit rate                      3.5  %                0.6  %

The increase in the gross profit rate, for the three months ended June 29, 2013, was primarily driven by:
• favorable impact of increased pricing for the Global Consumer segment, primarily in the U.S.;

• decreased material costs in our Global Consumer segment due to a decline in growing media material costs due to product cost-out initiatives; and

• increased volume in our Global Consumer segment, resulting in improved leverage of fixed manufacturing and warehousing costs.

The increase in the gross profit rates, for the nine months ended June 29, 2013, was primarily driven by:
• favorable impact of increased pricing for the Global Consumer segment, primarily in the U.S.;

• lower reimbursements attributable to our marketing agreement with Monsanto;

• partially offset by decreased sales volume in our Global Consumer segment resulting in reduced leverage of fixed manufacturing and warehousing costs.


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

                                      THREE MONTHS ENDED                         NINE MONTHS ENDED
                              JUNE 29, 2013         JUNE 30, 2012        JUNE 29, 2013        JUNE 30, 2012
                                                             (In millions)
Advertising                $         59.3         $          64.4     $        124.6        $         147.1
Share-based compensation              1.9                     1.7               10.4                   10.6
Research and development             11.5                    13.2               34.1                   37.4
Amortization of
intangibles                           1.9                     1.8                5.9                    5.4
Other selling, general and
administrative                      114.9                   116.5              346.0                  356.5
                           $        189.5         $         197.6     $        521.0        $         557.0

Selling, general and administrative ("SG&A") expenses decreased $8.1 million, or 4.1%, to $189.5 million for the third quarter of fiscal 2013 compared to the same period of fiscal 2012. The decrease in advertising of $5.1 million was driven by a planned reduction in media investment and our media purchasing efficiencies. The decrease in other SG&A of $1.6 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 incentive compensation and severance.

SG&A expenses decreased $36.0 million, or 6.5%, to $521.0 million for the first nine months of fiscal 2013 compared to the same period of fiscal 2012. The decrease in advertising of $22.5 million was driven by a planned reduction in media investment and our media purchasing efficiencies. The decrease in other SG&A of $10.5 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 incentive compensation and severance.
Impairment, Restructuring and Other
For the three months ended June 29, 2013, we recognized expense for employee severance charges of $8.5 million related to an international restructuring plan to reduce headcount and streamline management decision making within the Global Consumer segment. For the nine months ended June 29, 2013, we recognized expense of $8.3 million primarily related to international severance of $8.7 million. In addition, 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 nine months ended June 30, 2012, we incurred $7.1 million of impairment, restructuring and other charges primarily associated with a $5.3 million asset impairment charge as a result of issues with commercialization of products including the active ingredient MAT 28 for the Global Consumer segment. In continuation of the 2011 restructuring plan, we incurred an additional $1.6 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 our U.S. defined benefit pension and U.S retiree medical plans.
Other Income, net
Other income was $4.9 million for the three months ended June 29, 2013 compared to $2.2 million for the three months ended June 30, 2012. Other income was $7.5 million for the nine months ended June 29, 2013 compared to $3.5 million for the nine months ended June 30, 2012. The increase in other income for fiscal 2013 is primarily due to the sale of peat bog land in the United Kingdom for a gain of $2.3 million. 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 $16.8 million for the three months ended June 29, 2013 compared to $16.6 million for the three months ended June 30, 2012. Excluding the impact of foreign exchange rates, average borrowings declined by approximately $22.0 million during the three months ended June 29, 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 17 basis points primarily due to an increase in our credit facility rate as a result of an increase in our leverage ratio.


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Interest expense was $47.9 million for the nine months ended June 29, 2013 compared to $49.8 million for the nine months ended June 30, 2012. Excluding the impact of foreign exchange rates, average borrowings declined by approximately $53.2 million during the nine months ended June 29, 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 minimal change in our weighted average interest rate compared to the nine months ended June 30, 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 June 29, 2013 was 36.5% compared to 37.2% for the three months ended June 30, 2012. The effective tax rate related to continuing operations for the nine months ended June 29, 2013 was 36.6% compared to 37.2% for the nine months ended June 30, 2012. The effective tax rate used for interim purposes was based on our 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.
Income from Continuing Operations
We reported income from continuing operations of $148.2 million, or $2.37 per diluted share, for the third quarter of fiscal 2013 compared to $96.4 million, or $1.55 per diluted share, for the third quarter of fiscal 2012. Income from continuing operations for the first nine months of fiscal 2013 was $179.8 million, or $2.88 per diluted share, compared to $149.8 million, or $2.42 per diluted share, for the same period of fiscal 2012. The increase in our income from continuing operations for the three months ended June 29, 2013 was driven primarily by the impact of higher net sales and a decrease in SG&A, partially offset by impairment, restructuring and other charges. The increase in our income from continuing operations for the nine months ended June 29, 2013 was driven primarily by a decrease in SG&A expenses and product registration and recall matter charges. Diluted average common shares used in the diluted net income per common share calculation were 62.6 million for the third quarter of fiscal 2013 compared to 62.2 million for the same period a year ago. Diluted average common shares used in the diluted net income per common share calculation were 62.5 million for the first nine months ended June 29, 2013 compared to 62.0 million for the first nine months ended June 30, 2012. The increase in dilutive average common shares for the three and nine months ended June 29, 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                     NINE MONTHS ENDED
                     JUNE 29, 2013      JUNE 30, 2012      JUNE 29, 2013      JUNE 30, 2012
                                                  (In millions)
Global Consumer     $       1,052.2    $         960.7    $       2,180.0    $       2,229.4
Scotts LawnService®            89.9               87.8              167.6              161.3
Segment total               1,142.1            1,048.5            2,347.6            2,390.7
Corporate & Other               6.0                6.4               25.9               34.2
Consolidated        $       1,148.1    $       1,054.9    $       2,373.5    $       2,424.9


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

                                      THREE MONTHS ENDED                    NINE MONTHS ENDED
                                JUNE 29, 2013      JUNE 30, 2012     JUNE 29, 2013      JUNE 30, 2012
                                                           (In millions)
Global Consumer               $        261.7      $       171.7     $        413.1     $       377.4
Scotts LawnService®                     22.3               22.4                4.4               4.9
Segment total                          284.0              194.1              417.5             382.3
Corporate & Other                      (22.8 )            (18.1 )            (70.3 )           (72.4 )
Intangible asset amortization           (2.5 )             (2.2 )             (7.5 )            (6.7 )
Product registration and
recall matters                             -               (4.0 )                -              (7.8 )
Impairment, restructuring and
other                                   (8.5 )              0.4               (8.3 )            (7.1 )
. . .
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