SMG-2012.12.29 10-Q1
Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________________________
FORM 10-Q 
_________________________________
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from
 
to
     
commission file number: 001-11593
______________________________________________ 
The Scotts Miracle-Gro Company
(Exact name of registrant as specified in its charter)
______________________________________________
OHIO
 
31-1414921
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
14111 SCOTTSLAWN ROAD,
MARYSVILLE, OHIO
 
43041
(Address of principal executive offices)
 
(Zip Code)
(937) 644-0011
(Registrant’s telephone number, including area code)
______________________________________________ 
(Former name, former address and former fiscal year, if changed since last report)
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
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.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
Non-accelerated filer
 
o  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
 
Class
    
Outstanding at Feburary 4, 2013
 
Common Shares, $0.01 stated value, no par value
    
61,620,780 common shares

Table of Contents


THE SCOTTS MIRACLE-GRO COMPANY
INDEX

 
 
 
 
 
PAGE NO.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidated Statements of Operations
(In millions, except per common share data)
(Unaudited)
 
 
THREE MONTHS ENDED
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
Net sales
$
205.8

 
$
199.6

Cost of sales
174.7

 
174.0

Gross profit
31.1

 
25.6

Operating expenses:
 
 
 
Selling, general and administrative
124.5

 
122.5

Impairment, restructuring and other
(0.4
)
 
2.4

Product registration and recall matters
—

 
0.3

Other income, net
(1.1
)
 
(0.6
)
Loss from operations
(91.9
)
 
(99.0
)
Interest expense
13.2

 
15.3

Loss from continuing operations before income taxes
(105.1
)
 
(114.3
)
Income tax benefit from continuing operations
(36.8
)
 
(41.2
)
Loss from continuing operations
(68.3
)
 
(73.1
)
Income (loss) from discontinued operations, net of tax
0.6

 
(0.8
)
Net loss
$
(67.7
)
 
$
(73.9
)
Basic income (loss) per common share:
 
 
 
Loss from continuing operations
$
(1.11
)
 
$
(1.20
)
Income (loss) from discontinued operations
0.01

 
(0.01
)
Basic loss per common share
$
(1.10
)
 
$
(1.21
)
Weighted-average common shares outstanding during the period
61.4

 
60.9

Diluted income (loss) per common share:
 
 
 
     Loss from continuing operations
$
(1.11
)
 
$
(1.20
)
     Income (loss) from discontinued operations
0.01

 
(0.01
)
Diluted loss per common share
$
(1.10
)
 
$
(1.21
)
Weighted-average common shares outstanding during the period plus dilutive potential common shares
61.4

 
60.9

Dividends declared per common share
$
0.33

 
$
0.30

 
 
 
 
See notes to condensed consolidated financial statements.


3

THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidated Statements of Comprehensive Loss
(In millions)
(Unaudited)
 

 
THREE MONTHS ENDED
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
Net loss
$
(67.7
)
 
$
(73.9
)
Other comprehensive income (loss), net of tax:
 
 
 
Net foreign currency translation adjustment
(3.7
)
 
(3.5
)
Net loss on derivatives
(0.8
)
 
(0.6
)
Net change in pension and other post retirement benefits
1.2

 
1.9

Total other comprehensive loss
(3.3
)
 
(2.2
)
Comprehensive loss
$
(71.0
)
 
$
(76.1
)
See notes to condensed consolidated financial statements.


4

THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidated Statements of Cash Flows
(In millions)
(Unaudited)
 
THREE MONTHS ENDED
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
OPERATING ACTIVITIES
 
 
 
Net loss
$
(67.7
)
 
$
(73.9
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Impairment, restructuring and other
4.6

 
—

Share-based compensation expense
1.9

 
1.6

Depreciation
13.6

 
12.9

Amortization
2.7

 
2.7

Loss on sale of long-lived assets
—

 
0.1

Changes in assets and liabilities, net of acquired businesses:
 
 
 
Accounts receivable
163.6

 
141.8

Inventories
(231.8
)
 
(269.2
)
Prepaid and other assets
(2.3
)
 
—

Accounts payable
48.2

 
76.4

Other current liabilities
(92.2
)
 
(90.4
)
Restructuring reserves
(3.1
)
 
(3.0
)
Other non-current items
(3.7
)
 
(0.7
)
Other, net
(2.4
)
 
0.6

Net cash used in operating activities
(168.6
)
 
(201.1
)
 
 
 
 
INVESTING ACTIVITIES
 
 
 
Proceeds from sale of long-lived assets
0.1

 
—

Investments in property, plant and equipment
(25.0
)
 
(16.4
)
Investment in acquired business, net of cash acquired
(3.2
)
 
—

                Net cash used in investing activities
(28.1
)
 
(16.4
)
 
 
 
 
FINANCING ACTIVITIES
 
 
 
Borrowings under revolving and bank lines of credit
463.8

 
447.0

Repayments under revolving and bank lines of credit
(264.2
)
 
(205.7
)
Dividends paid
(19.9
)
 
(18.9
)
Purchase of common shares
—

 
(17.5
)
Excess tax benefits from share-based payment arrangements
0.4

 
3.8

Cash received from the exercise of stock options
0.7

 
5.6

Net cash provided by financing activities
180.8

 
214.3

Effect of exchange rate changes on cash
(0.4
)
 
0.1

Net decrease in cash and cash equivalents
(16.3
)
 
(3.1
)
Cash and cash equivalents, beginning of period
131.9

 
130.9

Cash and cash equivalents, end of period
$
115.6

 
$
127.8

 
 
 
 
SUPPLEMENTAL CASH FLOW INFORMATION
 
 
 
Interest paid
$
(11.4
)
 
$
(13.0
)
Income taxes paid
(2.8
)
 
(10.0
)
See notes to condensed consolidated financial statements.

5

THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidated Balance Sheets
(In millions, except stated value per share)
 
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
SEPTEMBER 30,
2012
 
(UNAUDITED)
 
(UNAUDITED)
 
 
ASSETS
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
115.6

 
$
127.8

 
$
131.9

Accounts receivable, less allowances of $8.7, $12.4 and $10.5, respectively
168.4

 
166.5

 
330.9

Accounts receivable pledged
—

 
14.3

 
—

Inventories
646.7

 
654.8

 
414.9

Prepaid and other current assets
126.2

 
148.8

 
122.3

Total current assets
1,056.9

 
1,112.2

 
1,000.0

Property, plant and equipment, net of accumulated depreciation of $556.4, $520.1 and $542.6, respectively
424.0

 
391.4

 
427.4

Goodwill
314.4

 
309.1

 
309.4

Intangible assets, net
303.3

 
316.2

 
307.1

Other assets
29.5

 
35.4

 
30.5

Total assets
$
2,128.1

 
$
2,164.3

 
$
2,074.4

 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
Current portion of debt
$
4.3

 
$
8.1

 
$
1.5

Accounts payable
185.5

 
220.4

 
152.3

Other current liabilities
186.6

 
220.6

 
279.8

Total current liabilities
376.4

 
449.1

 
433.6

Long-term debt
981.9

 
1,026.1

 
781.1

Other liabilities
256.0

 
224.9

 
257.8

Total liabilities
1,614.3

 
1,700.1

 
1,472.5

Commitments and contingencies (note 11)

 

 

Shareholders’ equity:
 
 
 
 
 
Common shares and capital in excess of $.01 stated value per share, 61.5, 60.8 and 61.3 shares issued and outstanding, respectively
405.3

 
410.3

 
408.6

Retained earnings
542.2

 
511.6

 
630.2

Treasury shares, at cost: 6.7, 7.4 and 6.8 shares, respectively
(343.1
)
 
(377.5
)
 
(349.6
)
Accumulated other comprehensive loss
(90.6
)
 
(80.2
)
 
(87.3
)
Total shareholders’ equity
513.8

 
464.2

 
601.9

Total liabilities and shareholders’ equity
$
2,128.1

 
$
2,164.3

 
$
2,074.4

See notes to condensed consolidated financial statements.

6

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Scotts Miracle-Gro Company (“Scotts Miracle-Gro”) and its subsidiaries (collectively, together with Scotts Miracle-Gro, the “Company”) are engaged in the manufacturing, marketing and sale of consumer branded products for lawn and garden care. The Company’s primary customers include home centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers and food and drug stores. The Company’s products are sold primarily in North America and the European Union. The Company also operates the Scotts LawnService® business, which provides residential and commercial lawn care, tree and shrub care and limited pest control services in the United States.
Organization and Basis of Presentation
The Company’s unaudited condensed consolidated financial statements for the three months ended December 29, 2012 and December 31, 2011 are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of Scotts Miracle-Gro and its subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The Company’s consolidation criteria are based on majority ownership (as evidenced by a majority voting interest in the entity) and an objective evaluation and determination of effective management control. In the opinion of management, interim results reflect all normal and recurring adjustments and are not necessarily indicative of results for a full year.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, this report should be read in conjunction with Scotts Miracle-Gro’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012, which includes a complete set of footnote disclosures, including the Company’s significant accounting policies.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and related disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from the estimates.
RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive Income
In June 2011, the FASB issued amended accounting guidance on the presentation of comprehensive income. The amended guidance requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The provisions were effective for the Company’s financial statements for the fiscal year beginning October 1, 2012. The adoption of the amended guidance did not have a significant impact on the Company's financial statements and related disclosures.
Balance Sheet Offsetting
In December 2011, the FASB issued an amendment to accounting guidance on the presentation of offsetting of derivatives, and financial assets and liabilities. The amended guidance requires quantitative disclosures regarding the gross amounts and their location within the statement of financial position. The provisions are effective for the Company's financial statements for the fiscal year beginning October 1, 2013. The adoption of the amended guidance will not have a significant impact on the Company's financial statements and related disclosures.

7

NOTE 2. DISCONTINUED OPERATIONS
In the fourth quarter of fiscal year 2012, the Company completed the wind down of the Company's professional seed business. As a result, effective in its fourth quarter of fiscal 2012, the Company classified its results of operations for all periods presented to reflect the professional seed business as a discontinued operation.
The following table summarizes the results of the professional seed business within discontinued operations for the periods presented: 
 
THREE MONTHS ENDED
 
DECEMBER 29, 2012
 
DECEMBER 31, 2011
 
(In millions)
Net sales
$
—

 
$
11.6

Operating costs
(0.8
)
 
12.9

Impairment, restructuring and other charges
—

 
0.2

Other income, net
—

 
(0.3
)
Income (loss) from discontinued operations before income taxes
0.8

 
(1.2
)
Income tax expense (benefit) from discontinued operations
0.2

 
(0.4
)
Income (loss) from discontinued operations
$
0.6

 
$
(0.8
)
NOTE 3. ACQUISITIONS
During the three months ended December 29, 2012, Scotts LawnService® completed the acquisition of two franchisee businesses that individually and in the aggregate were not significant. The aggregate purchase price of these acquisitions was $7.2 million. The condensed consolidated financial statements include the results of operations from these business combinations from the date of each acquisition.
NOTE 4. IMPAIRMENT, RESTRUCTURING AND OTHER
Activity described herein is classified within the "Impairment, restructuring and other" line in the Condensed Consolidated Statement of Operations.
For the three months ended December 29, 2012, the Company 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. During the second quarter of fiscal 2012, the Company recorded an impairment charge of $5.3 million to fully impair assets associated with the active ingredient MAT 28. In addition, for the three months ended December 29, 2012, the Company 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 three months ended December 31, 2011, in continuation of the 2011 restructuring plan, the Company incurred an additional $2.2 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.
The following table summarizes the activity related to liabilities associated with the restructuring and other charges during the three months ended December 29, 2012 (in millions):
Amounts reserved for restructuring and other charges at September 30, 2012
$
10.2

Restructuring and other charges
—

Payments and other
(3.1
)
Amounts reserved for restructuring and other charges at December 29, 2012
$
7.1


A portion of the amounts reserved as of December 29, 2012 will be paid out over the course of fiscal 2013. Included in the restructuring reserves is $4.2 million that is classified as long-term. Payments against the long-term reserves will start once the employees covered by the 2011 restructuring plan retire.

8

NOTE 5. INVENTORIES
Inventories consisted of the following for each of the periods presented:
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
SEPTEMBER 30,
2012
 
(In millions)
Finished goods
$
411.2

 
$
435.9

 
$
224.6

Work-in-process
63.3

 
52.0

 
48.3

Raw materials
172.2

 
166.9

 
142.0

Total inventories
$
646.7

 
$
654.8

 
$
414.9


Adjustments to reflect inventories at net realizeable values were $16.9 million at December 29, 2012, $12.2 million at December 31, 2011 and $21.0 million at September 30, 2012.
NOTE 6. MARKETING AGREEMENT
The Company is Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup® herbicide 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 Marketing Agreement, the Company is entitled to receive an annual commission from Monsanto as consideration for the performance of the Company’s duties as agent. The annual gross commission under the Marketing Agreement is calculated as a percentage of the actual earnings before interest and income taxes of the consumer Roundup® business in the markets covered by the Marketing Agreement and is based on the achievement of two earnings thresholds, as defined in the Marketing Agreement. The Marketing Agreement also requires the Company to make annual payments to Monsanto as a contribution against the overall expenses of the consumer Roundup® business. The annual contribution payment is defined in the Marketing Agreement as $20 million.
In consideration for the rights granted to the Company under the Marketing Agreement for North America, the Company was required to pay a marketing fee of $32 million to Monsanto. The Company has deferred this amount on the basis that the payment will provide a future benefit through commissions that will be earned under the Marketing Agreement. The economic useful life over which the marketing fee is being amortized is 20 years, with a remaining amortization period of less than six years as of December 29, 2012.
Under the terms of the Marketing Agreement, the Company performs certain functions, primarily manufacturing conversion, distribution and logistics, and selling and marketing support, on behalf of Monsanto in the conduct of the consumer Roundup® business. The actual costs incurred for these activities are charged to and reimbursed by Monsanto. The Company records costs incurred under the Marketing Agreement for which the Company is the primary obligor on a gross basis, recognizing such costs in “Cost of sales” and the reimbursement of these costs in “Net sales,” with no effect on gross profit dollars or net income.
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. The elements of the net commission and reimbursements earned under the Marketing Agreement and included in “Net sales” are as follows:
 
THREE MONTHS ENDED
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
(In millions)
Gross commission
$
—

 
$
—

Contribution expenses
(5.0
)
 
(5.0
)
Amortization of marketing fee
(0.2
)
 
(0.2
)
Net commission loss
(5.2
)
 
(5.2
)
Reimbursements associated with Marketing Agreement
13.7

 
17.9

Total net sales associated with Marketing Agreement
$
8.5

 
$
12.7


9

The Marketing Agreement has no definite term except as it relates to the European Union countries (the “EU term”). The EU term extends through September 30, 2013, with an automatic renewal period of two years, subject to non-renewal only upon the occurrence of certain performance defaults. Thereafter, the Marketing Agreement provides that the parties may agree to renew the EU term for an additional three years.
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 for cause, the Company would not be entitled to any termination fee. 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. If the Marketing Agreement was terminated for any reason, the Company would also lose all, or a substantial portion, of the significant source of earnings and overhead expense absorption the Marketing Agreement provides.
Under the Marketing Agreement, Monsanto must provide the Company with notice of any proposed sale of the consumer Roundup business, allow the Company to participate in the sale process and negotiate in good faith with the Company with respect to any such proposed sale. In the event the Company acquires the consumer Roundup® business in such a sale, the Company would receive as a credit against the purchase price the amount of the termination fee that would have been paid to the Company 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, the Company must let Monsanto know whether the Company intends to terminate the Marketing Agreement and forfeit any right to a termination fee or whether it will agree to continue to perform under the Marketing Agreement on behalf of the purchaser.
NOTE 7. DEBT
The components of long-term debt are as follows:
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
SEPTEMBER 30,
2012
 
(In millions)
Credit facility – revolving loans
$
575.5

 
$
621.7

 
$
377.1

Senior Notes – 7.25%
200.0

 
200.0

 
200.0

Senior Notes – 6.625%
200.0

 
200.0

 
200.0

MARP Agreement
—

 
5.4

 
—

Other
10.7

 
7.1

 
5.5

 
986.2

 
1,034.2

 
782.6

Less current portions
4.3

 
8.1

 
1.5

Total long-term debt
$
981.9

 
$
1,026.1

 
$
781.1


As of December 29, 2012, there was $1.1 billion of availability under the Company’s senior secured credit facility, including availability under letters of credit. Under the credit facility, the Company has the ability to issue letter of credit commitments up to $75 million. At December 29, 2012, the Company had letters of credit in the aggregate face amount of $24.2 million outstanding.
The Company was in compliance with the terms of all debt covenants at December 29, 2012. The credit facility contains, among other obligations, an affirmative covenant regarding the Company’s leverage ratio, calculated as average total indebtedness, as described in the Company’s credit facility, relative to the Company’s earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted pursuant to the terms of the credit facility (“Adjusted EBITDA”). Under the terms of the credit facility, the maximum leverage ratio was 3.50 as of December 29, 2012. The Company’s leverage ratio was 2.80 at December 29, 2012. The Company’s credit facility also includes an affirmative covenant regarding its interest coverage ratio. Interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in the credit facility, and excludes costs related to refinancings. Under the terms of the credit facility, the minimum interest coverage ratio was 3.50 for the twelve months ended December 29, 2012. The Company’s interest coverage ratio was 5.25 for the twelve months ended December 29, 2012.
The Company accounts for the sale of receivables under the Master Accounts Receivable Purchase Agreement ("2012 MARP Agreement") as short-term debt and continues to carry the receivables on its Consolidated Balance Sheet, primarily as a result of

10

the Company’s right to repurchase receivables sold. Refer to "NOTE 11. DEBT" in the Company's Form 10-K for the year ended September 30, 2012 for more information regarding the 2012 MARP Agreement. There were no short-term borrowings under the MARP Agreements as of December 29, 2012 and $5.4 million as of December 31, 2011.
Estimated Fair Values
A description of the methods and assumptions used to estimate the fair values of the Company’s debt instruments is as follows:
Credit Facility
The interest rate currently available to the Company fluctuates with the applicable LIBOR rate, prime rate or Federal Funds Effective Rate and thus the carrying value is a reasonable estimate of fair value. The fair value measurement for the credit facility was classified in Level 2 of the fair value hierarchy.
7.25% Senior Notes
The fair value of Scotts Miracle-Gro’s 7.25% Senior Notes due 2018 (the “7.25% Senior Notes”) can be determined based on the trading of the 7.25% Senior Notes in the open market. The difference between the carrying value and the fair value of the 7.25% Senior Notes represents the premium or discount on that date. Based on the trading value on or around December 29, 2012, December 31, 2011 and September 30, 2012, the fair value of the 7.25% Senior Notes was approximately $214.3 million, $212.0 million and $212.0 million, respectively. The fair value measurement for the 7.25% Senior Notes was classified in Level 1 of the fair value hierarchy.
6.625% Senior Notes
The fair value of Scotts Miracle-Gro’s 6.625% Senior Notes due 2020 (the “6.625% Senior Notes”) can be determined based on the trading of the 6.625% Senior Notes in the open market. The difference between the carrying value and the fair value of the 6.625% Senior Notes represents the premium or discount on that date. Based on the trading value on or around December 29, 2012, December 31, 2011 and September 30, 2012, the fair value of the 6.625% Senior Notes was approximately $220.5 million, $203.3 million and $217.5 million, respectively. The fair value measurement for the 6.625% Senior Notes was classified in Level 1 of the fair value hierarchy.
Interest Rate Swap Agreements
At December 29, 2012 and December 31, 2011, the Company had outstanding interest rate swap agreements with major financial institutions that effectively converted a portion of the Company’s variable-rate debt to a fixed rate. The swap agreements had a total U.S. dollar equivalent notional amount of $1,100 million and $900 million at December 29, 2012 and December 31, 2011, respectively. Interest payments made between the effective date and expiration date are hedged by the swap agreements, except as noted below. The notional amount, effective date, expiration date and rate of each of these swap agreements are shown in the table below.
Notional Amount
(in millions)
 
Effective
Date (a)
 
Expiration
Date
 
Fixed
Rate
50
 
2/14/2012
 
2/14/2016
 
3.78%
150
(b) 
2/7/2012
 
5/7/2016
 
2.42%
150
(c) 
11/16/2009
 
5/16/2016
 
3.26%
50
(c) 
2/16/2010
 
5/16/2016
 
3.05%
100
(b) 
2/21/2012
 
5/23/2016
 
2.40%
150
(b) 
12/20/2011
 
6/20/2016
 
2.61%
50
(d) 
12/6/2012
 
9/6/2017
 
2.96%
150
(c) 
2/7/2017
 
5/7/2019
 
2.12%
50
(b) 
2/7/2017
 
5/7/2019
 
2.45%
100
(c) 
12/20/2016
 
6/20/2019
 
2.11%
100
(c) 
12/20/2016
 
6/20/2019
 
2.14%

(a)
The effective date refers to the date on which interest payments were, or will be, first hedged by the applicable swap agreement.
(b)
Interest payments made during the three-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement.

11

(c)
Interest payments made during the six-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement.
(d)
Interest payments made during the nine-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement.
Accounts Receivable Pledged
The interest rate on the short-term debt associated with accounts receivable pledged under the MARP Agreement fluctuates with the applicable LIBOR rate and thus the carrying value is a reasonable estimate of fair value. The fair value measurement for the MARP agreement was classified in Level 2 of the fair value hierarchy.
NOTE 8. RETIREMENT AND RETIREE MEDICAL PLANS
The following summarizes the components of net periodic benefit cost for the retirement and retiree medical plans sponsored by the Company: 
 
THREE MONTHS ENDED
 
DECEMBER 29, 2012
 
DECEMBER 31, 2011
 
U.S.
Pension
 
International
Pension
 
U.S.
Medical
 
U.S.
Pension
 
International
Pension
 
U.S.
Medical
 
(In millions)
Service cost
$
—

 
$
0.4

 
$
0.1

 
$
—

 
$
0.3

 
$
0.1

Interest cost
1.0

 
2.5

 
0.3

 
1.1

 
2.4

 
0.4

Expected return on plan assets
(1.3
)
 
(2.7
)
 
—

 
(1.4
)
 
(2.2
)
 
—

Net amortization
1.2

 
0.4

 
0.1

 
1.3

 
0.2

 
0.1

Curtailment loss
—

 
—

 
—

 
0.2

 
—

 
—

Net periodic benefit cost
$
0.9

 
$
0.6

 
$
0.5

 
$
1.2

 
$
0.7

 
$
0.6

NOTE 9. SHAREHOLDERS' EQUITY
Share-Based Awards
The following is a summary of the share-based awards granted during the periods indicated:
 
THREE MONTHS ENDED
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
Restricted stock units (including deferred stock units)
8,693

 
1,134

Total share-based awards
8,693

 
1,134

 
 
 
 
Aggregate fair value at grant dates (in millions)
$
0.4

 
$
0.1


Total share-based compensation recognized was as follows for the periods indicated:
 
THREE MONTHS ENDED
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
(In millions)
Share-based compensation
$
1.9

 
$
1.6


Subsequent to December 29, 2012, Scotts Miracle-Gro awarded performance share units, restricted stock units and deferred stock units covering 0.3 million Common Shares to employees and members of the Board of Directors with an estimated fair value of $14.7 million on the date of the grant.
NOTE 10. INCOME TAXES
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 reporting purposes is based on management’s best estimate of factors impacting the effective tax rate for the full fiscal year. An allocation of the income tax expense has been separately determined to report the discontinued operations, net of tax. There can be no assurance that the

12

effective tax rate estimated for interim financial reporting purposes will approximate the effective tax rate determined at fiscal year end.

Scotts Miracle−Gro or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, which are discussed further below, the Company is no longer subject to examination by these tax authorities for fiscal years prior to 2009. The Company is currently under examination by certain foreign and U.S. state and local tax authorities. Regarding the foreign jurisdictions, audits are currently underway in multiple countries covering fiscal years 2008 through 2011. A Belgium audit closed during the first quarter having an immaterial impact on the financial statements. In regard to the U.S. state and local audits, the tax periods under examination are limited to fiscal years 1997 through 2011. In addition to the aforementioned audits, certain other tax deficiency notices and refund claims for previous years remain unresolved.
The Company currently anticipates that few of its open and active audits will be resolved within the next 12 months. The Company is unable to make a reasonably reliable estimate as to when or if cash settlements with taxing authorities may occur. Although audit outcomes and the timing of audit payments are subject to significant uncertainty, the Company does not anticipate that the resolution of these tax matters or any events related thereto will result in a material change to its consolidated financial position, results of operations or cash flows.
NOTE 11. CONTINGENCIES
Management regularly evaluates the Company’s contingencies, including various lawsuits and claims which arise in the normal course of business, product and general liabilities, workers’ compensation, property losses and other liabilities for which the Company is self-insured or retains a high exposure limit. Self-insurance reserves are established based on actuarial loss estimates for specific individual claims plus actuarially estimated amounts for incurred but not reported claims and adverse development factors applied to existing claims. Legal costs incurred in connection with the resolution of claims, lawsuits and other contingencies generally are expensed as incurred. In the opinion of management, its assessment of contingencies is reasonable and related reserves, in the aggregate, are adequate; however, there can be no assurance that final resolution of these matters will not have a material effect on the Company’s financial condition, results of operations or cash flows. The Company's identified contingencies include the matters set out below.
Regulatory Matters
At December 29, 2012, $5.1 million was accrued in the “Other liabilities” line in the Condensed Consolidated Balance Sheet for compliance-related environmental actions, the majority of which is for site remediation. The amounts accrued are believed to be adequate to cover such known environmental exposures based on current facts and estimates of likely outcomes. Although it is reasonably possible that the costs to resolve such known environmental exposures will exceed the amounts accrued, any variation from accrued amounts is not expected to be material.
Other
In connection with the sale of wild bird food products that were the subject of a voluntary recall in 2008, the Company has been named as a defendant in four putative class actions filed on and after June 27, 2012, which have now been consolidated in the United States District Court for the Southern District of California as In re Morning Song Bird Food Litigation, Lead Case No. 3:12-cv-01592-JAH-RBB. The plaintiffs allege various statutory and common law claims associated with the Company's sale of wild bird food products and a plea agreement entered into in previously pending government proceedings associated with such sales. The plaintiffs seek on behalf of themselves and various purported class members monetary damages, restitution, injunctive relief, declaratory relief, attorney's fees, interest and costs. The Company intends to vigorously defend the consolidated action. Given the early stages of the action, the Company cannot make a determination as to whether it could have a material effect on the Company's financial condition, results of operations or cash flows and has not recorded any accruals with respect thereto.
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. In many of these cases, the complaints are not specific about the plaintiffs’ contacts with the Company or its products. 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 these cases and, accordingly, no reserves have been recorded in the Company’s Consolidated Financial Statements. 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. 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 effect on the Company’s financial condition, results of operations or cash flows.

13

The Company is involved in other lawsuits and claims which arise in the normal course of business. These claims individually and in the aggregate are not expected to result in a material effect on the Company’s financial condition, results of operations or cash flows.
NOTE 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. To manage a portion of the volatility related to these exposures, the Company enters into various financial transactions. The utilization of these financial transactions is governed by policies covering acceptable counterparty exposure, instrument types and other hedging practices. The Company does not hold or issue derivative financial instruments for speculative trading purposes.
Exchange Rate Risk Management
The Company periodically uses foreign currency swap contracts to manage the exchange rate risk associated with intercompany loans with foreign subsidiaries that are denominated in local currencies. At December 29, 2012, the notional amount of outstanding foreign currency swap contracts was $306.7 million, with a fair value of $0.3 million. At December 31, 2011, the notional amount of outstanding foreign currency swap contracts was $306.3 million, with a fair value of $3.5 million. The fair value of foreign currency swap contracts is determined based on changes in spot rates. The contracts will mature over the next fiscal year.
Interest Rate Risk Management
The Company enters into interest rate swap agreements as a means to hedge its variable interest rate risk on debt instruments. The fair values are reflected in the Company’s Condensed Consolidated Balance Sheets. Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since the interest rate swap agreements have been designated as hedging instruments, unrealized gains or losses resulting from adjusting these swaps to fair value are recorded as elements of accumulated other comprehensive income (loss) (“AOCI”) within the Condensed Consolidated Balance Sheets. The fair value of the swap agreements is determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date.
At December 29, 2012 and December 31, 2011, the Company had outstanding interest rate swap agreements with major financial institutions that effectively converted a portion of the Company’s variable-rate debt to a fixed rate. The swap agreements had a total U.S. dollar equivalent notional amount of $1,100 million and $900 million at December 29, 2012 and December 31, 2011, respectively. Included in the AOCI balance at December 29, 2012 was a loss of $5.1 million related to interest rate swap agreements that is expected to be reclassified to earnings during the next 12 months, consistent with the timing of the underlying hedged transactions.
Commodity Price Risk Management
The Company had outstanding hedging arrangements at December 29, 2012 designed to fix the price of a portion of its projected future urea requirements. The contracts are designated as hedges of the Company’s exposure to future cash flow fluctuations associated with the cost of urea. The objective of the hedges is to mitigate the earnings and cash flow volatility attributable to the risk of changing prices. Unrealized gains or losses in the fair value of these contracts are recorded to the AOCI component of shareholders’ equity. Realized gains or losses remain as a component of AOCI until the related inventory is sold. Upon sale of the underlying inventory, the gain or loss is reclassified to cost of sales. Included in the AOCI balance at December 29, 2012 was a loss of $0.1 million related to urea derivatives that is expected to be reclassified to earnings during the next 12 months, consistent with the timing of the underlying hedged transactions.
Periodically, the Company also uses derivatives to partially mitigate the effect of fluctuating diesel and gasoline costs on operating results. Any such derivatives that do not qualify for hedge accounting treatment in accordance with GAAP are recorded at fair value, with unrealized gains and losses on open contracts and realized gains or losses on settled contracts recorded as an element of cost of sales. Unrealized gains or losses in the fair value of contracts that do qualify for hedge accounting are recorded in AOCI except for any ineffective portion of the change in fair value, which is immediately recorded in earnings. For the effective portion of the change in fair value, realized gains or losses remain as a component of AOCI until the related fuel is consumed. Upon consumption of the fuel, the gain or loss is reclassified to cost of sales. Included in the AOCI balance at December 29, 2012 was a gain of $0.1 million related to fuel derivatives that is expected to be reclassified to earnings during the next 12 months, consistent with the timing of the underlying hedged transactions.


14

The Company had the following outstanding commodity contracts that were entered into to hedge forecasted purchases:
Commodity
DECEMBER 29,
2012
 
DECEMBER 31,
2011
Urea
40,500
 tons
  
40,500
 tons
Diesel
5,796,000
 gallons
  
5,250,000
 gallons
Gasoline
350,000
 gallons
  
217,000
 gallons
Heating Oil
4,746,000
 gallons
  
2,268,000
 gallons
Fair Values of Derivative Instruments
The fair values of the Company’s derivative instruments were as follows:
 
 
 
 
ASSETS / (LIABILITIES)
DERIVATIVES DESIGNATED AS  HEDGING INSTRUMENTS
 
 
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
SEPTEMBER 30,
2012
 
BALANCE SHEET LOCATION
 
FAIR VALUE
 
 
 
 
(In millions)
Interest rate swap agreements
 
Other current liabilities
 
$
(8.2
)
 
$
(8.4
)
 
$
(8.2
)
 
 
Other liabilities
 
(20.9
)
 
(18.9
)
 
(20.6
)
Commodity hedging instruments
 
Prepaid and other current assets
 
0.1

 
—

 
1.0

 
 
Other current liabilities
 
(0.7
)
 
(2.1
)
 
—

Total derivatives designated as hedging instruments
 
 
 
$
(29.7
)
 
$
(29.4
)
 
$
(27.8
)
 
 
 
 
 
 
 
 
 
DERIVATIVES NOT DESIGNATED AS
HEDGING INSTRUMENTS
 
 
 
 
 
 
 
 
Foreign currency swap contracts
 
Prepaid and other current assets
 
$
0.8

 
$
3.5

 
$
—

 
 
Other current liabilities
 
(0.5
)
 
(0.6
)
 
(1.0
)
Commodity hedging instruments
 
Prepaid and other current assets
 
0.2

 
—

 
1.0

 
 
Other current liabilities
 
—

 
(0.2
)
 
—

Total derivatives not designated as hedging instruments
 
 
 
$
0.5

 
$
2.7

 
$
—

Total derivatives
 
 
 
$
(29.2
)
 
$
(26.7
)
 
$
(27.8
)

The effect of derivative instruments on AOCI and the Condensed Consolidated Statements of Operations was as follows: 
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS
 
AMOUNT OF GAIN / (LOSS)
RECOGNIZED IN AOCI
 
THREE MONTHS ENDED
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
 
(In millions)
Interest rate swap agreements
 
$
(0.9
)
 
$
(2.2
)
Commodity hedging instruments
 
(1.0
)
 
(1.4
)
Total
 
$
(1.9
)
 
$
(3.6
)
DERIVATIVES IN CASH FLOW
HEDGING RELATIONSHIPS
 
RECLASSIFIED FROM AOCI INTO STATEMENT OF OPERATIONS
 
AMOUNT OF GAIN / (LOSS)
THREE MONTHS ENDED
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
 
 
 
(In millions)
Interest rate swap agreements
 
Interest expense
 
$
(1.2
)
 
$
(3.1
)
Commodity hedging instruments
 
Cost of sales
 
0.1

 
0.1

Total
 
 
 
$
(1.1
)
 
$
(3.0
)

15

DERIVATIVES NOT DESIGNATED
AS HEDGING INSTRUMENTS
 
RECOGNIZED IN
STATEMENT OF OPERATIONS
 
AMOUNT OF GAIN / (LOSS)
THREE MONTHS ENDED
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
 
 
 
(In millions)
Foreign currency swap contracts
 
Interest expense
 
$
(1.6
)
 
$
6.7

Commodity hedging instruments
 
Cost of sales
 
(0.5
)
 
0.4

Total
 
 
 
$
(2.1
)
 
$
7.1

NOTE 13. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1 — Quoted prices in active markets for identical assets or liabilities.
Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following describes the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis, as well as the general classification within the valuation hierarchy.
Derivatives
Derivatives consist of foreign currency, interest rate and commodity derivative instruments. Foreign currency swap contracts are valued using observable forward rates in commonly quoted intervals for the full term of the contracts. Interest rate swap agreements are valued based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date. Commodity contracts are measured using observable commodity exchange prices in active markets.
These derivative instruments are classified within Level 2 of the valuation hierarchy and are included within other assets and other liabilities in the Company’s Condensed Consolidated Balance Sheets, except for derivative instruments expected to be settled within the next 12 months, which are included within prepaid and other current assets and other current liabilities.
Cash equivalents
Cash equivalents consist of highly liquid investments purchased with a maturity of three months or less. The carrying value of these cash equivalents approximates fair value due to their short-term maturities.
Other
Other financial assets consist of investment securities in non-qualified retirement plan assets. These securities are valued using observable market prices in active markets.

16

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 29, 2012: 
 
Quoted Prices in  Active
Markets for Identical Assets
(Level 1)
 
Significant Other
Observable  Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
 
(In millions)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
83.3

 
$
—

 
$
—

 
$
83.3

Derivatives
 
 
 
 
 
 
 
Foreign currency swap contracts
—

 
0.8

 
—

 
0.8

Commodity hedging instruments
—

 
0.3

 
—

 
0.3

Other
6.5

 
—

 
—

 
6.5

Total
$
89.8

 
$
1.1

 
$
—

 
$
90.9

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate swap agreements
$
—

 
$
(29.1
)
 
$
—

 
$
(29.1
)
Foreign currency swap contracts
—

 
(0.5
)
 
—

 
(0.5
)
Commodity hedging instruments
—

 
(0.7
)
 
—

 
(0.7
)
Total
$
—

 
$
(30.3
)
 
$
—

 
$
(30.3
)
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at December 31, 2011: 
 
Quoted Prices in  Active
Markets for Identical Assets
(Level 1)
 
Significant Other
Observable  Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
 
(In millions)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
83.5

 
$
—

 
$
—

 
$
83.5

Derivatives
 
 
 
 
 
 
 
Foreign currency swap contracts
—

 
3.5

 
—

 
3.5

Other
6.5

 
—

 
—

 
6.5

Total
$
90.0

 
$
3.5

 
$
—

 
$
93.5

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate swap agreements
$
—

 
$
(27.3
)
 
$
—

 
$
(27.3
)
Foreign currency swap contracts
—

 
(0.6
)
 
—

 
(0.6
)
Commodity hedging instruments
—

 
(2.3
)
 
—

 
(2.3
)
Total
$
—

 
$
(30.2
)
 
$
—

 
$
(30.2
)

17


The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2012:
 
Quoted Prices in  Active
Markets for Identical Assets
(Level 1)
 
Significant Other
Observable  Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
 
(In millions)
Assets
 
 
 
 
 
 
 
Cash equivalents
$
41.1

 
$
—

 
$
—

 
$
41.1

Derivatives
 
 
 
 
 
 
 
Commodity hedging instruments
—

 
2.0

 
—

 
2.0

Foreign currency swap contracts
—

 
—

 
—

 
—

Other
6.4

 
—

 
—

 
6.4

Total
$
47.5

 
$
2.0

 
$
—

 
$
49.5

Liabilities
 
 
 
 
 
 
 
Derivatives
 
 
 
 
 
 
 
Interest rate swap agreements
$
—

 
$
(28.8
)
 
$
—

 
$
(28.8
)
Commodity hedging instruments
—

 
(1.0
)
 
—

 
(1.0
)
Total
$
—

 
$
(29.8
)
 
$
—

 
$
(29.8
)

The following presents the Company’s non-financial assets and liabilities measured at fair value on a non-recurring basis at December 29, 2012 and describes the valuation methodologies used for non-financial assets and liabilities measured at fair value, as well as the general classification within the valuation hierarchy:
 
 
Quoted Prices in  Active
Markets for Identical
Assets
(Level 1)
 
Significant Other
Observable  Inputs
(Level 2)
 
Unobservable
Inputs
(Level 3)
 
Total
Losses
 
(In millions)
Global Consumer insect repellent technology
$
—

 
$
—

 
$
—

 
$
4.3


The intangible asset was determined to be fully impaired based on the estimated future cash flows associated with the insect repellent technology in relation to its carrying value.
NOTE 14. SEGMENT INFORMATION
The Company divides its business into the following 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.
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 GAAP measure. Senior management of the Company uses this measure of operating profit to gauge segment performance because the Company believes this measure is the most indicative of performance trends and the overall earnings potential of each segment.
Corporate & Other consists of revenues and expenses associated with the Company’s supply agreements with ICL and the 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. Corporate & Other assets primarily include deferred financing and debt issuance costs and corporate intangible assets, as well as deferred tax assets.


18

The following tables present summarized financial information concerning the Company’s reportable segments for the periods indicated: 
 
THREE MONTHS ENDED
 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
(In millions)
Net sales:
 
 
 
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

Loss from continuing operations before income taxes:
 
 
 
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 charges
0.4

 
(2.4
)
Interest expense
(13.2
)
 
(15.3
)
Consolidated
$
(105.1
)
 
$
(114.3
)

 
DECEMBER 29,
2012
 
DECEMBER 31,
2011
 
SEPTEMBER 30,
2012
 
(In millions)
Total assets:
 
 
 
 
 
Global Consumer
$
1,751.2

 
$
1,723.8

 
$
1,676.4

Scotts LawnService®
166.4

 
162.2

 
181.5

Corporate & Other
210.5

 
278.3

 
216.5

Consolidated
$
2,128.1

 
$
2,164.3

 
$
2,074.4


19

NOTE 15. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
The 7.25% and 6.625% Senior Notes (collectively, the “Senior Notes”) issued by Scotts Miracle-Gro on January 14, 2010 and December 16, 2010, respectively, are guaranteed by certain of its domestic subsidiaries and, therefore, the Company has disclosed condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. The following 100% directly or indirectly owned subsidiaries fully and unconditionally guarantee the Senior Notes on a joint and several basis: EG Systems, Inc., dba Scotts LawnService®; Gutwein & Co., Inc.; Hyponex Corporation; Miracle-Gro Lawn Products, Inc.; OMS Investments, Inc.; Rod McLellan Company; Sanford Scientific, Inc.; Scotts Temecula Operations, LLC; Scotts Manufacturing Company; Scotts Products Co.; Scotts Professional Products Co.; Scotts-Sierra Investments, Inc.; SMG Brands, Inc.; SMG Growing Media, Inc.; Swiss Farms Products, Inc.; and The Scotts Company LLC (collectively, the “Guarantors”).
The following information presents Condensed Consolidating Statements of Operations for the three months ended December 29, 2012 and December 31, 2011, Condensed Consolidating Statements of Comprehensive Income for the three months ended December 29, 2012 and December 31, 2011, Condensed Consolidating Statements of Cash Flows for the three months ended December 29, 2012 and December 31, 2011, and Condensed Consolidating Balance Sheets as of December 29, 2012, December 31, 2011 and September 30, 2012. The condensed consolidating financial information presents, in separate columns, financial information for: Scotts Miracle-Gro on a Parent-only basis, carrying its investment in subsidiaries under the equity method; Guarantors on a combined basis, carrying their investments in subsidiaries which do not guarantee the debt (collectively, the “Non-Guarantors”) under the equity method; Non-Guarantors on a combined basis; and eliminating entries. The eliminating entries primarily reflect intercompany transactions, such as interest expense, accounts receivable and payable, short and long-term debt, and the elimination of equity investments and income in subsidiaries. Because the Parent is obligated to pay the unpaid principal amount and interest on all amounts borrowed by the Guarantors or Non-Guarantors under the credit facility (and was obligated to pay the unpaid principal amount and interest on all amounts borrowed by the Guarantors and Non-Guarantors under the previous senior secured five-year revolving loan facility), the borrowings and related interest expense for the loans outstanding of the Guarantors and Non-Guarantors are also presented in the accompanying Parent-only financial information, and are then eliminated.


20

THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidating Statement of Operations
for the three months ended December 29, 2012
(In millions)
(Unaudited)
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
153.3

 
$
52.5

 
$
—

 
$
205.8

Cost of sales
—

 
132.0

 
42.7

 
—

 
174.7

Gross profit
—

 
21.3

 
9.8

 
—

 
31.1

Operating expenses:
 
 
 
 
 
 
 
 
 
Selling, general and administrative
—

 
97.8

 
26.7

 
—

 
124.5

Impairment, restructuring and other
—

 
(0.4
)
 
—

 
—

 
(0.4
)
Other income, net
—

 
(1.0
)
 
(0.1
)
 
—

 
(1.1
)
Loss from operations
—

 
(75.1
)
 
(16.8
)
 
—

 
(91.9
)
Equity income in subsidiaries
60.0

 
11.8

 
—

 
(71.8
)
 
—

Other non-operating income
(4.0
)
 
—

 
—

 
4.0

 
—

Interest expense
10.5

 
3.8

 
1.4

 
(2.5
)
 
13.2

Loss from continuing operations before income taxes
(66.5
)
 
(90.7
)
 
(18.2
)
 
70.3

 
(105.1
)
Income tax benefit from continuing operations
(0.2
)
 
(30.2
)
 
(6.4
)
 
—

 
(36.8
)
Loss from continuing operations
(66.3
)
 
(60.5
)
 
(11.8
)
 
70.3

 
(68.3
)
Income from discontinued operations, net of tax
—

 
0.6

 
—

 
—

 
0.6

Net Loss
$
(66.3
)
 
$
(59.9
)
 
$
(11.8
)
 
$
70.3

 
$
(67.7
)

21




THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidated Statements of Comprehensive Loss
for the three months ended December 29, 2012
(In millions)
(Unaudited)
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net loss
$
(66.3
)
 
$
(59.9
)
 
$
(11.8
)
 
$
70.3

 
$
(67.7
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Net foreign currency translation adjustment
—

 
—

 
(3.7
)
 
—

 
(3.7
)
Net loss on derivatives
0.3

 
(1.1
)
 
—

 
—

 
(0.8
)
Net change in pension and other post retirement benefits
—

 
1.3

 
(0.1
)
 
—

 
1.2

Total other comprehensive income (loss)
0.3


0.2

 
(3.8
)
 
—

 
(3.3
)
Comprehensive loss
$
(66.0
)
 
$
(59.7
)
 
$
(15.6
)
 
$
70.3

 
$
(71.0
)



22

THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidating Statement of Cash Flows
for the three months ended December 29, 2012
(In millions)
(Unaudited)
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
NET CASH USED IN OPERATING ACTIVITIES
$
(5.8
)
 
$
(131.6
)
 
$
(31.2
)
 
$
—

 
$
(168.6
)
 
 
 
 
 
 
 
 
 
 
INVESTING ACTIVITIES
 
 
 
 
 
 
 
 
 
Proceeds from sale of long-lived assets
—

 
0.1

 
—

 
—

 
0.1

Investments in property, plant and equipment
—

 
(21.9
)
 
(3.1
)
 
—

 
(25.0
)
Investment in acquired business, net of cash acquired
—

 
(3.2
)
 
—

 
—

 
(3.2
)
Net cash used in investing activities
—

 
(25.0
)
 
(3.1
)
 
—

 
(28.1
)
 
 
 
 
 
 
 
 
 
 
FINANCING ACTIVITIES
 
 
 
 
 
 
 
 
 
Borrowings under revolving and bank lines of credit
—

 
451.0

 
12.8

 
—

 
463.8

Repayments under revolving and bank lines of credit
—

 
(26.5
)
 
(237.7
)
 
—

 
(264.2
)
Dividends paid
(19.9
)
 
—

 
—

 
—

 
(19.9
)
Excess tax benefits from share-based payment arrangements
—

 
0.4

 
—

 
—

 
0.4

Cash received from the exercise of stock options
0.7

 
—

 
—

 
—

 
0.7

Intercompany financing
25.0

 
(270.0
)
 
245.0

 
—

 
—

Net cash provided by financing activities
5.8

 
154.9

 
20.1

 
—

 
180.8

Effect of exchange rate changes on cash
—

 
—

 
(0.4
)
 
—

 
(0.4
)
Net decrease in cash and cash equivalents
—

 
(1.7
)
 
(14.6
)
 
—

 
(16.3
)
Cash and cash equivalents, beginning of period
—

 
2.6

 
129.3

 
—

 
131.9

Cash and cash equivalents, end of period
$
—

 
$
0.9

 
$
114.7

 
$
—

 
$
115.6


23



THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidating Balance Sheet
As of December 29, 2012
(In millions)
(Unaudited)
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
0.9

 
$
114.7

 
$
—

 
$
115.6

Accounts receivable, net
—

 
97.0

 
71.4

 
—

 
168.4

Inventories
—

 
531.6

 
115.1

 
—

 
646.7

Prepaid and other current assets
—

 
87.3

 
38.9

 
—

 
126.2

Total current assets
—

 
716.8

 
340.1

 
—

 
1,056.9

Property, plant and equipment, net
—

 
366.0

 
58.0

 
—

 
424.0

Goodwill
—

 
313.8

 
0.6

 
—

 
314.4

Intangible assets, net
—

 
260.6

 
42.7

 
—

 
303.3

Other assets
28.9

 
11.2

 
31.4

 
(42.0
)
 
29.5

Equity investment in subsidiaries
748.4

 
—

 
—

 
(748.4
)
 
—

Intercompany assets
748.8

 
200.3

 
—

 
(949.1
)
 
—

Total assets
$
1,526.1

 
$
1,868.7

 
$
472.8

 
$
(1,739.5
)
 
$
2,128.1

 
 
 
 
 
 
 
 
 
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
Current portion of debt
$
—

 
$
2.3

 
$
2.0

 
$
—

 
$
4.3

Accounts payable
—

 
127.8

 
57.7

 
—

 
185.5

Other current liabilities
16.5

 
90.0

 
80.1

 
—

 
186.6

Total current liabilities
16.5

 
220.1

 
139.8

 
—

 
376.4

Long-term debt
975.5

 
526.3

 
55.6

 
(575.5
)
 
981.9

Other liabilities
20.3

 
224.9

 
52.8

 
(42.0
)
 
256.0

Equity investment in subsidiaries
—

 
319.2

 
—

 
(319.2
)
 
—

Intercompany liabilities
—

 
—

 
373.6

 
(373.6
)
 
—

Total liabilities
1,012.3

 
1,290.5

 
621.8

 
(1,310.3
)
 
1,614.3

Shareholders’ equity
513.8

 
578.2

 
(149.0
)
 
(429.2
)
 
513.8

Total liabilities and shareholders’ equity
$
1,526.1

 
$
1,868.7

 
$
472.8

 
$
(1,739.5
)
 
$
2,128.1


24



\THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidating Statement of Operations
for the three months ended December 31, 2011
(In millions)
(Unaudited)
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net sales
$
—

 
$
145.5

 
$
54.1

 
$
—

 
$
199.6

Cost of sales
—

 
132.4

 
41.6

 
—

 
174.0

Gross profit
—

 
13.1

 
12.5

 
—

 
25.6

Operating expenses:

 

 

 

 

Selling, general and administrative
—

 
95.0

 
27.5

 
—

 
122.5

Impairment, restructuring and other
—

 
2.4

 
—

 
—

 
2.4

Product registration and recall matters
—

 
0.3

 
—

 
—

 
0.3

Other income, net
(2.8
)
 
(0.2
)
 
(0.4
)
 
2.8

 
(0.6
)
Income (loss) from operations
2.8

 
(84.4
)
 
(14.6
)
 
(2.8
)
 
(99.0
)
Equity income in subsidiaries
66.2

 
9.8

 
—

 
(76.0
)
 
—

Interest expense
10.8

 
6.6

 
0.7

 
(2.8
)
 
15.3

Loss from continuing operations before income taxes
(74.2
)
 
(100.8
)
 
(15.3
)
 
76.0

 
(114.3
)
Income tax benefit from continuing operations
(0.3
)
 
(35.4
)
 
(5.5
)
 
—

 
(41.2
)
Loss from continuing operations
(73.9
)
 
(65.4
)
 
(9.8
)
 
76.0

 
(73.1
)
Loss from discontinued operations, net of tax
—

 
(0.8
)
 
—

 
—

 
(0.8
)
Net Loss
$
(73.9
)
 
$
(66.2
)
 
$
(9.8
)
 
$
76.0

 
$
(73.9
)

25



THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidated Statements of Comprehensive Loss
for the three months ended December 31, 2011
(In millions)
(Unaudited)
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
Net loss
$
(73.9
)
 
$
(66.2
)
 
$
(9.8
)
 
$
76.0

 
$
(73.9
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
Net foreign currency translation adjustment
—

 
—

 
(3.5
)
 
—

 
(3.5
)
Net loss on derivatives
0.8

 
(1.4
)
 
—

 
—

 
(0.6
)
Net change in pension and other post retirement benefits
—

 
0.8

 
1.1

 
—

 
1.9

Total other comprehensive income (loss)
0.8

 
(0.6
)
 
(2.4
)
 
—

 
(2.2
)
Comprehensive loss
$
(73.1
)
 
$
(66.8
)
 
$
(12.2
)
 
$
76.0

 
$
(76.1
)



26

THE SCOTTS MIRACLE-GRO COMPANY
Condensed Consolidating Statement of Cash Flows
for the three months ended December 31, 2011
(In millions)
(Unaudited)
 
 
Parent
 
Subsidiary
Guarantors
 
Non-
Guarantors
 
Eliminations
 
Consolidated
NET CASH USED IN OPERATING ACTIVITIES
$