2 0 0 6 A N N U A L R E P O R T
A History of Leadership
in Lawn and Garden
14111 Scottslawn Road
Marysville, Ohio 43041
937.644.0011
www.scotts.com
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Shareholder Information
World Headquarters
14111 Scottslawn Road
Marysville, Ohio 43041
(937) 644-0011
www.scotts.com
Annual Meeting
The annual meeting of shareholders
will be held at The Berger Learning
Center, 14111 Scottslawn Road,
Marysville, Ohio 43041, on Thursday,
January 25, 2007, at 10:00 a.m. (EST).
NYSE Symbol
The common shares of
The Scotts Miracle-Gro
Company trade on the
New York Stock Exchange
under the symbol SMG.
Transfer Agent and Registrar
National City Bank
Corporate Trust Operations
P.O. Box 92301
Cleveland, Ohio 44193-0900
Shareholder and Investor
Relations Contact
James D. King
Vice President, Investor Relations
and Corporate Communications
The Scotts Miracle-Gro Company
14111 Scottslawn Road
Marysville, Ohio 43041
(937) 644-0011
Dividends
On June 22, 2005, The Scotts Miracle-Gro
Company announced that its Board of
Directors had approved the establishment
of a quarterly cash dividend. The $0.50
per share (adjusted for the 2-for-1
stock split distributed November 9,
2005) annual dividend has been paid in
quarterly increments since the fourth
quarter of fi scal 2005. On December
12, 2006, the Company announced its
intention for a one-time cash dividend
totalling $500 million to be paid during
fi scal 2007.
The payment of future dividends, if any,
on common shares will be determined
by the Board of Directors of The
Scotts Miracle-Gro Company in light of
conditions then existing, including the
Company’s earnings, fi nancial condition
and capital requirements, restrictions
in fi nancing agreements, business
conditions and other factors.
Stock Price Performance
See chart at right for stock price
performance. The Scotts Miracle-Gro
Company common shares have been
publicly traded since January 31, 1992.
Shareholders
As of November 28, 2006, there were
approximately 49,000 shareholders,
including holders of record and
The Scotts Miracle-Gro Company’s
estimate of benefi cial holders.
Publications for Shareholders
In addition to this 2006 Annual Report,
The Scotts Miracle-Gro Company informs
shareholders about the Company
through the Form 10-K Report, the Form
10-Q Reports, the Form 8-K Reports
and the Notice of Annual Meeting of
Shareholders and Proxy Statement.
Copies of any of these documents
may be obtained without charge on
our Investor Relations Web site at
http://investor.scotts.com or by
writing to:
The Scotts Miracle-Gro Company
Attention: Investor Relations
14111 Scottslawn Road
Marysville, Ohio 43041
Certifi cations
The Scotts Miracle-Gro Company
has fi led the certifi cations of its chief
executive offi cer and its chief fi nancial
offi cer, required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 13a-
14(a) under the Securities Exchange Act
of 1934, as exhibits to its Annual Report
on Form 10-K for the fi scal year ended
September 30, 2006.
On February 16, 2006, The Scotts
Miracle-Gro Company, submitted to the
New York Stock Exchange the annual
certifi cation of the chief executive
offi cer required by Section 303A.12(a)
of the New York Stock Exchange Listed
Company Manual.
Stock Price Range*
Fiscal year ended
September 30, 2006 HIGH
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$48.11
$50.47
$47.50
$44.98
Fiscal year ended
September 30, 2005 HIGH
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$36.83
$36.19
$36.56
$43.97
LOW
$41.37
$44.94
$39.40
$37.22
LOW
$30.95
$33.29
$33.55
$36.19
*Adjusted to reflect 2-for-1 stock split,
November 9, 2005
Safe Harbor Statement under
the Private Securities Litigation
Reform Act of 1995:
Certain of the statements
contained in this 2006 Annual
Report, including, but not limited
to, information regarding the
future fi nancial performance and
fi nancial condition of the Company,
the plans and objectives of the
Company’s management, and the
Company’s assumptions regarding
such performance and plans are
forward-looking in nature. Actual
results could differ materially from
the forward-looking information
in this 2006 Annual Report, due
to a variety of factors. Additional
detailed information concerning
a number of the important factors
that could cause actual results to
differ materially from the forward-
looking information contained in
this 2006 Annual Report is readily
available in the Company’s Annual
Report on Form 10-K for the fi scal
year ended September 30, 2006,
which is fi led with the Securities
and Exchange Commission.
Net Sales
(in billions of dollars)
Diluted Earnings Per Share+
(in dollars)
2.70
2.37
2.11
1.94
1.77
Reported
Adjusted*
2.62
1.65
1.62
1.79
1.30
2.03
2.21
1.91
1.52
1.47
Net Income
(in millions of dollars)
Reported
Adjusted*
104.3
114.7
103.8
82.5
181.9
135.3
151.4
132.7
100.9
100.6
02
03
04
05
06
02
03
04
05
06
02
03
04
05
06
+ Adjusted for stock split * Excludes restructuring and other non-recurring charges
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Our strategy is clearly articulated with three simple words –
Gro, Excel, Win. And by successfully executing our plans
we strive to build what only the world’s greatest companies
enjoy – an enduring franchise.
We will Gro by …
• Focusing on our core business
• Extending our reach into new markets
• Providing products for garden-inspired lifestyles
• Using knowledge about consumers to better serve their needs
We will Excel by …
• Developing a high-performance culture
• Driving innovation in all areas
• Forging stronger relationships with our retail partners
• Strengthening our infrastructure
• Demonstrating corporate responsibility
We will Win by …
• Creating a dynamic, productive workplace
• Increasing our market share
• Enhancing shareholder value
• Making a positive diff erence in our communities
About the cover In 2007, Scotts
Miracle-Gro will celebrate its 100th
anniversary as a consumer-focused
company. Th ough founded in 1868
in Marysville, Ohio, the Company
did not begin marketing products
to consumers until 1907, when it
began selling grass seed through the
U.S. Mail. Th roughout our history,
advertising has been a critical
element to our success. Th e cover
of this year’s Annual Report is a
reproduction of a 1959 photograph
that originally was used in an
advertisement in LIFE magazine.
Net Sales $2.70 billion
71% North America
15% International
8% Scotts LawnService
6% Smith & Hawken
Dear Shareholder,
When the founders of our Company began selling grass seed to consumers in 1907,
surely they had visions of success. It’s doubtful, though, they could have imagined
just how far ScottsMiracle-Gro would travel along the way. And although we will
commemorate the centennial of our consumer business in 2007, we believe our
journey has just begun.
By continuing to leverage the foundation we
building upon a track record of long-term success
inherited – strong brands, a commitment to
and a commitment to excellence. In the past fi ve years,
innovation and an unrivaled relationship with
sales and adjusted net income have improved by a
the consumer – we now look forward to our next
compounded annual growth rate of 10 and 23 percent,
century of success.
respectively. Additionally, the business has generated
Th e Company’s most recent results provide good
more than $700 million of free cash fl ow since 2001,
reason for our continued optimism. Fiscal 2006
allowing us to steadily improve our balance sheet.
was another record year for ScottsMiracle-Gro as
Th is strength has provided us with signifi cant
we improved our market share and reported sales
fl exibility as we consider our options in managing
of $2.7 billion, up 14 percent from 2005. Adjusted
our business for continued long-term growth and
net income improved 20 percent to a record $181.9
enhanced shareholder value.
million. Th ese strong results were driven by the
We are now poised to put that fl exibility to work.
strength of our core North American business,
the continued momentum of Scotts LawnService
Shareholders benefi t from strength
and an eff ort launched in 2005, called Project
Given our strong performance and consistent
Excellence, which reduced expenses by about
cash fl ow, ScottsMiracle-Gro began paying a regular
$50 million before reinvestments.
quarterly dividend in fi scal 2005 and, last year, launched
Twenty percent growth in any year is worth
a fi ve-year $500 million share repurchase. In 2006, we
noting. We are especially pleased that our record
began executing this program and repurchased approx-
results in 2006 came in the face of continued raw
imately $90 million of shares. Now we have decided to
material pressures as well as other challenges. For
be even more aggressive in returning cash to shareholders.
example, our International business was hampered
Based on our continued confi dence in the core
by category declines in much of Europe and fell
business, our Board of Directors has recently approved
short of expectations, though it gained market share.
plans to return $750 million to shareholders in the
Smith & Hawken was impacted by a supplier
second quarter of fi scal 2007. Up to $250 million
disruption and unexpected costs and posted a loss
of shares will be repurchased, with the balance to be
for the year, although sales improved 6 percent.
distributed through a special dividend. To fund this
Overall, we’re pleased with our company-wide
program, we will be recapitalizing our balance sheet
results for 2006, which allowed us to continue
and increasing our debt facilities.
02
Even with the increased leverage, ScottsMiracle-Gro
margin products and a pricing strategy focused on
will maintain the ability to pursue targeted, strategic
maintaining our margin rate.
acquisitions in adjacent categories that leverage our
We also must make a greater commitment to
core competencies. We will continue making the
improving our return on invested capital. Although
necessary investments in the existing portfolio to drive
ROIC has improved by more than 200 basis points
sustained growth, while also retaining the fi nancial
during the past fi ve years, our improvements to this
fl exibility necessary to protect the Company against
metric have been less impressive over the past two
unforeseen events or operational downturns.
years. Our goal is to improve ROIC by at least another
Th is recapitalization will create a more effi cient
150-250 basis points within fi ve years.
capital structure based on the continued confi dence
Of course, the success of each of our business
in the strength and stability of our cash fl ows. It
units will be key to our success. Let me provide
also recognizes there are no signifi cant acquisitions
a brief overview on the results delivered by each
currently on the horizon. Our strategy is for debt levels
of these businesses in 2006, as well as our outlook
to return to equivalent 2006 levels by 2011, the end
for the future.
of our current strategic planning cycle.
During that period, investors also should
North America
expect to see a renewed focus on improving gross
In a season challenged by $3-a-gallon gasoline
margins. Over the past three years, gross margins
prices and concerns about the fi nancial health of the
have been diluted by increased commodity prices,
consumer, our core business reported its best year
acquisitions and unfavorable product mix. Going
ever in fi scal 2006. We increased by 18 percent our
forward, we will aggressively aim to improve margins
investment in advertising and consumer-focused trade
through innovation, a focus on marketing higher-
programs, resulting in a 10-percent improvement in
03
consumer purchases of our products, with strength
and we’re optimistic that we can continue to drive
in nearly every product category.
growth in the value-added growing media business,
Strong consumer demand translated into ongoing
just as we have in the U.S.
support from our retail partners and a 15 percent
For fi scal 2006, International sales declined
increase in sales, 8 percent when excluding the impact
5 percent, or 2 percent excluding the impact of foreign
of acquisitions. Operating profi t in the business
exchange rates. Although the business remains solidly
improved by 11 percent.
profi table, operating profi ts, excluding restructuring,
Our continued focus on customer service was evident
declined by 17 percent.
again as our fi ll rates to our major retail partners
Th ere is no debate that this business unit has faced
exceeded 99 percent, an all-time high.
challenges in recent years and must improve. While
For 2007, we are optimistic that an array of targeted
we believe near-term consolidation in the market is
new lawn fertilizer products and continued excitement
unlikely without a catalyst, we remain fi rm in our belief
for Miracle-Gro® LiquaFeed® – which we introduced in
that ScottsMiracle-Gro is well served in the long-term
2006 – will result in strong consumer demand and sales
by maintaining its global presence.
growth in the high single digits. (NOTE: We provide
We also remain optimistic that International can
a detailed discussion of our North American business
generate meaningful growth in the future and that its
on pages 6 through 15 of this report).
results can keep pace with the rest of the organization.
International
To succeed against these goals, we must continue to
outperform the competition and fi nd further synergies
Th e overall European consumer lawn and garden
between this business and North America.
market had a tough year in 2006, reinforcing our belief
that a consolidation of this market is needed. Even
Smith & Hawken
without such an impetus, we have made progress and
Th e potential of the outdoor living business
gained share in the marketplace. We were especially
remains obvious from the high level of interest in this
pleased that our European growing media business
competitive category. In Smith & Hawken, we are
– which will continue to be a major focus – was up
pleased to possess the most important brand in the
16 percent for the year. In fact, sales of Miracle-Gro®
space as well as an increasingly stronger understanding
branded soils in the UK increased nearly 50 percent,
of the outdoor living consumer.
04
In its second year since we acquired this business,
For 2007, we continue to expect sales growth in
Smith & Hawken reported sales growth of 6 percent
the business to exceed 15 percent, and we believe
in 2006 while making signifi cant strides in advancing
our goal to reach operating margins in the low teens
our strategic plan. Th e fi rst year of our partnership
remains achievable.
with Target exceeded our goals and set the stage for
further improvement. During the year, we also opened
Our Vision: An Enduring Franchise
two new fl agship stores. We are excited by the potential
A year ago in this space, I wrote that we aspire to
of these new stores and the new merchandising
build “an enduring franchise,” in other words “an
opportunities they provide.
enterprise that continues to win in the marketplace
We also introduced a strong new management
by clearly owning the relationship with its consumers,
team, which is taking Smith & Hawken back to its
leveraging its core strengths and continuing to distance
roots with a greater focus on the gardening experience.
itself from the competitors.”
While the business did not reach profi tability in 2006,
We are fi rmly committed to this goal and it is
we are not discouraged. Investors should recognize
one that I am confi dent we can reach. I am equally
Smith & Hawken was never planned to be a ‘quick
confi dent we can build an enduring franchise while
win’ for ScottsMiracle-Gro. In taking a long-term
also using our fi nancial strength and fl exibility to
approach to running this Company, we look to strike
share our success with our shareholders.
a balance between near-term wins and long-term
I continue to believe that ScottsMiracle-Gro has
opportunity. In that context, we’re convinced of
evolved as one of the truly unique companies in
the potential for outdoor living and look forward
America. As we celebrate our 100th anniversary as
to continue making progress against our vision
a consumer-focused company, I can speak for each
in 2007 and beyond.
of our more than 6,000 associates in saying we are
Scotts LawnService
proud of what we have accomplished.
More importantly, we are energized by the
Th is fast-growing business maintained its
opportunities that still lie ahead.
momentum in 2006 with 29 percent sales growth,
nearly all of which was organic. Our customer count
Regards,
grew by 12 percent to nearly 450,000 and our trailing
52-week retention rate at fi scal year-end was 70
percent, signifi cantly better than our largest competitor.
JIM HAGEDORN
We enjoyed better than expected results with our
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN
higher-end program off erings, which helped us off set
THE SCOTTS MIRACLEGRO COMPANY
lower sales of value-priced off erings as well as higher
DECEMBER 2006
than expected product, labor and sales costs. And we
believe we have continued opportunity to build the
high end of the market going forward.
05
Consumers frequently tell us they learned about lawn care from their fathers –
the same person who taught them that ScottsMiracle-Gro products are the key
to success. In addition to their indisputable environmental benefi t, lawns provide
the perfect family playground. The photo on the right shows a Scotts Turf Builder
magazine ad from the 1960s.
A history of innovation that
drives continued growth
From our fi rst consumer grass seed off ering in 1907 to the introduction of
Miracle-Gro® LiquaFeed® a century later, ScottsMiracle-Gro has a history of
bringing the industry’s most innovative and eff ective products to the marketplace.
Our goal is not to drive innovation simply because we can. Rather, we strive
to make lawn and garden care easier and more enjoyable for the tens of millions
of consumers who have used our products over the years. Th ere is no doubt we
are succeeding.
Innovation at ScottsMiracle-Gro starts with our unique understanding of the
consumer and the importance that lawn and garden activity plays in their lives.
By using this knowledge, we are developing new products that allow us to
continually strengthen our relationship with the consumer and drive our business
higher. In the past three years, for example, new products have accounted for more
than $150 million in sales and a substantial percentage of our growth in the core
North American consumer business.
Th e most recent example came just last year when Miracle-Gro® LiquaFeed®
became our most successful new product launch ever with sales of nearly $40
million. Th e goal and design of the product was simple – to provide gardeners
with an easy-to-use way to feed and water their plants simultaneously. LiquaFeed®
not only succeeded, but reinvigorated the plant food category, resulting in an 11
percent increase in consumer purchases of plant food for the full year. Household
penetration of LiquaFeed® remains in the single digits, however, giving us confi dence
that it will continue to drive growth in the plant food category for several years.
LiquaFeed® was just one of the products that helped the North America segment
Our heritage of innovation...
From our earliest days as a consumer
products company, ScottsMiracle-Gro was
focused on bringing innovative products to
the market.
1928
1947
1951
1958
1960
North America Sales
Compounded Annual Growth Rate: 8%
(in millions of dollars)
1,380
1,461
1,569
1,668
1,914
report 15 percent sales growth for the year – 8 percent excluding acquisitions –
02
03
04
05
06
and operating income improvement of 11 percent. Despite macroeconomic issues
like higher gasoline prices and interest rates, which cast doubt on the ‘health’
of the consumer during the peak of our season, consumer purchases across this
07
According to the National Gardening Association, a record 91 million
Americans are now participating in gardening at some level. The number
of consumers using our products also is at record levels. In 2006, consumer
purchases of our products increased by 10 percent – a metric that has
improved by at least 7 percent each year since 2001.
business increased by 10 percent, a metric that has improved by at least 7 percent
each year since 2001.
At year-end, our estimated U.S. market share stood at more than 52 percent
and our core brands – Scotts®, Miracle-Gro®, Ortho® and Roundup® – continued
to maintain market-leading positions in grass seed, lawn fertilizer, spreaders,
...remains with us today
New products accounted for more than $150
million of sales over the past three fi scal
years. This timeline shows some of our most
recent successes.
2001
plant food, potting mix, garden soil, insect control and weed control.
We expect continued momentum in the North American consumer business for
fi scal 2007 and beyond. Our ability to continue outperforming our competitors
2002
will be dependent on further leveraging our core competitive advantages, starting
2004
2005
2005
2006
with a commitment to innovation.
Indeed, our history is a case study of product innovation that has driven
sustained growth and enhanced shareholder value. Th e milestones on the next page
outline just a few of our most important product innovations.
Every one of the products on this timeline remains in our portfolio today and
continues to grow. For example, consumer purchases of Turf Builder® fertilizer –
which was introduced nearly 80 years ago – improved by 24 percent in 2006. As
a company, our ability to balance ongoing support of franchise products like Turf
Builder® while also investing in innovation has been critical to our sustained growth.
Going forward, investors should expect ScottsMiracle-Gro to work even harder
to maintain this balance. For example, because nearly half of all homeowners still
don’t actively engage in lawn care, many of our eff orts will remain focused on
building participation in the category. We believe the introduction in 2007 of
natural and organic lawn fertilizers marketed under the Scotts® brand will play
a key role in reaching a broader audience.
Whether it’s a new product or one that has been in the marketplace for years,
consumers know that our commitment to innovation means they can expect
superior performance from ScottsMiracle-Gro. And building upon that consumer
trust will remain a critical part of our continued success.
* Roundup is a registered trademark of Monsanto Technology, LLC.
08
History of Innovation
1907: The Company began selling grass seed to consumers
1928: Turf Builder® introduced, recognizing turf has unique nutritional needs
1946: ScottsMiracle-Gro became – and remains – the only company in the
industry to maintain a full-time research division
1947: Introduction of the fi rst combined weed control and fertilizer product
(today marketed as Turf Builder® Plus 2®)
1951: Miracle-Gro® water soluble plant food introduced
1958: Halts® introduced as the fi rst combination fertilizer and crabgrass preventer
1971: The rotary spreader introduced, making fertilizer application easier
1997: Miracle-Gro® Potting Mix introduced, making it easier for gardeners
to succeed at growing container plants
2003: Ortho® Season Long Grass and Weed Killer introduced, making weed
control easier than ever
2006: Miracle-Gro® LiquaFeed® introduced, allowing gardeners to feed and water
their plants in one easy step
There are few activities that can bring the generations together like gardening. Our
consumer research suggests that today’s most avid gardeners grew up in a family of
gardeners. In fact, this family connection has been key to many of our communications
over the years, including this portrait (right) commissioned by Miracle-Gro in the early
1980s, by artist Joe Cstari.
Our communications build
relationships that drive growth
“Know-how is a prime ingredient of a good lawn”
– Lawn Care® magazine Vol. 1 No. 1
Th ose words appeared in 1928 in the inaugural issue of one of our fi rst
communications programs aimed at consumers. Th at fi rst edition of Lawn Care®
magazine reached 5,000 consumers and was likely considered an aggressive
marketing eff ort at the time.
Today, our messages make hundreds of millions of impressions a year through
advertising, in-store displays, the Internet and – yes – through Lawn Care®
magazine as well. Soon celebrating its 80th anniversary, the publication now
reaches nine million homes a year, providing them with some of the same type
of ‘know how’ that our founders communicated decades ago.
Indeed, consumer relationships have always been key to the success of
ScottsMiracle-Gro. Th at is why we continue to seek opportunities to reinvest in
our brands and increase the rate of advertising spending whenever possible. In fi scal
2006, for example, spending on advertising and consumer-focused promotions
with our retail partners increased by 18 percent. Th e result? Consumer purchases
of our products reached new records and increased 10 percent during the year.
Our experience shows a clear correlation between advertising spending and
sales growth. Th e chart shown on the following page demonstrates how consumer
purchases of our new LiquaFeed® product corresponded with weekly changes
in advertising spending. We have a similar response in several other product
categories as well.
Over the past three years, total advertising spending has increased 41 percent to
$137 million. Th at increase has allowed us to put additional spending behind key
products such as Turf Builder® Plus 2®, Ortho® Bug B Gon Max®, Ortho® Home
Defense® and Miracle-Gro® Garden Soil. Consumer purchases of those products
over the past three years have increased 18, 39, 44 and 79 percent, respectively.
11
80 years of Lawn Care® magazine
From humble beginnings, this direct mail
effort now has an annual distribution to
nine million homes.
1936
1941
1960s
1967
1970
2002
2006
Our commitment to advertising has been an essential ingredient in our
growth and success since the early days of our Company. Today, more than
85 percent of advertising impressions in the lawn and garden industry come
from ScottsMiracle-Gro. From TV to print to the Internet, we will continue to
fi nd new ways to communicate with our consumers.
Advertising has been key to growth
From TV to print to NASCAR, we make
billions of consumer impressions annually.
While TV advertising results in more than eight billion consumer impressions
a year and remains critical to the continued growth and success of our core brands,
we recognize that other outlets also provide opportunity.
Since 2004, ScottsMiracle-Gro has been a sponsor with Rousch Racing in
the NASCAR Nextel Cup Series, the NASCAR Busch Series and the NASCAR
1960s
Craftsman Truck series. We estimate that we have generated more than 70 million
consumer impressions related to this sponsorship and have plans in place for even
stronger NASCAR-related marketing in 2007 that include a primary sponsorship
with popular driver Carl Edwards in the NASCAR Busch Series.
While the vast majority of our advertising is directed at our core North
American brands, we believe it has a halo eff ect for our fast-growing Scotts
LawnService business. Because consumer awareness of the Scotts® brand exceeds 95
percent, Scotts LawnService has a clear competitive advantage in using the Scotts®
brand in marketing eff orts – which includes
distribution of more than 20 million pieces
of direct mail each year.
Of course, for all of our businesses, the
Internet continues to play a larger role in our
communications with consumers. Our award-
winning Web site, www.scotts.com, allows us to
communicate even more broadly and eff ectively.
Last year, nearly fi ve million visitors came
LiquaFeed®
Creating awareness drove highly
responsive POS in 2006.
JAN
FEB
MAR
APR MAY
JUN
JUL
Consumer
Purchases
Advertising
Spending
to the site, which is geared to answer nearly any lawn and garden question while
providing homeowners with reminders about the appropriate use of our
products and the Company’s commitment to environmental stewardship and
corporate governance.
1970s
1980s
1990s
2000s
2006
12
We continue to use our Web site to conduct ‘permission marketing,’ which allows
users to request information from ScottsMiracle-Gro on a regular basis throughout
the growing season. As a result, we sent nine million e-mail reminders to consumers
in 2006, telling them when it was time to feed their lawn, treat pests in their area
and take the other steps necessary to maintain a healthy lawn and beautiful garden.
Our Smith & Hawken business also has seen great results from the Internet.
When the business redesigned its Web site in 2006, sales improved dramatically in
the fi rst month. Online sales of Smith & Hawken® products comprise about 15
percent of total sales, a number that has been growing quickly over the past two years.
No matter what medium we use, our communications with the consumer have
created a competitive advantage for ScottsMiracle-Gro – one that we intend
to continue to improve upon and leverage for further growth.
13
Springtime in the garden center sparks creative energy and excitement about a new
growing season. Ensuring that consumers are able to fi nd our products on retail shelves
is critical to our success – and an area where we have seen continuous improvement.
But our commitment to industry-leading customer service has been evident since the
earliest days of our Company.
Customer service: an ongoing
commitment to excellence
A history of supply chain excellence
Even in the earliest days of ScottsMiracle-Gro – long before anyone coined the
term ‘supply chain’ – our founders understood the importance of getting accurate
shipments of product to consumers on time. In the late 1800s, when the Company
focused on farmers, products were delivered by horse-and-buggy. In 1907, when
1907
we fi rst sold grass seed to consumers, we depended on the U.S. Mail.
Today, our products are sold to the world’s largest and most sophisticated
retailers, meaning speed and order accuracy have never been more critical. Our
1960
commitment to customer service and supply chain excellence is manifested in our
investment in state-of-the-art systems and processes, which have made us one of
the world’s best suppliers of seasonal products.
In 2006, our order fi ll rate improved to a record 99.2 percent. Th is critical
metric has been rising even as we drive costs out of our supply chain and improve
1963
inventory turns. In fact, our inventory turns of fi nished goods last year were 60
percent better than in 2001. We expect even better performance in 2007.
Once products are in the store, our industry-leading sales force takes over. By
building eff ective merchandising displays and working directly with consumers,
this team is also responsible for helping to drive sales through the cash register.
But getting products on and off the retail shelf is just part of where we excel.
2006
We also have a long history as the industry leader in manufacturing.
ScottsMiracle-Gro became the fi rst manufacturer of controlled-release fertilizer
for consumer use in 1956. We introduced major improvements in the decades
that followed until our industry-leading introduction of new patented technology
in 1992 that transformed our manufacturing eff orts while improving product
performance and reducing manufacturing costs.
Today, ScottsMiracle-Gro believes it is the lowest cost producer of lawn fertilizer
in the marketplace. Th at fact, coupled with our commitment to improving our
customer service at all levels, provides us with a competitive advantage that will
remain critical to our ongoing success.
15
Order fi ll rates
– which measures the accuracy of our shipments –
continue to improve.
97.5%
97.5% 98.0%
98.1%
99.2%
91.3%
01
02
03
04
05
06
The Chairman’s Award program is the premier showcase of ScottsMiracle-Gro’s high-performance culture,
a best of the best’ recognition that illustrates the commitment associates have to living GroExcellence in
everything they do. In 2006, the annual award was given to 29 individuals, all of whom exceeded expectations
during the year with contributions that drove signifi cant results throughout the Company.
At the Left Backed by four years of intense
research and development, Miracle-Gro®
LiquaFeed ® Plant Feeding System had
nearly $40 million in sales in its fi rst year,
making it the Company’s most successful
new product introduction. The Chairman’s
Award honored these associates
responsible for LiquaFeed’s technical
design creation and launch: (clockwise,
from far left) Jon Moyer, Brian Birrenkott,
Rich Foster, Paul Havlovitz, Steve Cichy,
Tom Danniger, and Bonny Beetham.
Below Chairman’s Award recipients Pam
Kuryla (left) and Melanie Hoffman designed
ScottsMiracle-Gro’s comprehensive
LiveTotal Health initiative, which focuses
on improving associates’ physical, fi nancial
and personal wellness.
17
Shareholder Information
World Headquarters
14111 Scottslawn Road
Marysville, Ohio 43041
(937) 644-0011
www.scotts.com
Annual Meeting
The annual meeting of shareholders
will be held at The Berger Learning
Center, 14111 Scottslawn Road,
Marysville, Ohio 43041, on Thursday,
January 25, 2007, at 10:00 a.m. (EST).
NYSE Symbol
The common shares of
The Scotts Miracle-Gro
Company trade on the
New York Stock Exchange
under the symbol SMG.
Transfer Agent and Registrar
National City Bank
Corporate Trust Operations
P.O. Box 92301
Cleveland, Ohio 44193-0900
Shareholder and Investor
Relations Contact
James D. King
Vice President, Investor Relations
and Corporate Communications
The Scotts Miracle-Gro Company
14111 Scottslawn Road
Marysville, Ohio 43041
(937) 644-0011
Dividends
On June 22, 2005, The Scotts Miracle-Gro
Company announced that its Board of
Directors had approved the establishment
of a quarterly cash dividend. The $0.50
per share (adjusted for the 2-for-1
stock split distributed November 9,
2005) annual dividend has been paid in
quarterly increments since the fourth
quarter of fi scal 2005. On December
12, 2006, the Company announced its
intention for a one-time cash dividend
totalling $500 million to be paid during
fi scal 2007.
The payment of future dividends, if any,
on common shares will be determined
by the Board of Directors of The
Scotts Miracle-Gro Company in light of
conditions then existing, including the
Company’s earnings, fi nancial condition
and capital requirements, restrictions
in fi nancing agreements, business
conditions and other factors.
Stock Price Performance
See chart at right for stock price
performance. The Scotts Miracle-Gro
Company common shares have been
publicly traded since January 31, 1992.
Shareholders
As of November 28, 2006, there were
approximately 49,000 shareholders,
including holders of record and
The Scotts Miracle-Gro Company’s
estimate of benefi cial holders.
Publications for Shareholders
In addition to this 2006 Annual Report,
The Scotts Miracle-Gro Company informs
shareholders about the Company
through the Form 10-K Report, the Form
10-Q Reports, the Form 8-K Reports
and the Notice of Annual Meeting of
Shareholders and Proxy Statement.
Copies of any of these documents
may be obtained without charge on
our Investor Relations Web site at
http://investor.scotts.com or by
writing to:
The Scotts Miracle-Gro Company
Attention: Investor Relations
14111 Scottslawn Road
Marysville, Ohio 43041
Certifi cations
The Scotts Miracle-Gro Company
has fi led the certifi cations of its chief
executive offi cer and its chief fi nancial
offi cer, required by Section 302 of the
Sarbanes-Oxley Act of 2002 and Rule 13a-
14(a) under the Securities Exchange Act
of 1934, as exhibits to its Annual Report
on Form 10-K for the fi scal year ended
September 30, 2006.
On February 16, 2006, The Scotts
Miracle-Gro Company, submitted to the
New York Stock Exchange the annual
certifi cation of the chief executive
offi cer required by Section 303A.12(a)
of the New York Stock Exchange Listed
Company Manual.
Stock Price Range*
Fiscal year ended
September 30, 2006 HIGH
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$48.11
$50.47
$47.50
$44.98
Fiscal year ended
September 30, 2005 HIGH
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
$36.83
$36.19
$36.56
$43.97
LOW
$41.37
$44.94
$39.40
$37.22
LOW
$30.95
$33.29
$33.55
$36.19
*Adjusted to reflect 2-for-1 stock split,
November 9, 2005
Safe Harbor Statement under
the Private Securities Litigation
Reform Act of 1995:
Certain of the statements
contained in this 2006 Annual
Report, including, but not limited
to, information regarding the
future fi nancial performance and
fi nancial condition of the Company,
the plans and objectives of the
Company’s management, and the
Company’s assumptions regarding
such performance and plans are
forward-looking in nature. Actual
results could differ materially from
the forward-looking information
in this 2006 Annual Report, due
to a variety of factors. Additional
detailed information concerning
a number of the important factors
that could cause actual results to
differ materially from the forward-
looking information contained in
this 2006 Annual Report is readily
available in the Company’s Annual
Report on Form 10-K for the fi scal
year ended September 30, 2006,
which is fi led with the Securities
and Exchange Commission.
Net Sales
(in billions of dollars)
Diluted Earnings Per Share+
(in dollars)
2.70
2.37
2.11
1.94
1.77
Reported
Adjusted*
2.62
1.65
1.62
1.79
1.30
2.03
2.21
1.91
1.52
1.47
Net Income
(in millions of dollars)
Reported
Adjusted*
104.3
114.7
103.8
82.5
181.9
135.3
151.4
132.7
100.9
100.6
02
03
04
05
06
02
03
04
05
06
02
03
04
05
06
+ Adjusted for stock split * Excludes restructuring and other non-recurring charges
Untitled-4 2
Untitled-4 2
1/8/07 1:43:56 PM
1/8/07 1:43:56 PM
THE SCOTTS MIRACLE-GRO COMPANY
2006 FINANCIAL RESULTS
TABLE OF CONTENTS
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reconciliation of Non-GAAP Disclosure Items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Financial Statements of The Scotts Miracle-Gro Company and Subsidiaries:
Annual Report of Management on Internal Control Over Financial Reporting . . . . . . . . . . . . . . . .
Reports of Independent Registered Public Accounting Firm. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations for the fiscal years ended September 30, 2006, 2005
and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the fiscal years ended September 30, 2006, 2005
and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets at September 30, 2006 and 2005 . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Shareholders’ Equity for the fiscal years ended September 30,
2006, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Accounting Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Governance Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Page
20
22
23
36
41
43
44
46
47
48
49
50
95
95
19
3960_fin.pdf
SELECTED FINANCIAL DATA
Five-Year Summary(1)
For the fiscal year ended September 30,
(in millions, except per share amounts)
OPERATING RESULTS(4):
Net sales
Gross profit
Income from operations
Income from continuing operations
(net of tax)
Net income
Depreciation and amortization
FINANCIAL POSITION:
Working capital
Current ratio
Property, plant and equipment, net
Total assets
Total debt to total book capitalization
Total debt
Total shareholders’ equity
CASH FLOWS:
Cash flows from operating activities
Investments in property, plant and
equipment
Cash invested in acquisitions,
including seller note payments
PER SHARE DATA:
Basic earnings per common share
Diluted earnings per common share
Total cash dividends paid
Dividends per share(5)
Stock price at year-end
Stock price range — High
Stock price range — Low
OTHER:
Adjusted EBITDA(6)
Interest coverage (Adjusted
EBITDA/interest expense)(6)
Weighted average common shares
outstanding
Common shares and dilutive potential
common shares used in diluted EPS
calculation
2006(2)
2005(3)
2004
2003
2002
$2,697.1
955.9
252.5
$2,369.3
860.4
200.9
$2,106.5
792.4
252.8
$ 1,941.6
701.7
231.6
$1,772.9
649.4
238.4
132.7
132.7
67.0
445.8
1.9
367.6
2,217.6
30.8%
481.2
1,081.7
100.4
100.6
67.2
301.6
1.6
337.0
2,018.9
100.5
100.9
57.7
396.7
1.9
328.0
2,047.8
27.7%
41.9%
393.5
1,026.2
630.6
874.6
103.2
103.8
52.2
364.4
1.8
338.2
2,030.3
51.0%
757.6
728.2
100.5
82.5
43.5
278.3
1.6
329.2
1,914.1
58.3%
829.4
593.9
182.4
226.7
214.2
216.1
238.9
57.0
122.9
1.97
1.91
33.5
0.50
44.49
50.47
37.22
$
$
40.4
84.6
$
1.51
1.47
8.6
$ 0.125
43.97
43.97
30.95
$
35.1
20.5
1.56
1.52
—
—
32.08
34.28
27.63
$
51.8
57.1
1.68
1.62
—
—
27.35
28.85
21.77
$
57.0
63.0
1.41
1.30
—
—
20.85
25.18
17.23
385.9
291.5
310.5
283.8
281.9
9.7
67.5
7.0
66.8
6.4
64.7
4.1
61.8
3.7
58.6
69.4
68.6
66.6
64.3
63.3
(1) All common share and per share information presented in the above five-year summary have been
adjusted to reflect the 2-for-1 stock split of the common shares which was distributed on Novem-
ber 9, 2005 to shareholders of record on November 2, 2005.
(2) Fiscal 2006 includes Rod McLellan Company, Gutwein & Co., Inc. and certain brands and assets
acquired from Turf-Seed, Inc. and Landmark Seed Company from the dates of acquisition. See further
discussion of acquisitions in Note 5 to Consolidated Financial Statements included elsewhere in this
Annual Report.
20
3960_fin.pdf
(3) Fiscal 2005 includes Smith & Hawken» from the October 2, 2004 date of acquisition. See further dis-
cussion of acquisitions in Note 5 to Consolidated Financial Statements included elsewhere in this
Annual Report.
(4) Operating results includes the following items segregated by accounts impacted on the Consolidated
Statements of Operations included with the Consolidated Financial Statements included in this
Annual Report.
For the fiscal year ended September 30,
2006
2002
2004
2003
2005
Net sales includes the following relating to the
Roundup» Marketing Agreement:
Net commission income (expense) . . . . . . . . . . . $39.9
Reimbursements associated with the Marketing
$ (5.3)
$28.5
$ 17.6
$ 16.2
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .
37.6
40.7
40.1
36.3
33.0
Deferred contribution charge (see
Management’s Discussion and Analysis and
Note 3 of Notes to Consolidated Financial
Statements included in this Annual Report) . .
Cost of sales includes:
Costs associated with the Roundup» Marketing
Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring and other charges (income). . . . . .
Selling, general and administrative includes:
—
(45.7)
—
—
—
37.6
0.1
40.7
(0.3)
40.1
0.6
36.3
9.1
8.0
—
33.0
1.7
8.1
—
—
Restructuring and other charges . . . . . . . . . . . . .
Impairment charges . . . . . . . . . . . . . . . . . . . . . .
9.3
66.4
9.8
23.4
9.1
—
Interest expense includes:
Costs related to refinancings . . . . . . . . . . . . . . .
Net income includes:
Cumulative effect of accounting for intangible
assets, net of tax . . . . . . . . . . . . . . . . . . . . . .
—
—
1.3
45.5
—
—
—
—
(18.5)
(5) The Company began paying a quarterly dividend of 12.5 cents per share in the fourth quarter of fiscal
2005.
(6) Given our significant borrowings, we view our credit agreements as material to our ability to fund
operations, particularly in light of our seasonality. Reference should be made to “RISK FACTORS,” in
this Annual Report for a more complete discussion of risks associated with the Company’s debt and
our credit facility and related covenants. Our ability to generate cash flows sufficient to cover our
debt service costs is essential to our ability to maintain our borrowing capacity. We believe that
Adjusted EBITDA provides additional information for determining our ability to meet debt service
requirements. The presentation of Adjusted EBITDA herein is intended to be consistent with the cal-
culation of that measure as required by our borrowing arrangements, and used to calculate a lever-
age ratio (maximum of 3.75 at September 30, 2006) and an interest coverage ratio (minimum of 3.50
for the year ended September 30, 2006). The Company’s leverage ratio was 1.75 at September 30,
2006 and our interest coverage ratio was 9.7 for the year ended September 30, 2006.
In accordance with the terms of our credit facility, Adjusted EBITDA is defined as net income before
interest, taxes, depreciation and amortization, as well as certain other items such as the impact of
discontinued operations, the cumulative effect of changes in accounting, costs associated with debt
refinancings, and other non-recurring, non-cash items effecting net income. Adjusted EBITDA does
not represent and should not be considered as an alternative to net income or cash flow from opera-
tions as determined by accounting principles generally accepted in the United States of America,
and Adjusted EBITDA does not necessarily indicate whether cash flow will be sufficient to meet cash
requirements. Interest coverage is calculated as Adjusted EBITDA divided by interest expense exclud-
ing costs related to refinancings.
21
3960_fin.pdf
A numeric reconciliation of net income to Adjusted EBITDA is as follows:
2006
2005
2004
2003
2002
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ 132.7
39.6
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
80.2
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . .
67.0
Deprecation and amortization . . . . . . . . . . . .
66.4
Loss on impairment . . . . . . . . . . . . . . . . . . . .
—
Discontinued operations . . . . . . . . . . . . . . . .
—
Cumulative effect of change in accounting . . .
—
Costs related to refinancings . . . . . . . . . . . . .
$100.6
41.5
57.7
67.2
23.4
(0.2)
—
1.3
$100.9
48.8
58.0
57.7
—
(0.4)
—
45.5
$ 103.8
69.2
59.2
52.2
—
(0.6)
—
—
$ 82.5
76.3
61.6
43.5
—
(0.5)
18.5
—
Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . $385.9
$ 291.5
$ 310.5
$283.8
$281.9
Reconciliation of Non-GAAP Disclosure Items
This table is part of The Scotts Miracle-Gro Company 2006 Annual Report (the “Annual Report”). The
Annual Report includes financial charts and a letter from James Hagedorn, President, Chief Executive
Officer and Chairman of the Board, to the shareholders of The Scotts Miracle-Gro Company. Some of the
charts and Mr. Hagedorn’s letter include non-GAAP financial measures, as defined in SEC Regulation G,
of adjusted net income and adjusted diluted earnings per share which exclude costs or gains for discrete
projects or transactions. Items excluded during the five-year period ended September 30, 2006 relate to
the closure, downsizing or divestiture of certain operations that are apart from and not indicative of the
results of operations of the business, costs incurred to refinance the long-term debt of the Company,
peat bog income, environmental charges, intangible asset impairment charges, and a deferred contribu-
tion charge related to the Roundup˛ marketing agreement, in each case net of tax. The comparable GAAP
measures are reported net income and reported diluted earnings per share. A reconciliation of the GAAP
to the non-GAAP measures for the applicable years follows:
The Scotts Miracle-Gro Company
Reconciliation of Non-GAAP Disclosure Items for the Twelve
Months Ended September 30, 2006, 2005, 2004, 2003 and 2002
(in millions, except per share data)
2006
Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $132.7
6.1
—
43.1
—
—
Restructuring and other charges, net of tax . . . . . . . .
Debt refinancing charges, net of tax . . . . . . . . . . . . .
Impairment of intangibles, net of tax . . . . . . . . . . . . .
Deferred contribution charge, net of tax . . . . . . . . . . .
Other charges, net of tax . . . . . . . . . . . . . . . . . . . . . .
Twelve Months Ended September 30,
2004
$100.9
6.1
28.3
—
—
—
2005
$100.6
6.1
0.8
14.9
29.0
—
2003
$103.8
10.9
—
—
—
—
2002
$ 82.5
4.9
—
—
—
16.9
Adjusted net income. . . . . . . . . . . . . . . . . . . . . . . . . . . $181.9
$ 151.4
$ 135.3
$ 114.7
$104.3
Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . $ 1.91
0.09
—
0.62
—
—
Restructuring and other charges, net of tax . . . . . . . .
Debt refinancing charges, net of tax . . . . . . . . . . . . .
Impairment of intangibles, net of tax . . . . . . . . . . . . .
Deferred contribution charge, net of tax . . . . . . . . . . .
Other charges, net of tax . . . . . . . . . . . . . . . . . . . . . .
$ 1.47
0.09
0.01
0.21
0.43
—
$ 1.52
0.09
0.42
—
—
—
$ 1.62
0.17
—
—
—
—
$ 1.30
0.08
—
—
—
0.27
Adjusted diluted earnings per share . . . . . . . . . . . . . . . $ 2.62
$ 2.21
$ 2.03
$ 1.79
$ 1.65
22
3960_fin.pdf
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The purpose of this discussion is to provide an understanding of the Company’s financial results
and condition by focusing on changes in certain key measures from year to year. Management’s
Discussion and Analysis (MD&A) is organized in the following sections:
(cid:129) Executive summary
(cid:129) Results of operations
(cid:129) Liquidity and capital resources
(cid:129) Critical accounting policies and estimates
(cid:129) Management’s outlook
On November 9, 2005, The Scotts Miracle-Gro Company distributed a 2-for-1 stock split of the
common shares to shareholders of record on November 2, 2005. To enhance comparability going
forward, all share and per share information referred to in this MD&A and elsewhere in this Annual
Report have been adjusted to reflect this stock split for all periods presented.
On December 12, 2006, The Scotts Miracle-Gro Company announced that its Board of Directors
approved in concept a plan of recapitalization encompassing the following actions:
(cid:129) New senior secured credit facilities aggregating $2.1 to $2.3 billion to replace the existing
$1.05 billion senior credit facility.
(cid:129) Repurchase of The Scotts Miracle-Gro Company’s existing $200 million 65⁄8% senior subordinated
notes.
(cid:129) Expanding and accelerating the previously announced program to repurchase $500 million
common shares. The revised program will be increased to $750 million, with approximately one-
third allocated to repurchase common shares and two-thirds toward a special one-time cash
dividend.
The recapitalization is expected to be consummated during the second quarter of fiscal 2007. These
actions reflect management’s confidence in the continued growth of the Company coupled with strong
and consistent cash flows that can support higher levels of debt.
Executive Summary
We are dedicated to delivering strong, consistent financial results and outstanding shareholder
returns by providing consumers with products of superior quality and value to enhance their outdoor
living environments. We are a leading manufacturer and marketer of consumer branded products for
lawn and garden care and professional horticulture in North America and Europe. We are Monsanto’s
exclusive agent for the marketing and distribution of consumer Roundup» non-selective herbicide
products within the United States and other contractually specified countries. We entered the North
America wild bird food category with the acquisition of Gutwein & Co., Inc. (“Gutwein”) in November
2005, and the outdoor living category with the acquisition of Smith & Hawken» in October 2004. We
have a presence in Australia, the Far East, Latin America and South America. Also, in the United States,
we operate the second largest residential lawn service business, Scotts LawnService. In fiscal 2006, our
operations were divided into the following reportable segments: North America, Scotts LawnService»,
International, and Corporate & Other. The Corporate & Other segment consists of the Smith & Hawken»
business and corporate general and administrative expenses.
23
3960_fin.pdf
As a leading consumer branded lawn and garden company, we focus our consumer marketing
efforts, including advertising and consumer research, on creating consumer demand to pull products
through the retail distribution channels. In the past three years, we have spent approximately 5% of our
net sales annually on media advertising to support and promote our products and brands. We have
applied this consumer marketing focus for a number of years, and we believe that we receive a
significant return on these marketing expenditures. We expect we will continue to focus our marketing
efforts toward the consumer and make additional targeted investments in consumer marketing expendi-
tures in the future to continue to drive market share and sales growth. A portion of our selling, general
and administrative cost savings from our long-term strategic improvement plan initiated in fiscal 2005
has been reinvested to strengthen our brands and relationships with consumers. Our spending on
advertising in fiscal 2006 increased 12.1% over fiscal 2005 and when combined with promotions,
increased 15.2%.
Our sales are susceptible to global weather conditions. For instance, periods of wet weather can
adversely impact sales of certain products, while increasing demand for other products. We believe that
our past acquisitions have somewhat diversified both our product line risk and geographic risk to
weather conditions.
Percent of Net Sales
by Quarter
2005
2006
2004
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
9.3% 10.4% 8.7%
33.6% 34.3% 35.2%
38.9% 38.0% 38.2%
18.2% 17.3% 17.9%
Due to the nature of our lawn and garden business, significant portions of our shipments occur in
the second and third fiscal quarters. In recent years, retailers have reduced their pre-season inventories
placing greater reliance on us to deliver products “in season” when consumers seek to buy our
products.
Management focuses on a variety of key indicators and operating metrics to monitor the health and
performance of our business. These metrics include consumer purchases (point-of-sale data), market
share, net sales (including volume, pricing and foreign exchange), gross profit margins, income from
operations, net income and earnings per share. To the extent applicable, these measures are evaluated
with and without impairment, restructuring and other charges. We also focus on measures to optimize
cash flow and return on invested capital, including the management of working capital and capital
expenditures.
The long-term strategic improvement plan (“Project Excellence”), initiated in June 2005, is focused
on improving organizational effectiveness, implementing better business processes, reducing SG&A
expenses, and increasing spending on consumer marketing and innovation. Net Project Excellence
savings are estimated to have increased fiscal 2006 pre-tax earnings by approximately $25.0 million. We
incurred approximately $9.7 million in restructuring charges associated with Project Excellence during
fiscal 2006 and approximately $36.0 million since the inception of the project.
Improving the performance of our consumer International business continues to be a challenge. This
is evidenced by the impairment charges for this business in the first quarter of fiscal 2005 and the
fourth quarter of fiscal 2006. Over the past several years, we have reorganized and rationalized our
European supply chain and increased sales force productivity. Current efforts are focused on improving
our competitive position, continuing to reduce supply chain and SG&A costs within the business, and
realigning the organization to better leverage our knowledge of the marketplace and the consumer. We
are working towards pan-European category management of our consumer product portfolio. Overall, we
have moderated our goals for the consumer International business to reflect the realities of the
marketplace.
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We continue to view strategic acquisitions as a means to enhance our strong core businesses.
Effective October 3, 2005, we acquired all the outstanding shares of Rod McLellan Company (“RMC”) for
$20.5 million in cash plus assumed liabilities of $6.8 million. RMC is a leading branded producer and
marketer of soil and landscape products in the western U.S. This business has been integrated into our
existing Growing Media business. Effective November 18, 2005, we acquired Gutwein & Co., Inc.
(“Gutwein”) for approximately $78.3 million in cash plus assumed liabilities of $4.7 million. Through its
Morning Song» brand, Gutwein is a leader in the growing North America wild bird food category,
generating approximately $80 million in annual revenues. Morning Song» products are sold at leading
mass retailers, grocery, pet and general merchandise stores. This is our first acquisition in the wild bird
food category and we are excited about the opportunity to leverage the strengths of both organizations
to drive continued growth in this category.
In late May and early June 2006, the Company invested cash of $16.2 million and assumed
$5.5 million of liabilities to consummate two acquisitions designed to strengthen the Company’s overall
global position in the turfgrass seed category. First, the Company completed the acquisition of certain
assets, including brands, turfgrass varieties and intellectual property, from Oregon based Turf-Seed, Inc.
(“Turf-Seed”), a leading producer of quality commercial turfgrasses for the professional seed business.
The transaction includes a 49% equity interest in Turf-Seed Europe, which distributes Turf-Seed’s grass
varieties throughout the European Union and other countries in the region. Based on future performance,
additional contingent consideration estimated at $15.0 million may be due in 2012. Second, the
Company completed the acquisition of certain assets of Oregon based Landmark Seed Company, a
leading producer and distributor of quality professional seed and turfgrasses, including its brands,
turfgrass varieties and intellectual property.
Given the Company’s strong performance and consistent cash flows, our Board of Directors has
undertaken several actions over the past eighteen months to return cash to our shareholders. We began
paying a quarterly cash dividend of 12.5 cents per share in the fourth quarter of fiscal 2005. In fiscal
2006, our Board launched a five-year $500 million share repurchase program pursuant to which we have
repurchased 2.0 common shares for $87.9 million.
Most recently, on December 12, 2006, we announced that we intend to implement a recapitalization
plan that would expand upon and accelerate returns to shareholders beyond the current $500 million
program (which has been canceled) by returning $750 million to our shareholders. Pursuant to this plan,
which has been approved in concept by our Board of Directors, we intend to launch a “Dutch auction”
tender offer in January 2007 to repurchase up to $250 million of our common shares. Following the
consummation of the tender offer and subject to final Board approval, we intend to declare a special
one-time cash dividend during the second quarter of fiscal 2007, currently anticipated to be $500 million
in the aggregate but subject to revision based on spending for tendered common shares.
In connection with this recapitalization plan, we have received a commitment letter from JPMorgan
Chase, Bank of America and Citigroup, subject to the terms and conditions set forth therein, to provide
Scotts Miracle-Gro and certain of its subsidiaries the following loan facilities totaling in the aggregate up
to $2.1 billion: (a) a senior secured five-year term loan in the principal amount of $550.0 million and
(b) a senior secured five-year revolving loan facility in the aggregate principal amount of up to
$1.55 billion. The Company will have the ability to increase the aggregate amount of the revolving and
term loan facilities by $200 million allocated on a pro rata basis, subject to demand in the syndication
process. The new $2.1 billion senior secured credit facilities would replace our existing $1.05 billion
senior credit facility. In connection with the recapitalization plan, we also intend to use proceeds from
our new credit facilities to repurchase our 65⁄8% senior subordinated notes due 2013 in an aggregate
principal amount of $200 million.
These actions reflect management’s confidence in the continued growth of the Company coupled
with strong and consistent cash flows that can support the higher levels of debt necessary to finance
this plan, as discussed in the Liquidity and Capital Resources section of this Annual Report. Even with
an increase in borrowings under the new credit facilities, we believe we will maintain the capacity to
pursue targeted, strategic acquisitions that leverage our core competencies.
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Results of Operations
The following table sets forth the components of income and expense as a percentage of net sales
for the three years ended September 30, 2006:
Net sales
Cost of sales
Gross profit
Operating expenses:
Selling, general and administrative
Impairment, restructuring and other charges
Other income, net
Income from operations
Costs related to refinancings
Interest expense
Income before income taxes
Income taxes
Income from continuing operations
Income from discontinued operations
Net income
Net Sales
2006
100.0%
64.6
35.4
23.6
2.8
(0.4)
9.4
—
1.5
7.9
3.0
4.9
—
2005
100.0%
63.7
36.3
26.7
1.4
(0.3)
8.5
0.1
1.8
6.6
2.4
4.2
—
2004
100.0%
62.4
37.6
25.7
0.4
(0.5)
12.0
2.2
2.3
7.5
2.8
4.7
—
4.9%
4.2%
4.7%
Consolidated net sales for fiscal 2006 increased 13.8% to $2.70 billion from $2.37 billion in fiscal
2005. Acquisitions, foreign exchange rates and a Roundup» deferred contribution liability charge in fiscal
2005 significantly impacted the rate of sales growth in fiscal 2006, as detailed in the following table:
Net sales growth
Acquisitions
Impact of $45.7 million charge in fiscal 2005 associated with deferred contribution
liability under Roundup» marketing agreement
Foreign exchange rates
Adjusted net sales growth
13.8%
(5.0)
(1.9)
0.4
7.3%
The adjusted net sales growth of 7.3% was driven by strong growth in our North American consumer
business and the Scotts LawnService» business. In contrast, the lawn and garden market has been
difficult in Europe as net sales are down 1.7% after adjusting for the effect of exchange rates. North
America segment sales grew 14.8% to $1.91 billion, or 7.9% excluding acquisitions. Volume growth
contributed 5.8%, pricing 1.9%, with the balance due to the effects of foreign exchange rates. Scotts
LawnService» net sales were $205.7 million in fiscal 2006, up 28.7% from fiscal 2005. Volume growth
drove approximately two-thirds of the increase with the balance from pricing and acquisitions.
International segment sales declined 5.1% to $408.5 million in fiscal 2006, with one-third of the decline
due to volume and the balance due to a decline in average foreign exchange rates.
In fiscal 2005, worldwide net sales totaled $2.37 billion, an increase of 12.5% compared to fiscal
2004 or 4.7% excluding the impact of the Smith & Hawken» acquisition. Positive impacts from foreign
exchanges rates contributed 1.2% to sales growth, while the impact of net selling prices added 1.9% to
sales growth.
Gross Profit
As a percentage of net sales, gross profit was 35.4% of net sales for fiscal 2006 compared to 36.3%
for fiscal 2005. Adjusting for the effect of the Roundup» contribution charge (see the following paragraph
and Note 3 to the accompanying Consolidated Financial Statements), the fiscal 2005 gross profit rate
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was 37.5%, a decline of 210 basis points. Acquisitions accounted for 70 basis points of the decline, as
the margins of these businesses are below our historical average. Product mix adversely affected
margins by 80 basis points, due in part to significant increases in sales of lower margin grass seed and
garden soils. Increased costs for fuel and commodities exceeded price increases, resulting in 90 basis
point decline in gross margin as a percentage of net sales. The offsetting 30 basis point differential is
comprised of miscellaneous other items.
Fiscal 2005 gross profit margins declined 130 basis points compared to fiscal 2004. The Roundup»
marketing agreement contribution charge of $45.7 million recorded in fiscal 2005 reduced gross margin
by approximately 90 basis points. Smith & Hawken» gross margins, which were below the Company’s
average, accounted for approximately 30 basis points of the decline. From an operating segment
standpoint, North America gross margins increased 50 basis points, primarily on a higher net Roundup»
commission, while pricing offset increased commodity costs. Scotts LawnService» gross margins
improved as frontline labor and supervisory productivity and fleet management improvements offset
higher fuel costs. Gross margins declined in the International segment primarily due to higher commodity
and supply chain costs.
Selling, General and Administrative Expenses (in millions)
Advertising
Selling, general and administrative (SG&A)
Stock-based compensation
Amortization of intangibles
2006
$ 137.3
468.7
15.7
15.2
$636.9
2005
$ 122.5
486.6
9.9
14.8
$633.8
2004
$105.0
419.6
7.8
8.3
$540.7
Advertising expenses in fiscal 2006 were $137.3 million, an increase of $14.8 million or 12.1% from
fiscal 2005. On a percentage of net sales basis, the advertising expense was 5.1% in fiscal 2006
compared to 5.2% in fiscal 2005. Some planned increases in traditional media advertising were shifted
to consumer directed promotions funded via programs with our retail partners, which are accounted for
as a reduction to net sales. The combination of higher advertising spending and consumer promotions
led to an 18% increase in spending for the North American consumer business. In fiscal 2005,
advertising expenses increased $17.5 million from fiscal 2004. Excluding the impact of Smith & Hawken»,
advertising expense was 5.0% of net sales in fiscal 2005 and fiscal 2004. Increases in media spending
in North America and Scotts LawnService» were offset by more focused International media spending.
In fiscal 2006, Selling, general and administrative expenses spending decreased $17.9 million or
3.7% from fiscal 2005. This decrease reflects the savings generated by our Project Excellence initiative
coupled with a $10.1 million benefit from an insurance recovery relating to past legal costs incurred in
our defense of lawsuits regarding our use of vermiculite. Increases in SG&A spending occurred in our
rapidly expanding Scotts LawnService» business in the amount of $16.6 million and our wild bird food
acquisition which added $4.2 million in spending.
SG&A expenses in fiscal 2005 were $486.6 million compared to $419.6 million in fiscal 2004.
Excluding Smith & Hawken», SG&A spending was $450.3 million, an increase of $30.7 million or 7.3%.
This increase was primarily the result of outside legal fees associated with litigation matters, Sarbanes-
Oxley associated compliance costs, expansion of Scotts LawnService», foreign exchange rates and
incremental North America selling expense (primarily for increased home center support), partially offset
by lower non-restructuring severance costs in North America and International.
We began expensing share-based awards commencing with grants issued in fiscal 2003. The
majority of our share-based awards vest over three years, with the associated expense generally
recognized ratably over the vesting period. As such, fiscal 2005 was the first year to be impacted with
the expense associated with three years of grants. Prior to the fiscal 2006 adoption of Statement of
Financial Accounting Standards No. 123(R), “Share-Based Payment,” forfeitures were recognized as
incurred, which reduced fiscal 2005 expense by approximately $2.2 million. Our stock-based compensa-
tion expense now includes an estimate of forfeitures starting at the grant date.
The $5.8 million increase in stock-based compensation in fiscal 2006 as compared to fiscal 2005
relates to two items. First, there was an increase in the number of awards granted to key employees and
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the value of each grant has increased commensurate with our stock price. Second, the departure of
several key executives in fiscal 2005 resulted in a high level of forfeitures, reducing the related share-
based awards expense in that fiscal year.
Amortization expense was $15.2 million in fiscal 2006 compared to $14.8 million in fiscal 2005. The
increased amount of amortization is associated with recent acquisitions. The $6.5 million increase in
fiscal 2005 as compared to fiscal 2004 primarily results from a comprehensive review of intangibles and
corrections to the accumulated amortization of certain intangible assets. Recent acquisitions also
contributed to this increase.
Impairment, Restructuring and Other Charges, net (in millions)
Impairment charges
Restructuring — severance and related
Litigation related income
Other
2006
$66.4
9.3
—
—
$ 75.7
2005
$ 23.4
26.3
(16.8)
0.3
$ 33.2
2004
$ —
9.1
—
—
$9.1
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets”, goodwill and indefinite-
lived intangible assets are no longer amortized and are subject to impairment testing at least annually
or more frequently if circumstances indicate a potential impairment between annual testing. We conduct
our annual assessment at the end of our first fiscal quarter. Our assessment in the first quarter of fiscal
2006 resulted in an impairment charge of $1.0 million associated with a tradename no longer in use in
our U.K. consumer business. Category declines in the European consumer markets during the 2006
season resulted in a decline in the profitability of the consumer component of our International business
segment in fiscal 2006. After an evaluation, management reached the conclusion that the projections
supporting first quarter 2006 impairment testing for the consumer component of our International
business segment were unlikely to be met. Management engaged an independent valuation firm to
assist in an interim impairment assessment of the indefinite-lived tradenames and goodwill associated
with this business. As a result of this evaluation in the fourth quarter of fiscal 2006, we recorded a
$65.4 million non-cash impairment charge, $62.3 million of which was associated with indefinite-lived
tradenames that continue to be employed in the consumer portion of our International segment. The
balance of the fiscal 2006 fourth quarter impairment charge was in our North America segment and
consisted of $1.3 million for a Canadian tradename being phased out and $1.8 million related to
goodwill of a pottery business we exited.
In the first quarter of fiscal 2005, we recorded an impairment charge of $22.0 million associated
with indefinite-lived tradenames in the U.K. consumer business, reflecting a reduction in the value of the
business resulting primarily from the decline in the profitability of its growing media business and
unfavorable category mix trends.
Restructuring activities in fiscal 2006 and fiscal 2005 relate primarily to organizational reductions
associated with Project Excellence initiated in the third quarter of fiscal 2005. As a result of this
program, approximately 110 associates accepted early retirement or were severed during the last four
months of fiscal 2005. Approximately 110 additional associates exited in fiscal 2006. We continue to
evaluate our organization and operating efficiencies. As a result of these ongoing evaluations, there may
be further restructuring charges in future quarters.
Litigation related income is attributable to two separate matters in fiscal 2005. In the fourth quarter
of fiscal 2001, as a result of collection concerns, we recorded a reserve against accounts receivable from
Central Garden & Pet Company (Central Garden). This charge was recorded in impairment, restructuring
and other charges, net. After nearly five years of pursuing collection of these receivables via litigation,
we received payment totaling $15.0 million on July 14, 2005. As a result, we reversed $7.9 million of the
Central Garden reserve recorded in fiscal 2001. In September 2005, we reached a settlement with sanofi-
aventis related to our litigation of matters related to the Aventis business. In relation to this matter, we
received a net $8.9 million settlement on September 30, 2005.
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Other Income, net
Other income, net was $9.2 million for fiscal 2006 and was comprised primarily of $6.8 million of
royalty income. Other income, net for fiscal 2005 resulted primarily from $4.1 million awarded to us as
part of the Central Garden judgment discussed above and royalty income, partially offset by foreign
currency losses. Other income, net in fiscal 2004 was attributable to royalty income, gains on foreign
currency transactions, Scotts LawnService» franchise fees and cost subsidies related to the sale of peat
bogs in the United Kingdom, for which a portion of the cost benefit was historically recorded as other
income (fiscal 2004 was the final year we received such subsidies).
Income from Operations
Income from operations in fiscal 2006 was $252.5 million, compared to $200.9 million in fiscal
2005, an increase of $51.6 million. Income from operations in fiscal 2006 was negatively impacted by
$66.4 million from impairment charges and an additional $9.4 million of restructuring charges. Income
from operations in fiscal 2005 was negatively impacted by the following charges: (1) $45.7 million related
to the Roundup» deferred contribution charge; (2) a $22.0 million charge for impairment of U.K.
intangibles; and (3) $26.3 million in restructuring charges. These were partially offset by $16.8 million of
litigation related income as discussed above. If these unusual factors were excluded from year-over-year
comparison, fiscal 2006 would show an 18% improvement over fiscal 2005. Higher net sales and Project
Excellence savings, offset by a gross margin rate decline and growth in advertising spending, were the
major contributors to the 18% growth in income from operations.
Income from operations in fiscal 2005 declined $51.9 million from fiscal 2004. In addition to fiscal
2005 charges detailed in the preceding paragraph, the change in income from operations is attributable
to higher net sales and gross profit margins, and significantly higher earnings from the Roundup»
marketing agreement, partially offset by higher legal and Sarbanes-Oxley compliance costs and sales
force investments in North America.
Interest Expense and Refinancing Activities
We have refinanced our debt arrangements several times over the past two years to take advantage
of our improving financial position and favorable market conditions. In October 2003, we tendered nearly
all of our $400 million then outstanding senior subordinated notes that bore interest at 85⁄8% and
issued $200 million of new senior subordinated notes bearing interest at 65⁄8%. At the time, we also
secured a new credit facility at more favorable terms than our previous arrangement. Refinancing costs
associated with these transactions were $44.3 million, including premiums paid on the redemption of
the 85⁄8% notes, write-off of previously deferred financing and treasury lock costs and transactions fees.
In August 2004, we refinanced the term loan facility under a new credit agreement with new term loans,
providing for improved terms and borrowing costs. Costs charged associated with this refinancing were
$1.2 million.
In July 2005, we entered into a new credit agreement that provided for a significantly increased
revolving credit facility and allowed us to repay our outstanding term notes, again providing for improved
terms and borrowing costs. Costs charged against income from operations associated with this refinanc-
ing were $1.3 million.
Interest expense decreased from $41.5 million in fiscal 2005 to $39.6 million in fiscal 2006. A
$3.6 million increase in expense due to an increase in rates on the variable rate portion of our
outstanding debt and an increase in average debt outstanding was more than offset by hedging
strategies, the impact of foreign exchange rates, and miscellaneous other items. In fiscal 2005, interest
expense decreased $7.3 million compared to fiscal 2004. The decrease in interest expense was primarily
attributable to a $113.9 million reduction in average borrowings, coupled with a nine basis point
reduction in our weighted average interest rate to 5.83%.
Income Taxes
The effective tax rate for fiscal 2006 was 37.7% compared to 36.5% in fiscal 2005 and 36.6% in
fiscal 2004. The effective tax rate in fiscal 2006 was higher than in the prior two years due to fewer
favorable developments. In fiscal 2005, our income tax rate benefited primarily as a result of favorable
developments related to prior year foreign tax exposures. In fiscal 2004, our effective tax rate benefited
from an adjustment of state deferred income taxes resulting from a detailed review of state effective tax
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3960_fin.pdf
rates and increased utilization of foreign tax credits. We anticipate the effective tax rate will be
approximately 37.0% for fiscal 2007.
Net Income and Earnings per Share
We reported income from continuing operations of $132.7 million in fiscal 2006, compared to
$100.4 million in fiscal 2005. Income from discontinued operations pertains to the disposal of our
professional growing media business at the end of fiscal 2004. Reported net income, including income
from discontinued operations, increased from $100.6 million or $1.47 per diluted share in fiscal 2005 to
$132.7 million or $1.91 per diluted share in fiscal 2006. As described in the Income from Operations
discussion, the benefit from net sales growth and Project Excellence savings, was offset by impairment
and restructuring charges in fiscal 2006, while similar factors impacted fiscal 2005, along with the
Roundup» deferred contribution charge. Average diluted shares outstanding increased from 68.6 million
in fiscal 2005 to 69.4 million in fiscal 2006, due to option exercises and the impact on common stock
equivalents of a higher average share price, and partially offset by the repurchase of our common shares
under the program approved by our Board of Directors in November 2005.
In fiscal 2005, we reported income from continuing operations of $100.4 million, compared to
$100.5 million in fiscal 2004. Reported net income, including income from discontinued operations,
decreased from $100.9 million or $1.52 per diluted share in fiscal 2004 to $100.6 million or $1.47 per
diluted share in fiscal 2005. As described in the Income from Operations discussion, the benefit from
solid sales growth in fiscal 2005 was offset by the significant Roundup» deferred contribution charge,
and impairment and restructuring charges. Average diluted shares outstanding increased from 66.6 mil-
lion in fiscal 2004 to 68.6 million in fiscal 2005, due to option exercises and the impact on common
stock equivalents of a higher average share price.
Segment Results
Our operations are divided into the following reportable segments: North America, Scotts
LawnService», International, and Corporate & Other. The Corporate & Other segment consists of Smith &
Hawken» and corporate general and administrative expenses. Segment performance is evaluated based
on several factors, including income from operations before amortization, and impairment, restructuring
and other charges, which is a non-GAAP financial measure. Management uses this measure of operating
profit to gauge segment performance because we believe this measure is the most indicative of
performance trends and the overall earnings potential of each segment.
Net Sales by Segment (in millions)
North America
Scotts LawnService»
International
Corporate & other
Segment total
Roundup» deferred contribution charge
Roundup» amortization
2006
$ 1,914.5
205.7
408.5
167.6
2,696.3
—
0.8
2005
$1,668.1
159.8
430.3
159.6
2,417.8
(45.7)
(2.8)
2004
$1,569.0
135.2
405.6
—
2,109.8
—
(3.3)
$ 2,697.1
$2,369.3
$ 2,106.5
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Income from Operations by Segment (in millions)
North America
Scotts LawnService»
International
Corporate & other
Segment total
Roundup» deferred contribution charge
Roundup» amortization
Amortization
Impairment of intangibles
Restructuring and other charges
North America
2006
$382.0
15.6
28.5
(81.8)
344.3
—
0.8
(16.8)
(66.4)
(9.4)
2005
$ 343.9
13.1
34.3
(94.2)
297.1
(45.7)
(2.8)
(14.8)
(23.4)
(9.5)
2004
$306.1
9.4
29.3
(70.6)
274.2
—
(3.3)
(8.3)
—
(9.8)
$ 252.5
$200.9
$252.8
North America segment net sales were $1.91 billion in fiscal 2006, an increase of 14.8% from fiscal
2005. Excluding the impact of acquisitions, sales improved 7.9%, approximately 1.9% of which was a
result of pricing. Each of the core businesses performed well, with lawn fertilizers up 8% and growing
media up 17%. Plant food grew 12%, benefiting from the very successful launch of Miracle-Gro»
LiquaFeed», while grass seed grew 24%. Ortho» sales were flat to last year due to a unfavorable season
for weed control products.
During fiscal 2005, North America segment net sales increased 6.3%. Of the increase in North
America net sales, approximately 2.3% was attributable to pricing. Within the North America segment,
Gardening Products net sales, which include growing media and garden fertilizers, increased 9.8% with
higher sales of value-added Miracle-Gro» garden soils and potting mix, Shake ’N Feed» continuous
release plant food and Organic Choice» garden soils. Net sales of Ortho» products increased by 11.0% in
fiscal 2005, driven largely by the successful launches of Home Defense MAX», Weed-B-Gon» MAX», and
Ortho» Season-Long Grass and Weed Killer concentrate. Excluding the favorable impact of foreign
exchange rates, the Canadian group of North America posted a 23.0% net sales increase in fiscal 2005.
Unfavorable early season weather conditions adversely impacted the Lawns group within North America,
resulting in net sales that were flat compared to fiscal 2004.
In fiscal 2006, North America segment operating income increased $38.1 million or 11.1%. This
increased operating income was primarily the result of higher net sales and Project Excellence savings,
offsetting a gross margin rate decline and growth in advertising spending.
In fiscal 2005, North America segment operating income increased $37.8 million or 12.3%. Higher
sales volume and gross profits, product price increases, strong performance in the Roundup» business
and moderate increases in SG&A spending more than offset higher commodity and fuel costs,
investments in the home center sales team, and in research and development projects.
Scotts LawnService»
In fiscal 2006, we continued the expansion of our Scotts LawnService» business primarily through
internal growth. We invested $4.4 million of capital in lawn care acquisitions in fiscal 2006, and
$6.4 million in fiscal 2005. Acquisitions had been a major factor in the growth of the lawn care business
prior to fiscal 2004. While we expect to continue making selective acquisitions in future years, we
anticipate the majority of the future growth in our lawn care business will be organic.
Scotts LawnService» segment net sales increased $45.9 million or 28.7% in fiscal 2006. In fiscal
2005, Scotts LawnService» net sales increased 18.2% or $24.6 million. The growth in net sales for both
years has been from increased customer counts and revenue per customer, strong customer retention,
pricing to cover increased input costs, modest geographic expansion and the full year impact of recent
acquisitions.
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Operating income for the Scotts LawnService» segment increased $2.5 million or 19.1% in fiscal
2006 and $3.7 million or 39.4% in fiscal 2005. These increases are the result of revenue growth offset
by investments in personnel and infrastructure to support future growth and service levels.
International
Net sales for the International segment in fiscal 2006 declined by 5.1% or $21.8 million compared
to fiscal 2005. Excluding the effects of currency fluctuations, net sales declined 1.7%. The retail
environment in Europe was challenging with category sales down in both the U.K. and France, our two
largest European markets. We believe listing improvements have resulted in market share gains;
however, these gains did not result in top line growth due to the category declines.
Fiscal 2005 International segment net sales increased $24.7 million or 6.1% compared to fiscal
2004. Excluding the effects of currency fluctuations, the fiscal 2005 net sales increase was 1.1%. Lower
sales in France and the Benelux countries largely offset higher sales in the International professional
business, Central Europe and the United Kingdom.
In fiscal 2006, International operating income decreased $5.8 million or 16.9% as compared to
fiscal 2005. Lower sales and gross margins were partially offset by reduced SG&A spending, resulting in
the year-over-year decline. Operating income grew $5.0 million or 17.1% in fiscal 2005, compared to
fiscal 2004. Excluding favorable foreign exchange rates, International segment operating income
increased 8.5%. The increase in fiscal 2005 operating income was attributable to modest revenue growth
and reduced SG&A spending, partially offset by lower gross margins.
Corporate & Other
The loss from operations in Corporate & Other was $81.8 million in fiscal 2006, $94.2 million in
fiscal 2005, and $70.6 million in fiscal 2004. The increase from fiscal 2004 to fiscal 2005 largely was
driven by increased legal and Sarbanes-Oxley compliance costs. While significant reductions in these
costs in fiscal 2006 served to reduce the loss as compared to fiscal 2005, a loss in our Smith &
Hawken» business mitigated the impact of these cost reductions.
Management’s Outlook
We are very pleased with our performance in fiscal 2006. Despite upward pressure on commodity
raw material costs and a challenging retail environment in Europe, we delivered record net sales and
earnings. Our sales results were driven by strong point of sales growth in our North America business
and continued expansion of our Scotts LawnService» business, as well as recent acquisitions.
Our strong results in fiscal 2006 have set the stage for another successful year in fiscal 2007. We
are committed to executing the strategic initiatives, all of which we believe will increase operating
profits, secure future growth opportunities and strengthen the Company’s franchise for our consumers,
our retail partners and our shareholders.
From a financial perspective, the execution of our strategic plan will also allow us to continue to
improve Return on Invested Capital (ROIC) and free cash flows. Our regular quarterly dividends coupled
with the special stock repurchase and dividend planned for the second quarter of fiscal 2007, will allow
us to return funds to shareholders while maintaining our targeted capital structure and allowing for
opportunistic acquisitions.
For certain information concerning our risk factors, see “RISK FACTORS” included elsewhere in this Annual Report.
Liquidity and Capital Resources
Net cash provided from operating activities was $182.4 million for fiscal 2006, compared to
$226.7 million for fiscal 2005, a decline of $44.3 million resulting from the following factors. First, we
undertook an inventory build in North America in the fourth quarter of fiscal 2006 to take advantage of a
historical trough in urea costs and to increase the predictability of fiscal 2007 costs. Second, Smith &
Hawken» inventories increased as a result of a conscious early season effort to improve customer
service; however, sales subsequently did not meet expectations. Third, $43.0 million of the Roundup»
deferred contribution amount was paid in October 2005. Lastly, net payments against restructuring
reserves used $9.2 million in cash in fiscal 2006 while non-cash restructuring costs of $10.3 million
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served to increase operating cash flows in fiscal 2005. These unfavorable cash flow developments were
offset by a $34.3 million increase in accounts payable.
The seasonal nature of our operations generally requires cash to fund significant increases in
working capital (primarily inventory) during the first half of the year. Receivables and payables also build
substantially in the second quarter of the year in line with the timing of sales as the spring selling
season begins. These balances liquidate during the June through September period as the lawn and
garden season unwinds. Unlike our core retail business, Scotts LawnService» typically has its highest
receivables balances in the fourth quarter because of the seasonal timing of customer applications and
extra services revenues.
Cash used in investing activities was $174.1 million and $60.9 million for fiscal 2006 and fiscal
2005, respectively. Our acquisitions of Gutwein and RMC required a net cash outlay of $98.8 million in
the first quarter of 2006, which was financed with borrowings under our existing lines of credit. Our
acquisition of Smith & Hawken» in the first quarter of fiscal 2005 required a cash outlay of $73.6 million,
financed in large part through the redemption of $57.2 million of investments. Capital spending of
$57.0 million in fiscal 2006 was done in the normal course of business, compared to the $40.4 million
spent in fiscal 2005. The increase in capital spending was partially due to approximately $4.9 million
spent acquiring peat bogs in Scotland along with $5.4 million in new Smith and Hawken» stores.
Financing activities used cash of $46.9 million and $195.2 million in fiscal 2006 and fiscal 2005,
respectively. As noted earlier, in fiscal 2006, we began a program to return cash to our shareholders. To
that end, we paid dividends of $33.5 million and repurchased $87.9 million of our common shares
financed in part by a net increase in borrowings under our Revolving Credit Agreement of $55.2 million.
Prior to fiscal 2006, our focus was on aggressively paying down debt and managing our credit
agreements and borrowings to maximize the benefit of our improving capital structure and debt facilities.
Approximately $211.2 million of debt was retired in fiscal 2005. We also paid our first ever common
share dividend in the fourth quarter of fiscal 2005 totaling $8.6 million. Proceeds from the exercise of
employee stock options were $17.6 million in fiscal 2006 compared to $32.2 million in fiscal 2005.
Our primary sources of liquidity are cash generated by operations and borrowings under our credit
agreements. Our Revolving Credit Agreement consists of an aggregate $1.05 billion multi-currency
commitment (increased from $1.0 billion in February 2006), that extends through July 21, 2010. Under
our current structure, we may request an additional $100 million in revolving credit commitments,
subject to approval from our lenders. As of September 30, 2006, there was $775.9 million of availability
under the Revolving Credit Agreement. As of September 30, 2006, we also had $200.0 million of 65⁄8%
senior subordinated notes outstanding. Note 9 to the Consolidated Financial Statements provides
additional information pertaining to our borrowing arrangements. We were in compliance with all of our
debt covenants throughout fiscal 2006.
The recapitalization plan announced on December 12, 2006, to return $750 million to shareholders
during the second quarter of fiscal 2007 will be financed by a restructuring of the Company’s principal
borrowing arrangements. Our Revolving Credit Agreement will be replaced with new senior secured $2.1
to $2.3 billion multicurrency credit facilities that will provide for revolving credit and term loans. As part
of the refinancing, we intend to repurchase the $200 million of 65⁄8% senior subordinated notes
outstanding. We believe our new facilities will continue to provide the Company with the capacity to
pursue targeted, strategic acquisitions that leverage our core competencies.
We are party to various pending judicial and administrative proceedings arising in the ordinary
course of business. These include, among others, proceedings based on accidents or product liability
claims and alleged violations of environmental laws. We have reviewed our pending environmental and
legal proceedings, including the probable outcomes, reasonably anticipated costs and expenses,
reviewed the availability and limits of our insurance coverage and have established what we believe to
be appropriate reserves. We do not believe that any liabilities that may result from these proceedings
are reasonably likely to have a material adverse effect on our liquidity, financial condition or results of
operations; however, there can be no assurance that future quarterly or annual operating results will not
be materially affected by final resolution of these matters.
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The following table summarizes our future cash outflows for contractual obligations as of Septem-
ber 30, 2006 (in millions):
Payments Due by Period
Contractual Cash Obligations
Total
Less than 1 year
1-3 years
4-5 years
$ 481.2
190.3
419.3
$ 6.0
34.9
215.9
$ 5.8
56.0
145.6
$255.0
36.1
48.2
More than
5 years
$ 214.4
63.3
9.6
Long-term debt obligations
Operating lease obligations
Purchase obligations
Other, primarily retirement plan
obligations
37.4
13.5
5.4
5.4
13.1
Total contractual cash obligations
$1,128.2
$270.3
$212.8
$344.7
$300.4
Purchase obligations primarily represent outstanding purchase orders for materials used in the
Company’s manufacturing processes. Purchase obligations also include commitments for warehouse
services, seed, and out-sourced information services which comprise the unconditional purchase
obligations disclosed in Note 15 to Consolidated Financial Statements.
Other includes actuarially determined retiree benefit payments and pension funding to comply with
local funding requirements. Pension funding requirements beyond fiscal 2007 are not currently determin-
able. The above table excludes interest payments, and insurance accruals as the Company is unable to
estimate the timing of the payment for these items.
The Company has no off-balance sheet financing arrangements.
In our opinion, cash flows from operations and capital resources will be sufficient to meet debt
service and working capital needs during fiscal 2007, and thereafter for the foreseeable future. However,
we cannot ensure that our business will generate sufficient cash flow from operations or that future
borrowings will be available under our credit facilities in amounts sufficient to pay indebtedness or fund
other liquidity needs. Actual results of operations will depend on numerous factors, many of which are
beyond our control.
Environmental Matters
We are subject to local, state, federal and foreign environmental protection laws and regulations
with respect to our business operations and believe we are operating in substantial compliance with, or
taking actions aimed at ensuring compliance with, such laws and regulations. We are involved in several
legal actions with various governmental agencies related to environmental matters. While it is difficult to
quantify the potential financial impact of actions involving environmental matters, particularly remedia-
tion costs at waste disposal sites and future capital expenditures for environmental control equipment,
in the opinion of management, the ultimate liability arising from such environmental matters, taking into
account established reserves, should not have a material adverse effect on our financial position.
However, there can be no assurance that the resolution of these matters will not materially affect our
future quarterly or annual results of operations, financial condition or cash flows.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based upon the
Company’s consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America (U.S. GAAP). Certain accounting policies
are particularly significant, including those related to revenue recognition, goodwill and intangibles,
certain employee benefits, and income taxes. We believe these accounting policies, and others set forth
in Note 1 of the Notes to Consolidated Financial Statements, should be reviewed as they are integral to
understanding our results of operations and financial position. Our critical accounting policies are
reviewed periodically with the Audit Committee of The Scotts Miracle-Gro Company Board of Directors.
The preparation of financial statements requires management to use judgment and make estimates
that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those
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related to customer programs and incentives, product returns, bad debts, inventories, intangible assets,
income taxes, restructuring, environmental matters, contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances. Although actual results historically have not deviated significantly from those determined
using our estimates, our results of operations or financial position could differ, perhaps materially, from
these estimates under different assumptions or conditions.
Revenue Recognition
Most of our revenue is derived from the sale of inventory, and we recognize revenue when title and
risk of loss transfer, generally when products are received by the customer. Provisions for payment
discounts, product returns and allowances are recorded as a reduction of sales at the time revenue is
recognized based on historical trends and adjusted periodically as circumstances warrant. Similarly,
reserves for uncollectible receivables due from customers are established based on management’s
judgment as to the ultimate collectibility of these balances. We offer sales incentives through various
programs, consisting principally of volume rebates, cooperative advertising, consumer coupons and
other trade programs. The cost of these programs is recorded as a reduction of sales. The recognition of
revenues, receivables and trade programs requires the use of estimates. While we believe these
estimates to be reasonable based on the then current facts and circumstances, there can be no
assurance that actual amounts realized will not differ materially from estimated amounts recorded.
Goodwill, Indefinite-lived Intangibles and Long-lived Assets
We have significant investments in property and equipment, intangible assets and goodwill.
Whenever changing conditions warrant, we review the realizability of the assets that may be affected. At
least annually, we review goodwill and indefinite-lived intangible assets for impairment. The review for
impairment of long-lived assets, intangibles and goodwill is primarily based on our estimates of future
cash flows, which are based upon budgets and longer-range strategic plans. These budgets and plans
are used for internal purposes and are also the basis for communication with outside parties about
future business trends. While we believe the assumptions we use to estimate future cash flows are
reasonable, there can be no assurance that the expected future cash flows will be realized. As a result,
impairment charges that possibly should have been recognized in earlier periods may not be recognized
until later periods if actual results deviate unfavorably from earlier estimates.
Inventories
Inventories are stated at the lower of cost or market, the majority of which are based on the first-in,
first-out method of accounting. Reserves for excess and obsolete inventory are based on a variety of
factors, including product changes and improvements, changes in active ingredient availability and
regulatory acceptance, new product introductions and estimated future demand. The adequacy of our
reserves could be materially affected by changes in the demand for our products or regulatory actions.
Contingencies
As described more fully in Note 16 of the Notes to Consolidated Financial Statements, we are
involved in significant environmental and legal matters, which have a high degree of uncertainty
associated with them. We continually assess the likely outcomes of these matters and the adequacy of
amounts, if any, provided for their resolution. There can be no assurance that the ultimate outcomes will
not differ materially from our assessment of them. There can also be no assurance that all matters that
may be brought against us are known at any point in time.
Income Taxes
Our annual effective tax rate is established based on our income, statutory tax rates and the tax
impacts of items treated differently for tax purposes than for financial reporting purposes. We record
income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax
asset or liability is recognized whenever there are future tax effects from existing temporary differences
and operating loss and tax credit carryforwards. Valuation allowances are used to reduce deferred tax
assets to the balance that is more likely than not to be realized. We must make estimates and
judgments on future taxable income, considering feasible tax planning strategies and taking into account
existing facts and circumstances, to determine the proper valuation allowance. When we determine that
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deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and
consolidated statement of operations reflect the change in the period such determination is made. Due
to changes in facts and circumstances and the estimates and judgments that are involved in determining
the proper valuation allowance, differences between actual future events and prior estimates and
judgments could result in adjustments to this valuation allowance. We use an estimate of our annual
effective tax rate at each interim period based on the facts and circumstances available at that time,
while the actual effective tax rate is calculated at year-end.
Associate Benefits
We sponsor various post-employment benefit plans. These include pension plans, both defined
contribution plans and defined benefit plans, and other post-employment benefit (OPEB) plans, consist-
ing primarily of health care for retirees. For accounting purposes, the defined benefit pension and OPEB
plans are dependent on a variety of assumptions to estimate the projected and accumulated benefit
obligations determined by actuarial valuations. These assumptions include the following: discount rate;
expected salary increases; certain employee-related factors, such as turnover, retirement age and
mortality; expected return on plan assets; and health care cost trend rates. These and other assumptions
affect the annual expense recognized for these plans.
Assumptions are reviewed annually for appropriateness and updated as necessary. We base the
discount rate assumption on investment yields available at year-end on corporate long-term bonds rated
AA or the equivalent. The salary growth assumption reflects our long-term actual experience, the near-
term outlook and assumed inflation. The expected return on plan assets assumption reflects asset
allocation, investment strategy and the views of investment managers regarding the market. Retirement
and mortality rates are based primarily on actual and expected plan experience. The effects of actual
results differing from our assumptions are accumulated and amortized over future periods.
Changes in the discount rate and investment returns can have a significant effect on the funded
status of our pension plans and shareholders’ equity. We cannot predict these discount rates or
investment returns with certainty and, therefore, cannot determine whether adjustments to our share-
holders’ equity for minimum pension liability in subsequent years will be significant.
We also award stock options to directors and certain associates. Beginning in fiscal 2003, we began
expensing prospective grants of employee stock-based compensation awards in accordance with
Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”. The
fair value of future awards is being expensed ratably over the vesting period, which has historically been
three years, except for grants to directors, which have shorter vesting periods. Stock options granted
prior to fiscal 2003 are accounted for under the intrinsic value recognition and measurement provisions
of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and
related interpretations. As those stock options were issued with exercise prices equal to the market
value of the underlying common shares on the grant date, no compensation expense was recognized.
RISK FACTORS
Cautionary Statement on Forward-Looking Statements
We have made and will make “forward-looking statements” within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 in our 2006 Annual
on Form 10-K in this Annual Report and in other contexts relating to future growth and
Report
profitability targets and strategies designed to increase total shareholder value. Forward-looking
statements also include, but are not limited to, information regarding our future economic and financial
condition, the plans and objectives of our management and our assumptions regarding our performance
and these plans and objectives.
,
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking
statements to encourage companies to provide prospective information, so long as those statements are
identified as forward-looking and are accompanied by meaningful cautionary statements identifying
important factors that could cause actual results to differ materially from those discussed in the forward-
looking statements. We desire to take advantage of the “safe harbor” provisions of that Act.
Some forward-looking statements that we make in our 2006 Annual Report
,
on Form 10-K
in this
Annual Report
and in other contexts represent challenging goals for our Company
and the achievement of
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these goals is subject to a variety of risks and assumptions and numerous factors beyond our control.
Important factors that could cause actual results to differ materially from the forward-looking statements
we make are described below. All forward-looking statements attributable to us or persons working on
our behalf are expressly qualified in their entirety by the following cautionary statements.
Products
Perceptions that the products we produce and market are not safe could adversely affect us and
contribute to the risk we will be subjected to legal action. We manufacture and market a number of
complex chemical products, such as fertilizers, growing media, herbicides and pesticides, bearing our
brand names. On occasion, allegations are made that some of our products have failed to perform up to
expectations or have caused damage or injury to individuals or property. Based on reports of contami-
nation at a third party supplier’s vermiculite mine, the public may perceive that some of our products
manufactured in the past using vermiculite are or may also be contaminated. Public perception that our
products are not safe, whether justified or not, could impair our reputation, involve us in litigation,
damage our brand names and have a material adverse affect on our business.
Weather and Seasonality
Weather conditions in North America and Europe can have a significant impact on the timing of
sales in the spring selling season and overall annual sales. An abnormally wet and/or cold spring
throughout North America or Europe could adversely affect both fertilizer and pesticide sales and,
therefore, our financial results. Because our products are used primarily in the spring and summer, our
business is highly seasonal. For the past three fiscal years, 70% to 75% of our annual net sales have
occurred in the second and third fiscal quarters combined. Our working capital needs and borrowings
peak toward the end of our second fiscal quarter because we are incurring expenditures in preparation
for the spring selling season while the majority of our revenue collections occur in our third fiscal
quarter. If cash on hand is insufficient to pay our obligations as they come due, including interest
payments or operating expenses, at a time when we are unable to draw on our credit facility, this
seasonality could have a material adverse effect on our ability to conduct our business. Adverse weather
conditions could heighten this risk.
Competition
Each of our segments participates in markets that are highly competitive. Many of our competitors
sell their products at prices lower than ours, and we compete primarily on the basis of product quality,
product performance, value, brand strength, supply chain competency and advertising. Some of our
competitors have significant financial resources. The strong competition that we face in all of our
markets may prevent us from achieving our revenue goals, which may have a material adverse affect on
our financial condition and results of operations.
Customer Concentration
In the North America segment, net sales represented approximately 70% of our worldwide net sales
in fiscal 2006. Our top three North American retail customers together accounted for 61% of our North
America segment fiscal 2006 net sales and 42% of our outstanding accounts receivable as of
September 30, 2006. Home Depot, Wal*Mart and Lowe’s represented approximately 30%, 16% and 15%,
respectively, of our fiscal 2006 North America net sales. The loss of, or reduction in orders from, Home
Depot, Wal*Mart, Lowe’s or any other significant customer could have a material adverse effect on our
business and our financial results, as could customer disputes regarding shipments, fees, merchandise
condition or related matters. Our inability to collect accounts receivable from any of these customers
could also have a material adverse affect on our financial condition and results of operations.
We do not have long-term sales agreements or other contractual assurances as to future sales to
any of our major retail customers. In addition, continued consolidation in the retail industry has resulted
in an increasingly concentrated retail base. To the extent such concentration continues to occur, our net
sales and income from operations may be increasingly sensitive to deterioration in the financial
condition of, or other adverse developments involving our relationship with, one or more customers.
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Significant Agreement
If we were to commit a serious default under the marketing agreement with Monsanto for consumer
Roundup» products, Monsanto may have the right to terminate the agreement. If Monsanto was to
terminate the marketing agreement for cause, we would not be entitled to any termination fee, and we
would lose all, or a significant portion, of the significant source of earnings and overhead expense
absorption the marketing agreement provides. Monsanto may also be able to terminate the marketing
agreement within a given region, including North America, without paying us a termination fee if 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.
Debt
We have a significant amount of debt that could adversely affect our financial health and prevent us
from fulfilling our obligations. Our debt levels will increase as a result of our plan to return $750 million
to shareholders in the second quarter of fiscal 2007. Our substantial indebtedness could have important
consequences. For example, it could:
(cid:129) make it more difficult for us to satisfy our obligations under outstanding indebtedness;
(cid:129) increase our vulnerability to general adverse economic and industry conditions;
(cid:129) require us to dedicate a substantial portion of cash flows from operating activities to payments
on our indebtedness, which would reduce the cash flows available to fund working capital,
capital expenditures, advertising, research and development efforts and other general corporate
requirements;
(cid:129) limit our flexibility in planning for, or reacting to, changes in our business and the industry in
which we operate;
(cid:129) place us at a competitive disadvantage compared to our competitors that have less debt;
(cid:129) limit our ability to borrow additional funds; and
(cid:129) expose us to risks inherent in interest rate fluctuations because some of our borrowings are at
variable rates of interest, which could result in higher interest expense in the event of increases
in interest rates.
Our ability to make payments and to refinance our indebtedness, to fund planned capital expendi-
tures, acquisitions, and to pay dividends will depend on our ability to generate cash in the future. This,
to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control.
We cannot provide assurance that our business will generate sufficient cash flow from operating
activities or that future borrowings will be available to us under our credit facility in amounts sufficient
to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all
or a portion of our indebtedness, on or before maturity. We cannot assure you that we would be able to
refinance any of our indebtedness on commercially reasonable terms or at all.
Our existing credit facility contains, and the new credit facilities will contain, restrictive covenants
and cross default provisions that require us to maintain specified financial ratios. Our ability to satisfy
those financial ratios can be affected by events beyond our control, and we cannot be assured we will
satisfy those ratios. A breach of any of these financial ratio covenants or other covenants could result in
a default. Upon the occurrence of an event of default, the lenders could elect to declare the applicable
outstanding indebtedness due immediately and payable and terminate all commitments to extend
further credit. We cannot be sure that our lenders would waive a default or that we could pay the
indebtedness in full if it were accelerated.
Equity Ownership Concentration
Hagedorn Partnership, L.P. beneficially owned approximately 31% of our outstanding common shares
as of November 28, 2006, and has sufficient voting power to significantly influence the election of
directors and the approval of other actions requiring the approval of our shareholders.
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Regulatory and Environmental
Local, state, federal and foreign laws and regulations relating to environmental matters affect us in
several ways. In the United States, all products containing pesticides must be registered with the
U.S. EPA (and similar state agencies) before they can be sold. The inability to obtain or the cancellation
of any such registration could have an adverse effect on our business, the severity of which would
depend on the products involved, whether another product could be substituted and whether our
competitors were similarly affected. We attempt to anticipate regulatory developments and maintain
registrations of, and access to, substitute active ingredients, but there can be no assurance that we will
continue to be able to avoid or minimize these risks.
The Food Quality Protection Act, enacted by the U.S. Congress in August 1996, establishes a
standard for food-use pesticides, which standard is the reasonable certainty that no harm will result
from the cumulative effects of pesticide exposures. Under this Act, the U.S. EPA is evaluating the
cumulative risks from dietary and non-dietary exposures to pesticides. The pesticides in our products,
certain of which may be used on crops processed into various food products, are typically manufactured
by independent third parties and continue to be evaluated by the U.S. EPA as part of this exposure risk
assessment. The U.S. EPA or the third party registrant may decide that a pesticide we use in our
products will be limited or made unavailable to us. For example, in December 2000, the U.S. EPA
reached agreement with various parties, including manufacturers of the active ingredient diazinon,
regarding a phased withdrawal from retailers by December 2004 of residential uses of products
containing diazinon, also used in our lawn and garden products. We cannot predict the outcome or the
severity of the effect of their continuing evaluations.
In addition, the use of certain pesticide and fertilizer products is regulated by various local, state,
federal and foreign environmental and public health agencies. These regulations may include require-
ments that only certified or professional users apply the product or that certain products be used only
on certain types of locations, may require users to post notices on properties to which products have
been or will be applied, may require notification to individuals in the vicinity that products will be
applied in the future or may ban the use of certain ingredients. Even if we are able to comply with all
such regulations and obtain all necessary registrations, we cannot assure you that our products,
particularly pesticide products, will not cause injury to the environment or to people under all
circumstances. The costs of compliance, remediation or products liability have adversely affected
operating results in the past and could materially affect future quarterly or annual operating results.
The harvesting of peat for our growing media business has come under increasing regulatory and
environmental scrutiny. In the United States, state regulations frequently require us to limit our
harvesting and to restore the property to an agreed-upon condition. In some locations, we have been
required to create water retention ponds to control the sediment content of discharged water. In the
United Kingdom, our peat extraction efforts are also the subject of legislation.
In addition to the regulations already described, local, state, federal and foreign agencies regulate
the disposal, handling and storage of waste, air and water discharges from our facilities.
The adequacy of our current environmental reserves and future provisions is based on our operating
in substantial compliance with applicable environmental and public health laws and regulations and
several significant assumptions:
(cid:129) that we have identified all of the significant sites that must be remediated;
(cid:129) that there are no significant conditions of potential contamination that are unknown to us; and
(cid:129) that with respect to the agreed judicial consent order in Ohio, the potentially contaminated soil
can be remediated in place rather than having to be removed and only specific stream segments
will require remediation as opposed to the entire stream.
If there is a significant change in the facts and circumstances surrounding these assumptions or if
we are found not to be in substantial compliance with applicable environmental and public health laws
and regulations, it could have a material impact on future environmental capital expenditures and other
environmental expenses and our results of operations, financial position and cash flows.
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European Economic Conditions and Foreign Currency Exposures
We currently operate manufacturing, sales and service facilities outside of North America, particu-
larly in the United Kingdom, Germany, France and the Netherlands. In fiscal 2006, International net sales
accounted for approximately 15% of our total net sales. Accordingly, we are subject to risks associated
with operations in foreign countries, including:
(cid:129) fluctuations in currency exchange rates;
(cid:129) limitations on the remittance of dividends and other payments by foreign subsidiaries;
(cid:129) additional costs of compliance with local regulations; and
(cid:129) historically, in certain countries, higher rates of inflation than in the United States.
In addition, our operations outside the United States are subject to the risk of new and different
legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing
local operations and potentially adverse tax consequences. The costs related to our International
operations could adversely affect our operations and financial results in the future.
Restructuring Activities
In June 2005, we commenced a long-term strategic improvement plan, focused on improving organiza-
tional effectiveness, implementing better business processes and reducing selling, general and administrative
(“SG&A”) expenses. This reorganization places significant pressure on many SG&A functions to reduce
headcount and streamline activities. While management believes these efforts will ultimately generate even
stronger financial results, there can be no assurance that the plan will achieve all of its expected savings.
Cost Pressures
Our ability to manage our cost structure can be adversely affected by movements in commodity and
other raw material prices, such as those experienced in fiscal 2006. Market conditions may limit the
Company’s ability to raise selling prices to offset increases in our input costs. The uniqueness of our
technologies can limit our ability to locate alternative supplies for certain products. For certain materials,
new sources of supply may have to be qualified under regulatory standards, which can require additional
investment and delay bringing the product to market.
Manufacturing
We use a combination of internal and outsourced facilities to manufacture our products. We are
subject to the inherent risks in such activities, including product quality, safety, licensing requirements
and other regulatory issues, environmental events, loss or impairment of key manufacturing sites,
disruptions in logistics, labor disputes and industrial accidents. Furthermore, we are subject to natural
disasters and other factors over which the Company has no control.
Acquisitions
From time to time we make strategic acquisitions, including the October 2004 acquisition of Smith &
Hawken», the October 2005 acquisition of Rod McLellan Company (RMC), the November 2005 acquisition
of Gutwein (Morning Song»), the May 2006 acquisition of certain assets of Turf-Seed, Inc. and the June
2006 acquisition of certain assets of the Landmark Seed Company. Acquisitions have inherent risks,
such as obtaining necessary regulatory approvals, retaining key personnel, integration of the acquired
business, and achievement of planned synergies and projections. We have approximately $880 million
of goodwill and intangible assets as of September 30, 2006, primarily related to prior acquisitions.
Uncertainty regarding the future performance of the acquired businesses also results in the risk of future
impairment charges related to the associated goodwill and intangible assets.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As part of our ongoing business, we are exposed to certain market risks, including fluctuations in
interest rates, foreign currency exchange rates and commodity prices. Financial derivative and other
instruments are used to manage these risks. These instruments are not used for speculative purposes.
Interest Rate Risk
The Company had variable rate debt instruments outstanding at September 30, 2006 and 2005 that
are impacted by changes in interest rates. As a means of managing our interest rate risk on these debt
instruments, the Company enters into interest rate swap agreements to effectively convert certain
variable-rate debt obligations to fixed rates.
At September 30, 2006, the Company had outstanding interest rate swaps with major financial
institutions that effectively converted a portion of our British pound (GBP) and Euro dollar denominated
variable-rate debt to a fixed rate. The swaps agreements have a total U.S. dollar equivalent notional
amount of $108.2 million with three-year terms expiring November 2008. Under the terms of these
swaps, we paid fixed rates of 2.98% on Euro denominated swaps and 4.76% on GBP denominated
swaps. At September 30, 2005, we had no outstanding interest rate swaps.
The following table summarizes information about our derivative financial instruments and debt
instruments that are sensitive to changes in interest rates as of September 30, 2006 and 2005. For debt
instruments, the table presents principal cash flows and related weighted-average interest rates by
expected maturity dates. For interest rate swaps, the table presents expected cash flows based on
notional amounts and weighted-average interest rates by contractual maturity dates. Weighted-average
variable rates are based on implied forward rates in the yield curve at September 30, 2006 and 2005. A
change in our variable interest rate of 1% would have a $1.5 million impact on interest expense
assuming the $145.8 million of our variable-rate debt that had not been hedged via an interest rate
swap at September 30, 2006 was outstanding for the entire fiscal year. The information is presented in
U.S. dollars (in millions):
2006
Long-term debt:
Fixed rate debt
Average rate
Variable rate debt
Average rate
Interest rate derivatives:
Expected Maturity Date
2010
After
2008
Total
Fair
Value
$ — $200.0
$200.0
—
$253.8
6.625% 6.625%
— $ 253.8
$
$194.0
—
$253.8
4.4%
—
4.4%
—
1.3
—
Interest rate swaps based on Euro and GBP LIBOR
$ 1.3
$ — $
— $
1.3
$
Average rate
3.87%
—
—
3.87%
2005
Long-term debt:
Fixed rate debt
Average rate
Variable rate debt
Average rate
Expected
Maturity Date
2010
After
Total
Fair
Value
$ — $200.0
$200.0
$201.5
—
6.625% 6.625%
—
$166.2
$
3.52%
— $ 166.2
—
3.52%
$166.2
—
Excluded from the information provided above are $27.4 million and $27.3 million at September 30,
2006 and 2005, respectively, of miscellaneous debt instruments.
41
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The recapitalization plan announced on December 12, 2006, to return $750 million to shareholders
during the second quarter of fiscal 2007 will be financed by a restructuring of the Company’s principal
borrowing arrangements. Our Revolving Credit Agreement will be replaced with new senior secured $2.1
to $2.3 billion multicurrency credit facilities that will provide for revolving credit and term loans. As part
of the refinancing, we intend to repurchase the $200 million principal amount of 65⁄8% senior
subordinated notes outstanding.
Other Market Risks
Our market risk associated with foreign currency rates is not considered to be material. Through
fiscal 2006, we had only minor amounts of transactions that were denominated in currencies other than
the currency of the country of origin. We are subject to market risk from fluctuating market prices of
certain raw materials, including urea and other chemicals and paper and plastic products. Our objectives
surrounding the procurement of these materials are to ensure continuous supply and to minimize costs.
We seek to achieve these objectives through negotiation of contracts with favorable terms directly with
vendors. We have entered into arrangements to partially mitigate the effect of fluctuating fuel costs on
our Scotts LawnService» business and hedged a portion of our urea needs for fiscal 2007.
42
3960_fin.pdf
ANNUAL REPORT OF MANAGEMENT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial
reporting to provide reasonable assurance regarding the reliability of our financial reporting and the
preparation of financial statements for external purposes in accordance with accounting principles
generally accepted in the United States of America. Internal control over financial reporting includes
those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of The Scotts Miracle-Gro
Company and our consolidated subsidiaries; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America, and that receipts and expenditures of The
Scotts Miracle-Gro Company and our consolidated subsidiaries are being made only in accordance with
authorizations of management and directors of The Scotts Miracle-Gro Company and our consolidated
subsidiaries, as appropriate; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the assets of The Scotts Miracle-Gro
Company and our consolidated subsidiaries that could have a material effect on the consolidated
financial statements.
Management, with the participation of our principal executive officer and principal financial officer,
assessed the effectiveness of our internal control over financial reporting as of September 30, 2006, the
end of our fiscal year. Management based its assessment on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commis-
sion. Management’s assessment included evaluation of such elements as the design and operating
effectiveness of key financial reporting controls, process documentation, accounting policies and our
overall control environment. This assessment is supported by testing and monitoring performed under
the direction of management.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject
to the risk that controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of
internal control over financial reporting will provide only reasonable assurance with respect to financial
statement preparation.
Based on our assessment, management has concluded that our internal control over financial
reporting was effective as of September 30, 2006, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external reporting
purposes in accordance with accounting principles generally accepted in the United States of America.
We reviewed the results of management’s assessment with the Audit Committee of The Scotts Miracle-
Gro Company.
Our independent registered public accounting firm, Deloitte & Touche LLP, audited management’s
assessment and independently assessed the effectiveness of our internal control over financial reporting.
Deloitte & Touche LLP has issued an attestation report concurring with management’s assessment, as
stated in their report which appears herein.
/s/
JAMES HAGEDORN
James Hagedorn
President, Chief Executive Officer
and Chairman of the Board
Dated: December 13, 2006
/s/ DAVID C. EVANS
David C. Evans
Executive Vice President
and Chief Financial Officer
Dated: December 13, 2006
43
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company
Marysville, Ohio
We have audited the accompanying consolidated balance sheets of The Scotts Miracle-Gro Company
and Subsidiaries (the “Company”) as of September 30, 2006 and 2005, and the related consolidated
statements of operations, shareholders’ equity, and cash flows for the years then ended. These financial
statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits. The financial statements of the Company for
the year ended September 30, 2004 were audited by other auditors whose report, dated November 22,
2004, expressed an unqualified opinion on those statements.
We conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material respects, the financial
position of the Company as of September 30, 2006 and 2005, and the results of its operations and its
cash flows for the years then ended, in conformity with accounting principles generally accepted in the
United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of the Company’s internal control over financial
reporting as of September 30, 2006, based on the criteria established in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated December 13, 2006 expressed an unqualified opinion on management’s assessment of the
effectiveness of the Company’s internal control over financial reporting and an unqualified opinion on
the effectiveness of the Company’s internal control over financial reporting.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
December 13, 2006
44
3960_fin.pdf
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company
Marysville, Ohio
We have audited management’s assessment, included in the accompanying Annual Report of
Management on Internal Control Over Financial Reporting, that The Scotts Miracle-Gro Company and
Subsidiaries (the “Company”) maintained effective internal control over financial reporting as of Septem-
ber 30, 2006, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. The Company’s management is
responsible for maintaining effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion
on management’s assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was maintained in
all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating management’s assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed by, or under the
supervision of, the company’s principal executive and principal financial officers, or persons performing
similar functions, and effected by the company’s board of directors, management, and other personnel to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are being made only in
accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the
possibility of collusion or improper management override of controls, material misstatements due to
error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future periods are subject to the risk
that the controls may become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Company maintained effective internal control
over financial reporting as of September 30, 2006 is fairly stated, in all material respects, based on the
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of September 30, 2006, based on the
criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated financial statements as of and for the year ended
September 30, 2006 of the Company and our report dated December 13, 2006 expressed an unqualified
opinion on those financial statements.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
December 13, 2006
45
3960_fin.pdf
The Scotts Miracle-Gro Company
Consolidated Statements of Operations
for the fiscal years ended September 30, 2006, 2005 and 2004
(in millions, except per share data)
Net sales
Cost of sales
Restructuring and other charges
Gross profit
Operating expenses:
Selling, general and administrative
Impairment, restructuring and other charges
Other income, net
Income from operations
Costs related to refinancings
Interest expense
Income before income taxes
Income taxes
Income from continuing operations
Income from discontinued operations
Net income
Basic earnings per common share:
Income from continuing operations
Income from discontinued operations
Net income
Diluted earnings per common share:
Income from continuing operations
Income from discontinued operations
Net income
See Notes to Consolidated Financial Statements.
2006
2005
2004
$2,697.1
$2,369.3
$2,106.5
1,741.1
0.1
1,509.2
(0.3)
955.9
860.4
1,313.5
0.6
792.4
636.9
633.8
75.7
(9.2)
252.5
—
39.6
212.9
80.2
132.7
—
33.2
(7.5)
200.9
1.3
41.5
158.1
57.7
100.4
0.2
540.7
9.1
(10.2)
252.8
45.5
48.8
158.5
58.0
100.5
0.4
$ 132.7
$ 100.6
$ 100.9
$
$
$
$
1.97
—
1.97
1.91
—
1.91
$
$
$
$
1.51
—
1.51
1.47
—
1.47
$
$
$
$
1.55
0.01
1.56
1.51
0.01
1.52
46
3960_fin.pdf
The Scotts Miracle-Gro Company
Consolidated Statements of Cash Flows
for the fiscal years ended September 30, 2006, 2005 and 2004
(in millions)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$ 132.7
$ 100.6
$ 100.9
2006
2005
2004
Impairment of intangible assets
Costs related to refinancings
Stock-based compensation expense
Depreciation
Amortization
Deferred taxes
Gain on sale of property, plant and equipment
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable
Accrued taxes and liabilities
Restructuring reserves
Other non-current items
Other, net
Net cash provided by operating activities
INVESTING ACTIVITIES
Investment in available for sale securities
Redemption of available for sale securities
Payments on seller notes
Proceeds from sale of property, plant and equipment
Investment in property, plant and equipment
Investments in acquired businesses, net of cash acquired
Net cash used in investing activities
FINANCING ACTIVITIES
Borrowings under revolving and bank lines of credit
Repayments under revolving and bank lines of credit
Repayment of term loans
Proceeds from issuance of term loans
Redemption of 85⁄8% Senior Subordinated Notes
Proceeds from issuance of 65⁄8% Senior Subordinated Notes
Financing and issuance fees
Dividends paid
Payments on sellers notes
Purchase of common shares
Excess tax benefits from share-based payment arrangements
Cash received from exercise of stock options
Proceeds from termination of interest rate swaps
Net cash used in financing activities
Effect of exchange rate changes
Net decrease in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid, net of interest capitalized
Income taxes paid
See Notes to Consolidated Financial Statements.
66.4
—
15.7
51.0
16.0
(0.4)
(0.5)
(37.6)
(60.6)
(3.6)
34.3
(33.4)
(9.2)
2.0
9.6
182.4
—
—
—
1.3
(57.0)
(118.4)
(174.1)
746.9
(691.7)
—
—
—
—
—
(33.5)
(4.5)
(87.9)
6.2
17.6
—
(46.9)
6.5
(32.1)
80.2
$ 48.1
23.4
1.3
10.7
49.6
17.6
(13.6)
—
(37.9)
(15.8)
8.1
10.3
27.9
10.3
6.6
27.6
226.7
—
57.2
—
—
(40.4)
(77.7)
(60.9)
—
45.5
7.8
46.1
11.6
17.6
—
(1.9)
(14.0)
(16.9)
(18.7)
29.5
0.8
(5.8)
11.7
214.2
(121.4)
64.2
(12.3)
—
(35.1)
(8.2)
(112.8)
924.2
(736.4)
(399.0)
—
—
—
(3.6)
(8.6)
(6.9)
—
—
32.2
2.9
(195.2)
(6.0)
(35.4)
115.6
$ 80.2
648.6
(646.6)
(827.5)
900.0
(418.0)
200.0
(13.0)
—
—
—
—
23.5
—
(133.0)
(8.7)
(40.3)
155.9
$ 115.6
(38.2)
(60.3)
(39.9)
(64.0)
(50.9)
(34.7)
47
3960_fin.pdf
The Scotts Miracle-Gro Company
Consolidated Balance Sheets
September 30, 2006 and 2005
(in millions except per share data)
Current assets:
Cash and cash equivalents
Accounts receivable, less allowances of $11.3 in 2006 and
ASSETS
$11.4 in 2005
Inventories, net
Prepaid and other assets
Total current assets
Property, plant and equipment, net
Goodwill
Intangible assets, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt
Accounts payable
Accrued liabilities
Accrued taxes
Total current liabilities
Long-term debt
Other liabilities
Total liabilities
Commitments and contingencies (Notes 14, 15 and 16)
Shareholders’ equity:
Common shares and capital in excess of $.01 stated value
per share, shares issued and outstanding of 66.6 in 2006
and 67.8 in 2005
Retained earnings
Treasury shares, at cost; 1.5 shares
Accumulated other comprehensive loss
Total shareholders’ equity
Total liabilities and shareholders’ equity
See Notes to Consolidated Financial Statements.
2006
2005
$
48.1
$
80.2
380.4
409.2
104.3
942.0
367.6
458.1
424.7
25.2
323.3
324.9
59.4
787.8
337.0
432.9
439.5
21.7
$2,217.6
$2,018.9
$
6.0
$
11.1
200.4
269.1
20.7
496.2
475.2
164.5
1,135.9
509.1
690.7
(66.5)
(51.6)
1,081.7
$2,217.6
151.7
314.7
8.7
486.2
382.4
124.1
992.7
491.3
591.5
—
(56.6)
1,026.2
$2,018.9
48
3960_fin.pdf
The Scotts Miracle-Gro Company
Consolidated Statements of Shareholders’ Equity
for the fiscal years ended September 30, 2006, 2005, and 2004
(in millions)
Balance, September 30, 2003
Net income
Foreign currency translation
Unrecognized gain on derivatives, net of tax
Minimum pension liability, net of tax
Comprehensive income
Stock-based compensation awarded
Stock-based compensation forfeitures
Stock-based compensation expense
Issuance of common shares
Balance, September 30, 2004
Net income
Foreign currency translation
Unrecognized gain on derivatives, net of tax
Minimum pension liability, net of tax
Comprehensive income
Stock-based compensation awarded
Stock-based compensation forfeitures
Stock-based compensation expense
Cash dividends paid (12.5 cents per share)
Issuance of common shares
Balance, September 30, 2005
Net income
Foreign currency translation
FAS 123(R) reclassification
Minimum pension liability, net of tax
Comprehensive income
Stock-based compensation expense
Cash dividends paid (50 cents per share)
Treasury stock purchases
Treasury stock issuances
Issuance of common shares
Balance, September 30, 2006
Common Stock
Shares Amount
Capital in
Excess of
Stated Value
Deferred
Compensation
Treasury Stock
Retained
Earnings Shares Amount
Accumulated
Other
Comprehensive
Income/(loss)
64.1
$0.3
$398.4
$ (8.3)
$398.6
100.9
—
—
$(60.8)
(0.9)
1.0
2.9
1.6
65.7
0.3
2.1
67.8
0.3
12.2
(1.2)
33.6
443.0
15.1
(2.6)
47.7
503.2
(12.2)
1.2
8.9
(10.4)
(15.1)
2.6
10.7
(12.2)
(12.2)
12.2
15.7
(21.4)
23.5
499.5
100.6
—
—
(57.8)
4.1
2.1
(5.0)
(8.6)
591.5
132.7
(33.5)
—
—
(56.6)
(1.5)
6.5
2.0
(0.5)
(87.9)
21.4
Total
$ 728.2
100.9
(0.9)
1.0
2.9
103.9
8.9
33.6
874.6
100.6
4.1
2.1
(5.0)
101.8
10.7
(8.6)
47.7
1,026.2
132.7
(1.5)
—
6.5
137.7
15.7
(33.5)
(87.9)
—
23.5
0.3
68.1
$0.3
$508.8
$ —
$690.7
1.5
$(66.5)
$ (51.6)
$ 1,081.7
49
3960_fin.pdf
The Scotts Miracle-Gro Company
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Scotts Miracle-Gro Company (“Scotts Miracle-Gro”) and its subsidiaries (collectively, the “Com-
pany”) are engaged in the manufacture, marketing and sale of lawn and garden care products. The
Company’s major customers include home improvement centers, mass merchandisers, warehouse clubs,
large hardware chains, independent hardware stores, nurseries, garden centers, food and drug stores,
commercial nurseries and greenhouses, and specialty crop growers. The Company’s products are sold
primarily in North America and the European Union. We also operate the Scotts LawnService» business
which provides lawn and tree and shrub fertilization, insect control and other related services in the
United States and Smith & Hawken», a leading brand in the outdoor living and gardening lifestyle
category. Effective November 18, 2005, the Company entered the North America wild bird food category
with the acquisition of Gutwein & Co., Inc. (“Gutwein”).
Due to the nature of the lawn and garden business, the majority of shipments to retailers occur in
the Company’s second and third fiscal quarters. On a combined basis, net sales for the second and third
fiscal quarters generally represent 70% to 75% of annual net sales.
Restructuring Merger
On March 18, 2005, The Scotts Company consummated the restructuring of its corporate structure
into a holding company structure by merging The Scotts Company into a newly-created, wholly-owned,
second-tier Ohio limited liability company subsidiary, The Scotts Company LLC, pursuant to the
Agreement and Plan of Merger, dated as of December 13, 2004, by and among The Scotts Company, The
Scotts Company LLC and Scotts Miracle-Gro (the “Restructuring Merger”). As a result of the Restructuring
Merger, each of The Scotts Company’s common shares, without par value, issued and outstanding
immediately prior to the consummation of the Restructuring Merger was automatically converted into
one fully paid and nonassessable common share, without par value, of Scotts Miracle-Gro. Scotts
Miracle-Gro is the public company successor to The Scotts Company. Following the consummation of the
Restructuring Merger, The Scotts Company LLC is the successor to The Scotts Company and is a direct,
wholly-owned subsidiary of Scotts Miracle-Gro, the new parent holding company.
Organization and Basis of Presentation
The Company’s consolidated financial statements are presented in accordance with accounting
principles generally accepted in the United States of America. The consolidated financial statements
include the accounts of Scotts Miracle-Gro and all wholly-owned and majority-owned subsidiaries. All
intercompany transactions and accounts are eliminated in consolidation. The Company’s criteria for
consolidating entities is based on majority ownership (as evidenced by a majority voting interest in the
entity) and an objective evaluation and determination of effective management control.
Revenue Recognition
Revenue is recognized when title and risk of loss transfer, which generally occurs when products are
received by the customer. Provisions for estimated returns and allowances are recorded at the time
revenue is recognized based on historical rates and are periodically adjusted for known changes in
return levels. Shipping and handling costs are included in cost of sales. Scotts LawnService» revenues
are recognized at the time service is provided to the customer.
Under the terms of the Amended and Restated Exclusive Agency and Marketing Agreement (the
“Marketing Agreement”) between the Company and Monsanto, the Company, in its role as exclusive
agent performs certain functions, such as sales support, merchandising, distribution and logistics, and
incurs certain costs in support of the consumer Roundup» business. The actual costs incurred by the
Company on behalf of Roundup» are recovered from Monsanto through the terms of the Marketing
Agreement. The reimbursement of costs for which the Company is considered the primary obligator is
included in net sales.
50
3960_fin.pdf
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Promotional Allowances
The Company promotes its branded products through cooperative advertising programs with retailers.
Retailers also are offered in-store promotional allowances and rebates based on sales volumes. Certain
products are promoted with direct consumer rebate programs and special purchasing incentives. Promotion
costs (including allowances and rebates) incurred during the year are expensed to interim periods in
relation to revenues and are recorded as a reduction of net sales. Accruals for expected payouts under the
programs are included in the “Accrued liabilities” line in the Consolidated Balance Sheets.
Advertising
The Company advertises its branded products through national and regional media. Advertising
costs incurred during the year are expensed to interim periods in relation to revenues. All advertising
costs, except for external production costs, are expensed within the fiscal year in which such costs are
incurred. External production costs for advertising programs are deferred until the period in which the
advertising is first aired. Advertising expenses were $137.3 million in fiscal 2006, $122.5 million in fiscal
2005 and $105.0 million in fiscal 2004.
Scotts LawnService» promotes its service offerings primarily through direct mail campaigns. External
costs associated with these campaigns that qualify as direct response advertising costs are deferred and
recognized as advertising expense in proportion to revenues over a period not beyond the end of the
subsequent calendar year. Costs that are not direct advertising costs are expensed within the fiscal year
incurred on a monthly basis in proportion of net sales. The costs deferred at September 30, 2006 and
2005 were $5.6 million and $2.4 million, respectively.
Research and Development
All costs associated with research and development are charged to expense as incurred. Expense
for fiscal 2006, 2005 and 2004 was $35.1 million, $38.0 million and $34.4 million including registrations
of $8.2 million, $7.5 million and $6.8 million, respectively.
Environmental Costs
The Company recognizes environmental liabilities when conditions requiring remediation are proba-
ble and the amounts can be reasonably estimated. Expenditures which extend the life of the related
property or mitigate or prevent future environmental contamination are capitalized. Environmental
liabilities are not discounted or reduced for possible recoveries from insurance carriers.
Stock-Based Compensation Awards
In fiscal 2003, the Company began expensing prospective grants of employee stock-based compen-
sation awards in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, “Account-
ing for Stock-Based Compensation.” The Company adopted SFAS 123(R), “Share-Based Payment”
effective October 1, 2005, following the modified prospective application approach. The Company was
already in substantial compliance with SFAS 123(R) at the adoption date as SFAS 123(R) closely parallels
SFAS 123. The adoption of SFAS 123(R) did not have a significant effect on the Company’s results of
operations for the period ended September 30, 2006. The fair value of awards is expensed ratably over
the vesting period, generally three years, except for grants to members of the Board of Directors that
have a shorter vesting period.
The Company changed its fair value option pricing model from the Black-Scholes model to a
binomial model for all options granted on or after October 1, 2004. The fair value of options granted
prior to October 1, 2004, was determined using the Black-Scholes model. The Company believes the
binomial model considers characteristics of fair value option pricing that are not available under the
Black-Scholes model. Both the Black-Scholes model and the binomial model take into account a number
of variables such as volatility, risk-free interest rate, contractual term of the option, the probability that
the option will be exercised prior to the end of its contractual life, and the probability of termination or
retirement of the option holder in computing the value of the option. However, the binomial model uses
a more refined approach in applying those variables thereby improving the quality of the estimate of fair
value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings per Common Share
On November 9, 2005, the Company executed a 2-for-1 stock split to shareholders of record on
November 2, 2005. All share and per share information included in these consolidated financial
statements and notes thereto reflect this stock split for all periods presented.
Basic earnings per common share is computed based on the weighted-average number of common
shares outstanding each period. Diluted earnings per common share is computed based on the
weighted-average number of common shares and dilutive potential common shares (stock options,
restricted stock, performance shares and stock appreciation rights) outstanding each period.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with original maturities of three
months or less to be cash equivalents. The Company maintains cash deposits in banks which from time
to time exceed the amount of deposit insurance available. Management periodically assesses the
financial condition of the institutions and believes that any potential credit loss is minimal.
Investments
At September 30, 2004, the Company held investments consisting of adjustable rate notes issued
by a variety of borrowers (the “Notes”). The Notes were accounted for as “available for sale securities”
in accordance with SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The
Notes held at September 30, 2004, in the amount of $57.2 million, were redeemed on October 1, 2004.
Accounts Receivable and Allowances
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Allowances
reflect our best estimate of amounts in our existing accounts receivable that may not be collected due
to customer claims, the return of goods, or customer inability or unwillingness to pay. We determine the
allowance based on customer risk assessment and historical experience. We review our allowances
monthly. Past due balances over 90 days and in excess of a specified amount are reviewed individually
for collectibility. All other balances are reviewed on a pooled basis by type of receivable. Account
balances are charged off against the allowance when we feel it is probable the receivable will not be
recovered. We do not have any off-balance-sheet credit exposure related to our customers.
Inventories
Inventories are stated at the lower of cost or market, principally determined by the FIFO method.
Certain growing media inventories are accounted for by the LIFO method. Approximately 5% and 6% of
inventories were valued at the lower of LIFO cost or market at September 30, 2006 and 2005,
respectively. Inventories include the cost of raw materials, labor and manufacturing overhead. The
Company makes provisions for obsolete or slow-moving inventories as necessary to properly reflect
inventory at the lower of cost or market value. Reserves for excess and obsolete inventories were
$15.1 million and $16.3 million at September 30, 2006 and 2005, respectively.
The Company adopted the provisions of SFAS 151, “Inventory Costs,” in the first quarter of fiscal
2006. SFAS 151 amends ARB 43, Chapter 4, to clarify that abnormal amounts of idle facility expense,
freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges.
In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion
be based on the normal capacity of the production facilities. The Company has completed its evaluation
of the provisions of SFAS 151, and its adoption did not have a material impact on its financial position
or results of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill and Indefinite-lived Intangible Assets
In accordance with SFAS 142, goodwill and intangible assets determined to have indefinite lives are
not subject to amortization. Goodwill and indefinite-lived intangible assets are reviewed for impairment
by applying a fair-value based test on an annual basis or more frequently if circumstances indicate a
potential impairment. The Company conducts its annual impairment review of indefinite-lived tradenames
and goodwill during its first fiscal quarter. If it is determined that an impairment has occurred, an
impairment loss is recognized for the amount by which the carrying amount of the asset exceeds its
estimated fair value and classified as “Impairment, restructuring, and other charges” in the Consolidated
Statement of Operations.
Long-lived Assets
Property, plant and equipment, are stated at cost. Expenditures for maintenance and repairs are
charged to expense as incurred. When properties are retired or otherwise disposed of, the cost of the
asset and the related accumulated depreciation are removed from the accounts with the resulting gain
or loss being reflected in income from operations.
Depreciation of property, plant and equipment is provided on the straight-line method and is based
on the estimated useful economic lives of the assets as follows:
Land improvements
Buildings
Machinery and equipment
Furniture and fixtures
Software
10 — 25 years
10 — 40 years
3 — 15 years
6 — 10 years
3 — 8 years
Interest capitalized on capital projects amounted to $0.5 million and $0.3 million during fiscal 2006
and fiscal 2005, respectively. No interest was capitalized on capital projects in fiscal 2004.
Intangible assets with finite lives, and therefore subject to amortization, include technology
(e.g., patents), customer accounts, and certain tradenames. These intangible assets are being amortized
on the straight-line method over periods typically ranging from 10 to 25 years. The Company’s fixed
assets and intangible assets subject to amortization are required to be tested for recoverability under
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”, whenever events or
changes in circumstances indicate that its carrying amount may not be recoverable.
Internal Use Software
The Company accounts for the costs of internal use software in accordance with Statement of
Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.”
Accordingly, costs are expensed or capitalized depending on whether they are incurred in the preliminary
project stage, application development stage or the post-implementation/operation stage. As of Septem-
ber 30, 2006 and 2005, the Company had $29.4 million and $37.4 million, respectively, in unamortized
capitalized internal use computer software costs. Amortization of these costs was $10.7 million, $9.6 mil-
lion and $8.7 million during fiscal 2006, 2005 and 2004, respectively.
Translation of Foreign Currencies
For all foreign operations, the functional currency is the local currency. Assets and liabilities of
these operations are translated at the exchange rate in effect at each year-end. Income and expense
accounts are translated at the average rate of exchange prevailing during the year. Translation gains and
losses arising from the use of differing exchange rates from period to period are included in other
comprehensive income, a component of shareholders’ equity. Foreign currency transaction gains and
losses are included in the determination of net income and amounted to a loss of $0.5 million, a gain of
$2.1 million and a loss of $0.7 million in fiscal years 2006, 2005, and 2004, respectively.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Derivative Instruments
In the normal course of business, the Company is exposed to fluctuations in interest rates, the
value of foreign currencies, and the cost of commodities. A variety of financial instruments, including
forward and swap contracts, are used to manage these exposures. The Company’s objective in managing
these exposures is to better control these elements of cost and mitigate the earnings and cash flow
volatility associated with changes in the applicable rates and prices.
The Company has established policies and procedures that encompass risk-management philosophy
and objectives, guidelines for derivative-instrument usage, counterparty credit approval, and the
monitoring and reporting of derivative activity. The Company does not enter into derivative instruments
for the purpose of speculation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the amounts reported in the consolidated financial statements and accompanying 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.
New Accounting Pronouncements
Statement of Financial Accounting Standards No. 157 — Fair Value Measurements
In September 2006, the Financial Accounting Standards Board issued SFAS No. 157, “Fair Value
Measurements”. SFAS 157 defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The Company will be required to adopt SFAS 157 no
later than October 1, 2008, the beginning of its 2009 fiscal year. The Company has not yet determined
the effect, if any, that the adoption of SFAS 157 will have on its consolidated financial statements.
Statement of Financial Accounting Standards No. 158 — Employers’ Accounting For Defined Benefit
Pension And Other Postretirement Plans
The Financial Accounting Standards Board has issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB Statements No. 87, 88,
106, and 132(R).” SFAS 108 will require the Company to recognize the underfunded status of its defined
benefit postretirement plans as a liability in its statement of financial position and to recognize changes
in that funded status in the year in which the changes occur through comprehensive income. SFAS 158
does not change the way the Company measures plan assets and benefit obligations as of the date of
its balance sheet and in determining the amount of net periodic benefit cost.
The Company will be required to adopt the provisions of SFAS 158 as of September 30, 2007. As
disclosed in Note 7, Retirement Plans, the Company’s projected benefit obligation for its international
defined benefit plans exceeded the accumulated benefit obligation at September 30, 2006. As disclosed
in Note 8, Associate Medical Benefits, the Company’s accumulated plan benefit obligation for its post-
retirement medical plan exceeded the liability recorded at September 30, 2006. If the provisions of
SFAS 158 were adopted as of September 30, 2006, the Company would be required to record an
additional long-term liability of $26.3 million, an additional long-term deferred tax asset of $9.6 million,
and charge the accumulated other comprehensive loss component of shareholders’ equity for
$16.7 million.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIN 48 — Accounting For Uncertainty In Income Taxes — An Interpretation Of FASB Statement
No. 109
The Financial Accounting Standards Board has issued Interpretation (FIN) 48, “Accounting for
Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109.” This Interpretation clarifies
the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in
accordance with SFAS No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recogni-
tion threshold and measurement attribute for the financial statement recognition and measurement of a
tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and
transition.
The evaluation of a tax position in accordance with this Interpretation is a two-step process. The
first step is recognition: The enterprise determines whether it is more-likely-than-not that a tax position
will be sustained upon examination, including resolution of any related appeals or litigation processes,
based on the technical merits of the position. In evaluating whether a tax position has met the more-
likely-than-not recognition threshold, the enterprise should presume that the position will be examined
by the appropriate taxing authority that would have full knowledge of all relevant information. The
second step is measurement: A tax position that meets the more-likely-than-not recognition threshold is
measured to determine the amount of benefit to recognize in the financial statements. The tax position
is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon
ultimate settlement.
Tax positions that previously failed to meet the more-likely-than-not recognition threshold should be
recognized in the first subsequent financial reporting period in which that threshold is met. Previously
recognized tax positions that no longer meet the more-likely-than-not recognition threshold should be
derecognized in the first subsequent financial reporting period in which that threshold is no longer met.
The Company will be required to adopt the provisions of FIN 48 in respect of all the Company’s tax
positions as of October 1, 2007, the beginning of the 2008 fiscal year. The cumulative effect of applying
the provisions of the Interpretation will be reported as an adjustment to the opening balance of retained
earnings for the 2008 fiscal year. The Company has not completed its evaluation of FIN 48 and the effect
the adoption of the Interpretation will have on the Company’s consolidated financial statements. It is
possible that the adoption of this Interpretation will have a material effect on future results of
operations.
SEC Staff Accounting Bulletin (“SAB”) No. 108 — Quantifying Financial Statement
Misstatements
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin
(“SAB”) No. 108, “Quantifying Financial Statement Misstatements”. Due to diversity in practice among
registrants, the SEC staff in SAB 108 expresses its views regarding the process by which misstatements
in financial statements are evaluated for purposes of determining whether financial statement restate-
ment is necessary. The Company will be required to adopt SAB 108 in fiscal 2007. The Company is in the
process of evaluating SAB 108, but does not believe it will have a material impact on its financial
condition, results of operations or liquidity.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
INVENTORIES, NET:
Finished goods
Work-in-progress
Raw materials
PROPERTY, PLANT AND EQUIPMENT, NET:
Land and improvements
Buildings
Machinery and equipment
Furniture and fixtures
Software
Construction in progress
Less: accumulated depreciation
ACCRUED LIABILITIES:
Payroll and other compensation accruals
Advertising and promotional accruals
Restructuring accruals
Other
September 30,
2006
2005
(In millions)
$ 267.4
36.0
105.8
$ 409.2
$ 216.0
31.4
77.5
$ 324.9
$ 49.8
$ 39.6
144.6
401.8
39.2
79.7
22.5
737.6
(370.0)
$ 367.6
$ 53.7
126.8
6.4
82.2
$ 269.1
131.1
353.7
35.4
76.6
23.0
659.4
(322.4)
$ 337.0
$ 62.5
114.0
15.6
122.6
$ 314.7
OTHER NON-CURRENT LIABILITIES:
Accrued pension and postretirement liabilities
$ 93.8
$ 102.9
Legal and environmental reserves
Deferred tax liability
Other
4.2
49.2
17.3
3.3
4.5
13.4
$ 164.5
$ 124.1
2006
September 30,
2005
(in millions)
2004
ACCUMULATED OTHER COMPREHENSIVE LOSS:
Unrecognized gain (loss) on derivatives, net of tax of $(0.9),
$(1.2) and $0.2
Minimum pension liability, net of tax of $19.5, $23.7 and $22.7
Foreign currency translation adjustment
$ 1.8
(34.1)
$ 1.8
(40.6)
$ (0.3)
(35.6)
(19.3)
(17.8)
(21.9)
$(51.6)
$(56.6)
$ (57.8)
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. MARKETING AGREEMENT
Under the terms of the Marketing Agreement with Monsanto, the Company is Monsanto’s exclusive
agent for the domestic and international marketing and distribution of consumer Roundup» herbicide
products. Under the terms of the Marketing Agreement, the Company is entitled to receive an annual
commission from Monsanto in consideration for the performance of the Company’s duties as agent. The
Marketing Agreement also requires the Company to make annual payments to Monsanto as a contribu-
tion against the overall expenses of the consumer Roundup» business.
The annual gross commission under the Marketing Agreement is calculated as a percentage of the
actual earnings before interest and income taxes (EBIT) of the consumer Roundup» business, as defined
in the Marketing Agreement. Each year’s percentage varies in accordance with the terms of the Marketing
Agreement based on the achievement of two earnings thresholds and on commission rates that vary by
threshold and program year.
The annual contribution payment is defined in the Marketing Agreement as $20 million; however,
portions of the annual contribution payments for the first three years of the Marketing Agreement were
deferred. Through July 2, 2005, the Company recognized a periodic charge associated with the annual
contribution payments equal to the required payment for that period. The Company had not recognized a
charge for the portions of the contribution payments that were deferred until the time those deferred
amounts were due under the terms of the Marketing Agreement. Based on the then available facts and
circumstances, the Company considered this method of accounting to be appropriate. Factors considered
in this determination included the likely term of the Marketing Agreement, the Company’s ability to
terminate the Marketing Agreement without paying the deferred amounts, the Company’s assessment
that the Marketing Agreement could have been terminated at any balance sheet date without incurring
significant economic consequences as a result of such action and the fact that a significant portion of
the deferred amount could never have been paid, even if the Marketing Agreement was not terminated
prior to 2018, unless significant earnings targets were exceeded.
During the quarter ended July 2, 2005, the Company updated its assessment of the amounts
deferred and previously considered a contingent obligation under the Marketing Agreement. Based on
the strong performance and other economic developments surrounding the consumer Roundup»
business, the Company concluded that it was probable that the deferred contribution payment that
totaled $45.7 million as of July 2, 2005 would be paid. Since the recognition of this contingent obligation
was for previously deferred contribution payments under the Marketing Agreement, the Company
recorded this liability with a charge to net sales in the quarter ended July 2, 2005. This amount bore
interest at 8% until it was paid in October 2005. The deferred contribution balance was recorded as a
current liability at September 30, 2005.
Under the terms of the Marketing Agreement, the Company performs certain functions, primarily
manufacturing conversion, 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, for which the Company recognizes no gross profit or net income. 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 or net income. The related net sales and cost of sales were
$37.6 million, $40.7 million and $40.1 million for fiscal 2006, 2005 and 2004, respectively. The elements
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the net commission earned under Marketing Agreement included in “Net sales” for each of the three
years in the period ended September 30, 2006 are as follows:
Gross commission
Contribution expenses
Deferred contribution charge
Amortization of marketing fee
Net commission income (expense)
Reimbursements associated with marketing agreement
2006
2005
2004
$ 60.7
(20.0)
$ 67.0
(23.8)
$ 58.2
(26.4)
—
(0.8)
39.9
37.6
(45.7)
(2.8)
(5.3)
40.7
—
(3.3)
28.5
40.1
Total net sales associated with marketing agreement
$ 77.5
$ 35.4
$ 68.6
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 $33 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. Based on management’s current
assessment of the likely term of the Marketing Agreement, the useful life over which the marketing fee is
being amortized is 20 years. Prior to fiscal 2005, the marketing fee had been amortized over ten years.
The Marketing Agreement has no definite term except as it relates to the European Union countries.
With respect to the European Union countries, the term of the Marketing Agreement has been extended
through September 30, 2008 and may be renewed at the option of both parties for two additional
successive terms ending on September 30, 2015 and 2018, with a separate determination being made
by the parties at least six months prior to the expiration of each such term as to whether to commence
a subsequent renewal term. If Monsanto does not agree to the renewal term with respect to the
European Union countries, the commission structure will be renegotiated within the terms of the
Marketing Agreement. For countries outside of the European Union, the Marketing Agreement continues
indefinitely unless terminated by either party. The Marketing Agreement provides Monsanto with the right
to terminate the Marketing Agreement for an event of default (as defined in the Marketing Agreement) by
the Company or 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 for an event of default by the Company,
Monsanto is required to pay a termination fee to the Company that varies by program year. If Monsanto
terminates the Marketing Agreement upon a change of control of Monsanto or the sale of the consumer
Roundup» business prior to September 30, 2008, we will be entitled to a termination fee in excess of
$100 million. If we terminate the Marketing Agreement upon an uncured material breach, material fraud
or material willful misconduct by Monsanto, we will be entitled to receive a termination fee in excess of
$100 million if the termination occurs prior to September 30, 2008. The termination fee declines over
time from $100 million to a minimum of $16 million for terminations between September 30, 2008 and
September 30, 2018. If Monsanto was to terminate the Marketing Agreement for cause, we would not be
entitled to any termination fee, and we would lose all, or a significant portion, of the significant source
of earnings and overhead expense absorption the Marketing Agreement provides. Monsanto may also be
able to terminate the Marketing Agreement within a given region, including North America, without
paying us a termination fee if 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.
NOTE 4. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
2006 Charges
An impairment charge of $1.0 million was recorded in the first quarter related to a tradename no
longer in use in the U.K. consumer business. As further discussed in Note 6, an impairment charge of
$65.4 million primarily related to indefinite-lived tradenames in our European consumer business was
recorded in the fourth quarter as a result of the interim date impairment analysis of indefinite-lived
intangibles and goodwill. During fiscal 2006, the Company recorded $9.4 million of restructuring and
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other charges relating to the strategic improvement plan initiated in fiscal 2005, consisting primarily of
severance and related costs.
2005 Charges
During fiscal 2005, the Company recorded $9.5 million of restructuring and other charges. The
Company recognized restructuring costs relating primarily to the Company’s strategic improvement plan
designed to significantly improve long-term earnings through a sustained effort to reduce general and
administrative costs. Primarily in relation to the plan, the Company recognized $26.3 million of severance
and related costs, including curtailment charges relating to a pension plan and the retiree medical plan.
The Company anticipates that restructuring activities under the strategic improvement plan will continue
through fiscal 2007 and that total costs under the plan will be in the range of $33 million to $35 million.
In the first quarter of fiscal 2005, the Company recorded an impairment charge of $22.0 million for
indefinite-lived tradenames in our U.K. consumer business, reflecting a reduction in the value of the
business resulting primarily from the decline in the profitability of its growing media business and
unfavorable category mix trends.
Offsetting these charges was a reserve reversal to restructuring income of $7.9 million related to the
collection of outstanding accounts receivable due from Central Garden & Pet Company (Central Garden),
and a net settlement gain of $8.9 million was recorded relating to the lawsuit against Aventis.
2004 Charges
During fiscal 2004, the Company recorded $9.7 million of restructuring and other charges. Charges
related to our North America distribution restructuring were classified as cost of sales in the amount of
$0.6 million. Severance costs related to our International Profit Improvement Plan and the restructuring
of our International team amounted to $6.1 million. The restructuring of our Global Business Information
Services group amounted to $3.0 million and related primarily to severance and outside service costs.
The severance costs incurred in fiscal 2004 are related to the reduction of 75 administrative and
production employees.
The following is the detail of impairment, restructuring, and other charges and a rollforward of the
cash portion of the restructuring and other charges accrued in fiscal 2006, 2005, and 2004 (in millions).
Restructuring:
Severance
Facility exit costs
Central Garden litigation
Aventis litigation
Curtailment of pension and retiree medical plans
Other related costs
Asset impairment:
Other intangibles
Total restructuring and asset impairment expense
Amounts reserved for restructuring and other charges at beginning of year
Restructuring expense
Receipts, payments and other
2006
2005
2004
$ 8.5
—
$ 15.9
0.1
$ 7.6
1.0
—
—
—
0.9
9.4
(7.9)
(8.9)
4.9
5.4
9.5
—
—
—
1.1
9.7
66.4
23.4
—
$ 75.8
$32.9
$ 9.7
$ 15.6
9.4
$ 5.3
9.5
$ 4.5
9.7
(18.6)
0.8
(8.9)
Amounts reserved for restructuring and other charges at end of year
$ 6.4
$ 15.6
$ 5.3
The restructuring activities to which these costs apply are expected to be largely completed in fiscal
2007. The balance of the accrued charges at September 30, 2006 and 2005, are included in “Accrued
liabilities” on the Consolidated Balance Sheets.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. ACQUISITIONS
The Company continues to view strategic acquisitions as a means to enhance our strong core
businesses. The following recaps key acquisitions made over the last two years:
Date of Acquisition
June 2006
May 2006
November 2005
Assets Acquired
Certain brands and assets
of Landmark Seed
Company, a leading
producer and distributor
of quality professional
seed and turfgrasses.
Certain brands and assets
of Turf-Seed, Inc., a
leading producer of
quality commercial
turfgrasses, including
49% equity interest in
Turf-Seed Europe, which
distributes Turf-Seed’s
grass varieties throughout
the European Union and
other countries in the
region.
All the outstanding shares
of Gutwein & Co., Inc.
(“Gutwein”), a leader in
the growing North
America wild bird food
category.
Consideration
Cash of $6.2 million with
an additional $1 million
deferred to future
periods.
Cash of $10.0 million plus
assumed liabilities of
$4.5 million. Contingent
consideration based on
future performance of the
business due in 2012 that
may approximate
$15 million which would
be recorded as additional
purchase price.
$78.3 million in cash plus
assumed liabilities of
$4.7 million.
October 2005
October 2004
All the outstanding shares
of Rod McLellan Company
(“RMC”), a leading
branded producer and
marketer of soil and
landscape products in the
western U.S.
All the outstanding shares
of Smith & Hawken, Ltd.,
a leader in the outdoor
living and gardening
lifestyle category.
$20.5 million in cash plus
assumed liabilities of
$6.8 million.
$73.6 million in cash plus
assumed liabilities of
$13.9 million.
Reasons for the Acquisition
Transaction enhances the
Company’s position in the
global turfgrass seed
industry and compliments
the acquisition of Turf-
Seed, Inc.
Integration of Turf-Seed’s
extensive professional
seed sales and
distribution network with
the Company’s existing
presence and industry
leading brands in the
consumer seed market
will strengthen the
Company’s overall global
position in the seed
category.
Gutwein’s Morning Song»
branded products are
sold at leading mass
retailers, grocery, pet and
general merchandise
stores. This acquisition
gives the Company its
entry into the North
America wild bird food
category. We are
leveraging the strengths
of both organizations to
drive continued growth in
this category.
RMC compliments our
existing line of growing
media products and has
been integrated into that
business.
The power and flexibility
of the Smith & Hawken»
brand in outdoor living
fits our strategy to extend
our reach into adjacent
lawn and garden
categories and to own
industry leading brands in
every category in which
we compete.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Preliminary allocations of purchase price to assets acquired and liabilities assumed have been
recorded for all acquisitions made during fiscal 2006, based on estimated fair values at the date of the
acquisitions. The Company has finalized purchase accounting allocations for the RMC acquisition and
expects to complete the Gutwein allocation during the first quarter of fiscal 2007. Purchase price
allocations for the assets acquired from Turf-Seed, Inc. and Landmark Seed Company will be completed
during fiscal 2007.
On a pro forma basis, net sales for the year ended September 30, 2005 would have been
$2.48 billion (an increase of $114.5 million) had the acquisitions of RMC and Gutwein, and the brands
and assets from Turf-Seed and Landmark Seed occurred as of October 1, 2004. The pro forma reported
net income for the year ended September 30, 2005 would have increased by approximately $6.5 million
or $0.09 cents per diluted common share. Due to the timing of these acquisitions in fiscal 2006, pro
forma results would not be materially different from actual results for the year ended September 30,
2006.
On a pro forma basis, net sales for the years ended September 30, 2004, would have been
$2.26 billion (an increase of $148.5 million) had the acquisition of Smith & Hawken, Ltd. occurred as of
October 1, 2003. Reported net income on a pro forma basis would have decreased by approximately
$1.6 million, or $0.02 per common share, for the year ended September 30, 2004.
Scotts LawnService»
From fiscal 2004 through 2006, the Company’s Scotts LawnService» segment acquired 12 individual
lawn service entities for a total cost of approximately $14.8 million. The following table summarizes the
details of these transactions by fiscal year (dollar amounts in millions):
Number of individual acquisitions
Total cost
Portion of cost paid in cash
Notes issued and liabilities assumed
Goodwill
Other intangible assets
Working capital and property, plant and equipment
Fiscal Year
2005
3
$6.4
4.1
2.3
4.7
0.9
0.8
2006
5
$4.4
3.4
1.0
3.5
0.7
0.2
2004
4
$4.0
3.0
1.0
3.0
0.6
0.4
In addition to the above, the Company acquired the minority interest in the Scotts LawnService»
business during fiscal 2004 for $5.2 million ($2.0 million in cash and $3.2 million in seller notes). The
purchase price was allocated to goodwill in the amount of $5.1 million and other intangible assets in the
amount of $0.1 million. Substantially all of the recorded goodwill relating to the Scotts LawnService»
acquisitions is deductible for tax purposes. Goodwill is not being amortized for financial reporting
purposes. Other intangible assets consist primarily of customer lists and non-compete agreements, and
are being amortized for financial reporting purposes over a period of 7 and 3 years, respectively. These
acquisitions are deemed immaterial for pro forma disclosure.
During fiscal 2004, the Company acquired the minority interest in a subsidiary for $3.2 million, the
cost of which was allocated to intangible assets.
NOTE 6. GOODWILL AND INTANGIBLE ASSETS, NET
In accordance with SFAS 142, goodwill and indefinite-lived intangible assets are not subject to
amortization. Goodwill and indefinite-lived intangible assets are reviewed for impairment by applying a
fair-value based test on an annual basis or more frequently if circumstances indicate a potential
impairment. The Company performed its annual impairment analysis of indefinite-lived intangible assets
and goodwill during the first quarter of fiscal 2006, which resulted in an impairment charge of
$1.0 million associated with a tradename no longer in use in its European consumer business. The
European consumer business of our International reporting segment and Smith & Hawken experienced
significant off plan performance in 2006. Management believes the off plan performance of the European
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consumer business was driven largely by category declines in the European consumer markets. The off
plan performance of these two businesses was an indication that, more-likely-than-not, the fair values of
the related reporting units and indefinite-lived intangibles have declined below their carrying amount.
Accordingly, an interim impairment test was performed for the goodwill and indefinite-lived tradenames
of these reporting units during the fourth quarter. Management engaged an independent valuation firm
to assist in the interim impairment assessment. The value of all indefinite-lived tradenames was
determined using a royalty savings methodology similar to that employed when the associated
businesses were acquired but using updated estimates of sales, cash flow and profitability. The fair
value of the Company’s reporting units for purposes of goodwill testing was determined primarily by
employing a discounted cash flow methodology. As a result of the interim impairment test, the Company
recorded a $65.4 million non-cash impairment charge, $62.3 million of which was associated with
indefinite-lived tradenames that continue to be employed in the consumer portion of the International
reporting segment. The balance of the fiscal 2006 fourth quarter impairment charge was in our North
America segment and consisted of $1.3 million for a Canadian tradename being phased out and
$1.8 million related to goodwill of a pottery business we exited. The interim impairment testing of the
Smith & Hawken goodwill and indefinite-lived tradename did not indicate impairment.
In the first quarter of fiscal 2005, the Company completed its annual impairment analysis of
goodwill and indefinite-lived tradenames and determined that tradenames associated with the consumer
business in the United Kingdom were impaired. The fair value of the tradenames was determined using
the royalty savings approach described above. The reduction in the value of the tradenames has resulted
primarily from a decline in the profitability of the U.K. growing media business and unfavorable category
mix trends. As a result of this evaluation, an impairment charge of $22.0 million was recorded for certain
indefinite-lived tradenames associated with this business.
The following table presents goodwill and intangible assets as of September 30, 2006 and 2005
(dollars in millions).
September 30,
2006
September 30,
2005
Weighted
Average
Life
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortizable intangible
assets:
Technology
Customer accounts
Tradenames
Other
Total amortizable
intangible assets, net
Unamortizable intangible
assets:
Tradenames
Total intangible assets,
net
Goodwill
Total goodwill and
intangible assets, net
13
17
17
10
$ 54.3
$ 80.5
$ 11.3
$111.2
$(34.3)
(17.9)
(4.9)
(75.6)
$ 20.0 $ 49.4
49.1
11.3
108.6
62.6
6.4
35.6
$(29.8)
(11.6)
(4.2)
(71.5)
124.6
300.1
424.7
458.1
$882.8
$ 19.6
37.5
7.1
37.1
101.3
338.2
439.5
432.9
$872.4
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The changes to the net carrying value of goodwill by segment for the fiscal years ended
September 30, 2006 and 2005, are as follows (in millions):
Balance as of September 30, 2004
Increases due to acquisitions
Reclassifications
Other, primarily cumulative translation
Balance as of September 30, 2005
Increases due to acquisitions
Impairment
Other, primarily cumulative translation
North
America
$198.7
—
(8.0)
0.2
190.9
16.6
(1.8)
—
Scotts
LawnService»
International
Other/
Corporate
Total
$100.3
$118.9
$ —
$ 417.9
4.7
—
—
105.0
3.6
—
—
—
(2.7)
(3.8)
112.4
—
—
6.8
24.6
—
—
24.6
—
—
—
29.3
(10.7)
(3.6)
432.9
20.2
(1.8)
6.8
Balance as of September 30, 2006
$205.7
$108.6
$119.2
$24.6
$458.1
The total amortization expense for the years ended September 30, 2006, 2005 and 2004 was
$16.0 million, $17.6 million and $8.3 million, respectively. Amortization expense is estimated to be as
follows for the years ended September 30 (in millions):
2007
2008
2009
2010
2011
$13.8
13.7
12.0
10.1
9.6
NOTE 7. RETIREMENT PLANS
The Company sponsors a defined contribution profit sharing and 401(k) plan for substantially all
U.S. associates. The Company provides a base contribution equal to 2% of compensation up to 50% of
the Social Security taxable wage base plus 4% of remaining compensation. Associates also may make
pretax contributions from compensation that are matched by the Company at 100% of the associates’
initial 3% contribution and 50% of their remaining contribution up to 5%. The Company recorded charges
of $10.3 million, $10.8 million and $9.7 million under the plan in fiscal 2006, 2005 and 2004,
respectively.
The Company sponsors two defined benefit plans for certain U.S. associates. Benefits under these
plans have been frozen and closed to new associates since 1997. The benefits under the primary plan
are based on years of service and the associates’ average final compensation or stated amounts. The
Company’s funding policy, consistent with statutory requirements and tax considerations, is based on
actuarial computations using the Projected Unit Credit method. The second frozen plan is a non-qualified
supplemental pension plan. This plan provides for incremental pension payments so that total pension
payments equal amounts that would have been payable from the Company’s pension plan if it were not
for limitations imposed by the income tax regulations.
The Company sponsors defined benefit pension plans associated with its International businesses
in the United Kingdom, the Netherlands, Germany, and France. These plans generally cover all associates
of the respective businesses with retirement benefits primarily based on years of service and compensa-
tion levels. During fiscal 2004, the U.K. plans were closed to new participants, but existing participants
continue to accrue benefits. All newly hired associates of the U.K. business now participate in a new
defined contribution plan in lieu of the defined benefit plans.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables present information about benefit obligations, plan assets, annual expense,
assumptions and other information about the Company’s defined benefit pension plans (in millions):
Change in projected benefit obligation
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Curtailment / settlement loss (gain)
Actuarial loss (gain)
Benefits paid
Foreign currency translation
Curtailed Defined
Benefit Plans
International
Benefit Plans
2006
2005
2006
2005
$ 96.1
—
$ 92.1
—
$158.2
4.2
$130.9
3.3
5.2
—
—
(1.7)
(6.2)
—
5.2
—
2.3
2.0
(5.5)
—
7.7
0.9
(1.1)
3.4
(4.7)
10.1
7.1
1.1
—
24.8
(4.7)
(4.3)
Projected benefit obligation at end of year
$ 93.4
$ 96.1
$178.7
$158.2
Accumulated benefit obligation at end of year
$ 93.4
$ 96.1
$ 154.5
$143.3
Change in plan assets
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contribution
Plan participants’ contributions
Benefits paid
Foreign currency translation
$ 72.5
4.4
$ 69.6
8.3
$ 96.4
9.8
$ 80.0
14.9
0.2
—
(6.2)
—
0.1
—
(5.5)
—
7.2
0.9
(4.7)
6.5
7.6
1.1
(4.7)
(2.5)
Fair value of plan assets at end of year
$ 70.9
$ 72.5
$ 116.1
$ 96.4
Amounts recognized in the balance sheets consist of:
Funded Status — projected benefit obligation in excess of plan
assets as of September 30 measurement date
$(22.5)
$(23.6)
$(62.6)
$ (61.8)
Unrecognized losses
Net amount recognized
Additional minimum pension liability
Total amount accrued
29.3
6.8
32.1
8.5
(29.3)
(32.1)
46.8
(15.8)
(24.3)
45.4
(16.4)
(32.2)
$(22.5)
$(23.6)
$ (40.1)
$(48.6)
5.93% 5.63% 4.86% 4.68%
3.5%
n/a
3.5%
n/a
Weighted average assumptions used in development of projected
benefit obligation:
Discount rate
Rate of compensation increase
64
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Curtailed Defined
Benefit Plan
2005
2004
2006
International
Benefit Plans
2005
2004
2006
Components of net periodic benefit cost
Service cost
Interest cost
Expected return on plan assets
Net amortization
Net periodic benefit cost
Curtailment / settlement loss (gain)
$ — $ — $ — $ 4.2
7.7
(7.0)
2.0
5.2
(5.4)
2.6
5.1
(4.5)
2.6
5.2
(5.5)
2.2
1.9
—
2.4
2.3
3.2
—
6.9
(1.2)
$ 3.3
7.1
(6.3)
1.4
5.5
—
$ 4.2
6.6
(5.3)
1.8
7.3
(0.3)
Total benefit cost
$ 1.9
$ 4.7
$ 3.2
$ 5.7
$ 5.5
$ 7.0
Curtailed Defined
Benefit Plan
2005
2006
2004
2006
International
Benefit Plans
2005
2004
5.63% 5.75% 6.0% 4.68% 5.35% 5.25%
8.0% 8.0% 8.0% 6.9% 7.5% 7.5%
3.5% 3.7% 3.7%
n/a
n/a
n/a
Curtailed Defined
Benefit Plans
International
Benefit
Plans
60%
40%
66%
34%
—
63%
36%
1%
$ 4.1
—
$ 6.4
6.4
6.5
6.5
6.6
33.8
53%
47%
56%
43%
1%
61%
38%
1%
$ 7.0
0.9
$ 5.2
5.2
5.3
5.6
5.6
31.5
Weighted average assumptions used in development of
net periodic benefit cost:
Discount rate
Expected return on plan assets
Rate of compensation increase
Other Information:
Plan asset allocations:
Target for September 30, 2007:
Equity securities
Debt securities
September 30, 2006:
Equity securities
Debt securities
Other
September 30, 2005:
Equity securities
Debt securities
Other
Expected contributions in fiscal 2007:
Company
Employee
Expected future benefit payments:
2007
2008
2009
2010
2011
Total 2012 to 2016
65
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Investment Strategy:
The Company maintains target allocation percentages among various asset classes based on an
individual investment policy established for each of the various pension plans which are designed to
achieve long term objectives of return, while mitigating against downside risk and considering expected
cash requirements to fund benefit payments. Our investment policies are reviewed from time to time to
ensure consistency with our long-term objectives.
Basis for Long-Term Rate of Return on Asset Assumptions:
The Company’s expected long-term rate of return on asset assumptions are derived from studies
conducted by third parties. The studies include a review of anticipated future long-term performance of
individual asset classes and consideration of the appropriate asset allocation strategy given the
anticipated requirements of the plan to determine the average rate of earnings expected on the funds
invested to provide for benefits under the various pension plans. While the studies give appropriate
consideration to recent fund performance and historical returns, the assumptions primarily represent
expectations about future rates of return over the long term.
NOTE 8. ASSOCIATE MEDICAL BENEFITS
The Company provides comprehensive major medical benefits to certain of its retired associates
and their dependents. Substantially all of the Company’s domestic associates who were hired before
January 1, 1998 become eligible for these benefits if they retire at age 55 or older with more than ten
years of service. The plan requires certain minimum contributions from retired associates and includes
provisions to limit the overall cost increases the Company is required to cover. The Company funds its
portion of retiree medical benefits on a pay-as-you-go basis.
66
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the information about the retiree medical plan for domestic associates
(in millions):
Change in Accumulated Plan Benefit Obligation (APBO)
Benefit obligation at beginning of year
Service cost
Interest cost
Plan participants’ contributions
Loss on curtailment
Actuarial gain
Benefits paid
APBO at end of year
Change in plan assets
Fair value of plan assets at beginning of year
Employer contribution
Plan participants’ contributions
Benefits paid
Fair value of plan assets at end of year
Amounts recognized in the balance sheets consist of:
Funded status as of September 30 measurement date
Unrecognized prior loss
Accrued benefit cost (net amount recognized)
Discount rate used in development of APBO
Development of accrued benefit cost
Accrued benefit cost at beginning of year
Postretirement benefit cost
Curtailment charge
Employer contributions
Accrued benefit cost at end of year
Components of net periodic benefit cost
Service cost
Interest cost
Amortization of:
Actuarial loss
Prior service cost
Net periodic postretirement benefit cost
Curtailment charge
Total postretirement benefit cost
2006
2005
$ 34.7
0.7
$ 33.8
0.7
1.9
0.7
—
(2.3)
(2.5)
2.0
0.6
2.5
(2.1)
(2.8)
$ 33.2
$ 34.7
$ — $ —
1.8
0.7
(2.5)
2.2
0.6
(2.8)
$ — $ —
$(33.2)
$ (34.7)
3.7
6.1
$(29.5)
$(28.6)
5.86%
5.51%
$ 28.6
2.7
$ 25.0
3.3
—
(1.8)
2.5
(2.2)
$ 29.5
$ 28.6
2006
2005
2004
$ 0.7
$ 0.7
$ 0.5
1.9
2.0
2.0
0.1
—
2.7
—
0.6
—
3.3
2.5
0.4
(0.4)
2.5
—
$ 2.7
$ 5.8
$ 2.5
Discount rate used in development of net periodic benefit cost
5.51% 5.75% 6.00%
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the
“Act”) became law. The Act provides for a federal subsidy to sponsors of retiree health care benefit
plans that provide a prescription drug benefit that is at least actuarially equivalent to the benefit
established by the Act. On May 19, 2004, the FASB issued Staff Position No. 106-2, “Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act
of 2003” (the “FSP”). The FSP provides guidance on accounting for the effects of the Act, which the
Company adopted at the beginning of its fourth quarter of fiscal 2004. The APBO at September 30,
2006, has been reduced by a deferred actuarial gain in the amount of $6.0 million to reflect the effect
of the subsidy related to benefits attributed to past service. The amortization of the actuarial gain and
reduction of service and interest costs served to reduce net periodic post retirement benefit cost for
fiscal years 2006, 2005 and 2004 by $0.9, $0.2 and $0.1 million, respectively.
For measurement as of September 30, 2006, management has assumed that health care costs will
increase at an annual rate of 8.0% in fiscal 2007, decreasing 0.50% per year to an ultimate trend of
5.00% in 2013. A 1% increase in health cost trend rate assumptions would increase the APBO as of
September 30, 2006 and 2005 by $0.1 million and $0.2 million, respectively. A 1% decrease in health
cost trend rate assumptions would decrease the APBO as of September 30, 2006 and 2005 by
$0.2 million and $0.2 million, respectively. A 1% increase or decrease in the same rate would not have a
material effect on service or interest costs.
Estimated Future Benefit Payments
The following benefit payments under the plan are expected to be paid by the Company and the
retirees for the fiscal years indicated (in millions):
2007
2008
2009
2010
2011
2012-2016
Gross
Benefit
Payments
$ 3.6
Retiree
Contributions
$ (0.9)
Medicare
Part D
Subsidy
$(0.3)
Net
Company
Payments
$ 2.4
4.0
4.2
4.4
4.6
26.8
(1.0)
(1.1)
(1.3)
(1.5)
(10.9)
(0.3)
(0.4)
(0.4)
(0.4)
(2.8)
2.7
2.7
2.7
2.7
13.1
The Company also provides comprehensive major medical benefits to its associates. The Company
is self-insured for certain health benefits up to $0.3 million per occurrence per individual. The cost of
such benefits is recognized as expense in the period the claim is incurred. This cost was $21.8 million,
$17.9 million, and $17.0 million in fiscal 2006, 2005 and 2004, respectively.
NOTE 9. DEBT
Revolver
Senior Subordinated 65⁄8% Notes, due 2013
Notes due to sellers
Foreign bank borrowings and term loans
Other
Less current portions
68
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September 30,
2006
2005
(in millions)
$ 253.8
$ 166.2
200.0
200.0
15.4
2.8
9.2
481.2
6.0
8.1
6.8
12.4
393.5
11.1
$ 475.2
$382.4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Maturities of short- and long-term debt for the next five fiscal years and thereafter are as follows
(in millions):
2007
2008
2009
2010
2011
Thereafter
$ 6.0
4.6
1.2
254.6
0.4
214.4
$481.2
As of July 21, 2005, the Company entered into a Revolving Credit Agreement for the purpose of
providing funds for working capital and other general corporate purposes of the Company. The Revolving
Credit Agreement consists of an aggregate $1.05 billion multi-currency revolving credit commitment,
expiring July 21, 2010. Borrowings may be made in various currencies including United States dollars,
Euro dollars, British pounds sterling, Australian dollars and Canadian dollars. The Company may, at any
time prior to July 21, 2010, request additional revolving credit commitments from the lenders up to an
aggregate amount, when combined with the existing commitments, not to exceed $1.15 billion.
The Revolving Credit Agreement has several borrowing options, including interest rates that are
based on (i) a LIBOR rate plus a margin based on a Leverage Ratio (as defined) or (ii) the greater of the
prime rate or the Federal Funds Effective Rate (as defined) plus 1/2 of 1% plus a margin based on a
Leverage Ratio. Facility fees are also based on the Leverage Ratio of the Company and, as of
September 30, 2006, will accrue at 0.20% of the committed amounts per annum. The weighted average
interest rate on amounts outstanding under the Revolving Credit Agreement was 4.4% at September 30,
2006.
Swingline loans are also available under the Revolving Credit Agreement provided that (i) the
aggregate principal amount of swingline loans outstanding at any time may not exceed $100 million and
(ii) the sum of outstanding letters of credit, swingline loans and other loans made under the Revolving
Credit Agreement may not exceed $1.05 billion.
The terms of the Revolving Credit Agreement provide for customary representations and warranties
and affirmative covenants. The Revolving Credit Agreement also contains customary negative covenants
providing limitations, subject to negotiated carve-outs, on liens, contingent obligations, fundamental
changes, acquisitions, investments, loans and advances, indebtedness, restrictions on subsidiary
distributions, transactions with affiliates and officers, sales of assets, sale and leaseback transactions,
changing the Company’s fiscal year end, modification of specified debt instruments, negative pledge
clauses, entering into new lines of business, restricted payments (including dividend payments restricted
to $75 million annually based on the current Leverage Ratio of the Company) and redemption of
specified indebtedness. The Revolving Credit Agreement also requires the maintenance of a specified
Leverage Ratio and Minimum Interest Coverage (both as defined).
The terms of the Revolving Credit Agreement include customary events of default such as payment
defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a
defined change in control or the failure to observe the negative covenants and other covenants related
to the operation and conduct of the business of the Company and its subsidiaries. Upon an event of
default, the lenders may, among other things, terminate their commitments under the Revolving Credit
Agreement and declare any of the then outstanding loans due and payable immediately.
Borrowings under the Revolving Credit Agreement are guaranteed by Scotts Miracle-Gro and
substantially all of its domestic subsidiaries. Borrowings under the Revolving Credit Agreement are also
collateralized by a pledge by Scotts Miracle-Gro and its domestic subsidiaries of the capital stock of
substantially all of such domestic subsidiaries and a majority of the capital stock of certain foreign
subsidiaries that are first-tier subsidiaries of such domestic subsidiaries.
The 65⁄8% senior subordinated notes (“65⁄8% Notes”) were sold at par, pay interest semi-annually on
May 15 and November 15, have a ten-year maturity, and are guaranteed by certain current and future
69
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
domestic restricted subsidiaries of the Company (see Note 24). Such guarantees are unsecured senior
subordinated obligations of the Company. The 65⁄8% Notes may be called after November 2008, at a
premium to par value of 3.313%, with the call premium declining each year thereafter. The 65⁄8% Notes
contain covenants limiting or restricting the Company in certain types of transactions. Limitations or
restrictions affect transactions involving liens, contingent obligations, capital expenditures, acquisitions,
investments, loans and advances, indebtedness, subsidiary distributions, asset sales, sale and lease-
backs, and dividends. The 65⁄8% Notes also contain cross default provisions that may occur should the
Company default in the observance or performance of other indebtedness or covenants, causing the
obligations therein to become immediately due and payable prior to the stated maturity thereof upon
passing of a cure period.
The Company was in compliance with the terms of all borrowing agreements at September 30,
2006. See Note 22 for disclosure as to a recapitalization plan announced on December 12, 2006 to
return $750 million to shareholders that will require a restructuring of the Company’s principal long-term
financing arrangements.
NOTE 10. SHAREHOLDERS’ EQUITY
Preferred shares, no par value:
Authorized
Issued
Common shares, no par value, $.01 stated value per share
Authorized
Issued
2006
2005
(in millions)
0.2 shares
0.0 shares
0.2 shares
0.0 shares
100.0 shares
100.0 shares
68.1 shares
67.8 shares
In fiscal 1995, The Scotts Company merged with Stern’s Miracle-Gro Products, Inc. (Miracle-Gro). At
September 30, 2006, the former shareholders of Miracle-Gro, including Hagedorn Partnership L.P., owned
approximately 31% of Scotts Miracle-Gro’s outstanding common shares and, thus, have the ability to
significantly influence the election of directors and approval of other actions requiring the approval of Scotts
Miracle-Gro’s shareholders.
Under the terms of the Miracle-Gro merger agreement, the former shareholders of Miracle-Gro may not
collectively acquire, directly or indirectly, beneficial ownership of Voting Stock (as that term is defined in the
Miracle-Gro merger agreement) representing more than 49% of the total voting power of the outstanding
Voting Stock, except pursuant to a tender offer for 100% of that total voting power, which tender offer is
made at a price per share which is not less than the market price per share on the last trading day before
the announcement of the tender offer and is conditioned upon the receipt of at least 50% of the Voting
Stock beneficially owned by shareholders of Scotts Miracle-Gro other than the former shareholders of
Miracle-Gro and their affiliates and associates.
Scotts Miracle-Gro grants share-based awards annually to officers and other key employees of the
Company and non-employee directors. Historically, these awards primarily included options with exercise
prices equal to the market price of the underlying common shares on the date of grant with a term of
10 years. Scotts Miracle-Gro also has awarded stock appreciation rights (“SARs”) with a stated price
determined by the closing price of Scotts Miracle-Gro’s common shares on the date of grant. SARs result
in less dilution than option awards as the SAR holder receives a net share settlement upon exercise. In
recent years, the Company also has begun to grant awards of restricted stock and performance shares.
These share-based awards have been made under plans approved by the shareholders. Generally, in
respect of grants to employees, a three-year cliff vesting schedule is used for all share-based awards
unless decided otherwise by the Compensation and Organization Committee of the Board of Directors.
The Company uses newly issued common shares or treasury shares, if available, in conjunction with its
share-based compensation awards. Grants to non-employee directors typically vest in one year or less. A
maximum of 18 million common shares may be delivered for issuance under these plans. At Septem-
ber 30, 2006, approximately 5.1 million common shares are not subject to outstanding awards and are
available to underlie the grant of new share-based awards. Subsequent to September 30, 2006, Scotts
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Miracle-Gro granted a total of 991,600 share-based awards to key employees. These awards had an
estimated fair value of $19.9 million as of the date of grant.
The following is a recap of the share-based awards granted over the periods indicated:
Year Ended September 30,
2005
2004
2006
Key employees
Options
Stock appreciation rights
Restricted stock
Performance shares
Board of Directors — Options
Total share-based awards
835,640
—
184,595
30,000
126,000
965,600
—
101,000
118,000
775,500
—
147,000
152,500
1,176,235
1,213,600
1,046,000
Fair value at grant dates (in millions)
$
20.9
$
15.1
$
11.0
Total share-based compensation and the tax benefit recognized in compensation expense were as
follows for the periods indicated (in millions):
Share-based compensation
Tax benefit recognized
Year Ended September 30,
2005
$10.7
3.9
2006
$15.7
5.9
2004
$7.8
2.9
Had compensation expense been recognized for unvested stock options granted prior to the
Company’s adoption of the expense recognition provisions of SFAS 123 as of October 1, 2002, the
Company would have recorded net income and net income per share as follows (in millions, except per
share data):
Net income
Stock-based compensation expense included in reported net income, net of tax
Total stock-based employee compensation expense determined under fair value based
method for all awards, net of tax
Net income, as adjusted
Net income per share, as reported:
Basic
Diluted
Net income per share, as adjusted:
Basic
Diluted
For the Fiscal
Year Ended
September 30,
2004
$100.9
4.9
(7.1)
$ 98.7
$ 1.56
$ 1.52
$ 1.53
$ 1.48
The “as adjusted” amounts shown above are not necessarily representative of the impact on net
income in future periods.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Options/SARs
Aggregate option and stock appreciation right award activity consists of the following (options/SARs
in millions):
2006
Fiscal Year Ended September 30,
2005
2004
No. of
Options/SARs
6.4
1.0
(0.9)
(0.3)
6.2
3.8
WTD.
Avg.
Exercise
Price
$23.09
$ 43.58
$ 20.15
$ 37.44
$26.09
$20.38
No. of
Options/SARs
7.6
1.2
(2.1)
(0.3)
6.4
3.4
WTD.
Avg.
Exercise
Price
$ 19.87
$ 34.56
$ 15.99
$28.06
$23.09
$ 17.89
No. of
Options/SARs
8.2
1.2
(1.6)
(0.2)
7.6
4.6
WTD.
Avg.
Exercise
Price
$ 17.50
$ 29.41
$ 14.67
$24.28
$ 19.87
$ 16.97
Beginning balance
Granted
Exercised
Forfeited
Ending balance
Exercisable
The following summarizes certain information pertaining to option and stock appreciation right
awards outstanding and exercisable at September 30, 2006 (options/SARs in millions):
Range of
Exercise Price
$ 8.50 – $14.72
$15.00 – $17.38
$17.50 – $19.98
$20.07 – $25.62
$29.08 – $31.56
$32.58 – $40.53
$42.51 – $49.55
Awards Outstanding
WTD. Avg.
Remaining
Life
0.73
3.19
3.96
6.37
7.41
8.51
9.36
WTD. Avg.
Exercise
Price
$ 10.81
15.72
18.85
24.49
29.41
34.63
43.74
No. of
Options/
SARs
0.4
0.7
1.4
1.1
0.9
0.9
0.8
Awards Exercisable
No. of
Options/
SARS
0.4
0.7
1.4
1.1
—
0.1
0.1
Exercise
Price
$ 10.81
15.72
18.85
24.49
—
34.15
49.55
The intrinsic value of the options and stock appreciation right awards outstanding and exercisable
at September 30, were as follows (in millions):
6.2
$26.09
3.8
$20.38
Outstanding
Exercisable
2006
2005
2004
$114.1
91.6
$133.6
88.7
$92.8
69.5
The fair value of each award granted has been estimated on the grant date using the Binomial model
for fiscal 2006 and fiscal 2005 and the Black-Scholes option-pricing model for fiscal 2004 using the
assumptions noted in the following table. Expected market price volatility is based on implied volatilities
from traded options on Scotts Miracle-Gro’s common shares and historical volatility on the Scotts Miracle-
Gro’s common shares. Historical data, including demographic factors impacting historical exercise behavior,
is used to estimate option exercise and employee termination within the valuation model. The risk-free rate
for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
time of grant. The weighted average assumptions for those awards granted in fiscal 2006, fiscal 2005 and
fiscal 2004 are as follows:
Market price volatility
Risk-free interest rates
Expected dividend yield
Expected life of options/SARs
Estimated weighted-average fair value per
share of options/SARs
Restricted Stock
Aggregate restricted stock award activity is as follows:
Year Ended September 30,
2005
2006
2004
23.0%
4.4%
1.2%
6.19
23.9%
3.7%
0.0%
6.15
24.3%
3.3%
0.0%
6.20
$12.04
$10.57
$8.86
Balance September 30, 2004
Granted
Vested
Forfeited
Balance September 30, 2005
Granted (including 30,000 performance shares)
Vested
Forfeited
Balance September 30, 2006
No. of
Shares
30,000
101,000
(1,600)
(15,000)
114,400
214,595
(10,400)
(15,800)
302,795
WTD Avg.
Grant Date
Fair Value
per Share
$29.08
33.03
34.50
32.20
$ 32.07
43.43
41.17
42.51
$39.26
As of September 30, 2006, there was $14.2 million of total unrecognized compensation cost related
to non-vested share-based compensation arrangements. The unrecognized compensation cost is
expected to be recognized over a weighted-average period of 2.3 years. Unearned compensation is
amortized over the vesting period for the particular grant and is recognized as a component of “Selling,
general and administrative” expense within the Consolidated Statements of Operations.
The total intrinsic value of options exercised was $23.2 million, $41.7 million and $26.7 million for
fiscal 2006, fiscal 2005 and fiscal 2004, respectively. The total fair value of restricted stock vested was
$0.4 million and $0.1 million during fiscal 2006 and fiscal 2005, respectively. No restricted stock vested
in fiscal 2004.
Cash received from option exercises under all share-based payment arrangements for fiscal 2006
was $17.6 million. The tax benefit realized from the tax deductions from option exercises under the
share-based payment arrangements totaled $8.7 million for fiscal 2006.
NOTE 11. EARNINGS PER COMMON SHARE
The following table (in millions, except per share data) presents information necessary to calculate
basic and diluted earnings per common share. Basic earnings per common share are computed by
dividing net income by the weighted average number of common shares outstanding. Diluted earnings
per common share are computed by dividing net income by the weighted average number of common
shares outstanding plus all potentially dilutive securities. Options to purchase 0.15 million, 0.04 million
and 0.2 million common shares for the years ended September 30, 2006, 2005 and 2004, respectively,
were not included in the computation of diluted earnings per common share. These options were
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
excluded from the calculation because the exercise price of these options was greater than the average
market price of the common shares in the respective periods, and therefore, they were anti-dilutive.
Income from continuing operations
Income from discontinued operations
Net income
BASIC EARNINGS PER COMMON SHARE:
Weighted-average common shares outstanding
during the period
Income from continuing operations
Income from discontinued operations
Net income
DILUTED EARNINGS PER COMMON SHARE:
Weighted-average common shares outstanding
during the period
Potential common shares
Weighted-average number of common shares
outstanding and dilutive potential common
shares
Income from continuing operations
Income from discontinued operations
Net income
2006
$132.7
—
$132.7
67.5
$ 1.97
—
$ 1.97
67.5
1.9
69.4
$ 1.91
—
$ 1.91
Year Ended September 30,
2005
$100.4
0.2
$100.6
66.8
$ 1.51
—
$ 1.51
66.8
1.8
68.6
$ 1.47
—
$ 1.47
2004
$100.5
0.4
$100.9
64.7
$ 1.55
0.01
$ 1.56
64.7
1.9
66.6
$ 1.51
0.01
$ 1.52
Through September 30, 2006, Scotts Miracle-Gro had reacquired 2.0 million common shares to be
held in treasury at an aggregate cost of $87.9 million under its share repurchase program. Common
shares held in treasury totaling 0.5 million common shares have been reissued in support of share-
based compensation awards and employee purchases of common shares under the employee stock
purchase plan. See Note 22 for disclosure as to a recapitalization plan announced on December 12,
2006 to return $750 million to shareholders via a tender offer to repurchase up to $250 million of our
common shares and a special dividend.
NOTE 12. INCOME TAXES
The provision for income taxes consists of the following (in millions):
Currently payable:
Federal
State
Foreign
Deferred:
Federal
State
Foreign
3960_fin.pdf
Year Ended September 30,
2005
$ 55.9
7.0
8.4
(11.8)
(1.8)
—
$ 57.7
2004
$33.4
4.9
4.5
14.9
0.2
0.1
$58.0
2006
$68.3
6.0
6.3
(0.5)
1.6
(1.5)
$80.2
74
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The domestic and foreign components of income before taxes are as follows (in millions):
Domestic
Foreign
Income before taxes
Year Ended September 30,
2005
$170.0
(11.9)
$ 158.1
2006
$253.6
(40.7)
$212.9
2004
$143.2
15.3
$158.5
A reconciliation of the federal corporate income tax rate and the effective tax rate on income before
income taxes from continuing operations is summarized below (in millions):
Statutory income tax rate
Effect of foreign operations
State taxes, net of federal benefit
Change in state NOL & credit carryforwards
Change in valuation allowance
Other
Effective income tax rate
Year Ended September 30,
2005
2006
35.0%
(0.5)
2.3
0.1
—
0.8
37.7%
35.0%
0.2
1.8
1.9
—
(2.4)
36.5%
2004
35.0%
(0.4)
2.1
(0.8)
(0.6)
1.3
36.6%
The net current and non-current components of deferred income taxes recognized in the Consoli-
dated Balance Sheets are (in millions):
Net current deferred tax asset (classified with prepaid and other
assets)
Net non-current deferred tax liability (classified with other liabilities)
Net deferred tax asset
September 30,
2006
$ 52.6
(49.2)
$ 3.4
2005
$15.6
(4.5)
$ 11.1
The components of the net deferred tax asset are as follows (in millions):
DEFERRED TAX ASSETS
Inventories
Accrued liabilities
Postretirement benefits
Accounts receivable
Other
Gross deferred tax assets
Valuation allowance
Deferred tax assets
DEFERRED TAX LIABILITIES
Property, plant and equipment
Intangible assets
Other
Deferred tax liability
Net deferred tax asset
September 30,
2006
2005
$ 13.0
$ 11.4
39.0
33.9
3.3
21.0
110.2
(2.2)
108.0
(44.5)
(52.1)
(8.0)
54.7
38.4
6.5
18.3
129.3
(2.4)
126.9
(47.5)
(59.9)
(8.4)
(104.6)
$
3.4
(115.8)
$ 11.1
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Tax benefits relating to state net operating loss carryforwards were $4.5 million and $5.4 million at
September 30, 2006 and 2005, respectively. State net operating loss carryforward periods range from
5 to 20 years. Any losses not previously utilized within a specific state’s carryforward period will expire.
The tax benefits relating to state net operating loss carryforwards for 2006 include $2.2 million relating
to the acquisition of Smith & Hawken». As these losses may only be used against income of Smith &
Hawken», and cannot be used to offset income of the consolidated group, a full valuation allowance has
been placed on this portion. Tax benefit associated with state tax credits was $0.3 million and
$0.4 million at September 30, 2006 and 2005, respectively. Any credits not previously utilized will begin
to expire starting in fiscal year 2007.
In accordance with APB 23, deferred taxes have not been provided on unremitted earnings of certain
foreign subsidiaries and foreign corporate joint ventures of approximately $72.5 million that arose in
fiscal years ended on or before September 30, 2006, since such earnings have been permanently
reinvested.
The American Jobs Creation Act (the “AJCA”) provides a deduction of 85% on certain foreign
earnings repatriated. The Company was not able to take advantage of this deduction based upon its
current foreign income and tax rates. The AJCA also provided a deduction calculated as a percentage of
qualified income from manufacturing in the United States. This deduction was codified as Internal
Revenue Code §199. The percentage deduction increases from 3% to 9% over a 6-year period beginning
with the Company’s 2006 fiscal year. In December 2004, the FASB issued a new staff position providing
for this deduction to be treated as a special deduction, as opposed to a tax rate reduction, in
accordance with SFAS 109. The benefit of this deduction did not have a material impact on the
Company’s effective tax rate in fiscal 2006.
Management judgment is required in determining tax provisions and evaluating tax positions.
Management believes its tax positions and related provisions reflected in the consolidated financial
statements are fully supportable and appropriate. We establish reserves for additional income taxes that
may become due if our tax positions are challenged and not sustained. Our tax provision includes the
impact of recording reserves and changes thereto. The reserves for additional income taxes are based on
management’s best estimate of the ultimate resolution of the tax matter. Based on currently available
information, we believe that the ultimate outcomes of any challenges to our tax positions will not have a
material adverse effect on our financial position, results of operations or cash flows. Our tax provision
includes the impact of recording reserves and changes thereto.
NOTE 13. FINANCIAL INSTRUMENTS
A description of the Company’s financial instruments and the methods and assumptions used to
estimate their fair values is as follows:
Long-Term Debt
The fair value of the Company’s 65⁄8% Senior Subordinated Notes was estimated based on recent
trading information. The carrying amounts of borrowings under the Revolving Credit Agreement, are
considered to approximate their fair values.
Foreign Currency Swap Agreements
The Company uses foreign currency swap contracts to manage the exchange rate risk associated
with intercompany loans with foreign subsidiaries that are denominated in dollars. At September 30,
2006, the notional amount of outstanding contracts was $66.7 million with a fair value of $0.4 million.
The unrealized gain on the contracts approximates the unrealized loss on the intercompany loans
recognized by our foreign subsidiaries.
Interest Rate Swap Agreements
At September 30, 2006, the Company had outstanding interest rate swaps with major financial
institutions that effectively converted a portion of our variable-rate debt denominated in the Euro dollar
and British pound to a fixed rate. The swaps agreements have a total U.S. dollar equivalent notional
amount of $108.2 million with three-year terms expiring November 2008. Under the terms of these
76
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
swaps, the Company pays fixed rates of 2.98% on Euro denominated swaps and 4.76% on British pound
denominated swaps. At September 30, 2005, there were no outstanding interest rate swaps.
The Company enters into interest rate swap agreements as a means to hedge its variable interest
rate exposure on debt instruments. Since the interest rate swaps have been designated as hedging
instruments, their fair values are reflected in the Company’s Consolidated Balance Sheets. Net amounts
to be received or paid under the swap agreements are reflected as adjustments to interest expense.
Unrealized gains or losses resulting from valuing these swaps at fair value are recorded as elements of
accumulated other comprehensive loss within the Consolidated Balance Sheets. The fair value of the
swap agreements was 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.
Commodity Hedges
Company has entered into a strip of collars to partially mitigate the effect of fluctuating fuel costs
on the operating results of the Scotts LawnService» business through December 31, 2007. The collar is
being marked-to-market with an unrealized loss of approximately $0.2 million on the contracts recorded
as an element of other income or expense at September 30, 2006. The contracts are for approximately
3.2 million gallons of fuel.
The Company has also entered into hedging arrangements to fix the price of a portion of its urea
needs through March 31, 2007. The contracts are designated as hedges of the Company’s exposure to
future cash flows associated with the cost of urea. Unrealized gains or losses in the fair value of these
contracts are recorded to the accumulated other comprehensive loss component of shareholders’ equity.
Gains or losses upon realization will remain as a component of accumulated other comprehensive loss
until the related inventory is sold. Upon sale of the underlying inventory, the gain or loss will be
reclassified to cost of sales. The fair value of the 69,000 aggregate tons hedged at September 30, 2006
was nil.
Estimated Fair Values
The estimated fair values of the Company’s financial instruments are as follows for the fiscal years
ended September 30 (in millions):
Revolving loans under Revolving Credit Agreement
Senior Subordinated Notes
Foreign bank borrowings and term loans
Foreign currency swap agreements
Interest rate swap agreements
Commodity hedging instruments
2006
2005
Carrying
Amount
$ 253.8
200.0
2.8
0.4
1.3
(0.2)
Fair
Value
$253.8
194.0
2.8
0.4
1.3
(0.2)
Carrying
Amount
$ 166.2
200.0
6.8
2.4
—
—
Fair
Value
$166.2
201.5
6.8
2.4
—
—
Certain miscellaneous instruments included in the Company’s total debt balances for which fair
value determinations are not ascertainable have been excluded from the fair value table above. The
excluded items at September 30, 2006 and 2005 (in millions) are as follows:
Notes due to sellers
Other
NOTE 14. OPERATING LEASES
2006
$15.4
9.2
2005
$ 8.1
12.4
The Company leases certain property and equipment from third parties under various non-
cancelable operating lease agreements. Certain lease agreements contain renewal and purchase options.
The lease agreements generally provide that the Company pay taxes, insurance and maintenance
77
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
expenses related to the leased assets. Future minimum lease payments for non-cancelable operating
leases at September 30, 2006, are as follows (in millions):
2007
2008
2009
2010
2011
Thereafter
Total future minimum lease payments
$ 34.9
31.7
24.3
19.0
17.1
63.3
$190.3
The Company also leases certain vehicles (primarily cars and light trucks) under agreements that are
cancelable after the first year, but typically continue on a month-to-month basis until canceled by the
Company. The vehicle leases and certain other non-cancelable operating leases contain residual value
guarantees that create a contingent obligation on the part of the Company to compensate the lessor if
the leased asset cannot be sold for an amount in excess of a specified minimum value at the conclusion
of the lease term. If all such vehicle leases had been canceled as of September 30, 2006, the
Company’s residual value guarantee would have approximated $7.8 million. Other residual value
guarantees apply only at the conclusion of the non-cancelable lease term, as follows:
Scotts LawnService» vehicles
Corporate aircraft
Amount of
Guarantee
$11.8 million
12.2 million
Lease
Termination Date
2010
2008 and 2010
Rent expense for fiscal 2006, fiscal 2005 and fiscal 2004 totaled $63.3 million, $57.9 million, and
$44.8 million, respectively.
NOTE 15. COMMITMENTS
The Company has the following unconditional purchase obligations due during each of the next five
fiscal years that have not been recognized on the Consolidated Balance Sheet at September 30, 2006
(in millions):
2007
2008
2009
2010
2011
$ 215.9
77.8
67.8
37.3
10.9
$409.7
Purchase obligations primarily represent outstanding purchase orders for materials used in the
Company’s manufacturing processes. Purchase obligations also include commitments for warehouse
services, seed, and out-sourced information services.
NOTE 16. CONTINGENCIES
Management continually evaluates the Company’s contingencies, including various lawsuits and
claims which arise in the normal course of business, product and general liabilities, worker’s compensa-
tion, property losses and other fiduciary liabilities for which the Company is self-insured or retains a
high exposure limit. Self-insurance reserves are established based on actuarial estimates. 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 future
quarterly or annual operating results will not be materially affected by final resolution of these matters.
The following matters are the more significant of the Company’s identified contingencies.
78
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Environmental Matters
In 1997, the Ohio Environmental Protection Agency (the “Ohio EPA”) initiated an enforcement action
against the Company with respect to alleged surface water violations and inadequate treatment
capabilities at the Marysville, Ohio facility and seeking corrective action under the federal Resource
Conservation and Recovery Act. The action related to discharges from on-site waste water treatment and
several discontinued on-site disposal areas.
Pursuant to a Consent Order entered by the Union County Common Pleas Court in 2002, the
Company is actively engaged in restoring the site to eliminate exposure to waste materials from the
discontinued on-site disposal areas.
At September 30, 2006, $4.2 million was accrued for environmental and regulatory matters,
primarily related to the Marysville facility. Most of the accrued costs are expected to be paid in fiscal
2007; however, payments could be made for a period thereafter. While the amounts accrued are
believed to be adequate to cover known environmental exposures based on current facts and estimates
of likely outcome, the adequacy of these accruals is based on several significant assumptions:
(cid:129) that all significant sites that must be remediated have been identified;
(cid:129) that there are no significant conditions of contamination that are unknown to us; and
(cid:129) that with respect to the agreed judicial Consent Order in Ohio, the potentially contaminated soil
can be remediated in place rather than having to be removed and only specific stream segments
will require remediation as opposed to the entire stream.
If there is a significant change in the facts and circumstances surrounding these assumptions, it
could have a material impact on the ultimate outcome of these matters and our results of operations,
financial position and cash flows.
During fiscal 2006, fiscal 2005, and fiscal 2004, we have expensed approximately $2.4 million,
$3.7 million, and $3.3 million, respectively, for environmental matters.
AgrEvo Environmental Health, Inc. v. The Scotts Company (Southern District of New York)
The Scotts Company v. Aventis S.A. and Starlink Logistics, Inc. (Southern District of Ohio)
On September 30, 2005, all litigation among the aforementioned companies had been concluded
with the Company receiving a payment of approximately $10 million, of which amount $8.9 million is
recorded in “Impairment, restructuring and other charges” within the Consolidated Statements of
Operations (see Note 4).
Central Garden & Pet Company
The Scotts Company v. Central Garden, Southern District of Ohio
Central Garden v. Scotts & Pharmacia, Northern District of California
All litigation with Central Garden & Pet Company (“Central Garden”) has been concluded. On July 15,
2005, the Company received approximately $15 million in satisfaction of the judgment against Central
Garden. The Company has recognized the satisfaction of this judgment in its financial results for fiscal
2005 as follows (in millions):
Reversal of reserve against outstanding receivables due from Central Garden. The
reserve was initially established through a charge to restructuring and other charges
within selling, general and administrative expenses; therefore, the reversal of the
reserve has been classified in a like manner. (See Note 4)
Portion of judgment classified with other income, net
Total amount included in income from operations
Portion of judgment applied to unreserved accounts receivable due from Central Garden
Total judgment
$ 7.9
4.1
12.0
3.0
$15.0
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All pending litigation brought by Central Garden against the Company has been concluded including
the previously pending antitrust case in the Northern District of California in which the Company
prevailed.
U.S. Horticultural Supply, Inc. (F/K/A E.C. Geiger, Inc.)
On November 5, 2004, U.S. Horticultural Supply, Inc. (“Geiger”) filed suit against the Company in
the U.S. District Court for the Eastern District of Pennsylvania. The complaint alleges that the Company
conspired with another distributor, Griffin Greenhouse Supplies, Inc., to restrain trade in the horticultural
products market, in violation of Section 1 of the Sherman Antitrust Act. Geiger has not specified the
amount of monetary damages it is seeking. On June 2, 2006, the Court denied the Company’s motion to
dismiss the complaint. The Company is currently engaged in discovery relating to Geiger’s claim. The
deadline for fact discovery is March 8, 2007.
The Company intends to vigorously defend against Geiger’s claims. The Company believes that
Geiger’s claims are without merit and that the likelihood of an unfavorable outcome is remote. Therefore,
no accrual has been established related to this matter. However, the Company cannot predict the
ultimate outcome with certainty. If the above action is determined adversely to the Company, the result
could have a material adverse effect on the Company’s results of operations, financial position and cash
flows. Because Geiger has not specified an amount of monetary damages in the case (which may be
trebled under the antitrust statutes) and discovery has not yet concluded, any potential exposure that
the Company may face cannot be reasonably estimated at this time.
Other
The Company has been named a defendant in a number of cases alleging injuries that the lawsuits
claim resulted from exposure to asbestos-containing products, apparently based on the Company’s
historic use of vermiculite in certain of its products. The complaints in these cases are not specific about
the plaintiffs’ contacts with the Company or its products. The Company in each case is one of numerous
defendants and none of the claims seeks damages from the Company alone. The Company believes that
the claims against it are without merit and is vigorously defending them. It is not currently possible to
reasonably estimate a probable loss, if any, associated with the cases and, accordingly, no accrual or
reserves have been recorded in the consolidated financial statements. There can be no assurance that
these cases, whether as a result of adverse outcomes or as a result of significant defense costs, will not
have a material adverse effect on the Company’s financial condition, results of operations and cash
flows.
The Company is reviewing agreements and policies that may provide insurance coverage or
indemnity as to these claims and is pursuing coverage under some of these agreements, although there
can be no assurance of the results of these efforts.
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 adverse effect on
the Company’s results of operations, financial position or cash flows.
NOTE 17. CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of credit risk consist
principally of trade accounts receivable. The Company sells its consumer products to a wide variety of
retailers, including mass merchandisers, home centers, independent hardware stores, nurseries, garden
outlets, warehouse clubs and local and regional chains. Professional products are sold to commercial
nurseries, greenhouses, landscape services, and growers of specialty agriculture crops.
At September 30, 2006, 76% of the Company’s accounts receivable were due from customers
geographically located in North America. Approximately 79% of these receivables were generated from
the consumer business with the remaining 21% due from customers of Scotts LawnService», the
professional businesses (primarily distributors), Smith & Hawken», and Morning Song». Our top 3
customers within the consumer business accounted for 53% of total consumer accounts receivable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At September 30, 2005, 76% of the Company’s accounts receivable were due from customers
geographically located in North America. Approximately 83% of these receivable were generated from the
Company’s consumer business with the remaining 17% generated from customers of Scotts LawnService»
and the professional businesses (primarily distributors). Our top 3 customers within the consumer
business accounted for 80% of total consumer accounts receivable.
The remainder of the Company’s accounts receivable at September 30, 2006 and 2005, were
generated from customers located outside of North America, primarily retailers, distributors, nurseries
and growers in Europe. No concentrations of customers or individual customers within this group
account for more than 10% of the Company’s accounts receivable at either balance sheet date.
The Company’s three largest customers accounted for the following percentage of net sales in each
respective period:
2006
2005
2004
Largest
Customer
21.5%
23.5%
25.0%
2nd Largest
Customer
11.2%
11.9%
12.9%
3rd Largest
Customer
10.5%
9.7%
9.4%
Sales to the Company’s three largest customers are reported within the Company’s North America
segment. No other customers accounted for more than 10% of fiscal 2006, fiscal 2005 or fiscal 2004 net
sales.
NOTE 18. OTHER (INCOME) EXPENSE
Other (income) expense consisted of the following for the fiscal years ended September 30 (in
millions):
Royalty income
Gain from peat transaction
Franchise fees
Foreign currency (gains) losses
Legal settlement
Other, net
Total
2006
$(6.8)
(0.9)
(0.2)
(0.7)
—
(0.6)
2005
$ (6.5)
(0.8)
(0.3)
2.1
(4.0)
2.0
2004
$ (5.4)
(2.4)
(1.0)
(0.7)
—
(0.7)
$(9.2)
$ (7.5)
$(10.2)
NOTE 19. DISCONTINUED OPERATIONS
On September 30, 2004, the Company consummated the sale of the intangibles comprising its
U.S. professional growing media business for $6.0 million. A gain of $4.1 million was recognized after
associated goodwill in the amount of $1.9 million was written off. As a result of the sale, the Company
shut down a manufacturing facility and severed the associates employed in the business. In accordance
with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal
Of Long-Lived Assets,” these transactions have been accounted for as disposals of a component of the
Company. The gain on the sale of the intangibles and the results of operations of the component are
81
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
reported as discontinued operations in the accompanying Consolidated Statements of Operations. The
detail comprising the discontinued operations is as follows (in millions):
Net sales
Cost of sales
Gross profit
Selling, general and administrative
Gain on sale
Income from discontinued operations before income
taxes
Income taxes
2006
$—
—
—
—
—
—
—
Net income from discontinued operations
$—
2005
$ —
—
—
0.3
—
0.3
(0.1)
$ 0.2
2004
$ 17.7
(18.9)
(1.2)
(1.1)
4.1
1.8
(1.4)
$ 0.4
NOTE 20. VARIABLE INTEREST ENTITIES
In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation 46,
“Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51” (FIN 46). In December 2003,
the FASB modified FIN 46 to make certain technical corrections and address certain implementation
issues that had arisen. FIN 46 provides a new framework for identifying variable interest entities (VIEs)
and determining when a company should include the assets, liabilities, noncontrolling interests, and
results of operations of a VIE in its consolidated financial statements.
In general, a VIE is a corporation, partnership, limited liability company, trust, or any other legal
structure used to conduct activities or hold assets that either (1) has an insufficient amount of equity to
carry out its principal activities without additional subordinated financial support, (2) has a group of
equity owners that are unable to make significant decisions about its activities, or (3) has a group of
equity owners that do not have the obligation to absorb losses or the right to receive returns generated
by its operations.
FIN 46 requires a VIE to be consolidated if a party with an ownership, contractual or other financial
interest in the VIE (a variable interest holder) is obligated to absorb a majority of the risk of loss from
the VIE’s activities, is entitled to receive a majority of the VIE’s residual returns (if no party absorbs a
majority of the VIE’s losses), or both. A variable interest holder that consolidates the VIE is called the
primary beneficiary. Upon consolidation, the primary beneficiary generally must initially record all of the
VIE’s assets, liabilities and noncontrolling interests at fair value and subsequently account for the VIE as
if it were consolidated based on majority voting interest. FIN 46 also requires disclosures about VIEs
that the variable interest holder is not required to consolidate but in which it has a significant variable
interest.
The Company’s Scotts LawnService» business sells new franchise territories, primarily in small to
mid-size markets, under arrangements where a portion of the franchise fee is paid in cash with the
balance due under a promissory note. The Company believes that it may be the primary beneficiary for
certain of its franchisees initially, but ceases to be the primary beneficiary as the franchisees develop
their businesses and the promissory notes are repaid. At September 30, 2006, the Company had
approximately $1.5 million in notes receivable from such franchisees. The effect of consolidating the
entities where the Company may be the primary beneficiary for a limited period of time is not material to
either the Consolidated Statements of Operations or the Consolidated Balance Sheets.
NOTE 21. SEGMENT INFORMATION
The Company is divided into the following segments — North America, Scotts LawnService», Interna-
tional, and Corporate & Other. This division of reportable segments is consistent with how the segments
report to and are managed by senior management of the Company.
The North America segment primarily consists of the Lawns, Gardens, Growing Media, Ortho»
(Controls), Canada and North American Professional business groups as well as the North American portion
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the Roundup» commission. This segment manufactures, markets and sells dry, granular slow-release
lawn fertilizers, combination lawn fertilizer and control products, grass seed, spreaders, water-soluble,
liquid and continuous-release garden and indoor plant foods, plant care products, potting, garden and
lawn soils, pottery, mulches and other growing media products, pesticide products and a full line of
horticulture products. Products are marketed to mass merchandisers, home improvement centers, large
hardware chains, warehouse clubs, distributors, nurseries, garden centers and specialty crop growers in
the United States, Canada, Latin America, South America, Australia, and Asia/Pacific.
The Scotts LawnService» segment provides lawn fertilization, disease and insect control and other
related services such as core aeration and tree and shrub fertilization primarily to residential consumers
through company-owned branches and franchises. In our larger branches, an exterior barrier pest control
service also is offered.
The International segment provides products similar to those described above for the North America
segment to consumers primarily in Europe. The Other/Corporate segment consists of the Smith &
Hawken» business and corporate general and administrative expenses.
The following table (dollars in millions) presents segment financial information in accordance with
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information”. Pursuant to
SFAS No. 131, the presentation of the segment financial information is consistent with the basis used by
management (i.e., certain costs not allocated to business segments for internal management reporting
purposes are not allocated for purposes of this presentation).
2006
2005
2004
Net sales:
North America
Scotts LawnService»
International
Corporate & Other
Segment total
Roundup» deferred contribution charge
Roundup» amortization
Operating income (loss):
North America
Scotts LawnService»
International
Corporate & Other
Segment total
Roundup» deferred contribution charge
Roundup» amortization
Amortization
Impairment of intangibles
Restructuring and other charges
Depreciation & amortization
North America
Scotts LawnService»
International
Corporate & Other
$ 1,914.5
205.7
408.5
167.6
2,696.3
—
0.8
$ 2,697.1
$ 382.0
15.6
28.5
(81.8)
344.3
—
0.8
(16.8)
(66.4)
(9.4)
$1,668.1
159.8
430.3
159.6
2,417.8
(45.7)
(2.8)
$1,569.0
135.2
405.6
—
2,109.8
—
(3.3)
$2,369.3
$ 2,106.5
$ 343.9
13.1
34.3
(94.2)
297.1
(45.7)
(2.8)
(14.8)
(23.4)
(9.5)
$ 306.1
9.4
29.3
(70.6)
274.2
—
(3.3)
(8.3)
—
(9.8)
$ 252.5
$ 200.9
$ 252.8
$
$
30.7
3.8
13.1
19.4
67.0
$
$
30.9
3.9
11.5
20.9
67.2
$
$
24.9
3.9
12.6
16.3
57.7
83
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Capital expenditures:
North America
Scotts LawnService»
International
Corporate & Other
Long-lived assets:
North America
Scotts LawnService»
International
Corporate & Other
Total assets:
North America
Scotts LawnService»
International
Corporate & Other
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2006
2005
2004
$
$
21.4
1.5
9.2
3.0
35.1
$
$
24.8
3.0
11.4
17.8
57.0
$ 771.2
120.3
235.0
123.9
$ 1,250.4
$ 1,355.2
161.6
450.9
249.9
$ 2,217.6
$
$
22.6
2.1
3.5
12.2
40.4
$ 704.7
116.8
262.4
125.5
$1,209.4
$ 1,219.3
146.7
463.1
189.8
$2,018.9
Segment operating income (loss) represents earnings before amortization of intangible assets,
interest and taxes, since this is the measure of profitability used by management. Accordingly, the
Corporate & Other operating loss includes unallocated corporate general and administrative expenses
and certain other income/expense not allocated to the business segments.
Long-lived assets reported for the Company’s operating segments include goodwill and intangible
assets as well as property, plant and equipment within each segment. Total assets reported for the
Company’s operating segments include the intangible assets for the acquired businesses within those
segments. Corporate & Other assets primarily include deferred financing and debt issuance costs,
corporate intangible assets as well as deferred tax assets and Smith & Hawken» assets.
NOTE 22. SUBSEQUENT EVENT — RECAPITALIZATION
On December 12, 2006, it was announced that the Company intends to implement a recapitalization
plan that would expand upon and accelerate returns to shareholders beyond the current $500 million
share repurchase program (which has been canceled) by returning $750 million to the Company’s
shareholders. Pursuant to this plan, which has been approved in concept by the Board of Directors, the
Company intends to launch a “Dutch auction” tender offer in January 2007 to repurchase up to
$250 million of the Company’s common shares. Following the consummation of the tender offer and
subject to final Board approval, the Company intends to declare a special one-time cash dividend during
the second quarter of fiscal 2007, currently anticipated to be $500 million in the aggregate but subject
to revision based on spending for tendered common shares.
In connection with this recapitalization plan, a commitment letter has been received from JPMorgan
Chase, Bank of America and Citigroup, subject to the terms and conditions set forth therein, to provide
Scotts Miracle-Gro and certain of its subsidiaries the following loan facilities totaling in the aggregate up
to $2.1 billion: (a) a senior secured five-year term loan in the principal amount of $550.0 million and
(b) a senior secured five-year revolving loan facility in the aggregate principal amount of up to
$1.55 billion. The Company will have the ability to increase the aggregate amount of the revolving and
term loan facilities by $200 million allocated on a pro rata basis, subject to demand in the syndication
process. The new $2.1 billion senior secured credit facilities would replace the Company’s existing
$1.05 billion senior credit facility described in Note 9. In connection with the recapitalization plan,
84
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
proceeds from the new credit facilities are also intended to be used to repurchase the 65⁄8% senior
subordinated notes due 2013 in an aggregate principal amount of $200 million.
NOTE 23. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for fiscal 2006 and
fiscal 2005 (in millions, except per share data).
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
FISCAL 2006
Net sales
Gross profit
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss)
Basic earnings (loss) per common share
$249.5
53.5
(52.7)
—
(52.7)
$ 907.5
346.4
94.8
—
94.8
$1,048.0
406.0
133.3
—
133.3
Income (loss) from continuing operations
Income from discontinued operations
$ (0.78)
—
$ 1.40
—
Net income (loss) per common share
$ (0.78)
$ 1.40
Common shares used in basic EPS
calculation
Diluted earnings (loss) per common share
68.0
67.5
Income (loss) from continuing operations
Income from discontinued operations
$ (0.78)
—
$ 1.36
—
Net income (loss) per common share
$ (0.78)
$ 1.36
$
$
$
$
1.97
—
1.97
$492.1
150.0
(42.7)
—
(42.7)
$(0.64)
—
$(0.64)
67.5
66.8
1.92
—
1.92
$(0.64)
—
$(0.64)
Full Year
$2,697.1
955.9
132.7
—
132.7
$
$
$
$
1.97
—
1.97
67.5
1.91
—
1.91
Common shares and dilutive potential
common shares used in diluted EPS
calculation
FISCAL 2005
Net sales
Gross profit
Income (loss) from continuing operations
Income (loss) from discontinued operations
Net income (loss)
Basic earnings (loss) per common share
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss) per common share
Common shares used in basic EPS
calculation
Diluted earnings (loss) per common share
Income (loss) from continuing operations
Income from discontinued operations
Net income (loss) per common share
Common shares and dilutive potential
common shares used in diluted EPS
calculation
68.0
69.6
69.4
66.8
69.4
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
$246.5
61.1
(62.5)
(0.2)
(62.7)
$ (0.95)
—
$ (0.95)
$813.4
327.6
83.3
(0.1)
83.2
$ 1.25
—
$ 1.25
$901.2
333.8
88.1
0.4
88.5
$ 1.32
0.01
$ 1.33
$408.2
137.9
(8.5)
0.1
(8.4)
$ (0.13)
—
$ (0.13)
66.0
66.6
67.0
67.4
$ (0.95)
—
$ (0.95)
$ 1.22
—
$ 1.22
$ 1.29
—
$ 1.29
$ (0.13)
—
$ (0.13)
Full Year
$2,369.3
860.4
100.4
0.2
100.6
$
$
$
$
1.51
—
1.51
66.8
1.47
—
1.47
66.0
68.2
68.6
67.4
68.6
85
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Common stock equivalents, such as stock awards, are excluded from the diluted loss per share
calculation in periods where there is a net loss because their effect is anti-dilutive.
The Company’s business is highly seasonal with 70% to 75% of net sales occurring in the second
and third fiscal quarters combined.
Unusual items during fiscal 2006 consisted of impairment charges, restructuring and other costs,
and an insurance recovery. These items are reflected in the quarterly financial information as follows:
first quarter restructuring and other charges of $4.7 million and impairment of intangible assets of
$1.0 million; second quarter restructuring and other charges of $1.1 million; third quarter restructuring
and other charges of $1.1 million; and fourth quarter restructuring and other charges of $2.5 million and
impairment of intangible assets of $65.4 million. Also included in the first and second quarters are a
$1.0 million and $9.1 million benefit from an insurance recovery, respectively.
Unusual charges during fiscal 2005 consisted of the charge to record the deferred contribution
amounts under the Roundup» marketing agreement, impairment charges and restructuring and other
costs. These charges are reflected in the quarterly financial information as follows: first quarter
restructuring and other charges of $0.2 million and impairment of intangible assets of $22.0 million;
second quarter restructuring and other charges of $0.1 million; third quarter deferred contribution charge
under the Roundup» marketing agreement of $45.7 million; and fourth quarter restructuring and other
charges of $8.3 million and impairment of intangible assets of $1.4 million. Also included in the fourth
quarter is $3.6 million relating to an immaterial correction of prior periods’ amortization expense.
NOTE 24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
The 65⁄8% senior subordinated notes are general obligations of The Scotts Miracle-Gro Company and are
guaranteed by all of the existing wholly-owned, domestic subsidiaries and all future wholly-owned, significant
(as defined in Regulation S-X of the Securities and Exchange Commission) domestic subsidiaries of The Scotts
Miracle-Gro Company. These subsidiary guarantors jointly and severally guarantee the obligations of the
Company under the Notes. The guarantees represent full and unconditional general obligations of each
subsidiary that are subordinated in right of payment to all existing and future senior debt of that subsidiary
but are senior in right of payment to any future junior subordinated debt of that subsidiary.
The following information presents consolidating Statements of Operations and Statements of Cash
Flows for each of the three years in the period ended September 30, 2006, and Balance Sheets as of
September 30, 2006 and 2005.
86
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Scotts Miracle-Gro Company
Consolidating Statement of Operations
for the fiscal year ended September 30, 2006
(in millions)
Parent
Subsidiary
Guarantors
Non-
Guarantors
Eliminations
Consolidated
Net sales
Cost of sales
Restructuring and other charges
$
Gross profit
Operating expenses:
Selling, general and
administrative
Impairment, restructuring, and
other charges
Equity income in subsidiaries
Intercompany allocations
Other income, net
Income (loss) from operations
Interest expense
Income (loss) before income
taxes
Income taxes
Income (loss) from continuing
operations
Income from discontinued
operations
—
—
—
—
—
—
(146.0)
—
—
146.0
13.3
132.7
—
$
$ 2,184.7
1,400.6
—
784.1
$512.4
340.5
0.1
171.8
504.2
132.7
28.4
—
(21.2)
(7.6)
280.3
11.8
268.5
67.4
47.3
—
21.2
(1.6)
(27.8)
14.5
(42.3)
12.8
—
—
—
—
—
—
146.0
—
—
(146.0)
—
(146.0)
—
132.7
201.1
(55.1)
(146.0)
—
—
—
—
$2,697.1
1,741.1
0.1
955.9
636.9
75.7
—
—
(9.2)
252.5
39.6
212.9
80.2
132.7
—
Net income (loss)
$ 132.7
$ 201.1
$ (55.1)
$(146.0)
$ 132.7
87
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Scotts Miracle-Gro Company
Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 2006
(in millions)
Parent
Subsidiary
Guarantors
Non-
Guarantors
Eliminations
Consolidated
$ 132.7
$ 201.1
$ (55.1)
$(146.0)
$ 132.7
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss)
to net cash (used in) provided by
operating activities:
Impairment of intangible assets
Stock-based compensation expense
Depreciation
Amortization
Deferred taxes
Equity income in subsidiaries
Gain on sale of property, plant and
equipment
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable
Accrued taxes and liabilities
Restructuring reserves
Other non-current items
Other, net
Net cash (used in) provided by operating
activities
INVESTING ACTIVITIES
Proceeds from the sale of property, plant
and equipment
Investment in property, plant and
equipment
Investments in acquired businesses, net of
cash acquired
Net cash used in investing activities
FINANCING ACTIVITIES
Borrowings under revolving and bank lines
of credit
Repayments under revolving and bank lines
of credit
Dividends paid
Payments on seller notes
Purchase of common shares
Excess tax benefits from share-based
payment arrangements
Cash received from exercise of stock
options
Intercompany financing
Net cash (used in) provided by financing
activities
Effect of exchange rate changes
Net increase (decrease) in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
3960_fin.pdf
—
—
—
—
—
146.0
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(146.0)
—
—
—
—
—
0.1
—
—
0.3
24.2
15.7
44.0
9.5
1.1
—
(0.5)
(36.7)
(58.8)
(3.3)
32.9
(30.3)
(10.0)
2.0
1.7
(12.9)
192.6
—
—
(97.8)
(97.8)
1.3
(44.6)
(20.6)
(63.9)
42.2
—
7.0
6.5
(1.5)
—
—
(0.9)
(1.8)
(0.3)
1.4
(3.2)
0.8
—
7.6
2.7
—
(12.4)
—
(12.4)
—
417.8
329.1
—
(33.5)
—
(87.9)
(421.7)
—
(4.5)
—
—
6.2
17.6
214.5
110.7
—
—
—
—
—
(157.6)
(159.8)
(1.2)
(32.3)
42.5
$ 10.2
(270.0)
—
—
—
—
—
(56.9)
2.2
7.7
0.2
37.7
$ 37.9
$
88
66.4
15.7
51.0
16.0
(0.4)
—
(0.5)
(37.6)
(60.6)
(3.6)
34.3
(33.4)
(9.2)
2.0
9.6
182.4
1.3
(57.0)
(118.4)
(174.1)
746.9
(691.7)
(33.5)
(4.5)
(87.9)
6.2
17.6
—
(46.9)
6.5
(32.1)
80.2
$ 48.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Scotts Miracle-Gro Company
Consolidating Balance Sheet
As of September 30, 2006
(in millions)
Parent
Subsidiary
Guarantors
Non-
Guarantors
Eliminations
Consolidated
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid and other assets
Total current assets
Property, plant and equipment,
net
Goodwill
Intangible assets, net
Other assets
Investment in affiliates
Intracompany assets
$
—
—
—
—
—
—
—
—
8.8
973.8
299.2
ASSETS
$
10.2
292.9
310.1
84.1
697.3
317.8
333.4
343.6
14.8
—
—
$ 37.9
87.5
99.1
20.2
244.7
49.8
124.7
81.1
1.6
—
—
$
—
—
—
—
—
—
—
—
—
(973.8)
(299.2)
$
48.1
380.4
409.2
104.3
942.0
367.6
458.1
424.7
25.2
—
—
Total assets
$1,281.8
$1,706.9
$ 501.9
$(1,273.0)
$2,217.6
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt
Accounts payable
Accrued liabilities
Accrued taxes
Total current liabilities
Long-term debt
Other liabilities
Intracompany liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’
$
—
—
0.1
—
0.1
200.0
—
—
200.1
1,081.7
$
3.1
155.2
172.8
18.5
349.6
20.9
133.7
59.4
563.6
1,143.3
$
2.9
45.2
96.2
2.2
146.5
254.3
30.8
239.8
671.4
(169.5)
$
—
—
—
—
—
—
—
(299.2)
(299.2)
(973.8)
$
6.0
200.4
269.1
20.7
496.2
475.2
164.5
—
1,135.9
1,081.7
equity
$1,281.8
$1,706.9
$ 501.9
$(1,273.0)
$2,217.6
89
3960_fin.pdf
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Scotts Miracle-Gro Company
Consolidating Statement of Operations
for the fiscal year ended September 30, 2005
(in millions)
Net sales
Cost of sales
Restructuring and other charges
Gross profit
Operating expenses:
Selling, general and
administrative
Impairment, restructuring and
other charges
Equity income in subsidiaries
Intercompany allocations
Other income, net
Income from operations
Costs related to refinancings
Interest expense
Income (loss) before income taxes
Income taxes (benefit)
Income (loss) from continuing
operations
Income from discontinued
operations
Net income (loss)
Parent
$ —
—
—
—
Subsidiary
Guarantors
Non-
Guarantors
$1,850.8
1,172.9
(0.4)
678.3
$ 518.5
336.3
0.1
182.1
Eliminations
Consolidated
$ —
—
—
—
$2,369.3
1,509.2
(0.3)
860.4
—
494.1
139.7
—
—
(117.8)
—
—
117.8
1.3
15.9
100.6
—
8.0
—
(23.5)
(9.6)
209.3
—
16.5
192.8
64.1
100.6
128.7
25.2
—
23.5
2.1
(8.4)
—
9.1
(17.5)
(6.4)
(11.1)
—
117.8
—
—
(117.8)
—
—
(117.8)
—
(117.8)
633.8
33.2
—
—
(7.5)
200.9
1.3
41.5
158.1
57.7
100.4
—
$100.6
0.2
$ 128.9
—
$ (11.1)
—
$(117.8)
0.2
$ 100.6
90
3960_fin.pdf
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Scotts Miracle-Gro Company
Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 2005
(in millions)
Parent
Subsidiary
Guarantors
Non-
Guarantors
Eliminations
Consolidated
$ 100.6
$ 128.9
$ (11.1)
$(117.8)
$ 100.6
—
—
—
—
—
—
117.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ —
23.4
1.3
10.7
49.6
17.6
(13.6)
—
(37.9)
(15.8)
8.1
10.3
27.9
10.3
6.6
27.6
226.7
57.2
(40.4)
(77.7)
(60.9)
924.2
(736.4)
(399.0)
(3.6)
(8.6)
(6.9)
2.9
32.2
—
(195.2)
(6.0)
(35.4)
115.6
$ 80.2
—
1.3
—
—
—
—
(117.8)
—
—
—
—
—
—
—
—
—
—
10.7
42.7
9.8
(13.6)
—
(29.4)
(21.0)
(0.2)
19.3
28.1
11.4
5.9
32.3
(15.9)
224.9
57.2
(36.9)
(77.7)
(57.4)
23.4
—
—
6.9
7.8
—
—
(8.5)
5.2
8.3
(9.0)
(0.2)
(1.1)
0.7
(4.7)
17.7
—
(3.5)
—
(3.5)
174.3
749.9
(169.4)
—
—
—
(6.9)
(567.0)
—
—
—
—
—
—
32.2
(238.9)
(208.7)
—
(41.2)
83.7
$ 42.5
—
(185.3)
(2.4)
(6.0)
5.8
31.9
$ 37.7
—
—
—
—
—
—
(399.0)
(3.6)
(8.6)
—
2.9
—
424.2
15.9
—
—
—
—
91
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Impairment of intangible assets
Costs related to refinancings
Stock-based compensation expense
Depreciation
Amortization
Deferred taxes
Equity income in subsidiaries
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable
Accrued taxes and liabilities
Restructuring reserves
Other non-current items
Other, net
Net cash provided by (used in) operating
activities
INVESTING ACTIVITIES
Redemption of available for sale securities
Investment in property, plant and
equipment
Investments in acquired businesses, net of
cash acquired
Net cash used in investing activities
FINANCING ACTIVITIES
Borrowings under revolving and bank lines
of credit
Repayments under revolving and bank lines
of credit
Repayment of term loans
Financing and issuance fees
Dividends paid
Payments on seller notes
Proceeds from termination of interest rate
swaps
Cash received from exercise of stock
options
Intercompany financing
Net cash (used in) provided by financing
activities
Effect of exchange rate changes
Net increase (decrease) in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
3960_fin.pdf
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Scotts Miracle-Gro Company
Consolidating Balance Sheet
As of September 30, 2005
(in millions)
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventories, net
Prepaid and other assets
Total current assets
Property, plant and equipment,
net
Goodwill
Intangible assets, net
Other assets
Investment in affiliates
Intracompany assets
Parent
Subsidiary
Guarantors
Non-
Guarantors
Eliminations
Consolidated
ASSETS
$
$
10.6
1,660.5
—
42.5
240.3
232.5
40.1
555.4
294.7
314.9
315.4
10.8
—
606.9
$ 37.7
83.0
92.4
19.3
232.4
42.3
118.0
124.1
0.3
—
—
$
—
—
—
—
—
—
—
—
—
(1,660.5)
(606.9)
$
80.2
323.3
324.9
59.4
787.8
337.0
432.9
439.5
21.7
—
—
Total assets
$ 1,671.1
$2,098.1
$ 517.1
$ (2,267.4)
$2,018.9
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt
Accounts payable
Accrued liabilities
Accrued taxes
Total current liabilities
Long-term debt
Other liabilities
Intracompany liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’
$
$
200.0
444.9
644.9
1,026.2
4.1
110.2
222.5
5.2
342.0
16.1
102.2
—
460.3
1,637.8
$
7.0
41.5
92.2
3.5
144.2
166.3
21.9
162.0
494.4
22.7
$
—
—
—
—
—
—
—
(606.9)
(606.9)
(1,660.5)
$
11.1
151.7
314.7
8.7
486.2
382.4
124.1
—
992.7
1,026.2
equity
$ 1,671.1
$2,098.1
$ 517.1
$(2,267.49)
$2,018.9
92
3960_fin.pdf
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Scotts Miracle-Gro Company
Consolidating Statement of Operations
for the fiscal year ended September 30, 2004
(in millions)
Net sales
Cost of sales
Restructuring and other charges
Gross profit
Operating expenses:
Selling, general and
administrative
Impairment, restructuring and
other charges
Equity income in subsidiaries
Intercompany allocations
Other income, net
Income from operations
Costs related to refinancings
Interest expense (income)
Income before income taxes
Income taxes (benefit)
Income from continuing
operations
Income from discontinued
operations, net of tax
Net income
Subsidiary
Guarantors
Non-
Guarantors
Eliminations
Consolidated
Parent
$1,087.4
684.0
0.2
403.2
$ 544.2
328.6
—
215.6
$ 474.9
300.9
0.4
173.6
345.6
53.6
141.5
4.1
(107.2)
(27.7)
(1.9)
190.3
45.5
52.1
92.7
(8.2)
0.2
—
6.7
(4.5)
159.6
—
(13.1)
172.7
66.1
4.8
—
21.0
(3.8)
10.1
—
9.8
0.3
0.1
$
—
—
—
—
—
—
107.2
—
—
(107.2)
—
—
(107.2)
—
$2,106.5
1,313.5
0.6
792.4
540.7
9.1
—
—
(10.2)
252.8
45.5
48.8
158.5
58.0
100.9
106.6
0.2
(107.2)
100.5
—
$ 100.9
0.4
$ 107.0
—
$ 0.2
—
$(107.2)
0.4
$ 100.9
93
3960_fin.pdf
The Scotts Miracle-Gro Company
Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 2004
(in millions)
OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities:
Costs related to refinancings
Stock-based compensation expense
Depreciation
Amortization
Deferred taxes
Equity income in subsidiaries
Changes in assets and liabilities, net of
acquired businesses:
Accounts receivable
Inventories
Prepaid and other current assets
Accounts payable
Accrued taxes and liabilities
Restructuring reserves
Other non-current items
Other, net
Net cash provided by (used in) operating
activities
INVESTING ACTIVITIES
Investment in available for sale securities
Redemption of available for sale securities
Payment on seller notes
Investment in property, plant and
equipment, net
Investments in acquired businesses, net of
cash acquired
Net cash used in investing activities
FINANCING ACTIVITIES
Borrowings under revolving and bank lines
of credit
Repayments under revolving and bank lines
of credit
Repayment of term loans
Proceeds from issuance of term loans
Redemption of 85⁄8% Senior Subordinated
Notes
Proceeds from issuance of 65⁄8% Senior
Subordinated Notes
Financing and issuance fees
Cash received from exercise of stock
options
Intercompany financing
Net cash provided by (used in) financing
activities
Effect of exchange rate changes
Net increase (decrease) in cash
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Parent
Subsidiary
Guarantors
Non-
Guarantors
Eliminations
Consolidated
$ 100.9
$107.0
$
0.2
$(107.2)
$ 100.9
—
—
8.4
4.2
—
—
3.7
(17.7)
(11.4)
0.4
1.5
0.7
1.9
1.9
(6.2)
—
—
—
(9.2)
(3.2)
(12.4)
648.6
(646.6)
—
—
—
—
—
—
34.6
36.6
(8.7)
9.3
22.6
$ 31.9
—
—
—
—
—
107.2
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$
45.5
7.8
46.1
11.6
17.6
—
(1.9)
(14.0)
(16.9)
(18.7)
29.5
0.8
(5.8)
11.7
214.2
(121.4)
64.2
(12.3)
(35.1)
(8.2)
(112.8)
648.6
(646.6)
(827.5)
900.0
(418.0)
200.0
(13.0)
23.5
—
(133.0)
(8.7)
(40.3)
155.9
$ 115.6
45.5
7.8
26.4
0.4
17.6
(107.2)
14.6
10.9
(3.3)
(8.4)
25.2
0.6
(9.1)
6.6
—
—
11.3
7.0
—
—
(20.2)
(7.2)
(2.2)
(10.7)
2.8
(0.5)
1.4
3.2
128.5
91.9
(121.4)
64.2
(2.0)
—
—
(10.3)
(10.7)
(15.2)
(0.3)
(70.2)
(4.7)
(30.2)
—
—
(827.5)
900.0
(418.0)
200.0
(13.0)
23.5
27.0
(108.0)
—
(49.7)
132.1
$ 82.4
—
—
—
—
—
—
—
—
(61.6)
(61.6)
—
0.1
1.2
$ 1.3
94
3960_fin.pdf
ADDITIONAL ACCOUNTING MATTERS
As previously reported in the Current Report on Form 8-K/A filed by The Scotts Company, the public
company predecessor to The Scotts Miracle-Gro Company, on December 17, 2004, at a meeting held on
December 2, 2004, the Audit Committee of the Board of Directors of The Scotts Company dismissed
PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm and
approved the engagement of Deloitte & Touche LLP as the Company’s independent registered public
accounting firm. Deloitte & Touche LLP accepted the engagement as the Company’s independent
registered public accounting firm effective as of December 17, 2004.
As of the date of PricewaterhouseCoopers LLP’s dismissal as the Company’s independent registered
public accounting firm, PricewaterhouseCoopers LLP and the Company had an open consultation
regarding the appropriate accounting treatment for an approximately $3.0 million liability resulting from
a bonus pool related to an acquisition made during the first quarter of the Company’s 2005 fiscal year.
At the time of their dismissal, PricewaterhouseCoopers LLP did not have sufficient information to reach a
conclusion on the appropriate accounting for this matter. Since this matter was not resolved prior to
PricewaterhouseCoopers LLP’s dismissal, this matter was considered a reportable event under
Item 304(a)(1)(v)(D) of SEC Regulation S-K.
Based on a thorough review of the facts and circumstances, and relevant accounting literature
regarding this matter, the Company determined that this liability should be recorded on the opening
balance sheet of Smith & Hawken». This liability was based on an incentive agreement between the
prior owners of Smith & Hawken» and their employees, whereby a portion of the purchase price was to
be paid to the employees upon the sale of the business. No post-sale service was required in order for
the employees to earn this bonus; therefore, this was considered a liability assumed by the Company as
of the purchase date and not an expense related to post-acquisition service.
GOVERNANCE DOCUMENTS
In accordance with the requirements of Section 303A.10 of the New York Stock Exchange’s Listed
Company Manual, the Board of Directors of the Registrant has adopted a Code of Business Conduct and
Ethics covering the members of the Registrant’s Board of Directors and associates (employees) of the
Registrant and its subsidiaries, including, without limitation, the Registrant’s principal executive officer,
principal financial officer and principal accounting officer. The Registrant intends to disclose the
following on its Internet website located at http://investor.scotts.com within four business days following
their occurrence: (A) the date and nature of any amendment to a provision of its Code of Business
Conduct and Ethics that (i) applies to the Registrant’s principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing similar functions, (ii) relates to
any element of the code of ethics definition enumerated in Item 406(b) of SEC Regulation S-K, and (iii) is
not a technical, administrative or other non-substantive amendment; and (B) a description (including the
nature of the waiver, the name of the person to whom the waiver was granted and the date of the
waiver) of any waiver, including an implicit waiver, from a provision of the Code of Business Conduct
and Ethics to the Registrant’s principal executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions, that relates to one or more of the elements
of the code of ethics definition set forth in Item 406(b) of SEC Regulation S-K.
The text of the Code of Business Conduct and Ethics, the Registrant’s Corporate Governance
Guidelines, the Audit Committee charter, the Governance and Nominating Committee charter, the
Compensation and Organization Committee charter and the Innovation & Technology Committee charter
are posted under the “governance” link on the Registrant’s Internet website located at
http://investor.scotts.com. Interested persons may also obtain copies of each of these documents
without charge by writing to The Scotts Miracle-Gro Company, Attention: Corporate Secretary, 14111
Scottslawn Road, Marysville, Ohio 43041.
95
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3960_fin.pdf
2 0 0 6 A N N U A L R E P O R T
A History of Leadership
in Lawn and Garden
14111 Scottslawn Road
Marysville, Ohio 43041
937.644.0011
www.scotts.com
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