UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

COMMISSION FILE NUMBER: 001-11593

THE SCOTTS MIRACLE-GRO COMPANY

(Exact name of registrant as specified in its charter)

OHIO		31-1414921
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
14111 SCOTTSLAWN ROAD,
MARYSVILLE, OHIO		43041
(Address of principal executive offices)		(Zip Code)

(937) 644-0011
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer þ		Accelerated filero		Non-accelerated filer o		oSmaller reporting company o
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

Class		Outstanding at May 6, 2011
Common Shares, $0.01 stated value, no par value		64,966,209 common shares

 

 

THE SCOTTS MIRACLE-GRO COMPANY
INDEX

		PAGE NO.
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Condensed, Consolidated Statements of Operations — Three and six months ended April 2, 2011 and April 3, 2010			3
Condensed, Consolidated Statements of Cash Flows — Six months ended April 2, 2011 and April 3, 2010			4
Condensed, Consolidated Balance Sheets — April 2, 2011, April 3, 2010 and September 30, 2010			5
Notes to Condensed, Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			32
Item 3. Quantitative and Qualitative Disclosures about Market Risk			41
Item 4. Controls and Procedures			41
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings			41
Item 1A. Risk Factors			42
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			42
Item 5. Other Information			43
Item 6. Exhibits			43
Signatures			44
Index to Exhibits			45
Exhibit 10.7
Exhibit 10.11
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

ITEM 1.		FINANCIAL STATEMENTS

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED STATEMENTS OF OPERATIONS

(IN MILLIONS, EXCEPT PER SHARE DATA)

(UNAUDITED)

		THREE MONTHS ENDED								SIX MONTHS ENDED
		APRIL 2,				APRIL 3,				APRIL 2,				APRIL 3,
		2011				2010				2011				2010
Net sales		$	1,129.6			$	1,050.7			$	1,359.8			$	1,303.1
Cost of sales			665.6				635.1				845.9				833.8
Cost of sales — product registration and recall matters			1.3				0.6				2.1				1.5
Gross profit			462.7				415.0				511.8				467.8
Operating expenses:
Selling, general and administrative			216.2				216.7				359.4				343.0
Product registration and recall matters			1.2				1.1				2.1				2.8
Other (income) expense, net			(0.3	)			0.5				(0.8	)			(5.7	)
Income from operations			245.6				196.7				151.1				127.7
Interest expense			13.8				14.1				23.3				23.8
Income from continuing operations before income taxes			231.8				182.6				127.8				103.9
Income tax expense from continuing operations			83.2				68.4				45.9				39.8
Income from continuing operations			148.6				114.2				81.9				64.1
Income (loss) from discontinued operations, net of tax			29.0				4.3				27.8				(3.3	)
Net income		$	177.6			$	118.5			$	109.7			$	60.8
BASIC INCOME PER COMMON SHARE:
Income from continuing operations		$	2.26			$	1.72			$	1.24			$	0.97
Income (loss) from discontinued operations			0.44				0.07				0.42				(0.05	)
Basic net income per common share		$	2.70			$	1.79			$	1.66			$	0.92
Weighted-average common shares outstanding during the period			65.8				66.2				66.1				66.0
DILUTED INCOME PER COMMON SHARE:
Income from continuing operations		$	2.20			$	1.69			$	1.21			$	0.95
Income (loss) from discontinued operations			0.43				0.07				0.41				(0.05	)
Diluted net income per common share		$	2.63			$	1.76			$	1.62			$	0.90
Weighted-average common shares outstanding during the period plus dilutive potential common shares			67.6				67.4				67.7				67.2
Dividends declared per common share		$	0.250			$	0.125			$	0.500			$	0.250

See notes to condensed, consolidated financial statements

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED STATEMENTS OF CASH FLOWS

(IN MILLIONS)

(UNAUDITED)

		SIX MONTHS ENDED
		APRIL 2,				APRIL 3,
		2011				2010
OPERATING ACTIVITIES
Net income		$	109.7			$	60.8
Adjustments to reconcile net income to net cash used in operating activities:
Share-based compensation expense			10.8				8.2
Depreciation			24.6				24.2
Amortization			5.4				5.6
Gain on sale of long-lived assets			(0.1	)			(21.6	)
Gain on sale of business			(90.6	)			—
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable			(801.7	)			(699.4	)
Inventories			(202.1	)			(136.0	)
Prepaid and other assets			(34.4	)			(42.1	)
Accounts payable			223.4				133.2
Other current liabilities			141.4				43.1
Restructuring reserves			(0.1	)			—
Other non-current items			5.0				7.3
Other, net			4.7				5.3
Net cash used in operating activities			(604.0	)			(611.4	)
INVESTING ACTIVITIES
Proceeds from sale of long-lived assets			0.2				23.6
Proceeds from sale of business, net of transaction costs			249.8				—
Investments in property, plant and equipment			(44.5	)			(37.9	)
Net cash provided by (used in) investing activities			205.5				(14.3	)
FINANCING ACTIVITIES
Borrowings under revolving and bank lines of credit and term loans			993.7				845.5
Repayments under revolving and bank lines of credit and term loans			(651.3	)			(440.4	)
Proceeds from issuance of Senior Notes, net of discount			200.0				198.5
Financing and issuance fees			(4.1	)			(5.5	)
Dividends paid			(33.3	)			(17.6	)
Purchase of treasury shares			(93.7	)			—
Excess tax benefits from share-based payment arrangements			4.4				3.7
Cash received from exercise of stock options			21.8				12.9
Net cash provided by financing activities			437.5				597.1
Effect of exchange rate changes on cash			1.6				(3.7	)
Net increase (decrease) in cash and cash equivalents			40.6				(32.3	)
Cash and cash equivalents at beginning of period			88.1				70.6
Cash and cash equivalents at end of period		$	128.7			$	38.3
Supplemental cash flow information
Interest paid, net of interest capitalized			18.6				20.0
Income taxes paid			4.2				9.0

See notes to condensed, consolidated financial statements

THE SCOTTS MIRACLE-GRO COMPANY

CONDENSED, CONSOLIDATED BALANCE SHEETS

(IN MILLIONS, EXCEPT PER SHARE DATA)

		APRIL 2,				APRIL 3,				SEPTEMBER 30,
		2011				2010				2010
		UNAUDITED								(SEE NOTE 1)
ASSETS
Current assets:
Cash and cash equivalents		$	128.7			$	38.3			$	88.1
Accounts receivable, less allowances of $7.9, $10.2 and $7.7, respectively			1,142.3				916.2				350.9
Accounts receivable pledged			—				80.5				—
Inventories, net			556.1				531.6				352.9
Assets held for sale			—				237.9				193.1
Prepaid and other assets			164.5				195.9				133.1
Total current assets			1,991.6				2,000.4				1,118.1
Property, plant and equipment, net of accumulated depreciation of $485.1, $439.7 and $461.1, respectively			396.1				362.7				381.3
Goodwill			305.8				305.8				305.8
Intangible assets, net			344.7				353.5				330.2
Other assets			36.4				29.2				28.6
Total assets		$	3,074.6			$	3,051.6			$	2,164.0
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current portion of debt		$	764.6			$	244.3			$	195.0
Accounts payable			365.9				301.8				141.7
Liabilities held for sale			—				45.7				45.3
Other current liabilities			508.5				424.2				354.8
Total current liabilities			1,639.0				1,016.0				736.8
Long-term debt			416.0				1,156.0				436.7
Other liabilities			231.0				205.9				226.0
Total liabilities			2,286.0				2,377.9				1,399.5
Commitments and contingencies (notes 3 and 11)
Shareholders’ equity:
Common shares and capital in excess of $.01 stated value per share, 65.7, 66.9 and 66.8 shares issued and outstanding, respectively			425.7				435.9				434.0
Retained earnings			573.3				381.4				499.6
Treasury shares, at cost: 2.6, 1.7 and 1.8 shares, respectively			(139.0	)			(90.0	)			(92.0	)
Accumulated other comprehensive loss			(71.4	)			(53.6	)			(77.1	)
Total shareholders’ equity			788.6				673.7				764.5
Total liabilities and shareholders’ equity		$	3,074.6			$	3,051.6			$	2,164.0

See notes to condensed, consolidated financial statements

NOTES TO CONDENSED, CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NATURE OF OPERATIONS

The Scotts Miracle-Gro Company (“Scotts Miracle-Gro”) and its subsidiaries (collectively, together with Scotts Miracle-Gro, the “Company”) are engaged in the manufacturing, marketing and sale of branded products for consumer lawn and garden care. The Company’s primary customers include home centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers and food and drug stores. The Company’s products are sold primarily in North America and the European Union. The Company also operates the Scotts LawnService^® business, which provides residential and commercial lawn care, tree and shrub care and limited pest control services in the United States.

On February 28, 2011, the Company completed the sale of a significant majority of the assets of its Global Professional business (excluding the non-European professional seed business, “Global Pro”) to Israel Chemicals Ltd. (“ICL”). Effective in the Company’s first quarter of fiscal 2011, the Company classified Global Pro as discontinued operations. See “NOTE 2. DISCONTINUED OPERATONS.”

Due to the nature of the consumer lawn and garden business, the majority of sales to customers occur in the Company’s second and third fiscal quarters. On a combined basis, net sales for the second and third fiscal quarters represent approximately 75% of annual net sales.

ORGANIZATION AND BASIS OF PRESENTATION

The Company’s condensed, consolidated financial statements are unaudited; however, in the opinion of management, these financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The condensed, consolidated financial statements include the accounts of Scotts Miracle-Gro and its subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The Company’s consolidation criteria are based on majority ownership (as evidenced by a majority voting interest in the entity) and an objective evaluation and determination of effective management control. Interim results reflect all normal and recurring adjustments and are not necessarily indicative of results for a full year.

Certain information and disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The information in this report should be read in conjunction with Scotts Miracle-Gro’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010, which includes a complete set of disclosures, including the Company’s significant accounting policies.

The Company’s Condensed, Consolidated Balance Sheet at September 30, 2010 has been derived from the Company’s audited Consolidated Balance Sheet at that date, but does not include all of the information and disclosures required by GAAP for complete financial statements.

USE OF ESTIMATES

The preparation of condensed, consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and related disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from the estimates.

RECENT ACCOUNTING PRONOUNCEMENTS

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity. The new guidance also requires enhanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The Company adopted the new guidance on October 1, 2010 and the adoption did not impact the Company’s financial statements and related disclosures.

Revenue Recognition — Multiple-Element Arrangements

In October 2009, the FASB issued new accounting guidance addressing the accounting for multiple-deliverable arrangements to enable entities to account for products or services (deliverables) separately rather than as a combined unit. The provisions establish the accounting and reporting guidance for arrangements under which the entity will perform multiple revenue-generating activities. Specifically, this guidance addresses how to separate deliverables and how to measure and allocate arrangement consideration to one or more units of accounting. The Company adopted the new guidance on October 1, 2010 and the adoption did not impact the Company’s financial statements and related disclosures.

NOTE 2. DISCONTINUED OPERATIONS

Global Pro

On February 28, 2011, the Company completed the sale of Global Pro to ICL for $270 million, pursuant to the terms of the definitive share and business sale agreement (the “SBSA”) between Scotts Miracle-Gro, The Scotts Company LLC (“Scotts”), a wholly-owned subsidiary of Scotts Miracle-Gro, and ICL. After agreed upon adjustments, the Company received $264.6 million net proceeds at closing. This amount is subject to further post-closing adjustments, primarily relating to working capital, and is expected to be finalized during the Company’s third quarter of fiscal 2011. Results from discontinued operations for the first six months of fiscal 2011 include an after-tax gain on the sale of Global Pro of $21.5 million, which includes transaction costs.

The Company’s decision to exit the professional ornamental horticulture, turf and specialty agriculture markets and sell Global Pro was another step in its strategy to evolve its business portfolio to better leverage growth opportunities within its core Global Consumer business segment. The Company applied a portion of the net proceeds of the sale toward debt retirement and intends to apply the remaining portion toward capital investments.

In conjunction with the transaction, Scotts and ICL entered into several product supply agreements which are generally up to five years in duration, as well as various trademark and technology licensing agreements with varying durations. The purpose of these agreements is to allow each party to continue leveraging existing production capabilities and intellectual property to meet customer demand for their respective products. Furthermore, certain transitional services are being provided by Scotts to ICL, the majority of which extend for a period of six to 12 months from the date of sale. Scotts estimates that it will supply ICL with approximately $35 million of product, as well as purchase approximately $15 million of materials from ICL, each on an annualized basis.

The Company’s continuing cash inflows and outflows related to these agreements are not considered to be significant in relation to the overall cash flows of Global Pro. Furthermore, none of these agreements permit the Company to influence the operating or financial policies of Global Pro under the ownership of ICL. Therefore, Global Pro met the criteria for presentation as discontinued operations. As such, effective in the first quarter of fiscal 2011, the Company classified Global Pro as discontinued operations for all periods presented.

The Global Pro results from discontinued operations include an allocation of interest expense relating to the amount of our senior secured credit facilities that was required to be repaid from the sale proceeds. The amount of interest expense allocated to and included in discontinued operations was $0.7 million and $0.9 million for the three-month periods, and $1.7 million and $2.0 million for the six-month periods ended April 2, 2011 and April 3, 2010, respectively.

Smith & Hawken Ltd.

In July 2009, Scotts Miracle-Gro announced that its wholly-owned subsidiary, Smith & Hawken, Ltd., had adopted a plan to close the Smith & Hawken^®+ business. During the Company’s first quarter of fiscal 2010, all Smith & Hawken stores were closed and substantially all operational activities of Smith & Hawken were discontinued. As a result, effective in its first quarter of fiscal 2010, the Company classified Smith & Hawken as discontinued operations.

In the first six months of fiscal 2010, the Company incurred charges related to the liquidation of the Smith & Hawken business primarily associated with the termination of retail site lease obligations, third-party agency fees and severance and benefit commitments. These charges were partially offset by a gain of approximately $18 million from the sale of the Smith & Hawken intellectual property on December 30, 2009.

The following table summarizes the results of Global Pro and Smith & Hawken as discontinued operations (in millions):

		THREE MONTHS ENDED								SIX MONTHS ENDED
		APRIL 2,				APRIL 3,				APRIL 2,				APRIL 3,
		2011				2010				2011				2010
Net sales		$	41.8			$	72.4			$	88.7			$	137.0
Operating costs			35.9				65.0				78.1				136.5
Impairment, restructuring and other charges			—				—				—				17.1
Gain on sale of Global Pro business			(90.6	)			—				(90.6	)			—
Global Pro sale related transaction costs			9.6				—				14.8				—
Other (income) expense, net			—				(0.2	)			0.1				(18.5	)
Interest expense			0.7				0.9				1.7				2.0
Income (loss) from discontinued operations before income taxes			86.2				6.7				84.6				(0.1	)
Income tax expense from discontinued operations			57.2				2.4				56.8				3.2
Income (loss) from discontinued operations		$	29.0			$	4.3			$	27.8			$	(3.3	)

The major classes of assets and liabilities of Global Pro were as follows (in millions):

		APRIL 3,				SEPTEMBER 30,
		2010				2010
Cash and cash equivalents		$	1.0			$	1.0
Accounts receivable, net			96.7				57.5
Inventories, net			57.8				50.7
Prepaid and other assets			2.6				3.4
Property, plant and equipment, net			14.4				13.5
Goodwill			65.4				67.0
Assets held for sale		$	237.9			$	193.1
Accounts payable		$	17.8			$	11.4
Other current liabilities			17.3				18.7
Other liabilities			10.6				15.2
Liabilities held for sale		$	45.7			$	45.3

The major classes of assets and liabilities of Smith & Hawken were as follows (in millions):

		APRIL 2,				APRIL 3,				SEPTEMBER 30,
		2011				2010				2010
Assets of discontinued operations in other current assets		$	—			$	0.2			$	1.3
Accounts payable		$	—			$	3.1			$	—
Other current liabilities			0.4				5.2				0.9
Liabilities of discontinued operations		$	0.4			$	8.3			$	0.9

NOTE 3. PRODUCT REGISTRATION AND RECALL MATTERS

In April 2008, the Company became aware that a former associate apparently deliberately circumvented the Company’s policies and U.S. Environmental Protection Agency (“U.S. EPA”) regulations under the Federal Insecticide, Fungicide, and Rodenticide Act of 1947, as amended (“FIFRA”), by failing to obtain valid registrations for certain products and/or causing certain invalid product registration forms to be submitted to regulators. Since that time, the Company has been cooperating with both the U.S. EPA and the U.S. Department of Justice (the “U.S. DOJ”) in related civil and criminal investigations into the pesticide product registration issues as well as a state civil investigation into related allegations arising under state pesticide registration laws and regulations.

In late April of 2008, in connection with the U.S. EPA’s investigation, the Company conducted a consumer-level recall of certain consumer lawn and garden products and a Scotts LawnService^® product. Subsequently, the Company and the U.S. EPA agreed upon a Compliance Review Plan for conducting a comprehensive, independent review of the Company’s product registration records. Pursuant to the Compliance Review Plan, an independent third-party firm, Quality Associates Incorporated (“QAI”), reviewed substantially all of the Company’s U.S. pesticide product registrations and associated advertisements, some of which were historical in nature and no longer related to sales of the Company’s products. The U.S. EPA investigation and the QAI review process resulted in the temporary suspension of sales and shipments of certain products. In addition, as the QAI review process or the Company’s internal review identified potential FIFRA registration issues (some of which appear unrelated to the actions of the former associate), the Company endeavored to stop selling or distributing the affected products until the issues could be resolved. QAI’s review of the Company’s U.S. pesticide product registrations and associated advertisements is now substantially complete. The results of the QAI review process did not materially affect the Company’s fiscal 2010 or year-to-date fiscal 2011 sales and are not expected to materially affect the Company’s sales during the remainder of fiscal 2011.

In June of 2008, the California Department of Pesticide Regulation (“CDPR”) issued a request for information to the Company relating to products that had been the subject of the April 2008 recall. The Company cooperated with that inquiry and reached agreement with CDPR that CDPR would place its investigation on hold pending the completion of the Company’s internal audit. In furtherance of that agreement, in May of 2010, the Company and CDPR executed a tolling agreement that extends CDPR’s rights through April 2012. In July of 2010, CDPR notified the Company that CDPR planned to proceed with its investigation independent of the U.S. EPA and U.S. DOJ. On or about March 3, 2011, the Company received a letter from CDPR offering to settle the matter without the need for an enforcement proceeding for $245,631. As of April 2, 2011, no reserve was established for this matter.

As a result of these registration and recall matters, the Company has recorded charges for affected inventory and other registration and recall-related costs. The effects of these adjustments were pre-tax charges of $2.5 million and $1.7 million for the three-month periods, and $4.2 million and $4.3 million for the six-month periods ended April 2, 2011 and April 3, 2010, respectively. The Company expects to incur $8-$10 million in fiscal 2011 on recall and registration matters, excluding possible fines, penalties, judgments and/or litigation costs. The Company expects that these charges will include costs associated with the rework of certain finished goods inventories, the potential disposal of certain products and ongoing third-party professional services related to the U.S. EPA, U.S. DOJ and state investigations.

The U.S. EPA, U.S. DOJ and CDPR investigations continue and may result in future state, federal or private rights of action including fines and/or penalties with respect to known or potential additional product registration issues. Until the U.S. EPA, U.S. DOJ and related state investigations are complete, the Company cannot reasonably determine the scope or magnitude of possible liabilities that could result from known or potential product registration issues. No reserves for these potential liabilities have been established as of April 2, 2011. However, it is possible that such liabilities, including fines, penalties, judgments and/or litigation costs, could be material and have an adverse effect on the Company’s financial condition, results of operations or cash flows.

The following tables summarize the impact of the product registration and recall matters on the Company’s results of operations during the three and six months ended April 2, 2011 and April 3, 2010, and on accrued liabilities and inventory reserves as of April 2, 2011 (in millions):

		THREE MONTHS ENDED								SIX MONTHS ENDED
		APRIL 2, 2011				APRIL 3, 2010				APRIL 2, 2011				APRIL 3, 2010
Cost of sales — other charges		$	1.3			$	0.6			$	2.1			$	1.5
Gross profit			(1.3	)			(0.6	)			(2.1	)			(1.5	)
Selling, general and administrative			1.2				1.1				2.1				2.8
Loss from operations			(2.5	)			(1.7	)			(4.2	)			(4.3	)
Income tax benefit			0.8				0.6				1.4				1.5
Net loss		$	(1.7	)		$	(1.1	)		$	(2.8	)		$	(2.8	)

						ADDITIONAL
		RESERVES AT				COSTS AND								RESERVES AT
		SEPTEMBER 30,				CHANGES IN				RESERVES				APRIL 2,
		2010				ESTIMATE				USED				2011
Inventory reserves		$	3.0			$	0.7			$	(0.7	)		$	3.0
Other incremental costs of sales			0.5				1.5				(1.5	)			0.5
Other general and administrative costs			0.5				2.0				(2.0	)			0.5
Accrued liabilities and inventory reserves		$	4.0			$	4.2			$	(4.2	)		$	4.0

NOTE 4. DETAIL OF INVENTORIES, NET

Inventories, net of reserves for slow moving and obsolete inventories of $22.7 million, $26.2 million and $27.0 million as of April 2, 2011, April 3, 2010 and September 30, 2010, respectively, consisted of:

		APRIL 2,				APRIL 3,				SEPTEMBER 30,
		2011				2010				2010
		(IN MILLIONS)
Finished goods		$	363.4			$	343.7			$	144.8
Work-in-process			33.0				34.9				27.2
Raw materials			159.7				153.0				180.9
		$	556.1			$	531.6			$	352.9

NOTE 5. MARKETING AGREEMENT

The Company is Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup^®* herbicide products (with additional rights to new products containing glyphosate or other similar non-selective herbicides) in the consumer lawn and garden market within the United States and other specified countries, including Australia, Austria, Belgium, Canada, France, Germany, the Netherlands and the United Kingdom. Under the terms of the Marketing Agreement, the Company is entitled to receive an annual commission from Monsanto as consideration for the performance of the Company’s duties as agent. The annual gross commission under the Marketing Agreement is calculated as a percentage of the actual earnings before interest and income taxes (EBIT) of the consumer Roundup^® business in the markets covered by the Marketing Agreement and is based on the achievement of two earnings thresholds, as defined in the Marketing Agreement. The Marketing Agreement also requires the Company to make annual payments to Monsanto as a contribution against the overall expenses of the consumer Roundup^® business. The annual contribution payment is defined in the Marketing Agreement as $20 million.

In consideration for the rights granted to the Company under the Marketing Agreement for North America, the Company was required to pay a marketing fee of $32 million to Monsanto. The Company has deferred this amount on the basis that the payment will provide a future benefit through commissions that will be earned under the Marketing Agreement. 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.

Under the terms of the Marketing Agreement, the Company performs certain functions, primarily manufacturing conversion, distribution and logistics, and selling and marketing support, on behalf of Monsanto in the conduct of the consumer Roundup^® business. The actual costs incurred for these activities are charged to and reimbursed by Monsanto. The Company records costs incurred under the Marketing Agreement for which the Company is the primary obligor on a gross basis, recognizing such costs in “Cost of sales” and the reimbursement of these costs in “Net sales,” with no effect on gross profit or net income. The related net sales and cost of sales were $19.0 million and $18.4 million for the three-month periods, and $34.2 million and $35.1 million for the six-month periods ended April 2, 2011 and April 3, 2010, respectively.

The elements of the net commission earned under the Marketing Agreement and included in “Net sales” are as follows (in millions):

		THREE MONTHS ENDED								SIX MONTHS ENDED
		APRIL 2, 2011				APRIL 3, 2010				APRIL 2, 2011				APRIL 3, 2010
Gross commission		$	32.9			$	29.9			$	32.9			$	29.9
Contribution expenses			(5.0	)			(5.0	)			(10.0	)			(10.0	)
Amortization of marketing fee			(0.2	)			(0.2	)			(0.4	)			(0.4	)
Net commission income			27.7				24.7				22.5				19.5
Reimbursements associated with Marketing Agreement			19.0				18.4				34.2				35.1
Total net sales associated with Marketing Agreement		$	46.7			$	43.1			$	56.7			$	54.6

The Marketing Agreement has no definite term except as it relates to the European Union countries (the “EU term”). The EU term extends through September 30, 2011, with up to two additional automatic renewal periods of two years each, subject to non-renewal only upon the occurrence of certain performance defaults. Thereafter, the Marketing Agreement provides that the parties may agree to renew the EU term for an additional three years.

The Marketing Agreement provides Monsanto with the right to terminate the Marketing Agreement upon an event of default (as defined in the Marketing Agreement) by the Company, a change in control of Monsanto or the sale of the consumer Roundup^® business. The Marketing Agreement provides the Company with the right to terminate the Marketing Agreement in certain circumstances, including an event of default by Monsanto or the sale of the consumer Roundup^® business. Unless Monsanto terminates the Marketing Agreement due to an event of default by the Company, Monsanto is required to pay a termination fee to the Company that varies by program year. The termination fee is calculated as a percentage of the value of the Roundup^® business exceeding a certain threshold, but in no event will the termination fee be less than $16 million. If Monsanto were to terminate the Marketing Agreement due to an event of default by the Company, however, the Company would not be entitled to any termination fee, and the Company would lose all, or a substantial 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 a termination fee if unit volume sales to consumers in that region decline: (1) over a cumulative three-fiscal-year period; or (2) by more than 5% for each of two consecutive years.

Under the Marketing Agreement, Monsanto must provide the Company with notice of any proposed sale of the consumer Roundup^® business, allow the Company to participate in the sale process and negotiate in good faith with the Company with respect to any such proposed sale. In the event the Company acquires the consumer Roundup^® business in such a sale, the Company would receive as a credit against the purchase price the amount of the termination fee that would have been paid to the Company if Monsanto had exercised its right to terminate the Marketing Agreement in connection with a sale to another party. If Monsanto decides to sell the consumer Roundup^® business to another party, the Company must let Monsanto know whether the Company intends to terminate the Marketing Agreement and forfeit any right to a termination fee or whether it will agree to continue to perform under the Marketing Agreement on behalf of the purchaser.

NOTE 6. DEBT

The components of long-term debt are as follows (in millions):

		APRIL 2,				APRIL 3,				SEPTEMBER 30,
		2011				2010				2010
Credit Facilities:
Revolving loans		$	760.6			$	720.7			$	111.7
Term loans			—				386.4				302.4
Senior Notes — 7.25%			200.0				200.0				200.0
Senior Notes — 6.625%			200.0				—				—
Master Accounts Receivable Purchase Agreement			—				72.3				—
Contingent consideration			10.8				10.6				10.9
Other			9.2				10.3				6.7
			1,180.6				1,400.3				631.7
Less current portions			764.6				244.3				195.0
		$	416.0			$	1,156.0			$	436.7

In February 2007, Scotts Miracle-Gro and certain of its subsidiaries entered into the following senior secured credit facilities totaling up to $2.15 billion in the aggregate: (a) a senior secured five-year term loan facility in the principal amount of $560 million and (b) a senior secured five-year revolving loan facility in the aggregate principal amount of up to $1.59 billion. Under the terms of these senior secured credit facilities, the Company may request an additional $200 million in revolving credit and/or term credit commitments, subject to approval from the lenders. In December 2010, the senior secured credit facilities were amended to increase the maximum permitted principal amount of unsecured indebtedness that is not subordinated from $200 million to $450 million. Borrowings may be made in various currencies including U.S. dollars, Euros, British pounds, Australian dollars and Canadian dollars. Amortization payments on the term loan portion of the senior secured credit facilities began on September 30, 2007. As of April 2, 2011, cumulative payments on the term loan totaled $560 million, thereby eliminating the balance of the Company’s term loan.

As of April 2, 2011, there was $803.1 million of availability under the senior secured credit facilities, including letters of credit. Under the senior secured credit facilities, the Company has the ability to issue letter of credit commitments up to $65 million. At April 2, 2011, the Company had letters of credit in the aggregate face amount of $26.3 million outstanding.

On January 14, 2010, Scotts Miracle-Gro issued $200 million aggregate principal amount of 7.25% Senior Notes due 2018 (the “7.25% Senior Notes”). The net proceeds of the offering were used to reduce outstanding borrowings under the Company’s senior secured credit facilities. The 7.25% Senior Notes represent general unsecured senior obligations of Scotts Miracle-Gro, and were sold to the public at 99.254% of the principal amount thereof, to yield 7.375% to maturity. The 7.25% Senior Notes have interest payment dates of January 15 and July 15 of each year, which began on July 15, 2010, and may be redeemed prior to maturity at applicable redemption premiums. The 7.25% Senior Notes contain usual and customary incurrence-based covenants, which include, but are not limited to, restrictions on the incurrence of additional indebtedness, the incurrence of liens and the issuance of certain preferred shares, and the making of certain distributions, investments and other restricted payments, as well as other usual and customary covenants, which include, but are not limited to, restrictions on sale and leaseback transactions, restrictions on purchases or redemptions of Scotts Miracle-Gro stock and prepayments of subordinated debt, limitations on asset sales and restrictions on transactions with affiliates. The 7.25% Senior Notes mature on January 15, 2018.

On December 16, 2010, Scotts Miracle-Gro issued $200 million aggregate principal amount of 6.625% Senior Notes due 2020 (the “6.625% Senior Notes”) in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended. The net proceeds of the offering were used to repay outstanding borrowings under the Company’s senior secured credit facilities and for general corporate purposes. The 6.625% Senior Notes represent general unsecured senior obligations of Scotts Miracle-Gro and rank equal in right of payment with the Company’s existing and future unsecured senior debt, including, without limitation, the 7.25% Senior Notes. The 6.625% Senior Notes have interest payment dates of June 15 and December 15 of each year, commencing June 15, 2011, and may be redeemed prior to maturity at applicable redemption premiums. The 6.625% Senior Notes contain usual and customary incurrence-based covenants, as well as other usual and customary covenants, substantially similar to those contained in the 7.25% Senior Notes. The 6.625% Senior Notes mature on December 15, 2020.

Certain of Scotts Miracle-Gro’s domestic subsidiaries serve as guarantors of both the 7.25% and the 6.625% Senior Notes. Refer to “NOTE 15. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS” for more information regarding the guarantor entities.

The Company was in compliance with the terms of all borrowing agreements at April 2, 2011.

At April 2, 2011, the Company had outstanding interest rate swap agreements with major financial institutions that effectively convert a portion of variable-rate debt denominated in U.S. dollars to a fixed rate. The swap agreements had a total U.S. dollar notional amount of $900 million at April 2, 2011. Interest payments made between the effective date and expiration date are hedged by the swap agreements, except as noted below. The notional amount, effective date, expiration date and rate of these swap agreements are shown in the table below.

NOTIONAL AMOUNT				EFFECTIVE		EXPIRATION
(IN MILLIONS)				DATE (a)		DATE		FIXED RATE
$	200			2/14/2007		2/14/2012			5.20%
	50			2/14/2012		2/14/2016			3.78%
	150 (b)			11/16/2009		5/16/2016			3.26%
	50 (c)			2/16/2010		5/16/2016			3.05%
	150 (b)			12/20/2011		6/20/2016			2.61%
	150 (c)			2/7/2012		5/7/2016			2.42%
	100 (c)			2/21/2012		5/23/2016			2.40%
	50 (d)			12/6/2012		9/6/2017			2.96%

Master Accounts Receivable Purchase Agreement

On May 1, 2009, the Company entered into a Master Accounts Receivable Purchase Agreement (the “2009 MARP Agreement”), with an initial stated termination date of May 1, 2010, or such later date as may be mutually agreed by the Company and its lender. The 2009 MARP Agreement provided for the discounted sale, on an uncommitted, revolving basis, of accounts receivable generated by a specified account debtor, with aggregate limits not to exceed $80 million. The 2009 MARP Agreement provided an interest rate that approximated the 7-day LIBOR rate plus 225 basis points.

On May 13, 2010, the Company and its lender entered into a First Amendment to the 2009 MARP Agreement (the “First Amendment”). The First Amendment, which was effective May 1, 2010, extended the stated termination date of the 2009 MARP Agreement through May 12, 2011, or such later date as may be mutually agreed by the Company and its lender. On May 10, 2011, the Company and its lender entered into a Second Amendment to the 2009 MARP Agreement which further extended the stated termination date through September 30, 2011, or such later date as may be mutually agreed by the Company and its lender.

The 2009 MARP Agreement, as amended by the First Amendment, provides an interest rate that approximates the 7-day LIBOR rate plus 125 basis points; the amendments did not otherwise modify any substantive provisions of the 2009 MARP Agreement.

The Company accounts for the sale of receivables under the 2009 MARP Agreement, as amended, as short-term debt and continues to carry the receivables on its Condensed, Consolidated Balance Sheet, primarily as a result of the Company’s right to repurchase receivables sold. The caption “Accounts receivable pledged” on the accompanying Condensed, Consolidated Balance Sheets in the amount of $80.5 million as of April 3, 2010 represents the pool of receivables that were designated as “sold” under the 2009 MARP Agreement and served as collateral for short-term debt thereunder in the amount of $72.3 million as of April 3, 2010. There were no short-term borrowings under the amended 2009 MARP Agreement as of April 2, 2011 and September 30, 2010.

Contingent Consideration

In May 2006, the Company acquired certain brands and assets of Turf-Seed, Inc., a leading producer of quality commercial turfgrasses, for cash of $10.0 million, assumed liabilities of $4.5 million and contingent consideration due in the second half of fiscal 2012. The final determination of the contingent consideration is largely based on the performance of the Company’s consumer and professional seed business for the twelve-month period ending in May 2012.

Estimated Fair Values

A description of the methods and assumptions used to estimate the fair values of the Company’s debt instruments is as follows:

Credit Facilities

The interest rate currently available to the Company fluctuates with the applicable LIBOR rate, prime rate or Federal Funds Effective Rate, and thus the carrying value is a reasonable estimate of fair value.

7.25% Senior Notes

The fair value of the 7.25% Senior Notes can be determined based on the trading of the 7.25% Senior Notes in the open market. The difference between the carrying value and the fair value of the 7.25% Senior Notes represents the premium or discount on that date. Based on the trading value on or around April 2, 2011, the fair value of the 7.25% Senior Notes was approximately $212.0 million.

6.625% Senior Notes

The fair value of the 6.625% Senior Notes can be determined based on the trading of the 6.625% Senior Notes. The difference between the carrying value and the fair value of the 6.625% Senior Notes represents the premium or discount on that date. Based on the trading value on or around April 2, 2011, the fair value of the 6.625% Senior Notes was approximately $205.8 million.

Accounts Receivable Pledged

The interest rate on the short-term debt associated with accounts receivable pledged under the 2009 MARP Agreement fluctuates with the one-week LIBOR rate, and thus the carrying value is a reasonable estimate of fair value.

NOTE 7. COMPREHENSIVE INCOME

The components of other comprehensive income (expense) (“OCI”) and total comprehensive income were as follows (in millions):

		THREE MONTHS ENDED								SIX MONTHS ENDED
		APRIL 2,				APRIL 3,				APRIL 2,				APRIL 3,
		2011				2010				2011				2010
Net income		$	177.6			$	118.5			$	109.7			$	60.8
Other comprehensive income (expense):
Change in valuation of derivative instruments			0.5				2.9				8.1				5.3
Pension and other postretirement related items			5.7				3.0				7.1				8.8
Foreign currency translation adjustments			(11.7	)			5.4				(9.5	)			5.1
Comprehensive income		$	172.1			$	129.8			$	115.4			$	80.0

NOTE 8. RETIREMENT AND RETIREE MEDICAL PLANS COST INFORMATION

The following summarizes the net periodic benefit cost from continuing operations for the various retirement and retiree medical plans sponsored by the Company (in millions):

		THREE MONTHS ENDED
		APRIL 2, 2011												APRIL 3, 2010
		U.S.				International				U.S.				U.S.				International				U.S.
		Pension				Pension				Medical				Pension				Pension				Medical
Components of net periodic benefit cost
Service cost		$	—			$	0.4			$	0.1			$	—			$	0.5			$	0.1
Interest cost			1.2				2.7				0.4				1.3				2.2				0.4
Expected return on plan assets			(1.3	)			(2.6	)			—				(1.3	)			(1.9	)			—
Net amortization			1.3				0.4				—				1.1				0.5				—
Net periodic benefit cost		$	1.2			$	0.9			$	0.5			$	1.1			$	1.3			$	0.5

		SIX MONTHS ENDED
		APRIL 2, 2011												APRIL 3, 2010
		U.S.				International				U.S.				U.S.				International				U.S.
		Pension				Pension				Medical				Pension				Pension				Medical
Components of net periodic benefit cost
Service cost		$	—			$	0.8			$	0.2			$	—			$	1.0			$	0.3
Interest cost			2.4				5.4				0.8				2.6				4.6				0.8
Expected return on plan assets			(2.6	)			(5.2	)			—				(2.6	)			(4.0	)			—
Net amortization			2.5				0.8				—				2.2				1.0				—
Net periodic benefit cost		$	2.3			$	1.8			$	1.0			$	2.2			$	2.6			$	1.1

NOTE 9. SHARE-BASED COMPENSATION AWARDS

Share-Based Awards

The following is a summary of the share-based compensation awards granted during the periods indicated:

		SIX MONTHS ENDED
		APRIL 2, 2011				APRIL 3, 2010
Options			429,700				363,300
Restricted stock units (including deferred stock units)			90,908				287,276
Performance shares			—				4,200
Performance units			53,874				—
Total share-based awards			574,482				654,776
Aggregate fair value at grant dates (in millions)		$	13.5			$	16.8

At April 2, 2011, approximately 0.7 million common shares authorized for issuance pursuant to The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan were not subject to outstanding awards and were available to underlie the grant of new share-based awards.

Total share-based compensation recognized was as follows for the periods indicated (in millions):

		THREE MONTHS ENDED								SIX MONTHS ENDED
		APRIL 2, 2011				APRIL 3, 2010				APRIL 2, 2011				APRIL 3, 2010
Share-based compensation		$	6.5			$	5.3			$	10.8			$	8.2

Stock Options/Stock Appreciation Rights

Aggregate stock option and stock appreciation right (“SAR”) activity consisted of the following for the six months ended April 2, 2011 (options/SARs in millions):

						WTD.
						Avg.
		No. of				Exercise
		Options/SARs				Price
Beginning balance			4.6			$	31.74
Granted			0.4				51.73
Exercised			(0.7	)			31.86
Forfeited			(0.1	)			38.27
Ending balance			4.2				33.61
Exercisable			2.9				32.24

The following summarizes certain information pertaining to stock option and SAR awards outstanding and exercisable at April 2, 2011 (options/SARs in millions):

		Awards Outstanding												Awards Exercisable
		No. of				WTD. Avg.				WTD. Avg.				No. of				WTD. Avg.
Range of		Options/				Remaining				Exercise				Options/				Remaining				WTD. Avg.
Exercise Price		SARs				Life				Price				SARS				Life				Exercise Price
$16.69 — $19.82			0.2				0.15			$	17.15				0.2				0.15			$	17.15
$20.12 — $21.65			0.9				5.05				21.45				0.4				1.90				21.20
$24.45 — $28.72			0.4				2.91				25.74				0.4				2.91				25.74
$29.01 — $31.62			0.3				3.85				29.16				0.3				3.72				29.11
$33.25 — $37.48			0.4				4.64				35.74				0.4				4.61				35.77
$37.89 — $38.90			1.0				6.09				38.59				1.0				6.09				38.59
$40.81 — $51.73			1.0				8.35				46.61				0.2				5.49				43.37
			4.2				5.52			$	33.61				2.9				4.24			$	32.24

The intrinsic value of the stock option and SAR awards outstanding and exercisable at April 2, 2011 was as follows (in millions):

Outstanding		$	104.1
Exercisable			75.9

The grant date fair value of stock option awards is estimated using a binomial model and the assumptions 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 specific to the common shares. Historical data, including demographic factors impacting historical exercise behavior, is used to estimate stock option exercises and employee terminations within the valuation model. The risk-free interest rate for periods within the contractual life (normally ten years) of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of stock options is based on historical experience and expectations for grants outstanding. The weighted average assumptions for awards granted during the six months ended April 2, 2011 are as follows:

Expected market price volatility			31.85	%
Risk-free interest rates			2.39	%
Expected dividend yield			1.93	%
Expected life of stock options in years			5.97
Estimated weighted-average fair value per stock option		$	14.06

Restricted Stock (including Performance Shares)

Restricted stock award activity for the period was as follows:

						WTD. Avg.
						Grant Date
		No. of				Fair Value
		Shares				per Share
Awards outstanding at September 30, 2010			333,000			$	31.52
Vested			(140,000	)			37.07
Forfeited			(26,400	)			25.53
Awards outstanding at April 2, 2011			166,600				27.80

Restricted Stock Units (including Deferred Stock Units and Performance Units)

Restricted stock unit award activity for the period was as follows:

						WTD. Avg.
						Grant Date
		No. of				Fair Value
		Shares				per Share
Awards outstanding at September 30, 2010			531,626			$	34.60
Granted			144,782				51.77
Vested			(12,355	)			31.71
Forfeited			(58,500	)			34.56
Awards outstanding at April 2, 2011			605,553				38.77

As of April 2, 2011, total unrecognized compensation cost related to non-vested share-based awards amounted to $20.7 million. This cost is expected to be recognized over a weighted-average period of 1.7 years. Unearned compensation cost is amortized by grant on the straight-line method over the vesting period, with the amortization expense classified as a component of “Selling, general and administrative” expense within the Condensed, Consolidated Statements of Operations. Vesting periods are generally three years, although compensation expense related to non-vested share-based awards is accelerated for those employees who are eligible for early vesting based on age and service requirements.

During the six months ended April 2, 2011, the total intrinsic value of stock options exercised was $23.9 million. The total fair value of restricted stock and restricted stock units vested during the six months ended April 2, 2011 was $5.2 million and $0.4 million, respectively. Cash received from the exercise of stock options for the six months ended April 2, 2011 was $21.8 million.

NOTE 10. INCOME TAXES

The effective tax rate related to continuing operations for the six months ended April 2, 2011 was 35.9%, compared to 38.3% for the six months ended April 3, 2010. The effective tax rate used for interim reporting purposes is based on management’s best estimate of factors impacting the effective tax rate for the full fiscal year. In accordance with the Company’s decision to report certain aspects of the business as discontinued operations, an allocation of the income tax expense has been separately determined to specifically report the discontinued operations net of tax. There can be no assurance that the effective tax rate estimated for interim financial reporting purposes will approximate the effective tax rate determined at fiscal year end.

Scotts Miracle-Gro or one or more of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With few exceptions, the Company is no longer subject to examinations by these tax authorities for fiscal years prior to 2007. The Company is currently under examination by the Internal Revenue Service (the “IRS”) and certain foreign and U.S. state and local tax authorities. The IRS is currently reviewing the fiscal 2008 tax period only. In regards to a local German audit, the tax periods under investigation are limited to fiscal years 2004 through 2008. In regards to U.S. state and local audits, the tax periods under investigation are limited to fiscal years 1997 through 2008. In addition to these audits, certain other tax deficiency notices and refund claims for previous years remain unresolved.

The Company currently anticipates that few of its open and active audits will be resolved within the next 12 months. The Company is unable to make a reasonably reliable estimate as to when or if cash settlements with taxing authorities may occur. Although audit outcomes and the timing of audit payments are subject to significant uncertainty, the Company does not currently anticipate that the resolution of these tax matters or any events related thereto will result in a material change to its consolidated financial position, results of operations or cash flows.

NOTE 11. CONTINGENCIES

Management regularly evaluates the Company’s contingencies, including various lawsuits and claims which arise in the normal course of business, product and general liabilities, workers’ compensation, property losses and other fiduciary liabilities for which the Company is self-insured or retains a high exposure limit. Self-insurance reserves are established based on actuarial loss estimates for specific individual claims plus actuarially estimated amounts for incurred but not reported claims and adverse development factors applied to existing claims. Legal costs incurred in connection with the resolution of claims, lawsuits and other contingencies are expensed as incurred. In the opinion of management, its assessment of contingencies is reasonable and related reserves, in the aggregate, are adequate; however, there can be no assurance that final resolution of these matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. The following are the more significant of the Company’s identified contingencies:

FIFRA Compliance and the Corresponding Governmental Investigations

For a description of the Company’s ongoing FIFRA compliance efforts and the corresponding governmental investigations, see “NOTE 3. PRODUCT REGISTRATION AND RECALL MATTERS.”

Other Regulatory Matters

In 2004, the Company completed negotiations with the Philadelphia District of the U.S. Army Corps of Engineers (the “Corps”) regarding the terms of site remediation and the resolution of the Corps’ civil penalty demand in connection with the Company’s prior peat harvesting operations at its Lafayette, New Jersey facility. The final consent decree required the Company to perform five years of wetland monitoring and to complete additional actions if after five years the monitoring indicated the wetlands had not developed satisfactorily. As site monitoring activities were not initiated until the beginning of 2006, the five-year monitoring period extended until December 2010. Having received notice from the Environmental Defense Section of the U.S. DOJ that the terms of the consent decree had been satisfied, on January 24, 2011, the United States District Court for the District of New Jersey ordered the matter closed.

At April 2, 2011, $2.9 million was accrued for other regulatory matters in the “Other liabilities” line in the Condensed, Consolidated Balance Sheet. The amounts accrued are believed to be adequate to cover such known regulatory exposures based on current facts and estimates of likely outcomes. However, if facts and circumstances change significantly, they could result in a material adverse effect on the Company’s financial condition, results of operations or cash flows.

Other

The Company has been named as a defendant in a number of cases alleging injuries that the lawsuits claim resulted from exposure to asbestos-containing products, apparently based on the Company’s historic use of vermiculite in certain of its products. 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 seek damages from the Company alone. The Company believes that the claims against it are without merit and is vigorously defending against them. It is not currently possible to reasonably estimate a probable loss, if any, associated with these cases and, accordingly, no accrual or reserves have been recorded in the Company’s condensed, consolidated financial statements. The Company is reviewing agreements and policies that may provide insurance coverage or indemnity as to these claims and is pursuing coverage under some of these agreements and policies, although there can be no assurance of the results of these efforts. There can be no assurance that these cases, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

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 financial condition, results of operations or cash flows.

NOTE 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivatives and Hedging

The Company is exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. To manage a portion of the volatility related to these exposures, the Company enters into various financial transactions. The utilization of these financial transactions is governed by policies covering acceptable counterparty exposure, instrument types and other hedging practices. The Company does not hold or issue derivative financial instruments for speculative trading purposes.

The Company formally designates and documents qualifying instruments as hedges of underlying exposures at inception. The Company formally assesses, both at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. Fluctuations in the value of these instruments generally are offset by changes in the cash flows of the underlying exposures being hedged. This offset is driven by the high degree of effectiveness between the exposure being hedged and the hedging instrument. GAAP requires all derivative instruments to be recognized as either assets or liabilities at fair value in the Condensed, Consolidated Balance Sheets. The Company designates commodity hedges as cash flow hedges of forecasted purchases of commodities and interest rate swap agreements as cash flow hedges of interest payments on variable rate borrowings. Any ineffective portion of a change in the fair value of a qualifying instrument is immediately recognized in earnings. The amounts recorded in earnings related to ineffectiveness of derivative hedges for the three- and six-month periods ended April 2, 2011 and April 3, 2010 were not significant.

Foreign Currency Swap Contracts

The Company periodically uses foreign currency swap contracts to manage the exchange rate risk associated with intercompany loans with foreign subsidiaries that are denominated in local currencies. At April 2, 2011, the notional amount of outstanding foreign currency swap contracts was $107.7 million, with a liability position based on negative fair value of $0.4 million. At April 3, 2010, there were no outstanding foreign currency swap contracts. Foreign currency swap contracts that do not qualify for hedge accounting treatment in accordance with GAAP are recorded at fair value as an element of interest expense. The fair value of foreign currency swap contracts is determined based on changes in spot rates. The unrealized loss on the foreign currency swap contracts approximates the unrealized gain on the intercompany loans recognized by the Company’s lending subsidiaries.

Interest Rate Swap Agreements

The Company enters into interest rate swap agreements as a means to hedge its variable interest rate exposure on debt instruments. The fair values are reflected in the Company’s Condensed, Consolidated Balance Sheets. Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since the interest rate swap agreements have been designated as hedging instruments, unrealized gains or losses resulting from adjusting these swaps to fair value are recorded as elements of accumulated other comprehensive loss (“AOCI”) within the Condensed, Consolidated Balance Sheets. The fair value of the swap agreements is determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date.

At April 2, 2011 and April 3, 2010, the Company had outstanding interest rate swap agreements with major financial institutions that effectively converted a portion of the Company’s variable-rate debt to a fixed rate. The swap agreements had a total U.S. dollar equivalent notional amount of $900 million and $450 million at April 2, 2011 and April 3, 2010, respectively. Refer to “NOTE 6. DEBT” for the terms of the swap agreements outstanding at April 2, 2011. Included in the AOCI balance at April 2, 2011 was a pre-tax loss of $12.8 million related to interest rate swap agreements that is expected to be reclassified to earnings during the next 12 months, consistent with the timing of the underlying hedged transactions.

Commodity Hedges

The Company had outstanding hedging arrangements at April 2, 2011 designed to fix the price of a portion of its urea needs. The contracts are designated as hedges of the Company’s exposure to future cash flow fluctuations associated with the cost of urea. The objective of the hedges is to mitigate the earnings and cash flow volatility attributable to the risk of changing prices. Unrealized gains or losses in the fair value of these contracts are recorded to the AOCI component of shareholders’ equity. Realized gains or losses remain as a component of AOCI until the related inventory is sold. Upon sale of the underlying inventory, the gain or loss is reclassified to cost of sales. Included in the AOCI balance at April 2, 2011 was a pre-tax gain of $1.6 million related to urea derivatives that is expected to be reclassified to earnings during the next 12 months, consistent with the timing of the underlying hedged transactions.

The Company enters into fuel derivatives for its Scotts LawnService^® business that qualify for hedge accounting treatment. Unrealized gains or losses in the fair value of these contracts are recorded in OCI except for any ineffective portion of the change in fair value, which is immediately recorded in earnings. For the effective portion of the change in fair value, realized gains or losses remain as a component of AOCI until the related fuel is consumed by the Scotts LawnService^® service vehicles. Upon consumption of the fuel, the gain or loss is reclassified to cost of sales. Included in the AOCI balance at April 2, 2011 was a pre-tax gain of $0.1 million related to fuel derivatives that is expected to be reclassified to earnings during the next 12 months, consistent with the timing of the underlying hedged transactions.

Periodically, the Company also uses fuel derivatives to partially mitigate the effect of fluctuating diesel and gasoline costs on operating results. Fuel derivatives used by the Company that do not qualify for hedge accounting treatment in accordance with GAAP are recorded at fair value, with unrealized gains and losses on open contracts and realized gains or losses on settled contracts recorded as an element of cost of sales.

As of April 2, 2011, the Company had the following outstanding commodity contracts that were entered into to hedge forecasted purchases:

Commodity		Volume
Urea		11,000 tons
Diesel		3,108,000 gallons

Fair Values of Derivative Instruments

The fair values of the Company’s derivative instruments were as follows (in millions):

		ASSETS / (LIABILITIES)
				APRIL 2,				APRIL 3,				SEPTEMBER 30,
DERIVATIVES DESIGNATED AS HEDGING				2011				2010				2010
INSTRUMENTS		BALANCE SHEET LOCATION		FAIR VALUE
Interest rate swap agreements		Other assets		$	3.6			$	2.3			$	—
		Other current liabilities			(12.8	)			(11.8	)			(12.1	)
		Other liabilities			(2.9	)			(6.9	)			(12.5	)
Commodity hedging instruments		Prepaid and other assets			0.3				0.8				1.9
Total derivatives designated as hedging instruments				$	(11.8	)		$	(15.6	)		$	(22.7	)
DERIVATIVES NOT DESIGNATED AS HEDGING INSTRUMENTS (1)
Foreign currency swap contracts		Prepaid and other assets		$	—			$	0.1			$	—
		Other current liabilities			(0.4	)			—				(6.6	)
Commodity hedging instruments		Prepaid and other current assets			1.4				—				—
Total derivatives not designated as hedging instruments (1)				$	1.0			$	0.1			$	(6.6	)
Total derivatives				$	(10.8	)		$	(15.5	)		$	(29.3	)

Refer to “NOTE 13. FAIR VALUE MEASUREMENTS” for the Company’s fair value measurements of derivative instruments as they relate to the valuation hierarchy.

The effect of derivative instruments on AOCI and the Condensed, Consolidated Statements of Operations for the three- and six-month periods ended April 2, 2011 and April 3, 2010 was as follows:

		AMOUNT OF GAIN / (LOSS) RECOGNIZED IN AOCI
		(IN MILLIONS)
		THREE MONTHS ENDED								SIX MONTHS ENDED
		APRIL 2,				APRIL 3,				APRIL 2,				APRIL 3,
DERIVATIVES IN CASH FLOW HEDGING RELATIONSHIPS		2011				2010				2011				2010
Interest rate swap agreements		$	(1.2	)		$	(5.0	)		$	1.3			$	(6.6	)
Commodity hedging instruments			(0.7	)			(0.3	)			1.4				2.1
Total		$	(1.9	)		$	(5.3	)		$	2.7			$	(4.5	)

				AMOUNT OF GAIN / (LOSS) RECLASSIFIED
		LOCATION OF GAIN /		FROM AOCI INTO EARNINGS (IN MILLIONS)
		(LOSS) RECLASSIFIED		THREE MONTHS ENDED								SIX MONTHS ENDED
DERIVATIVES IN CASH FLOW		FROM		APRIL 2,				APRIL 3,				APRIL 2,				APRIL 3,
HEDGING RELATIONSHIPS		AOCI INTO EARNINGS		2011				2010				2011				2010
Interest rate swap agreements		Interest expense		$	(3.7	)		$	(6.0	)		$	(6.8	)		$	(11.5	)
Commodity hedging instruments		Cost of sales			1.3				(2.2	)			1.4				(2.8	)
Total				$	(2.4	)		$	(8.2	)		$	(5.4	)		$	(14.3	)

				AMOUNT OF GAIN / (LOSS) RECOGNIZED
		LOCATION OF GAIN /		IN EARNINGS (IN MILLIONS)
		(LOSS)		THREE MONTHS ENDED								SIX MONTHS ENDED
DERIVATIVES NOT DESIGNATED AS		RECOGNIZED IN		APRIL 2,				APRIL 3,				APRIL 2,				APRIL 3,
HEDGING INSTRUMENTS		EARNINGS		2011				2010				2011				2010
Foreign currency swap contracts		Interest expense		$	(3.3	)		$	—			$	5.6			$	0.7
Commodity hedging instruments		Cost of sales			1.6				(0.1	)			2.3				(0.1	)
Total				$	(1.7	)		$	(0.1	)		$	7.9			$	0.6

NOTE 13. FAIR VALUE MEASUREMENTS

GAAP defines fair value, establishes a framework for measuring fair value, and prescribes disclosures about fair value measurements. It defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. GAAP establishes a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1 — Quoted prices in active markets for identical assets or liabilities.

Level 2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.

The following describes the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis, as well as the general classification within the valuation hierarchy.

Derivatives

Derivatives consist of foreign currency, interest rate and commodity derivative instruments. For further information on the Company’s derivative instruments, refer to “NOTE 12. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES.”

Other

Other financial assets consist of investment securities in non-qualified retirement plan assets. These securities are valued using observable market prices in active markets.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at April 2, 2011 (in millions):

		Quoted Prices in
		Active Markets for				Significant Other				Unobservable
		Identical Assets				Observable Inputs				Inputs
		(Level 1)				(Level 2)				(Level 3)				Total
Assets
Derivatives
Interest rate swap agreements		$	—			$	3.6			$	—			$	3.6
Commodity hedging instruments			—				1.7				—				1.7
Other			7.9				—				—				7.9
Total		$	7.9			$	5.3			$	—			$	13.2
Liabilities
Derivatives
Interest rate swap agreements		$	—			$	(15.7	)		$	—			$	(15.7	)
Foreign currency swap contracts			—				(0.4	)			—				(0.4	)
Total		$	—			$	(16.1	)		$	—			$	(16.1	)