Spectrum to exit fertilizers and growing products by Jan. 31, 2009; closes Sylacauga plant

Spectrum/United has traditionally supplied the lawn and garden market via its Home & Garden segment. Spectrum bought the Sylacauga business and much of its fertilizer assets from Pursell Industries back in 2002 (GM Jan. 7, 2002, p. 10; Oct. 7, 2002, p. 10).

Spectrum said it is eliminating unprofitable businesses, including fertilizer, enriched soils, mulch, and grass seed. The company has been trying to sell these businesses and has not been successful.

“We believe that the inability of interested buyers to obtain the necessary working capital financing proved to be an insurmountable issue,” Kent Hussey, Spectrum CEO, told analysts. “Our growing products segment required a working capital investment in the peak of the production cycle of nearly $100 million. While these products delivered revenues of $267 million for fiscal 2008, gross margins for the growing products business were down 16 percent year-over-year, creating a significant drag on the rest of our businesses. Adjusted EBITDA for our growing products in 2008 was a loss of $11.3 million; including allocated overheads of approximately $9 million, the loss was over $20 million.”

Hussey told analysts that the growing products delivered an adjusted EBITDA loss of $11.9 million for the fourth quarter, while the controls unit delivered positive adjusted EBITDA of $17.1 million. Consolidated EBITDA for the company was $84.8 million versus the year-ago $93.3 million. FY’08 company EBITDA was $281.3 million, a 1.3 percent increase over the prior year.

Hussey also cited a sluggish housing market, tight inventories at retailers, low levels of foot traffic, and unprecedented commodity impacting the growing products category. Despite recent declines in urea, Hussey said DAP and potash prices remain at historically high levels.

As a result of the growing products shutdown, Spectrum expects an annualized net savings of $15-$20 million. It is also expected to eliminate some $90-$100 million of investment in working capital during the growing products’ peak season. Spectrum expects to record charges of $60-$75 million during fiscal 2009 related to its decision to exit this portion of the business.

According to its SEC filings, Spectrum both owned and leased H&G lawn and garden blending, packing, and distribution locations in Orrville, Ohio. It owned locations in Cave City, Ky., and Livingston, Texas, and leased sites in Winterhaven, Fla., Los Angeles, Calif., Sylacauga, Ala., and Brantford, Ont.

Spectrum has had exclusive brand arrangements for its Vigoro brand at The Home Depot, for its Sta-Green brand at Lowe’s, and for its Expert Gardener brand at Wal-Mart. As such, these products have been positioned as the “value” option to other name-brand products. Hussey told analysts that the company is currently working on transferring its fertilizer brand names to its retail customers. As for whether there will be any compensation for that he said, “We’re still working on that.”

Primary competitors for the H&G business have been The Scotts Miracle-Gro Co. and Central Garden & Pet Co. Last week, primary competitor Scotts (GM Nov. 17, p. 11) said it is in negotiations with retailers to take over the private label branding that was exited by Spectrum.

Spectrum sold its Canadian lawn and garden business about a year ago (GM Oct. 8, 2007, p. 12) for $15 million. This included lawn and garden blending, packing, and distribution locations in Woodstock, Ont., Crossfield, Alberta, Abbotsford, B.C., and Laval, Quebec.

Spectrum is not totally deserting the home and garden sector. It plans to retain its control business, which includes indoor and outdoor insecticides, pesticides, herbicides, and personal repellants. It said these products generated over $300 million in revenues during fiscal 2008 and have high gross margins, less seasonality, and lower peak working capital investment. Control brands include Spectracide, Hot Shot, Cutter, and Repel. Spectrum controls locations include leased manufacturing at Vinita Park and Bridgeton, Mo., and distribution at Orrville, Ohio, San Bernardino, Calif., Vinita Park, Mo., Pendergrass, Ga., and Edwardsville, Ill.

Spectrum reports that Amy Yoder, United Industries president, voluntarily resigned in October to pursue other opportunities. She signed a separation agreement entitling her to an approximate $1 million in salary and other pay, as well as additional bonuses for which she may have been eligible in FY’08, according to SEC filings. David Lumley, Global Batteries president and co-chief operating officer of Spectrum, has assumed day-to-day operations of the H&G operations, including the control business, which will remain as an ongoing business.

Lumley and Hussey, along with Anthony Genito, CFO and chief accounting officer, and John Heil, co-chief operating officer, have all signed long-term incentive agreements in addition to existing long-term incentives. The aggregate payable to each is as follows: Hussey, $721,875; Genito, $187,000; Lumley, $393,750; and Heil, $337,500. The total amounts are payable in two equal installments, one on Dec. 31, 2008, and another Dec. 31, 2009. Lumley and Neil also each received a boost in salary as of Nov. 1.

Hussey also received a retention agreement in which he can receive $1.2 million if he remains with the company through the end of 2009.

Write-offs put Spectrum well into the red during the fourth quarter and for fiscal year 2008. Spectrum reported $550.4 million in goodwill and trade name impairments during the fourth quarter, versus year-ago impairments of $148.4 million. Only about $60 million of the fourth quarter 2008 impairments came from the home and garden segment, with the rest coming from other areas of the company.

Total fiscal 2008 impairments were $721.9 million, versus the prior year impairment of $323.8 million. Some $150.9 million of FY’08 impairments were attributable to the home and garden business.

Spectrum just reported a net loss of $492.6 million ($9.68 per diluted share) on sales of $706.5 million for the fourth quarter ending Sept. 30, 2008, versus a year-ago loss of $333 million ($6.60 per share) and $659.2 million, respectively. The H&G business reported fourth-quarter profit of $1.8 million on sales of $123.7 million, compared to the year-ago $6.2 million and $111 million. Of this, $36.4 million in profits came from the control portion of H&G on sales of $84 million, versus the year-ago $32.9 million and $78.2 million, respectively. Spectrum actually reported sales growth in all three of its major business segments for the quarter, including H&G, Global Batteries & Personal Care, and Global Pet Supplies. While H&G profits were off, they were up for Global Batteries and down slightly for Global Pet. Hussey said he believes the company will have free cash flow next year.

For the year ending Sept. 30, Spectrum’s loss was $931.6 million ($18.29 per share) on sales of $2.69 billion versus the prior year loss of $596.8 million ($11.72 per share) and $2.56 billion. The H&G segment reported profit of $8 million for the year on sales of $595.7 million versus the year-ago $47 million and $570.2 million, respectively. FY’08 control sales were $328.7 million.

In other news, Spectrum is in danger of losing its listing – SPC – on the New York Stock Exchange. It received notice Nov. 4 that it was “below criteria” for the NYSE’s continued listing standards because its average total market capitalization was less than $75 million over a 30-day trading period and, at the same time, its stockholders’ equity was less than $75 million. As of Oct. 31, 2008, the latter was $72.4 million. The company has 45 days from the date of the notice to submit a plan to come into compliance within 18 months.

“While we are extremely disappointed in the recent performance of our stock, which was pressured during the last few months by an extremely volatile market as well as by the distribution of over 12 million shares held by our largest shareholder, Thomas H. Lee Partners, a private equity firm, in conjunction with the winding down of one of its investment funds, we do not believe that this notification reflects the performance of our businesses,” said Hussey. T. Lee Partners was formerly Spectrum’s largest shareholder, representing almost 25 percent of shares outstanding. Hussey pointed to the positive performance of the Global Batteries and Global Pets segments, adding that the company has $105 million in cash and $108 million of availability on its $225 million ABL and is in compliance with the requirement under senior and subordinated debt agreements. Hussey did say that companies like Spectrum, which have high levels of debt, have been more severely impacted during the current financial crisis as investors have made a flight to security.

Spectrum is also in danger of NYSE delisting because its stock price recently dropped below $1.00. If it remains below $1.00 for a consecutive 30-day period, the stock could be delisted.