Factors that helped O. M.

Scott & Son Company achieved nationwide growth

The company has been a pioneer in the lawn care market for many years, gaining recognition
for its various products that offer multiple solutions for lawn care.

Since its beginnings in Ohio, O.M. Scott & Son company has been characterized by product
innovation, portfolio growth, full service offering and most of all quality, which has made it
now a leader throughout the United States.

In the decade after World War II the company focused on the development and market
introduction of a broad new line of pesticide chemicals for lawn and garden control, leading
to a significant increase in sales and profits. But the main factors that contribute to its
nationwide growth were:

1. New ways of advertisement such as creating a free magazine called Lawn Care and
distributing it with every sale they made by mail. This activity was made to lead
customers to know their name, their main objective and idea of being a company that
wanted to improve lawn care.
2. Diversify all the lawn care line, such as giving different types of main and
complementary products, leading them to have major profits and gaining major part
of the market share among its competitors having the purchase, processing, and the
sale of grass seed as well as the manufacture and sale of fertilizers weed and pest
control products, mechanical spreaders, and electric lawn mowers.
3. Increase of its force sales from 6 to 150 salesperson, enlarging its roles and
responsibilities to their distribution channels allowing them to attend and capacitate
their dealers for them to offer the best products and services to the final consumers.
4. Availability of seasonal stock gave the company a huge competitive advantage on the
market because sometimes dealers could not sell due to a lack of inventory, so the
company realized that available stock was an important factor to supply the demand
and often resulted in a lost sale for its competitors.

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Stock market price

The stock market price of Scott's shares have been increasing from 1958 to 1961, from an
average price per share of $3,81 to $44,38 respectively, which means an overall increase of
1064% in the average price in 4 years.
From 1958 to 1959, the stock price increase from an average price per share of $3,81 to
$19,50 or 411% increase, the stock price continue increasing from 1959 to 1960 from $19,50
to $41,44 or 113% increase, due to the growth in net income and consequently, earnings per
share. Finally the average share price increased just 7% between 1960 and 1961, because net
income dropped from $1785,0 to $1570,7 or 12% and earning per share dropped from $1,21
to $0,99 or -18%.

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Analysis of company’s financial situation
To look at the financial position of O. M. Scott & Sons Company at a specified time (in this
case the fiscal year 1961), we should first take a look at the balance sheet of the company,
which shows the firm’s investment in assets, and funding sources. It is also important to
have in mind the equation of a company’s financial position: assets = liabilities + equity.
Assets: net fixed assets and current assets.

Source (own graph with data from OM Scott & Son Company case)
It can be seen that in the four quarters of the financial year the company has the same
structure, a much more quantity of total current assets than net fixed assets. From the first to
the second quarter the total assets increase, in the next quarter decrease, and again in the
last quarter increase. The company structure shows that they have a lot more current assets,
which are the assets that are going to convert in cash in less than 1 year, and a very little fixed
assets which are the ones linked to the business and take longer to convert into cash. This is
because O. M. Scott & Sons Company which is seasonal and they sell their products to
distributors, so it is an example of a trading company structure which can reduce its
investment in fixed assets and purchase stock.
The total assets (current assets, net fixed assets and other assets) go from $25060 in the first
quarter to $31420 in the last quarter.
Liabilities and equity.

Source (own graph with data from OM Scott & Son Company case)
The company has more liabilities than equity, so it assumes a high volume of indebtedness,
which means high financial risk. But this does not mean that the company is going bad, or
that it is going, it is just that it has potential risk. But, as it can be seen above in the analysis

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of assets, this company also has a very high level of current assets, which means that it will
have cash for those assets in less than a year and would be able to manage those liabilities.
Moreover, the company has the same seasonal structure analyzed in the assets, that
increases and decreases from one quarter to the next one. If we look at the whole financial
year, total liabilities increase from $16250 to $20210, along with equity which increases from
$8810 to $11210.
Financial risk. Even if we cannot see the whole picture of a
company with only one indicator, the debt-to-equity ratio is
an indicator that shows the level of financial risk, and it is
calculated by dividing liabilities by equity.
The debt-to-equity ratio goes from 1,84 in the first quarter,
to 2,47 in the second, to 1,77 in the third, and 1,80 at the end
of the financial year.
So, in the first, third and fourth quarter of the financial year the company has a ratio between
1 and 2 (closer to 2), which can be considered as a medium level of risk. But, in the third
quarter it has a higher ratio which means higher risk. But as mentioned before, the
debt-to-equity ratio has to be analyzed with other parameters of the company, as we have
analyzed with the assets, and then we will look at the income statement of the company.
Regarding the income statement, it shows the firm’s revenues and expenses during a
specified period. After analyzing the income statement of O. M. Scott & Sons Company in
1961 we have the following table:

Source (own table with data from OM Scott & Son Company case)
From the table above, we can conclude that as we mentioned before the company is seasonal,
because it changes a lot from one quarter to another, just looking at the sales and the cost of
sales. This also can be seen clearly in the gross profit which is $-1950 in the first quarter,
then goes up to $4050, decreases to $900, and increases again in the last quarter of the year
to $3950. If we pay attention to the complete year, it had a positive net income of $1340 (a
gross profit of $6950, EBIT of $3550, and income before income taxes of $2700). Having a
positive income at the end of the year for this company means that the company has earned a
profit because total revenues have been higher than total expenses.

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Scott’s sales forecasts for 1962 and 1963 ( In $ Thousands)

As we can see in the company’s sales forecast for 1962 - 1963, even though net sales have
increased by 25%, the net income has been flat over these two years in comparison from the
period 1958 to 1959 that profits increased 1% and were flat until 1961. The reason could be
that the expenses are also increasing at the same rate, resulting in low profits.

Improvement on supplier and creditor management

The 2 payment plan resulted in an increment in Accounts receivable, financed by
subordinated notes, revolving line of bank credit, and increased use of supplier credits. The
company has a good agreement with its chemical supplier, where the company settles only
once or twice a year with its suppliers and no interest or other charges are levied on these
amounts. Scott and its subsidiaries had $16.2 million of long-term debt of which $12 million
consisted of renewable five-year subordinated notes of the parent company held by four
insurance companies and a trustee, and $4.2 million in publicly held bonds owned by Scotts
Chemical Plant. In addition to the long-term debt just described, Scott also had a $12.5
million line of credit at the end of fiscal 1961 with a group of seven commercial banks.

The following chart represents the increases and decreases the company has faced Since the
implementation of both payment plans.

Increment in Increment from 1959 to 1960 Increment from 1960 to 1961

Net sales $38,396.4 $43,140.1

Increase of 25% Increase of 12.3%

Cost of product sold $30,416.8 $34,331.7

Increase of 26.1% Increase of 12%

Financial Cost $881.6 $1,131.5

Increase of 114% Increase 28%

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 Account payable $2,791.0 $6,239.2
Decrease of 32% Increase of 123%

Account receivable $15,749.7 $21,500.5

Increase of 172% Increase of of 36.5%

Long Term debt $13,649.5 $16,170.4

Increase of 96% Increase of 18%

Short term debt $5114.7 $7,959,4

Decrease of 30.5% Increase of 55%

Net Income $1,785.0 $1570.7

Increase of 20% Decrease of 12%

EBIT $4,541.8 $4,368.1

Increase of 27.3% Decrease of 3.82%

Following chart shows the company's asset and liabilities structure and Debt- to-equity ratio.

Year Fix Assets Current Assets Short-term Long-term Equity debt to equity
debt debt ratio

1960 21% 73% 17% 45% 37.2% 1.68

1961 17% 79% 22% 45% 32% 2.07

Based on this we can say that the company can finance its fixed assets with its own equity
and enough to finance some of its current assets. The company can still face its debt, but the
prediction is that the financial risk will continue to grow since the long term debt and short
term debt, cost of sale, and financial costs represent a higher growth than the net sales and
net income which showed a decrease of 12% in 1961.

The increment on short- term debt and long -term debt started since the implementation of
financing the accounts receivable with subordinated note (long - term debt) and use of
supplier credit (short-term debt). Long- term debt has more of an impact on the company’s
current and future finances. While the short-term debt with suppliers has no much impact
on the company since the suppliers don’t charge any interest or other charges on the amount
and the company is able to settle its debts once or even twice a year.

So the recommendation would be to stick with the agreement of use of credit from suppliers
but reduce the long-term debt. Since the debt is growing every year but sales and profits are
not increasing proportionally with yearly increases on liabilities.