Sun Gro Horticulture Income Fund Releases 2010 Second Quarter and First-Half
Results

Fund continues to strengthen balance sheet; Sun Gro delivers stable operating performance and improved sales volumes of core growing mix products, experiences ongoing negative impact of stronger Canadian dollar

TRADING SYMBOL: Toronto Stock Exchange - GRO.UN

Sun Gro Horticulture Income Fund will hold a conference call and webcast to discuss 2010 second quarter and first-half financial results on Wednesday, August 11 at 7:30 am Pacific Time (10:30 am Eastern). The call can be accessed by dialing: 1-888-231-8191 or 647-427-7450 (Greater Toronto Area and International).

A replay will be available through August 24, 2010 at: 1-800-642-1687 or 416-849-0833. Passcode 91465710.

To access the live and archived webcast, please go to: http://www.investorcalendar.com/IC/CEPage.asp?ID=160847 or to the Fund's website at: www.sungro.com.

VANCOUVER, Aug. 10 /CNW/ - Sun Gro Horticulture Income Fund (the Fund or Sun Gro) today reported financial results for the three and six months ended June 30, 2010. For the three-month period, which represents the second quarter of the Fund's 2010 fiscal year, its primarily US dollar denominated sales revenues were level with the amount recorded in 2009 when reported in US dollars. In Canadian dollars, second quarter revenues were down by 13% year-over-year, due to the effect of a significantly stronger Canadian dollar.

Overall sales volumes, as measured in equivalent bales, or EBs (referring to 10 cubic feet of product), declined by 2% due to significant, ongoing weakness in Sun Gro's sales of sand-based mixes and a slowdown in orders for straight peat moss. However, the company continued to enjoy volume growth in sales of its core growing mix product lines.

This year's stronger Canadian dollar had an unfavourable impact on Sun Gro's gross margin and a favourable impact on its selling, general and administrative expenses. Distribution costs were down as a slight increase in per-EB costs on shipments from US facilities was more than offset by lower shipping costs in Canada, the positive effect of exchange rates on US freight costs and the lower sales volumes.

"In the second quarter, the sustained strength of the greenhouse segment of our business helped us to maintain the strong operating performance we delivered in the first three months of the year. We also continued to benefit from the plant efficiencies generated by our 2008 and 2009 productivity and infrastructure initiatives, especially at our Canadian locations," said Mitch Weaver, President and CEO of Sun Gro and a Trustee of the Fund.

"We are particularly pleased with our ongoing progress in reducing our debt obligations and interest expense," continued Weaver. "At quarter-end, we had improved our senior leverage ratio to 2.8, down significantly from 3.7 at June 30, 2009. Going forward, lower leverage will significantly reduce the future interest expense on both our term debt and our revolving operating facility."

Second Quarter Financial Results

Revenue for the second quarter of 2010 was $56.1 million, a decrease of $8.8 million from the $64.9 million reported in 2009, mainly due to the unfavourable foreign exchange impact. The average value of the Canadian dollar compared to the US dollar appreciated 14% year-over-year, effectively reducing revenue by approximately $7.0 million. While overall sales volumes declined by 2%, sales volumes of compressed professional growing mixes increased by 17%, and overall growing mix volumes increased by 3%, reflecting the continued strength of Sun Gro's core product offering.

The less favourable exchange rates reduced gross margin to 40% from 41% in 2009, which in turn brought operating income down to $2.0 million from $4.9 million in 2009. Had exchange rates remained constant year-over-year, gross margin would have been 43% and operating income would have been flat.

Earnings during the quarter were also affected significantly by the change in exchange rates and by the Fund's foreign currency management program. Maturing forward currency contracts resulted in realized gains of $2.3 million during the quarter, compared to losses of $2.4 million in Q2 2009, driving a $1.7 million, or 28%, increase in EBITDA. The marking to market of its forward foreign currency contract position resulted in an unrealized loss of $5.8 million, compared to an unrealized gain of $8.3 million last year. This drove a $5.5 million net loss for the three months, compared to net earnings of $9.0 million in 2009.

As in the first quarter of 2010, capital spending was up from the prior year level and continued to be limited to plant improvements to enhance efficiency and upgrade production capacity. Most notably, Sun Gro is acquiring a new $1.1 million, 110-cubic-foot baler for its Seba Beach, Alberta plant. The new baler will allow the company to package products more efficiently with reduced use of plastic. It will be operational by the end of this year.

Sun Gro's annual peat harvest began in late April and should proceed through October. Generally favourable peat harvesting conditions resulted in a 50% year-over-year increase in harvest volumes during the second quarter. Volumes were up in all regions, although virtually no peat was harvested in Manitoba during the month of June due to wet weather.

Six-Month Financial Results

Revenue for the six months ended June 30, 2010 was $120.4 million, down by 10% from the $133.9 million reported in the first half of 2009. As with the quarterly result, the difference was primarily due to the negative impact of currency exchange. The average value of the Canadian dollar compared to the US dollar for the six months appreciated by 17%. This change effectively reduced Sun Gro's 2010 revenue by approximately $17.0 million. In US dollar terms, six-month revenue increased 5% to $115.7 million from $110.3 million in 2009. The adverse effect of exchange rates was partially offset by a 3% increase in overall sales volumes and changes in Sun Gro's sales mix, as first-half sales volumes of higher-value professional mix products increased significantly and sales of lower value sand-based mixes decreased.

Sun Gro's first-half gross margin of 41% was down by 2% from the 43% recorded in the first six months of 2009. The gross margin reduction brought operating income down to $8.0 million from the $13.5 million recorded in the first six months of 2009. Had exchange rates remained constant, gross margin would have increased to 44% and operating income would have increased by approximately $2.3 million, or 17%, due both to the higher volumes and improved productivity. First-half EBITDA increased by $1.2 million, or 7%, to $18.1 million, primarily as a result of a realized gain on forward currency contracts of $3.0 million, versus a realized loss of $3.8 million in the prior year. Due to the impact of exchange rate fluctuations on the Fund's forward foreign currency contracts, net earnings decreased to $0.3 million from $12.4 million last year.

    
    Reconciliation of net earnings to earnings before interest, taxes,
    depreciation and amortization (EBITDA)

                                     Three      Three       Six        Six
                                     months     months     months     months
    (in thousands of dollars)        ended      ended      ended      ended
                                    June 30,   June 30,   June 30,   June 30,
                                      2010       2009       2010       2009
                                  -------------------------------------------

    Net earnings (loss) for
     the period                    $ (5,535)  $  9,028   $    322   $ 12,353

    Adjustments:
      Interest expense                1,885      2,593      3,791      5,037

      Depreciation, depletion
       and accretion                  3,111      3,209      6,235      6,475
      Amortization of intangibles       558        612      1,140      1,238
      Unrealized (gain) loss on
       foreign currency contracts     5,760     (8,260)     4,134     (8,687)
      Unrealized foreign exchange
       (gain) loss on US dollar
       assets and liabilities         2,114     (3,039)       791     (1,998)
      Gain on disposal of property,
       plant and equipment              (46)        (4)       (15)    (1,074)
      Income tax provision
       (recovery)                      (111)     1,912      1,671      3,494
                                  -------------------------------------------
    EBITDA                         $  7,736   $  6,051   $ 18,069   $ 16,838
                                  -------------------------------------------
                                  -------------------------------------------
    

Balance Sheet Improvements

In the second quarter, Sun Gro reduced its term-debt obligations by a total of $6.7 million, repaying principal of $3.4 million on term loans and other debt, and depositing $3.3 million (US$3.1 million) to a restricted cash account. Drawings on the Fund's revolving operating facility decreased seasonally to $24.5 million at June 30, 2010 from $35.8 million at March 31, 2010, and were also down from borrowings of $27.9 million at June 30, 2009. The Fund's improved balance sheet enabled it to reduce second quarter interest expense by $0.7 million year-over-year. At June 30, 2010, the Fund was in compliance with all of its debt covenants.

Distributable Cash

For the three months ended June 30, 2010, after the $6.7 million of debt repayments and restricted cash deposits, distributable cash was negative $3.0 million, or ($0.13) per unit. This compares to negative $3.2 million, or ($0.15) per unit, in the second quarter of 2009.

For the six months ended June 30, 2010, after deducting the $8.6 million of debt repayments and restricted cash deposits made during the first half, distributable cash was $1.0 million, or $0.05 per unit. This compares to distributable cash of $2.3 million, or $0.10 per unit, in the same period of 2009.

The year-over-year differences in distributable cash generated in both the three and six-month periods were primarily due to increased debt repayments and restricted cash deposits, higher sustaining capital expenditures in 2010 and an increase in current income tax expense. A portion of the tax expense increase is expected to reverse in the seasonally slower second half of the year. No cash distributions were declared to unitholders in either 2009 or 2010.

    
    Statement of Distributable Cash

                                     Three      Three       Six        Six
                                     months     months     months     months
    (in thousands of dollars         ended      ended      ended      ended
     except per-unit amounts)       June 30,   June 30,   June 30,   June 30,
                                      2010       2009       2010       2009
                                  -------------------------------------------

    Cash flows from operating
     activities                    $ 18,536   $ 23,777   $ 10,288   $ 11,812

    Adjustments:
      Change in non-cash operating
       working capital(1)           (13,779)   (20,468)     1,420       (881)

      Sustaining capital
       expenditures(2)               (1,031)      (472)    (1,843)      (836)
      Payments on capital leases
       and other loans(3)              (130)      (126)      (220)      (285)
      Restricted cash payments(4)    (3,272)    (2,960)    (4,061)    (2,960)
      Repayment of term loans(5)     (3,307)    (2,985)    (4,554)    (4,597)
                                  -------------------------------------------
    Distributable cash             $ (2,983)  $ (3,234)  $  1,030   $  2,253
                                  -------------------------------------------
                                  -------------------------------------------
    Distributable cash per unit    $  (0.13)  $  (0.15)  $   0.05   $   0.10
                                  -------------------------------------------
                                  -------------------------------------------

    Distributions declared
     per unit(6)                   $      -   $      -   $      -   $      -
                                  -------------------------------------------
                                  -------------------------------------------

    (1) Non-cash operating working capital fluctuates significantly on a
        quarterly basis as a result of the seasonality of Sun Gro's business.

    (2) Sustaining capital expenditures are defined as cash outlays, capital
        in nature, required to maintain the business at its current operating
        capacity and efficiency level. Investment capital expenditures are
        those made for the purpose of business expansion and are not recorded
        as a reduction from distributable cash.

    (3) Capital leases and equipment loans are used to finance certain
        harvesting and transportation equipment. Government loans were
        received to directly support certain capital projects. Payments on
        these capital-related loans and leases are included in the
        calculation of distributable cash.

    (4) Payments were made to a restricted cash account related to the Fund's
        fixed-rate term debt.

    (5) Repayments were made on a vendor note for a business acquisition and
        on the Fund's variable-rate term debt.

    (6) Under our amended credit facilities, the Fund is prohibited from
        making distributions.


    Operating Results for the three months ended June 30, 2010 and 2009

    Comparative Statements of Earnings
     (Loss) and Comprehensive Income
     (Loss)
    (In thousands of dollars except        Three months       Three months
     per-unit amounts, and number              ended              ended
     of units outstanding)                 June 30, 2010      June 30, 2009
                                        ------------------ ------------------

    Revenue                              $   56,141  100%   $   64,893  100%
    Cost of goods sold                       33,834   60%       38,482   59%
                                        ------------       ------------
    Gross profit                             22,307   40%       26,411   41%

    Distribution expenses                    10,382   18%       11,028   17%
    Selling expenses                          4,687    8%        4,920    8%
    General and administrative expenses       5,266    9%        5,556    8%
                                        ------------       ------------
    Total operating expenses                 20,335   36%       21,504   33%
                                        ------------       ------------
    Operating income                          1,972    4%        4,907    8%

    Other income (expense), net              (5,733) -11%        8,626   13%
    Interest expense                         (1,885)  -3%       (2,593)  -4%
                                        ------------       ------------
    Earnings (loss) before income taxes      (5,646) -10%       10,940   17%
    Income tax (provision) recovery
      Current                                (1,094)  -2%         (149)   0%
      Future                                  1,205    2%       (1,763)  -3%
                                        ------------       ------------
    Income tax (provision) recovery             111    0%       (1,912)  -3%
                                        ------------       ------------
    Net earnings (loss) for the period   $   (5,535) -10%   $    9,028   14%
    Other comprehensive income (loss):
      Unrealized gain (loss) on
       translating financial statements
       of self-sustaining foreign
       operations                             2,545    5%       (3,684)  -6%
                                        ------------       ------------
    Comprehensive income (loss)
     for the period                      $   (2,990)  -5%   $    5,344    9%
                                        ------------       ------------
                                        ------------       ------------

    Basic and diluted earnings
     (loss) per unit                     $    (0.25)        $     0.41
                                        ------------       ------------
                                        ------------       ------------
    Weighted average number of
     units outstanding                   22,284,681         22,284,681
                                        ------------       ------------
                                        ------------       ------------


    Selected supplemental revenue
     information for the
     three months ended June 30       2010       2009    Increase  (decrease)
                                  ---------- ---------- ---------- ----------

      Volume in thousands of
       EBs(1)
      Peat and Bark-based
       Growing Mixes                  1,683      1,638         45         3%
      Peat Moss                         910      1,002        (92)       -9%
      Bulk Bark Mixes                   804        695        109        16%
      Sand-based Mixes                  130        256       (126)      -49%
      Fertilizer and Minerals            75         76         (1)       -1%
                                  ---------- ---------- ---------- ----------
      Total                           3,602      3,667        (65)       -2%
                                  ---------- ---------- ---------- ----------
                                  ---------- ---------- ---------- ----------

      Average revenue per
       EB(1) (US$)
      Peat and Bark-based
       Growing Mixes              $   20.41   $  19.95   $   0.46         2%
      Peat Moss                       10.50      10.87      (0.37)       -3%
      Bulk Bark Mixes                  7.52       7.94      (0.42)       -5%
      Sand-based Mixes                12.19      11.07       1.12        10%
      Fertilizer and Minerals         46.32      41.18       5.14        12%
                                  ---------- ---------- ---------- ----------
      Total                        $  15.27   $  15.01   $   0.26         2%
                                  ---------- ---------- ---------- ----------
                                  ---------- ---------- ---------- ----------

      Average revenue per
       EB(1) (CDN$)
      Peat and Bark-based
       Growing Mixes               $  21.00   $  23.69   $  (2.69)      -11%
      Peat Moss                       10.81      12.82      (2.01)      -16%
      Bulk Bark Mixes                  7.75       9.41      (1.66)      -18%
      Sand-based Mixes                12.64      12.89      (0.25)       -2%
      Fertilizer and Minerals         47.73      48.58      (0.85)       -2%
                                  ---------- ---------- ---------- ----------
      Total                        $  15.72   $  17.78   $  (2.06)      -12%
                                  ---------- ---------- ---------- ----------
                                  ---------- ---------- ---------- ----------

    (1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
        referring to 10 cubic feet of product. Calculation of average revenue
        per EB does not include transportation-related surcharges or the cost
        of early payment discounts.


    Operating Results for the six months ended June 30, 2010 and 2009

    Comparative Statements of Earnings
     and Comprehensive Income
    (In thousands of dollars except         Six months         Six months
     per-unit amounts, and number of           ended              ended
     units outstanding)                    June 30, 2010      June 30, 2009
                                        ------------------ ------------------

    Revenue                              $  120,358  100%   $  133,854  100%
    Cost of goods sold                       70,926   59%       75,946   57%
                                        ------------       ------------
    Gross profit                             49,432   41%       57,908   43%

    Distribution expenses                    21,440   18%       21,499   16%
    Selling expenses                          9,484    8%       10,165    8%
    General and administrative expenses      10,470    8%       12,757    9%
                                        ------------       ------------
    Total operating expenses                 41,394   34%       44,421   33%
                                        ------------       ------------
    Operating income                          8,038    7%       13,487   10%

    Other income (expense), net              (2,254)  -2%        7,397    6%
    Interest expense                         (3,791)  -3%       (5,037)  -4%
                                        ------------       ------------
    Earnings before income taxes              1,993    2%       15,847   12%
    Income tax (provision) recovery
      Current                                (2,570)  -2%         (870)  -1%
      Future                                    899    1%       (2,624)  -2%
                                        ------------       ------------
    Income tax provision                     (1,671)  -1%       (3,494)  -3%
                                        ------------       ------------
    Net earnings for the period          $      322    0%   $   12,353    9%
    Other comprehensive income:
      Unrealized gain (loss) on
       translating financial statements
       of self-sustaining foreign
       operations                               822    1%       (2,903)  -2%
                                        ------------       ------------
    Comprehensive income for
     the period                          $    1,144    1%   $    9,450    7%
                                        ------------       ------------
                                        ------------       ------------

    Basic and diluted earnings
     per unit                            $     0.01         $     0.55
                                        ------------       ------------
                                        ------------       ------------
    Weighted average number of units
     outstanding                         22,284,681         22,284,681
                                        ------------       ------------
                                        ------------       ------------


    Selected supplemental revenue
     information for the
     six months ended June 30         2010       2009    Increase  (decrease)
                                  ---------- ---------- ---------- ----------

      Volume in thousands of
       EBs(1)
      Peat and Bark-based
       Growing Mixes                  3,648      3,388        260         8%
      Peat Moss                       1,852      1,803         49         3%
      Bulk Bark Mixes                 1,423      1,311        112         9%
      Sand-based Mixes                  205        425       (220)      -52%
      Fertilizer and Minerals           192        162         30        19%
                                  ---------- ---------- ---------- ----------
      Total                           7,320      7,089        231         3%
                                  ---------- ---------- ---------- ----------
                                  ---------- ---------- ---------- ----------

      Average revenue per
       EB(1) (US$)
      Peat and Bark-based
       Growing Mixes               $  20.75   $  20.27   $   0.48         2%
      Peat Moss                       10.67      10.89      (0.22)       -2%
      Bulk Bark Mixes                  7.66       8.19      (0.53)       -6%
      Sand-based Mixes                11.40      11.14       0.26         2%
      Fertilizer and Minerals         41.60      43.75      (2.15)       -5%
                                  ---------- ---------- ---------- ----------
      Total                        $  15.94   $  15.64   $   0.30         2%
                                  ---------- ---------- ---------- ----------
                                  ---------- ---------- ---------- ----------

      Average revenue per
       EB(1) (CDN$)
      Peat and Bark-based
       Growing Mixes               $  21.59   $  24.55   $  (2.96)      -12%
      Peat Moss                       11.09      13.11      (2.02)      -15%
      Bulk Bark Mixes                  7.96       9.89      (1.93)      -20%
      Sand-based Mixes                11.86      13.28      (1.42)      -11%
      Fertilizer and Minerals         43.32      52.81      (9.49)      -18%
                                  ---------- ---------- ---------- ----------
      Total                        $  16.58   $  18.90   $  (2.32)      -12%
                                  ---------- ---------- ---------- ----------
                                  ---------- ---------- ---------- ----------

    (1) An EB, or equivalent bale, is Sun Gro's standard unit of measure,
        referring to 10 cubic feet of product. Calculation of average revenue
        per EB does not include transportation-related surcharges or the cost
        of early payment discounts.
    

Conversion to Corporation

As previously announced, at the Fund's annual and special meeting on May 27, 2010, unitholders approved the plan of arrangement (the arrangement) for the Fund's reorganization into a corporate structure by a near unanimous vote of 99.91%. A final order of the Supreme Court of British Columbia approving the arrangement was granted on May 31, 2010. The arrangement is expected to become effective on or before December 31, 2010, at which time all of the units of the Fund will be exchanged on a one-for-one basis for common shares of the new public corporation, Sun Gro Horticulture Inc.

Outlook

Over the near term, although economic conditions remain unsettled, Sun Gro expects that its sales volumes will be consistent with 2009 levels. "Half of our top 10 professional peat mix customers increased their volumes with us in the second quarter. This bodes well for the future growth of our business," said Weaver, adding that, "After two historically low annual peat harvests, we are also encouraged by the marked improvement in our harvest volumes so far this year."

"We remain focused on reducing debt in order to continue strengthening our balance sheet in the second half. We expect to make principal repayments over the balance of 2010 similar to those we made last year," said Weaver.

Foreign currency contracts for the remainder of 2010 total US$26.5 million at an average rate of CDN$1.11 (US$0.90), representing substantially all of Sun Gro's anticipated purchases of Canadian dollars for the balance of the year. For 2011, the Fund has entered into foreign currency contracts totalling US$41.0 million at an average rate of CDN$1.05 (US$0.95).

Copies of management's discussion and analysis (MD&A) and the Fund's unaudited financial statements for the three and six months ended June 30, 2010 will be available at www.sedar.com and at www.sungro.com on or about August 11, 2010.

Forward-Looking Information

This news release contains certain forward-looking statements within the meaning of applicable Canadian provincial securities laws. All statements, other than statements of historical fact, are forward-looking statements or information. When used in this news release, the words "anticipate", "will", "believe", "estimate", "expect", "intend", "target", "plan", "goals", "objectives", "pro forma", "forecast", "schedule", "may" and other similar words and expressions, identify forward-looking statements or information.

This forward-looking information relates to, among other things: compliance with Sun Gro's debt covenants; the completion of the new baler installation at Sun Gro's Seba Beach facility; expected sales volumes; the impact of increased volumes among Sun Gro's professional peat mix customers; expected principal payments on Sun Gro's debt facilities; and the completion of the Fund's conversion to a corporation prior to year-end. These statements reflect the current views of the Fund with respect to future events and are necessarily based upon a number of assumptions and estimates that, while considered reasonable by the Fund, are inherently subject to significant business, economic, political and social uncertainties and contingencies. Many factors, both known and unknown, could cause actual results, performance or achievements to be materially different from the results, performance or achievements that are or may be expressed or implied by such forward-looking statements contained in this news release and the Fund has made assumptions based on or related to many of these factors. Such factors include, without limitation, risks relating to: currency fluctuations; interest rate fluctuations; Sun Gro's ability to meet its financial obligations as they fall due; financial loss if a customer or counterparty to a financial instrument fails to meet its contractual obligations; Sun Gro's resource supply; competition in the growing media industry; the effect of seasonality, weather and other related factors on Sun Gro's production and sales; environmental regulations and related requirements; climate and its ability to affect the cost and quality of Sun Gro's harvest; potential product liabilities, regulatory requirements and labour relations connected with Sun Gro's operations; Sun Gro's ability to retain key personnel; potential litigation; unitholder distributions; the Fund's reliance on Sun Gro's operations; unitholder limited liability; income tax matters; the eligibility of the Fund's units under registered retirement savings plans, deferred profit sharing plans, registered retirement income funds and registered education savings plans; the nature of and statutory rights associated with units; distributions to unitholders upon redemption of units or termination of the Fund; dilution of existing unitholder interests on the issuance of additional units; restrictions on Sun Gro's potential growth under its current income trust structure; the inability to obtain required consents, permits or approvals including unitholder and court approval of the proposed conversion into a corporation; the completion of the proposed conversion; and those factors that have been identified under the caption "Risk Factors" in the Fund's Annual Information Form filed on SEDAR at www.sedar.com. Although the Fund has attempted to identify important factors that could cause actual results to differ materially, there may be other factors that cause results not to be as anticipated, estimated, described or intended. The Fund does not intend and does not assume any obligation, to update the forward-looking statements or information to reflect changes in assumptions or changes in circumstances where any other events affecting such statements or information, other than as required by applicable securities laws. Unitholders are cautioned against attributing undue reliance on forward-looking statements or information.

Non-GAAP Measures

EBITDA is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, EBITDA of the Fund may not be comparable to EBITDA measures presented by other issuers. However, EBITDA is commonly used as an indicator of financial performance and the Fund believes that EBITDA is a useful supplemental measure that may assist in assessing the potential return on an investment in the Fund.

The calculation of EBITDA is based on net earnings for the period, adjusted for interest expense, income tax provision or recovery, depreciation, depletion and accretion, amortization of intangibles, goodwill and asset impairments, gain or loss on disposal of property, plant and equipment, unrealized gain or loss on foreign currency contracts and unrealized foreign exchange gain or loss on US dollar assets and liabilities.

Distributable cash is not an earnings measure recognized by GAAP and does not have a standardized meaning prescribed by GAAP. Therefore, the distributable cash of the Fund may not be comparable to the distributable cash measures presented by other issuers. However, distributable cash is commonly used by Canadian open-ended trusts as an indicator of financial performance and the Fund believes that distributable cash is a useful supplemental measure that may assist in assessing the potential return on an investment in the Fund.

The calculation of distributable cash is based on cash flows from operating activities, adjusted for changes in non-cash operating working capital, sustaining capital expenditures, government grants and government loans, other loans for certain production equipment, capital lease obligations, repayments on term loans, restricted cash payments and such reserves as the Board of Directors of Sun Gro and Trustees of the Fund may consider appropriate. Certain expenditures that are incurred as part of earnings-enhancing capital projects and acquisitions are excluded from the determination of distributable cash flow if the project or acquisition is funded by term debt or equity financing.

Income Fund Profile

Sun Gro Horticulture Income Fund was launched with the completion of an Initial Public Offering on March 27, 2002. Units of the Fund are listed for trading on the Toronto Stock Exchange. At August 10, 2010, there were 22,284,681 units of the Fund issued and outstanding.

Company Profile

Sun Gro is the largest producer and distributor of peat and bark-based growing mixes to professional plant growers in the US and Canada. It is also North America's largest producer and distributor of sphagnum peat moss, with approximately 65,000 acres of peat bogs under lease. Sun Gro sells its professional products primarily to greenhouse, nursery and specialty crop growers. The company also sells peat moss and potting mixes to retail customers, either by way of private label partnerships or under its own brand names. In addition, Sun Gro sells sand-based mixes to golf course developers and landscapers. The company's North America-wide production network now comprises 12 Canadian operating plants and 13 US operating plants.

    
    Sun Gro Horticulture Income Fund
    Consolidated Balance Sheet
    (in thousands of dollars)

                                                     As at          As at
                                                    June 30      December 31
                                                      2010           2009
                                                -------------- --------------
    Assets

    Current assets
      Accounts receivable                        $     41,919   $     30,356
      Inventories                                      33,938         39,723
      Unrealized gain on foreign currency
       contracts                                        1,170          4,511
      Prepaid expenses and other assets                 2,533          2,911
                                                -------------- --------------
                                                       79,560         77,501

    Property, plant and equipment                     106,878        110,436
    Intangible assets                                  39,535         40,490
    Unrealized gain on foreign currency
     contracts                                              -            115
    Restricted cash                                     9,012          4,790
    Other assets                                        1,262          1,253
                                                -------------- --------------
                                                 $    236,247   $    234,585
                                                -------------- --------------
                                                -------------- --------------
    Liabilities and Unitholders' Equity

    Current liabilities
      Bank overdraft                             $      2,688   $      2,242
      Operating line                                   24,537         24,709
      Accounts payable and accrued liabilities         15,878         13,722
      Current taxes payable                             2,028            816
      Current portion of long-term debt                 6,911          7,264
                                                -------------- --------------
                                                       52,042         48,753

    Other liabilities                                   6,163          5,887
    Unrealized loss on foreign currency
     contracts                                            678              -
    Long-term debt                                     54,103         57,016
    Future income taxes                                12,916         13,728
                                                -------------- --------------
                                                      125,902        125,384
                                                -------------- --------------
    Unitholders' equity
      Capital contributions                           211,726        211,726
      Accumulated other comprehensive loss            (18,831)       (19,653)
      Cumulative earnings                              50,468         50,146
      Cumulative distributions declared              (133,018)      (133,018)
                                                -------------- --------------
                                                      110,345        109,201
                                                -------------- --------------
                                                 $    236,247   $    234,585
                                                -------------- --------------
                                                -------------- --------------



    Sun Gro Horticulture Income Fund
    Consolidated Statements of Earnings (Loss) and Comprehensive Income
    (Loss)
    (in thousands of dollars except per-unit amounts and number of units
    outstanding)

                                 Three       Three        Six         Six
                                 months      months      months      months
                                 ended       ended       ended       ended
                                June 30,    June 30,    June 30,    June 30,
                                  2010        2009        2010        2009
                              -----------------------------------------------

    Revenue                   $   56,141  $   64,893  $  120,358  $  133,854
    Cost of goods sold            33,834      38,482      70,926      75,946
                              -----------------------------------------------
    Gross profit                  22,307      26,411      49,432      57,908

    Distribution expenses         10,382      11,028      21,440      21,499
    Selling expenses               4,687       4,920       9,484      10,165
    General and administrative
     expenses                      5,266       5,556      10,470      12,757
                              -----------------------------------------------
    Total operating expenses      20,335      21,504      41,394      44,421
                              -----------------------------------------------
    Operating income               1,972       4,907       8,038      13,487

    Other income (expense), net   (5,733)      8,626      (2,254)      7,397
    Interest expense              (1,885)     (2,593)     (3,791)     (5,037)
                              -----------------------------------------------
    Earnings (loss) before
     income taxes                 (5,646)     10,940       1,993      15,847
    Income tax (provision)
     recovery
      Current                     (1,094)       (149)     (2,570)       (870)
      Future                       1,205      (1,763)        899      (2,624)
                              -----------------------------------------------
    Income tax (provision)
     recovery                        111      (1,912)     (1,671)     (3,494)
                              -----------------------------------------------
    Net earnings (loss) for
     the period                   (5,535)      9,028         322      12,353
    Other comprehensive income
     (loss):
      Unrealized (loss) gain
       on translating financial
       statements of self-
       sustaining foreign
       operations                  2,545      (3,684)        822      (2,903)
                              -----------------------------------------------
    Comprehensive income
     (loss) for the period    $   (2,990) $    5,344  $    1,144  $    9,450
                              -----------------------------------------------
                              -----------------------------------------------

    Basic and diluted earnings
     per unit                 $    (0.25) $     0.41  $     0.01  $     0.55
                              -----------------------------------------------
                              -----------------------------------------------
    Weighted average number
     of units outstanding     22,284,681  22,284,681  22,284,681  22,284,681
                              -----------------------------------------------
                              -----------------------------------------------



    Sun Gro Horticulture Income Fund
    Consolidated Statements of Changes in Unitholders' Equity
    (in thousands of dollars)

                                    Accumu-
                                    lated
                                    Other
                          Unit-     Compre-             Cumulative
                        holders'   hensive   Cumulative   Distri-
                         Capital     Loss     Earnings    butions     Total
                       ------------------------------------------------------
    Balance -
     December 31,
     2008              $ 211,726  $ (12,200) $  31,225  $(133,018) $  97,733
      Earnings for
       the year                -          -     18,921          -     18,921
      Other comprehensive
       loss for the
       year                    -     (7,453)         -          -     (7,453)
                       ------------------------------------------------------
    Balance -
     December 31,
     2009              $ 211,726  $ (19,653) $  50,146  $(133,018) $ 109,201
      Earnings for
       the period              -          -        322          -        322
      Other comprehensive
       income for the
       period                  -        822          -          -        822
                       ------------------------------------------------------
    Balance -
     June 30, 2010     $ 211,726  $ (18,831) $  50,468  $(133,018) $ 110,345
                       ------------------------------------------------------
                       ------------------------------------------------------



    Sun Gro Horticulture Income Fund
    Consolidated Statements of Cash Flows
    (in thousands of dollars)

                                 Three       Three        Six         Six
                                 months      months      months      months
                                 ended       ended       ended       ended
                                June 30,    June 30,    June 30,    June 30,
                                  2010        2009        2010        2009
                              -----------------------------------------------
    Cash flows from
     operating  activities
    Net earnings (loss) for
     the period               $   (5,535) $    9,028  $      322  $   12,353
      Items not affecting
       cash
        Depreciation, depletion
         and accretion             3,111       3,209       6,235       6,475
        Amortization of
         intangible assets           558         612       1,140       1,238
        Unrealized (gain) loss
         on foreign currency
         contracts                 5,760      (8,260)      4,134      (8,687)
        Unrealized foreign
         exchange (gain) loss
         on US dollar assets
         and liabilities           2,114      (3,039)        791      (1,998)
        Gain on disposal of
         property, plant and
         equipment                   (46)         (4)        (15)     (1,074)
        Future income tax
         provision (recovery)     (1,205)      1,763        (899)      2,624
                              -----------------------------------------------
                                   4,757       3,309      11,708      10,931

      Change in non-cash
       operating working
       capital                    13,779      20,468      (1,420)        881
                              -----------------------------------------------
                                  18,536      23,777      10,288      11,812
    Cash flows from investing
     activities
      Instalment note payment
       for business acquisition        -           -        (420)       (496)
      Additions to property,
       plant and equipment        (1,031)       (472)     (1,843)       (836)
      Proceeds from disposal
       of property, plant
       and equipment                 102          24         102       1,370
                              -----------------------------------------------
                                    (929)       (448)     (2,161)         38
    Cash flows from financing
     activities
      Restricted cash payments    (3,272)     (2,960)     (4,061)     (2,960)
      Repayment of term loans     (3,307)     (2,985)     (4,134)     (5,351)
      Decrease in
       operating line            (11,242)    (16,163)       (173)     (6,235)
      Payments on capital
       leases and other term
       loans                        (130)       (126)       (220)       (285)
                              -----------------------------------------------
                                 (17,951)    (22,234)     (8,588)    (14,831)
    Effect of exchange rate
     changes on cash                  59        (379)         15        (403)
                              -----------------------------------------------
    Decrease (increase) in
     bank overdraft                 (285)        716        (446)     (3,384)
    Cash (bank overdraft) -
     beginning of the period      (2,403)     (1,823)     (2,242)      2,277
                              -----------------------------------------------
    Bank overdraft - end of
     the period               $   (2,688) $   (1,107) $   (2,688) $   (1,107)
                              -----------------------------------------------
                              -----------------------------------------------
    Supplemental cash flow
     information
      Interest paid           $    1,855  $    2,464  $    3,844  $    4,998
      Income taxes paid
       (refund), net          $      630  $      (43) $    1,431  $      (22)
      Equipment acquired
       under capital lease    $      204  $        -  $      424  $        -
    

%SEDAR: 00017490E

SOURCE SUN GRO HORTICULTURE INCOME FUND

For further information: For further information: Bradley A. Wiens, Vice-President, Finance and CFO, Sun Gro Horticulture Income Fund, Tel: (425) 373-3603, Email: bradw@sungro.com, Website: www.sungro.com

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SUN GRO HORTICULTURE INCOME FUND

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