10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 28, 2015

or

 

¨ TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 001-33268

 

 

CENTRAL GARDEN & PET COMPANY

 

 

 

Delaware   68-0275553

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

1340 Treat Blvd., Suite 600, Walnut Creek, California 94597

(Address of principal executive offices)

(925) 948-4000

(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.    x  Yes    ¨  No

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).    x  Yes    ¨  No

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 definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨    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    x  No

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

 

Common Stock Outstanding as of April 30, 2015

     11,908,317   

Class A Common Stock Outstanding as of April 30, 2015

     35,804,066   

Class B Stock Outstanding as of April 30, 2015

     1,652,262   

 

 

 


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements   4   
Condensed Consolidated Balance Sheets as of March 28, 2015, March 29, 2014, and September 27, 2014   4   
Condensed Consolidated Statements of Operations Three and Six Months Ended March 28, 2015 and March 29, 2014   5   
Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended March 28, 2015 and March 29, 2014   6   
Condensed Consolidated Statements of Cash Flows Six Months Ended March 28, 2015 and March 29, 2014   7   
Notes to Condensed Consolidated Financial Statements   8   
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   31   
Item 3. Quantitative and Qualitative Disclosures About Market Risk   38   
Item 4. Controls and Procedures   38   
PART II. OTHER INFORMATION   
Item 1. Legal Proceedings   38   
Item 1A. Risk Factors   38   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   38   
Item 3. Defaults Upon Senior Securities   39   
Item 4. Mine Safety Disclosures   39   
Item 5. Other Information   39   
Item 6. Exhibits   39   

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Form 10-Q includes ‘‘forward-looking statements.’’ Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, projected cost savings, capital expenditures, financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries in which we operate and other information that is not historical information. When used in this Form 10-Q, the words ‘‘estimates,’’ ‘‘expects,’’ ‘‘anticipates,’’ ‘‘projects,’’ ‘‘plans,’’ ‘‘intends,’’ ‘‘believes’’ and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-Q are set forth in the Form 10-K for the fiscal year ended September 27, 2014, including the factors described in the section entitled ‘‘Item 1A – Risk Factors.’’ If any of these risks or uncertainties materializes, or if any of our underlying assumptions is incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances. Presently known risk factors include, but are not limited to, the following factors:

 

    seasonality and fluctuations in our operating results and cash flow;

 

    fluctuations in market prices for seeds and grains and other raw materials;

 

    our inability to pass through cost increases in a timely manner;

 

    risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;

 

    declines in consumer spending during economic downturns;

 

2


    inflation, deflation and other adverse macro-economic conditions;

 

    supply shortages in small animals and pet birds;

 

    adverse weather conditions;

 

    fluctuations in energy prices, fuel and related petrochemical costs;

 

    access to and cost of additional capital;

 

    dependence on a small number of customers for a significant portion of our business;

 

    consolidation trends in the retail industry;

 

    competition in our industries;

 

    risks associated with our acquisition strategy;

 

    potential goodwill or intangible asset impairment;

 

    dependence upon our key executives;

 

    continuing implementation of a new enterprise resource planning information technology system;

 

    our ability to protect our intellectual property rights;

 

    potential environmental liabilities;

 

    risk associated with international sourcing;

 

    litigation and product liability claims;

 

    regulatory issues;

 

    the impact of product recalls;

 

    potential costs and risks associated with actual or anticipated cyber attacks;

 

    the voting power associated with our Class B stock; and

 

    potential dilution from issuance of authorized shares.

 

3


PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

Unaudited

 

     March 28,      March 29,      September 27,  
     2015      2014      2014  
ASSETS         

Current assets:

        

Cash and cash equivalents

   $ 11,943       $ 16,748       $ 78,676   

Restricted cash

     12,583         0         14,283   

Short term investments

     0         14,220         9,990   

Accounts receivable (less allowance for doubtful accounts of $20,813, $24,771 and $25,212)

     321,765         323,183         193,729   

Inventories

     382,328         402,720         326,386   

Prepaid expenses and other

     58,251         55,882         48,488   
  

 

 

    

 

 

    

 

 

 

Total current assets

  786,870      812,753      671,552   

Land, buildings, improvements and equipment—net

  163,207      185,354      166,849   

Goodwill

  209,089      205,756      208,233   

Other intangible assets—net

  85,185      77,895      87,997   

Deferred income taxes and other assets

  28,657      12,589      14,096   
  

 

 

    

 

 

    

 

 

 

Total

$ 1,273,008    $ 1,294,347    $ 1,148,727   
  

 

 

    

 

 

    

 

 

 
LIABILITIES AND EQUITY

Current liabilities:

Accounts payable

$ 139,821    $ 142,152    $ 88,428   

Accrued expenses

  83,442      80,886      84,379   

Current portion of long-term debt

  289      303      291   
  

 

 

    

 

 

    

 

 

 

Total current liabilities

  223,552      223,341      173,098   

Long-term debt

  514,924      545,032      449,948   

Other long-term obligations

  44,549      40,470      39,228   

Equity:

Common stock, $.01 par value: 11,919,749, 12,308,802, and 12,437,307 shares outstanding at March 28, 2015, March 29, 2014 and September 27, 2014

  119      123      124   

Class A common stock, $.01 par value: 35,765,091, 36,417,849 and 36,887,311 shares outstanding at March 28, 2015, March 29, 2014 and September 27, 2014

  357      364      369   

Class B stock, $.01 par value: 1,652,262 shares outstanding

  16      16      16   

Additional paid-in capital

  387,074      396,490      396,586   

Accumulated earnings

  101,556      85,779      86,396   

Accumulated other comprehensive income

  64      1,529      1,232   
  

 

 

    

 

 

    

 

 

 

Total Central Garden & Pet Company shareholders’ equity

  489,186      484,301      484,723   

Noncontrolling interest

  797      1,203      1,730   
  

 

 

    

 

 

    

 

 

 

Total equity

  489,983      485,504      486,453   
  

 

 

    

 

 

    

 

 

 

Total

$ 1,273,008    $ 1,294,347    $ 1,148,727   
  

 

 

    

 

 

    

 

 

 

 

See notes to condensed consolidated financial statements.

 

4


CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended     Six Months Ended  
     March 28,
2015
    March 29,
2014
    March 28,
2015
    March 29,
2014
 

Net sales

   $ 497,602      $ 501,611      $ 804,922      $ 792,132   

Cost of goods sold and occupancy

     347,540        354,015        566,879        564,795   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  150,062      147,596      238,043      227,337   

Selling, general and administrative expenses

  100,091      102,827      186,934      190,923   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

  49,971      44,769      51,109      36,414   

Interest expense

  (11,876   (10,405   (22,379   (22,622

Interest income

  18      16      89      29   

Other income (expense)

  (121   108      (489   (60
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes and noncontrolling interest

  37,992      34,488      28,330      13,761   

Income taxes

  14,012      12,999      10,043      5,084   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income including noncontrolling interest

  23,980      21,489      18,287      8,677   

Net income attributable to noncontrolling interest

  743      594      747      490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Central Garden & Pet Company

$ 23,237    $ 20,895    $ 17,540    $ 8,187   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per share attributable to Central Garden & Pet Company:

Basic

$ 0.48    $ 0.43    $ 0.36    $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

$ 0.47    $ 0.43    $ 0.35    $ 0.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average shares used in the computation of net income per

share:

Basic

  48,384      48,688      48,882      48,523   

Diluted

  49,439      49,116      49,689      48,963   

See notes to condensed consolidated financial statements.

 

5


CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands, except per share amounts)

(unaudited)

 

     Three Months Ended      Six Months Ended  
     March 28,
2015
    March 29,
2014
     March 28,
2015
    March 29,
2014
 

Net income

   $ 23,980      $ 21,489       $ 18,287      $ 8,677   

Other comprehensive income (loss):

         

Unrealized loss on securities

     (20     0         (10     0   

Reclassification of realized loss on securities included in net income

     20        0         20        0   

Foreign currency translation

     (626     2         (1,178     87   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total comprehensive income

  23,354      21,491      17,119      8,764   

Comprehensive income attributable to noncontrolling interests

  743      594      747      490   
  

 

 

   

 

 

    

 

 

   

 

 

 

Comprehensive income attributable to Central Garden & Pet Company

$ 22,611    $ 20,897    $ 16,372    $ 8,274   
  

 

 

   

 

 

    

 

 

   

 

 

 

See notes to condensed consolidated financial statements.

 

6


CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

     Six Months Ended  
     March 28,
2015
    March 29,
2014
 

Cash flows from operating activities:

    

Net income

   $ 18,287      $ 8,677   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     16,814        17,512   

Stock-based compensation

     3,684        4,578   

Excess tax benefits from stock-based awards

     (351     (321

Deferred income taxes

     4,467        5,064   

Write-off of deferred financing costs

     537        1,731   

Loss on sale of property and equipment

     115        74   

Other

     (51     0   

Change in assets and liabilities:

    

Accounts receivable

     (128,623     (128,803

Inventories

     (56,740     (10,587

Prepaid expenses and other assets

     (6,794     406   

Accounts payable

     51,474        38,334   

Accrued expenses

     (1,245     5,163   

Other long-term obligations

     (95     (1,871
  

 

 

   

 

 

 

Net cash used in operating activities

  (98,521   (60,043
  

 

 

   

 

 

 

Cash flows from investing activities:

Additions to property and equipment

  (11,025   (10,024

Payments to acquire companies, net of cash acquired

  (16,000   0   

Proceeds from short term investments

  9,997      3,600   

Investments in short term investments

  (17   0   

Change in restricted cash

  1,700      0   

Other investing activities

  (331   0   
  

 

 

   

 

 

 

Net cash used in investing activities

  (15,676   (6,424
  

 

 

   

 

 

 

Cash flows from financing activities:

Repayments of long-term debt

  (50,141   (203

Borrowings under revolving line of credit

  186,000      188,000   

Repayments on revolving line of credit

  (71,000   (116,000

Proceeds from issuance of common stock

  1,220      461   

Repurchase of common stock

  (17,164   (924

Distribution to noncontrolling interest

  (1,680   (633

Payment of financing costs

  0      (3,087

Excess tax benefits from stock-based awards

  351      321   
  

 

 

   

 

 

 

Net cash provided by financing activities

  47,586      67,935   

Effect of exchange rate changes on cash and cash equivalents

  (122   124   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  (66,733   1,592   

Cash and equivalents at beginning of period

  78,676      15,156   
  

 

 

   

 

 

 

Cash and equivalents at end of period

$ 11,943    $ 16,748   
  

 

 

   

 

 

 

Supplemental information:

Cash paid for interest

$ 21,448    $ 20,804   
  

 

 

   

 

 

 

 

See notes to condensed consolidated financial statements.

 

7


CENTRAL GARDEN & PET COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six Months Ended March 28, 2015

(unaudited)

 

1.   Basis of Presentation

The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of March 28, 2015 and March 29, 2014, the condensed consolidated statements of operations for the three months and six months ended March 28, 2015 and March 29, 2014, the condensed consolidated statements of comprehensive income for the three months and six months ended March 28, 2015 and March 29, 2014 and the condensed consolidated statements of cash flows for the six months ended March 28, 2015 and March 29, 2014 have been prepared by the Company, without audit. In the opinion of management, the interim financial statements include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented.

For the Company’s foreign business in the UK, the local currency is the functional currency. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Deferred taxes are not provided on translation gains and losses because the Company expects earnings of its foreign subsidiary to be permanently reinvested. Transaction gains and losses are included in results of operations. See Note 8, Supplemental Equity Information, for further detail.

Due to the seasonal nature of the Company’s garden business, the results of operations for the three and six month periods ended March 28, 2015 are not indicative of the operating results that may be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2014 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 27, 2014 balance sheet presented herein was derived from the audited statements.

Noncontrolling Interest

Noncontrolling interest in the Company’s condensed consolidated financial statements represents the 20% interest not owned by Central in a consolidated subsidiary. Since the Company controls this subsidiary, its financial statements are consolidated with those of the Company, and the noncontrolling owner’s 20% share of the subsidiary’s net assets and results of operations is deducted and reported as noncontrolling interest on the consolidated balance sheets and as net income (loss) attributable to noncontrolling interest in the consolidated statements of operations. See Note 8, Supplemental Equity Information, for additional information.

Derivative Instruments

The Company principally uses a combination of purchase orders and various short and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities. The Company also enters into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of corn, which impacts the cost of raw materials. The Company’s primary objective when entering into these derivative contracts is to achieve greater certainty with regard to the future price of commodities purchased for use in its supply chain. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments.

The Company does not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in other income (expense) in its condensed consolidated statements of operations. As of March 28, 2015 and March 29, 2014, the Company had no outstanding derivative instruments.

Recent Accounting Pronouncements

Discontinued Operations

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. ASU 2014-08 provides amended guidance for reporting discontinued operations and disclosures of disposals of components. The amended guidance raises the threshold for disposals to qualify as discontinued operations and permits significant

 

8


continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The amended guidance became effective for the Company during the first quarter of fiscal 2015. The adoption of the applicable sections of this ASC may have an impact on the accounting for any future discontinued operations the Company may have.

Revenue Recognition

In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. This update was issued as Accounting Standards Codification Topic 606. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On April 1, 2015 the FASB voted to defer the effective date of ASU 2014-09 for one year. ASU 2014-09 is now effective for the Company in the first quarter of its fiscal year ending September 28, 2019. Early adoption is not permitted. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.

Stock Based Compensation

In June 2014, the FASB issued ASU No. 2014-12 (ASU 2014-12), Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

Consolidation

In February 2015, the FASB issued ASU 2015-02 (ASU 2015-02), Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years that begin after December 15, 2015. The Company is currently evaluating the impact the adoption of ASU 2015-02 will have on its consolidated financial statements.

Debt Issuance Costs

In April 2015, the FASB issued ASU No. 2015-03(ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. ASU 2015-03 is effective on a retrospective basis for annual and interim reporting periods beginning after December 15, 2015, but early adoption is permitted. As of March 28, 2015, the Company has approximately $6.1 million of net deferred financing costs that would be reclassified from a long-term asset to a reduction in the carrying amount of its debt.

Cloud Computing Costs

In April 2015, the FASB issued ASU No. 2015-05(ASU 2015-05), Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This standard clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. ASU 2015-05 is effective for public entities for annual and interim periods therein beginning after December 15, 2015. Early adoption is permitted. Entities may adopt the guidance either retrospectively or prospectively to arrangements entered into, or materially modified after the effective date. The Company is currently evaluating the impact the adoption of ASU 2015-05 will have on its consolidated financial statements.

 

9


2.   Fair Value Measurements

ASC 820 establishes a single authoritative definition of fair value, a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 requires financial assets and liabilities to be categorized based on the inputs used to calculate their fair values as follows:

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

Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).

The Company’s financial instruments include cash and equivalents, short term investments consisting of bank certificates of deposit, accounts receivable and payable, derivative instruments, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of March 28, 2015 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Liabilities:

           

Liability for contingent consideration (b)

   $ 0       $ 0       $ 4,343       $ 4,343   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

$ 0    $ 0    $ 4,343    $ 4,343   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of March 29, 2014 (in thousands):

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Certificates of deposit (c)

   $ 0       $ 14,220       $ 0       $ 14,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 0    $ 14,220    $ 0    $ 14,220   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

Liability for contingent consideration (b)

$ 0    $ 0    $ 4,414    $ 4,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

$ 0    $ 0    $ 4,414    $ 4,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents our financial assets and liabilities at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of September 27, 2014:

 

     Level 1      Level 2      Level 3      Total  

Assets:

           

Short-term investments (a)

   $ 9,990       $ 0       $ 0       $ 9,990   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total assets

$ 9,990    $ 0    $ 0    $ 9,990   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

Liability for contingent consideration (b)

$ 0    $ 0    $ 4,414    $ 4,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

$ 0    $ 0    $ 4,414    $ 4,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The fair value of short-term investments is based on quoted prices in active markets for identical assets.

 

10


(b) The liability for contingent consideration relates to an earn-out for B2E, acquired in December 2012. The fair value of the contingent consideration arrangement is determined based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. This is presented as part of long-term liabilities in our consolidated balance sheets.
(c) The fair value of the Company’s time deposits is based on the most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. These are presented as short term investments in the Company’s consolidated balance sheets.

The following table provides a summary of changes in fair value of our Level 3 financial instruments for the periods ended March 28, 2015 and March 29, 2014 (in thousands):

 

     Amount  

Balance as of September 27, 2014

   $ 4,414   

Changes in the fair value of contingent performance-based payments established at the time of acquisition

     (71
  

 

 

 

Balance as of March 28, 2015

$ 4,343   
  

 

 

 
     Amount  

Balance as of September 28, 2013

   $ 4,165   

Changes in the fair value of contingent performance-based payments established at the time of acquisition

     249   
  

 

 

 

Balance as of March 29, 2014

$ 4,414   
  

 

 

 

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company measures certain non-financial assets and liabilities, including long-lived assets, goodwill and intangible assets, at fair value on a non-recurring basis. Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived assets, goodwill and other intangible assets. During the periods ended March 28, 2015 and March 29, 2014, the Company was not required to measure any significant non-financial assets and liabilities at fair value.

Fair Value of Other Financial Instruments

In January 2015, the Company called $50 million aggregate principal amount of the 2018 Notes for redemption on March 1, 2015 at a price of 102.063%. The estimated fair value of the Company’s $400.0 million remaining aggregate principal amount of the 2018 Notes as of March 28, 2015 was $409.5 million, compared to a carrying value of $399.6 million. The estimated fair value of the Company’s $450 million principal amount of 2018 Notes as of March 29, 2014 and September 27, 2014, was $464.9 million and $459.5 million, respectively, compared to a carrying value of $449.5 million and $449.5 million, respectively. The estimated fair value is based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.

 

3.   Acquisitions

Envincio LLC

On April 1, 2014, the Company purchased certain assets of Envincio LLC, including brands, EPA registrations, inventory and trade receivables, for approximately $20.3 million. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by approximately $3.3 million, which is recorded in goodwill. Financial results for Envincio have been included in the results of operations within the Pet segment since the date of acquisition. This acquisition is expected to enable the Company to be a key supplier and product innovator in the growing natural insecticides product market, often characterized as EPA-exempt products, and expand its offerings in traditional pesticides.

 

11


The following table summarizes the preliminary recording of the fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments:

 

(In thousands)

   Amounts
Previously
Recognized as of
Acquisition Date(1)
     Measurement
Period
Adjustments
     Amounts
Recognized as of
Acquisition Date
(as Adjusted)
 

Current assets, net of cash and cash equivalents acquired

   $ 6,650       $ 0       $ 6,650   

Fixed assets

     20         0         20   

Goodwill

     2,477         856         3,333   

Intangible assets

     12,306         (856      11,450   

Current liabilities

     (1,170      0         (1,170
  

 

 

    

 

 

    

 

 

 

Net assets acquired, less cash and cash equivalents

$ 20,283    $ 0    $ 20,283   
  

 

 

    

 

 

    

 

 

 

 

(1) As previously reported in our Form 10-K for the period ended September 27, 2014.

During fiscal 2015 the fair value measurements of assets acquired and liabilities assumed of Envincio LLC as of the acquisition date were finalized. This refinement did not have a significant impact on the Company’s condensed consolidated statements of operations, balance sheets or cash flows in any period and, therefore, the Company has not retrospectively adjusted its financial statements. Financial results for Envincio LLC have been included in the results of operations within the Pet segment since the date of acquisition.

Investment in Joint Ventures

On December 30, 2014, the Company invested $16 million in cash for a 50% interest in two newly formed entities. The two entities own rights to commercialize products which incorporate features covered by certain patents, technology and associated intellectual property rights in the fields of animal health and pesticide applications. The investment is being accounted for under the equity method of accounting and is not expected to contribute to earnings in the near future.

 

4.   Inventories, net

Inventories, net of allowance for obsolescence, consist of the following (in thousands):

 

     March 28, 2015      March 29, 2014      September 27, 2014  

Raw materials

   $ 99,490       $ 101,783       $ 93,678   

Work in progress

     15,601         16,267         13,397   

Finished goods

     252,104         269,870         207,818   

Supplies

     15,133         14,800         11,493   
  

 

 

    

 

 

    

 

 

 

Total inventories, net

$ 382,328    $ 402,720    $ 326,386   
  

 

 

    

 

 

    

 

 

 

 

5.   Goodwill

The Company accounts for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other,” and tests goodwill for impairment annually, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This assessment involves the use of significant accounting judgments and estimates as to future operating results and discount rates. Changes in estimates or use of different assumptions could produce significantly different results. An impairment loss is generally recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company uses discounted cash flow analysis to estimate the fair value of our reporting units. The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of its reporting units to the Company’s total market capitalization.

 

12


6.   Other Intangible Assets

The following table summarizes the components of gross and net acquired intangible assets:

 

     Gross      Accumulated
Amortization
     Impairment      Net
Carrying
Value
 
            (in millions)                

March 28, 2015

           

Marketing-related intangible assets – amortizable

   $ 14.1       $ (10.2    $ 0       $ 3.9   

Marketing-related intangible assets – nonamortizable

     59.6         0         (16.9      42.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  73.7      (10.2   (16.9   46.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Customer-related intangible assets – amortizable

  43.3      (21.2   0      22.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other acquired intangible assets – amortizable

  19.3      (9.4   0      9.9   

Other acquired intangible assets – nonamortizable

  7.8      0      (1.2   6.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  27.1      (9.4   (1.2   16.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other intangible assets

$ 144.1    $ (40.8 $ (18.1 $ 85.2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Gross      Accumulated
Amortization
     Impairment      Net
Carrying
Value
 
            (in millions)                

March 29, 2014

           

Marketing-related intangible assets – amortizable

   $ 12.5       $ (9.4    $ 0       $ 3.1   

Marketing-related intangible assets – nonamortizable

     59.6         0         (16.9      42.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  72.1      (9.4   (16.9   45.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Customer-related intangible assets – amortizable

  42.8      (19.0   0      23.8   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other acquired intangible assets – amortizable

  16.6      (8.3   0      8.3   

Other acquired intangible assets – nonamortizable

  1.2      0      (1.2   0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  17.8      (8.3   (1.2   8.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other intangible assets

$ 132.7    $ (36.7 $ (18.1 $ 77.9   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Gross      Accumulated
Amortization
     Impairment      Net
Carrying
Value
 
            (in millions)                

September 27, 2014

           

Marketing-related intangible assets – amortizable

   $ 15.5       $ (9.9    $ 0       $ 5.6   

Marketing-related intangible assets – nonamortizable

     59.6         0         (16.9      42.7   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  75.1      (9.9   (16.9   48.3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Customer-related intangible assets – amortizable

  42.8      (20.2   0      22.6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other acquired intangible assets – amortizable

  19.4      (8.8   0      10.6   

Other acquired intangible assets – nonamortizable

  7.7      0      (1.2   6.5   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  27.1      (8.8   (1.2   17.1   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total other intangible assets

$ 145.0    $ (38.9 $ (18.1 $ 88.0   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other acquired intangible assets include contract-based and technology-based intangible assets.

The Company evaluates long-lived assets, including amortizable and indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates indefinite-lived intangible assets on an annual basis. In fiscal 2014, the Company tested its indefinite-lived intangible assets and no impairment was indicated. Other factors indicating the carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in fiscal 2014 or during the six months ended March 28, 2015, and accordingly, no impairment testing was performed on these assets.

 

13


The Company amortizes its acquired intangible assets with definite lives over periods ranging from 1 to 25 years; over weighted average remaining lives of eight years for marketing-related intangibles, 15 years for customer-related intangibles and 14 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $1.0 million for each of the three month periods ended March 28, 2015 and March 29, 2014, and $1.9 million and $2.0 million for the six months ended March 28, 2015 and March 29, 2014, respectively, and is classified within operating expenses in the condensed consolidated statements of operations. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $4 million to $5 million per year from fiscal 2015 through fiscal 2019.

 

7.   Long-Term Debt

Long-term debt consists of the following:

 

     March 28, 2015      March 29, 2014      September 27, 2014  
     (in thousands)  

Senior subordinated notes, net of unamortized discount (1), interest at 8.25%, payable semi-annually, principal due March 2018

   $ 399,637       $ 449,472       $ 449,529   

Asset-based revolving credit facility, interest at LIBOR plus a margin of 1.25% to 1.75% or Base Rate plus a margin of 0.25% to 0.75%, final maturity December 2018

     115,000         95,000         0   

Other notes payable

     576         863         710   
  

 

 

    

 

 

    

 

 

 

Total

  515,213      545,335      450,239   

Less current portion

  (289   (303   (291
  

 

 

    

 

 

    

 

 

 

Long-term portion

$ 514,924    $ 545,032    $ 449,948   
  

 

 

    

 

 

    

 

 

 

 

(1) Represents unamortized original issue discount of $363, $528 and $471 as of March 28, 2015, March 29, 2014 and September 27, 2014, respectively.

Senior Subordinated Notes

On March 8, 2010, the Company issued $400 million aggregate principal amount of 8.25% senior subordinated notes due March 1, 2018 (the “2018 Notes”). On February 13, 2012, the Company issued an additional $50 million aggregate principal amount of its 2018 Notes at a price of 98.501%, plus accrued interest from September 1, 2011, in a private placement. The Company used the net proceeds from the offering to pay a portion of the outstanding balance under its prior revolving credit facility.

The 2018 Notes require semiannual interest payments, which commenced on September 1, 2010. The 2018 Notes are unsecured senior subordinated obligations and are subordinated to all of the Company’s existing and future senior debt, including the Company’s Credit Facility. The obligations under the 2018 Notes are fully and unconditionally guaranteed on a senior subordinated basis by each of the Company’s existing and future domestic restricted subsidiaries with certain exceptions. The guarantees are general unsecured senior subordinated obligations of the guarantors and are subordinated to all existing and future senior debt of the guarantors.

In March 2015, the Company redeemed $50.0 million of its 8.25% senior subordinated notes due March 2018 (2018 Notes) at a price of 102.063% of the principal amount of the notes redeemed. In conjunction with this transaction, the Company recognized a charge of approximately $1.6 million in its second fiscal quarter as part of interest expense related to the payment of the call premium and the non-cash write-off of unamortized financing costs.

The Company may redeem some or all of the remaining 2018 Notes at any time on or after March 1, 2015 for 102.063% and on or after March 1, 2016 for 100%, plus accrued and unpaid interest. The holders of the 2018 Notes have the right to require the Company to repurchase all or a portion of the 2018 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.

The 2018 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all financial covenants in the 2018 Notes indenture as of March 28, 2015.

 

14


Asset Backed Loan Facility

On December 5, 2013, the Company entered into a credit agreement which provides up to a $390 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if the Company exercises the accordion feature set forth therein (collectively, the “Credit Facility”). The Credit Facility matures on December 5, 2018 and replaced the Company’s prior revolving credit facility. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. As of March 28, 2015, there were borrowings of $115 million outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $12.6 million outstanding as of March 28, 2015.

The Credit Facility is subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. The borrowing availability as of March 28, 2015 was $165 million. Borrowings under the Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s total outstanding borrowings. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.75% (and was 1.25% at March 28, 2015) and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.75% (and was 0.25% at March 28, 2015). As of March 28, 2015, the applicable interest rate related to Base Rate borrowings was 3.5%, and the applicable interest rate related to LIBOR-based borrowings was 1.4%.

The Credit Facility contains customary covenants, including financial covenants which require the Company to maintain a minimum fixed charge coverage ratio of 1.00:1.00 upon reaching certain borrowing levels. The Credit Facility is secured by substantially all assets of the Company. The Company was in compliance with all financial covenants under the Credit Facility during the period ended March 28, 2015.

The Company incurred approximately $3.1 million of costs in conjunction with this transaction, which included banking fees and legal expenses. These costs are being amortized over the term of the Credit Facility.

The Company recorded a non-cash charge of $1.7 million for the three month period ended December 28, 2013 as part of interest expense, related to the write-off of unamortized deferred financing costs under the prior revolving credit facility.

 

8.   Supplemental Equity Information

The following table provides a summary of the changes in the carrying amounts of equity attributable to controlling interest and noncontrolling interest for the six months ended March 28, 2015 and March 29, 2014:

 

     Controlling Interest              
(in thousands)    Common
Stock
    Class A
Common
Stock
    Class B
Stock
     Additional
Paid In
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Income
    Total     Noncontrolling
Interest
    Total  

Balance September 27, 2014

   $ 124      $ 369      $ 16       $ 396,586      $ 86,396      $ 1,232      $ 484,723      $ 1,730      $ 486,453   

Comprehensive income

              17,540        (1,168     16,372        747        17,119   

Stock based compensation

            2,771            2,771          2,771   

Restricted share activity

       (2        (638         (640       (640

Issuance of common stock

       2           730            732          732   

Repurchase of common stock

     (5     (12        (12,726     (2,380       (15,123       (15,123

Tax benefit on stock option exercise

            351            351          351   

Distribution to Noncontrolling interest

                    (1,680     (1,680
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance March 28, 2015

$ 119    $ 357    $ 16    $ 387,074    $ 101,556    $ 64    $ 489,186    $ 797    $ 489,983   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


     Controlling Interest               
(in thousands)    Common
Stock
     Class A
Common
Stock
     Class
B

Stock

     Additional
Paid In
Capital
     Retained
Earnings
     Accumulated
Other
Comprehensive
Income
     Total      Noncontrolling
Interest
    Total  

Balance September 28, 2013

   $ 122       $ 353       $ 16       $ 389,153       $ 77,592       $ 1,442       $ 468,678       $ 1,346      $ 470,024   

Comprehensive income

                 8,187         87         8,274         490        8,764   

Stock based compensation

              2,486               2,486           2,486   

Restricted share activity

        9            3,968               3,977           3,977   

Issuance of common stock

     1         2            562               565           565   

Tax benefit on stock option exercise

              321               321           321   

Distribution to Noncontrolling interest

                          (633     (633
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Balance March 29, 2014

$ 123    $ 364    $ 16    $ 396,490    $ 85,779    $ 1,529    $ 484,301    $ 1,203    $ 485,504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

9.   Stock-Based Compensation

The Company recognized share-based compensation expense of $3.7 million and $4.6 million for the six month periods ended March 28, 2015 and March 29, 2014, respectively, as a component of selling, general and administrative expenses. The tax benefit associated with share-based compensation expense for the six month periods ended March 28, 2015 and March 29, 2014 was $1.4 million and $1.7 million, respectively.

 

10.   Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income from continuing operations.

 

     Three Months Ended
March 28, 2015
    Six Months Ended
March 28, 2015
 
     Income      Shares      Per Share     Income      Shares      Per Share  
     (in thousands, except per share amounts)  

Basic EPS:

                

Net income available to common shareholders

   $ 23,237         48,384       $ 0.48      $ 17,540         48,882       $ 0.36   

Effect of dilutive securities:

                

Options to purchase common stock

        457         0.00           251         0.00   

Restricted shares

        598         (0.01        556         (0.01

Diluted EPS:

                
  

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Net income available to common shareholders

$ 23,237      49,439    $ 0.47    $ 17,540      49,689    $ 0.35   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

     Three Months Ended
March 29, 2014
     Six Months Ended
March 29, 2014
 
     Income      Shares      Per Share      Income      Shares      Per Share  
     (in thousands, except per share amounts)  

Basic EPS:

                 

Net income available to common shareholders

   $ 20,895         48,688       $ 0.43       $ 8,187         48,523       $ 0.17   

Effect of dilutive securities:

                 

Options to purchase common stock

        23         0.00            50         0.00   

Restricted shares

        405         0.00            390         0.00   

Diluted EPS:

                 
  

 

 

    

 

 

    

 

 

       

 

 

    

 

 

 

Net income available to common shareholders

$ 20,895      49,116    $ 0.43    $ 8,187      48,963    $ 0.17   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

16


Options to purchase 9.6 million shares of common stock at prices ranging from $6.43 to $15.00 per share were outstanding at March 28, 2015, and options to purchase 11.6 million shares of common stock at prices ranging from $4.60 to $16.23 per share were outstanding at March 29, 2014.

For the three month periods ended March 28, 2015 and March 29, 2014, options to purchase 3.4 million and 10.4 million shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

For the six month period ended March 28, 2015 and March 29, 2014, options to purchase 6.1 million and 10.4 million shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

 

17


11.   Segment Information

Management has determined that the Company has two operating segments which are also reportable segments based on the level at which the Chief Operating Decision Maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are Pet segment and Garden segment and are presented in the table below (in thousands).

 

     Three Months Ended      Six Months Ended  
     March 28,
2015
     March 29,
2014
     March 28,
2015
     March 29,
2014
 

Net sales:

           

Pet segment

   $ 221,485       $ 216,744       $ 420,805       $ 401,349   

Garden segment

     276,117         284,867         384,117         390,783   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total net sales

$ 497,602    $ 501,611    $ 804,922    $ 792,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) from operations:

Pet segment

  27,051      24,193      47,626      38,579   

Garden segment

  39,325      36,799      35,790      30,568   

Corporate

  (16,405   (16,223   (32,307   (32,733
  

 

 

    

 

 

    

 

 

    

 

 

 

Total income from operations

  49,971      44,769      51,109      36,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Interest expense - net

  (11,858   (10,389   (22,290   (22,593

Other income (expense)

  (121   108      (489   (60

Income taxes

  14,012      12,999      10,043      5,084   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income including noncontrolling interest

  23,980      21,489      18,287      8,677   

Net income attributable to noncontrolling interest

  743      594      747      490   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Central Garden & Pet Company

$ 23,237    $ 20,895    $ 17,540    $ 8,187   
  

 

 

    

 

 

    

 

 

    

 

 

 

Depreciation and amortization:

Pet segment

$ 3,878    $ 4,484    $ 7,819    $ 8,370   

Garden segment

  1,483      1,832      3,049      3,405   

Corporate

  2,989      2,876      5,946      5,737   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total depreciation and amortization

$ 8,350    $ 9,192    $ 16,814    $ 17,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

Assets:    March 28,
2015
     March 29,
2014
     September 27,
2014
 

Pet segment

   $ 450,240       $ 434,059       $ 414,279   

Garden segment

     490,514         521,663         337,461   

Corporate

     332,254         338,625         396,987   
  

 

 

    

 

 

    

 

 

 

Total assets

$ 1,273,008    $ 1,294,347    $ 1,148,727   
  

 

 

    

 

 

    

 

 

 

Goodwill (included in corporate assets above):

Pet segment

$ 209,089    $ 205,756    $ 208,233   

 

18


12.   Consolidating Condensed Financial Information of Guarantor Subsidiaries

Certain 100% wholly-owned subsidiaries of the Company (as listed below, collectively the “Guarantor Subsidiaries”) have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest on the Company’s 2018 Notes. Certain subsidiaries and operating divisions are not guarantors of the Notes. Those subsidiaries that are guarantors and co-obligors of the Notes are as follows:

Farnam Companies, Inc.

Four Paws Products Ltd.

Gulfstream Home & Garden, Inc.

Kaytee Products, Inc.

Matson, LLC

New England Pottery, LLC

Pennington Seed, Inc. (including Gro Tec, Inc. and All-Glass Aquarium Co., Inc.)

Pets International, Ltd.

T.F.H. Publications, Inc.

Wellmark International (including B2E Corporation and B2E Biotech LLC)

In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying consolidating condensed financial statements based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X.

 

    

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended March 28, 2015

 
     (in thousands)        
     Parent     Non-
Guarantor
Subsidiaries
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 150,014      $ 37,434      $ 338,994      $ (28,840   $ 497,602   

Cost of goods sold and occupancy

     113,668        29,545        231,403        (27,076     347,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  36,346      7,889      107,591      (1,764   150,062   

Selling, general and administrative expenses

  30,843      5,339      65,673      (1,764   100,091   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

  5,503      2,550      41,918      (0   49,971   

Interest expense

  (11,815   (61   (0   (0   (11,876

Interest income

  18      0      0      0      18   

Other income (expense)

  (347   (0   226      (0   (121
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes and equity in earnings of affiliates

  (6,641   2,489      42,144      (0   37,992   

Income tax (benefit) expense

  (1,123   952      14,183      (0   14,012   

Equity in earnings of affiliates

  28,755      0      796      (29,551   0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income including noncontrolling interest

  23,237      1,537      28,757      (29,551   23,980   

Net income attributable to noncontrolling interest

  0      743      0      0      743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Central Garden & Pet Company

$ 23,237    $ 794    $ 28,757    $ (29,551 $ 23,237   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


    

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended March 29, 2014 (As Revised)

 
     (in thousands)        
     Parent     Non-
Guarantor
Subsidiaries
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 146,049      $ 40,409      $ 340,660      $ (25,507   $ 501,611   

Cost of goods sold and occupancy

     109,458        30,652        237,863        (23,958     354,015   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  36,591      9,757      102,797      (1,549   147,596   

Selling, general and administrative expenses

  29,798      6,595      67,983      (1,549   102,827   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

  6,793      3,162      34,814      0      44,769   

Interest expense

  (10,375   (25   (5   0      (10,405

Interest income

  16      0      0      0      16   

Other income

  50      0      58      0      108   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes and equity in earnings of affiliates

  (3,516   3,137      34,867      0      34,488   

Income tax (benefit) expense

  (1,011   1,226      12,784      0      12,999   

Equity in earnings of affiliates

  23,400      0      1,353      (24,753   0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income including noncontrolling interest

  20,895      1,911      23,436      (24,753   21,489   

Net income attributable to noncontrolling interest

  0      594      0      0      594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Central Garden & Pet Company

$ 20,895    $ 1,317    $ 23,436    $ (24,753 $ 20,895   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Six Months Ended March 28, 2015

 
     (in thousands)        
     Parent     Non-
Guarantor
Subsidiaries
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 246,976      $ 54,757      $ 546,119      $ (42,930   $ 804,922   

Cost of goods sold and occupancy

     192,447        44,123        370,494        (40,185     566,879   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  54,529      10,634      175,625      (2,745   238,043   

Selling, general and administrative expenses

  58,694      9,338      121,647      (2,745   186,934   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  (4,165   1,296      53,978      (0   51,109   

Interest expense

  (22,302   (76   (1   (0   (22,379

Interest income

  88      1      0      0      89   

Other income (expense)

  (677   (0   188      (0   (489
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes and equity in earnings of affiliates

  (27,056   1,221      54,165      (0   28,330   

Income tax (benefit) expense

  (9,580   508      19,115      (0   10,043   

Equity in earnings of affiliates

  35,016      0      209      (35,225   0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income including noncontrolling interest

  17,540      713      35,259      (35,225   18,287   

Net income attributable to noncontrolling interest

  0      747      0      0      747   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Central Garden & Pet Company

$ 17,540    $ (34 $ 35,259    $ (35,225 $ 17,540   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


 

 

    

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Six Months Ended March 29, 2014 (As Revised)

       
     (in thousands)        
     Parent     Non-
Guarantor
Subsidiaries
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net sales

   $ 232,282      $ 53,795      $ 543,682      $ (37,627   $ 792,132   

Cost of goods sold and occupancy

     177,949        41,661        380,365        (35,180     564,795   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

  54,333      12,134      163,317      (2,447   227,337   

Selling, general and administrative expenses

  55,654      10,012      127,704      (2,447   190,923   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from operations

  (1,321   2,122      35,613      0      36,414   

Interest expense

  (22,566   (31   (25   0      (22,622

Interest income

  29      0      0      0      29   

Other income (expense)

  7      0      (67   0      (60
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes and equity in earnings of affiliates

  (23,851   2,091      35,521      0      13,761   

Income tax (benefit) expense

  (8,818   911      12,991      0      5,084   

Equity in earnings of affiliates

  23,220      0      1,053      (24,273   0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income including noncontrolling interest

  8,187      1,180      23,583      (24,273   8,677   

Net income attributable to noncontrolling interest

  0      490      0      0      490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Central Garden & Pet Company

$ 8,187    $ 690    $ 23,583    $ (24,273 $ 8,187   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(LOSS)

Three Months Ended March 28, 2015

 
     (in thousands)  
     Parent     Non-
Guarantor
Subsidiaries
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 23,237      $ 1,537      $ 28,757      $ (29,551   $ 23,980   

Other comprehensive income (loss):

          

Unrealized loss on securities

     (20     0        0        0        (20

Reclassification of realized loss on securities included in net income

     20        0        0        0        20   

Foreign currency translation

     (626     (355     (164     519        (626
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

  22,611      1,182      28,593      (29,032   23,354   

Comprehensive income attributable to noncontrolling interests

  0      743      0      0      743   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Central Garden & Pet Company

$ 22,611    $ 439    $ 28,593    $ (29,032 $ 22,611   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

21


    

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

Three Months Ended March 29, 2014 (As Revised)

 
     (in thousands)  
     Parent     Non-Guarantor
Subsidiaries
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 20,895      $ 1,911      $ 23,436      $ (24,753   $ 21,489   

Other comprehensive income:

          

Foreign currency translation

     0        2        0        0        2   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

  20,895      1,913      23,436      (24,753   21,491   

Comprehensive income attributable to noncontrolling interests

  0      594      0      0      594   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Central Garden & Pet Company

$ 20,895    $ 1,319    $ 23,436    $ (24,753 $ 20,897   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

Six Months Ended March 28, 2015

 
     (in thousands)  
     Parent     Non-Guarantor
Subsidiaries
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 17,540      $ 713      $ 35,259      $ (35,225   $ 18,287   

Other comprehensive income (loss):

          

Unrealized loss on securities

     (10     0        0        0        (10

Reclassification of realized loss on securities included in net income

     20        0        0        0        20   

Foreign currency translation

     (1,178     (700     (268     968        (1,178
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

  16,372      13      34,991      (34,257   17,119   

Comprehensive income attributable to noncontrolling interests

  0      747      0      0      747   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Central Garden & Pet Company

$ 16,372    $ (734 $ 34,991    $ (34,257 $ 16,372   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    

CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

Six Months Ended March 29, 2014 (As Revised)

 
     (in thousands)  
     Parent     Non-Guarantor
Subsidiaries
    Guarantor
Subsidiaries
    Eliminations     Consolidated  

Net income

   $ 8,187      $ 1,180      $ 23,583      $ (24,273   $ 8,677   

Other comprehensive income:

          

Foreign currency translation

     0        87        0        0        87   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

  8,187      1,267      23,583      (24,273   8,764   

Comprehensive income attributable to noncontrolling interests

  0      490      0      0      490   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Central Garden & Pet Company

$ 8,187    $ 777    $ 23,583    $ (24,273 $ 8,274   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

22


    

CONSOLIDATING CONDENSED BALANCE SHEET

March 28, 2015

 
     (in thousands)  
     Parent      Non-
Guarantor
Subsidiaries
    Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Cash and cash equivalents

   $ 6,159       $ 4,309      $ 1,475       $ 0      $ 11,943   

Restricted cash

     12,583         0        0         0        12,583   

Accounts receivable, net

     86,569         17,099        218,097         0        321,765   

Inventories

     95,564         19,429        267,335         0        382,328   

Prepaid expenses and other

     26,013         901        31,337         0        58,251   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

  226,888      41,738      518,244      0      786,870   

Land, buildings, improvements and equipment, net

  57,093      3,590      102,524      0      163,207   

Goodwill

  0      0      209,089      0      209,089   

Other long term assets

  34,187      3,999      81,263      (5,607   113,842   

Intercompany receivable

  44,855      0      293,685      (338,540   0   

Investment in subsidiaries

  1,017,461      0      0      (1,017,461   0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,380,484    $ 49,327    $ 1,204,805    $ (1,361,608 $ 1,273,008   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

Accounts payable

$ 47,277    $ 10,169    $ 82,375    $ 0    $ 139,821   

Accrued expenses

  39,061      2,857      41,524      0      83,442   

Current portion of long-term debt

  259      0      30      0      289   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

  86,597      13,026      123,929      0      223,552   

Long-term debt

  514,841      0      83      0      514,924   

Intercompany payable

  288,423      50,117      0      (338,540   0   

Losses in excess of investment in subsidiaries

  0      0      14,104      (14,104   0   

Other long-term obligations

  1,437      0      48,719      (5,607   44,549   

Total Central Garden & Pet shareholders’ equity

  489,186      (14,613   1,017,970      (1,003,357   489,186   

Noncontrolling interest

  0      797      0      0      797   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

  489,186      (13,816   1,017,970      (1,003,357   489,983   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,380,484    $ 49,327    $ 1,204,805    $ (1,361,608 $ 1,273,008   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

23


    

CONSOLIDATING CONDENSED BALANCE SHEET

March 29, 2014 (As Revised)

 
     (in thousands)  
     Parent      Non-Guarantor
Subsidiaries
    Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Cash and cash equivalents

   $ 8,001       $ 6,819      $ 1,928       $ 0      $ 16,748   

Short term investments

     14,220         0        0         0        14,220   

Accounts receivable, net

     81,577         17,792        223,814         0        323,183   

Inventories

     106,858         22,158        273,704         0        402,720   

Prepaid expenses and other

     25,151         740        29,991         0        55,882   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

  235,807      47,509      529,437      0      812,753   

Land, buildings, improvements and equipment, net

  75,320      2,583      107,451      0      185,354   

Goodwill

  0      0      205,756      0      205,756   

Other long term assets

  20,331      3,614      72,061      (5,522   90,484   

Intercompany receivable

  41,540      0      219,454      (260,994   0   

Investment in subsidiaries

  955,388      0      0      (955,388   0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,328,386    $ 53,706    $ 1,134,159    $ (1,221,904 $ 1,294,347   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

Accounts payable

$ 49,181    $ 13,414    $ 79,557    $ 0    $ 142,152   

Accrued expenses

  32,409      2,775      45,702      0      80,886   

Current portion of long-term debt

  270      0      33      0      303   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

  81,860      16,189      125,292      0      223,341   

Long-term debt

  544,917      0      115      0      545,032   

Intercompany payable

  215,634      45,360      0      (260,994

Losses in excess of investment in subsidiaries

  0      0      8,047      (8,047   0   

Other long-term obligations

  1,674      0      44,318      (5,522   40,470   

Total Central Garden & Pet shareholders’ equity

  484,301      (9,046   956,387      (947,341   484,301   

Noncontrolling interest

  0      1,203      0      0      1,203   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

  484,301      (7,843   956,387      (947,341   485,504   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,328,386    $ 53,706    $ 1,134,159    $ (1,221,904 $ 1,294,347   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

24


    

CONSOLIDATING CONDENSED BALANCE SHEET

September 27, 2014

 
     (in thousands)  
     Parent      Non-Guarantor
Subsidiaries
    Guarantor
Subsidiaries
     Eliminations     Consolidated  

ASSETS

            

Cash and cash equivalents

   $ 63,471       $ 12,806      $ 2,399       $ 0      $ 78,676   

Restricted cash

     14,283         0        0         0        14,283   

Short term investments

     9,990         0        0         0        9,990   

Accounts receivable, net

     41,235         8,268        144,226         0        193,729   

Inventories

     79,199         15,210        231,977         0        326,386   

Prepaid expenses and other

     26,092         816        21,580         0        48,488   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current assets

  234,270      37,100      400,182      0      671,552   

Land, buildings, improvements and equipment, net

  63,059      3,649      100,141      0      166,849   

Goodwill

  0      0      208,233      0      208,233   

Other long term assets

  25,230      4,244      83,713      (11,094   102,093   

Intercompany receivable

  16,906      0      351,423      (368,329   0   

Investment in subsidiaries

  983,413      0      0      (983,413   0   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,322,878    $ 44,993    $ 1,143,692    $ (1,362,836 $ 1,148,727   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

LIABILITIES AND EQUITY

Accounts payable

$ 28,937    $ 3,542    $ 55,949    $ 0    $ 88,428   

Accrued expenses

  34,151      1,868      48,360      0      84,379   

Current portion of long term debt

  261      0      30      0      291   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total current liabilities

  63,349      5,410      104,339      0      173,098   

Long-term debt

  449,855      0      93      0      449,948   

Intercompany payable

  323,315      45,014      0      (368,329   0   

Losses in excess of investment in subsidiaries

  0      0      7,594      (7,594   0   

Other long-term obligations

  1,636      0      48,686      (11,094   39,228   

Total Central Garden & Pet shareholders’ equity

  484,723      (7,161   982,980      (975,819   484,723   

Noncontrolling interest

  0      1,730      0      0      1,730   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity

  484,723      (5,431   982,980      (975,819   486,453   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ 1,322,878    $ 44,993    $ 1,143,692    $ (1,362,836 $ 1,148,727   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

25


    

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Six Months Ended March 28, 2015

 
     (in thousands)  
     Parent     Non-Guarantor
Subsidiaries
   

Guarantor

Subsidiaries

    Eliminations     Consolidated  

Net cash used by operating activities

   $ (36,828   $ (5,623   $ (49,351   $ (6,719   $ (98,521
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions to property, plant and equipment

  (1,359   (154   (9,512   (0   (11,025

Payments to acquire companies, net of cash acquired

  (16,000   0      0      0      (16,000

Proceeds from short term investments

  9,997      0      0      0      9,997   

Investment in short term investments

  (17   (0   (0   (0   (17

Change in restricted cash

  1,700      (0   (0   (0   1,700   

Other investing activities

  (331   0      0      0      (331

Intercompany investing activities

  (27,949   (0   57,738      (29,789   (0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used) provided by investing activities

  (33,959   (154   48,226      (29,789   (15,676
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repayments of long-term debt

  (50,131   (0   (10   (0   (50,141

Borrowings under revolving line of credit

  186,000      0      0      0      186,000   

Repayments on revolving line of credit

  (71,000   0      0      0      (71,000

Proceeds from issuance of common stock

  1,220      0      0      0      1,220   

Repurchase of common stock

  (17,164   (0   (0   (0   (17,164

Distribution to noncontrolling interest

  0      (1,680   0      0      (1,680

Excess tax benefits from stock-based awards

  351      0      0      0      351   

Distribution to parent

  0      (6,719   0      6,719      0   

Intercompany financing activities

  (34,891   5,102      0      29,789      0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided (used) by financing activities

  14,385      (3,297   (10   36,508      47,586   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash

  (910   577      211      0      (122
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

  (57,312   (8,497   (924   0      (66,733

Cash and cash equivalents at beginning of year

  63,471      12,806      2,399      0      78,676   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

$ 6,159    $ 4,309    $ 1,475    $ 0    $ 11,943   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

26


    

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Six Months Ended March 29, 2014 (As Revised)

 
     (in thousands)  
     Parent     Non-Guarantor
Subsidiaries
   

Guarantor

Subsidiaries

    Eliminations     Consolidated  

Net cash (used) provided by operating activities

   $ (35,501   $ 604      $ (22,612   $ (2,534   $ (60,043
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions to property, plant and equipment

  (4,507   (473   (5,044   0      (10,024

Proceeds from short term investments

  3,600      0      0      0      3,600   

Intercompany investing activities

  (31,360   0      27,043      4,317      0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used) provided by investing activities

  (32,267   (473   21,999      4,317      (6,424
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Repayments of long-term debt

  (104   0      (99   0      (203

Borrowings under revolving line of credit

  188,000      0      0      0      188,000   

Repayments on revolving line of credit

  (116,000   0      0      0      (116,000

Proceeds from issuance of common stock

  461      0      0      0      461   

Repurchase of common stock

  (924   0      0      0      (924

Distribution to noncontrolling interest

  0      (633   0      0      (633

Payment of deferred financing costs

  (3,087   0      0      0      (3,087

Excess tax benefits from stock-based awards

  321      0      0      0      321   

Distribution to parent

  0      (2,534   0      2,534      0   

Intercompany financing activities

  1,376      2,941      0      (4,317   0   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used) provided by financing activities

  70,043      (226   (99   (1,783   67,935   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rates on cash

  288      (89   (75   0      124   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

  2,563      (184   (787   0      1,592   

Cash and cash equivalents at beginning of year

  5,438      7,003      2,715      0      15,156   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of year

$ 8,001    $ 6,819    $ 1,928    $ 0    $ 16,748   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Subsequent to the issuance of the Form 10-Q for the quarterly period ended June 28, 2014, management identified certain corrections that were needed in the presentation of the Consolidating Condensed Financial Statements. The Company revised its Consolidating Condensed Financial Statements to correct the presentation of intercompany activities and other classification items between the Parent, Guarantors and Non-Guarantor subsidiaries for intercompany activities. The Company has also included a new column in its Consolidating Condensed Financial Statements to present separate results for Non-Guarantor subsidiaries. There were no changes to any of the Company’s Consolidated Financial Statements. The Company assessed the materiality of these items on previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108, and concluded that the revisions were not material to the Consolidating Condensed Financial Statements. The impact of these revisions is shown in the following tables:

 

    

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Three Months Ended March 29, 2014

 
     As previously reported      Adjustments      As revised  

Parent

   $ 9,935       $ (3,142    $ 6,793   

Non-guarantor subsidiaries

     0         3,162         3,162   

Guarantor subsidiaries

     34,834         (20      34,814   

Eliminations

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Income from operations

  44,769      0      44,769   

Parent

  20,895      0      20,895   

Non-guarantor subsidiaries

  0      1,317      1,317   

Guarantor subsidiaries

  23,516      (80   23,436   

Eliminations

  (23,516   (1,237   (24,753
  

 

 

    

 

 

    

 

 

 

Net income attributable to Central Garden & Pet Company

$ 20,895    $ 0    $ 20,895   

 

27


    

CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS

Six Months Ended March 29, 2014

 
     As previously reported      Adjustments      As revised  

Parent

   $ 1,152       $ (2,473    $ (1,321

Non-guarantor subsidiaries

     0         2,122         2,122   

Guarantor subsidiaries

     35,262         351         35,613   

Eliminations

     0         0         0   
  

 

 

    

 

 

    

 

 

 

Income (loss) from operations

  36,414      0      36,414   

Parent

  8,187      0      8,187   

Non-guarantor subsidiaries

  0      690      690   

Guarantor subsidiaries

  23,408      175      23,583   

Eliminations

  (23,408   (865   (24,273
  

 

 

    

 

 

    

 

 

 

Net income attributable to Central Garden & Pet Company

$ 8,187    $ 0    $ 8,187   

In the Consolidating Condensed Statement of Operations, the Company now presents the Non-Guarantor subsidiaries separate from the Parent. The Company also recorded the equity in earnings of Non-Guarantor subsidiaries, which are owned by Guarantor subsidiaries, within the Guarantor subsidiary column, and have appropriately eliminated intercompany earnings between Non-Guarantor and Guarantor subsidiaries.

 

    

CONSOLIDATING CONDENSED STATEMENT

OF COMPREHENSIVE INCOME

 
     As previously reported      Three Months Ended
March 29, 2014

Adjustments
     As revised  

Parent

   $ (2,027    $ 22,922       $ 20,895   

Non-guarantor subsidiaries

     0         1,911         1,911   

Guarantor subsidiaries

     23,516         (80      23,436   

Eliminations

     0         (24,753      (24,753
  

 

 

    

 

 

    

 

 

 

Net income (loss)

  21,489      0      21,489   

Parent

  (2,025   22,920      20,895   

Non-guarantor subsidiaries

  0      1,913      1,913   

Guarantor subsidiaries

  23,516      (80   23,436   

Eliminations

  0      (24,753   (24,753
  

 

 

    

 

 

    

 

 

 

Total comprehensive income (loss)

  21,491      0      21,491   

Parent

  (2,619   23,514      20,895   

Non-guarantor subsidiaries

  0      1,319      1,319   

Guarantor subsidiaries

  23,516      (80   23,436   

Eliminations

  0      (24,753   (24,753
  

 

 

    

 

 

    

 

 

 

Comprehensive income (loss) attributable to Central Garden & Pet Company

$ 20,897    $ 0    $ 20,897   

 

28


    

CONSOLIDATING CONDENSED STATEMENT

OF COMPREHENSIVE INCOME

 
     As previously reported
    Six Months Ended
March 29, 2014

Adjustments
    As revised
 

Parent

   $ (14,731   $ 22,918      $ 8,187   

Non-guarantor subsidiaries

     0        1,180        1,180   

Guarantor subsidiaries

     23,408        175        23,583   

Eliminations

     0        (24,273     (24,273
  

 

 

   

 

 

   

 

 

 

Net income (loss)

  8,677      0      8,677   

Parent

  (14,644   22,831      8,187   

Non-guarantor subsidiaries

  0      1,267      1,267   

Guarantor subsidiaries

  23,408      175      23,583   

Eliminations

  0      (24,273   (24,273
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

  8,764      0      8,764   

Parent

  (15,134   23,321      8,187   

Non-guarantor subsidiaries

  0      777      777   

Guarantor subsidiaries

  23,408      175      23,583   

Eliminations

  0      (24,273   (24,273
  

 

 

   

 

 

   

 

 

 

Comprehensive income (loss) attributable to Central Garden & Pet Company

$ 8,274    $ 0    $ 8,274   

In the Consolidating Condensed Statement of Comprehensive Income, the Company now presents the Non-Guarantor subsidiaries separate from the Parent. The Company also recorded an adjustment to correct the beginning net income of the Parent to reflect equity in the earnings from affiliates.

 

    

CONSOLIDATING CONDENSED BALANCE SHEET

March 29, 2014

 
     As previously reported     Adjustments     As revised  

Parent

   $ 288,510      $ (52,703   $ 235,807   

Non-Guarantor subsidiaries

     0        47,509        47,509   

Guarantor subsidiaries

     532,265        (2,828     529,437   

Eliminations

     (8,022     8,022        0   
  

 

 

   

 

 

   

 

 

 

Current assets

  812,753      0      812,753   

Parent

  1,165,145      163,241      1,328,386   

Non-Guarantor subsidiaries

  0      53,706      53,706   

Guarantor subsidiaries

  878,709      255,450      1,134,159   

Eliminations

  (749,507   (472,397   (1,221,904
  

 

 

   

 

 

   

 

 

 

Total assets

$ 1,294,347    $ 0    $ 1,294,347   

Parent

$ 99,258    $ (17,398 $ 81,860   

Non-Guarantor subsidiaries

  0      16,189      16,189   

Guarantor subsidiaries

  132,105      (6,813   125,292   

Eliminations

  (8,022   8,022      0   
  

 

 

   

 

 

   

 

 

 

Current liabilities

  223,341      0      223,341   

 

29


Parent

  485,504      (1,203   484,301   

Non-Guarantor subsidiaries

  0      (7,843   (7,843

Guarantor subsidiaries

  741,485      214,902      956,387   

Eliminations

  (741,485   (205,856   (947,341
  

 

 

    

 

 

    

 

 

 

Total equity

$ 485,504    $ 0    $ 485,504   

In the Consolidating Condensed Balance Sheet, the Company now presents the Non-Guarantor subsidiaries separate from the Parent. The Company also recorded adjustments to present intercompany receivables and payables between legal entities of the Guarantor, Non-Guarantor and Parent on a gross basis instead of net. These adjustments impacted the Parent’s total long term assets and liabilities and the Guarantor subsidiaries’ total long term assets and equity. The Company also corrected the presentation of certain deferred tax balances to present on a gross basis by legal entity.

 

    

CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS

Six Months Ended March 29, 2014

 
     As previously reported      Adjustments      As revised  

Parent

   $ (16,606    $ (18,895    $ (35,501

Non-Guarantor subsidiaries

     0         604         604   

Guarantor subsidiaries

     (20,029      (2,583      (22,612

Eliminations

     (23,408      20,874         (2,534
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) operating activities

  (60,043   0      (60,043

Parent

  (49,249   16,982      (32,267

Non-Guarantor subsidiaries

  0      (473   (473

Guarantor subsidiaries

  19,417      2,582      21,999   

Eliminations

  23,408      (19,091   4,317   
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) investing activities

  (6,424   0      (6,424

Parent

  68,034      2,009      70,043   

Non-Guarantor subsidiaries

  0      (226   (226

Guarantor subsidiaries

  (99   0      (99

Eliminations

  0      (1,783   (1,783
  

 

 

    

 

 

    

 

 

 

Net cash provided by (used in) financing activities

$ 67,935    $ 0    $ 67,935   

In the Consolidating Condensed Statement of Cash Flows, the Company now presents the Non-Guarantor subsidiaries separate from the Parent. The Company also presents changes in receivable balances between affiliates as investing activities and changes in payable balances between affiliates as financing activities because these changes are a result of subsidiaries’ deposits to or borrowings from the Parent’s cash account under a cash pooling arrangement. The Company also corrected the presentation of the Parent’s cash flow from operating activities to reflect equity in earnings of affiliates as a non-cash operating activity. The Company previously presented changes of intercompany receivables and payables in investing activities.

 

13.   Contingencies

The Company may from time to time become involved in legal proceedings in the ordinary course of business. Currently, the Company is not a party to any legal proceedings that management believes would have a material effect on the Company’s financial position or results of operations.

 

30


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Company

Central Garden & Pet Company (“Central”) is a leading innovator, marketer and producer, of quality branded products and distributor of third-party products in the pet and lawn and garden supplies industries in the United States. The total pet food and supplies industry in 2013 was estimated to have been over $42.0 billion in annual retail sales. We estimate the annual retail sales of the pet supplies and super premium pet food markets in the categories in which we participate to be approximately $25.4 billion. According to The Freedonia Group, the total lawn and garden consumables industry in the United States is estimated to be approximately $17.2 billion in annual retail sales, including fertilizer, pesticides, growing media, seeds, mulch and other consumables. We estimate the annual retail sales of the lawn and garden consumables markets in the categories in which we participate to be approximately $10.2 billion. In addition, we participate in the pottery and seasonal décor markets.

Our pet supplies products include products for dogs and cats, including edible bones, premium healthy edible and non-edible chews, super premium dog and cat food and treats, toys, pet carriers, grooming supplies and other accessories; products for birds, small animals and specialty pets, including food, cages and habitats, toys, chews and related accessories; animal and household health and insect control products; products for fish, reptiles and other aquarium-based pets, including aquariums, furniture and lighting fixtures, pumps, filters, water conditioners, food and supplements, and information and knowledge resources; and products for horses and livestock. These products are sold under the master brands including AdamsTM, Aqueon®, Avoderm®, Bio Spot Active CareTM, Farnam®, Four Paws®, Kaytee®, Nylabone®, Pinnacle®, TFHTM, Zilla® as well as a number of other brands including Altosid, Comfort Zone®, Coralife®, Interpet, Kent Marine®, Oceanic Systems®, Pet Select®, Pre-Strike®, Super Pet®, and Zodiac®.

Our lawn and garden supplies products include proprietary and non-proprietary grass seed; wild bird feed, bird feeders, bird houses and other birding accessories; weed, grass, ant and other herbicide, insecticide and pesticide products; and decorative outdoor lifestyle and lighting products including pottery, trellises and other wood products and holiday lighting. These products are sold under the master brands AMDRO®, GKI/Bethlehem Lighting®, Ironite®, Pennington®, and Sevin®, as well as a number of other brand names including Lilly Miller®, Over-N-Out®, Smart Seed® and The Rebels®.

In fiscal 2014, our consolidated net sales were $1.6 billion, of which our Pet segment, or Pet, accounted for approximately $846 million and our Lawn and Garden segment, or Garden, accounted for approximately $759 million. In fiscal 2014, our income from operations before corporate expenses and eliminations of $72.9 million was $129.1 million, of which the Pet segment accounted for $88.1 million and the Garden segment accounted for $41.0 million. See Note 11 to our consolidated financial statements for financial information about our two operating segments.

We were incorporated in Delaware in June 1992 as the successor to a California corporation that was formed in 1955. Our executive offices are located at 1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597, and our telephone number is (925) 948-4000. Our website is www.central.com. The information on our website is not incorporated by reference in this annual report.

Recent Developments

Fiscal 2015 Second Quarter Financial Performance:

 

    Our net sales decreased $4.0 million, or 0.8%, to $497.6 million from the prior year quarter.

 

    Gross margin increased 80 basis points to 30.2%.

 

    Selling, general & administrative expenses decreased as a percentage of net sales to 20.1% from 20.5% in the prior year quarter.

 

    Operating earnings improved by $5.2 million from the prior year quarter, to $50.0 million in the second quarter of fiscal 2015.

 

    Our net income in the second quarter of fiscal 2015 was $23.2 million, or $0.47 per diluted share, compared to $20.9 million, or $0.43 per diluted share, in the second quarter of fiscal 2014.

 

31


Stock Repurchase – During the three months ended March 28, 2015, we repurchased $10.0 million of our common stock, which consisted of 0.3 million shares of our voting common stock (CENT) at an aggregate cost of approximately $2.7 million, or approximately $9.11 per share, and 0.8 million shares of our non-voting Class A common stock (CENTA) at an aggregate cost of approximately $7.3 million, or approximately $9.68 per share. As of March 28, 2015, approximately $35.0 million remained available under our current share repurchase authorization for future share repurchases.

Bond Redemption – In March 2015, we redeemed $50.0 million of our 8.25% senior subordinated notes due March 2018 (2018 Notes) at a price of 102.063%. In conjunction with this transaction, we recognized a charge of approximately $1.6 million in our second fiscal quarter as part of interest expense related to the payment of the call premium and the write-off of unamortized financing costs.

Investment in Joint Ventures - On December 30, 2014, we invested $16 million in cash for a 50% interest in two newly formed entities. The two entities own rights to commercialize products which incorporate features covered by certain patents, technology and associated intellectual property rights in the fields of animal health and pesticide applications. The investment is being accounted for under the equity method of accounting and is not expected to contribute to earnings in the near future.

Results of Operations

Three Months Ended March 28, 2015

Compared with Three Months Ended March 29, 2014

Net Sales

Net sales for the three months ended March 28, 2015 decreased $4.0 million, or 0.8%, to $497.6 million from $501.6 million for the three months ended March 29, 2014. Our branded product sales decreased $12.0 million and sales of other manufacturers’ products increased $8.0 million.

Pet segment net sales increased $4.8 million, or 2.2%, to $221.5 million for the three months ended March 28, 2015 from $216.7 million for the three months ended March 29, 2014. The increase in sales was due primarily to a $6.2 million increase in sales of other manufacturers’ products, partially offset by decreased pet branded product sales. Pet branded product sales decreased $1.4 million, due primarily to a $5.2 million decrease in our wild bird feed category, related to both price and volume decreases, and a $3.3 million decrease in our dog and cat category. A principal reason for the decrease in the dog and cat category was lost retail space for our dog food products. These decreases were partially offset by a $7.1 million increase in our animal health category, due primarily to increased sales in our active ingredient professional business including $2.9 million from an acquisition which was completed in 2014.

Garden segment net sales decreased $8.8 million, or 3.1%, to $276.1 million for the three months ended March 28, 2015 from $284.9 million for the three months ended March 29, 2014. Garden branded product sales decreased $10.6 million and sales of other manufacturers’ products increased $1.8 million. The sales decrease in our garden branded products was due primarily to a decrease of $14.3 million in grass seed and a $3.5 million decrease in wild bird feed, partially offset by an $11.3 million increase in Garden controls and fertilizers. The decrease in sales in grass seed was primarily volume driven as the prior year quarter was bolstered by an early inventory build at retail that we believe shifted sales from April into our fiscal 2014 second quarter. The decrease in sales in wild bird feed was primarily volume driven reflecting decreased distribution. The increase in sales in Garden controls and fertilizers was due primarily to increased sales in our private label business.

Gross Profit

Gross profit for the three months ended March 28, 2015 increased $2.5 million, or 1.7%, to $150.1 million from $147.6 million for the three months ended March 29, 2014. Gross margin improved to 30.2% for the three months ended March 28, 2015 from 29.4% for the three months ended March 29, 2014 due to gross margin improvement in both our Garden and Pet operating segments.

Gross profit improved in the Pet segment due primarily to increases in both sales and gross margin in our animal health category. Our animal health category was favorably impacted by increased volumes in our professional active ingredients business and the nonrecurrence of certain costs in our flea and tick business in the prior year. These gains were partially offset by decreased sales and margins in our bird and small animal business, impacted by reduced customer pricing associated with declining raw material commodity costs. Gross profit declined slightly in our Garden segment due to decreased sales while gross margin in Garden improved due primarily to increased sales and margin improvement in Garden controls and fertilizers. A principal reason for this improvement in Garden controls and fertilizers was increased volume due to new distribution of our private label products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $2.7 million, or 2.7%, to $100.1 million for the three months ended March 28, 2015 from $102.8 million for the three months ended March 29, 2014. As a percentage of net sales, selling, general and administrative expenses decreased to 20.1% for the three months ended March 28, 2015, compared to 20.5% in the comparable prior year quarter.

 

32


Selling and delivery expense decreased $1.4 million, or 2.5%, to $55.3 million for the three months ended March 28, 2015 from $56.7 million for the three months ended March 29, 2014. The decrease was due primarily to decreased marketing program expenses, including advertising, and reduced delivery expenses favorably impacted by lower sales volume and distribution efficiency gains in our Garden segment.

Warehouse and administrative expense decreased $1.3 million, or 2.8%, to $44.8 million for the quarter ended March 28, 2015 from $46.1 million in the quarter ended March 29, 2014. The improvement was primarily attributable to decreased warehouse costs in our Garden segment due to lower volumes and temporary labor expense reduction efforts. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resource, and informational technology functions.

Operating Income

Operating income increased $5.2 million, or 11.6%, to $50.0 million for the three months ended March 28, 2015 from $44.8 million for the three months ended March 29, 2014. Operating income increased due to lower selling, general and administrative costs and an improved gross margin that were partially offset by lower sales. Operating income increased in both our Pet and Garden segments, partially offset by an increase in operating expense in Corporate. Operating income as a percentage of net sales improved due to the decrease in selling, general and administrative expenses and improved gross margin.

Pet operating income increased $2.9 million, or 12.0% to $27.1 million for the three months ended March 28, 2015 from $24.2 million for the three months ended March 29, 2014. The increase was due primarily to improved gross margin and increased sales. Garden operating income increased $2.5 million, or 6.8%, to $39.3 million for the fiscal 2015 quarter from $36.8 million in the fiscal 2014 quarter due primarily to lower selling, general and administrative costs. Corporate operating expense increased $0.2 million.

Net Interest Expense

Net interest expense for the three months ended March 28, 2015 increased $1.5 million, or 14.1%, to $11.9 million from $10.4 million for the three months ended March 29, 2014. Interest expense increased due primarily to the redemption of notes during our second fiscal quarter. In March 2015, we redeemed $50.0 million of our 8.25% senior subordinated notes due March 2018 (2018 Notes) at a price of 102.063%. In conjunction with this transaction, we recognized a charge of approximately $1.6 million in our second fiscal quarter as part of interest expense related to the payment of the call premium and the non-cash write-off of unamortized financing costs. Debt outstanding on March 28, 2015 was $515.2 million compared to $545.3 million as of March 29, 2014. Our average borrowing rate for the current quarter increased slightly to 7.8% from 7.7% for the prior year quarter.

Other Income / Expense

Other income (expense) decreased $0.2 million to a $0.1 million expense for the three months ended March 28, 2015 from $0.1 million income for the three months ended March 29, 2014. Other income (expense) was comprised primarily of income from investments accounted for under the equity method of accounting and foreign currency exchange gains and losses. The decrease was primarily due to the losses from our investment in two newly formed entities, accounted for under the equity method of accounting, and increased foreign currency exchange losses.

Income Taxes

Our effective income tax rate was 36.9% for the quarter ended March 28, 2015 and 37.7% for the quarter ended March 29, 2014. The income tax rate decrease was due primarily to additional tax credits available in the current year quarter that were not available in the prior year quarter.

Six Months Ended March 28, 2015

Compared with Six Months Ended March 29, 2014

Net Sales

Net sales for the six months ended March 28, 2015 increased $12.8 million, or 1.6%, to $804.9 million from $792.1 million for the six months ended March 29, 2014. Our branded product sales decreased $8.3 million, while sales of other manufacturers’ products increased $21.1 million.

Pet Products’ net sales increased $19.5 million, or 4.9%, to $420.8 million for the six months ended March 28, 2015 from $401.3 million for the six months ended March 29, 2014. Pet branded product sales increased $4.8 million from the prior year period, due primarily to a $14.7 million increase in our animal health category, driven by increased sales in our active ingredient professional business, including $5.5 million from a prior year acquisition. The increase was partially offset by a $4.6 million decrease in our wild bird feed category, due to both price and volume decreases, and a $2.0 million decrease in our aquatic category. Sales of other manufacturers’ products increased approximately $14.7 million compared to the prior year six month period.

 

33


Garden Products’ net sales decreased $6.7 million, or 1.7%, to $384.1 million for the six months ended March 28, 2015 from $390.8 million for the six months ended March 29, 2014. Garden branded product sales decreased $13.1 million due primarily to a decrease of $15.0 million in grass seed, a $6.0 million decrease in wild bird feed and an $8.5 million decrease in Decor, partially offset by a $15.9 million increase in Garden controls and fertilizers. The decrease in sales in grass seed was primarily volume driven as an early inventory build at retail in the comparable prior year period shifted sales from April into our second fiscal quarter of 2014. The decrease in sales in wild bird feed was volume driven reflecting decreased distribution. The Decor business was impacted by lower volumes as a result of reduced store listings and higher retail inventory levels. The increase in sales in Garden controls and fertilizers was due primarily to increased sales in our private label business. Sales of other manufacturers’ products increased approximately $6.4 million compared to the comparable prior year period.

Gross Profit

Gross profit for the six months ended March 28, 2015 increased $10.7 million, or 4.7%, to $238.0 million from $227.3 million for the six months ended March 29, 2014. Gross profit as a percentage of net sales increased to 29.6% for the six months ended March 28, 2015 from 28.7% for the six months ended March 29, 2014.

Gross profit and gross margin improved in the Pet segment primarily due to both increased sales and gross margin in our animal health category which was favorably impacted by increased volumes in our professional actives business. In our Garden segment, gross profit declined slightly due to decreased sales while the gross margin improved due primarily to increased sales and margin improvement in Garden controls and fertilizers which was favorably impacted by increased volume due to new distribution of our private label products.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $4.0 million, or 2.1%, to $186.9 million for the six months ended March 28, 2015 from $190.9 million for the six months ended March 29, 2014. As a percentage of net sales, selling, general and administrative expenses decreased to 23.2% for the six months ended March 28, 2015, compared to 24.1% in the comparable prior year six month period.

Selling and delivery expense decreased $1.6 million, or 1.6%, to $99.8 million for the six months ended March 28, 2015 from $101.4 million for the six months ended March 29, 2014. The decrease was due primarily to decreased marketing program expenditures, including marketing program expenditures and headcount reductions, in our Garden segment. The decrease was partially offset by an increase in our Pet segment due to higher variable expenses associated with the increased sales.

Warehouse and administrative expense decreased $2.4 million to $87.1 million for the six months ended March 28, 2015 from $89.5 million in the six months ended March 29, 2014. The improvement was primarily attributable to decreased warehouse costs in our Garden segment due to lower volumes and temporary labor expense reduction and reduced administrative costs due to headcount reductions.

Operating Income

Operating income increased $14.7 million, or 40.4%, to $51.1 million for the six months ended March 28, 2015 from $36.4 million for the six months ended March 29, 2014. Operating income increased due to increased sales, an improved gross margin and lower selling, general and administrative expenses. Increased operating income in the Garden and Pet segments and decreased operating expense in Corporate all contributed to the increased operating income.

Pet operating income increased $9.0 million to $47.6 million due to increased sales of $19.5 million and an improved gross margin which were partially offset by increased selling, general and administrative costs. Garden operating income increased $5.3 million to $35.8 million due to lower selling, general and administrative costs and an improved gross margin partially offset by decreased sales of $6.7 million. Corporate operating expense decreased $0.4 million.

Net Interest Expense

Net interest expense for the six months ended March 28, 2015 decreased $0.3 million or 1.3%, to $22.3 million from $22.6 million for the six months ended March 29, 2014. A non-cash charge of $1.7 million in the first quarter of fiscal 2014 related to the termination of our prior revolving credit facility was partially offset by a $1.6 million charge related to the redemption of $50 million of our 8.25% senior subordinated notes during the second quarter of fiscal 2015.

 

34


Other Expense

Other expense increased $0.4 million to $0.5 million for the six months ended March 28, 2015, from $0.1 million for the six months ended March 29, 2014. The increase in other expense was due primarily to increased foreign currency exchange losses and to the losses from our investment in two newly formed entities, accounted for under the equity method of accounting.

Income Taxes

Our effective income tax rate was 35.5% for the six months ended March 28, 2015 and 36.9% for the six months ended March 29, 2014. Our 2015 tax rate benefited primarily from additional tax benefits available in 2015.

Inflation

Our revenues and margins are dependent on various economic factors, including rates of inflation, energy costs, consumer attitudes toward discretionary spending, currency fluctuations, and other macro-economic factors which may impact levels of consumer spending. Historically, in certain fiscal periods, we have been adversely impacted by rising input costs related to domestic inflation, particularly related to grain and seed prices, fuel prices and the ingredients used in our Garden controls and fertilizer. Rising costs have made it difficult for us to increase prices to our retail customers at a pace sufficient to enable us to maintain margins.

In recent years, our business has been negatively impacted by low consumer confidence, as well as other macro-economic factors. In fiscal 2012 and throughout most of fiscal 2013, commodity costs continued to increase. Recently, many of our commodity costs have been declining although we have seen increases in our grass seed costs. We continue to monitor commodity prices in order to take action to mitigate the impact of increasing raw material costs.

Weather and Seasonality

Our sales of lawn and garden products are influenced by weather and climate conditions in the different markets we serve. Additionally, our Garden segment’s business is highly seasonal. In fiscal 2014, approximately 65% of our Garden segment’s net sales and 59% of our total net sales occurred during our second and third fiscal quarters. Substantially all of the Garden segment’s operating income is typically generated in this period, which has historically offset the operating loss incurred during the first fiscal quarter of the year.

Liquidity and Capital Resources

We have financed our growth through a combination of internally generated funds, bank borrowings, supplier credit, and sales of equity and debt securities to the public.

Our business is seasonal and our working capital requirements and capital resources track closely to this seasonal pattern. Generally, during the first fiscal quarter, accounts receivable reach their lowest level while inventory, accounts payable and short-term borrowings begin to increase. During the second fiscal quarter, receivables, accounts payable and short-term borrowings increase, reflecting the build-up of inventory and related payables in anticipation of the peak lawn and garden selling season. During the third fiscal quarter, inventory levels remain relatively constant while accounts receivable peak and short-term borrowings start to decline as cash collections are received during the peak selling season. During the fourth fiscal quarter, inventory levels are at their lowest, and accounts receivable and payables are substantially reduced through conversion of receivables to cash.

We service two broad markets: pet supplies and lawn and garden supplies. Our pet supplies businesses involve products that have a year round selling cycle with a slight degree of seasonality. As a result, it is not necessary to maintain large quantities of inventory to meet peak demands. On the other hand, our lawn and garden businesses are highly seasonal with approximately 65% of our Garden segment’s net sales occurring during the second and third fiscal quarters. This seasonality requires the shipment of large quantities of product well ahead of the peak consumer buying periods. To encourage retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.

Operating Activities

Net cash used in operating activities increased by $38.5 million, to $98.5 million used for the six months ended March 28, 2015 from $60.0 million of cash used in operating activities for the six months ended March 29, 2014. The increase in cash used in operating activities was due primarily to an increased seasonal inventory build in the current period compared to the prior year period, partially

 

35


offset by increased payables in support of the inventory build. While inventory levels were lower for the period ended March 28, 2015 compared to the prior year period, the seasonal build was higher due to the lower levels of inventory for the fiscal year ending September 27, 2014, compared to inventory levels as of September 28, 2013. We remain focused on bringing our investment in inventory down over time, while maintaining high fill rates and service levels to our customers.

Investing Activities

Net cash used in investing activities increased $9.3 million, from $6.4 million for the six months ended March 29, 2014 to $15.7 million for the six months ended March 28, 2015. The increase in cash used in investing activities was due primarily to our $16 million investment for a 50% interest in two newly formed entities, partially offset by an increase in proceeds from short-term investments.

Financing Activities

Net cash provided by financing activities decreased $20.3 million, from $67.9 million of cash provided by financing activities for the six months ended March 29, 2014 to $47.6 million provided for the six months ended March 28, 2015. The decrease in cash provided was due primarily to our redemption of $50 million aggregate principal of our 2018 Notes during the current year period at 102.063%, as well as increased purchases of our common stock compared to the prior year. During the six months ended March 28, 2015, we repurchased $15.1 million of our common stock, which consisted of 0.5 million shares of our voting common stock (CENT) at an aggregate cost of approximately $4.5 million, or approximately $9.00 per share, and 1.2 million shares of our non-voting Class A common stock (CENTA) at an aggregate cost of approximately $10.6 million, or approximately $8.83 per share. These uses of cash were partially offset by higher net borrowings under our revolving credit facility during the six months ended March 28, 2015 compared to the prior year period.

We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $390 million asset backed loan facility. Based on our anticipated cash needs, availability under our asset backed loan facility and the scheduled maturity of our debt, we believe that our sources of liquidity should be adequate to meet our working capital, capital spending and other cash needs for at least the next 12 months. However, we cannot assure you that these sources will continue to provide us with sufficient liquidity and, should we require it, that we will be able to obtain financing on terms satisfactory to us, or at all.

We believe that cash flows from operating activities, funds available under our asset backed loan facility, and arrangements with suppliers will be adequate to fund our presently anticipated working capital requirements for the foreseeable future. We anticipate that our capital expenditures, which are related primarily to replacements and upgrades to plant and equipment and investment in our implementation of a scalable enterprise-wide information technology platform, will not exceed $30 million during fiscal 2015. We are investing in this information technology platform to improve existing operations, support future growth and enable us to take advantage of new applications and technologies. We invested approximately $83 million from fiscal 2005 through fiscal 2014 in this initiative. Capital expenditures for 2015 and beyond will depend upon the pace of conversion of those remaining legacy systems. This initiative, when complete, will combine our numerous information systems, which should create greater efficiency and effectiveness.

As part of our growth strategy, we have acquired a number of companies in the past, and we anticipate that we will continue to evaluate potential acquisition candidates in the future. If one or more potential acquisition opportunities, including those that would be material, become available in the near future, we may require additional external capital. In addition, such acquisitions would subject us to the general risks associated with acquiring companies, particularly if the acquisitions are relatively large.

At March 28, 2015, our total debt outstanding was $515.2 million, as compared with $545.3 million at March 29, 2014.

Senior Subordinated Notes

On March 8, 2010, we issued $400 million aggregate principal amount of 2018 Notes. On February 13, 2012, we issued an additional $50 million aggregate principal amount of our 2018 Notes at a price of 98.501%, plus accrued interest from September 1, 2011, in a private placement. We used the net proceeds from the offering to pay a portion of the outstanding balance under our prior credit facility.

The 2018 Notes require semiannual interest payments, which commenced on September 1, 2010. The 2018 Notes are unsecured senior subordinated obligations and are subordinated to all of our existing and future senior debt, including our Credit Facility. The obligations under the 2018 Notes are fully and unconditionally guaranteed on a senior subordinated basis by each of our existing and future domestic restricted subsidiaries with certain exceptions. The guarantees are general unsecured senior subordinated obligations of the guarantors and are subordinated to all existing and future senior debt of the guarantors.

 

36


In March 2015, we redeemed $50.0 million of our 8.25% senior subordinated notes due March 2018 at a price of 102.063% and recorded a charge of approximately $1.6 million related to the payment of the call premium and the non-cash write-off of unamortized deferred financing costs.

We may redeem some or all of the remaining 2018 Notes on or after March 1, 2015 for 102.063% and on or after March 1, 2016 for 100%, plus accrued and unpaid interest. The holders of the 2018 Notes have the right to require us to repurchase all or a portion of the 2018 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.

The estimated fair value of our $400 million remaining aggregate principal amount of the 2018 Notes as of March 28, 2015 was approximately $409.5 million. The estimated fair value is based on quoted market prices for these notes.

The 2018 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all financial covenants as March 28, 2015.

Asset Backed Loan Facility

On December 5, 2013, we entered into a credit agreement which provides up to a $390 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if we exercise the accordion feature set forth therein (collectively, the “Credit Facility”). The Credit Facility matures on December 5, 2018 and replaced our prior revolving credit facility. We may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. As of March 28, 2015, there were borrowings of $115 million outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $12.6 million outstanding as of March 28, 2015.

The Credit Facility is subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. The borrowing availability as of March 28, 2015 was $165 million. Borrowings under the Credit Facility bear interest at an index based on LIBOR or, at our option, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on our total outstanding borrowings. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.75% (1.25% at March 28, 2015) and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.75% (0.25% at March 28, 2015). As of March 28, 2015, the applicable interest rate related to Base Rate borrowings was 3.5%, and the applicable interest rate related to LIBOR-based borrowings was 1.4%.

The Credit Facility contains customary covenants, including financial covenants which require us to maintain a minimum fixed charge coverage ratio of 1.00:1.00 upon reaching certain borrowing levels. The Credit Facility is secured by substantially all of our assets. We were in compliance with all covenants under the Credit Facility during the period ended March 28, 2015.

In fiscal 2014, we incurred approximately $3.1 million of costs in conjunction with the new facility, which included banking fees and legal expenses. These costs will be amortized over the term of the Credit Facility.

We recorded a non-cash charge of $1.7 million for the three month period ended December 28, 2013 as part of interest expense, related to the non-cash write-off of unamortized deferred financing costs under the prior revolving credit facility.

Off-Balance Sheet Arrangements

There have been no material changes to the information provided in our Annual Report on Form 10-K for the fiscal year ended September 27, 2014 regarding off-balance sheet arrangements.

Contractual Obligations

There have been no material changes outside the ordinary course of business in our contractual obligations set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended September 27, 2014.

 

37


New Accounting Pronouncements

Refer to Footnote 1 in the notes to the condensed consolidated financial statements for new accounting pronouncements.

Critical Accounting Policies, Estimates and Judgments

There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended September 27, 2014.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in our exposure to market risk from that discussed in our Annual Report on Form 10-K for the fiscal year ended September 27, 2014.

 

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have reviewed, as of the end of the period covered by this report, the “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) that ensure that information relating to the Company required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported in a timely and proper manner and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon this review, such officers concluded that our disclosure controls and procedures were effective as of March 28, 2015.

(b) Changes in Internal Control Over Financial Reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in our internal control over financial reporting occurred during the second quarter of fiscal 2015. Based on that evaluation, management concluded that there has been no change in our internal control over financial reporting during the second quarter of fiscal 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time, we are involved in certain legal proceedings in the ordinary course of business. Currently, we are not a party to any legal proceedings that management believes would have a material effect on our financial position or results of operations.

 

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the fiscal year ended September 27, 2014.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the repurchases of any equity securities during the fiscal quarter ended March 28, 2015 and the dollar amount of authorized share repurchases remaining under our stock repurchase program.

 

Period

   Total Number
of Shares

(or Units)
Purchased(2)
     Average
Price Paid

per Share
(or Units)
     Total Number
of Shares
(or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs
     Maximum Number (or
Approximate Dollar Value)
of Shares

(or Units)
that May Yet Be Purchased
Under the Plans or
Programs (1)
 

December 28, 2014 – January 31, 2015

     444,437       $ 9.46         401,454       $ 41,180,000   

February 1, 2015 – February 28, 2015

     516,192       $ 9.52         511,357       $ 36,315,000   

March 1, 2015 – March 28, 2015

     144,811       $ 9.64         139,800       $ 34,968,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

  1,105,440    $ 9.51      1,052,611    $ 34,968,000   

 

38


(1) During the third quarter of fiscal 2011, our Board of Directors authorized a $100 million share repurchase program. The program has no expiration date and expires when the amount authorized has been used or the Board withdraws its authorization. The repurchase of shares may be limited by certain financial covenants in our credit facility and indenture that restrict our ability to repurchase our stock.
(2) Shares purchased during the period indicated represent withholding of a portion of shares to cover taxes in connection with the vesting of restricted stock and the exercise of stock options.

 

Item 3. Defaults Upon Senior Securities

Not applicable

 

Item 4. Mine Safety Disclosures

Not applicable

 

Item 5. Other Information

Not applicable

 

Item 6. Exhibits
  31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1 Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.
  32.2 Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
101.INS XBRL Instance Document
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Label Linkbase Document
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document

 

39


SIGNATURES

Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.

 

CENTRAL GARDEN & PET COMPANY
Registrant                    
Dated: May 7, 2015

/s/ JOHN R. RANELLI

John R. Ranelli
President and Chief Executive Officer
(Principal Executive Officer)

/s/ LORI A. VARLAS

Lori A. Varlas
Chief Financial Officer
(Principal Financial Officer)

 

40