Central Garden & Pet Company — Q3 FY2022 Form 10-Q Summary
Business context and reporting period
Central Garden & Pet Company manufactures, markets and distributes pet and garden products through its Pet and Garden reportable segments. The filing covers the three and nine months ended June 25, 2022, compared with the corresponding periods ended June 26, 2021. Results are seasonal, particularly in Garden, where approximately 69% of annual segment sales historically occur in the second and third fiscal quarters.
Key financial metrics
| Metric | Three months ended June 25, 2022 | Year-over-year change | Nine months ended June 25, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $1,015.4 million | Down 2.1% | $2,631.1 million | Up 2.6% |
| Organic net sales | $990.3 million | Down 4.5% | $2,484.2 million | Down 3.0% |
| Gross profit | $307.6 million | Down 4.0% | $792.6 million | Up 4.5% |
| Gross margin | 30.3% | Down 60 basis points | 30.1% | Up 50 basis points |
| Operating income | $114.1 million | Up 0.7% | $247.1 million | Up 0.9% |
| Operating margin | 11.2% | Up 30 basis points | 9.4% | Down 10 basis points |
| Net income attributable to Central | $75.4 million | Down 1.0% | $154.1 million | Down 0.4% |
| Diluted earnings per share | $1.39 | Up from $1.37 | $2.82 | Up from $2.80 |
| Adjusted EBITDA | $141.4 million | Up from $140.9 million | $324.4 million | Up from $314.7 million |
For the quarter, Pet sales declined 0.6% to $504.8 million and Garden sales declined 3.5% to $510.6 million. Pet operating income fell 11.8% to $62.6 million, while Garden operating income increased to $75.6 million from $67.0 million. For the nine months, Pet sales increased 0.2% to $1,438.4 million and Garden sales increased 5.7% to $1,192.7 million, substantially reflecting recent acquisitions.
Net cash used in operating activities was $82.4 million for the nine months, compared with $178.6 million of cash provided in the prior-year period. The change primarily reflected intentional inventory growth, higher costs and increased accounts receivable. Capital expenditures were $98.6 million, compared with $57.0 million in the prior-year period.
Cash, cash equivalents and restricted cash totaled $208.5 million at June 25, 2022, including $195.8 million of unrestricted cash. Inventories were $882.5 million, up from $626.6 million a year earlier. Accounts receivable were $505.9 million.
Total debt was $1.186 billion, compared with $1.184 billion at June 26, 2021. The company had no borrowings or letters of credit outstanding under its $750 million asset-based revolving credit facility and reported approximately $556 million of net availability. The company stated that it was in compliance with all debt covenants.
Material changes versus the prior comparable periods
- Quarterly sales declined despite pricing actions, as volume reductions more than offset price increases. Organic sales declined more than reported sales because recent acquisitions contributed $25.1 million.
- Garden performance was pressured by unfavorable weather, higher prices and reduced consumer purchasing, although pricing and lower expenses improved Garden profitability.
- Gross margins remained under pressure from commodity, labor and freight inflation. Quarterly SG&A declined 6.5% and improved to 19.1% of sales, helping operating margin increase.
- Nine-month sales growth was acquisition-driven: Garden acquisitions contributed $146.9 million, while organic sales declined 3.0% overall and 7.3% in Garden.
- Operating cash flow deteriorated substantially because of working-capital investment, including higher inventory and receivables.
- The company repurchased approximately $41.8 million of common stock during the nine months and reported $100 million remaining under its 2019 repurchase authorization.
- The prior-year nine-month results included approximately $10.0 million of expenses related to debt redemption and issuance and a $2.6 million loss on the sale of the Breeder’s Choice business; these items did not recur in fiscal 2022.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance in the filing. It expects fiscal 2022 capital expenditures of approximately $115 million to $125 million, including investments in facilities, equipment and an enterprise-wide information technology platform; approximately $99 million had been spent through June 25, 2022.
Management expects pricing actions to continue but does not expect to fully offset fiscal 2022 cost pressures. Key risks include inflation in commodities, materials, labor and freight; inability to pass through costs; supply-chain disruptions; potential recession and lower consumer spending; excess retailer inventory; unfavorable weather; COVID-19 effects; seasonality; customer concentration; acquisition integration; competition; and access to capital.
Management believes available cash, operating cash flow, supplier arrangements and the revolving facility are adequate for working capital, capital expenditures and other needs for at least the next 12 months, but cautions that financing may not remain available on acceptable terms.
The company reported no goodwill impairment for the nine months. A pending Nite Glow litigation matter remains unresolved: the Federal Circuit eliminated patent infringement liability and dismissed the contract claim but ordered a new damages trial related to alleged misappropriation. Management believes the matter will not materially affect the consolidated financial statements, while acknowledging that the ultimate outcome is uncertain. State unclaimed-property examinations are also continuing.
Disclosure controls were deemed effective as of June 25, 2022, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether pricing actions can offset continuing inflation without causing further volume declines or margin erosion.
- Whether Garden demand and weather conditions normalize after the reported unfavorable season.
- The sustainability of acquisition-related sales growth versus the underlying organic sales decline.
- Inventory levels, receivables and operating cash flow as seasonal working capital converts to cash.
- Debt-service capacity, interest-rate exposure and continued compliance with revolving-facility and senior-note covenants.
- The final outcome and potential damages from the Nite Glow litigation and the unclaimed-property examinations.
- Progress and spending associated with the enterprise resource planning and broader information-technology implementation.