Central Garden & Pet Company — Fiscal 2022 Second-Quarter Form 10-Q
Business Context and Reporting Period
The filing covers the three and six months ended March 26, 2022, compared with March 27, 2021. Central Garden & Pet operates through two reportable segments: Pet and Garden, supplying branded, private-label and third-party pet, lawn and garden products. Garden operations are highly seasonal, with approximately 69% of annual Garden sales historically occurring in the second and third fiscal quarters.
Key Financial Metrics
| Metric | Three Months Ended March 26, 2022 | Prior Year | Six Months Ended March 26, 2022 | Prior Year |
|---|---|---|---|---|
| Net sales | $954.4 million | $935.3 million | $1,615.8 million | $1,527.5 million |
| Gross profit | $286.8 million | $272.4 million | $485.0 million | $437.8 million |
| Gross margin | 30.1% | 29.1% | 30.0% | 28.7% |
| Operating income | $106.8 million | $104.6 million | $133.1 million | $131.7 million |
| Operating margin | 11.2% | 11.2% | 8.2% | 8.6% |
| Net income attributable to Central | $69.7 million | $73.0 million | $78.7 million | $78.6 million |
| Diluted EPS | $1.27 | $1.32 | $1.44 | $1.43 |
| Adjusted EBITDA | $131.4 million | $129.2 million | $183.0 million | $173.8 million |
Second-quarter sales increased 2.0%, but organic sales declined 3.5% after excluding recent acquisitions and divestitures. Six-month sales increased 5.8%, while organic sales declined 1.9%. Second-quarter Pet sales rose 1.2% to $497.7 million and Garden sales rose 3.0% to $456.7 million; the Garden increase was acquisition-driven, while organic Garden sales declined 8.7%.
Second-quarter gross profit and margin benefited from pricing and acquisitions, partially offset by commodity, labor and freight inflation. Selling, general and administrative expense increased 7.2% to $179.9 million, or 18.9% of sales versus 17.9% in the prior year. Net interest expense increased 44.8% in the quarter to $14.7 million because of a higher debt balance.
For the six months, operating cash flow was negative $272.1 million versus negative $120.2 million in the prior year. The deterioration primarily reflected working-capital investment, including a $203.0 million inventory increase and a $234.1 million increase in accounts receivable. Capital expenditures were $75.4 million, and management expects fiscal 2022 capital expenditures of approximately $115 million to $125 million.
Debt, Liquidity and Balance Sheet
- Cash and cash equivalents were $54.1 million at March 26, 2022; cash, cash equivalents and restricted cash totaled $66.8 million.
- Total debt was approximately $1.186 billion, up from $979.0 million at March 27, 2021. Debt consisted primarily of $300 million of 2028 Notes, $500 million of 2030 Notes and $400 million of 2031 Notes.
- The amended asset-based revolving facility provides $750 million of commitments, plus a potential $400 million accordion with lender consent. Net availability was approximately $652 million, with no borrowings or letters of credit outstanding under the facility as of March 26, 2022.
- Management stated that available cash, operating cash flow, supplier arrangements and the revolving facility should fund working capital, capital spending and other needs for at least the next 12 months, while noting that financing availability and terms cannot be assured.
- The Company was in compliance with the covenants under its senior notes and revolving credit facility as of March 26, 2022.
Material Changes Versus the Prior Comparable Period
- Reported sales benefited from recent acquisitions, especially Green Garden Products and other fiscal 2021 acquisitions; organic sales declined.
- Garden results were affected by unfavorable weather and a delayed start to the season. Wild bird sales benefited from pricing, while most other Garden businesses experienced lower organic sales.
- Pricing actions and favorable mix improved gross margin, but inflation in commodities, labor, freight, fuel and other inputs continued to pressure profitability.
- SG&A increased due to acquisition-related costs, wage and freight inflation, higher marketing investment, and increased corporate payroll and equity compensation costs.
- Quarterly net income and diluted EPS declined despite higher sales and operating income, primarily because of higher interest expense, increased SG&A and unfavorable other income/expense.
- Inventory increased to $888.1 million from $672.9 million a year earlier as the Company intentionally built inventory amid strong demand, supply-chain constraints and higher input costs.
- The Company repurchased approximately 0.4 million Class A shares for approximately $16.1 million during the six-month period and had $100 million remaining under its principal repurchase authorization.
Guidance, Outlook, Risks and Unusual Items
Management did not provide a specific revenue or earnings outlook in the filing. It expects fiscal 2022 capital expenditures of approximately $115 million to $125 million and does not expect pricing actions to fully offset cost pressures during fiscal 2022.
- COVID-19 continued to affect labor availability, productivity, demand, fill rates, supply-chain reliability and operating costs. Fill rates improved but remained below historical levels.
- Key risks include inflation, commodity and freight costs, supply shortages, labor constraints, weather-related seasonality, reduced demand for pandemic-benefited categories, customer concentration, competition, acquisitions and integration, cyber risks, regulatory matters and access to capital.
- The Company reported no goodwill impairment for the six months ended March 26, 2022. Approximately $101 million of the D&D Commodities acquisition purchase price remained unallocated pending final purchase accounting.
- A patent-related lawsuit by Nite Glow remains pending. The Federal Circuit rejected patent infringement and required a new damages trial limited to alleged “head start” benefits from confidential information. Management believes the matter will not materially affect the consolidated financial statements, but acknowledges that the ultimate outcome is uncertain.
- State unclaimed-property examinations remain ongoing, and their ultimate impact is uncertain.
- Non-GAAP six-month fiscal 2021 results included approximately $10.0 million of incremental debt-redemption expenses and a $2.6 million loss on the sale of Breeder’s Choice; these items did not recur in fiscal 2022.
Important Facts for Investors to Verify
- Whether pricing actions can offset continuing commodity, labor, freight and fuel inflation without further margin deterioration.
- Whether Garden organic demand recovers following the delayed season and unfavorable weather, and how much reported growth remains acquisition-driven.
- Inventory levels, receivable collections and the pace of seasonal working-capital conversion, given six-month operating cash usage of $272.1 million.
- Debt-service requirements, interest-rate exposure and continued covenant compliance, particularly with approximately $1.186 billion of debt outstanding.
- The sustainability of reported performance after separating acquisition effects from organic sales and operating results.
- The final purchase-price allocation for D&D Commodities and any resulting effects on goodwill, intangible assets, deferred taxes and amortization.
- The outcome and potential damages from the Nite Glow litigation and the ongoing state unclaimed-property examinations.