Business Context and Reporting Period
Central Garden & Pet Company filed an unaudited Form 10-Q for the three months ended December 29, 2012, compared with the three months ended December 24, 2011. The company operates through Pet and Garden segments, with Garden results highly seasonal. Fiscal 2013 contains one fewer week than fiscal 2012.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $292.5 million | $302.1 million |
| Gross profit | $77.0 million | $80.7 million |
| Gross margin | 26.3% | 26.7% |
| Loss from operations | $13.1 million | $11.3 million |
| Net loss attributable to Central | $15.3 million | $13.1 million |
| Basic and diluted loss per share | $0.32 | $0.27 |
| Net cash from operating activities | $(28.0) million | $3.5 million |
| Net cash used in investing activities | $8.0 million | $9.2 million |
| Net cash from financing activities | $0.1 million | $3.9 million |
- SG&A was $90.1 million, or 30.8% of sales, compared with $92.0 million, or 30.5%, in the prior-year quarter.
- Pet sales were $195.2 million, down from $199.3 million; Pet operating income increased to $10.2 million from $9.7 million.
- Garden sales were $97.3 million, down from $102.8 million; Garden operating loss improved to $8.5 million from $11.1 million.
- Cash and cash equivalents were $12.6 million at December 29, 2012, compared with $48.5 million at September 29, 2012 and $10.3 million at December 24, 2011.
- Inventories were $397.7 million, up from $330.0 million at fiscal year-end and $365.7 million in the prior-year quarter.
- Total debt was $450.8 million, including approximately $449.3 million of 8.25% senior subordinated notes due 2018 and $1.0 million outstanding under the revolving facility.
- The $375 million revolving credit facility had $374.0 million of unused commitments, or $219.7 million available after financial covenants. Other letters of credit totaled $13.2 million.
- The company was in compliance with its financial covenants. Total leverage was 4.1x, senior secured leverage was 0.02x, and interest coverage was 2.8x against a 2.50x minimum.
Material Changes Versus the Prior Comparable Period
- Sales declined 3.2%, driven by lower branded and other manufacturers’ product sales in both segments. Pet sales decreased primarily from lower dog and cat volumes; Garden sales were affected by weaker winter seasonal product sales and increased returns.
- Gross profit decreased 4.7% and gross margin declined 40 basis points. Management attributed pressure to weaker Pet dog and cat performance, effects from Super Storm Sandy, and lower Garden seasonal sales with higher returns and expenses.
- Operating loss increased by $1.8 million. Lower SG&A spending was more than offset by lower gross profit and higher corporate expenses.
- Net interest expense increased 7.4% to $10.2 million, primarily because of a higher average borrowing rate. The average borrowing rate rose to 8.7% from 8.2%.
- Other expense increased to $1.0 million from $0.1 million, primarily because of realized and unrealized losses on commodity derivatives.
- Operating cash flow deteriorated by $31.5 million to an outflow of $28.0 million, primarily because inventory increased for safety stock, warehouse consolidations, and planned Garden product launches.
- The company paid $4.8 million to acquire the remaining majority interest in FourStar Microbial Products, LLC. The acquisition had no impact on reported operating results during the quarter and was not expected to materially affect fiscal 2013 results.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected the fiscal 2013 effective tax rate to be similar to the fiscal 2012 rate of approximately 36.9%.
- Fiscal 2013 capital expenditures were expected not to exceed $40 million, including up to $11 million for the enterprise-wide information technology platform.
- Management stated that operating cash flow, supplier arrangements, and availability under the revolving facility should meet anticipated needs for at least the next 12 months, while noting that future liquidity and financing availability cannot be assured.
- Garden results are seasonally concentrated: approximately 66% of Garden sales and 59% of total sales occurred in the second and third fiscal quarters in fiscal 2012. First-quarter results are therefore not indicative of the full fiscal year.
- Key risks include transformational change initiatives, warehouse consolidations, implementation of a new enterprise resource planning system, commodity and raw-material prices, weather, consumer spending, customer concentration, competition, acquisitions, product recalls and liability, regulatory matters, cyber attacks, and access to capital.
- The company hedges portions of anticipated commodity consumption, primarily corn and soy meal, with contracts extending through July 2013. These derivatives are not designated for hedge accounting, causing changes in fair value to affect other income or expense.
- Management reported no material legal proceedings, product liability claims, recalls, withdrawals, or replacements. There were no material changes to previously disclosed risk factors, off-balance-sheet arrangements, or contractual obligations.
- A new President and Chief Executive Officer, John R. Ranelli, was scheduled to assume the role effective at the February 11, 2013 annual shareholder meeting; William E. Brown would remain Chairman.
Important Facts for Investors to Verify
- Confirm whether inventory growth and the resulting operating cash outflow normalize as the Garden selling season progresses.
- Monitor Garden segment sales, seasonal returns, margins, and the extent to which planned product launches and warehouse consolidations affect results.
- Assess liquidity relative to the $450.8 million debt balance, the 2018 notes maturity, covenant headroom, and only $219.7 million of covenant-adjusted revolver availability.
- Evaluate commodity derivative losses and future grain, seed, fuel, and other raw-material cost trends.
- Track execution, costs, and operational disruption from transformational initiatives and the enterprise-wide information technology implementation.
- Review the final purchase-price allocation and any contingent payments related to the FourStar Microbial acquisition.