Central Garden & Pet Company — Fiscal 2021 Form 10-K Summary
Business context and reporting period
Central Garden & Pet is a U.S.-focused marketer, manufacturer and distributor of branded, private-label and third-party pet and lawn-and-garden products. Reportable segments are Pet and Garden. The filing covers the 52-week fiscal year ended September 25, 2021; the requested “2021 Q4” is the fourth quarter within this annual filing, but separate fourth-quarter financial statements are not provided in the supplied text.
Fiscal 2021 included four acquisitions: DoMyOwn, Hopewell Nursery, Green Garden Products and D&D Commodities. The Company also sold its Breeder’s Choice business and recast prior segment information to include outdoor cushions in Pet rather than Garden.
Financial performance and liquidity
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $3,303.7 million | $2,695.5 million | +22.6% |
| Gross profit | $970.9 million | $796.6 million | +21.9% |
| Gross margin | 29.4% | 29.6% | Down 20 bps |
| Operating income | $254.5 million | $198.0 million | +28.5% |
| Operating margin | 7.7% | 7.3% | Up 40 bps |
| Net income attributable to Central | $151.7 million | $120.7 million | +25.7% |
| Diluted EPS | $2.75 | $2.20 | +25.0% |
| Cash flow from operations | $250.8 million | $264.3 million | Down $13.5 million |
| Capital expenditures | $80.3 million | $43.1 million | +86.6% |
Pet sales were $1,894.9 million, up 12.9%, and Pet operating income was $208.2 million, up 21.5%. Garden sales were $1,408.8 million, up 38.5%, and Garden operating income was $138.8 million, up 20.2%. Organic consolidated sales increased 12.5%; acquisitions contributed $272.9 million of the reported sales increase.
Cash, cash equivalents and restricted cash totaled $439.5 million at year-end, including $426.4 million of cash and cash equivalents. Working capital was $1,021.3 million. Inventories increased to $685.2 million from $439.6 million, reflecting an intentional build to support demand and supply-chain uncertainty.
Total debt was $1,185.8 million, compared with $694.1 million in fiscal 2020. The Company issued $500 million of 4.125% senior notes due 2030 and $400 million of 4.125% senior notes due 2031, and redeemed its $400 million of 6.125% notes due 2023. The $400 million asset-based revolving facility had $400 million of availability and no borrowings outstanding at year-end. The Company reported compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales growth reflected pandemic-related demand, increased pet ownership, home gardening, retailer listing gains, pricing and acquisitions.
- Gross margin declined modestly because commodity, freight and labor inflation and acquisition-related inventory purchase accounting more than offset pricing and productivity gains.
- Operating margin improved because selling, general and administrative expenses declined to 21.7% of sales from 22.2%, despite higher absolute expenses.
- Interest expense increased to $58.2 million from $40.0 million, including approximately $10.0 million of note-redemption and refinancing costs and the effect of higher debt balances.
- Operating cash flow declined primarily because of increased inventory investment, while investing cash use rose to $899.4 million, principally because of acquisitions and higher capital expenditures.
- Reported fiscal 2021 non-GAAP diluted EPS was $2.92 versus $2.26 in fiscal 2020, excluding selected refinancing costs, the Breeder’s Choice sale loss and prior-year investment impairments. These measures are not substitutes for GAAP results.
Guidance, outlook, commentary and risks
Management did not provide specific fiscal 2022 revenue or earnings guidance in the supplied filing. It expects continued implementation of the “Central to Home” strategy, including brand investment, eCommerce development, portfolio management, supply-chain improvements, cost reduction and acquisitions. Planned capital expenditures for the next 12 months were estimated at approximately $80 million to $90 million.
Management expects inflationary pressure to continue in fiscal 2022 and stated that price increases may not fully offset higher commodity, material, freight and labor costs. The Company expects to rely on operating cash flow, supplier credit and its revolving facility to fund seasonal working capital, capital expenditures and other needs, and believes liquidity is adequate for at least the next 12 months.
- COVID-19 created elevated demand but also labor shortages, supply constraints, lower fill rates, higher logistics costs and uncertainty about post-pandemic demand normalization.
- Garden operations are highly seasonal: approximately 69% of Garden sales and 60% of consolidated sales occurred in the second and third fiscal quarters.
- Commodity exposure includes grains, seeds, chemicals, fertilizer ingredients and pet-food inputs. Fixed purchase commitments totaled approximately $224.9 million; a 10% commodity-price change could produce an estimated $22.5 million pretax gain or loss as related inventory is sold.
- Customer concentration is significant: the top five customers represented approximately 51% of sales, with Walmart at approximately 16%, Home Depot at approximately 15% and Lowe’s at approximately 9%.
- The Company remains exposed to debt-service, refinancing and variable-rate risks, although no variable-rate revolver borrowings were outstanding at year-end.
- A Nite Glow lawsuit remains unresolved. The Federal Circuit eliminated patent infringement liability and dismissed the breach-of-contract damages claim, but ordered a new trial limited to potential “head start” damages for misappropriation of confidential information. Management expects no material consolidated impact, but the outcome is uncertain.
- Purchase-price allocations for Green Garden Products and D&D Commodities remained incomplete at year-end, with approximately $487 million and $101 million, respectively, unallocated.
- The Company reported no goodwill or indefinite-lived intangible impairment in fiscal 2021. Future impairment remains sensitive to growth, cash-flow and discount-rate assumptions.
Most important facts for investors to verify
- Whether pandemic-driven demand, particularly in Garden and wild bird products, normalizes or declines.
- The pace and effectiveness of pricing actions in offsetting inflation and the resulting fiscal 2022 gross-margin trend.
- Inventory levels, working-capital conversion and operating cash flow after the fiscal 2021 build.
- Debt leverage, scheduled principal obligations, refinancing capacity and covenant headroom.
- Integration performance and final purchase accounting for the four fiscal 2021 acquisitions.
- Customer concentration and exposure to retailer inventory decisions, eCommerce shifts and private-label substitution.
- The resolution and potential damages associated with the Nite Glow litigation and any other environmental, product-liability or regulatory contingencies.
- Internal-control coverage for the four acquired businesses, which were excluded from management’s fiscal 2021 internal-control assessment and represented approximately 28% of total assets and 9% of net sales.