Central Garden & Pet Company — Fiscal 2014 First-Quarter Form 10-Q
Reporting period: Three months ended December 28, 2013; comparative period ended December 29, 2012. The interim financial statements are unaudited. The company operates in Pet and Garden segments, with Garden results materially seasonal.
Financial performance and position
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $290.5 million | $292.5 million | Down 0.7% |
| Gross profit | $79.7 million | $77.0 million | Up 3.6% |
| Gross margin | 27.4% | 26.3% | Up 110 basis points |
| Loss from operations | $(8.4) million | $(13.1) million | Improved $4.7 million |
| Net loss attributable to Central | $(12.7) million | $(15.3) million | Improved $2.6 million |
| Basic and diluted loss per share | $(0.26) | $(0.32) | Improved $0.06 |
| Net cash provided by operating activities | $30.0 million | $(28.0) million | Improved $58.0 million |
- Pet sales declined 5.4% to $184.6 million, primarily from lower volumes in wild bird feed and aquatic products. Pet operating income increased to $14.4 million from $10.2 million.
- Garden sales increased 8.8% to $105.9 million, led by controls and fertilizers and seasonal décor sold through a new channel. The Garden operating loss narrowed to $6.2 million from $8.5 million.
- SG&A declined 2.2% to $88.1 million and decreased to 30.3% of sales from 30.8%. Selling and delivery expense declined primarily because of lower delivery costs and commissions.
- Net interest expense increased to $12.2 million from $10.3 million, including a $1.7 million non-cash write-off of deferred financing costs related to the prior revolving facility.
- Cash and cash equivalents were $16.7 million, with $14.2 million of short-term investments. Inventories were $427.4 million, up from $397.7 million a year earlier.
- Total debt was $449.5 million at December 28, 2013, versus $450.8 million at December 29, 2012. The 8.25% senior subordinated notes had principal due in March 2018.
- Total assets were $1.16 billion and total equity was $458.5 million at quarter-end.
Material changes versus the prior comparable period
- Profitability improved despite slightly lower sales, reflecting higher pricing, manufacturing improvements, lower SG&A, improved Garden performance and lower commodity-related losses.
- Operating cash flow changed from a $28.0 million use to a $30.0 million source, principally because inventory spending was lower than in the prior-year quarter.
- Investing cash use decreased to $1.8 million from $8.0 million, partly because the prior-year period included the $4.8 million acquisition of FourStar Microbial.
- Financing cash use increased to $26.7 million from $0.1 million provided, primarily because of greater net repayments under the revolving facility and $3.0 million of financing costs.
- On December 5, 2013, the company replaced its prior revolving facility with a $390 million asset-based revolving credit facility, with an additional $200 million accordion subject to lender consent. No borrowings were outstanding under the new facility at quarter-end; the borrowing base was approximately $302.2 million.
- Commodity derivative positions were zero at quarter-end, compared with derivative assets and liabilities in the prior-year period. Prior-year other expense included approximately $0.8 million of derivative losses.
Outlook, risks and unusual items
- Management expects fiscal 2014 capital expenditures not to exceed $30 million, primarily for plant and equipment and the enterprise-wide information technology platform.
- Management stated that operating cash flow, availability under the asset-based facility and supplier arrangements should provide adequate liquidity for 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 credit facility and senior subordinated notes covenants at quarter-end. The credit facility requires a minimum 1.00:1.00 fixed-charge coverage ratio when specified borrowing levels are reached.
- Seasonality is significant: approximately 68% of Garden segment sales and 60% of total sales occurred in the second and third fiscal quarters in fiscal 2013. First-quarter results are therefore not indicative of full-year performance.
- Key risks include raw-material, grain and seed price volatility; inability to pass through cost increases; adverse weather; consumer spending and macroeconomic weakness; customer concentration; competition; acquisitions; goodwill or intangible impairment; ERP implementation; international sourcing; product liability and recalls; regulatory matters; cyberattacks; and access to capital.
- Fiscal 2013 goodwill testing resulted in a $7.7 million non-cash impairment charge for the Garden segment. No significant non-financial assets were required to be remeasured during the current quarter.
- Management reported no material legal proceedings, no material changes in previously disclosed risk factors or off-balance-sheet arrangements, and effective disclosure controls as of December 28, 2013.
Investor verification priorities
- Verify whether the improved gross margin and reduced operating loss continue as Garden sales enter their peak seasonal periods.
- Monitor Pet volume trends, especially wild bird feed and aquatic products, and assess whether pricing is offsetting volume pressure.
- Reconcile inventory growth and seasonal working-capital needs with operating cash flow and borrowing-base availability.
- Review the $449.5 million debt balance, 8.25% notes due 2018, refinancing costs and covenant headroom.
- Assess the execution, remaining cost and expected benefits of the ERP and other change initiatives.
- Evaluate exposure to commodity prices, weather, retailer concentration, product recalls, litigation, cyber risk and potential future goodwill or intangible impairments.