Central Garden & Pet Company — Fiscal 2015 Second-Quarter Form 10-Q
Reporting period: Three and six months ended March 28, 2015, compared with March 29, 2014. The interim statements are unaudited. Results are seasonal, particularly in the Garden segment; the second and third fiscal quarters typically generate most Garden sales and operating income.
Financial performance
| Metric | Three months ended March 28, 2015 | Prior year | Change |
|---|
| Net sales | $497.6 million | $501.6 million | Down 0.8% |
| Gross profit | $150.1 million | $147.6 million | Up 1.7% |
| Gross margin | 30.2% | 29.4% | Up 80 basis points |
| SG&A | $100.1 million | $102.8 million | Down 2.7% |
| Income from operations | $50.0 million | $44.8 million | Up 11.6% |
| Net income attributable to Central | $23.2 million | $20.9 million | Up 11.2% |
| Diluted EPS | $0.47 | $0.43 | Up $0.04 |
| Metric | Six months ended March 28, 2015 | Prior year | Change |
|---|
| Net sales | $804.9 million | $792.1 million | Up 1.6% |
| Gross profit | $238.0 million | $227.3 million | Up 4.7% |
| Gross margin | 29.6% | 28.7% | Up 90 basis points |
| SG&A | $186.9 million | $190.9 million | Down 2.1% |
| Income from operations | $51.1 million | $36.4 million | Up 40.4% |
| Net income attributable to Central | $17.5 million | $8.2 million | Up $9.4 million |
| Diluted EPS | $0.35 | $0.17 | Up $0.18 |
Segment and operating developments
- Pet: Second-quarter sales increased 2.2% to $221.5 million and operating income increased 12.0% to $27.1 million. Animal health sales benefited from professional active-ingredient products and the 2014 acquisition, while wild bird feed and dog and cat products declined.
- Garden: Second-quarter sales decreased 3.1% to $276.1 million, primarily because of lower grass seed and wild bird feed volumes. Operating income increased 6.8% to $39.3 million, supported by lower SG&A and improved margins in controls and fertilizers.
- Six-month Pet sales increased 4.9% to $420.8 million, while Garden sales decreased 1.7% to $384.1 million.
- Management attributed margin improvement to product mix, higher volumes in animal health and Garden controls and fertilizers, lower certain flea-and-tick costs, and SG&A reductions.
Cash flow, debt and liquidity
- Cash used in operating activities was $98.5 million for the six months, compared with $60.0 million used in the prior year. The increase primarily reflected a larger seasonal inventory build and working-capital needs.
- Cash used in investing activities was $15.7 million, including $11.0 million of capital expenditures and a $16.0 million investment for a 50% interest in two newly formed entities. The investment is not expected to contribute to earnings in the near term.
- Cash provided by financing activities was $47.6 million, including $186.0 million of revolving borrowings and $71.0 million of repayments. The company repurchased $17.2 million of common stock during the six-month period.
- Cash and cash equivalents declined to $11.9 million at March 28, 2015 from $78.7 million at September 27, 2014. Restricted cash was $12.6 million.
- Total debt was $515.2 million at March 28, 2015, compared with $545.3 million at March 29, 2014. Debt consisted primarily of $399.6 million carrying value of 8.25% senior subordinated notes and $115.0 million outstanding under the asset-based revolving facility.
- The company redeemed $50.0 million principal amount of the 2018 Notes in March 2015 at 102.063%, recognizing an approximately $1.6 million interest expense charge for the premium and financing-cost write-off.
- Revolving-facility borrowing availability was $165 million at March 28, 2015, with $12.6 million of other outstanding letters of credit. The company was in compliance with applicable debt covenants.
- Management believes available liquidity, operating cash flow, supplier arrangements and the revolving facility will satisfy anticipated needs for at least the next 12 months, but cautions that financing availability and terms are not assured.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2015 capital expenditures not to exceed $30 million, primarily for plant and equipment and the enterprise-wide information technology platform.
- No quantitative revenue or earnings guidance is provided in the filing.
- Key risks include seasonal operating results and cash flow, weather, commodity and raw-material price volatility, inability to pass through cost increases, consumer spending, customer concentration, retail consolidation, competition, acquisitions, goodwill or intangible impairment, international sourcing, litigation and product liability, recalls, regulatory matters, cyber attacks and access to capital.
- Garden sales are highly seasonal; approximately 65% of Garden sales occurred in the second and third fiscal quarters in fiscal 2014. The filing states that current interim results are not indicative of full-year results.
- The company reported no material legal proceedings and no material changes to previously disclosed risk factors, market-risk exposures, contractual obligations or critical accounting policies.
- There were no outstanding commodity derivatives at March 28, 2015. The company reported no significant non-financial asset impairment during the six months.
- The company repurchased approximately 1.1 million shares during the quarter for approximately $10.0 million; approximately $35.0 million remained under the repurchase authorization at quarter-end.
- Management stated that disclosure controls were effective as of March 28, 2015 and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether seasonal Garden demand, weather and retail inventory timing support the expected second-half sales outlook.
- Whether operating-margin gains can persist despite lower branded-product sales, commodity changes and pricing pressure.
- The pace of conversion of receivables and inventory into cash and the resulting need for revolving borrowings.
- Debt repayment and refinancing requirements, including the remaining $400 million principal amount of 2018 Notes due in March 2018.
- The company’s borrowing-base availability and compliance with fixed-charge coverage and other debt covenants.
- Performance and future funding requirements of the newly formed joint ventures and the Envincio acquisition.
- Potential impairment of $209.1 million of goodwill and $85.2 million of other intangible assets.
- The effect of continued share repurchases on liquidity, leverage and share count.
