Business Context and Reporting Period
Central Garden & Pet Company filed an unaudited Form 10-Q for the three and six months ended March 29, 2014, compared with the corresponding periods ended March 30, 2013. The company operates through Pet and Garden reportable segments and has highly seasonal Garden operations.
Financial Performance and Position
| Metric | Three Months Ended March 29, 2014 | Prior Year | Six Months Ended March 29, 2014 | Prior Year |
|---|---|---|---|---|
| Net sales | $501.6 million | $498.2 million | $792.1 million | $790.7 million |
| Gross profit | $147.6 million | $153.2 million | $227.3 million | $230.1 million |
| Gross margin | 29.4% | 30.7% | 28.7% | 29.1% |
| Operating income | $44.8 million | $46.7 million | $36.4 million | $33.7 million |
| Net income attributable to Central | $20.9 million | $22.2 million | $8.2 million | $6.9 million |
| Diluted EPS | $0.43 | $0.46 | $0.17 | $0.14 |
- Second-quarter SG&A declined to 20.5% of sales from 21.4%; six-month SG&A declined to 24.1% from 24.9%.
- Second-quarter interest expense declined to $10.4 million from $10.9 million, while six-month net interest expense increased to $22.6 million from $21.2 million, primarily because of a $1.7 million non-cash write-off of prior deferred financing costs.
- Six-month cash flow from operations was negative $60.0 million, an improvement from negative $162.2 million, mainly due to lower inventory investment. Capital expenditures were $10.0 million versus $16.2 million.
- Cash and cash equivalents were $16.7 million at March 29, 2014, supplemented by $14.2 million of short-term investments. Total current assets were $812.8 million and current liabilities were $223.3 million.
- Total debt was $545.3 million, including $449.5 million of 8.25% senior subordinated notes due 2018 and $95.0 million outstanding under the asset-based revolving facility.
Material Changes Versus Prior Comparable Period
- Second-quarter sales increased 0.7%, but gross profit decreased 3.7% and operating income decreased 4.2%; six-month sales increased 0.2%, while operating income increased 8.2%.
- Pet sales declined $18.1 million, or 7.7%, in the quarter and $28.6 million, or 6.7%, for six months. Declines reflected lower animal-health, flea-and-tick, aquatic, and dog-and-cat sales, lost shelf space, and reduced private-label business.
- Garden sales increased $21.5 million, or 8.2%, in the quarter and $30.0 million, or 8.3%, for six months, driven primarily by grass seed and wild bird feed. Garden operating income increased to $36.8 million in the quarter and $30.6 million for six months.
- Garden gross margin declined because of product mix, lower grass-seed margins, and higher grass-seed costs. Pet gross margin was stable in the quarter and improved for the six-month period, helped by lower commodity costs in bird and small-animal products.
- The company completed a refinancing in December 2013, replacing its prior revolving facility with a $390 million senior secured asset-based facility maturing in December 2018. Borrowing availability was approximately $295 million at quarter-end.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2014 capital expenditures not to exceed $30 million and believes available liquidity should meet working-capital, capital-spending, and other needs for at least the next 12 months, subject to normal financing risks.
- Management stated that early retailer inventory purchases shifted some grass-seed sales from the third quarter into the second quarter, likely adversely affecting third-quarter Garden sales.
- Two major Garden innovations introduced in fiscal 2013 continued to sell below expectations despite marketing, packaging, and promotional efforts; management had not yet determined whether its investment would be recouped.
- New flea-and-tick products temporarily reduced Pet sales during the quarter ahead of their planned third-quarter shipments.
- On April 1, 2014, after the reporting date, the company acquired certain Envincio assets for approximately $19.0 million in cash, including brands, EPA registrations, inventory, and receivables.
- Fiscal 2013 included a $7.7 million non-cash goodwill impairment charge for the Garden segment; Garden goodwill was zero at March 29, 2014. The company also reported a $4.4 million Level 3 contingent-consideration liability.
- Key risks include seasonality, weather, commodity and energy prices, inability to pass through cost increases, consumer spending, customer concentration, competition, acquisitions, goodwill impairment, supply disruptions, regulatory matters, product liability, recalls, cyberattacks, and ERP implementation.
- Management reported no material litigation, no material changes to previously disclosed risk factors or off-balance-sheet arrangements, and effective disclosure controls as of March 29, 2014. Debt covenants were satisfied.
Most Important Facts for Investors to Verify
- Whether the Pet segment can recover lost shelf space and reverse declines in animal-health and dog-and-cat categories.
- Whether Garden sales were pulled forward by retailer inventory builds and whether third-quarter sales and margins weaken as expected.
- Sell-through and profitability of the two underperforming Garden innovations and any further inventory or impairment charges.
- Operating cash-flow conversion, inventory levels, and seasonal borrowing needs during the peak Garden selling period.
- Debt repayment capacity, the December 2018 refinancing structure, borrowing-base availability, and compliance with fixed-charge and other covenants.
- Financial contribution and integration risks from the post-quarter-end $19.0 million Envincio asset acquisition.