Central Garden & Pet Company — Fiscal 2013 Form 10-K Summary
Business context and reporting period
Central Garden & Pet markets and manufactures branded and third-party pet supplies and lawn-and-garden products. Reported fiscal year ended September 28, 2013, comprising 52 weeks versus 53 weeks in fiscal 2012. The filing also provides unaudited fourth-quarter data.
- Pet segment sales: $888.2 million; operating income: $95.5 million.
- Garden segment sales: $765.4 million; operating income: $8.3 million.
- Fiscal 2013 included a February 2013 CEO transition to John Ranelli; William E. Brown remained Chairman.
Key financial metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Net sales | $1,653.6 million | $1,700.0 million | Down 2.7% |
| Gross profit | $463.9 million | $514.2 million | Down 9.8% |
| Gross margin | 28.1% | 30.2% | Down 210 bps |
| Operating income | $40.2 million | $74.4 million | Down 46.0% |
| Operating margin | 2.4% | 4.4% | Down 200 bps |
| Net income attributable to Central | $(1.9) million | $21.2 million | Turned to loss |
| Diluted EPS | $(0.04) | $0.44 | Down $0.48 |
| Net cash from operating activities | $(28.3) million | $89.2 million | Down $117.5 million |
| Capital expenditures | $25.2 million | $39.6 million | Down $14.4 million |
| Cash and short-term investments | $33.0 million | $71.2 million | Down $38.2 million |
| Total debt | $472.6 million | $449.8 million | Up $22.8 million |
Interest expense, net, was $43.0 million, compared with $40.2 million in fiscal 2012. Average debt increased to approximately $506 million from $474 million, while average interest rates were 8.1% and 8.2%, respectively. Working capital was $490.3 million at year-end, including $391.9 million of inventory versus $330.0 million a year earlier.
Material changes versus the prior comparable period
- Pet sales declined 4.6%, partly because fiscal 2013 had one fewer week and because of lower animal-health and pet-nutrition sales. Pet operating income nevertheless increased 8.9% to $95.5 million through lower selling and administrative costs.
- Garden sales declined 0.5%, but Garden operating income fell 79.2% to $8.3 million. Results were affected by weaker controls and fertilizer profitability, higher input costs, and poor sell-through of two new products.
- Fiscal 2013 included an $11.2 million fourth-quarter charge for inventory, product and packaging changes related to new Garden products.
- The Company recorded a $7.7 million noncash impairment of all Garden-segment goodwill.
- SG&A declined 5.4% to $416.0 million, but corporate operating expenses increased $10.0 million, primarily from insurance and information-technology costs.
- Operating cash flow turned negative primarily because inventory increased $61.7 million as the Company built safety stock, experienced a weaker Garden season, and held inventory associated with the new products.
- In December 2012, Central acquired the remaining majority interest in FourStar Microbial Products for approximately $4.8 million in cash, plus approximately $4.2 million of contingent performance-based payments. The acquisition had no material fiscal 2013 earnings impact.
Guidance, outlook, risks and unusual items
Management did not provide formal revenue or earnings guidance in the filing. It expects to continue a balanced approach focused on sales growth, margin improvement, customer service, innovation, brand building, cost reduction, and elimination of inefficiencies. Capital expenditures were expected not to exceed $30 million over the next 12 months.
- Liquidity: On December 5, 2013, the Company replaced its prior facility with a $390 million senior secured asset-based revolving facility, with up to an additional $200 million subject to lender consent. The facility matures December 5, 2018, and no amounts were drawn at closing.
- Debt maturity: $450 million of 8.25% senior subordinated notes mature in March 2018. The Company also had $23.0 million outstanding under its prior revolving facility at fiscal year-end.
- Liquidity risk: Management believed liquidity was adequate for at least the next 12 months, but noted dependence on operating cash flow, borrowing availability, supplier credit and continued access to financing.
- Seasonality: Approximately 68% of Garden sales and 60% of total sales occurred in the second and third fiscal quarters; adverse weather can materially affect sales and cash flow.
- Commodity exposure: Primary bird-feed grain costs increased approximately 15% in fiscal 2013. Fixed commodity purchase commitments totaled approximately $218.7 million; a 10% commodity-price change could produce an estimated $21.9 million pretax gain or loss as related inventory is sold.
- Customer concentration: The five largest customers represented approximately 43% of fiscal 2013 sales. The largest customer represented approximately 16% of total sales.
- Other risks include retail consolidation, competition, product recalls and liability, regulatory and environmental obligations, Chinese sourcing, cyberattacks, ERP implementation, acquisitions, goodwill impairment, variable-rate debt, and controlling voting power held by the Chairman through Class B stock.
- The Company reported no material pending legal proceedings and stated that disclosure controls and internal control over financial reporting were effective as of September 28, 2013.
Most important facts for investors to verify
- Whether Garden products and new-product initiatives recover sufficiently to restore margins and avoid additional impairment or inventory charges.
- Inventory levels, sell-through, working-capital requirements and the sustainability of operating cash flow.
- Availability under the asset-based facility and compliance with its borrowing-base and fixed-charge covenants.
- Refinancing or repayment plans for the $450 million notes due in 2018.
- Exposure to commodity prices, weather, retailer concentration and changes in customer purchasing patterns.
- Progress, remaining cost and operational risk associated with the SAP ERP implementation and broader transformation program.
- Potential dilution, share repurchases and the governance implications of the Chairman’s approximately 55% voting control.