Central Garden & Pet Company — Fiscal 2016 First-Quarter 10-Q
Reporting period: Three months ended December 26, 2015; comparative period ended December 27, 2014. Financial statements are unaudited. The business operates through Pet and Garden segments and is highly seasonal, particularly in Garden.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $359.8 million | $307.3 million | +17.1% |
| Gross profit | $99.8 million | $88.0 million | +13.4% |
| Gross margin | 27.7% | 28.6% | -90 basis points |
| SG&A | $91.0 million | $86.8 million | +4.8% |
| Operating income | $8.8 million | $1.1 million | +$7.6 million |
| Operating margin | 2.4% | 0.4% | +200 basis points |
| Net loss attributable to Central | $8.6 million | $5.7 million | Loss increased |
| Diluted loss per share | $0.18 | $0.12 | Loss increased |
| Net cash from operating activities | $(0.5) million | $15.9 million | Decrease of $16.4 million |
Segment performance: Pet sales increased 24.8% to $248.7 million and Pet operating income increased 27.2% to $26.2 million. Garden sales increased 2.9% to $111.1 million, while Garden reported a $3.3 million operating loss.
Balance sheet and liquidity: At December 26, 2015, cash and cash equivalents were $9.0 million, restricted cash was $11.9 million, inventories were $416.5 million, and total assets were $1.21 billion. Total debt was $436.2 million, including $400.0 million of 6.125% senior notes due 2023 and $42.0 million outstanding under the asset-based revolving facility. Remaining availability under that facility was $251.0 million. The Company reported compliance with applicable debt covenants.
Material Changes Versus Prior Comparable Period
- Sales growth was driven primarily by the Pet segment, with $28.1 million from two acquisitions and $21.3 million from organic growth.
- Gross profit rose, but gross margin declined because recent acquisitions generally carry lower margins than the historical dog and cat business.
- SG&A increased in dollars but declined to 25.3% of sales from 28.3%, reflecting operating leverage and lower relative expenses at acquired businesses.
- Interest expense increased to $22.1 million from $10.5 million, primarily because of refinancing-related charges.
- Operating cash flow declined to a use of $0.5 million, while investing cash use increased to $72.8 million due mainly to acquisitions.
- Cash used for acquisitions was $68.5 million, including the $61 million DMC pet-bedding acquisition and $7.8 million paid for Hydro-Organics Wholesale; Hydro-Organics also included approximately $2.0 million of estimated contingent consideration.
Guidance, Outlook, Risks, and Unusual Items
- Management expects fiscal 2016 capital expenditures not to exceed $40 million, including investment in an enterprise-wide information technology platform.
- Management believes operating cash flow, supplier arrangements, and available borrowing capacity will be adequate for working capital, capital expenditures, and other needs for at least the next 12 months, while noting that future financing may not be available on acceptable terms.
- The Garden segment is seasonal: approximately 66% of Garden sales and substantially all Garden operating income historically occur in the second and third fiscal quarters. First-quarter results are therefore not indicative of the full fiscal year.
- The Company issued $400 million of 6.125% senior notes due 2023 and redeemed the remaining $400 million of 8.25% senior subordinated notes due 2018. The refinancing generated approximately $14.3 million of incremental first-quarter interest expense, consisting of an $8.3 million call premium, $2.7 million of overlapping interest, and a $3.3 million non-cash financing-cost write-off. Management expects annual interest expense on the new notes to be approximately $8.5 million lower than under the redeemed notes.
- Excluding the refinancing-related charges, management reported adjusted net income of approximately $0.3 million, or $0.01 per diluted share. This is a non-GAAP measure and should not replace GAAP results.
- In January 2016, the Company exited its seasonal décor business, which generated approximately $35 million of fiscal 2015 revenue.
- Principal disclosed risks include seasonality, raw-material and energy-price volatility, inability to pass through cost increases, adverse weather, acquisition execution, competition, customer concentration, goodwill or intangible impairment, information-technology implementation, product liability and recalls, cyber risks, access to capital, and CEO succession.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors or off-balance-sheet arrangements, and effective disclosure controls as of December 26, 2015.
Important Facts for Investors to Verify
- Whether Pet acquisition-related growth and operating leverage can offset lower acquired-business margins.
- The sustainability of the $251 million of remaining revolver availability as seasonal inventory and working-capital needs increase.
- Whether the refinancing produces the expected annual interest savings after considering debt levels and variable-rate revolver borrowings.
- The effect of exiting the seasonal décor business on Garden sales, margins, inventory, and future cash flow.
- Integration results and final purchase-price allocations for IMS, Hydro-Organics, and DMC, including contingent consideration.
- Progress toward the fiscal 2016 capital-expenditure ceiling and implementation of the enterprise resource planning system.
- Management’s CEO succession planning and the impact of the disclosed commodity, weather, competitive, impairment, litigation, product-recall, and cyber risks.