Central Garden & Pet Company — Fiscal 2015 Form 10-K
Reporting period: Fiscal year ended September 26, 2015, comprising 52 weeks. The filing is an annual 10-K; fourth-quarter information is included in the audited annual filing and quarterly data.
Business context
Central Garden & Pet markets and manufactures branded products and distributes third-party products in two primary segments: Pet and Garden. Pet products include dog and cat supplies, animal health, aquatics, bird and small-animal products, and specialty pet food. Garden products include grass seed, wild bird feed, fertilizers, pesticides, controls, and outdoor decor.
- Pet segment sales were $894.5 million, or approximately 54% of consolidated sales.
- Garden segment sales were $756.2 million, or approximately 46% of consolidated sales.
- The company had approximately 3,300 employees and operated 33 manufacturing facilities and 29 sales and logistics facilities.
Financial results and key metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $1,650.7 million | $1,604.4 million | Up 2.9% |
| Gross profit | $488.1 million | $454.0 million | Up 7.5% |
| Gross margin | 29.6% | 28.3% | Up 130 basis points |
| Operating income | $91.4 million | $56.2 million | Up 62.7% |
| Operating margin | 5.5% | 3.5% | Up 200 basis points |
| Net income attributable to Central | $32.0 million | $8.8 million | Up $23.2 million |
| Diluted EPS | $0.64 | $0.18 | Up $0.46 |
| Net cash from operations | $87.4 million | $126.5 million | Down $39.1 million |
| Capital expenditures | $22.0 million | $17.2 million | Up $4.9 million |
| Free cash flow | $65.4 million | $109.3 million | Down $43.9 million |
| Total debt at year-end | $400.1 million | $450.2 million | Down $50.1 million |
Adjusted operating income, excluding the fiscal 2015 intangible-asset impairment and fiscal 2014 Garden-related unusual items, was $98.7 million versus $68.2 million. Adjusted diluted EPS was $0.74 versus $0.33.
At September 26, 2015, cash and cash equivalents were $47.6 million, restricted cash was $13.2 million, working capital was $476.9 million, total assets were $1.135 billion, and total equity was $506.4 million. The asset-backed revolving facility had $307 million of borrowing availability and no borrowings outstanding, although $6.0 million of other letters of credit were outstanding.
Material changes versus the prior comparable period
- Pet sales increased 5.8% to $894.5 million, driven by animal health, expanded third-party distribution, the Envincio acquisition, and the IMS acquisition. Pet operating income increased 12.2% to $98.8 million.
- Garden sales decreased 0.4% to $756.2 million. Controls and fertilizer sales improved, but grass seed and decor declined because of weather, foreign-exchange effects, lost distribution, and product mix.
- Gross margin improved in both segments, aided by lower commodity costs and favorable Pet mix, particularly in animal health.
- Selling, general and administrative expense decreased 2.1% to $389.3 million, or 23.6% of sales versus 24.8%.
- Operating cash flow declined because increased sales raised receivables and because fiscal 2014 benefited from a substantial inventory reduction. Year-end inventory increased to $335.9 million from $326.4 million, partly because of acquisitions.
- The company redeemed $50 million of its 8.25% notes in March 2015 and repurchased $15.1 million of common and Class A stock.
- On July 31, 2015, Central acquired substantially all assets of IMS Trading Corp. for approximately $23 million.
- Pet intangible assets were reduced by a $7.3 million non-cash impairment charge in the fourth quarter.
Outlook, commentary, risks and unusual items
- Management expected cash from operations, supplier credit, and the asset-backed facility to fund working capital and other needs for at least the next 12 months. Capital expenditures were expected not to exceed $40 million over the next 12 months.
- Management intended to continue investing in brands, new products, operational efficiency, acquisitions, and inventory reduction. No specific revenue or earnings guidance was provided.
- In November 2015, after year-end, Central issued $400 million of 6.125% senior notes due 2023 and used the proceeds and available cash to redeem the 8.25% 2018 notes. Fiscal 2016 first-quarter charges were expected to total approximately $14.3 million, including an $8.3 million call premium, $2.8 million of overlapping interest, and a $3.2 million non-cash financing-cost write-off. Annual interest expense was expected to decline by approximately $8.5 million thereafter.
- On December 1, 2015, after year-end, the company acquired DMC pet-bedding and related assets for $61 million.
- CEO John Ranelli planned to retire at the end of fiscal 2016 and continue consulting for four years. The CFO resigned in September 2015, and David Chichester served as Acting CFO through February 2016. The Chairman was on leave, with an interim non-executive chairman serving during his absence.
- Key risks include seasonality and weather, commodity and energy-price volatility, dependence on major retailers, competition and private-label pressure, acquisition integration, goodwill and intangible impairment, regulatory and environmental liabilities, product recalls and litigation, international sourcing, cybersecurity, ERP implementation, leverage, and concentrated voting control.
- Approximately 40% of sales came from the five largest customers. Walmart represented approximately 16% of consolidated sales; Lowe’s 8%; and Home Depot 7%.
- The company had approximately $198.3 million of fixed-price or fixed-quantity commodity and other purchase commitments and up to $5.1 million of potential future acquisition-related performance payments.
Investor verification checklist
- Reconcile GAAP results with management’s adjusted measures and assess the sustainability of the 2015 margin improvement.
- Evaluate the decline in operating cash flow and free cash flow relative to earnings, including receivables, inventory, and acquisition-related working capital.
- Review the post-year-end refinancing, expected fiscal 2016 charges, interest savings, covenants, and maturity profile.
- Assess the financial contribution and purchase-accounting treatment of IMS and DMC, including integration and impairment risk.
- Monitor CEO succession, CFO transition, board leadership, and the effect of management changes on execution.
- Assess customer concentration, especially Walmart, Lowe’s, Home Depot, PetSmart, and PETCO, and exposure to retailer pricing and inventory decisions.
- Review the $7.3 million Pet intangible impairment and the remaining $15.0 million carrying value of the affected assets for future impairment sensitivity.
- Consider seasonality, weather, commodity costs, fixed purchase commitments, regulatory exposure, product liability, environmental matters, and the unresolved state unclaimed-property examinations.