10-Q


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 _______________________________________________________________________ 

FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 26, 2016
or
¨
TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-33268
CENTRAL GARDEN & PET COMPANY 
 
 
 
Delaware
 
68-0275553
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1340 Treat Blvd., Suite 600, Walnut Creek, California 94597
(Address of principal executive offices)
(925) 948-4000
(Registrant’s telephone number, including area code)
_________ ______________________________________________________________ 

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
Common Stock Outstanding as of April 29, 2016
11,908,317

 
 
Class A Common Stock Outstanding as of April 29, 2016
36,824,537

 
 
Class B Stock Outstanding as of April 29, 2016
1,652,262

 
 


Table of Contents

 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Form 10-Q includes “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries in which we operate and other information that is not historical information. When used in this Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-Q are set forth in the Form 10-K for the fiscal year ended September 26, 2015, including the factors described in the section entitled “Item 1A – Risk Factors.” If any of these risks or uncertainties materializes, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in, or imply by, any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances, except as required by law. Presently known risk factors include, but are not limited to, the following factors:
 
seasonality and fluctuations in our operating results and cash flow;
fluctuations in market prices for seeds and grains and other raw materials;
our inability to pass through cost increases in a timely manner;

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the impending retirement of our CEO, the transition to a successor, our dependence upon our key executives and the ability to execute on our succession plan;
risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;
declines in consumer spending during economic downturns;
inflation, deflation and other adverse macro-economic conditions;
supply shortages in small animals and pet birds;
adverse weather conditions;
risks associated with our acquisition strategy;
access to and cost of additional capital;
dependence on a small number of customers for a significant portion of our business;
consolidation trends in the retail industry;
competition in our industries;
potential goodwill or intangible asset impairment;
continuing implementation of an enterprise resource planning information technology system;
our ability to protect our intellectual property rights;
potential environmental liabilities;
risk associated with international sourcing;
litigation and product liability claims;
regulatory issues;
the impact of product recalls;
potential costs and risks associated with actual or anticipated cyber attacks;
the voting power associated with our Class B stock; and
potential dilution from issuance of authorized shares.

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Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
 
 
March 26,
2016
 
March 28,
2015
 
September 26,
2015
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
9,826

 
$
11,943

 
$
47,584

Restricted cash
11,946

 
12,583

 
13,157

Accounts receivable (less allowance for doubtful accounts of $23,759, $20,813 and $19,296)
340,526

 
321,765

 
207,402

Inventories
390,754

 
382,328

 
335,946

Prepaid expenses and other
50,758

 
58,251

 
49,731

Total current assets
803,810

 
786,870

 
653,820

Land, buildings, improvements and equipment—net
164,794

 
163,207

 
162,809

Goodwill
213,753

 
209,089

 
209,089

Other intangible assets—net
82,989

 
85,185

 
75,460

Other assets
57,753

 
24,846

 
30,419

Total
$
1,323,099

 
$
1,269,197

 
$
1,131,597

LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
133,211

 
$
139,821

 
$
88,889

Accrued expenses
97,682

 
83,442

 
87,724

Current portion of long-term debt
594

 
289

 
291

Total current liabilities
231,487

 
223,552

 
176,904

Long-term debt
496,396

 
511,113

 
396,691

Other long-term obligations
62,274

 
44,549

 
51,622

Equity:
 
 
 
 
 
Common stock, $0.01 par value: 11,908,317, 11,919,749, and 11,908,317 shares outstanding at March 26, 2016, March 28, 2015 and September 26, 2015
119

 
119

 
119

Class A common stock, $0.01 par value: 36,794,100, 35,765,091 and 36,462,299 shares outstanding at March 26, 2016, March 28, 2015 and September 26, 2015
368

 
357

 
364

Class B stock, $0.01 par value: 1,652,262 shares outstanding
16

 
16

 
16

Additional paid-in capital
391,665

 
387,074

 
388,636

Accumulated earnings
140,082

 
101,556

 
115,987

Accumulated other comprehensive income (loss)
(528
)
 
64

 
164

Total Central Garden & Pet Company shareholders’ equity
531,722

 
489,186

 
505,286

Noncontrolling interest
1,220

 
797

 
1,094

Total equity
532,942

 
489,983

 
506,380

Total
$
1,323,099

 
$
1,269,197

 
$
1,131,597

See notes to condensed consolidated financial statements.

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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
Net sales
$
541,249

 
$
497,602

 
$
901,061

 
$
804,922

Cost of goods sold and occupancy
371,910

 
347,540

 
631,936

 
566,879

Gross profit
169,339

 
150,062

 
269,125

 
238,043

Selling, general and administrative expenses
109,936

 
100,091

 
200,949

 
186,934

Income from operations
59,403

 
49,971

 
68,176

 
51,109

Interest expense
(7,096
)
 
(11,876
)
 
(29,241
)
 
(22,379
)
Interest income
9

 
18

 
31

 
89

Other expense
(88
)
 
(121
)
 
(561
)
 
(489
)
Income before income taxes and noncontrolling interest
52,228

 
37,992

 
38,405

 
28,330

Income tax expense
18,793

 
14,012

 
13,593

 
10,043

Income including noncontrolling interest
33,435

 
23,980

 
24,812

 
18,287

Net income attributable to noncontrolling interest
738

 
743

 
717

 
747

Net income attributable to Central Garden & Pet Company
$
32,697

 
$
23,237

 
$
24,095

 
$
17,540

Net income per share attributable to Central Garden & Pet Company:
 
 
 
 
 
 
 
Basic
$
0.67

 
$
0.48

 
$
0.50

 
$
0.36

Diluted
$
0.65

 
$
0.47

 
$
0.48

 
$
0.35

Weighted average shares used in the computation of net income per share:
 
 
 
 
 
 
 
Basic
48,717

 
48,384

 
48,641

 
48,882

Diluted
50,445

 
49,439

 
50,558

 
49,689

See notes to condensed consolidated financial statements.


5



CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Six Months Ended
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
Net income
$
33,435

 
$
23,980

 
$
24,812

 
$
18,287

Other comprehensive loss:
 
 
 
 

 

Unrealized loss on securities

 
(20
)
 

 
(10
)
Reclassification of realized loss on securities included in net income

 
20

 

 
20

Foreign currency translation
(459
)
 
(626
)
 
(692
)
 
(1,178
)
Total comprehensive income
32,976

 
23,354

 
24,120

 
17,119

Comprehensive income attributable to noncontrolling interest
738

 
743

 
717

 
747

Comprehensive income attributable to Central Garden & Pet Company
$
32,238

 
$
22,611

 
$
23,403

 
$
16,372

See notes to condensed consolidated financial statements.


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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
 
 
Six Months Ended
 
March 26,
2016
 
March 28,
2015
Cash flows from operating activities:
 
 
 
Net income
$
24,812

 
$
18,287

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
Depreciation and amortization
18,202

 
16,814

Amortization of deferred financing costs
773

 
1,524

Stock-based compensation
3,578

 
3,684

Excess tax benefits from stock-based awards
(1,181
)
 
(351
)
Deferred income taxes
7,516

 
4,467

Write-off of deferred financing costs
3,337

 
537

Loss on sale of property and equipment
8

 
115

Other
25

 
(51
)
Change in assets and liabilities (excluding businesses acquired):
 
 
 
Accounts receivable
(111,671
)
 
(128,623
)
Inventories
(35,220
)
 
(56,740
)
Prepaid expenses and other assets
1,749

 
(8,318
)
Accounts payable
27,415

 
51,474

Accrued expenses
9,548

 
(1,245
)
Other long-term obligations
266

 
(95
)
Net cash used by operating activities
(50,843
)
 
(98,521
)
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(12,795
)
 
(11,025
)
Payments to acquire companies, net of cash acquired
(68,901
)
 
(16,000
)
Change in restricted cash
1,211

 
1,700

Proceeds from short-term investments

 
9,997

Investment in short-term investments

 
(17
)
Other investing activities
(500
)
 
(331
)
Net cash used in investing activities
(80,985
)
 
(15,676
)
Cash flows from financing activities:
 
 
 
Repayments of long-term debt
(400,145
)
 
(50,141
)
Proceeds from issuance of long-term debt
400,000

 

Borrowings under revolving line of credit
280,000

 
186,000

Repayments under revolving line of credit
(178,000
)
 
(71,000
)
Proceeds from issuance of common stock

 
1,220

Repurchase of common stock, including shares surrendered for tax withholding
(1,722
)
 
(17,164
)
Distribution to noncontrolling interest
(592
)
 
(1,680
)
Payment of financing costs
(6,362
)
 

Excess tax benefits from stock-based awards
1,181

 
351

Net cash provided by financing activities
94,360

 
47,586

Effect of exchange rate changes on cash and cash equivalents
(290
)
 
(122
)
Net decrease in cash and cash equivalents
(37,758
)
 
(66,733
)
Cash and equivalents at beginning of period
47,584

 
78,676

Cash and equivalents at end of period
$
9,826

 
$
11,943

Supplemental information:
 
 
 
Cash paid for interest
$
18,781

 
$
21,448

See notes to condensed consolidated financial statements.

7



CENTRAL GARDEN & PET COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended March 26, 2016
(Unaudited)
 
1.
Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of March 26, 2016 and March 28, 2015, the condensed consolidated statements of operations for the three and six months ended March 26, 2016 and March 28, 2015, the condensed consolidated statements of comprehensive income for the three and six months ended March 26, 2016 and March 28, 2015 and the condensed consolidated statements of cash flows for the six months ended March 26, 2016 and March 28, 2015 have been prepared by the Company, without audit. In the opinion of management, the interim financial statements include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented.
For the Company’s foreign business in the UK, the local currency is the functional currency. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Deferred taxes are not provided on translation gains and losses because the Company expects earnings of its foreign subsidiary to be permanently reinvested. Transaction gains and losses are included in results of operations. See Note 8, Supplemental Equity Information, for further detail.
Due to the seasonal nature of the Company’s garden business, the results of operations for the three and six months ended March 26, 2016 are not indicative of the operating results that may be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2015 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 26, 2015 balance sheet presented herein was derived from the audited financial statements.
Noncontrolling Interest
Noncontrolling interest in the Company’s condensed consolidated financial statements represents the 20% interest not owned by Central in a consolidated subsidiary. Since the Company controls this subsidiary, its financial statements are consolidated with those of the Company, and the noncontrolling owner’s 20% share of the subsidiary’s net assets and results of operations is deducted and reported as noncontrolling interest on the consolidated balance sheets and as net income (loss) attributable to noncontrolling interest in the consolidated statements of operations. See Note 8, Supplemental Equity Information, for additional information.
Derivative Instruments
The Company principally uses a combination of purchase orders and various short and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities. The Company may also enter into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of corn, which impacts the cost of raw materials. The Company’s primary objective when entering into these derivative contracts is to achieve greater certainty with regard to the future price of commodities purchased for use in its supply chain. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments.
The Company does not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in other income (expense) in its condensed consolidated statements of operations. As of March 26, 2016 and March 28, 2015, the Company had no outstanding derivative instruments.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Discontinued Operations
In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of

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Disposals of Components of an Entity. ASU 2014-08 provides amended guidance for reporting discontinued operations and disclosures of disposals of components. The amended guidance raises the threshold for disposals to qualify as discontinued operations and permits significant continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The amended guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2014 and became effective for the Company on September 27, 2015. The adoption of the applicable sections of this ASC will have an impact on the presentation of any future discontinued operations the Company may have.
Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. In August 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-15, Interest – Imputation of Interest (Subtopic 835-30). This ASU provides additional guidance on ASU 2015-03 with respect to line of credit arrangements, whereby specify debt issuance costs as part of line-of-credit arrangements may continue to be deferred and presented as an asset on the balance sheet. Recognition and measurement guidance for debt issuance costs are not affected. The Company adopted the guidance in ASU’s 2015-03 and 2015-15 as of September 27, 2015. See “Change in Accounting Principle” below.
Business Combinations
In September 2015, the FASB issued ASU No. 2015-16 (ASU 2015-16), Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period after an acquisition within the reporting period they are determined. This is a change from the previous requirement that the adjustments be recorded retrospectively. The ASU also requires disclosure of the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the adjustment to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015; early adoption is permitted. The Company has early adopted the guidance prospectively as of September 27, 2015. The adoption of this standard will impact the Company’s presentation of measurement period adjustments for any future business combinations.
Accounting Standards Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. This update was issued as Accounting Standards Codification Topic 606. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09 for one year. ASU 2014-09 is now effective for the Company in the first quarter of its fiscal year ending September 28, 2019.
In March 2016, the FASB issued ASU 2016-08 (ASU 2016-08), Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations.
In April 2016, the FASB issued ASU 2016-10 (ASU 2016-10), Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services.
Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.


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Leases
In February 2016, the FASB issued ASU 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for the Company in our first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements, and it currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02.
Stock Based Compensation
In June 2014, the FASB issued ASU No. 2014-12 (ASU 2014-12), Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, or the Company’s first quarter of fiscal 2017. Earlier adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 (ASU 2016-09), Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, or the Company's first quarter of fiscal 2018. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-09 and has not yet determined the impact on its condensed consolidated financial statements.
Consolidation
In February 2015, the FASB issued ASU 2015-02 (ASU 2015-02), Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years that begin after December 15, 2015, or the Company’s first quarter of fiscal 2017. The Company is currently evaluating the impact the adoption of ASU 2015-02 will have on its consolidated financial statements.

Cloud Computing Costs
In April 2015, the FASB issued ASU No. 2015-05 (ASU 2015-05), Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This standard clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. ASU 2015-05 is effective for public entities for annual and interim periods therein beginning after December 15, 2015, or the Company’s first quarter of fiscal 2017. Early adoption is permitted. Entities may adopt the guidance either retrospectively or prospectively to arrangements entered into, or materially modified after the effective date. The Company is currently evaluating the impact the adoption of ASU 2015-05 will have on its consolidated financial statements.
Inventory Measurement
In July 2015, the FASB issued ASU 2015-11 (ASU 2015-11), Simplifying the Measurement of Inventory. Under ASU 2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The standard defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016, or the Company’s first quarter of fiscal 2018. Early application is permitted and should be applied prospectively. The Company is currently evaluating the impact the adoption of ASU 2015-11 will have on its consolidated financial statements.

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Balance Sheet Classification of Deferred Taxes.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU eliminates the current requirement for entities to present deferred tax liabilities and assets as current and noncurrent in a classified statement of financial position and instead requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, or the Company's first quarter of fiscal 2018, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the adoption of ASU 2015-17 will have on its consolidated financial statements.
Change in Accounting Principle
Prior to its early adoption of ASU 2015-03, the Company recorded issuance costs associated with its long-term debt as a long-term asset on its consolidated balance sheet. The guidance in ASU 2015-03 requires the Company to present debt issuance costs in the consolidated balance sheet as a direct deduction from the carrying amount of the related debt liability. Changes in accounting principles are to be reported through retrospective application of the new principle to all prior financial statement periods presented. Accordingly, the condensed consolidated balance sheets have been adjusted to reflect the effects of reclassifying debt issuance costs from long-term assets to a direct deduction from the carrying amount of the related debt liability as follows. 
Financial Statement Line Item
 
Previously Reported
September 26, 2015
 
Reclassifications
 
As Adjusted
September 26, 2015
Other assets
 
$
33,576

 
$
(3,157
)
 
$
30,419

Total assets
 
1,134,754

 
(3,157
)
 
1,131,597

Long term debt
 
399,848

 
(3,157
)
 
396,691

Total liabilities and equity
 
1,134,754

 
(3,157
)
 
1,131,597

 
 
 
 
 
 
 
Financial Statement Line Item
 
Previously Reported
March 28, 2015
 
Reclassifications
 
As Adjusted
March 28, 2015
Other assets
 
$
28,657

 
$
(3,811
)
 
$
24,846

Total assets
 
1,273,008

 
(3,811
)
 
1,269,197

Long term debt
 
514,924

 
(3,811
)
 
511,113

Total liabilities and equity
 
1,273,008

 
(3,811
)
 
1,269,197


2.
Fair Value Measurements

ASC 820 establishes a single authoritative definition of fair value, a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 requires financial assets and liabilities to be categorized based on the inputs used to calculate their fair values as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company’s financial instruments include cash and equivalents, short term investments consisting of bank certificates of deposit, accounts receivable and payable, derivative instruments, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of March 26, 2016 (in thousands):
 

11



 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
6,215

 
$
6,215

Total liabilities
 
$
0

 
$
0

 
$
6,215

 
$
6,215

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of March 28, 2015 (in thousands):
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
4,343

 
$
4,343

Total liabilities
 
$
0

 
$
0

 
$
4,343

 
$
4,343

The following table presents our financial assets and liabilities at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of September 26, 2015:
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
3,625

 
$
3,625

Total liabilities
 
$
0

 
$
0

 
$
3,625

 
$
3,625

 

(a)
The liability for contingent consideration relates to an earn-out for B2E, acquired in December 2012 and future performance-based contingent payments for Hydro-Organics Wholesale, Inc., acquired in October 2015. The fair value of the estimated contingent consideration arrangement is determined based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. This is presented as part of long-term liabilities in our consolidated balance sheets.

The following table provides a summary of changes in fair value of our Level 3 financial instruments for the periods ended March 26, 2016 and March 28, 2015 (in thousands):
 
 
Amount
Balance as of September 26, 2015
$
3,625

Estimated contingent performance-based consideration established at the time of acquisition
2,590

Changes in the fair value of contingent performance-based payments established at the time of acquisition

Balance as of March 26, 2016
$
6,215

 
 
 
Amount
Balance as of September 27, 2014
$
4,414

Changes in the fair value of contingent performance-based payments established at the time of acquisition
(71
)
Balance as of March 28, 2015
$
4,343

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company measures certain non-financial assets and liabilities, including long-lived assets, goodwill and intangible assets, at fair value on a non-recurring basis. Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived assets, goodwill and other intangible assets. During the periods ended March 26, 2016 and March 28, 2015, the Company was not required to measure any significant non-financial assets and liabilities at fair value.

12



Fair Value of Other Financial Instruments
In November 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023 (the “2023 Notes”). The estimated fair value of the Company’s 2023 Notes as of March 26, 2016 was $416.1 million, compared to a carrying value of $394.0 million.
In January 2015, the Company called $50 million aggregate principal amount of the Company’s senior subordinated notes due 2018 (the “2018 Notes”) for redemption on March 1, 2015 at a price of 102.063%. In December 2015, the Company redeemed the remaining $400 million aggregate principal amount of the 2018 Notes at a price of 102.063%. The estimated fair value of the Company’s $400 million principal amount of 2018 Notes as of March 28, 2015 was $409.5 million, compared to a carrying value of $395.8 million. The estimated fair value of the Company’s $400 million aggregate principal amount of 2018 Notes as of September 26, 2015 was $410.5 million, compared to a carrying value of $396.5 million. The estimated fair value is based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.


13



3.
Acquisitions

IMS Trading Corp
On July 31, 2015, the Company purchased substantially all of the assets of IMS Trading Corp. for approximately $23 million. IMS Trading Corp was a manufacturer, importer and distributor of rawhide, natural dog treats and pet products throughout the United States and internationally. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by approximately $1.4 million, which is included in goodwill in our consolidated balance sheet as of March 26, 2016. Financial results for IMS Trading Corp. have been included in the results of operations within the Pet segment since the date of acquisition. This acquisition is expected to complement the Company's existing dog and cat business.
The Company finalized the allocation of the purchase price to the fair value of the tangible and intangible assets acquired during the second fiscal quarter of 2016. The following table summarizes the preliminary recording of the fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments:
In thousands
Amounts Previously Recognized as of Acquisition Date (1)

Measurement Period Adjustments

Amounts Recognized as of Acquisition Date (as Adjusted)
Current assets, net of cash and cash equivalents acquired
$
20,458


$
350


$
20,808

Fixed assets
1,670




1,670

Goodwill


1,365


1,365

Other assets
5,356


(5,356
)


Other intangible assets, net


4,475


4,475

Current liabilities
(5,100
)



(5,100
)
Net assets acquired, less cash and cash equivalents
$
22,384


$
834


$
23,218

(1) As previously reported in our Form 10-K for the period ended September 26, 2015 and our Form 10-Q for the period ended December 26, 2015.
Hydro-Organics Wholesale Inc.
On September 30, 2015, the Company purchased Hydro-Organics Wholesale, Inc., an organic fertilizer business, for approximately $7.8 million cash and approximately $2.6 million of estimated contingent future performance-based payments. The Company finalized the allocation of the purchase price to the fair value of the net tangible and intangible assets acquired during the second fiscal quarter of 2016. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $8.5 million, of which $5.2 million was allocated to identified intangible assets and $3.3 million is included in goodwill in the Company’s condensed consolidated balance sheet as of March 26, 2016. Financial results for Hydro-Organics Wholesale Inc. have been included in the results of operations within the Garden segment since the date of acquisition. This acquisition is expected to complement the Company's existing garden fertilizer business.
DMC
On December 1, 2015, the Company purchased the pet bedding business and certain other assets of National Consumers Outdoors Corp., formerly known as Dallas Manufacturing Company (“DMC”), for approximately $61 million. The purchase price exceeded the estimated fair value of the tangible net assets acquired by approximately $34.0 million, which is included in other assets in the Company’s condensed consolidated balance sheet as of March 26, 2016, as the Company has not yet finalized the allocation of the purchase price to the fair value of the intangible assets acquired. This acquisition is expected to complement the Company's existing dog and cat business.
Proforma financial information has not been presented as the IMS Trading Corp, Hydro-Organics Wholesale Inc. and DMC acquisitions were not considered individually or collectively material to the Company's overall consolidated financial statements during the periods presented.

4.
Inventories, net
Inventories, net of allowance for obsolescence, consist of the following (in thousands):

14



 
 
 
March 26, 2016
 
March 28, 2015
 
September 26, 2015
Raw materials
 
$
113,779

 
$
99,490

 
$
94,969

Work in progress
 
15,267

 
15,601

 
15,268

Finished goods
 
252,453

 
252,104

 
215,673

Supplies
 
9,255

 
15,133

 
10,036

Total inventories, net
 
$
390,754

 
$
382,328

 
$
335,946

 
5.
Goodwill
The Company accounts for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other,” and tests goodwill for impairment annually, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This assessment involves the use of significant accounting judgments and estimates as to future operating results and discount rates. Changes in estimates or use of different assumptions could produce significantly different results. An impairment loss is generally recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company uses discounted cash flow analysis to estimate the fair value of our reporting units. The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of its reporting units to the Company’s total market capitalization.

15



6.
Other Intangible Assets

The following table summarizes the components of gross and net acquired intangible assets:
 
 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
(in millions)
 
 
 
 
March 26, 2016
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.1

 
$
(10.8
)
 
$

 
$
3.3

Marketing-related intangible assets – nonamortizable
 
63.6

 

 
(24.2
)
 
39.4

Total
 
77.7

 
(10.8
)
 
(24.2
)
 
42.7

Customer-related intangible assets – amortizable
 
48.3

 
(23.6
)
 

 
24.7

Other acquired intangible assets – amortizable
 
20.0

 
(11.0
)
 

 
9.0

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
27.8

 
(11.0
)
 
(1.2
)
 
15.6

Total other intangible assets
 
$
153.8

 
$
(45.4
)
 
$
(25.4
)
 
$
83.0

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
(in millions)
 
 
 
 
March 28, 2015
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.1

 
$
(10.2
)
 
$

 
$
3.9

Marketing-related intangible assets – nonamortizable
 
59.6

 

 
(16.9
)
 
42.7

Total
 
73.7

 
(10.2
)
 
(16.9
)
 
46.6

Customer-related intangible assets – amortizable
 
43.3

 
(21.2
)
 

 
22.1

Other acquired intangible assets – amortizable
 
19.3

 
(9.4
)
 

 
9.9

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
27.1

 
(9.4
)
 
(1.2
)
 
16.5

Total other intangible assets
 
$
144.1

 
$
(40.8
)
 
$
(18.1
)
 
$
85.2

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
(in millions)
 
 
 
 
September 26, 2015
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.1

 
$
(10.4
)
 
$

 
$
3.7

Marketing-related intangible assets – nonamortizable
 
59.6

 

 
(24.2
)
 
35.4

Total
 
73.7

 
(10.4
)
 
(24.2
)
 
39.1

Customer-related intangible assets – amortizable
 
43.3

 
(22.3
)
 

 
21.0

Other acquired intangible assets – amortizable
 
19.3

 
(10.5
)
 

 
8.8

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
27.1

 
(10.5
)
 
(1.2
)
 
15.4

Total other intangible assets
 
$
144.1

 
$
(43.2
)
 
$
(25.4
)
 
$
75.5


16



Other acquired intangible assets include contract-based and technology-based intangible assets.
The Company evaluates long-lived assets, including amortizable and indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates indefinite-lived intangible assets on an annual basis. In fiscal 2015, the Company recognized a non-cash $7.3 million impairment charge to certain indefinite-lived intangible assets as a result of increased competition in the marketplace and declining volume of sales. The fair value of the remaining $15.0 million of indefinite-lived intangible assets that were impaired exceeded their carrying value at September 26, 2015.
Other factors indicating the carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in fiscal 2015 or during the six months ended March 26, 2016, and accordingly, no impairment testing was performed on these assets.
The Company amortizes its acquired intangible assets with definite lives over periods ranging from 1 to 25 years; over weighted average remaining lives of six years for marketing-related intangibles, 14 years for customer-related intangibles and 14 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $1.2 million and $1.0 million for the three month periods ended March 26, 2016 and March 28, 2015, respectively, and $2.2 million and $1.9 million for the six months ended March 26, 2016 and March 28, 2015, and is classified within operating expenses in the condensed consolidated statements of operations. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $4 million per year from fiscal 2016 through fiscal 2020.

7.
Long-Term Debt
Long-term debt consists of the following:
 
 
 
March 26, 2016
 
March 28, 2015
 
September 26, 2015
 
 
(in thousands)
Senior notes, interest at 6.125%, payable semi-annually, principal due May 2023
 
$
400,000

 
$

 
$

Senior subordinated notes, interest at 8.25%, payable semi-annually, repaid in December 2015
 

 
400,000

 
400,000

Unamortized discount
 

 
(363
)
 
(309
)
Unamortized debt issuance costs
 
(6,032
)
 
(3,811
)
 
(3,157
)
Net carrying value
 
393,968

 
395,826

 
396,534

Asset-based revolving credit facility, interest at LIBOR plus a margin of 1.25% to 1.75% or Base Rate plus a margin of 0.25% to 0.75%, final maturity December 2018
 
102,000

 
115,000

 

Other notes payable
 
1,022

 
576

 
448

Total
 
496,990

 
511,402

 
396,982

Less current portion
 
(594
)
 
(289
)
 
(291
)
Long-term portion
 
$
496,396

 
$
511,113

 
$
396,691

Senior Notes and Redemption of Senior Subordinated Notes
On November 9, 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023. In December 2015, the Company used the net proceeds from the offering, together with available cash, to redeem its $400 million aggregate principal amount of 8.25% senior subordinated notes due March 1, 2018 at a price of 102.063% of the principal amount and to pay fees and expenses related to the offering.
The Company incurred approximately $6.3 million of debt issuance costs in conjunction with these transactions, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs will be amortized over the term of the 2023 Notes.
As a result of the Company’s redemption of the 2018 Notes, the Company incurred a call premium payment of $8.3 million, overlapping interest expense for 30 days of approximately $2.7 million and a $3.3 million non-cash charge for the

17



write off of unamortized deferred financing costs and discount related to the 2018 Notes. These amounts are included in interest expense in the condensed consolidated statements of operations.
The 2023 Notes require semiannual interest payments, which commence on May 15, 2016. The 2023 Notes are unconditionally guaranteed on a senior basis by each of the Company’s existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central’s senior secured revolving credit facility. The 2023 Notes are unsecured senior obligations and are subordinated to all of the Company’s existing and future secured debt, including the Company’s Credit Facility, to the extent of the value of the collateral securing such indebtedness.
The Company may redeem some or all of the 2023 Notes at any time, at its option, prior to November 15, 2018 at the principal amount plus a “make whole” premium. At any time prior to November 15, 2018, the Company may also redeem, at its option, up to 35% of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of 106.125% of the principal amount of the notes. The Company may redeem some or all of the 2023 Notes, at its option, at any time on or after November 15, 2018 for 104.594%, on or after November 15, 2019 for 103.063%, on or after November 15, 2020 for 101.531% and on or after November 15, 2021 for 100%, plus accrued and unpaid interest.

The holders of the 2023 Notes have the right to require the Company to repurchase all or a portion of the 2023 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2023 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all covenants as of March 26, 2016.
Asset Backed Loan Facility
On December 5, 2013, the Company entered into a credit agreement which provided up to a $390 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if the Company exercises the accordion feature set forth therein (collectively, the “Credit Facility”). The Credit Facility initially matured on December 5, 2018. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. As of March 26, 2016, there were borrowings of $102.0 million outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $6.0 million outstanding as of March 26, 2016.
The Credit Facility was subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. As of March 26, 2016, the borrowing availability was $366.1 million and the remaining borrowing availability, after taking into consideration $102.0 million of outstanding borrowings, was $264.1 million. Borrowings under the Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s total outstanding borrowings. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.75% (and was 1.25% at March 26, 2016) and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.75% (and was 0.25% at March 26, 2016). As of March 26, 2016, the applicable interest rate related to Base Rate borrowings was 3.75%, and the applicable interest rate related to LIBOR-based borrowings was 1.68%.
The Credit Facility contains customary covenants, including financial covenants which required the Company to maintain a minimum fixed charge coverage ratio of 1.00:1.00 upon reaching certain borrowing levels. The Credit Facility was secured by substantially all assets of the Company. The Company was in compliance with all financial covenants under the Credit Facility during the period ended March 26, 2016.

 


18



8.
Supplemental Equity Information

The following table provides a summary of the changes in the carrying amounts of equity attributable to controlling interest and noncontrolling interest for the three months ended March 26, 2016 and March 28, 2015
 
 
Controlling Interest
 
 
 
 
(in thousands)
 
Common
Stock
 
Class A
Common
Stock
 
Class
B
Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
 
Noncontrolling
Interest
 
Total
Balance September 26, 2015
 
$
119

 
$
364

 
$
16

 
$
388,636

 
$
115,987

 
$
164

 
$
505,286

 
$
1,094

 
$
506,380

Comprehensive loss
 
 
 
 
 
 
 
 
 
24,095

 
(692
)
 
23,403

 
717

 
24,120

Amortization of share-based awards
 
 
 
 
 
 
 
2,986

 
 
 
 
 
2,986

 
 
 
2,986

Restricted share activity
 
 
 
2

 
 
 
(580
)
 
 
 
 
 
(578
)
 
 
 
(578
)
Issuance of common stock
 
 
 
2

 
 
 
(554
)
 
 
 
 
 
(552
)
 
 
 
(552
)
Tax benefit on stock option exercise, net of tax deficiency
 
 
 
 
 
 
 
1,177

 
 
 
 
 
1,177

 
 
 
1,177

Distribution to Noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(592
)
 
(592
)
Other
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1

 
1

Balance March 26, 2016
 
$
119

 
$
368

 
$
16

 
$
391,665

 
$
140,082

 
$
(528
)
 
$
531,722

 
$
1,220

 
$
532,942

 
 
Controlling Interest
 
 
 
 
(in thousands)
 
Common
Stock
 
Class A
Common
Stock
 
Class
B
Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
 
Noncontrolling
Interest
 
Total
Balance September 27, 2014
 
$
124

 
$
369

 
$
16

 
$
396,586

 
$
86,396

 
$
1,232

 
$
484,723

 
$
1,730

 
$
486,453

Comprehensive loss
 
 
 
 
 
 
 
 
 
17,540

 
(1,168
)
 
16,372

 
747

 
17,119

Amortization of share-based awards
 
 
 
 
 
 
 
2,771

 
 
 
 
 
2,771

 
 
 
2,771

Restricted share activity
 
 
 
(2
)
 
 
 
(638
)
 
 
 
 
 
(640
)
 
 
 
(640
)
Issuance of common stock
 
 
 
2

 
 
 
730

 
 
 
 
 
732

 
 
 
732

Repurchase of common stock
 
(5
)
 
(12
)
 
 
 
(12,726
)
 
(2,380
)
 
 
 
(15,123
)
 
 
 
(15,123
)
Tax benefit on stock option exercise, net of tax deficiency
 
 
 
 
 
 
 
351

 
 
 
 
 
351

 
 
 
351

Distribution to Noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,680
)
 
(1,680
)
Balance March 28, 2015
 
$
119

 
$
357

 
$
16

 
$
387,074

 
$
101,556

 
$
64

 
$
489,186

 
$
797

 
$
489,983

 
9.
Stock-Based Compensation

The Company recognized share-based compensation expense of $3.6 million and $3.7 million for the six month periods ended March 26, 2016 and March 28, 2015, respectively, as a component of selling, general and administrative expenses. The tax benefit associated with share-based compensation expense for the six month periods ended March 26, 2016 and March 28, 2015 was $1.3 million and $1.4 million, respectively.
 

19



10.
Earnings Per Share


The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income from continuing operations.
 
 
Three Months Ended
 
Six Months Ended
 
 
March 26, 2016
 
March 26, 2016
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
     Net income available to common shareholders
 
$
32,697


48,717


$
0.67


$
24,095


48,641


$
0.50

Effect of dilutive securities:
 











     Options to purchase common stock
 


976


(0.01
)



1,166


(0.02
)
     Restricted shares
 


752


(0.01
)



751



Diluted EPS:
 











     Net income available to common shareholders
 
$
32,697


50,445


$
0.65


$
24,095


50,558


$
0.48

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Three Months Ended
 
Six Months Ended
 
 
March 28, 2015
 
March 28, 2015
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
     Net income available to common shareholders
 
$
23,237


48,384


$
0.48

 
$
17,540


48,882


$
0.36

Effect of dilutive securities:
 





 





     Options to purchase common stock
 


457



 


251



     Restricted shares
 


598


(0.01
)
 


556


(0.01
)
Diluted EPS:
 





 





     Net income available to common shareholders
 
$
23,237


49,439


$
0.47

 
$
17,540


49,689


$
0.35

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options to purchase 6.8 million shares of common stock at prices ranging from $6.43 to $15.56 per share were outstanding at March 26, 2016, and options to purchase 9.6 million shares of common stock at prices ranging from $6.43 to $15.00 per share were outstanding at March 28, 2015.

For the three month periods ended March 26, 2016 and March 28, 2015, options to purchase 1.6 million and 3.4 million shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

For the six month periods ended March 26, 2016 and March 28, 2015, options to purchase 0.7 million and 6.1 million shares of common stock, respectively, were outstanding but were not included in the computation of diluted earnings per share, because

20



the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.


11.
Segment Information

Management has determined that the Company has two operating segments which are also reportable segments based on the level at which the Chief Operating Decision Maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are Pet segment and Garden segment and are presented in the table below (in thousands).
 
 
 
Three Months Ended
 
Six Months Ended
 
 
March 26,
2016
 
March 28,
2015
 
March 26,
2016
 
March 28,
2015
Net sales:
 
 
 
 
 
 
 
 
Pet segment
 
$
275,328

 
$
221,485

 
$
523,990

 
$
420,805

Garden segment
 
265,921

 
276,117

 
377,071

 
384,117

Total net sales
 
$
541,249

 
$
497,602

 
$
901,061

 
$
804,922

Income (loss) from operations:
 
 
 
 
 
 
 
 
Pet segment
 
32,409

 
27,051

 
58,604

 
47,626

Garden segment
 
44,407

 
39,325

 
41,153

 
35,790

Corporate
 
(17,413
)
 
(16,405
)
 
(31,581
)
 
(32,307
)
Total income from operations
 
59,403

 
49,971

 
68,176

 
51,109

Interest expense - net
 
(7,087
)
 
(11,858
)
 
(29,210
)
 
(22,290
)
Other expense
 
(88
)
 
(121
)
 
(561
)
 
(489
)
Income tax expense
 
18,793

 
14,012

 
13,593

 
10,043

Income including noncontrolling interest
 
33,435

 
23,980

 
24,812

 
18,287

Net income attributable to noncontrolling interest
 
738

 
743

 
717

 
747

Net income attributable to Central Garden & Pet Company
 
$
32,697

 
$
23,237

 
$
24,095

 
$
17,540

Depreciation and amortization:
 
 
 
 
 
 
 
 
Pet segment
 
$
4,956

 
3,878

 
$
9,420

 
$
7,819

Garden segment
 
1,359

 
1,483

 
3,044

 
3,049

Corporate
 
2,854

 
2,989

 
5,738

 
5,946

Total depreciation and amortization
 
$
9,169

 
$
8,350

 
$
18,202

 
$
16,814

 
 
 
March 26,
2016
 
March 28,
2015
 
September 26,
2015
Assets:
 
 
 
 
 
 
Pet segment
 
$
538,901

 
$
450,240

 
$
465,171

Garden segment
 
467,026

 
490,514

 
310,981

Corporate
 
317,172

 
328,443

 
355,445

Total assets
 
$
1,323,099

 
$
1,269,197

 
$
1,131,597

Goodwill (included in corporate assets above):
 
 
 
 
 
 
Pet segment
 
$
210,455

 
$
209,089

 
$
209,089

Garden segment
 
3,298

 

 

Total goodwill
 
$
213,753

 
$
209,089

 
$
209,089


21




12.
Consolidating Condensed Financial Information of Guarantor Subsidiaries

Certain 100% wholly-owned subsidiaries of the Company (as listed below, collectively the “Guarantor Subsidiaries”) have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest on the Company’s 2023 Notes. Certain subsidiaries and operating divisions are not guarantors of the 2023 Notes. Those subsidiaries that are guarantors and co-obligors of the 2023 Notes are as follows:
Farnam Companies, Inc.
Four Paws Products Ltd.
Gulfstream Home & Garden, Inc.
Hydro-Organics Wholesale, Inc.
IMS Trading, LLC
IMS Southern, LLC
Kaytee Products, Incorporated
Matson, LLC
New England Pottery, LLC
Pennington Seed, Inc. (including Gro Tec, Inc. and All-Glass Aquarium Co., Inc.)
Pets International, Ltd.
T.F.H. Publications, Inc.
Wellmark International (including B2E Corporation and B2E Biotech LLC)

In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying consolidating condensed financial statements based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X.
During the second quarter of fiscal 2016, the Company added Hydro-Organics Wholesale, Inc., IMS Trading, LLC and IMS Southern, LLC as guarantors of the 2023 Notes. Fiscal year ended September 26, 2015 financial results previously reflected IMS Trading, LLC and IMS Southern, LLC as part of the Parent. In accordance with Rule 3-10 of the Securities and Exchange Commissions Regulation S-X, financial results presented herein for the fiscal year ended September 26, 2015 have been adjusted to reflect the current Guarantor structure.

 

22



 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
 
 
Three Months Ended March 26, 2016
 
 
 
 
(in thousands)
 
 
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
156,790

 
$
30,002

 
$
381,748

 
$
(27,291
)
 
$
541,249

Cost of goods sold and occupancy
 
121,969

 
23,099

 
252,419

 
(25,577
)
 
371,910

Gross profit
 
34,821

 
6,903

 
129,329

 
(1,714
)
 
169,339

Selling, general and administrative expenses
 
33,210

 
5,124

 
73,316

 
(1,714
)
 
109,936

Income from operations
 
1,611

 
1,779

 
56,013

 

 
59,403

Interest expense
 
(6,653
)
 
(68
)
 
(375
)
 

 
(7,096
)
Interest income
 
8

 
1

 

 

 
9

Other income (expense)
 
657

 
(197
)
 
(548
)
 

 
(88
)
Income (loss) before taxes and equity in earnings of affiliates
 
(4,377
)
 
1,515

 
55,090

 

 
52,228

Income tax expense (benefit)
 
(775
)
 
694

 
18,874

 

 
18,793

Equity in earnings of affiliates
 
36,299

 

 
585

 
(36,884
)
 

Net income including noncontrolling interest
 
32,697

 
821

 
36,801

 
(36,884
)
 
33,435

Net income attributable to noncontrolling interest
 

 
738

 

 

 
738

Net income attributable to Central Garden & Pet Company
 
$
32,697

 
$
83

 
$
36,801

 
$
(36,884
)
 
$
32,697

 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
 
 
Three Months Ended March 28, 2015
 
 
 
 
(in thousands)
 
 
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
150,014

 
$
37,434

 
$
338,994

 
$
(28,840
)
 
$
497,602

Cost of goods sold and occupancy
 
113,668

 
29,545

 
231,403

 
(27,076
)
 
347,540

Gross profit
 
36,346

 
7,889

 
107,591

 
(1,764
)
 
150,062

Selling, general and administrative expenses
 
30,843

 
5,339

 
65,673

 
(1,764
)
 
100,091

Income from operations
 
5,503

 
2,550

 
41,918

 

 
49,971

Interest expense
 
(11,815
)
 
(61
)
 

 

 
(11,876
)
Interest income
 
18

 

 

 

 
18

Other expense
 
(347
)
 

 
226

 

 
(121
)
Income (loss) before taxes and equity in earnings of affiliates
 
(6,641
)
 
2,489

 
42,144

 

 
37,992

Income tax expense (benefit)
 
(1,123
)
 
952

 
14,183

 

 
14,012

Equity in earnings of affiliates
 
28,755

 

 
796

 
(29,551
)
 

Net income including noncontrolling interest
 
23,237

 
1,537

 
28,757

 
(29,551
)
 
23,980

Net income attributable to noncontrolling interest
 

 
743

 

 

 
743

Net income attributable to Central Garden & Pet Company
 
$
23,237

 
$
794

 
$
28,757

 
$
(29,551
)
 
$
23,237



23



 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
 
 
Six Months Ended March 26, 2016
 
 
 
 
(in thousands)
 
 
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
293,817

 
$
45,272

 
$
603,912

 
$
(41,940
)
 
$
901,061

Cost of goods sold and occupancy
 
232,228

 
36,045

 
402,908

 
(39,245
)
 
631,936

Gross profit
 
61,589

 
9,227

 
201,004

 
(2,695
)
 
269,125

Selling, general and administrative expenses
 
66,164

 
8,903

 
128,577

 
(2,695
)
 
200,949

Income (loss) from operations
 
(4,575
)
 
324

 
72,427

 

 
68,176

Interest expense
 
(29,161
)
 
(80
)
 

 

 
(29,241
)
Interest income
 
29

 
2

 

 

 
31

Other expense
 
(178
)
 
(263
)
 
(120
)
 

 
(561
)
Income (loss) before taxes and equity in earnings (loss) of affiliates
 
(33,885
)
 
(17
)
 
72,307

 

 
38,405

Income tax expense (benefit)
 
(11,920
)
 
197

 
25,316

 

 
13,593

Equity in earnings (loss) of affiliates
 
46,060

 

 
(177
)
 
(45,883
)
 

Net income (loss) including noncontrolling interest
 
24,095

 
(214
)
 
46,814

 
(45,883
)
 
24,812

Net loss attributable to noncontrolling interest
 

 
717

 

 

 
717

Net income (loss) attributable to Central Garden & Pet Company
 
$
24,095

 
$
(931
)
 
$
46,814

 
$
(45,883
)
 
$
24,095


 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
 
 
Six Months Ended March 28, 2015
 
 
 
 
(in thousands)
 
 
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
246,976

 
$
54,757

 
$
546,119

 
$
(42,930
)
 
$
804,922

Cost of goods sold and occupancy
 
192,447

 
44,123

 
370,494

 
(40,185
)
 
566,879

Gross profit
 
54,529

 
10,634

 
175,625

 
(2,745
)
 
238,043

Selling, general and administrative expenses
 
58,694

 
9,338

 
121,647

 
(2,745
)
 
186,934

Income (loss) from operations
 
(4,165
)
 
1,296

 
53,978

 

 
51,109

Interest expense
 
(22,302
)
 
(76
)
 
(1
)
 

 
(22,379
)
Interest income
 
88

 
1

 

 

 
89

Other income (expense)
 
(677
)
 

 
188

 

 
(489
)
Income (loss) before taxes and equity in earnings of affiliates
 
(27,056
)
 
1,221

 
54,165

 

 
28,330

Income tax expense (benefit)
 
(9,580
)
 
508

 
19,115

 

 
10,043

Equity in earnings of affiliates
 
35,016

 

 
209

 
(35,225
)
 

Net income including noncontrolling interest
 
17,540

 
713

 
35,259

 
(35,225
)
 
18,287

Net income attributable to noncontrolling interest
 

 
747

 

 

 
747

Net income (loss) attributable to Central Garden & Pet Company
 
$
17,540

 
$
(34
)
 
$
35,259

 
$
(35,225
)
 
$
17,540



24




 
 
CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
 
 
Three Months Ended March 26, 2016
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
 
$
32,697

 
$
821

 
$
36,801

 
$
(36,884
)
 
$
33,435

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
Unrealized loss on securities













Foreign currency translation
 
(459
)
 
(398
)
 
57

 
341

 
(459
)
Total comprehensive income
 
32,238

 
423

 
36,858

 
(36,543
)
 
32,976

Comprehensive income attributable to noncontrolling interests
 

 
738

 

 

 
738

Comprehensive income (loss) attributable to Central Garden & Pet Company
 
$
32,238

 
$
(315
)
 
$
36,858

 
$
(36,543
)
 
$
32,238

 
 
CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
 
 
Three Months Ended March 28, 2015
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
 
$
23,237

 
$
1,537

 
$
28,757

 
$
(29,551
)
 
$
23,980

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
Unrealized loss on securities

(20
)







(20
)
Reclassification of realized loss on securities included in net income
 
20

 

 

 

 
20

Foreign currency translation

(626
)

(355
)

(164
)

519


(626
)
Total comprehensive income
 
22,611

 
1,182

 
28,593

 
(29,032
)
 
23,354

Comprehensive income attributable to noncontrolling interests
 

 
743

 

 

 
743

Comprehensive income attributable to Central Garden & Pet Company
 
$
22,611

 
$
439

 
$
28,593

 
$
(29,032
)
 
$
22,611


 
 
CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
 
 
Six Months Ended March 26, 2016
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
 
$
24,095

 
$
(214
)
 
$
46,814

 
$
(45,883
)
 
$
24,812

Other comprehensive income (loss):
 

 

 

 

 

Foreign currency translation
 
(692
)
 
(540
)
 
7

 
533

 
(692
)
Total comprehensive income (loss)
 
23,403

 
(754
)
 
46,821

 
(45,350
)
 
24,120

Comprehensive income attributable to noncontrolling interests
 

 
717

 

 

 
717

Comprehensive income (loss) attributable to Central Garden & Pet Company
 
$
23,403

 
$
(1,471
)
 
$
46,821

 
$
(45,350
)
 
$
23,403


25




 
 
CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
 
 
Six Months Ended March 28, 2015
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income
 
$
17,540

 
$
713

 
$
35,259

 
$
(35,225
)
 
$
18,287

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
Unrealized loss on securities
 
(10
)
 

 

 

 
(10
)
Reclassification of realized loss on securities included in net income

20








20

Foreign currency translation
 
(1,178
)
 
(700
)
 
(268
)
 
968

 
(1,178
)
Total comprehensive income
 
16,372

 
13

 
34,991

 
(34,257
)
 
17,119

Comprehensive income attributable to noncontrolling interests
 

 
747

 

 

 
747

Comprehensive income (loss) attributable to Central Garden & Pet Company
 
$
16,372

 
$
(734
)
 
$
34,991

 
$
(34,257
)
 
$
16,372




26



 
 
CONSOLIDATING CONDENSED BALANCE SHEET
 
 
March 26, 2016
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
1,820

 
$
5,083

 
$
2,923

 
$

 
$
9,826

Restricted cash
 
11,946

 

 

 

 
11,946

Accounts receivable, net
 
100,346

 
15,446

 
224,734

 

 
340,526

Inventories
 
115,644

 
17,043

 
258,067

 

 
390,754

Prepaid expenses and other
 
23,003

 
797

 
26,958

 

 
50,758

Total current assets
 
252,759

 
38,369

 
512,682

 

 
803,810

Land, buildings, improvements and equipment, net
 
47,310

 
3,829

 
113,655

 

 
164,794

Goodwill
 

 

 
213,753

 

 
213,753

Other long-term assets
 
54,088

 
3,417

 
84,777

 
(1,540
)
 
140,742

Intercompany receivable
 
41,922

 

 
367,931

 
(409,853
)
 

Investment in subsidiaries
 
1,098,281

 

 

 
(1,098,281
)
 

Total
 
$
1,494,360

 
$
45,615

 
$
1,292,798

 
$
(1,509,674
)
 
$
1,323,099

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
48,693

 
$
10,546

 
$
73,972

 
$

 
$
133,211

Accrued expenses
 
52,837

 
2,029

 
42,816

 

 
97,682

Current portion of long-term debt
 
219

 

 
375

 

 
594

Total current liabilities
 
101,749

 
12,575

 
117,163

 

 
231,487

Long-term debt
 
496,001

 

 
395

 

 
496,396

Intercompany payable
 
359,472

 
50,381

 

 
(409,853
)
 

Losses in excess of investment in subsidiaries
 

 

 
16,928

 
(16,928
)
 

Other long-term obligations
 
5,416

 

 
58,398

 
(1,540
)
 
62,274

Total Central Garden & Pet shareholders’ equity (deficit)
 
531,722

 
(18,561
)
 
1,099,914

 
(1,081,353
)
 
531,722

Noncontrolling interest
 

 
1,220

 

 

 
1,220

Total equity (deficit)
 
531,722

 
(17,341
)
 
1,099,914

 
(1,081,353
)
 
532,942

Total
 
$
1,494,360

 
$
45,615

 
$
1,292,798

 
$
(1,509,674
)
 
$
1,323,099


27



 
 
CONSOLIDATING CONDENSED BALANCE SHEET
 
 
March 28, 2015
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
6,159

 
$
4,309

 
$
1,475

 
$

 
$
11,943

Restricted cash
 
12,583

 

 

 

 
12,583

Short term investments
 

 

 

 

 

Accounts receivable, net
 
86,569

 
17,099

 
218,097

 

 
321,765

Inventories
 
95,564

 
19,429

 
267,335

 

 
382,328

Prepaid expenses and other
 
26,013

 
901

 
31,337

 

 
58,251

Total current assets
 
226,888

 
41,738

 
518,244

 

 
786,870

Land, buildings, improvements and equipment, net
 
57,093

 
3,590

 
102,524

 

 
163,207

Goodwill
 

 

 
209,089

 

 
209,089

Other long-term assets
 
30,376

 
3,999

 
81,263

 
(5,607
)
 
110,031

Intercompany receivable
 
44,855

 

 
293,685

 
(338,540
)
 

Investment in subsidiaries
 
1,017,461

 

 

 
(1,017,461
)
 

Total
 
$
1,376,673

 
$
49,327

 
$
1,204,805

 
$
(1,361,608
)
 
$
1,269,197

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
47,277

 
$
10,169

 
$
82,375

 
$

 
$
139,821

Accrued expenses
 
39,061

 
2,857

 
41,524

 

 
83,442

Current portion of long-term debt
 
259

 

 
30

 

 
289

Total current liabilities
 
86,597

 
13,026

 
123,929

 

 
223,552

Long-term debt
 
511,030

 

 
83

 

 
511,113

Intercompany payable
 
288,423

 
50,117

 

 
(338,540
)
 

Losses in excess of investment in subsidiaries
 

 

 
14,104

 
(14,104
)
 

Other long-term obligations
 
1,437

 

 
48,719

 
(5,607
)
 
44,549

Total Central Garden & Pet shareholders’ equity (deficit)
 
489,186

 
(14,613
)
 
1,017,970

 
(1,003,357
)
 
489,186

Noncontrolling interest
 

 
797

 

 

 
797

Total equity (deficit)
 
489,186

 
(13,816
)
 
1,017,970

 
(1,003,357
)
 
489,983

Total
 
$
1,376,673

 
$
49,327

 
$
1,204,805

 
$
(1,361,608
)
 
$
1,269,197


28



 
 
CONSOLIDATING CONDENSED BALANCE SHEET
 
 
September 26, 2015
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
36,280

 
$
10,022

 
$
1,282

 
$

 
$
47,584

Restricted cash
 
13,157

 

 

 

 
13,157

Accounts receivable, net
 
46,326

 
6,775

 
154,301

 

 
207,402

Inventories
 
86,109

 
11,690

 
238,147

 

 
335,946

Prepaid expenses and other assets
 
22,926

 
848

 
25,957

 

 
49,731

Total current assets
 
204,798

 
29,335

 
419,687

 

 
653,820

Land, buildings, improvements and equipment, net
 
51,409

 
3,663

 
107,737

 

 
162,809

Goodwill
 

 

 
209,089

 

 
209,089

Other long-term assets
 
25,881

 
3,662

 
82,436

 
(6,100
)
 
105,879

Intercompany receivable
 
32,695

 

 
415,001

 
(447,696
)
 

Investment in subsidiaries
 
1,052,644

 

 

 
(1,052,644
)
 

Total
 
$
1,367,427

 
$
36,660

 
$
1,233,950

 
$
(1,506,440
)
 
$
1,131,597

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
20,506

 
$
2,543

 
$
65,840

 
$

 
$
88,889

Accrued expenses and other liabilities
 
38,723

 
1,789

 
47,212

 

 
87,724

Current portion of long term debt
 
261

 

 
30

 

 
291

Total current liabilities
 
59,490

 
4,332

 
113,082

 

 
176,904

Long-term debt
 
396,626

 

 
65

 

 
396,691

Intercompany payable
 
404,255

 
43,441

 

 
(447,696
)
 

Losses in excess of investment in subsidiaries
 

 

 
11,867

 
(11,867
)
 

Other long-term obligations
 
1,770

 

 
55,952

 
(6,100
)
 
51,622

Total Central Garden & Pet shareholders’ equity (deficit)
 
505,286

 
(12,207
)
 
1,052,984

 
(1,040,777
)
 
505,286

Noncontrolling interest
 

 
1,094

 

 

 
1,094

Total equity (deficit)
 
505,286

 
(11,113
)
 
1,052,984

 
(1,040,777
)
 
506,380

Total
 
$
1,367,427

 
$
36,660

 
$
1,233,950

 
$
(1,506,440
)
 
$
1,131,597


29



 
 
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
 
 
Six Months Ended March 26, 2016
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash used by operating activities
 
$
(12,121
)
 
$
(6,240
)
 
$
(27,598
)
 
$
(4,884
)
 
$
(50,843
)
Additions to property, plant and equipment
 
(2,394
)
 
(412
)
 
(9,989
)
 

 
(12,795
)
Payments to acquire companies, net of cash acquired
 
(60,916
)
 

 
(7,985
)
 

 
(68,901
)
Change in restricted cash and cash equivalents
 
1,211

 

 

 

 
1,211

Other investing activities
 
(500
)
 

 

 

 
(500
)
Intercompany investing activities
 
(9,227
)
 

 
47,070

 
(37,843
)
 

Net cash (used) provided by investing activities
 
(71,826
)
 
(412
)
 
29,096

 
(37,843
)
 
(80,985
)
Repayments on revolving line of credit
 
(178,000
)
 

 

 

 
(178,000
)
Borrowings on revolving line of credit
 
280,000

 

 

 

 
280,000

Repayments of long-term debt
 
(400,130
)
 

 
(15
)
 

 
(400,145
)
Issuance of long-term debt
 
400,000

 

 

 

 
400,000

Excess tax benefits from stock-based awards
 
1,181

 

 

 

 
1,181

Repurchase of common stock
 
(1,722
)
 

 

 

 
(1,722
)
Distribution to parent
 

 
(4,884
)
 

 
4,884

 

Distribution to noncontrolling interest
 

 
(592
)
 

 

 
(592
)
Payment of financing costs
 
(6,362
)
 

 

 

 
(6,362
)
Intercompany financing activities
 
(44,782
)
 
6,939

 

 
37,843

 

Net cash provided (used) by financing activities
 
50,185

 
1,463

 
(15
)
 
42,727

 
94,360

Effect of exchange rates on cash
 
(698
)
 
250

 
158

 

 
(290
)
Net (decrease) increase in cash and cash equivalents
 
(34,460
)
 
(4,939
)
 
1,641

 

 
(37,758
)
Cash and cash equivalents at beginning of period
 
36,280

 
10,022

 
1,282

 

 
47,584

Cash and cash equivalents at end of period
 
$
1,820

 
$
5,083

 
$
2,923

 
$

 
$
9,826


30



 
 
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
 
 
Six Months Ended March 28, 2015
 
 
(in thousands)
 
 
Parent
 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash used by operating activities
 
$
(36,828
)
 
$
(5,623
)
 
$
(49,351
)
 
$
(6,719
)
 
$
(98,521
)
Additions to property, plant and equipment
 
(1,359
)
 
(154
)
 
(9,512
)
 

 
(11,025
)
Payments to acquire companies, net of cash acquired
 
(16,000
)
 

 

 

 
(16,000
)
Proceeds from short-term investments
 
9,997

 

 

 

 
9,997

Change in restricted cash and cash equivalents
 
1,700

 

 

 

 
1,700

Investment in short-term investments
 
(17
)
 

 

 

 
(17
)
Other investing activities
 
(331
)
 

 

 

 
(331
)
Intercompany investing activities
 
(27,949
)
 

 
57,738

 
(29,789
)
 

Net cash (used) provided by investing activities
 
(33,959
)
 
(154
)
 
48,226

 
(29,789
)
 
(15,676
)
Repayments of long-term debt
 
(50,131
)
 

 
(10
)
 

 
(50,141
)
Borrowings under revolving line of credit
 
186,000

 

 

 

 
186,000

Repayments on revolving line of credit
 
(71,000
)
 

 

 

 
(71,000
)
Proceeds from issuance of common stock
 
1,220

 

 

 

 
1,220

Excess tax benefits from stock-based awards
 
351

 

 

 

 
351

Repurchase of common stock
 
(17,164
)
 

 

 

 
(17,164
)
Distribution to parent
 

 
(6,719
)
 

 
6,719

 

Distribution to noncontrolling interest
 

 
(1,680
)
 

 

 
(1,680
)
Intercompany financing activities
 
(34,891
)
 
5,102

 

 
29,789

 

Net cash provided (used) by financing activities
 
14,385

 
(3,297
)
 
(10
)
 
36,508

 
47,586

Effect of exchange rates on cash
 
(910
)
 
577

 
211

 

 
(122
)
Net increase decrease in cash and cash equivalents
 
(57,312
)
 
(8,497
)
 
(924
)
 

 
(66,733
)
Cash and cash equivalents at beginning of year
 
63,471

 
12,806

 
2,399

 

 
78,676

Cash and cash equivalents at end of year
 
$
6,159

 
$
4,309

 
$
1,475

 
$

 
$
11,943

 
13.
Contingencies

The Company may from time to time become involved in legal proceedings in the ordinary course of business. Currently, the Company is not a party to any legal proceedings that management believes would have a material effect on the Company’s financial position or results of operations.

14. Subsequent Events
Asset Backed Loan Facility Amendment
On April 22, 2016, the Company entered into an amended and restated credit agreement which provides up to a $400 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if the Company exercises the accordion feature set forth therein

31



(collectively, the “Amended Credit Facility”). The Amended Credit Facility matures on April 22, 2021. The Company may borrow, repay and reborrow amounts under the Amended Credit Facility until its maturity date, at which time all amounts outstanding under the Amended Credit Facility must be repaid in full.
The Amended Credit Facility is subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. As of April 22, 2016, the closing date, the borrowing base was $367.8 million and the remaining borrowing availability, after taking into consideration $86.0 million of outstanding borrowings at the time of closing, was $281.8 million. Borrowings under the Amended Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s consolidated senior leverage ratio. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.50% (previously between 1.25% and 1.75%) and was 1.25% at the time of closing, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.50% (previously between 0.25% and 0.75%) and was 0.25% at the time of closing.
The Amended Credit Facility contains customary covenants, including financial covenants which require the Company to maintain a minimum fixed charge coverage ratio of 1.00:1.00 upon reaching certain borrowing levels. The Amended Credit Facility is secured by substantially all assets of the Company.

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Company
Central Garden & Pet Company (“Central”) is a leading innovator, marketer and producer, of quality branded products and distributor of third party products in the pet and lawn and garden supplies industries in the United States. The total pet food, treats and supplies industry in 2014 was estimated by Packaged Facts to have been approximately $49.2 billion in annual retail sales. We estimate the annual retail sales of the pet supplies and consumables and super premium pet food markets in the categories in which we participate to be approximately $28.1 billion. The total lawn and garden consumables and decorative products industry in the United States is estimated to be approximately $22.0 billion in annual retail sales, including fertilizer, pesticides, growing media, seeds, mulch, other consumables and decorative products. We estimate the annual retail sales of the lawn and garden consumables and decorative products markets in the categories in which we participate to be approximately $12.0 billion.
Our pet supplies products include products for dogs and cats, including edible bones, premium healthy edible and non-edible chews, super premium dog and cat food and treats, toys, pet carriers, pet bedding, grooming supplies and other accessories; products for birds, small animals and specialty pets, including food, cages and habitats, toys, chews and related accessories; animal and household health and insect control products; products for fish, reptiles and other aquarium-based pets, including aquariums, furniture and lighting fixtures, pumps, filters, water conditioners, food and supplements, and information and knowledge resources; and products for horses and livestock. These products are sold under the brands including Adams, Aqueon®, Avoderm®, Bio Spot Active Care, Cadet®, Farnam®, Four Paws®, Kaytee®, Nylabone®, Pinnacle®, TFH, Zilla® as well as a number of other brands including Altosid, Comfort Zone®, Coralife®, Interpet, Kent Marine®, Pet Select®, Super Pet®, and Zodiac®.
Our lawn and garden supplies products include proprietary and non-proprietary grass seed; wild bird feed, bird feeders, bird houses and other birding accessories; fertilizers; weed, grass, ant and other herbicide, insecticide and pesticide products; and decorative products including pottery, trellises and other wood products. These products are sold under the brands AMDRO®, Ironite®, Pennington®, and Sevin®, as well as a number of other brand names including Earth Juice®, Lilly Miller®, Over-N-Out®, Smart Seed® and The Rebels®.
In fiscal 2015, our consolidated net sales were $1.7 billion, of which our pet segment, or Pet, accounted for approximately $895 million and our garden segment, or Garden, accounted for approximately $756 million. In fiscal 2015, our income from operations was $91.4 million consisting of income from our Pet segment of $98.8 million, income from our Garden segment of $60.1 million and corporate expenses and eliminations of $67.5 million. See Note 11 to our consolidated financial statements for financial information about our two operating segments.
We were incorporated in Delaware in May 1992 as the successor to a California corporation that was formed in 1955. Our executive offices are located at 1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597, and our telephone number is (925) 948-4000. Our website is www.central.com. The information on our website is not incorporated by reference in this annual report.

32




Recent Developments
Fiscal 2016 Second Quarter Financial Performance:
 
Our net sales increased $43.6 million, or 8.8%, to $541.2 million from the prior year quarter. An increase of $53.8 million in our Pet segment was partially offset by a $10.2 million decrease in our Garden segment.
Gross margin increased 110 basis points to 31.3% while gross profit increased $19.3 million, with both segments contributing to increased gross profit.
Selling, general & administrative expense increased $9.8 million to $109.9 million, and increased as a percentage of net sales to 20.3% from 20.1% in the prior year quarter.
Operating income improved by $9.4 million from the prior year quarter, to $59.4 million in the second quarter of fiscal 2016.
Our net income in the second quarter of fiscal 2016 was $32.7 million, or $0.65 per diluted share, compared to net income of $23.2 million, or $0.47 per diluted share, in the second quarter of fiscal 2015.

New Chief Executive Officer Announced
George C. Roeth will become President and Chief Executive Officer, effective June 1, 2016, succeeding John Ranelli. Mr. Roeth is a Director of the Company and a former Chief Operating Officer of The Clorox Company. He will remain on Central’s Board. John R. Ranelli will serve as a Senior Advisor to the Company until his retirement on September 30, 2016, and will remain a member of the Company’s Board of Directors.

Asset Backed Loan Facility Amendment
On April 22, 2016, we entered into an amended and restated credit agreement which provides up to a $400 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if we exercise the accordion feature set forth therein (collectively, the “Amended Credit Facility”). The Amended Credit Facility matures on April 22, 2021. We may borrow, repay and reborrow amounts under the Amended Credit Facility until its maturity date, at which time all amounts outstanding under the Amended Credit Facility must be repaid in full.
The Amended Credit Facility is subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. As of April 22, 2016, the closing date, the borrowing base was $367.8 million and the remaining borrowing availability, after taking into consideration $86.0 million of outstanding borrowings, was $281.8 million. Borrowings under the Amended Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s consolidated senior leverage ratio. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.50% (previously between 1.25% and 1.75%) and was 1.25% at the time of closing, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.50% (previously between 0.25% and 0.75%) and was 0.25% at the time of closing.



33



Results of Operations
Three Months Ended March 26, 2016
Compared with Three Months Ended March 28, 2015
Net Sales
Net sales for the three months ended March 26, 2016 increased $43.6 million, or 8.8%, to $541.2 million from $497.6 million for the three months ended March 28, 2015. Our branded product sales increased $27.6 million, and sales of other manufacturers’ products increased $16.0 million.
Pet net sales increased $53.8 million, or 24.3%, to $275.3 million for the three months ended March 26, 2016 from $221.5 million for the three months ended March 28, 2015. Of the increase in net sales, $37.5 million was from two recently acquired businesses, and the remaining $16.3 million was from organic growth. Excluding the impact of the recent acquisitions, net sales increased 7.4%. Pet branded product sales increased $48.5 million, due primarily to a $43.2 million increase in our dog and cat category, $37.5 million of which was from our two recent acquisitions, and a $6.6 million increase in our animal health category, driven by increased sales in our professional business. Sales of other manufacturers’ products increased $5.3 million due primarily to increased dog food sales and increased sales in the Food, Drug and Mass Merchandise channel.
Garden net sales decreased $10.2 million, or 3.7%, to $265.9 million for the three months ended March 26, 2016 from $276.1 million for the three months ended March 28, 2015. Garden branded product sales decreased $20.9 million, and sales of other manufacturers’ products increased $10.7 million. The sales decrease in branded products was due primarily to a $10.0 million decrease from our exit of the seasonal decor business and a private label relationship in the fertilizer category, and a $9.6 million volume-based decrease in wild bird feed. These decreases were partially offset by an $11.4 million increase in grass seed sales reflecting an earlier breaking spring season as compared to the prior year quarter.
Gross Profit
Gross profit for the three months ended March 26, 2016 increased $19.2 million, or 12.8%, to $169.3 million from $150.1 million for the three months ended March 28, 2015. The increase in gross profit was primarily in the Pet segment due to increased sales, principally in our dog and cat category, and increased sales and improved gross margin in our animal health category. Gross margin increased 110 basis points to 31.3% for the three months ended March 26, 2016 from 30.2% for the three months ended March 28, 2015. The principal reasons for the increase in gross margin were increased sales and improved gross margin in our grass seed business.
Although increased sales in our dog and cat category favorably impacted our gross profit, they had a negative impact on our gross margin, as expected. Two of our recently acquired businesses, IMS and DMC, generally have lower gross margins than our historical dog and cat category products. Excluding the impact of our recent acquisitions, the gross margin in our Pet segment would not have declined in the quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $9.8 million, or 9.8%, to $109.9 million for the three months ended March 26, 2016 from $100.1 million for the three months ended March 28, 2015. As a percentage of net sales, selling, general and administrative expenses increased to 20.3% for the three months ended March 26, 2016, compared to 20.1% in the comparable prior year quarter. An increase in corporate expenses in the quarter was the principal reason for the slight increase in selling, general and administrative expenses as a percentage of sales in the current year quarter.
Selling and delivery expense increased $2.3 million, or 4.2%, to $57.6 million for the three months ended March 26, 2016 from $55.2 million for the three months ended March 28, 2015. The increase was due to the addition of two recent acquisitions in our Pet segment. Although our total selling and delivery expenses increased in dollar terms, selling and delivery expenses decreased as a percentage of net sales.
Warehouse and administrative expense increased $7.5 million, or 16.8%, to $52.4 million for the quarter ended March 26, 2016 from $44.8 million in the quarter ended March 28, 2015. The increase was due primarily to an increase in our Pet segment due to two recent acquisitions and increased administrative and warehouse spending to support growth. Additionally, corporate expenses increased due primarily to insurance costs. Corporate expenses are included within administrative expense

34



and relate to the costs of unallocated executive, administrative, finance, legal, human resource, and information technology functions.
Operating Income
Operating income increased $9.4 million to $59.4 million for the three months ended March 26, 2016 from $50.0 million for the three months ended March 28, 2015. Increased sales of $43.6 million and an improved gross margin were partially offset by a $9.8 million increase in selling, general and administrative costs. Operating margin improved to 11.0% for the three months ended March 26, 2016 from 10.0% for the three months ended March 28, 2015 due to an improvement in gross margin which was only partially offset by a small increase in selling, general and administrative expenses as a percent of net sales.
Pet operating income increased $5.3 million, or 19.8%, to $32.4 million for the three months ended March 26, 2016 from $27.1 million for the three months ended March 28, 2015. The increase was due primarily to increased sales which were partially offset by a lower gross margin and increased selling, general and administrative expenses. Pet operating margin decreased to 11.8% for the three months ended March 26, 2016 from 12.2% for the three months ended March 28, 2015 due to a lower gross margin. Our recent acquisitions have a lower operating margin than our historical Pet business and are still in the process of being integrated.
Garden operating income increased $5.1 million, or 12.9%, to $44.4 million for the three months ended March 26, 2016 from $39.3 million for the three months ended March 28, 2015. The increase was due to an improved gross margin and lower selling, general and administrative expenses partially offset by decreased sales.
Corporate operating expense increased $1.0 million to $17.4 million in the current year quarter from $16.4 million in the fiscal 2015 quarter due primarily to increased insurance costs.
Net Interest Expense
Net interest expense for the three months ended March 26, 2016 decreased $4.8 million, or 40.2%, to $7.1 million from $11.9 million for the three months ended March 28, 2015. Interest expense decreased as a result of the lower interest rate on our 6.125% senior notes due 2023 ("2023 Notes") and the redemption of $50.0 million of our 8.25% senior subordinated notes due 2018 ("2018 Notes") during the prior year second fiscal quarter. In November 2015, we issued $400 million aggregate principal amount of 2023 Notes and replaced our outstanding 2018 Notes. Additionally, in March 2015, we redeemed $50.0 million of our 2018 Notes and, as a result, recognized a charge of approximately $1.6 million during the prior year second fiscal quarter.
Debt outstanding on March 26, 2016 was $497.0 million compared to $511.4 million as of March 28, 2015. Our average borrowing rate for the current quarter decreased to 5.6% from 7.8% for the prior year quarter.
Other Expense
Other expense was $0.1 million for the quarter ended March 26, 2016, unchanged from the prior year quarter. Other expense is comprised of income from investments accounted for under the equity method of accounting and foreign currency exchange gains and losses.
Income Taxes
Our effective income tax benefit rate was 36.0% for the quarter ended March 26, 2016 and 36.9% for the quarter ended March 28, 2015. The decrease in the income tax rate was due primarily to projected additional tax credits in the current year quarter.



35



Six Months Ended March 26, 2016
Compared with Six Months Ended March 28, 2015
Net Sales
Net sales for the six months ended March 26, 2016 increased $96.2 million, or 11.9%, to $901.1 million from $804.9 million for the six months ended March 28, 2015. Our branded product sales increased $67.2 million, and sales of other manufacturers’ products increased $29.0 million.
Pet net sales increased $103.2 million, or 24.5%, to $524.0 million for the six months ended March 26, 2016 from $420.8 million for the six months ended March 28, 2015. Of the increase in net sales, $65.6 million was from two recently acquired businesses, and the remaining $37.6 million came from organic growth. Pet branded product sales increased $90.4 million, due primarily to a $77.1 million increase in our dog and cat category, $65.6 million of which was from two recent acquisitions. Additionally, net sales increased $8.9 million in our animal health category due to increased sales in our professional business and equine category. Sales of other manufacturers’ products increased $12.8 million due primarily to increased dog food sales and increased sales in the Food, Drug and Mass Merchandise channel.
Garden net sales decreased $7.0 million, or 1.8%, to $377.1 million for the six months ended March 26, 2016 from $384.1 million for the six months ended March 28, 2015. Garden branded product sales decreased $23.2 million, and sales of other manufacturers’ products increased $16.2 million. The sales decrease in branded products was due primarily to a $13.6 million decrease from our exit of the seasonal decor business and a private label relationship in the fertilizer category, and a $12.1 million volume-based decrease in wild bird feed. These decreases were partially offset by a $16.1 million increase in grass seed sales reflecting an earlier breaking spring season as compared to the prior year quarter.
Gross Profit
Gross profit for the six months ended March 26, 2016 increased $31.1 million, or 13.1%, to $269.1 million from $238.0 million for the six months ended March 28, 2015. The increase in gross profit was primarily due to increased sales in the Pet segment, principally in our dog and cat category. Gross margin increased 30 basis points to 29.9% for the six months ended March 26, 2016 from 29.6% for the six months ended March 28, 2015. Improved gross margin in our Garden segment was partially offset by a decrease in our Pet segment.
Although increased sales in our dog and cat category favorably impacted our gross profit, they had a negative impact on our Pet segment's gross margin, as expected. Our recent acquisitions, IMS and DMC, generally have lower gross margins than our historical dog and cat category products. Excluding the impact of our recent acquisitions, the gross margin in our Pet segment for the six month period would not have declined.
Gross profit in our Garden segment improved due to gross margin improvement which was partially offset by a $7.0 million decrease in net sales. The gross margin improvement was due primarily to increased grass seed sales and a product mix change in our grass seed and controls and fertilizer businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $14.0 million, or 7.5%, to $200.9 million for the six months ended March 26, 2016 from $186.9 million for the six months ended March 28, 2015. As a percentage of net sales, selling, general and administrative expenses decreased to 22.3% for the six months ended March 26, 2016, compared to 23.2% in the comparable prior year six month period as we continued to leverage our existing infrastructure. This decrease as a percentage of net sales occurred in both the Pet and Garden segments. Additionally, recent acquisitions in our Pet segment have had lower selling, general and administrative expenses as a percentage of revenue as compared to our existing business.
Selling and delivery expense increased $4.7 million, or 4.7%, to $104.5 million for the six months ended March 26, 2016 from $99.8 million for the six months ended March 28, 2015. The increase was due to increased sales and the addition of two recent acquisitions in our Pet segment partially offset by a slight decrease in our Garden segment primarily due to a shift in timing of some advertising expenditures to our fiscal third quarter.
Warehouse and administrative expense increased $9.3 million, or 10.7%, to $96.4 million for the six months ended March 26, 2016 from $87.1 million for the six months ended March 28, 2015. Increased expenditures in our Pet segment were partially offset by minor decreases in our Garden segment and corporate. The increase expenditures in our Pet segment were due primarily to two recent acquisitions and increased administrative and warehouse spending to support growth in our

36



business units. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resource, and information technology functions.
Operating Income
Operating income increased $17.1 million to $68.2 million for the six months ended March 26, 2016 from $51.1 million for the six months ended March 28, 2015. Our operating margin improved to 7.6% for the six months ended March 26, 2016 from 6.3% for the six months ended March 28, 2015. Increased sales of $96.2 million, a 30 basis point gross margin improvement and a decline in selling, general and administrative expense as a percent of net sales all contributed to our improved operating income and operating margin.
Pet operating income increased $11.0 million, or 23.1%, to $58.6 million for the six months ended March 26, 2016 from $47.6 million for the six months ended March 28, 2015. The increase was due primarily to increased sales which were partially offset by a lower gross margin and increased selling, general and administrative expenses. Our Pet operating margin slightly decreased to 11.2% for the six months ended March 26, 2016 from 11.3% for the six months ended March 28, 2015 as a lower gross margin was partially offset by lower selling general and administrative expense as a percent of net sales. These changes were due primarily to two acquisitions in our dog and cat category made since the end of our 2015 third fiscal quarter.
Garden operating income increased $5.4 million, or 15.0%, to $41.2 million for the six months ended March 26, 2016 from $35.8 million in the six months ended March 28, 2015. Improved gross margin and lower selling, general and administrative expenses more than offset a decline in net sales.
Corporate operating expenses decreased $0.7 million to $31.6 million in the current six month period from $32.3 million in the comparable fiscal 2015 period.
Net Interest Expense
Net interest expense for the six months ended March 26, 2016 increased $6.9 million, or 31.0%, to $29.2 million from $22.3 million for the six months ended March 28, 2015. In November 2015, we issued $400 million aggregate principal amount of 2023 Notes. We used the net proceeds from the offering, together with available cash, to redeem our outstanding 2018 Notes and pay fees and expenses related to the offering. As a result of our redemption of the 2018 Notes, we recognized incremental interest expense of approximately $14.3 million comprised of an $8.3 million call premium, $2.7 million related to the 30 days of overlapping interest expense and a $3.3 million non-cash charge for the write-off of unamortized financing costs in interest expense. In March 2015, we redeemed $50.0 million of our 2018 Notes. As a result of the $50.0 million redemption, we recognized incremental interest expense of approximately $1.6 million in the second quarter of fiscal 2015.
Excluding the $14.3 million of incremental expense related to the issuance and redemption of our fixed rate debt in fiscal 2016 and the $1.6 million of incremental expense related to the redemption of $50 million of our fixed rate debt in fiscal 2015, interest expense decreased $5.8 million due to both lower interest rates on our 2023 Notes and lower average debt outstanding during the six months ended March 26, 2016, as a result of the redemption of $50.0 million of our 2018 Notes in March 2015. Debt outstanding on March 26, 2016 was $497.0 million compared to $511.4 million as of March 28, 2015. Our average borrowing rate for the current six month period decreased to 6.5% from 8.1% for the prior six month period.
Other Expense
Other expense increased $0.1 million to $0.6 million for the six months ended March 26, 2016, from $0.5 million for the six months ended March 28, 2015. Other expense is comprised of income from investments accounted for under the equity method of accounting and foreign currency exchange gains and losses.

Income Taxes
Our effective income tax benefit rate was 35.4% for the six months ended March 26, 2016 and 35.5% for the six months ended March 28, 2015.


37



Inflation
Our revenues and margins are dependent on various economic factors, including, but not limited to, rates of inflation, energy costs, consumer attitudes toward discretionary spending, currency fluctuations, and other macro-economic factors which may impact levels of consumer spending. In certain fiscal periods, we have been adversely impacted by rising input costs, particularly relating to grain and seed prices, fuel prices and the ingredients used in our garden controls and fertilizers. Rising costs in those periods have made it difficult for us to increase prices to our retail customers at a pace sufficient to enable us to maintain margins.
In recent years, our business was negatively impacted by low consumer confidence, as well as other macro-economic factors. In fiscal 2015, commodity costs declined from fiscal 2014 levels. In the first half of fiscal 2016, commodity costs have not changed significantly from fiscal 2015 levels. We continue to monitor commodity prices in order to be in a position to take action to mitigate the impact of increasing raw material costs.
Weather and Seasonality
Our sales of lawn and garden products are influenced by weather and climate conditions in the different markets we serve. Additionally, our Garden segment’s business is highly seasonal. In fiscal 2015, approximately 66% of our Garden segment’s net sales and 58% of our total net sales occurred during our second and third fiscal quarters. Substantially all of the Garden segment’s operating income is typically generated in this period, which has historically offset the operating loss incurred by the Garden segment during the first fiscal quarter of the year.
Liquidity and Capital Resources
We have financed our growth through a combination of internally generated funds, bank borrowings, supplier credit, and sales of equity and debt securities to the public.
Our business is seasonal and our working capital requirements and capital resources track closely to this seasonal pattern. Generally, during the first fiscal quarter, accounts receivable reach their lowest level while inventory, accounts payable and short-term borrowings begin to increase. During the second fiscal quarter, receivables, accounts payable and short-term borrowings increase, reflecting the build-up of inventory and related payables in anticipation of the peak lawn and garden selling season. During the third fiscal quarter, inventory levels remain relatively constant while accounts receivable peak and short-term borrowings start to decline as cash collections are received during the peak selling season. During the fourth fiscal quarter, inventory levels are at their lowest, and accounts receivable and payables are substantially reduced through conversion of receivables to cash.
We service two broad markets: pet supplies and lawn and garden supplies. Our pet supplies businesses involve products that have a year-round selling cycle with a slight degree of seasonality. As a result, it is not necessary to maintain large quantities of inventory to meet peak demands. On the other hand, our lawn and garden businesses are highly seasonal with approximately 66% of our Garden segment’s net sales occurring during the second and third fiscal quarters. This seasonality requires the shipment of large quantities of product well ahead of peak consumer buying periods. To encourage retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to provide extended credit terms and/or promotional discounts.
Operating Activities
Net cash used by operating activities decreased by $47.7 million, from $98.5 million of cash used by operating activities for the six months ended March 28, 2015, to $50.8 million for the six months ended March 26, 2016. The decrease in cash used by operating activities was due primarily to an increase in cash flow from working capital accounts for the period ended March 26, 2016, primarily receivables, inventory and accounts payable, as compared to the prior year period, due to better management of working capital. Our investment in inventory was not as large in the current year period as the prior year period. We remain focused on managing our investment in inventory, while maintaining high fill rates and service levels to our customers.
Investing Activities
Net cash used in investing activities increased $65.3 million, from $15.7 million for the six months ended March 28, 2015 to $81.0 million during the six months ended March 26, 2016. The increase in cash used in investing activities was due primarily to two acquisitions during the first fiscal quarter of 2016. On September 30, 2015, we acquired Hydro-Organics

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Wholesale Inc., an organic fertilizer company, for approximately $7.8 million cash and approximately $2.6 million of estimated contingent future performance-based payments. In December 2015, we purchased the pet bedding business and certain other assets of National Consumers Outdoors Corp., formerly known as Dallas Manufacturing Company (“DMC”), for $61 million. Additionally, our capital expenditures increased to $12.8 million from $11.0 million in the prior year period. We expect to increase our capital expenditures over the rest of fiscal 2016 and through fiscal 2017 as we improve our existing infrastructure for planned growth and make our manufacturing and distribution facilities more efficient.

Financing Activities
Net cash provided by financing activities increased $46.8 million, from $47.6 million for the six months ended March 28, 2015, to $94.4 million for the six months ended March 26, 2016. The increase in cash provided by financing activities was due primarily to the repayment of $50 million aggregate principal of our 2018 Notes during the prior year period at 102.063%, as well as increased purchases of our common stock in the prior year period compared to the current year. Decreased net borrowings under our asset backed revolving credit facility during the current year period, partially offset by the payment of financing costs associated with the issuance of our 2023 Notes and subsequent redemption of our 2018 Notes during the period ended March 26, 2016 also contributed to the increase in cash provided by financing activities.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $400 million asset backed loan facility. Based on our anticipated cash needs, availability under our asset backed loan facility and the scheduled maturity of our debt, we believe that our sources of liquidity should be adequate to meet our working capital, capital spending and other cash needs for at least the next 12 months. However, we cannot assure you that these sources will continue to provide us with sufficient liquidity and, should we require it, that we will be able to obtain financing on terms satisfactory to us, or at all.
We believe that cash flows from operating activities, funds available under our asset backed loan facility, and arrangements with suppliers will be adequate to fund our presently anticipated working capital requirements for the foreseeable future. We anticipate that our capital expenditures, which are related primarily to replacements and expansion of and upgrades to plant and equipment and investment in our implementation of a scalable enterprise-wide information technology platform, will not exceed $40 million for fiscal 2016. We are investing in this information technology platform to improve existing operations, support future growth and enable us to take advantage of new applications and technologies.
As part of our growth strategy, we have acquired a number of companies in the past, and we anticipate that we will continue to evaluate potential acquisition candidates in the future. If one or more potential acquisition opportunities, including those that would be material, become available in the near future, we may require additional external capital. In addition, such acquisitions would subject us to the general risks associated with acquiring companies, particularly if the acquisitions are relatively large.
At March 26, 2016, our total debt outstanding was $497.0 million, as compared with $511.4 million at March 28, 2015.
Senior Notes and Redemption of Senior Subordinated Notes
On November 9, 2015, we issued $400 million aggregate principal amount of 6.125% senior notes due November 2023. In December 2015, we used the net proceeds from the offering, together with available cash, to redeem our $400 million aggregate principal amount of 8.25% senior subordinated notes due March 1, 2018 at a price of 102.063% of the principal amount and pay fees and expenses related to the offering.
We incurred approximately $6.3 million of debt issuance costs in conjunction with these transactions, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs will be amortized over the term of the 2023 Notes.
As a result of our redemption of the 2018 Notes, we incurred incremental interest expense of $14.3 million, comprised of the call premium payment of $8.3 million, overlapping interest expense for 30 days of approximately $2.7 million and a $3.3 million non-cash charge for the write off of unamortized deferred financing costs and discount related to the 2018 Notes. These amounts are included in interest expense in the condensed consolidated statements of operations.
The 2023 Notes require semiannual interest payments, which commence on May 15, 2016. The 2023 Notes are unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries which are borrowers under or guarantors of our senior secured revolving credit facility. The 2023 Notes are unsecured senior obligations

39



and are subordinated to all of our existing and future secured debt, including our Credit Facility, to the extent of the value of the collateral securing such indebtedness.
We may redeem some or all of the 2023 Notes at any time, at our option, prior to November 15, 2018 at the principal amount plus a “make whole” premium. At any time prior to November 15, 2018, we may also redeem, at our option, up to 35% of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of 106.125% of the principal amount of the notes. We may redeem some or all of the 2023 Notes, at our option, at any time on or after November 15, 2018 for 104.594%, on or after November 15, 2019 for 103.063%, on or after November 15, 2020 for 101.531% and on or after November 15, 2021 for 100%, plus accrued and unpaid interest.
The holders of the 2023 Notes have the right to require us to repurchase all or a portion of the 2023 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2023 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all covenants as of March 26, 2016.
Asset Backed Loan Facility
On December 5, 2013, we entered into a credit agreement which provided up to a $390 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if we exercise the accordion feature set forth therein ( the “Credit Facility”). As of March 26, 2016, there were borrowings of $102.0 million outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $6.0 million outstanding as of March 26, 2016.
The Credit Facility was subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. As of March 26, 2016, the borrowing availability was $366.1 million and the remaining borrowing availability, after taking into consideration $102.0 million of outstanding borrowings, was $264.1 million. Borrowings under the Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s total outstanding borrowings. Such applicable margin for LIBOR-based borrowings fluctuated between 1.25%-1.75% (and was 1.25% at March 26, 2016) and such applicable margin for Base Rate borrowings fluctuated between 0.25%-0.75% (and was 0.25% at March 26, 2016). As of March 26, 2016, the applicable interest rate related to Base Rate borrowings was 3.75%, and the applicable interest rate related to LIBOR-based borrowings was 1.68%.
The Credit Facility contained customary covenants, including financial covenants which required us to maintain a minimum fixed charge coverage ratio of 1.00:1.00 upon reaching certain borrowing levels. The Credit Facility was secured by substantially all assets of the Company. We were in compliance with all financial covenants under the Credit Facility during the period ended March 26, 2016.
On April 22, 2016, we amended and restated our Credit Facility (the "Amended Credit Facility") which now provides up to a $400 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if we exercise the accordion feature set forth therein. The Amended Credit Facility matures on April 22, 2021. We may borrow, repay and reborrow amounts under the Amended Credit Facility until its maturity date, at which time all amounts outstanding under the Amended Credit Facility must be repaid in full.
The Amended Credit Facility is subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. As of April 22, 2016, the closing date, the borrowing base was $367.8 million and the remaining borrowing availability, after taking into consideration $86.0 million of outstanding borrowings, was $281.8 million. Borrowings under the Amended Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s consolidated senior leverage ratio. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.50% (previously between 1.25% and 1.75%) and was 1.25% at the time of closing, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.50% (previously between 0.25% and 0.75%) and was 0.25% at the time of closing.

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The Amended Credit Facility contains customary covenants, including financial covenants which require us to maintain a minimum fixed charge coverage ratio of 1.00:1.00 upon reaching certain borrowing levels. The Amended Credit Facility is secured by substantially all assets of the Company.

Off-Balance Sheet Arrangements
There have been no material changes to the information provided in our Annual Report on Form 10-K for the fiscal year ended September 26, 2015 regarding off-balance sheet arrangements.
Contractual Obligations
Except for the issuance of our 2023 Notes in November 2015 and the redemption of our 2018 Notes in December 2015, there have been no material changes outside the ordinary course of business in our contractual obligations set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended September 26, 2015.
New Accounting Pronouncements
Refer to Footnote 1 in the notes to the condensed consolidated financial statements for new accounting pronouncements.
Critical Accounting Policies, Estimates and Judgments
There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended September 26, 2015.
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk

There has been no material change in our exposure to market risk from that discussed in our Annual Report on Form 10-K for the fiscal year ended September 26, 2015.

Item 4.
Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer, who is also currently our principal financial officer, has reviewed, as of the end of the period covered by this report, the “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) that ensure that information relating to the Company required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported in a timely and proper manner and that such information is accumulated and communicated to our management, including our Chief Executive Officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon this review, such officers concluded that our disclosure controls and procedures were effective as of March 26, 2016.
(b) Changes in Internal Control Over Financial Reporting. Our management, with the participation of our Chief Executive Officer, who is also currently our principal financial officer, has evaluated whether any change in our internal control over financial reporting occurred during the second quarter of fiscal 2016. Based on that evaluation, management concluded that there has been no change in our internal control over financial reporting during the second quarter of fiscal 2016 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings


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From time to time, we are involved in certain legal proceedings in the ordinary course of business. Currently, we are not a party to any legal proceedings that management believes would have a material effect on our financial position or results of operations.

Item 1A.
Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the fiscal year ended September 26, 2015.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

The following table sets forth the repurchases of any equity securities during the fiscal quarter ended March 26, 2016 and the dollar amount of authorized share repurchases remaining under our stock repurchase program.
 
Period
 
Total Number
of Shares
(or Units)
Purchased
 
 
 
Average
Price Paid
per Share
(or Units)
 
Total Number
of Shares
(or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Number (or
Approximate Dollar Value)
of Shares
(or Units)
that May Yet Be Purchased
Under the Plans or
Programs (1)
December 27, 2015 - January 30, 2016
 
2,514

 
(2) 
 
$
13.20

 

 
$
34,968,000

January 31, 2016 - February 27, 2016
 
18,870

 
(2) 
 
$
13.75

 

 
$
34,968,000

February 28, 2016 - March 26, 2016
 
5,011

 
(2) 
 
$
13.68

 

 
$
34,968,000

Total
 
26,395

 
  
 
$
13.68

 

 
$
34,968,000

 
(1)
During the third quarter of fiscal 2011, our Board of Directors authorized a $100 million share repurchase program. The program has no expiration date and expires when the amount authorized has been used or the Board withdraws its authorization. The repurchase of shares may be limited by certain financial covenants in our credit facility and indenture that restrict our ability to repurchase our stock.
(2)
Shares purchased during the period indicated represent withholding of a portion of shares to cover taxes in connection with the vesting of restricted stock.

Item 3.
Defaults Upon Senior Securities
Not applicable

Item 4.
Mine Safety Disclosures
Not applicable

Item 5.
Other Information
Not applicable


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Item 6.
Exhibits
 
 
10.1
Amended and Restated Credit Agreement dated April 22, 2016 among the Company, certain of the Company's domestic subsidiaries as borrowers and guarantors, a syndicate of financial institutions party thereto, SunTrust Bank, as issuing bank and administrative agent, and SunTrust Robinson Humphrey, Inc., as left lead arranger and joint bookrunner, Bank of America, N.A., U.S. Bank National Association and Wells Fargo Bank, National Association , as co-syndication agents, Bank of the West, BMO Harris Bank N.A., JP Morgan Chase Bank, N.A. and KeyBank National Association as co-documentation agents.
 
 
31.1
Certification of Principal Executive Officer and Acting Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1
Certification of Principal Executive Officer and Acting Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.
 
 
101.INS
XBRL Instance Document
 
 
101.SCH
XBRL Taxonomy Extension Schema Document
 
 
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document

43



SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.
 
 
CENTRAL GARDEN & PET COMPANY
 
Registrant
 
 
 
Dated: May 5, 2016
 
 
 
/s/ JOHN R. RANELLI
 
John R. Ranelli
 
President and Chief Executive Officer
 
(Principal Executive Officer and Acting Principal Financial Officer)
 
 
 
 
 
 
 
 
 
 


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