CENTRAL GARDEN & PET COMPANY Our Company
Central Garden & Pet Company ("Central") is a market leader in the garden and pet industries inthe United States . For over 40 years, Central has proudly nurtured happy and healthy homes by bringing innovative and trusted solutions to consumers and its customers. We manage our operations through two reportable segments: Pet and Garden. Our pet segment includes dog and cat supplies such as dog treats and chews, toys, pet beds and grooming products, waste management and training pads, pet containment, supplies for aquatics, small animals, reptiles and pet birds including toys, cages and habitats, bedding, food and supplements, products for equine and livestock, animal and household health and insect control products, live fish and small animals as well as outdoor cushions. These products are sold under brands such as Aqueon®, Cadet®, Comfort Zone®, Farnam®, Four Paws®, K&H Pet Products® ("K&H"), Kaytee®, Nylabone® and Zilla®. Our garden segment includes lawn and garden consumables such as grass, vegetable, flower and herb seed, wild bird feed, bird houses and other birding accessories, weed, grass, and other herbicides, insecticide and pesticide products, fertilizers and live plants. These products are sold under brands such as Amdro®, Ferry-Morse®, Pennington® and Sevin®. In fiscal 2021, our consolidated net sales were$3.3 billion , of which our Pet segment, or Pet, accounted for approximately$1.9 billion and our Garden segment, or Garden, accounted for approximately$1.4 billion . In fiscal 2021, our operating income was$254 million consisting of income from our Pet segment of$208 million , income from our Garden segment of$139 million and corporate expenses of$93 million . We were incorporated inDelaware inMay 1992 as the successor to aCalifornia corporation that was formed in 1955. Our executive offices are located at1340 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 quarterly report. 23 --------------------------------------------------------------------------------
Recent Developments
Fiscal 2022 Second Quarter Financial Performance:
•Net sales increased$19.1 million , or 2.0%, from the prior year quarter to$954.4 million . Pet segment sales increased$5.7 million , and Garden segment sales increased$13.4 million .
•Organic net sales declined 3.5%, comprised of an 8.7% decrease in our Garden segment partially offset by a 1.2% increase in our Pet segment.
•Gross profit increased
•Selling, general and administrative expense increased$12.2 million from the prior year quarter to$179.9 million and as a percentage of net sales increased 100 basis points to 18.9%.
•Operating income increased
•Net income in the second quarter of fiscal 2022 was$69.7 million , or$1.27 per diluted share, compared to net income of$73.0 million , or$1.32 per diluted share, in the second quarter of fiscal 2021.
COVID-19 Impact
COVID-19 has led to adverse impacts on human health, the global economy and society at large. From the beginning, our priority has been the safety of our employees, customers and consumers.
Central has been impacted by COVID-19 in a number of ways, including increased demand and sales. The increased demand for our products continues to challenge our supply chain and our ability to procure and manufacture enough product to meet the continued high levels of demand. At some of our facilities, we have experienced reduced productivity and increased employee absences, which we expect to continue during the balance of the pandemic. Our manufacturing facilities and distribution centers are currently open and operational. We have incurred and will continue to incur additional costs including personal protective equipment and sanitation costs. We have hosted mobile vaccination clinics at some of our larger manufacturing and distribution sites, in order to make vaccines available to our employees. The pandemic and related increase in demand have created operational challenges, which have impacted our service and fill rates. While they have improved in fiscal 2022, they have yet to return to our historical rates. Our supply chain has experienced disruptions and delays which have resulted in increased operational and logistics costs. We may also experience additional disruptions in our supply chain as the pandemic continues, although we cannot reasonably estimate the potential impact or timing of those events, and we may not be able to mitigate such impact. We continue to face supply constraints for commodities, materials and freight and the limited availability of labor. Inflationary pressures stemming in part from the COVID-19 operating environment are continuing to result in significant increases in costs for commodities, materials, labor and freight.
We believe we have sufficient liquidity to satisfy our cash needs with our cash and revolving credit facility as we manage through the current economic and health environment.
While vaccination efforts and the easing of government restrictions have
signaled an improving health environment, the timing of a full recovery remains
uncertain. Forecasting and planning remain challenging in the current
environment and will continue to be challenging as the pandemic eases in the
future. In the current uncertain environment, our employees, customers and
consumers will continue to be our priority as we manage our business to deliver
long-term growth.
Results of Operations
Three Months Ended March 26, 2022
Compared with Three Months Ended March 27, 2021
Net Sales
Net sales for the three months ended March 26, 2022 increased $19.1 million , or
2.0%, to $954.4 million from $935.3 million for the three months ended March 27,
2021 . Organic net sales, which exclude the impact of acquisitions and
divestitures in the last 12 months, decreased $32.7 million , or 3.5%, as
compared to the fiscal 2021 quarter. Our branded product sales increased $29.2
million , and sales of other manufacturers' products decreased $10.1 million .
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Pet net sales increased $5.7 million , or 1.2%, to $497.7 million for the three
months ended March 26, 2022 from $492.0 million for the three months ended March
27, 2021 . This organic sales increase was due primarily to pricing actions taken
to offset the current inflationary operating environment. Increases in net sales
in our dog and cat treats and toy business and our outdoor cushion business were
partially offset by lower sales in our dog bed business. The increase in sales
in our dog and cat treats and toy business was due to pricing actions taken to
offset inflationary pressures; and the increase in our outdoor cushion business
was due primarily to a volume shift from our first quarter to our second
quarter. The decrease in our dog bed business was due to a purposeful SKU
rationalization. Pet branded product sales increased $6.3 million while sales of
other manufacturers' products declined $0.6 million .
Garden net sales increased $13.4 million , or 3.0%, to $456.7 million for the
three months ended March 26, 2022 from $443.3 million for the three months ended
March 27, 2021 . The sales increase was due to the addition of our fiscal 2021
acquisitions. Organic sales decreased 8.7% due primarily to unfavorable weather
resulting in a delayed start to the garden season which more than offset
increases from pricing actions taken to offset rising costs. As such, most of
our garden businesses had decreased sales in the quarter with the exception of
wild bird feed resulting from price increases taken to offset large commodity
inflation. Garden branded sales increased $22.9 million due to our fiscal 2021
acquisitions while sales of other manufacturers' products decreased $9.5
million .
Gross Profit
Gross profit for the three months endedMarch 26, 2022 increased$14.4 million , or 5.3%, to$286.8 million from$272.4 million for the three months endedMarch 27, 2021 . Gross margin increased 100 basis points to 30.1% for the three months endedMarch 26, 2022 from 29.1% for the three months endedMarch 27, 2021 . Both operating segments contributed to the increase in gross profit and gross margin. The increases in gross profit and gross margin were driven by pricing actions and the impact of our fiscal 2021 acquisitions partially offset by significant cost inflation in commodities, labor, and freight. Overall, our gross margins continue to be under pressure from the current inflationary environment and we continue to experience cost increases, primarily in commodities, labor and freight. We intend to continue to seek price increases to help offset the rising costs but do not anticipate that we will be able to fully offset the cost pressures in fiscal 2022. The improvement in the Pet segment was due to price increases and a more favorable product mix which were only partially offset by cost inflation in commodities, labor and freight. The improvement in our Garden segment was due primarily to price increases that helped offset lower sales volumes due to the late start to the garden season and to the impact of our fiscal 2021 acquisitions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$12.2 million , or 7.2%, to$179.9 million for the three months endedMarch 26, 2022 . As a percentage of net sales, selling, general and administrative expenses increased to 18.9% for the three months endedMarch 26, 2022 , compared to 17.9% in the comparable prior year quarter. Both operating segments and corporate had increased selling, general and administrative expenses. Overall, the increases were due primarily to the incremental expense from recent acquisitions, wage and freight inflation and increased marketing investment for brand development and innovation. Selling and delivery expense increased$4.3 million to$87.3 million for the three months endedMarch 26, 2022 . The increase was due primarily to our recent acquisitions, wage and freight inflation and increased marketing investment for brand development and innovation. Warehouse and administrative expense increased$7.9 million , or 9.3%, to$92.6 million for the three months endedMarch 26, 2022 . The increase was due primarily to the warehouse and administrative costs associated with our four fiscal 2021 acquisitions. Additionally, both operating segments experienced increased labor and payroll-related expense. Corporate expenses increased$0.9 million due primarily to increased salary and wages from headcount additions and equity compensation costs. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resources, and information technology functions.
Operating Income
Operating income increased$2.2 million , or 2.1%, to$106.8 million for the three months endedMarch 26, 2022 . The increase in operating income was due to increased sales and gross profit partially offset by higher selling, general and administrative expense. Our operating margin remained flat at 11.2% as compared to the prior year quarter, as a 100 basis point increase in gross margin was offset by a 100 basis point increase in selling, general and administrative expense as a percentage of net sales. Pet operating income decreased$1.4 million , or 2.3%, to$60.6 million for the three months endedMarch 26, 2022 . Pet operating income decreased due to higher selling, general and administrative expense which more than offset the favorable impact of increased sales and gross profit. Pet operating margin decreased 40 basis points to 12.2% due to higher input costs in the current inflationary environment and increased marketing and brand building spend. Garden operating income increased$4.5 million to$70.5 million for the three months endedMarch 26, 2022 from$66.0 million for the three months endedMarch 27, 2021 . Garden operating income increased due to increased sales and gross profit partially offset by higher selling, general and administrative expense. Garden operating margin increased 50 basis points to 15.4% due primarily to increased prices and the favorable impact of our recent acquisitions. 25 -------------------------------------------------------------------------------- Corporate expense increased$0.9 million , or 3.8%, to$24.3 million for the three months endedMarch 26, 2022 from$23.4 million for the three months endedMarch 27, 2021 . Corporate expense increased due primarily to increased salaries and wages from headcount additions and equity compensation costs.
Net Interest Expense
Net interest expense for the three months endedMarch 26, 2022 increased$4.6 million , or 44.8%, to$14.7 million due primarily to a higher debt balance outstanding during the quarter. InApril 2021 , we issued$400 million aggregate principal amount of 4.125% senior notes dueApril 2031 . Debt outstanding onMarch 26, 2022 was$1,185.8 million compared to$979.0 million atMarch 27, 2021 .
Other Income (Expense)
Other income (expense) is comprised of income or losses from investments accounted for under the equity method of accounting and foreign currency exchange gains and losses. Other income (expense) was$0.4 million of expense for the quarter endedMarch 26, 2022 compared to income of$0.7 million for the quarter endedMarch 27, 2021 , due primarily to foreign currency losses in the current year quarter as compared to gains in the prior year quarter.
Income Taxes
Our effective income tax rate was 23.4% for the quarter endedMarch 26, 2022 and 22.7% for the quarter endedMarch 27, 2021 . The increase in our effective income tax rate was due primarily to increased foreign earnings in higher tax rate jurisdictions.
Net Income and Earnings Per Share
Our net income in the second quarter of fiscal 2022 was
Six Months Ended March 26, 2022
Compared with Six Months Ended March 27, 2021
Net Sales
Net sales for the six months ended March 26, 2022 increased $88.3 million , or
5.8%, to $1,615.8 million from $1,527.5 million for the six months ended March
27, 2021 . Organic net sales declined $29.6 million , or 1.9%, as compared to the
prior year six-month period. Our branded product sales increased $87.2 million ,
and sales of other manufacturers' products increased $1.1 million .
Pet net sales increased $5.3 million , or 0.6%, to $933.7 million for the six
months ended March 26, 2022 from $928.4 million for the six months ended March
27, 2021 . Net sales in the prior year period include sales from the Breeder's
Choice business unit, which we sold in December 2020 . Organic net sales
increased $9.2 million , or 1.0%, as compared to the prior year six-month period.
The organic sales improvement was driven by price and volume based sales
increases in our dog and cat treats and toy business, animal health business and
outdoor cushion business, partially offset by a volume based sales decrease in
our dog bed business due primarily to SKU rationalization. Pet branded sales
increased $0.1 million , and sales of other manufacturer's products increased
$5.2 million .
Garden net sales increased $83.0 million , or 13.9%, to $682.1 million for the
six months ended March 26, 2022 from $599.1 million for the six months ended
March 27, 2021 . Organic sales decreased $38.8 million , or 6.5%, while sales from
recent acquisitions contributed $121.8 million . The organic sales decrease was
due primarily to unfavorable weather causing a delayed start to the garden
season. As such, most of our garden businesses had decreased sales with the
exception of wild bird feed which benefited from price increases taken to offset
large commodity inflation. Garden branded sales increased $87.1 million , while
sales of other manufacturers' products decreased $4.1 million .
Gross Profit
Gross profit for the six months ended March 26, 2022 increased $47.2 million , or
10.8%, to $485.0 million from $437.8 million for the six months ended March 27,
2021 . Gross margin improved 130 basis points to 30.0% for the six months ended
March 26, 2022 from 28.7% for the six months ended March 27, 2021 . Both Pet and
Garden contributed to the increase in gross profit and gross margin. Both
segments are being impacted by the rapidly increasing cost environment. We have
implemented and intend to continue to seek price increases to help offset the
rising costs but do not anticipate we will be able to fully offset the cost
pressures in 2022. Although our gross margin increased in the current six-month
period, as compared to the prior year six month period, our operating margin
declined during the current six-month period.
26
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In the Pet segment, the improved gross profit and margin were due primarily to
price increases taken to combat inflation and a favorable product mix partially
offset by increased commodity, freight and labor costs.
In the Garden segment, the improved gross profit and margin were due primarily
to price increases and the impact of our fiscal 2021 acquisitions, which
included the impact of purchase accounting in fiscal 2021 and the impact on our
product mix in the current year, partially offset by increased commodity,
freight and labor costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$45.7 million , or 14.9%, to$351.9 million for the six months endedMarch 26, 2022 from$306.2 million for the six months endedMarch 27, 2021 . As a percentage of net sales, selling, general and administrative expenses increased to 21.8% for the six months endedMarch 26, 2022 from 20.0% for the comparable prior year six-month period. Selling and delivery expense increased$16.9 million , or 11.3%, to$166.4 million for the six months endedMarch 26, 2022 from$149.5 million for the six months endedMarch 27, 2021 . The increase was due primarily to the addition of our fiscal 2021 acquisitions, marketing investment for brand development and innovation. Warehouse and administrative expense increased$28.8 million , or 18.4%, to$185.5 million for the six months endedMarch 26, 2022 from$156.7 million for the six months endedMarch 27, 2021 . The increased expense was driven by the addition of our four fiscal 2021 acquisitions in the Garden segment. Additionally, both operating segments experienced increased labor, delivery, fuel and rent rates due to the current inflationary environment. Corporate expenses increased$4.9 million due primarily to increased payroll related costs, non-cash equity compensation and medical insurance expense. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resources, and information technology functions.
Operating Income
Operating income increased$1.4 million to$133.1 million for the six months endedMarch 26, 2022 from$131.7 million for the six months endedMarch 27, 2021 . Our operating margin decreased to 8.2% for the six months endedMarch 26, 2022 from 8.6% for the six months endedMarch 27, 2021 . Increased sales and a 130 basis point improvement in gross margin was more than offset by a 180 basis point increase in selling, general and administrative expense. Pet operating income increased$0.3 million , or 0.3%, to$105.9 million for the six months endedMarch 26, 2022 from$105.6 million for the six months endedMarch 27, 2021 . Pet operating income increased due to increased sales and gross profit partially offset by higher selling, general and administrative expense. Pet operating margin declined 10 basis points as an improved gross margin was more than offset by higher selling, general and administrative expense as a percentage of net sales. Garden operating income increased$6.0 million to$76.6 million for the six months endedMarch 26, 2022 from$70.6 million for the six months endedMarch 27, 2021 . Garden operating income increased due to increased sales and gross profit partially offset by higher selling, general and administrative expense. Garden operating margin declined 60 basis points to 11.2% due to higher selling, general and administrative expense as a percentage of net sales which more than offset the favorable impact of increased sales and a higher gross margin.
Corporate operating expense increased
Net Interest Expense
Net interest expense for the six months endedMarch 26, 2022 decreased$1.8 million , or 5.9%, to$29.1 million from$30.9 million for the six months endedMarch 27, 2021 . In the prior year six-month period, we issued$500 million aggregate principal amount of 4.125% senior notes dueOctober 2030 and used the proceeds to redeem all of our outstanding aggregate principal amount 6.125% senior notes due 2023 with the remainder available for general corporate purposes. As a result of our redemption of the 2023 Notes, we recognized incremental interest expense in the prior year six-month period of approximately$10.0 million . Partially offsetting the reduction from the prior year's incremental interest expense was increased interest expense in the current year quarter related to our issuance inApril 2021 of$400 million aggregate principal amount of 4.125% senior notes dueApril 2031 .
Debt outstanding on
27
--------------------------------------------------------------------------------Other Income (Expense)
Other income (expense) was an expense of$0.6 million for the six-month period endedMarch 26, 2022 compared to income of$1.5 million for the six-month period endedMarch 27, 2021 , due primarily to foreign currency losses in the current six-month period as compared to gains in the prior six-month period.
Income Taxes
Our effective income tax rate was 23.1% for the six-month period endedMarch 26, 2022 compared to 22.5% for the six-month period endedMarch 27, 2021 . The increase in our effective income tax rate was due primarily to increased foreign earnings in higher tax rate jurisdictions.
Net Income and Earnings Per Share
Our net income for the six months endedMarch 26, 2022 was$78.7 million , or$1.44 per diluted share, compared to$78.6 million , or$1.43 per diluted share, for the six months endedMarch 27, 2021 .
Use of Non-GAAP Financial Measures
We report our financial results in accordance with accounting principles generally accepted inthe United States (GAAP). However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including non-GAAP net income and diluted net income per share, adjusted EBITDA and organic sales. Management believes these non-GAAP financial measures that exclude the impact of specific items (described below) may be useful to investors in their assessment of our ongoing operating performance and provide additional meaningful comparisons between current results and results in prior operating periods. Adjusted EBITDA is defined by us as income before income tax, net other expense, net interest expense, depreciation and amortization and stock-based compensation (or operating income plus depreciation and amortization and stock-based compensation expense). We present adjusted EBITDA because we believe that adjusted EBITDA is a useful supplemental measure in evaluating the cash flows and performance of our business and provides greater transparency into our results of operations. Adjusted EBITDA is used by our management to perform such evaluation. Adjusted EBITDA should not be considered in isolation or as a substitute for cash flow from operations, income from operations or other income statement measures prepared in accordance with GAAP. We believe that adjusted EBITDA is frequently used by investors, securities analysts and other interested parties in their evaluation of companies, many of which present adjusted EBITDA when reporting their results. Other companies may calculate adjusted EBITDA differently and it may not be comparable.
We have also provided organic net sales, a non-GAAP measure that excludes the impact of businesses purchased or exited in the prior 12 months, because we believe it permits investors to better understand the performance of our historical business without the impact of recent acquisitions or dispositions.
The reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below. We believe that the non-GAAP financial measures provide useful information to investors and other users of our financial statements by allowing for greater transparency in the review of our financial and operating performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating our performance, and we believe these measures similarly may be useful to investors in evaluating our financial and operating performance and the trends in our business from management's point of view. While our management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our GAAP financial results and should be read in conjunction with those GAAP results.
Non-GAAP financial measures reflect adjustments based on the following items:
•Incremental expenses from note redemption and issuance: we have excluded the
impact of the incremental expenses incurred from the note redemption and
issuance as they represent an infrequent transaction that occurs in limited
circumstances that impacts the comparability between operating periods. We
believe the adjustment of these expenses supplements the GAAP information with a
measure that may be used to assess the sustainability of our operating
performance.
•Loss on sale of business: we have excluded the impact of the loss on the sale
of a business as it represents an infrequent transaction that occurs in limited
circumstances that impacts the comparability between operating periods. We
believe the adjustment of this loss supplements the GAAP information with a
measure that may be used to assess the sustainability of our operating
performance.
28
--------------------------------------------------------------------------------From time to time in the future, there may be other items that we may exclude if we believe that doing so is consistent with the goal of providing useful information to investors and management.
The non-GAAP adjustments reflect the following:
(1)During the first quarter of fiscal 2021, we issued$500 million aggregate principal amount of 4.125% senior notes dueOctober 2030 . We used a portion of the proceeds to redeem all of our outstanding 6.125% senior notes due 2023. As a result of our redemption of the 2023 Notes, we incurred incremental expenses of approximately$10.0 million , comprised of a call premium payment of$6.1 million , overlapping interest expense of approximately$1.4 million and a$2.5 million non-cash charge for the write-off of unamortized financing costs. These amounts are included in Interest expense in the condensed consolidated statements of operations.
(2)During the first quarter of fiscal 2021, we recognized a loss of
GAAP to Non-GAAP Reconciliation
For the Three Months Ended For the Six Months Ended
Net Income and Diluted Net Income Per
Share Reconciliation March 26, 2022
(in thousands, except per share amounts)
GAAP net income attributable to
Central Garden & Pet Company $ 69,713 $
72,954
(1) - - - 9,952
Loss on sale of business (2) - - - 2,611
Tax effect of incremental expenses,
loss on sale and impairment $ - $ - - (2,821)
Non-GAAP net income attributable to
Central Garden & Pet Company $ 69,713 $
72,954
$ 1.27 $
1.32
1.32 $ 1.44 $ 1.61
Shares used in GAAP and non-GAAP
diluted net earnings per share
calculation 54,722 55,156 54,818 54,930
Organic Net Sales Reconciliation
We have provided organic net sales, a non-GAAP measure that excludes the impact of recent acquisitions and dispositions, because we believe it permits investors to better understand the performance of our historical business. We define organic net sales as net sales from our historical business derived by excluding the net sales from businesses acquired or exited in the preceding 12 months. After an acquired business has been part of our consolidated results for 12 months, the change in net sales thereafter is considered part of the increase or decrease in organic net sales. Consolidated
GAAP to Non-GAAP Reconciliation
For Three Months Ended March 26, 2022 For the Six Months Ended March 26, 2022
Effect of Effect of
acquisition & acquisition &
divestitures on divestitures on
increase in net Net sales increase in net Net sales
Net sales (GAAP) sales organic Net sales (GAAP) sales organic
(in millions)
Q2 FY 22 $ 954.4 $ 51.8 $ 902.6 $ 1,615.8 $ 121.8 $ 1,494.0
Q2 FY 21 935.3 - 935.3 1,527.5 3.9 1,523.6
$ increase (decrease) $ 19.1 $ (32.7) $ 88.3 $ (29.6)
% increase (decrease) 2.0 % (3.5) % 5.8 % (1.9) %
29-------------------------------------------------------------------------------- Pet
GAAP to Non-GAAP Reconciliation
For Three Months Ended March 26, 2022 For the Six Months Ended March 26, 2022
Effect of Effect of
acquisition & acquisition &
divestitures on divestitures on
increase in net Net sales Net sales increase in net Net sales
Net sales (GAAP) sales organic (GAAP) sales organic
(in millions)
Q2 FY 22 $ 497.7 $ - $ 497.7 $ 933.7 $ - $ 933.7
Q2 FY 21 492.0 - 492.0 928.4 3.9 924.5
$ increase $ 5.7 $ 5.7 $ 5.3 $ 9.2
% increase 1.2 % 1.2 % 0.6 % 1.0 %
Garden GAAP to Non-GAAP Reconciliation
For Three Months Ended March 26, 2022 For the Six Months Ended March 26, 2022
Effect of Effect of
acquisition & acquisition &
divestitures on divestitures on
increase in net Net sales increase in net Net sales
Net sales (GAAP) sales organic Net sales (GAAP) sales organic
(in millions)
Q2 FY 22 $ 456.7 $ 51.8 $ 404.9 $ 682.1 $ 121.8 $ 560.3
Q2 FY 21 443.3 - 443.3 599.1 - 599.1
$ increase (decrease) $ 13.4 $ (38.4) $ 83.0 $ (38.8)
% increase (decrease) 3.0 % (8.7) % 13.9 % (6.5) %
Adjusted EBITDA Reconciliation GAAP to Non-GAAP Reconciliation
For the
Three Months Ended
Garden Pet Corp Total
(in thousands)
Net income attributable to Central Garden
& Pet Company $ - $ - $ - $ 69,713
Interest expense, net - - - 14,702
Other expense - - - 369
Income tax expense - - - 21,488
Net income attributable to
noncontrolling interest - - - 573
Sum of items below operating income - - - 37,132 Income (loss) from operations$ 70,511 $ 60,645 $ (24,311) $ 106,845 Depreciation & amortization 7,719 9,539 989 18,247 Noncash stock-based compensation - - 6,292 6,292 Adjusted EBITDA$ 78,230 $ 70,184 $ (17,030) $ 131,384 30
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GAAP to Non-GAAP Reconciliation
Adjusted EBITDA Reconciliation For the
Three Months Ended
Garden Pet Corp Total
(in thousands)
Net income attributable to Central Garden
& Pet Company $ - $ - $ - $ 72,954
Interest expense, net - - - 10,151
Other income - - - (704)
Income tax expense - - - 21,564
Net income attributable to
noncontrolling interest - - - 645
Sum of items below operating income -
- - 31,656
Income (loss) from operations $ 65,962 $ 62,058 $ (23,410) $ 104,610
Depreciation & amortization 8,804 8,882 1,168 18,854
Noncash stock-based compensation - - 5,725 5,725
Adjusted EBITDA $ 74,766 $ 70,940 $ (16,517) $ 129,189
Adjusted EBITDA Reconciliation GAAP to Non-GAAP Reconciliation
For the
Six Months Ended
Garden Pet Corp Total
(in thousands)
Net income attributable to Central Garden
& Pet Company $ - $ - $ - $ 78,722
Interest expense, net - - - 29,110
Other expense - - - 578
Income tax expense - - - 23,889
Net income attributable to
noncontrolling interest - - - 760
Sum of items below operating income -
- - 54,337
Income (loss) from operations $ 76,568 $ 105,896 $ (49,405) $ 133,059
Depreciation & amortization 17,339 19,088 2,022 38,449
Noncash stock-based compensation - - 11,479 11,479
Adjusted EBITDA $ 93,907 $ 124,984 $ (35,904) $ 182,987
GAAP to Non-GAAP Reconciliation
Adjusted EBITDA Reconciliation For the
Six Months Ended
Garden Pet Corp Total
(in thousands)
Net income attributable to Central Garden
& Pet Company $ - $ - $ - $ 78,567
Interest expense, net - - - 30,920
Other income - - - (1,456)
Income tax expense - - - 22,945
Net income attributable to
noncontrolling interest - - - 674
Sum of items below operating income -
- - 53,083
Income (loss) from operations $ 70,613 $ 105,583 $ (44,546) $ 131,650
Depreciation & amortization 11,442 17,967 2,360 31,769
Noncash stock-based compensation - - 10,394 10,394
Adjusted EBITDA $ 82,055 $ 123,550 $ (31,792) $ 173,813
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Inflation
Our revenues and margins are dependent on various economic factors, including rates of inflation, energy costs, 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 related to inflation, 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 fiscal 2022, we have continued to experience increasing inflationary pressure stemming in part from the COVID-19 operating environment, including notable increases in costs for key commodities, labor and freight.
Weather and Seasonality
Our sales of lawn and garden products are influenced by weather and climate conditions in the different markets we serve. Our Garden segment's business is highly seasonal. In fiscal 2021, approximately 69% of our Garden segment's net sales and 60% 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 more than offset the operating loss incurred 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. Our lawn and garden businesses are highly seasonal with approximately 69% 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 the peak consumer buying periods. To encourage retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.
Operating Activities
Net cash used by operating activities increased by$151.9 million , from$120.2 million for the six months endedMarch 27, 2021 , to$272.1 million for the six months endedMarch 26, 2022 . The increase in cash used by operating activities was due primarily to changes in our working capital accounts for the period endedMarch 26, 2022 , as compared to the prior year period, predominantly an increase in inventory resulting from an intentional build-up in inventory due to the increased demand for our products amid the continuing global supply chain issues, as well as increased input costs.
Investing Activities
Net cash used in investing activities decreased$688.2 million , from$765.4 million for the six months endedMarch 27, 2021 to$77.2 million during the six months endedMarch 26, 2022 . The decrease in cash used in investing activities was due primarily to the three acquisitions in the prior six-month period, partially offset by an increase in capital expenditures of$41.8 million in the current year compared to the prior year. During the first quarter of fiscal 2021, we acquired DoMyOwn for approximately$81 million . During the second quarter of fiscal 2021, we acquiredHopewell Nursery onDecember 31, 2020 for approximately$81 million and Green Garden Products onFebruary 11, 2021 for approximately$571 million . 32 --------------------------------------------------------------------------------
Financing Activities
Net cash used by financing activities increased$293.5 million , from$270.5 million of cash provided for the six months endedMarch 27, 2021 , to$23.0 million of cash used for the six months endedMarch 26, 2022 . The increase in cash used by financing activities during the current year was due primarily to the issuance of$500 million of our 2030 Notes inOctober 2020 and net borrowings under our senior secured credit facility of$190 million in the prior year period, partially offset by the repayment of our 2023 Notes and the corresponding premium paid on extinguishment inNovember 2020 , as well as debt issuance costs incurred on the issuance of the 2030 Notes. We also recommenced open market purchases of our common stock during the current year period. During the six months endedMarch 26, 2022 , we repurchased approximately 0.4 million shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately$16.1 million , or approximately$42.30 per share. During the six months endedMarch 27, 2021 , we did not make any open market purchases of our common stock. We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our$750 million Amended Credit Facility. Based on our anticipated cash needs, availability under our asset backed revolving credit 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 and capital expenditure 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 also investment in our continued implementation of a scalable enterprise-wide information technology platform, will be approximately$115 million to$125 million in fiscal 2022, of which we have invested approximately$75 million throughMarch 26, 2022 . 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.
Total Debt
At
Senior Notes
Issuance of
In
We incurred approximately$6 million of debt issuance costs in conjunction with this issuance, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2031 Notes. The 2031 Notes require semi-annual interest payments onApril 30 andOctober 30 , which commencedOctober 30, 2021 . The 2031 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 Amended Credit Facility. The 2031 Notes were issued in a private placement under Rule 144A and will not be registered under the Securities Act of 1933. We may redeem some or all of the 2031 Notes at any time, at our option, prior toApril 30, 2026 at the principal amount plus a "make whole" premium. At any time prior toApril 30, 2024 , we may also redeem, at our option, up to 40% of the notes with the proceeds of certain equity offerings at a redemption price of 104.125% of the principal amount of the notes. We may redeem some or all of the 2031 Notes at our option, at any time on or afterApril 30, 2026 for 102.063%, on or afterApril 30, 2027 for 101.375%, on or afterApril 30, 2028 for 100.688% and on or afterApril 30, 2029 for 100.0%, plus accrued and unpaid interest. The holders of the 2031 Notes have the right to require us to repurchase all or a portion of the 2031 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 specific kinds of changes of control.
The 2031 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
33
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Issuance of
InOctober 2020 , we issued$500 million aggregate principal amount of 4.125% senior notes dueOctober 2030 (the "2030 Notes"). InNovember 2020 , we used a portion of the net proceeds to redeem all of our outstanding 6.125% senior notes dueNovember 2023 (the "2023 Notes") at a redemption price of 101.531% plus accrued and unpaid interest, and to pay related fees and expenses, with the remainder for general corporate purposes. We incurred approximately$8.0 million of debt issuance costs associated with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2030 Notes. As a result of our redemption of the 2023 Notes, we incurred a call premium payment of$6.1 million , overlapping interest expense for 30 days of approximately$1.4 million and a$2.5 million non-cash charge for the write-off of unamortized deferred financing costs related to the 2023 Notes. These amounts are included in interest expense in the condensed consolidated statements of operations. The 2030 Notes require semiannual interest payments onOctober 15 andApril 15 . The 2030 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 or guarantee our other debt. We may redeem some or all of the 2030 Notes at any time, at our option, prior toOctober 15, 2025 at a price equal to 100% of the principal amount plus a "make-whole" premium. Prior toOctober 15, 2023 , we may redeem up to 40% of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of 104.125% of the principal amount of the notes. We may redeem some or all of the 2030 Notes, at our option, in whole or in part, at any time on or afterOctober 15, 2025 for 102.063%, on or afterOctober 15, 2026 for 101.375%, on or afterOctober 15, 2027 for 100.688% and on or afterOctober 15, 2028 for 100.0%, plus accrued and unpaid interest. The holders of the 2030 Notes have the right to require us to repurchase all or a portion of the 2030 Notes at a purchase price equal to 101.0% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2030 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
InDecember 2017 , we issued$300 million aggregate principal amount of 5.125% senior notes dueFebruary 2028 (the "2028 Notes"). We used the net proceeds from the offering to finance acquisitions and for general corporate purposes. We incurred approximately$4.8 million of debt issuance costs in conjunction with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2028 Notes. The 2028 Notes require semiannual interest payments onFebruary 1 andAugust 1 . The 2028 Notes are unconditionally guaranteed on a senior basis by our existing and future domestic restricted subsidiaries who are borrowers under or guarantors of our senior secured revolving credit facility or who guarantee the 2030 Notes. We may redeem some or all of the 2028 Notes at any time, at our option, prior toJanuary 1, 2023 at the principal amount plus a "make whole" premium. We may redeem some or all of the 2028 Notes, at our option, at any time on or afterJanuary 1, 2023 for 102.563%, on or afterJanuary 1, 2024 for 101.708%, on or afterJanuary 1, 2025 for 100.854% and on or afterJanuary 1, 2026 for 100.0%, plus accrued and unpaid interest. The holders of the 2028 Notes have the right to require us to repurchase all or a portion of the 2028 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 2028 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
34
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OnDecember 16, 2021 , we entered into a Third Amended and Restated Credit Agreement ("Amended Credit Agreement"). The Amended Credit Agreement amended and restated the previous credit agreement datedSeptember 27, 2019 (the "Predecessor Credit Agreement"), and has been increased to provide for a$750 million principal amount senior secured asset-based revolving credit facility, with up to an additional$400 million principal amount available with the consent of the Lenders, as defined, if we exercise the uncommitted accordion feature set forth therein (collectively, the "Amended Credit Facility"). The Amended Credit Facility matures onDecember 16, 2026 . 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 that is calculated using a formula based upon eligible receivables and inventory, and at our election, eligible real property, minus certain reserves. We did not draw down any commitments under the Amended Credit Facility upon closing. Proceeds of the Amended Credit Facility will be used for general corporate purposes. Net availability under the Amended Credit Facility was approximately$652 million as ofMarch 26, 2022 . The Amended Credit Facility includes a$50 million sublimit for the issuance of standby letters of credit and a$75 million sublimit for short-notice borrowings. As ofMarch 26, 2022 , there were no borrowings outstanding and no letters of credit outstanding under the Amended Credit Facility. There were other letters of credit of$1.3 million outstanding as ofMarch 26, 2022 . Borrowings under the Amended Credit Facility will bear interest at an index based on LIBOR (which will not be less than 0.00%) or, at our option, the Base Rate, plus, in either case, an applicable margin based on our usage under the credit facility. Base Rate is defined as the highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50%, (c) one-month LIBOR plus 1.00% and (d) 0.00%. The applicable margin for LIBOR-based borrowings fluctuates between 1.00%-1.50%, and was 1.00% as ofMarch 26, 2022 , and such applicable margin for Base Rate borrowings fluctuates between 0.00%-0.50%, and was 0% as ofMarch 26, 2022 . An unused line fee shall be payable quarterly in respect of the total amount of the unutilized Lenders' commitments and short-notice borrowings under the Amended Credit Facility. Letter of credit fees at the applicable margin on the average undrawn and unreimbursed amount of letters of credit shall be payable quarterly and a facing fee of 0.125% shall be payable quarterly for the stated amount of each letter of credit. We are also required to pay certain fees to the administrative agent under the Amended Credit Facility. The Amended Credit Facility provides for the transition from LIBOR to SOFR and does not require an amendment in connection with such transition. As ofMarch 26, 2022 , the applicable interest rate related to Base Rate borrowings was 3.3%, and the applicable interest rate related to one-month LIBOR-based borrowings was 1.4%. We incurred approximately$2.4 million of debt issuance costs in conjunction with this transaction, which included lender fees and legal expenses. The debt issuance costs are being amortized over the term of the Amended Credit Facility. The Amended Credit Facility continues to contain customary covenants, including financial covenants which require us to maintain a minimum fixed charge coverage ratio of 1:1 upon triggered quarterly testing (e.g. when availability falls below certain thresholds established in the agreement), reporting requirements and events of default. The Amended Credit Facility is secured by substantially all assets of the borrowing parties, including (i) pledges of 100% of the stock or other equity interest of each domestic subsidiary that is directly owned by such entity and (ii) 65% of the stock or other equity interest of each foreign subsidiary that is directly owned by such entity, in each case subject to customary exceptions. We were in compliance with all financial covenants under the Amended Credit Facility during the period endedMarch 26, 2022 .
Summarized Financial Information for Guarantors and the Issuer of
Central (the "Parent/Issuer") issued$400 million of 2031 Notes inApril 2021 ,$500 million of 2030 Notes inOctober 2020 , and$300 million of 2028 Notes inDecember 2017 . The 2031 Notes, 2030 Notes and 2028 Notes are fully and unconditionally guaranteed on a joint and several senior basis by each of our existing and future domestic restricted subsidiaries (the "Guarantors") which are guarantors of our senior secured revolving credit facility ("Credit Facility"). The 2031 Notes, 2030 Notes and 2028 Notes are unsecured senior obligations and are subordinated to all of our existing and future secured debt, including our Amended Credit Facility, to the extent of the value of the collateral securing such indebtedness. There are no significant restrictions on the ability of the Guarantors to make distributions to the Parent/Issuer. Certain subsidiaries and operating divisions of the Company do not guarantee the 2031, 2030 or 2028 Notes and are referred to as the Non-Guarantors. The Guarantors jointly and severally, and fully and unconditionally, guarantee the payment of the principal and premium, if any, and interest on the 2031, 2030 and 2028 Notes when due, whether at stated maturity of the 2031, 2030 and 2028 Notes, by acceleration, call for redemption or otherwise, and all other obligations of the Company to the holders of the 2031, 2030 and 2028 Notes and to the trustee under the indenture governing the 2031, 2030 and 2028 Notes (the "Guarantee"). The Guarantees are senior unsecured obligations of each Guarantor and are of equal rank with all other existing and future senior indebtedness of the Guarantors. The obligations of each Guarantor under its Guarantee shall be limited to the maximum amount as well, after giving effect to all other contingent and fixed liabilities of such Guarantor and to any collections from or payments made by or on behalf of any other Guarantor in 35 --------------------------------------------------------------------------------
respect of the obligations of such Guarantor under the guarantee not constituting a fraudulent conveyance or fraudulent transfer under Federal or state law.
The Guarantee of a Guarantor will be released:
(1) upon any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation), in accordance with the governing indentures, to any person other than the Company;
(2) if such Guarantor merges with and into the Company, with the Company surviving such merger;
(3) if the Guarantor is designated as an Unrestricted Subsidiary; or
(4) if the Company exercises its legal defeasance option or covenant defeasance
option or the discharge of the Company's obligations under the indentures in
accordance with the terms of the indentures.
The following tables present summarized financial information of the
Parent/Issuer subsidiaries and the Guarantor subsidiaries. All intercompany
balances and transactions between subsidiaries under Parent/Issuer and
subsidiaries under the Guarantor have been eliminated. The information presented
below excludes eliminations necessary to arrive at the information on a
consolidated basis. In presenting the summarized financial statements, the
equity method of accounting has been applied to the Parent/Issuer's interests in
the Guarantor Subsidiaries. The summarized information excludes financial
information of the Non-Guarantors, including earnings from and investments in
these entities.
Summarized Statements of
Operations
Six Months Ended Fiscal Year Ended
March 26, 2022 September 25, 2021
Parent/Issuer Guarantors Parent/Issuer Guarantors
(in thousands)
Net sales $ 420,651 $ 1,102,518 $ 908,599 $ 2,142,925
Gross profit $ 97,911 $ 360,871 $ 205,837 $ 686,332
Income (loss) from operations $ 1,069 $ 135,416 $ 4,382 $ 229,961
Equity in earnings of Guarantor $ 104,201 $ - $ 183,122 $ -
subsidiaries
Net income (loss) $ (21,444) $ 104,201 © Edgar Online, source
