Passionately caring for the Gardens and Pets we all love
Annual Report 2016
Central Garden & Pet Company is a leading innovator, marketer and
producer of quality branded products for consumer and professional
use in the lawn and garden and pet supplies markets.
The cover photos feature our employee’s pets and gardens. A special thank you to:
Jeremy Foster, Andrea Fuller, Karen Gregg, Alan Hines, Denise Kartman, Vickie McClain, Jennelle McDonald,
Lauren Sohnen, Penny Strozier & Paul Vanasse
Designed by Darren Savage
To our Shareholders:
I was fortunate to take the reigns as President and CEO of Central Garden & Pet at the
tail end of what was a very successful 2016. Having already served as a board member at
the company for 16 months, I saw first-hand the tangible progress that we were making.
Organic sales were growing, cost reduction efforts were yielding material savings, and
the impact from recent acquisitions was adding significant value to the top and bottom
lines.
The momentum generated and the progress made by the company in 2016 was evidenced
by revenue growth of 11%, a third of which was organic. It was also evident in our
operating margins which rose 100 basis points, GAAP and non-GAAP EPS which
increased 36% and 70% respectively, and in free cash flow generated that almost
doubled. Strategically, the company successfully executed on our Customer First
initiative, introduced meaningful new innovation, and lowered costs to fuel profit growth.
Central also continued to positively position its business portfolio for the future,
acquiring the leading U.S. pet bedding company and divesting an unprofitable holiday
décor business. Central Garden & Pet ended the year in strong financial shape with a
leverage ratio of 2.2x and a significant cash balance. Simply put, the company performed
well during the year and positioned itself for continued prosperity in the years ahead.
This success is a direct result of Central’s dedicated and talented employees. During my
tenure as CEO, I have been more intimately exposed to the employee base, who exhibit
tremendous insight into and passion for our businesses. I have walked along
manufacturing lines and met with sales team members and have witnessed their pride,
expertise and commitment to producing and selling products that enhance the lives of
gardeners and pet owners. It would be an understatement to say that our employees are
the drivers to our success.
Going forward, Central will build on the foundation put into place by my predecessor,
John Ranelli. We will focus on continuing the momentum of solid revenue and earnings
growth by concentrating on our key strategic imperatives: Attract, Retain and Develop
Exceptional Employees; Accelerate the Growth Momentum of Our Portfolio; Build on
Strong Customer Relationships; Increase Innovation Output and Success Rates; and
Drive Cost Savings and Productivity Improvements to Fuel Growth. A key to these
strategies is having a three year line-of-sight on the inventory of initiatives designed to
drive these imperatives in order to have sustained success well into the future.
A key element of driving portfolio growth momentum is about clearly defining the role of
each business in the portfolio, and aligning the business’ strategy and plans to support
that role. This process will enable greater focus and overall company growth. In addition,
we will seek to acquire businesses that are accretive to our growth and exit businesses if
we cannot find a path to consistent profitablity.
Central will continue to focus on meeting customer needs and operating with a customer
first mindset. As part of this, we will strive to increasingly bring to market more
meaningful innovation designed to drive profitable growth of our businesses, while also
expanding our retail partners’ categories. These growth initiatives will be funded by a
systematic, disciplined program of cost savings and productivity improvements.
Finally, all of this could not be accomplished without the great people of Central Garden
& Pet. We will continue to build our skills in attracting, retaining and developing talent in
an effort to continue to win in the marketplace and advance Central Garden & Pet as a
premier destination for the best team in the industry.
I am energized by the positive momentum of the business as exemplified by the terrific
2016 results; and even more importantly, by what the future holds as our team executes
the growth strategies and plans in the years ahead.
George Roeth
Use of Non-GAAP Financial Measures
We report our financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, to supplement the
financial results prepared in accordance with GAAP, we use non-GAAP financial measures including free cash flow and non-GAAP diluted net
income per share. Management believes these non-GAAP financial measures that exclude the impact of specific items 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. The reconciliations of these non-GAAP measures to the most directly comparable financial measures
calculated and presented in accordance with GAAP are shown on page 28 of the attached Form 10-K.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended September 24, 2016
Commission File Number 1-33268
CENTRAL GARDEN & PET COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
68-0275553
(IRS Employer Identification Number)
______________________________________________________
1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597
(Address of principal executive offices) (Zip Code)
Telephone Number: (925) 948-4000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class
Common Stock
Class A Common Stock
Name of Each Exchange on Which Registered
Nasdaq
Nasdaq
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes ¨ No ý
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes ¨ No ý
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. Yes ý 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). Yes ý No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this
chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or 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 ¨
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company)
Accelerated Filer ý
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 ¨ No ý
At March 26, 2016, the aggregate market value of the registrant’s Common Stock, Class A Common Stock and Class B
Stock held by non-affiliates of the registrant was approximately $156 million, $515 million and $100,000, respectively.
At November 18, 2016, the number of shares outstanding of the registrant’s Common Stock was 11,998.472 and the
number of shares of Class A Common Stock was 37,463,554. In addition, on such date, the registrant had outstanding
1,652,262 shares of its Class B Stock, which are convertible into Common Stock on a share-for-share basis.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Company’s 2017 Annual Meeting of Stockholders – Part III of this Form 10-K
Central Garden & Pet Company
Index to Annual Report on Form 10-K
For the fiscal year ended September 24, 2016
Item 1.
Business
Item 1A.
Item 1B.
Risk Factors
Unresolved Staff Comments
Item 2.
Properties
Legal Proceedings
Item 3.
Item 4. Mine Safety Disclosures
PART I
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
Item 10.
Item 11.
Quantitative and Qualitative Disclosure About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
PART III
Directors, Executive Officers and Corporate Governance
Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13.
Item 14.
Item 15.
Certain Relationships and Related Transactions, and Director Independence
Principal Accountant Fees and Services
PART IV
Exhibits and Financial Statement Schedules
Page
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FORWARD-LOOKING STATEMENTS
This Form 10-K includes “forward-looking statements.” Forward-looking statements include statements concerning our
plans, objectives, goals, strategies, future events, future revenues or performance, projected cost savings, capital expenditures,
financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy
and the trends we anticipate in the industries and markets in which we operate and other information that is not historical
information. When used in this Form 10-K, 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-K. Important factors that could cause our actual results to differ materially from
the forward-looking statements we make in this Form 10-K are set forth in this Form 10-K, 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 is 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. Presently known risk factors include, but are not limited to, the following factors:
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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;
the recent transition to a new CEO, and our dependence upon him and our other key executives;
risks associated with new product introductions, including the risk that our new products will not produce
sufficient sales to recoup our investment;
fluctuations in energy prices, fuel and related petrochemical costs;
declines in consumer spending during economic downturns;
inflation, deflation and other adverse macro-economic conditions;
supply shortages in pet birds, small animals and fish;
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.
ii
MARKET, RANKING AND OTHER DATA
The data included in this Form 10-K regarding markets and ranking, including the size of certain markets and our
position and the position of our competitors and products within these markets, are based on both independent industry
publications, including The Freedonia Group Lawn & Garden Consumables June 2016; The Freedonia Group Landscaping
Products August 2015; Packaged Facts U.S. Pet Market Outlook, 2016-2017 April 2016; Packaged Facts Pet Supplies in the
U.S. September 2015; Packaged Facts Pet Food in the U.S., 12th Edition March 2016; Packaged Facts Pet Treats and Chews in
the U.S. June 2015; American Pet Products Association (APPA) National Pet Owners Survey 2015-2016; U.S. Census Bureau,
and our estimates based on management’s knowledge and experience in the markets in which we operate. Our estimates have
been based on information provided by customers, suppliers, trade and business organizations and other contacts in the markets
in which we operate. While we are not aware of any misstatements regarding our market and ranking data presented herein, our
estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the
heading “Risk factors” in this Form 10-K. This information may prove to be inaccurate because of the method by which we
obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due
to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other
limitations and uncertainties inherent in a survey of market size. As a result, you should be aware that market, ranking and
other similar data included herein, and estimates and beliefs based on that data, may not be reliable. We cannot guarantee the
accuracy or completeness of such information contained herein.
iii
Item 1. Business
Our Company
PART I
BUSINESS
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 2015 was estimated by Packaged Facts to have been approximately $50.8 billion in annual
retail sales. We estimate the annual retail sales of the pet supplies and consumables and natural pet food markets in the
categories in which we participate to be approximately $30.1 billion. The total lawn and garden consumables and decorative
products industry in the United States is estimated to be approximately $25.0 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
$17.6 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, 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; weed, grass, ant and other herbicide, insecticide and pesticide products; and
decorative outdoor lifestyle 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 Lilly Miller®, Over-
N-Out®, Smart Seed® and The Rebels®.
In fiscal 2016, our consolidated net sales were $1,829 million, of which our Pet segment, or Pet, accounted for
approximately $1,082 million and our Garden segment, or Garden, accounted for approximately $747 million. In fiscal 2016,
our operating income was $129 million consisting of income from our Pet segment of $120 million, income from our Garden
segment of $70 million and corporate expenses of $61 million. See Note 18 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.
1
Recent Developments
Earnings per fully diluted share increased $0.23 per share to $0.87 per share and our operating income increased $37.9
million to $129.4 million as compared to fiscal 2015, due to increased earnings in both our segments and decreased corporate
expenses. Certain charges and gains impacting fiscal 2016 and 2015 are excluded for purposes of the non-GAAP presentation
elsewhere in this Form 10-K.
Financial summary:
Net sales for fiscal 2016 increased $178.3 million, or 10.8%, to $1,829.0 million. Our Pet segment sales
increased 20.9%, and our Garden segment sales declined 1.2%.
Gross profit for fiscal 2016 increased $65.0 million, or 13.3%, to $553.1 million from $488.1 million in fiscal
2015. Gross margin increased 60 basis points in fiscal 2016 to 30.2%, from 29.6% in 2015.
Our operating income increased $37.9 million, or 41.5%, to $129.4 million in fiscal 2016, and increased as a
percentage of net sales to 7.1% from 5.5%. Non-GAAP operating income increased $30.1 million, or 30.5%.
Net income was $44.5 million, or $0.87 per share on a fully diluted basis, compared to net income in fiscal
2015 of $32.0 million, or $0.64 per share on a fully diluted basis. Non-GAAP net income increased to $64.4
million, or $1.26 per share, in fiscal 2016 from $36.6 million, or $0.74 per share, in fiscal 2015.
Our net cash provided by operating activities was $151.4 million in fiscal 2016, compared to $87.4 million in
fiscal 2015.
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Leadership
George C. Roeth became our President and Chief Executive Officer effective June 1, 2016. Mr. Roeth has been a director
of Central since 2015.
Investment Impairment
During the fourth quarter of fiscal 2016, we recognized a non-cash impairment charge of $16.6 million related to our
investment in two joint ventures as a result of changes in marketplace conditions, which impacted the expected cash flows and
recoverability of the investment. The impairment is included within Other income (expense).
Debt Refinancing
Note Offering - In November 2015, we issued $400 million aggregate principal amount of 6.125% senior notes due
November 2023 (the “2023 Notes”). 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. We used the net proceeds from the offering, together with available cash, to redeem our outstanding 8.25% senior
subordinated notes due March 1, 2018 (the “2018 Notes”) and pay fees and expenses related to the offering. As a result of our
redemption of the 2018 Notes, we incurred incremental interest expense of $14.3 million in our fiscal 2016 first quarter,
comprised of approximately $8.3 million related to the payment of the call premium, a one-time payment of 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
financing costs in interest expense. We expect our annual interest expense on the 2023 Notes going forward to be
approximately $8.5 million less than under the 2018 Notes.
Asset-Based Loan Facility Amendment - In April 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 (collectively, the
“Amended Credit Facility”). The Amended Credit Facility matures on April 22, 2021.
DMC Acquisition
In December 2015, we purchased the pet bedding and certain other assets of National Consumers Outdoors Corp.,
formerly known as Dallas Manufacturing Company (“DMC”), for a cash purchase price of $61 million. This acquisition is
expected to complement our existing dog and cat business.
2
Subsequent Events
Segrest, Inc. Acquisition
In October 2016, we purchased Segrest Inc. for a purchase price of $60 million, of which $6 million is contingent upon
future events. Segrest is the leading wholesaler of aquarium fish and is expected to strengthen our position in the aquatics
category and provide the opportunity for synergies with our existing aquatics business.
Veterinary Products Business
In November 2016, we sold a small veterinary products division, which had sales of $8.6 million in fiscal 2016. The
business was not profitable over the last several years.
Competitive Strengths
We believe we have a number of competitive strengths, which serve as the foundation of our business strategy, including
the following:
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Market Leadership Positions Built on a Strong Brand Portfolio. We are one of the leaders in the U.S. pet
supplies market and in the U.S. consumer lawn and garden supplies market. We have a diversified portfolio
of brands, many of which we believe are among the leading brands in their respective U.S. market categories.
The majority of our brands have been marketed and sold for more than 25 years.
History of Innovative New Products and Customer Service. We continuously seek to introduce new products,
both as complementary extensions of existing product lines and as new product categories. Over the last three
years, we have received a number of awards for innovation, customer service and marketing. For innovation
in 2016, the Pet segment received awards at both Global Pet Expo and Super Zoo in the reptile category for
Zilla Turtle Trunk and in the aquatics category for Aqueon NeoGlow aquariums. Aqueon's OptiBright won
Pet Product News Editor's Choice award and both Aqueon Jukebox 5 aquarium kit and Herptile Habitat
Accessories for Zilla Turtle Trunk won the Pet Business Industry Recognition Award. Also in 2016, we won
Best in Show at Global Pet for the the small animal category for Kaytee Critter Trail LED. In 2015, we
received best new aquatic product at Global Pet Expo 2015 for the Aqueon Jukebox and a Product of the Year
awards in 2014 for the Adams Flea and Tick Home Spray. For customer service in 2016, we received Lowe's
Lawn & Garden Supplier of the Year award. Also in 2016, at the Wal*Mart Lawn & Garden Supplier
Summit, Central was recognized for both e-commerce and collaboration.
Strong Relationships with Retailers. We have developed strong relationships with major and independent
retailers, as well as e-commerce retailers, through product innovation, premium brands, broad product
offerings, private label programs, proprietary sales and logistics capabilities and a high level of customer
service. Major retailers value the efficiency of dealing with suppliers with national scope and strong brands.
Our ability to meet their unique needs for packaging and point of sale displays provides us with a competitive
advantage. Independent retailers value our high level of customer service and broad array of premium
branded products. We believe these strengths have made us one of the largest pet supplies vendors to
PetSmart, PETCO and Wal*Mart and among the largest lawn and garden supplies vendors to Wal*Mart,
Home Depot and Lowe’s, as well as a leading supplier to independent pet and garden supplies retailers in the
United States.
Favorable Long-Term Industry Characteristics. We believe the U.S. pet supplies market is expected to grow
over the long-term due to favorable demographic and leisure trends. The key demographics bolstering our
markets are the growth rates in the number of children under 18 and the number of adults over age 55.
Households with children tend to own more pets, and adults over 55 are more likely to be “empty nesters”
that keep pets as companions and have more disposable income and leisure time. According to the 2015-2016
APPA National Pet Owners Survey, the number of U.S. pet owners in recent years has reached record highs,
with 79.7 million households, or 65%, owning a pet.
Sales and Logistics Networks. We are a leading supplier to independent specialty retailers for the pet and
lawn and garden supplies markets through our sales and logistics networks. We believe our sales and logistics
networks give us a significant competitive advantage over other suppliers. These networks provide us with
key access to independent pet specialty retail stores and retail lawn and garden customers that require two-
step distribution for our branded products facilitating:
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acquisition and maintenance of premium shelf placement;
prompt product replenishment;
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customization of retailer programs;
quick responses to changing customer and retailer preferences;
rapid deployment and feedback for new products; and
immediate exposure for new internally developed and acquired brands.
We plan to continue to utilize our team of dedicated sales people and our sales and logistics
networks to expand sales of our branded products.
Business Strategy
Our objective is to increase market share, revenue, earnings and cash flow by enhancing our position as one of the
leading companies in the U.S. pet supplies and lawn and garden supplies industries. To achieve our objective, we plan to
capitalize on our strengths and favorable industry trends by implementing the following key elements of our business strategy:
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Balanced Organizational Change. We have adopted a balanced approach to improving profitability through a
focus on increasing sales and improving margins, providing superior customer service and innovative new
products while improving our operations and reducing costs. We expect to continue this balanced approach in
the future and to continue to focus on profit, our customers, and eliminating inefficiencies.
Build Existing Brands. With our broad product assortment, strong brand names, strong sell-through and
innovative products and packaging, we believe we can further strengthen our relationships with existing and
new retailers, as well as e-commerce retailers, to increase shelf space and sales. Under our master branding
strategy, we have consolidated certain brands and expanded others. At the same time, we are developing
private label programs for key retailers to complement our proprietary brands, strengthen our relationships
with key retailers and increase sales and profits. We believe that the strength of our major customers provides
us with a solid foundation for future growth. We intend to gain market share in the home centers, mass
market, grocery, specialty pet store and independent channels. We intend to add new retailers through
marketing and sales personnel dedicated to these channels, as well as our innovative product introductions
and packaging. We will continue to focus on using our sales and logistics network to emphasize sales of our
higher margin, proprietary brands and to use efficient supply chain capabilities that enable us to provide
retailers with high service levels and consistent in-stock positions.
Continue New Product and Packaging Innovation. We will continue to build and leverage the strength of our
leading brand names by introducing innovative new products and packaging, extending existing product lines
and entering new product categories. Our product strategy seeks to capitalize on fulfilling consumer needs,
leveraging our strong brand names, utilizing our established customer relationships and continuing our
history of product innovation.
Improve Profitability. We believe there are opportunities to improve our gross and operating profits through
increasing sales of our innovative branded products, acquiring new private label business and reducing and
leveraging our existing infrastructure. Although we focused more on achieving gross margin gains in the past
several years, we have shifted our focus to concentrate more on overall profitability than on any specific
gross margin targets. We have undertaken a number of initiatives to lower the cost of production, and believe
success in doing so will allow us to gain additional sales and increase our profitability.
Pursue Strategic Acquisitions. We plan to continue to make selected strategic acquisitions of companies that
complement our existing brands and product offerings. By leveraging our marketing, manufacturing and sales
and logistics capabilities, we believe we can increase the sales and improve the operating efficiencies of the
companies we acquire. We generally seek target companies with high quality and innovative product
offerings, an experienced management team and historical and projected organic earnings growth.
Reduce Our Investment In Working Capital. We believe there are opportunities to reduce our investment in
working capital over the long term by focusing on specific balance sheet metrics. In particular, we believe
that the improvement in our fill rates as a result of tighter linkage between our businesses and supply chain
will enable us to reduce our investment in inventory without compromising the level of the service we
provide to our customers. During fiscal 2014, we reduced our inventory level from $391.9 million to $326.4
million while maintaining high fill rates. Our inventory level at the end of fiscal 2015 and fiscal 2016
increased to $335.9 million and $362.0 million, respectively, as a result of acquisitions. Our inventory turns
have continued to improve as a result of our focus on our working capital.
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Products – General
The following table indicates each class of similar products which represented approximately 10% or more of our
consolidated net sales in the fiscal years presented (in millions).
Category
Other pet products
Garden controls and fertilizer products
Wild bird feed
Grass seed
Other garden supplies
Dog and cat products
Total
2016
2015
2014
$
$
689.3
298.8
183.6
(1)
331.3
326.0
1,829.0
$
$
594.7
286.3
193.2
(1)
343.5
233.0
1,650.7
$
$
774.2
262.5
202.1
183.1
182.5
(1)
1,604.4
(1) The product category was less than 10% of our consolidated net sales in the respective period.
Pet Segment
Overview
We are one of the leading marketers and producers of pet supplies in the United States. In addition, our Pet segment
operates one of the largest sales and logistics networks in the industry strategically supporting our brands. In fiscal 2016, Pet
segment net sales were $1,081.8 million and operating income was $119.9 million.
Industry Background
According to the Packaged Facts U.S. Pet Market Outlook, 2016 - 2017, the number of U.S. households with dogs or cats
in 2015 increased to nearly 54% from a previous range of 51-53% since 2011.
The pet industry includes food, supplies, veterinarian care, services and live animals. We operate primarily in the pet
supplies segment of the industry. This segment includes: products for dogs and cats, including edible bones, premium healthy
edible and non-edible chews, rawhide, toys, pet beds, pet carriers, grooming supplies and other accessories; products for birds,
small animals and specialty pets, including 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 and supplements, and information and knowledge resources; and products
for horses and livestock. Packaged Facts estimates the pet supplies segment was $14.5 billion in revenue in 2014, up 2.5% from
2013. We also operate in the natural category of dog and cat food and treats and chews.
We believe this industry growth is due in significant part to favorable demographic and leisure trends, which we expect to
continue, albeit potentially at a slower rate due to a lower rate of growth in the broader U.S. economy. The key demographics
bolstering the U.S. pet supplies market are the growth rates in the number of children under 18 and the number of adults over
age 55. According to 2012 U.S. interim census data, approximately 41% of the population is 45 years or older. Households with
children tend to own more pets, and adults over 55 are more likely to be “empty nesters” who keep pets as companions and
have more disposable income and leisure time available for pets. In addition, many pet supplies products (e.g., dog and cat
food, dog chews, bird food, grooming supplies, pest control, etc.) are routinely consumed and replenished. For example, as
many as 87% of dog owners and 68% of cat owners regularly purchase some type of treat.
The U.S. pet supplies market is highly fragmented with approximately 1,400 manufacturers, consisting primarily of small
companies with limited product lines. The majority of these manufacturers do not have a captive sales and logistics network
and must rely on us or other independent distributors to supply their products to regional pet specialty chains and independent
retailers. According to Packaged Facts, pet supplies sales increased 14.9% from 2010 to 2014. Sales are expected to increase an
additional 16% to $16.8 billion by 2019, indicating the strength of this category.
The pet food and supplies industry retail channel also remains fragmented, with approximately 7,800 independent pet
supply stores in the United States and only two national specialty retailers, PetSmart and PETCO. These two “pet superstores”
have grown rapidly, and pet products have also become a growing category in mass merchandisers, discounters, grocery outlets
and the e-commerce channel. PetSmart and PETCO typically offer the broadest product selection with competitive prices and a
growing array of pet services. Mass merchandisers, supermarkets and discounters have historically carried a limited product
assortment that features primarily pet food, but we believe these retailers are devoting more shelf space to meet increased
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consumer demand for premium pet supplies. Independent pet stores typically have a relatively broad product selection and
attempt to differentiate themselves by offering premier brands and knowledgeable service.
Proprietary Branded Pet Products
Our principal pet supplies categories are dog and cat, aquatics, bird and small animal, wild bird feed and animal health
products.
Dog & Cat. The dog and cat category, featuring the brands Nylabone, Four Paws, Cadet®, Dallas Manufacturing
Company (DMC), TFH Publications, Pet Select, Pet Love and Mikki®, is an industry leader in manufacturing and marketing
premium edible and non-edible chews, interactive toys, super premium dog and cat food, grooming supplies and pet-care print
and digital content.
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Nylabone is made in the United States and has a strong history of developing innovative products such as
NutriDent® Edible Dental Brush Chews, as well as numerous other award-winning dog toys and healthy
chews.
IMS is a manufacturer and supplier of a full-line of quality rawhide and other natural dog chews, and treats.
Four Paws Products include industry leaders in grooming and waste management products under the Wee
Wee and Magic Coat Brands.
DMC, the industry-leading dog & cat bed company and supplier to many of the largest retailers for private
label and branded bedding.
TFH Publications is a globally recognized publisher of both pet books and an aquatics magazine.
Breeder’s Choice, featuring the Pinnacle® and AvoDerm® brands, is a manufacturer of natural pet food and
treats.
Aquatics. We are a leading supplier of aquariums and related fixtures and furniture, water conditioners and supplements,
sophisticated lighting systems and accessories featuring the brands Aqueon, Zilla, Kent Marine, Coralife and Blagdon. In
October 2016, we purchased Segrest Inc., the leading wholesaler of aquarium fish.
Small Animal, Pet Bird & Wild Bird Feed. We are a leading marketer and producer of supplies and pet food for pet birds,
small animals and wild birds. We offer a full range of products including species specific diets, treats, habitats, bedding, hay
and toys under the Kaytee®, Forti-Diet and Critter Trail® brands. Kaytee is one of the most widely recognized and trusted
brands for birds and small animals.
Animal Health. We are a leading marketer and producer of flea, tick, mosquito and other insect control products produced
by Wellmark International and sold primarily under the Bio Spot Active Care™, Adams, Altosid, Pre Strike and Extinguish®
brand names. Wellmark is the only domestic producer of (S)-Methoprene, which is an active ingredient to control mosquitoes,
fleas, ticks, ants and mites in many professional and consumer insect control applications. We also sell (S)-Methoprene to
manufacturers of other insect control products, including Frontline Plus. In addition, through our Farnam operations, we are a
leading manufacturer and marketer of innovative health care products for horses. Farnam’s portfolio of industry leading brands
includes the Farnam umbrella brand, IverCare®, Bronco®, Super Mask® II, Endure®, Horseshoer’s Secret® and Vetrolin®.
Sales Network
Our domestic sales network exists to promote both our proprietary brands and third party partner brands. It provides
value-added service to approximately 6,000 customers, the majority of which are independent specialty stores with fewer than
10 locations. This includes acquisition and maintenance of premium shelf placement, prompt product replenishment,
customization of retailer programs, quick response to changing customer and retailer preferences, rapid deployment and
feedback for new products and immediate exposure for acquired brands. The combination of brands in the network supplied in
single shipments enables our independent customers to work with us on a cost effective basis to meet their pet supplies
requirements. We also operate a sales and logistics facility in the United Kingdom.
Sales and Marketing
Our sales strategy is multi-tiered and designed to capture maximum market share with retailers. Our customers include
retailers, such as club, regional and national specialty pet stores, independent pet retailers, mass merchants, grocery and drug
stores, as well as the e-commerce channel. In addition, we also serve the professional market with insect control and health and
wellness products for use by veterinarians, municipalities, farmers and equine product suppliers. Costco Wholesale accounted
for approximately 10% of our Pet segment's net sales in fiscal 2016. PetSmart and PETCO are also significant customers.
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To optimize our product placement and visibility in retail stores, our focused sales resources are segmented as follows:
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a sales organization operating by category and channel;
dedicated account teams servicing our largest customers;
a group of account managers focused on regional chains;
a geographic based group of territory managers dedicated to the independent retailer; and
a specialized group of account managers dedicated to the professional and equine markets.
These sales teams deliver our marketing strategy that is consumer, brand and channel driven. We provide value creation
with a focus on innovation, product quality and performance, premium packaging, product positioning and consumer value. We
collaborate closely with our customers to identify their needs, jointly develop strategies to meet those needs and deliver
programs that include print, broadcast, direct mail and digital execution.
Competition
The pet supplies industry is highly competitive and has experienced considerable consolidation coupled with the
emergence of the e-commerce channel in recent years. Our branded pet products compete against national and regional branded
products and private label products produced by various suppliers. Our largest competitors in most product categories are
Spectrum Brands and Hartz Mountain. The Pet segment competes primarily on the basis of brand recognition, innovation,
upscale packaging, quality and service. Our Pet segment’s sales and logistics operations compete with Animal Supply Co.,
Phillips Pet Food & Supplies and a number of smaller local and regional distributors, with competition based on product
selection, price, value-added services and personal relationships.
Garden Segment
Overview
We are a leading company in the consumer lawn and garden market in the United States and offer both premium and
value-oriented branded products. We market and produce a broad array of premium brands, including Pennington, The Rebels,
AMDRO, Lilly Miller, Ironite, Sevin, and Over-N-Out. We also produce value brands at lower prices, including numerous
private label brands. In addition, our Garden segment operates a sales and logistics network that strategically supports its
brands. In fiscal 2016, Garden segment net sales were $747.2 million and operating income was $70.3 million.
Industry Background
We believe that gardening is one of the most popular leisure activities in the United States. Although in the past, the
Garden segment has been adversely impacted by fluctuations in input costs and weather, more recently the impact has been
negligible. The Freedonia Group predicts that household participation in lawn and garden activities will rebound slightly
through 2020. The key demographic bolstering our lawn and garden market is the growth rate in the number of adults over age
55 which is projected to increase from 88 million in 2015 to 99 million in 2020. This age group is more likely to be “empty
nesters” and have more disposable income and leisure time available for garden activities. As the baby boom generation ages,
this segment is expected to grow faster than the total population. According to 2012 U.S. interim census data, approximately
41% of the population is 45 years or older. We believe that this demographic should increase the number of lawn and garden
product users. With more people gardening in their yards and the potential trends of food gardening and organic gardening, we
perceive this market as staying intact and showing slow positive growth. We estimate the retail sales of the lawn and garden
supplies industry in the categories in which we participate to be approximately $17.6 billion. We believe that the industry will
continue to grow, albeit at a slow rate.
Lawn and garden products are sold to consumers through a number of distribution channels, including home centers,
mass merchants, independent nurseries and hardware stores. Home and garden centers and mass merchants typically carry
multiple premium and value brands. Due to the rapid expansion and consolidation of mass merchants and home and garden
centers, the concentration of purchasing power for the lawn and garden category has increased dramatically. We expect the
growth of home and garden centers, such as Home Depot and Lowe’s, and mass merchants, such as Wal*Mart, to continue to
concentrate industry distribution.
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Proprietary Branded Lawn and Garden Products
Our principal lawn and garden product lines are grass seed, wild bird feed, insect control products, lawn and garden care
products and decorative outdoor patio products. Our Pennington brand is one of the largest in grass seed, pottery and wild bird
feed, and our Amdro brand is a leading portfolio of control products.
Grass Seed. We are a leading marketer, producer and distributor of numerous mixtures and blends of cool and warm
season turf grass for both the residential and professional markets, as well as forage and wild game seed mixtures. We sell these
products under the Pennington Seed, Pennington, Penkoted®, Max-Q®, ProSelectTM, Tournament Quality CM, MasterTurf®,
The Rebels and Smart Seed® brand names. We also produce numerous private label brands of grass seed. The Pennington grass
seed manufacturing facilities are some of the largest and most modern seed coating and conditioning facilities in the industry.
Wild Bird Products. We are a leading marketer, producer and distributor of wild bird feed, bird feeders, bird houses and
other birding accessories in the United States. These products are sold primarily under the Pennington brand name. Many of
our branded Kaytee and Pennington wild bird mixes are treated with a proprietary blend of vitamins and minerals. An example
is our Pennington brand mixes which are enriched with Bird-Kote®, our exclusive process which literally seals each seed with a
a nutritious coating containing vitamins and minerals that are beneficial to the health of wild birds.
Fertilizers and Controls. We are a leading marketer, producer and distributor of lawn and garden weed, moss, insect and
pest control products and soil supplements and stimulants. We sell these products under the AMDRO®, Lilly Miller, Moss
Out®, Corry’s®, IMAGE®, Sevin, Over-N-Out, Rootboost®, Knockout®, Strike® brand names and the Eliminator private label
for Wal*Mart. We manufacture several lines of lawn and garden fertilizers and soil supplements, in granular and liquid form,
under the Pennington, Alaska Fish Fertilizer®,, Pro Care, Green Care, Green Charm, Ironite and other private and controlled
labels.
Decor. We are a leading marketer and distributor of decorative indoor and outdoor pottery products in the United States.
These products, sold under the Pennington name, include terra cotta, stoneware, ceramic and porcelain pots. We also market a
complete line of wooden garden products, including planters, barrel fountains, arbors and trellises under the Pennington brand
name.
Sales Network
Our sales and logistics network exists primarily to promote our proprietary brands and provides us with key access to
retail stores for our branded products, acquisition and maintenance of premium shelf placement, prompt product replenishment,
customization of retailer programs, quick responses to changing customer and retailer preferences, rapid deployment and
feedback for new products, immediate exposure for acquired brands and comprehensive and strategic information. The network
also sells other manufacturers’ brands of lawn and garden supplies and combines these products with our branded products into
single shipments enabling our customers to deal with us on a cost-effective basis to meet their lawn and garden supplies
requirements.
Sales and Marketing
The marketing strategy for our premium products is focused on meeting consumer needs through product performance,
innovation, quality, upscale packaging and retail shelf placement. The marketing strategy for our value products is focused on
promotion of the quality and efficacy of our value brands at a lower cost relative to premium brands. Our customers include
retailers, such as mass merchants, home improvement centers, independent lawn and garden nurseries, drug and grocery stores,
and professional end users. Sales to Wal*Mart represented approximately 31%, 31% and 31%, sales to Lowe’s represented
approximately 20%, 18% and 15%, and sales to Home Depot represented approximately 19%, 16% and 17% of our Garden
segment’s net sales in fiscal 2016, 2015 and 2014, respectively.
To maximize our product placement and visibility in retail stores, we market our products through the following four
complementary strategies:
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dedicated sales forces represent our combined brand groups;
retail sales and logistics network, which provides in-store training and merchandising for our customers,
especially during the prime spring and summer seasons;
dedicated account-managers and sales teams located near and dedicated to serve several of our largest
customers; and
selected independent distributors who sell our brands.
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Competition
The lawn and garden products industry is highly competitive. Our lawn and garden products compete against national
and regional products and private label products produced by various suppliers. Our turf and forage grass seed products,
fertilizers, pesticides and combination products compete principally against products marketed by The Scotts Miracle-Gro
Company (“Scotts”). Scotts’ dominant position in the lawn and garden industry is a significant competitive disadvantage for
our garden products. In addition, Spectrum Brands is a strong competitor in yard and household insecticides. Our Garden
segment competes primarily on the basis of its strong premium and value brands, quality, service, price and low cost
manufacturing. Our Garden segment’s sales and logistics operations also compete with a large number of distributors, with
competition based on price, service and personal relationships.
Manufacturing
We manufacture the majority of our branded products in 33 manufacturing facilities, located primarily in the United
States. In addition, certain of our proprietary branded products are manufactured by contract manufacturers. We have also
entered into an exclusive arrangement with a third party to manufacture one of our registered active ingredients,
(S)‑Methoprene, for use in that third party’s flea and tick control products.
Purchasing
We purchase most of our raw materials from a number of different suppliers. In addition, we purchase one of the raw
materials used to manufacture (S)‑Methoprene from a single source of supply. We maintain an inventory of this raw material
(in addition to our (S)‑Methoprene inventory) to reduce the possibility of any interruption in the availability of (S)‑Methoprene,
but a prolonged delay in obtaining (S)‑Methoprene or this raw material could result in a temporary delay in product shipments
and have an adverse effect on our Pet segment’s financial results.
The key ingredients in our fertilizer and insect and weed control products are commodity and specialty chemicals,
including urea, potash, phosphates, herbicides, insecticides and fungicides.
The principal raw materials required for our wild bird feed operations are bulk commodity grains, including millet, milo
and sunflower seeds, which are generally purchased from large national commodity companies and local grain cooperatives. In
order to ensure an adequate supply of grains and seed to satisfy expected production volume, we enter into contracts to
purchase a portion of our expected grain and seed requirements at future dates by fixing the quantity, and often the price, at the
commitment date. Although we have never experienced a severe interruption of supply, we are exposed to price risk with
respect to the portion of our supply which is not covered by contracts with a fixed price.
In fiscal 2016, prices for some of our key inputs declined compared to fiscal 2015. Our fiscal 2016 and 2015 weighted
average cost per pound for our primary bird feed grains decreased slightly. In fiscal 2014, prices decreased 32% compared to
fiscal 2013. This followed a period where our commodity costs had increased for a number of years, including fiscal 2012 and
2013, when prices increased substantially. The recent decreases in commodity costs generally are reflected in lower prices to
our retailers.
Logistics Network
Our distribution network consists of 29 facilities strategically placed across the United States, one facility in the United
Kingdom and one facility in China to allow us to service both our mass market customers as well as our independent specialty
retail stores for our branded products. This network also supports distribution of many other manufacturers’ brands and
combines these products with our branded products into single shipments, enabling us to serve our customers in an effective
and cost efficient manner.
Significant Customers
Wal*Mart, our largest customer, represented approximately 15%, 16% and 17% of our total company net sales in fiscal
2016, 2015 and 2014, respectively. In addition, Lowe's, Home Depot, Costco, PetSmart and PETCO are also significant
customers, and together with Wal*Mart, accounted for approximately 42% of our net sales in fiscal 2016, 40% in fiscal 2015
and 41% in fiscal 2014.
Patents and Other Proprietary Rights
Our branded products companies hold numerous patents in the United States and in other countries and have several
patent applications pending. We consider the development of patents through creative research and the maintenance of an
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active patent program to be advantageous to our business, but we do not regard the holding of any particular patent as essential
to our operations.
In addition to patents, we have numerous active ingredient registrations, end-use product registrations and trade secrets,
including certain technology used in the Wellmark operations for the production of (S)-Methoprene, which has been licensed
from Novartis. This license is perpetual but non-exclusive. In addition, we have developed certain proprietary improvements
relating to the synthesis of (S)-Methoprene. The success of certain portions of our business, especially our animal health
operations, partly depends on our ability to continue to maintain trade secret information which has been licensed to us, and to
keep both licensed and owned trade secret information confidential.
Along with patents, active ingredient registrations, end use product registrations and trade secrets, we own a number of
trademarks, service marks, trade names and logotypes. Many of our trademarks are registered but some are not. We are not
aware of any reason we cannot continue to use our trademarks, service marks and trade names in the way that we have been
using them.
Employees
As of September 24, 2016, we had approximately 3,600 employees, of which approximately 3,400 were full-time
employees and 200 were temporary or part-time employees. We also hire substantial numbers of additional temporary
employees for the peak lawn and garden shipping season of February through June to meet the increased demand experienced
during the spring and summer months. The majority of our temporary employees are paid on an hourly basis. Except for 41
employees at a facility in Puebla, Mexico, none of our employees is represented by a labor union. We consider our relationships
with our employees to be good.
Environmental and Regulatory Considerations
Many of the products that we manufacture or distribute are subject to local, state, federal and foreign laws and regulations
relating to environmental matters. Such regulations are often complex and are subject to change. In the United States, all
pesticides must be registered with the United States Environmental Protection Agency (the “EPA”), in addition to individual
state and/or foreign agency registrations, before they can be sold. Fertilizer products are also subject to state Department of
Agriculture registration and foreign labeling regulations. Grass seed is also subject to state, federal and foreign labeling
regulations.
The Food Quality Protection Act ("FQPA"), establishes a standard for food-use pesticides, which is a reasonable certainty
that no harm will result from the cumulative effect of pesticide exposures. Under this Act, the EPA is evaluating the cumulative
risks from dietary and non-dietary exposures to pesticides. The pesticides in our products, which are also used on foods, will be
evaluated by the EPA as part of this non-dietary exposure risk assessment.
In addition, the use of certain pesticide and fertilizer products is regulated by various local, state, federal and foreign
environmental and public health agencies. These regulations may include requirements that only certified or professional users
apply the product or that certain products be used only on certain types of locations (such as “not for use on sod farms or golf
courses”), may require users to post notices on properties to which products have been or will be applied, may require
notification of individuals in the vicinity that products will be applied in the future or may ban the use of certain ingredients.
We believe we are operating in substantial compliance with, or taking action aimed at ensuring compliance with, these laws and
regulations.
Various federal, state and local laws, including the federal Food Safety Modernization Act (“FSMA”), also regulate pet
food products and give regulatory authorities the power to recall or require re-labeling of products. Several new FSMA
regulations became effective this past year and additional requirements will become effective in 2017. We believe we are in
substantial compliance with all currently effective requirements and are taking steps to ensure that we are in compliance with
all regulatory requirements going forward.
Various local, state, federal and foreign environmental laws also impose obligations on various entities to clean up
contaminated properties or to pay for the cost of such remediation, often upon parties that did not actually cause the
contamination. Accordingly, we may become liable, either contractually or by operation of law, for remediation costs even if
the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during
or prior to our ownership or operation of the property. With our extensive acquisition history, we have acquired a number of
manufacturing and distribution facilities, and most of these facilities have not been subjected to Phase II environmental tests to
determine whether they are contaminated.
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Environmental regulations may affect us by restricting the manufacturing or use of our products or regulating their
disposal. Regulatory or legislative changes may cause future increases in our operating costs or otherwise affect operations.
Although we believe we are and have been in substantial compliance with such regulations and have strict internal guidelines
on the handling and disposal of our products, there is no assurance that in the future we may not be adversely affected by such
regulations or incur increased operating costs in complying with such regulations. However, neither the compliance with
regulatory requirements nor our environmental procedures can ensure that we will not be subject to claims for personal injury,
property damages or governmental enforcement.
Executive Officers
The following table sets forth the name, age and position of our executive officers as of December 1, 2016.
Name
George C. Roeth
William E. Brown
Howard Machek
Michael A. Reed
George Yuhas
Age
Position
55 President & Chief Executive Officer
75 Chairman of the Board
53 Principal Financial Officer
68 Executive Vice President
64 General Counsel and Secretary
George C. Roeth. Mr. Roth became our President and Chief Executive Officer in June 2016. Mr. Roeth is a 27-year
veteran of The Clorox Company, most recently, from 2013 to 2014, serving as Chief Operating Officer and Executive Vice
President. Previously Mr. Roeth served as Senior Vice President and General Manager, during which time he was also
Chairman of the Board for the Clorox and Proctor & Gamble Joint Venture. Prior to that, Mr. Roeth served in senior-level
marketing and operating roles at Clorox, including Vice President and General Manager, Vice President of Growth and
Marketing, and Vice President of Brand Development among others.
William E. Brown. Mr. Brown has been our Chairman since 1980. From 1980 to June 2003 and from October 2007 to
February 2013, Mr. Brown served as our Chief Executive Officer. From 1977 to 1980, Mr. Brown was Senior Vice President of
the Vivitar Corporation with responsibility for Finance, Operations, and Research & Development. From 1972 to 1977, he was
with McKesson Corporation where he was responsible for its 200-site data processing organization. Prior to joining McKesson
Corporation, Mr. Brown spent the first 10 years of his business career at McCormick, Inc. in manufacturing, engineering and
data processing.
Howard Machek. Mr. Machek has been Principal Financial Officer since September 2016. Mr. Machek has served as our
Chief Accounting Officer since September 2015 and has been our Corporate Controller since 2001.
Michael A. Reed. Mr. Reed has been Executive Vice President since June 2000 and was President of the Garden Products
division from October 2007 to May 2012 and from January 2014 to September 2016. Mr. Reed served as President of the Pet
Products division from 2003 to 2004. Previously, Mr. Reed served as President and CEO of PM Ag Products, Inc., a wholly
owned subsidiary of global agri-business Tate & Lyle, PLC.
George Yuhas. Mr. Yuhas has been our General Counsel since March 2011 and our Secretary since September 2015.
From 1984 to March 2011, he was a partner specializing in litigation at Orrick, Herrington & Sutcliffe LLP.
Available Information
Our web site is www.central.com. We make available free of charge, on or through our website, our annual, quarterly and
current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing or furnishing
such reports with the Securities and Exchange Commission. Information contained on our web site is not part of this report.
Item 1A. Risk Factors.
This Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ
materially from those anticipated in these forward-looking statements as a result of factors both in and out of our control,
including the risks faced by us described below and elsewhere in this Form 10-K.
You should carefully consider the risks described below. In addition, the risks described below are not the only ones
facing us. We have only described the risks we consider to be material. However, there may be additional risks that are viewed
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by us as not material at the present time or are not presently known to us. Conditions could change in the future, or new
information may come to our attention that could impact our assessment of these risks.
If any of the events described below were to occur, our business, prospects, financial condition and/or results of
operations could be materially adversely affected. When we say below that something could or will have a material adverse
effect on us, we mean that it could or will have one or more of these effects. In any such case, the price of our common stock
could decline, and you could lose all or part of your investment in our company.
Our operating results and cash flow are susceptible to fluctuations.
We expect to continue to experience variability in our net sales, net income and cash flow on a quarterly basis. Factors
that may contribute to this variability include:
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seasonality and adverse weather conditions;
fluctuations in prices of commodity grains and other input costs;
operational problems;
shifts in demand for lawn and garden and pet products;
changes in product mix, service levels, marketing and pricing by us and our competitors;
the effect of acquisitions; and
economic stability and strength of our relationships with retailers.
These fluctuations could negatively impact our business and the market price of our common stock.
Seeds and grains we use to produce bird feed and grass seed are commodity products subject to price volatility that has had,
and could have, a negative impact on us.
Our financial results are partially dependent upon the cost of raw materials and our ability to pass along increases in these
costs to our customers. In particular, our Pennington and Kaytee businesses are exposed to fluctuations in market prices for
commodity seeds and grains used to produce bird feed. Historically, market prices for commodity seeds and grains have
fluctuated in response to a number of factors, including changes in United States government farm support programs, changes
in international agricultural and trading policies and weather conditions during the growing and harvesting seasons.
To mitigate our exposure to changes in market prices, we enter into purchase contracts for grains, bird feed and grass
seed to cover a limited portion of our purchase requirements for a selling season. Since these contracts cover only a portion of
our purchase requirements, as market prices for such products increase, our cost of production increases as well. In contrast, if
market prices for such products decrease, we may end up purchasing grains and seeds pursuant to the purchase contracts at
prices above market.
Our 2016 weighted average cost per pound for our primary bird feed grains decreased approximately 7% from fiscal
2015. In fiscal 2015, prices decreased 4% compared to fiscal 2014 and in fiscal 2014, prices decreased 32% compared to fiscal
2013. This followed a period where our commodity costs had increased for a number of years, including fiscal 2012 and 2013,
when prices increased substantially. The recent decreases in commodity costs are reflected in lower prices to our retailers.
Although we have been able to negotiate some price increases in the past with our retailers, it is possible that price
increases may not fully offset rising costs in the future, resulting in margin erosion. We can provide no assurance as to the
timing or extent of our ability to implement additional price adjustments in the event of increased costs in the future. Similarly,
we can provide no assurance of our ability to retain pricing with our retailers in the context of declining costs. We also cannot
predict to what extent price increases may negatively affect our sales volume. As retailers pass along price increases, consumers
may shift to our lower margin bird feed, switch to competing products or reduce purchases of wild bird feed products.
Our success depends upon our retaining and recruiting key personnel.
Our performance is substantially dependent upon the continued services of George C. Roeth, our new President and Chief
Executive Officer, and our senior management team. The loss of the services of these persons could have a material adverse
effect on our business unless adequate replacements are found. In September 2015, our Chief Financial Officer resigned. Our
future performance depends on our ability to attract and retain skilled employees, including a new Chief Financial Officer. We
cannot assure you that we will be able to retain our existing personnel or attract additional qualified employees in the future.
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We are subject to significant risks associated with innovation, including the risk that our new product innovations will not
produce sufficient sales to recoup our investment.
We believe that our future success will depend upon, in part, our ability to continue to improve our existing products
through product innovation and to develop, market and produce new products. We cannot assure you that we will be successful
in the introduction, marketing and production of any new products or product innovations, or that we will develop and
introduce in a timely manner improvements to our existing products which satisfy customer needs or achieve market
acceptance. Our failure to develop new products and introduce them successfully and in a timely manner could harm our ability
to grow our business and could have a material adverse effect on our business, results of operations and financial condition.
In December 2014, we invested $16 million in cash for a 50% interest in two newly formed entities that own rights to
commercialize products, covered by certain patents, technology and associated intellectual property rights in the fields of
animal health and pesticide applications. During the fourth quarter of fiscal 2016, we recognized a non-cash impairment charge
of $16.6 million related to our investment in these two joint ventures as a result of changes in marketplace conditions, which
have impacted the expected cash flows and recoverability of the investment.
We believe that the period of time to gain consumer acceptance of major innovations is longer in the garden industry
than in many industries, which compounds the risks generally associated with major new product innovations.
A decline in consumers’ discretionary spending or a change in consumer preferences could reduce our sales and harm our
business.
Our sales ultimately depend on consumer discretionary spending, which is influenced by factors beyond our control,
including general economic conditions, the availability of discretionary income and credit, weather, consumer confidence and
unemployment levels. Any material decline in the amount of consumer discretionary spending could reduce our sales and harm
our business. These economic and market conditions, combined with continuing difficulties in the credit markets and the
resulting pressures on liquidity, may also place a number of our key retail customers under financial stress, which would
increase our credit risk and potential bad debt exposure.
The success of our business also depends in part on our ability to identify and respond to evolving trends in
demographics and consumer preferences. Our failure to timely identify or effectively respond to changing consumer tastes,
preferences, spending patterns and lawn and garden and pet care needs could adversely affect the demand for our products and
our profitability.
Inflation, deflation, economic uncertainty and other adverse macro-economic conditions may harm our business.
Our revenues and margins are dependent on various economic factors, including rates of inflation or deflation, energy
costs, consumer attitudes toward discretionary spending, currency fluctuations, and other macro-economic factors which may
impact levels of consumer spending. If we are unable to pass through rising input costs and raise the price of our products, or
consumer confidence continues to weaken, we may experience gross margin declines.
Supply disruptions in pet birds, small animals and fish may negatively impact our sales.
The federal government and many state governments have increased restrictions on the importation of pet birds and the
supply of small animals. These restrictions have resulted in reduced availability of new pet birds and animals and thus reduced
demand for pet bird and small animal food and supplies. If these restrictions become more severe, or similar restrictions
become applicable to live pet fish, our future sales of these products would likely suffer, which would negatively impact our
profitability. In addition, some countries have experienced outbreaks of avian flu. While the number of cases worldwide has
declined, a significant outbreak in the United States would reduce demand for our pet and wild bird food and negatively impact
our financial results.
Our recently acquired Segrest subsidiary is the largest supplier of aquarium fish in the United States and also supplies pet
birds and small animals. The sale of fish, pet birds and small animals subjects us to additional risk, including risks associated
with sourcing, developing captive breeding programs, health of the fish, pet birds and small animals supplied by us and future
governmental regulation of the sale of fish, pet birds and small animals.
Our lawn and garden sales are highly seasonal and subject to adverse weather.
Because our lawn and garden products are used primarily in the spring and summer, the Garden business is seasonal. In
fiscal 2016, approximately 66.0% 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 generated in this period. Our working
capital needs and our borrowings generally peak in our second fiscal quarter, because we are generating lower revenues while
incurring expenses in preparation for the spring selling season. If cash on hand and borrowings under our credit facility are ever
13
insufficient to meet our seasonal needs or if cash flow generated during the spring and summer is insufficient to repay our
borrowings on a timely basis, this seasonality could have a material adverse effect on our business.
Because demand for lawn and garden products is significantly influenced by weather, particularly weekend weather
during the peak gardening season, our results of operations and cash flow could also be adversely affected by certain weather
patterns such as unseasonably cool or warm temperatures, heavy rains, water shortages or floods.
Rising energy prices could adversely affect our operating results.
During fiscal 2012, energy prices increased substantially, which resulted in increased fuel costs for our businesses and
increased raw materials costs for many of our branded products. Energy prices have significantly declined since then. Rising
energy prices in the future could adversely affect consumer spending and demand for our products and increase our operating
costs, both of which would reduce our sales and operating income.
We depend on a few customers for a significant portion of our business.
Wal*Mart, our largest customer, represented approximately 15%, 16% and 17% of our total company net sales in fiscal
2016, 2015 and 2014, respectively. In addition, Lowe's, Home Depot, Costco, PetSmart and PETCO are also significant
customers, and together with Wal*Mart, accounted for approximately 42% of our net sales in fiscal 2016, 40% in fiscal 2015
and 41% in fiscal 2014. The market shares of many of these key retailers have increased and may continue to increase in future
years.
The loss of, or significant adverse change in, our relationship with any of these key retailers could cause our net sales,
operating income and cash flow to decline. The loss of, or reduction in, orders from any significant customer, losses arising
from customer disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts
receivable from any major customer could reduce our operating income and cash flow.
We may be adversely affected by trends in the retail industry.
With the growing trend towards retail trade consolidation, we are increasingly dependent upon key retailers whose
leverage is growing. Our business may be negatively affected by changes in the policies of our retailers, such as inventory
destocking, limitations on access to shelf space, price demands and other conditions. In addition, retailers continue to more
closely manage inventory levels and make purchases on a “just-in-time” basis. This requires us to shorten our lead time for
production in certain cases and to more closely anticipate demand, which could in the future require the carrying of additional
inventories and an increase in our working capital and related financing requirements. This shift to “just-in-time” can also
cause retailers to delay purchase orders, which can cause a shift in sales from quarter to quarter. Decisions to move in or out of
a market category by leading retailers can also have a significant impact on our business. Additionally, some retailers are
increasing their emphasis on private label products. While we view private label as an opportunity and supply many private
label products to retailers, we could lose sales in the event that key retailers replace our branded products with private label
product manufactured by others.
The emerging e-commerce channel continues to grow rapidly. To the extent that the key retailers on which we depend
lose share to the e-commerce channel, we could lose sales. If the e-commerce channel continues its rapid growth, we may need
to make additional investments to access this channel more effectively, and there can be no assurances that any such
investments will be successful.
A significant deterioration in the financial condition of one of our major customers could have a material adverse effect
on our sales, profitability and cash flow. We continually monitor and evaluate the credit status of our customers and attempt to
adjust sales terms as appropriate. Despite these efforts, a bankruptcy filing or liquidation by a key customer could have a
material adverse effect on our business, results of operations and financial condition in the future.
14
Issues with products may lead to product liability, personal injury or property damage claims, recalls, withdrawals,
replacements of products, regulatory actions by governmental authorities that could divert resources, affect business
operations, decrease sales, increase costs, and put us at a competitive disadvantage, any of which could have a significant
adverse effect on our results of operations and financial condition.
We have experienced, and may in the future experience, issues with products that may lead to product liability, recalls,
withdrawals, replacements of products, or regulatory actions by governmental authorities. Product recalls or other
governmental regulatory action directed at product sales could result in increased governmental scrutiny, reputational harm,
reduced demand by consumers for our products, decreased willingness by retailer customers to purchase or provide marketing
support for those products, unavailability or increased cost of insurance, or additional safety and testing requirements. Such
results could divert development and management resources, adversely affect our business operations, decrease sales, increase
legal fees and other costs, and put us at a competitive disadvantage compared to other manufacturers not affected by similar
issues with products, any of which could have a significant adverse effect on our results of operations and financial condition.
Competition in our industries may hinder our ability to execute our business strategy, increase our profitability or maintain
relationships with existing customers.
We operate in highly competitive industries, which have experienced increased consolidation in recent years. We compete
against numerous other companies, some of which are more established in their industries and have substantially greater
revenue and resources than we do. Our products compete against national and regional products and private label products
produced by various suppliers. Our largest competitors in the Pet segment are Spectrum Brands and Hartz Mountain, and our
largest competitors in the Garden segment are Scotts and Spectrum Brands.
To compete effectively, among other things, we must:
•
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•
•
•
•
develop and grow brands with leading market positions;
grow market share;
maintain and expand our relationships with key retailers;
continually develop innovative new products that appeal to consumers;
implement effective marketing and sales promotion programs;
maintain strict quality standards;
deliver products on a reliable basis at competitive prices; and
effectively integrate acquired companies.
Competition could lead to lower sales volumes, price reductions, reduced profits, losses, or loss of market share. Our
inability to compete effectively could have a material adverse effect on our business, results of operations and financial
condition.
Our acquisition strategy involves a number of risks.
We are regularly engaged in acquisition discussions with other companies and anticipate that one or more potential
acquisition opportunities, including those that would be material or could involve businesses with operating characteristics that
differ from our existing business operations, may become available in the near future. If and when appropriate acquisition
opportunities become available, we intend to pursue them actively. Acquisitions involve a number of special risks, including:
•
•
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•
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•
failure of the acquired business to achieve expected results, as well as the potential impairment of the
acquired assets if operating results decline after an acquisition;
diversion of management’s attention;
failure to retain key personnel of the acquired business;
additional financing, if necessary and available, which could increase leverage and costs, dilute equity, or
both;
the potential negative effect on our financial statements from the increase in goodwill and other intangibles;
the high cost and expenses of identifying, negotiating and completing acquisitions; and
risks associated with unanticipated events or liabilities.
These risks could have a material adverse effect on our business, results of operations and financial condition.
15
We have faced, and expect to continue to face, intense competition for acquisition candidates, which may limit our ability
to make acquisitions and may lead to higher acquisition prices. We cannot assure you that we will be able to identify, acquire or
manage profitably additional businesses or to integrate successfully any acquired businesses into our existing business without
substantial costs, delays or other operational or financial difficulties. In future acquisitions, we also could incur additional
indebtedness or pay consideration in excess of fair value, which could have a material adverse effect on our business, results of
operations and financial condition.
If our goodwill, indefinite-lived intangible assets or other long-term assets become impaired, we will be required to record
impairment charges, which may be significant.
A significant portion of our long-term assets consists of goodwill and other intangible assets recorded as a result of past
acquisitions. We do not amortize goodwill and indefinite-lived intangible assets, but rather review them for impairment on a
periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We
consider whether circumstances or conditions exist which suggest that the carrying value of our goodwill and other long-lived
intangible assets might be impaired. If such circumstances or conditions exist, further steps are required to determine whether
the carrying value of each of the individual assets exceeds its fair value. If analysis indicates that an individual asset’s carrying
value does exceed its fair value, we would record a loss equal to the excess of the individual asset’s carrying value over its fair
value.
The steps required by GAAP entail significant amounts of judgment and subjectivity. Events and changes in
circumstances that may indicate that there may be an impairment and that interim impairment testing is necessary include, but
are not limited to: competitive conditions; the impact of the economic environment on our customer base and on broad market
conditions that drive valuation considerations by market participants; our internal expectations with regard to future revenue
growth and the assumptions we make when performing impairment reviews; a significant decrease in the market value of our
assets; a significant adverse change in the extent or manner in which our assets are used; a significant adverse change in the
business climate that could affect our assets; and significant changes in the cash flows associated with an asset. As a result of
such circumstances, we may be required to record a significant charge to earnings in our financial statements during the period
in which any impairment of our goodwill, indefinite-lived intangible assets or other long-term assets is determined. Any such
impairment charges could have a material adverse effect on our results of operations and financial condition.
During fiscal 2016, 2015 and 2014, we performed evaluations of the fair value of our indefinite-lived trade names and
trademarks. Our expected revenues were based on our future operating plan and market growth or decline estimates for future
years. In fiscal 2016, we recognized a $1.8 million non-cash impairment charge related to certain indefinite-lived intangible
assets in our Pet Segment as a result a decline in volume of sales, as well as a non-cash impairment charge of $16.6 million
related to our investment in two joint ventures as a result of changes in marketplace conditions, which impacted the expected
cash flows and recoverability of the investment. In fiscal 2015, we recognized a $7.3 million non-cash impairment charge
related to certain indefinite-lived intangible assets in our Pet Segment as a result of increased competition in the marketplace
and an expected decline in the volume of sales.
Our goodwill is associated with one of the reporting units within our Pet segment. In connection with our annual
goodwill impairment testing performed during fiscal 2016, the Company made a qualitative evaluation about the likelihood of
goodwill impairment to determine whether it was necessary to calculate the fair values of its reporting units under the two-step
goodwill impairment test. The Company completed its qualitative assessment of potential goodwill impairment and it was
determined that it was more likely than not the fair values of the Company's reporting units were greater than their carrying
amounts, and accordingly, no further testing of goodwill was required. During fiscal 2015, the first step of such testing
indicated that the fair value of our reporting units exceeded their carrying value by more than 10%, and accordingly, no further
testing of goodwill was required. During fiscal 2014, the reporting unit’s operating income declined approximately 50% from
the comparable fiscal 2013 period. In connection with our annual goodwill impairment testing performed during fiscal 2014,
the first step of such testing indicated that the fair value of our reporting segments exceeded their carrying value by more than
10%, and accordingly, no further testing of goodwill was required.
We continue to implement an enterprise resource planning information technology system.
In fiscal 2005, we began incurring costs associated with designing and implementing SAP, a company-wide enterprise
resource planning (ERP) software system with the objective of gradually migrating to the new system. This new system
replaces numerous accounting and financial reporting systems, most of which were obtained in connection with business
acquisitions. To date, we have reduced the number of ERP systems from 28 to 7. Capital expenditures for our enterprise
resource planning software system for fiscal 2017 and beyond will depend upon the pace of conversion for those remaining
legacy systems. If the balance of the implementation is not executed successfully, we could experience business interruptions.
If we do not complete the implementation of the project timely and successfully, we may experience, among other things,
16
additional costs associated with completing this project and a delay in our ability to improve existing operations, support future
growth and enable us to take advantage of new applications and technologies. All of this may also result in a distraction of
management’s time, diverting their attention from our operations and strategy.
Our inability to protect our trademarks and any other proprietary rights may have a significant, negative impact on our
business.
We consider our trademarks to be of significant importance in our business. Although we devote resources to the
establishment and protection of our trademarks, we cannot assure you that the actions we have taken or will take in the future
will be adequate to prevent violation of our trademarks and proprietary rights by others or prevent others from seeking to block
sales of our products as an alleged violation of their trademarks and proprietary rights. There can be no assurance that future
litigation will not be necessary to enforce our trademarks or proprietary rights or to defend ourselves against claimed
infringement or the rights of others. Any future litigation of this type could result in adverse determinations that could have a
material adverse effect on our business, financial condition or results of operations. Our inability to use our trademarks and
other proprietary rights could also harm our business and sales through reduced demand for our products and reduced revenues.
Some of the products that we manufacture and distribute require governmental permits and also subject us to potential
environmental liabilities.
Some of the products that we manufacture and distribute are subject to regulation by federal, state, foreign and local
authorities. Environmental health and safety laws and regulations are often complex and are subject to change. Environmental
health and safety laws and regulations may affect us by restricting the manufacture, sale or use of our products or regulating
their disposal. Regulatory or legislative changes may cause future increases in our operating costs or otherwise affect
operations. There is no assurance that in the future we may not be adversely affected by such laws or regulations, incur
increased operating costs in complying with such regulations or not be subject to claims for personal injury, property damages
or governmental enforcement. In addition, due to the nature of our operations and the frequently changing nature of
environmental compliance standards and technology, we cannot predict with any certainty that future material capital
expenditures will not be required.
In addition to operational standards, environmental laws also impose obligations on various entities to clean up
contaminated properties or to pay for the cost of such remediation, often upon parties that did not actually cause the
contamination. Accordingly, we may become liable, either contractually or by operation of law, for remediation costs even if
the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during
or prior to our ownership or operation of the property. With our extensive acquisition history, we have acquired a number of
manufacturing and distribution facilities. Given the nature of the past operations conducted by us and others at these properties,
there can be no assurance that all potential instances of soil or groundwater contamination have been identified, even for those
properties where an environmental site assessment has been conducted. Future events, such as changes in existing laws or
policies or their enforcement, or the discovery of currently unknown contamination, may give rise to future remediation
liabilities that may be material.
Our business is dependent upon our ability to continue to source products from China.
We outsource a significant amount of our manufacturing requirements to third party manufacturers located in China. This
international sourcing subjects us to a number of risks, including: the impact on sourcing or manufacturing of public health and
contamination risks in China; quality control issues; social and political disturbances and instability; export duties, import
controls, tariffs, quotas and other trade barriers; shipping and transportation problems; and fluctuations in currency values.
These risks may be heightened under the new U.S. administration trade policies. Because we rely on Chinese third party
manufacturers for a substantial portion of our product needs, any disruption in our relationships with these manufacturers could
adversely affect our operations.
The products that we manufacture and distribute could expose us to product liability claims.
Our business exposes us to potential product liability risks in the manufacture and distribution of certain of our products.
Although we generally seek to insure against such risks, there can be no assurance that such coverage is adequate or that we
will be able to maintain such insurance on acceptable terms. A successful product liability claim in excess of our insurance
coverage could have a material adverse effect on us and could prevent us from obtaining adequate product liability insurance in
the future on commercially reasonable terms.
17
Deterioration in operating results could prevent us from fulfilling our obligations under the terms of our indebtedness or
impact our ability to refinance our debt on favorable terms as it matures.
We have, and we will continue to have, a significant amount of indebtedness. As of September 24, 2016, we had total
indebtedness of approximately $400 million. This level of indebtedness and future borrowing needs could have material
adverse consequences for our business, including:
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•
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•
•
•
•
make it more difficult for us to satisfy our obligations with respect to the terms of our indebtedness;
require us to dedicate a large portion of our cash flow to pay principal and interest on our indebtedness,
which would reduce the availability of our cash flow to fund working capital, capital expenditures,
acquisitions and other business activities;
increase our vulnerability to adverse industry conditions, including unfavorable weather conditions or
commodity price increases;
limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we
operate;
restrict us from making strategic acquisitions or exploiting business opportunities;
place us at a competitive disadvantage compared to competitors that have less debt; and
limit our ability to borrow additional funds at reasonable rates, if at all.
In addition, since a portion of our debt commitments bear interest at variable rates, an increase in interest rates or interest
rate margins as defined under the credit agreement will create higher debt service requirements, which would adversely affect
our cash flow.
We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.
Our business employs systems and websites that allow for the secure storage and transmission of proprietary or
confidential information regarding our customers, employees, suppliers and others, including personal identification
information. Security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability.
We may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber attacks.
Attacks may be targeted at us, our customers and suppliers, or others who have entrusted us with information. Actual or
anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection
technologies, train employees, and engage third party experts and consultants. Advances in computer capabilities, new
technological discoveries, or other developments may result in the technology used by us to protect transaction or other data
being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical issues,
including breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of
personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy
and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an
adverse effect on our results of operations and our reputation.
We do not presently expect to pay dividends in the foreseeable future.
We have never paid any cash dividends on our common stock or Class A common stock and currently do not intend to do
so. Provisions of our credit facility and the indenture governing our senior subordinated notes restrict our ability to pay cash
dividends. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, subject to
limitations under applicable law and contractual restrictions, and will depend upon our results of operations, financial condition
and other factors deemed relevant by our Board of Directors.
We may issue additional shares of our common stock or Class A common stock that could dilute the value and market price
of your stock.
We may decide or be required to issue, including upon the exercise of any outstanding stock options, or in connection
with any acquisition made by us, additional shares of our common stock or Class A common stock that could dilute the value of
your common stock or Class A common stock and may adversely affect the market price of our common stock or Class A
common stock.
Our Chairman, through his holdings of our Class B common stock, exercises effective control of the Company, which may
discourage potential acquisitions of our business and could have an adverse effect on the market price of our stock.
18
Holders of our Class B common stock are entitled to the lesser of ten votes per share or 49% of the total votes cast, and
each share of Class B common stock is convertible at any time into one share of our common stock. Holders of our common
stock are entitled to one vote for each share owned. Holders of our Class A common stock and Series B preferred stock have no
voting rights, except as required by Delaware law.
As of November 18, 2016, William E. Brown, our Chairman, beneficially controlled approximately 55% of the voting
power of our capital stock. Accordingly, except to the extent that a class vote of the common stock is required by applicable
law, he can effectively control all matters requiring stockholder approval, including the election of our directors, and can exert
substantial control over our management and policies. The disproportionate voting rights of our common stock and Class B
common stock and Mr. Brown’s substantial holdings of Class B common stock could have an adverse effect on the market
price of our common stock and Class A common stock. Also, such disproportionate voting rights and Mr. Brown’s controlling
interest may make us a less attractive target for a takeover than we otherwise might be, or render more difficult or discourage a
merger proposal, tender offer or proxy contest, even if such actions were favored by our other stockholders, which could
thereby deprive holders of common stock or Class A common stock of an opportunity to sell their shares for a “take-over”
premium.
We have authorized the issuance of shares of common stock, Class A common stock and preferred stock, which may
discourage potential acquisitions of our business and could have an adverse effect on the market price of our common stock
and our Class A common stock.
Pursuant to our Fourth Amended and Restated Certificate of Incorporation, the Board of Directors is authorized to issue
up to 80,000,000 shares of our common stock, 100,000,000 shares of our nonvoting Class A common stock, 3,000,000 shares
of our Class B common stock and up to 1,000,000 additional shares of preferred stock without seeking the approval or consent
of our stockholders, unless required by the NASDAQ Global Market. Although the issuance of the nonvoting Class A common
stock would not dilute the voting rights of the existing stockholders, it would have a dilutive effect on the economic interest of
currently outstanding shares of common stock and Class B common stock similar to the dilutive effect of subsequent issuances
of ordinary common stock. The issuance of the preferred stock could, depending on the rights and privileges designated by the
board with respect to any particular series, have a dilutive effect on the voting interests of the common stock and Class B
common stock and the economic interests of our common stock, Class A common stock and Class B common stock. In
addition, the disproportionate voting rights of our common stock, preferred stock, Class B common stock and Class A common
stock, and the ability of the board to issue stock to persons friendly to current management, may make us a less attractive target
for a takeover than we otherwise might be or render more difficult or discourage a merger proposal, tender offer or proxy
contest, even if such actions were favored by our common stockholders, which could thereby deprive holders of common stock
of an opportunity to sell their shares for a “take-over” premium.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We currently operate 33 manufacturing facilities totaling approximately 3.9 million square feet and 31 sales and logistics
facilities totaling approximately 4.3 million square feet. Most sales and logistics centers consist of office and warehouse space,
and several large bays for loading and unloading. Each sales and logistics center provides warehouse, distribution, sales and
support functions for its geographic area. Our executive offices are located in Walnut Creek, California.
19
The table below lists the Pet segment’s manufacturing and sales and logistics facilities. Numbers in parentheses represent
Owned or Leased
Owned
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Leased
Owned
Leased
Leased
Leased
Owned
Leased
Leased
Owned
Leased
Owned
Leased
Leased
Leased
Owned
Leased
Leased
multiple locations.
Location
Phoenix, AZ (2)
Irwindale, CA
Sacramento, CA
Santa Fe Springs, CA
Aurora, CO
Tampa, FL
Council Bluffs, IA
Jamesburg, NJ
Neptune City, NJ
Neptune City, NJ
South Brunswick, NJ (2)
Wood-Ridge, NJ
Fairfield, OH
Cressona, PA
Pottsville, PA
Athens, TX
Athens, TX
Dallas, TX
Dallas, TX
Algona, WA
Chilton, WI
Franklin, WI
Franklin, WI
Guelph, Ontario, Canada
Guangzhou, China
Shanghai, China
Atlixco, Puebla, Mexico
Dorking, Surrey, UK
Taunton, Somerset, UK
Type of Facility
Sales and Logistics
Manufacturing
Sales and Logistics
Sales and Logistics
Sales and Logistics
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Manufacturing
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Sales and Logistics
Sales and Logistics
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Sales and Logistics
Manufacturing
Manufacturing
Sales and Logistics
20
The table below lists the Garden segment’s manufacturing and sales and logistics facilities. Numbers in parentheses
represent multiple locations.
Location
Cullman, AL
Cullman, AL
Roll, AZ
Yuma, AZ
Chico, CA
El Centro, CA
Ontario, CA
Longmont, CO
Covington, GA
Eatonton, GA
Eatonton, GA
Madison, GA
Madison, GA (2)
Madison, GA
Madison, GA
Laurel, MD
Greenfield, MO (2)
Greenfield, MO
Neosho, MO
Charlotte, NC
Sidney, NE
Fairfield, OH
Peebles, OH
Peebles, OH
Albany, OR
Lebanon, OR
Portland, OR
Easton, PA
Grand Prairie, TX
Kenbridge, VA
Northbend, WA
Type of Facility
Sales and Logistics
Sales and Logistics
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Manufacturing
Sales and Logistics
Sales and Logistics
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Sales and Logistics
Manufacturing
Manufacturing
Manufacturing
Manufacturing
Sales and Logistics
Sales and Logistics
Sales and Logistics
Sales and Logistics
Manufacturing
Owned or Leased
Owned
Leased
Owned
Leased
Leased
Owned
Leased
Owned
Leased
Owned
Leased
Leased
Owned
Owned
Leased
Leased
Owned
Owned
Owned
Leased
Owned
Leased
Owned
Leased
Owned
Owned
Leased
Leased
Leased
Leased
Leased
We are reviewing the number, location and size of our manufacturing facilities and expect to make changes over time in
order to optimize our manufacturing footprint. We lease 13 of our manufacturing facilities and 26 of our sales and logistics
facilities. These leases generally expire between 2016 and 2029. Substantially all of the leases contain renewal provisions with
automatic rent escalation clauses. The facilities we own are subject to major encumbrances under our principal credit facility. In
addition to the facilities that are owned, our fixed assets are comprised primarily of machinery and equipment, trucks and
warehousing, transportation and computer equipment.
Item 3. Legal Proceedings
We may from time to time become involved in 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 adverse effect on our financial position or
results of operations.
Item 4. Mine Safety Disclosures
Not applicable.
21
PART II
Item 5.
Equity Securities
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Our common stock is traded on the NASDAQ Stock Market under the symbol CENT, and our class A common stock is
traded on the NASDAQ Stock Market under the symbol CENTA. Our Class B stock is not listed on any market and generally
cannot be transferred unless converted to common stock on a one-for-one basis. The following table sets forth the high and low
closing sale prices for our common stock and our Class A common stock, as reported by the NASDAQ Global Select Market,
for each quarterly period during our fiscal years set forth below.
Fiscal 2015
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Fiscal 2016
First Quarter
Second Quarter
Third Quarter
Fourth Quarter
Common Stock
Class A
Common Stock
High
Low
High
Low
$
$
$
$
8.85
10.41
10.61
16.43
17.93
16.21
22.54
27.62
$
$
6.61
8.45
9.26
9.19
13.35
12.05
14.82
21.21
$
$
9.47
11.24
11.51
17.00
18.54
16.14
21.29
25.51
7.04
9.10
9.67
10.08
13.65
12.02
14.80
20.12
As of November 18, 2016, there were approximately 96 holders of record of our common stock, approximately 322
holders of record of our Class A nonvoting common stock and 5 holders of record of our Class B stock.
We have not paid any cash dividends on our common stock, our Class A common stock or our Class B Stock. We
currently intend to retain any earnings for use in our business and do not presently anticipate paying any cash dividends on our
common stock, our Class A common or our Class B stock in the foreseeable future. In addition, our credit facility and senior
notes restrict our ability to pay dividends. See Note 10 to our consolidated financial statements.
22
Stock Performance Graph
The following graph compares the percentage change of our cumulative total stockholder return on our Common Stock
(“CENT”) for the period from September 24, 2011 to September 24, 2016 with the cumulative total return of the NASDAQ
Composite (U.S.) Index and the Dow Jones Non-Durable Household Products Index, a peer group index consisting of
approximately 30 manufacturers and distributors of household products.
The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, the
possible future performance of our Common Stock.
Total Return Analysis
Central Garden & Pet Company
NASDAQ Composite
Dow Jones US Nondurable Household
Products
9/24/2011
9/29/2012
9/28/2013
9/27/2014
9/26/2015
9/24/2016
100.00
100.00
177.73
126.98
105.08
156.30
114.95
188.77
244.99
198.31
379.22
227.35
100.00
116.75
134.57
153.44
141.64
175.13
23
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table sets forth the repurchases of any equity securities during the fourth quarter of the fiscal year ended
September 24, 2016 and the dollar amount of authorized share repurchases, remaining under our stock repurchase program.
Period
June 26, 2016 - July 30, 2016
July 31, 2016 - August 27, 2016
August 28, 2016 - September 24, 2016
Total
Total Number
of Shares
(or Units)
Purchased
Average
Price Paid
per Share
(or Unit)
940
2,634
1,128
4,702
(2) $
(2)
(2)
$
22.85
24.01
22.98
23.53
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)
— $
—
—
— $
34,968,000
34,968,000
34,968,000
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 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.
24
Item 6. Selected Financial Data
The following selected statement of operations and balance sheet data as of and for the five fiscal years in the period
ended September 24, 2016 have been derived from our audited consolidated financial statements. The financial data set forth
below should be read in conjunction with our consolidated financial statements and related notes thereto in “Item 8 – Financial
Statements and Supplementary Data” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results
of Operations” included elsewhere herein.
Statement of Operations Data (1):
Net sales
Cost of goods sold and occupancy
Gross profit
Selling, general and administrative
expenses
Intangible asset and goodwill
impairments (2)
Operating income (3)
Interest expense, net (4)
Other income (expense) (5)
Income (loss) before income taxes
and noncontrolling interest
Income tax expense (benefit)
Income (loss) including
noncontrolling interest
Net income attributable to
noncontrolling interest
Net income (loss) attributable to
Central Garden & Pet
Net income (loss) per share
attributable to Central Garden & Pet:
Basic
Diluted
Weighted average shares used in the
computation of income (loss) per
share:
Basic
Diluted
Other Data:
Depreciation and amortization
Capital expenditures
Cash provided (used) by operating
activities
Cash used in investing activities
Cash provided (used) by financing
activities
Ratio of earnings to fixed charges (6)
Fiscal Year Ended
September 24,
2016
September 26,
2015
September 27,
2014
September 28,
2013
September 29,
2012
(in thousands, except per share amounts)
$
1,829,017
$
1,650,737
$
1,604,357
$
1,653,633
$
1,700,013
1,275,967
553,050
1,162,685
488,052
1,150,333
454,024
1,189,731
463,902
1,185,855
514,158
421,864
389,345
397,811
416,038
439,737
1,828
129,358
(42,707)
(17,013)
69,638
24,053
45,585
1,071
7,272
91,435
(39,898)
13
51,550
18,535
33,015
1,044
—
56,213
(42,750)
403
13,866
4,045
9,821
1,017
7,709
40,155
(42,970)
(677)
(3,492)
(2,592)
—
74,421
(40,170)
678
34,929
12,816
(900)
22,113
1,029
940
44,514
$
31,971
$
8,804
$
(1,929) $
21,173
0.91
0.87
$
$
0.66
0.64
$
$
0.18
0.18
$
$
(0.04) $
(0.04) $
0.44
0.44
48,964
51,075
48,562
49,638
48,880
49,397
48,094
48,094
40,001
27,622
$
$
33,703
22,030
$
$
35,781
17,173
$
$
32,968
25,172
$
$
47,622
48,374
30,425
39,592
151,426
$
(91,195) $
87,449
$
(49,854) $
126,467
$
(35,181) $
(28,282) $
(25,122) $
89,169
(44,477)
(14,165) $
2.6x
(68,370) $
2.3x
(27,759) $
1.3x
20,309
$
—
(8,575)
1.8x
$
$
$
$
$
$
$
$
25
September 24,
2016
September 26,
2015
Fiscal Year Ended
September 27,
2014
(in thousands)
September 28,
2013
September 29,
2012
Balance Sheet Data:
Cash and short term investments
Working capital
Total assets (7)
Total debt (7)
Equity
$
$
92,982
512,587
1,212,193
395,269
554,587
$
47,584
476,916
1,131,597
396,982
506,380
$
88,666
498,454
1,143,702
445,214
486,453
$
32,976
490,325
1,155,906
467,333
470,024
71,180
445,299
1,143,103
443,370
464,883
(1) Fiscal years 2013, 2014, 2015 and 2016 included 52 weeks. Fiscal year 2012 included 53 weeks.
(2) During fiscal 2016, we recognized a non-cash charge of $1.8 million related to the impairment of a certain indefinite-lived
intangible asset in our Pet segment. During fiscal 2015, we recognized a non-cash charge of $7.3 million related to the
impairment of certain indefinite-lived intangible assets in our Pet segment. During fiscal 2013, we recognized a non-cash
charge of $7.7 million related to impairment of goodwill in our Garden segment.
(3) During fiscal 2013, we recognized an $11.2 million charge related to certain products introduced in fiscal 2013 in our
Garden segment. During fiscal 2014, we recognized a $16.9 million charge related to these products. We recognized a $4.9
million gain in fiscal 2014 from the sale of manufacturing plant assets. During fiscal 2016 we recognized a $2.4 million
gain in our Pet segment from the sale of a manufacturing plant.
(4) During fiscal 2016 we incurred incremental expenses of $14.3 million, comprised of a call premium payment of $8.3
million, a $2.7 million payment of overlapping interest expense for 30 days and a $3.3 million non-cash charge for the
write-off of unamortized deferred financing costs and discount on our 2018 Notes, as a result of the redemption of our
2018 Notes and issuance of our 2023 Notes.
(5) During fiscal 2016, we recognized a non-cash impairment charge of $16.6 million related to our investment in two joint
ventures as a result of changes in marketplace conditions, which impacted expected cash flows and the recoverability of
the investment.
(6) For the purposes of determining the ratio of earnings to fixed charges, earnings consist of income (loss) before income
taxes and noncontrolling interest and after eliminating undistributed earnings of equity method investees and before fixed
charges. Fixed charges consist of interest expense incurred, the portion of rental expense under operating leases deemed by
management to be representative of the interest factor and amortization of deferred financing costs. For the fiscal year
ended September 28, 2013, earnings were insufficient to cover fixed charges by approximately $3.2 million, and the ratio
is not meaningful.
(7) In fiscal 2016, we retrospectively adopted new accounting guidance, which requires classification of debt issuance costs as
a reduction of the carrying value of the debt. In doing so, $3.2 million, $5.0 million, $5.3 million and $6.4 million of
deferred issuance costs have been reclassified from Other assets to Long-term debt in our Consolidated Balance Sheets for
fiscal 2015, 2014, 2013 and 2012, respectively.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following is management’s discussion of the financial results, liquidity and other key items related to our
performance. This discussion should be read in conjunction with our consolidated financial statements and the related notes and
other financial information appearing elsewhere in this Form 10-K. This Form 10-K contains forward-looking statements that
involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See
“Forward-Looking Statements” and “Item 1A – Risk Factors.”
Business Overview
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 2015 was estimated by Packaged Facts to have been approximately $50.8 billion in annual
retail sales. We estimate the annual retail sales of the pet supplies and consumables and natural pet food markets in the
categories in which we participate to be approximately $30.1 billion. The total lawn and garden consumables and decorative
products industry in the United States is estimated to be approximately $25.0 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
$17.6 billion.
26
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, 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; weed, grass, ant and other herbicide, insecticide and pesticide products; and
decorative outdoor lifestyle 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 Lilly Miller®, Over-
N-Out®, Smart Seed® and The Rebels®.
In fiscal 2016, our consolidated net sales were $1,829 million, of which our Pet segment, or Pet, accounted for
approximately $1,082 million and our Garden segment, or Garden, accounted for approximately $747 million. In fiscal 2016,
our operating income was $129 million consisting of income from our Pet segment of $120 million, income from our Garden
segment of $70 million and corporate expenses of $61 million.
Fiscal 2016 Financial Highlights
Earnings per fully diluted share increased $0.23 per share to $0.87 per share and our operating income increased $37.9
million to $129.4 million as compared to fiscal 2015, due to increased earnings in both our segments and decreased corporate
expenses. Certain charges and gains impacting fiscal 2016 and 2015 are excluded for purposes of the non-GAAP presentation
elsewhere in this Form 10-K.
Financial summary:
•
•
•
•
•
Net sales for fiscal 2016 increased $178.3 million, or 10.8%, to $1,829.0 million. Our Pet segment sales
increased 20.9%, and our Garden segment sales declined 1.2%.
Gross profit for fiscal 2016 increased $65.0 million, or 13.3%, to $553.1 million from $488.1 million in fiscal
2015. Gross margin increased 60 basis points in fiscal 2016 to 30.2%, from 29.6% in 2015.
Our operating income increased $37.9 million, or 41.5%, to $129.4 million in fiscal 2016, and increased as a
percentage of net sales to 7.1% from 5.5%. Non-GAAP operating income increased $30.1 million, or 30.5%.
Net income was $44.5 million, or $0.87 per share on a fully diluted basis, compared to net income in fiscal
2015 of $32.0 million, or $0.64 per share on a fully diluted basis. Non-GAAP net income increased to $64.4
million, or $1.26 per share, in fiscal 2016 from $36.6 million, or $0.74 per share, in fiscal 2015.
Our net cash provided by operating activities was $151.4 million in fiscal 2016, compared to $87.4 million in
fiscal 2015.
Recent Developments
Leadership
George C. Roeth became our President and Chief Executive Officer effective June 1, 2016. Mr. Roeth has been a director
of Central since 2015.
Investment Impairment
During the fourth quarter of fiscal 2016, we recognized a non-cash impairment charge of $16.6 million related to our
investment in two joint ventures as a result of changes in marketplace conditions, which impacted the expected cash flows and
recoverability of the investment. The impairment is included within Other income (expense).
Debt Refinancing
Note Offering - In November 2015, we issued $400 million aggregate principal amount of 6.125% senior notes due
November 2023 (the “2023 Notes”). 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. We used the net proceeds from the offering, together with available cash, to redeem our outstanding 8.25% senior
subordinated notes due March 1, 2018 (the “2018 Notes”) and pay fees and expenses related to the offering. As a result of our
redemption of the 2018 Notes, we incurred incremental interest expense of $14.3 million in our fiscal 2016 first quarter,
27
comprised of approximately $8.3 million related to the payment of the call premium, a one-time payment of 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
financing costs in interest expense. We expect our annual interest expense on the 2023 Notes going forward to be
approximately $8.5 million less than under the 2018 Notes.
Asset-Based Loan Facility Amendment - In April 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 (collectively, the
“Amended Credit Facility”). The Amended Credit Facility matures on April 22, 2021.
DMC Acquisition
In December 2015, we purchased the pet bedding and certain other assets of National Consumers Outdoors Corp.,
formerly known as Dallas Manufacturing Company (“DMC”), for a cash purchase price of $61 million. This acquisition is
expected to complement our existing dog and cat business.
Subsequent Events
Segrest, Inc. Acquisition
In October 2016, we purchased Segrest Inc. for a purchase price of $60 million, of which $6 million is contingent upon
future events. Segrest is the leading wholesaler of aquarium fish and is expected to strengthen our position in the aquatics
category and provide the opportunity for synergies with our existing aquatics business.
Veterinary Products Business
In November 2016, we sold a small veterinary products division, which had sales of $8.6 million in fiscal 2016. The
business was not profitable over the last several years.
Use of Non-GAAP Financial Measures
We report our financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, to
supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including non-
GAAP net sales on a consolidated and segment basis, non-GAAP selling, general and administrative (SG&A) expense, non-
GAAP operating income on a consolidated and segment basis, non-GAAP interest expense, non-GAAP other income (expense)
and non-GAAP net income and diluted net income per share. 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.
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:
•
•
•
Asset impairment charges: we have excluded the impact of asset impairments on intangible assets and equity
method investments as such non-cash amounts are inconsistent in amount and frequency and are impacted by
the timing and/or size of acquisitions. We believe that the adjustment of these charges supplements the GAAP
information with a measure that can be used to assess the sustainability of our operating performance.
Gains or losses on disposals of significant plant assets: we have excluded the impact of gains or losses on the
disposal of significant plant assets as these represent infrequent transactions that impact the comparability
between operating periods. We believe the adjustment of these gains or losses supplements the GAAP
information with a measure that may be used to assess the sustainability of our operating performance.
Other adjustments: we have excluded costs associated with the discontinuation of two new products in our
Garden segment, including the write off of associated inventory, product return costs, promotional allowances
and other costs related to the cessation of the products.
28
•
•
Loss on early extinguishment of debt: we have excluded the charges associated with the refinancing of our 2018
Notes as the amount and frequency of such charges is not consistent and is significantly impacted by the timing
and size of debt financing transactions.
Tax impact: adjustment represents the impact of the tax effect of the pre-tax non-GAAP adjustments excluded
from non-GAAP net income. The tax impact of the non-GAAP adjustments is calculated based on the
consolidated effective tax rate on a GAAP basis, applied to the non-GAAP adjustments, unless the underlying
item has a materially different tax treatment.
• 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.
•
Additionally, we have provided a comparison of our free cash flow, a non-GAAP measure which may be used as
an assessment of liquidity and which we use internally to evaluate our operating performance. We define free
cash flow as net cash provided by operations less capital expenditures. Free cash flow does not represent cash
available only for discretionary expenditures, since we have mandatory debt service requirements and other
contractual and non-discretionary expenditures.
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 made reflect the following:
(1) During the fourth quarter of fiscal 2016 and fiscal 2015, we recognized non-cash impairment charges in our Pet
segment of $1.8 million and $7.3 million, respectively, related to the impairment of intangible assets caused by
increased competition and declining volume of sales. These impairments are included within Intangible asset
impairment.
(2) During fiscal 2016, we recorded a $2.4 million gain in our Pet segment from the sale of a manufacturing plant
resulting from rationalizing our facilities to reduce excess capacity. This adjustment was recorded as part of Selling,
general and administrative costs.
(3) During the first quarter of fiscal 2016, we redeemed our 2018 Notes and issued senior notes due November 2023. As
a result of the bond redemption, we incurred incremental expenses of $14.3 million, comprised of a call premium
payment of $8.3 million, a $2.7 million payment of overlapping interest expense for 30 days 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 consolidated statements of operations.
(4) During the fourth quarter of fiscal 2016, we recognized a non-cash impairment charge of $16.6 million related to our
investment in two joint ventures as a result of changes in marketplace conditions, which impacted the expected cash
flows and recoverability of the investment. The impairment is included within Other income (expense).
(5) During fiscal 2014, we recorded a $16.9 million charge in our Garden segment (“garden charge”). During fiscal
2013, we introduced two new Garden products. Despite support from our retailers and substantial marketing spend,
the new products did not sell through as expected, and we recorded an $11.2 million charge to operating income
relating to the new products. Despite a concerted effort to improve consumer takeaway of the products through
product, packaging and placement changes, as well as aggressive promotions, we continued to experience weak
consumer sales of the products in their second season. Late in the third quarter of fiscal 2014, major retailers
indicated that they would not support the products going forward. Consequently, we made the decision to discontinue
the two products at the end of the 2014 garden season. As a result, we recorded a $16.9 million charge to operating
income in the quarter ended June 28, 2014 to write off the remaining inventory of these products and to account for
product returns, promotional allowances and other costs related to the discontinuance of the products. The $16.9
million charge to Operating income is composed of a $7.0 million reduction of revenue included within net sales and
$9.9 million included within Cost of goods sold.
29
GAAP to Non-GAAP Reconciliation
(in thousands)
For the Year Ended September
2015
2014
2016
$
7,272
(1) $
(2)
(3)
(4)
(5)
1,828
(2,363)
14,339
16,572
30,376
(10,492)
19,884
$
7,272
(2,618)
4,654
N/A
N/A
N/A
N/A
(4,875)
16,908
12,033
(4,352)
7,681
1,604,357
7,035
1,611,392
758,852
7,035
765,887
$
$
$
$
$
Non-GAAP Adjustments
Impairments of intangible assets
(Gain)/loss on disposal of plant assets
Incremental expenses from note redemption and issuance
Impairment of equity method investments
Garden inventory innovation charge
Total non-GAAP adjustments
Tax effects of non-GAAP adjustments
Total net income impact from non-GAAP adjustments
$
Net Sales Reconciliation
GAAP net sales
Net sales impact from non-GAAP adjustments
Non-GAAP net sales
Garden Segment Net Sales Reconciliation
GAAP Garden segment net sales
Net sales impact from non-GAAP adjustments
Non-GAAP Garden segment net sales
(5)
(5)
30
GAAP to Non-GAAP Reconciliation
(in thousands)
For the Year Ended September
2015
N/A
$
2016
N/A
2014
454,024
16,908
470,932
397,811
4,875
402,686
24.8%
25.0%
56,213
12,033
68,246
3.5%
4.2%
$
$
$
$
$
396,617
(7,272)
389,345
24.0%
23.6%
91,435
7,272
98,707
5.5%
6.0%
98,798
N/A
7,272
106,070
11.0%
11.9%
$
$
$
$
$
$
423,692
535
424,227
23.1%
23.2%
129,358
(535)
128,823
7.1%
7.0%
119,930
(535)
119,395
11.1%
11.0%
N/A
N/A
$
$
41,020
12,033
53,053
5.4%
6.9%
N/A
N/A
(42,847)
14,339
(28,508)
Gross Profit Reconciliation
GAAP gross profit
Gross profit impact from non-GAAP adjustments
(5)
Non-GAAP gross profit
SG&A Expense Reconciliation
GAAP SG&A expense
SG&A expense impact from non-GAAP adjustments
(1) (2)
Non-GAAP SG&A expense
GAAP SG&A expense as a percentage of net sales
Non-GAAP SG&A expense as a percentage of net sales
Operating Income Reconciliation
GAAP operating income
Total operating income impact from non-GAAP
adjustments
(1)(2)
(5)
Non-GAAP operating income
GAAP operating margin
Non-GAAP operating margin
Pet Segment Operating Income Reconciliation
GAAP Pet segment operating income
Total operating income impact from non-GAAP
adjustments
Non-GAAP Pet segment operating income
GAAP Pet segment operating margin
Non-GAAP Pet operating margin
Garden Segment Operating Income Reconciliation
GAAP Garden segment operating income
Total operating income impact from non-GAAP
adjustments
Non-GAAP Garden segment operating income
GAAP Garden segment operating margin
Non-GAAP Garden segment operating margin
Interest Expense Reconciliation
GAAP interest expense
Impact from non-GAAP adjustment
Non-GAAP interest expense
(1)(2)
(5)
(3)
31
$
$
$
$
$
$
$
$
Other Income (Expense) Reconciliation
GAAP other income (expense)
Impact from non-GAAP adjustment
Non-GAAP other income (expense)
Net Income and Diluted Net Income Per Share
Reconciliation
GAAP net income attributable to Central Garden & Pet
Total non-GAAP adjustments
Tax effects of non-GAAP adjustments
Total net income impact from non-GAAP adjustments
Non-GAAP net income attributable to Central Garden &
Pet
GAAP diluted net income per share
Non-GAAP diluted net income per share
Shares used in GAAP and non-GAAP diluted net earnings
per share calculation
Organic Net Sales Reconciliation
(4)
(1)(2)
(3)(4)
$
$
$
$
$
$
GAAP to Non-GAAP Reconciliation
(in thousands, except per share amounts)
For the Year Ended September
2015
N/A
2014
N/A
2016
(17,013)
16,572
(441)
44,514
$
31,971
$
30,376
(10,492)
19,884
$
$
$
64,398
0.87
1.26
51,075
7,272
(2,618)
4,654
36,625
0.64
0.74
49,638
$
$
$
8,084
12,033
(4,352)
7,681
16,485
0.18
0.33
49,397
We have provided organic net sales, a non-GAAP measure that excludes the impact of 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.
Pet Segment
September 24, 2016
September 26, 2015
Percentage change
Reported net sales - GAAP
Effect of acquisitions
Organic net sales
$
$
1,081.8
(133.3)
948.5
$
$
894.5
—
894.5
20.9%
—
6%
GAAP to Non-GAAP Reconciliation
(in millions)
For the Year Ended
32
Results of Operations (GAAP)
The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items
bear to net sales:
Net sales
Cost of goods sold and occupancy
Gross profit
Selling, general and administrative
Intangible asset impairment
Operating income
Interest expense, net
Other income (expense)
Income taxes
Noncontrolling interest
Net income (loss)
Fiscal 2016 Compared to Fiscal 2015
Net Sales
Fiscal Year Ended
September 24, 2016
September 26, 2015
September 27, 2014
100.0 %
69.8
30.2
23.1
— %
7.1
(2.3)%
(0.9)%
1.3 %
0.2 %
2.4 %
100.0 %
70.4
29.6
23.6
0.5 %
5.5
(2.4)%
—
1.1 %
0.1 %
1.9 %
100.0 %
71.7
28.3
24.8
—
3.5
(2.7)%
—
0.3 %
0.1 %
0.5 %
Net sales for fiscal 2016 increased $178.3 million, or 10.8%, to $1,829.0 million from $1,650.7 million in fiscal 2015.
Our branded product sales increased $127.8 million, and sales of other manufacturers’ products increased $50.5 million.
Branded product sales include products we produce under Central brand names and products we produce under third party
brands. Sales of our branded products represented 78.9% of our total sales in fiscal 2016 compared with 79.7% in fiscal 2015.
Private label sales represented less than 10% of our consolidated net sales.
The following table indicates each class of similar products which represented approximately 10% or more of our
consolidated net sales in the fiscal years presented (in millions):
Category
Other pet products
Garden controls and fertilizer products
Wild bird feed
Grass seed
Other garden supplies
Dog and cat products
Total
2016
2015
2014
$
$
689.3
298.8
183.6
(1)
331.3
326.0
1,829.0
$
$
594.7
286.3
193.2
(1)
343.5
233.0
1,650.7
$
$
774.2
262.5
202.1
183.1
182.5
(1)
1,604.4
(1) The product category was less than 10% of our consolidated net sales in the respective period.
Our Pet segment’s net sales for fiscal 2016 increased $187.3 million, or 20.9%, to $1,081.8 million from $894.5 million
in fiscal 2015. Pet branded product sales increased $168.6 million from fiscal 2015. Two recent acquisitions in the dog & cat
category, accounted for approximately $133.3 million of the increase. Organic sales growth of $54.0 million, or 6.0% was
volume-based and primarily driven by a $13.4 million increase in our dog & cat category and an $18.7 million increase in sales
of other manufacturers’ products benefiting from expanded distribution.
Our Garden segment’s net sales for fiscal 2016 decreased $9.0 million, or 1.2%, to $747.2 million from $756.2 million in
fiscal 2015. Garden branded product sales decreased $40.8 million due primarily to a $28.2 million decrease due to our exit
from the holiday decor business in January 2016, a $12.7 million decrease in our controls and fertilizer category due primarily
to our exit from a private label relationship in the fertilizer category and an $8.6 million decrease in wild bird feed due
primarily to lower prices precipitated by lower raw material costs. These decreases were partially offset by an $18.0 million
increase in grass seed due primarily to the comparison to a weather related weak fiscal 2015. Sales of other manufacturers’
33
products increased approximately $31.8 million compared to fiscal 2015 due primarily to increased distribution to existing
customers.
Gross Profit
Gross profit for fiscal 2016 increased $65.0 million, or 13.3%, to $553.0 million from $488.0 million in fiscal 2015.
Both our operating segments contributed to the increase in gross profit, primarily the Pet segment. Gross margin increased 60
basis points to 30.2% in fiscal 2016 from 29.6% in fiscal 2015. While our gross profit increase was primarily in the Pet
segment, our gross margin increase was due to an improved Garden segment margin, partially offset by a lower gross margin in
the Pet segment.
In the Pet segment, gross profit increased in fiscal 2016 due to a $187.3 million increase in sales. Although increased
sales from our recently acquired businesses favorably impacted our gross profit, as expected, they had a negative impact on our
gross margin, as these businesses historically have lower gross margins than our historical segment average. The gross margin
in our Pet segment would have improved absent the impact of the recent acquisitions compared to fiscal 2015 due primarily to
the positive impact of increased sales in our professional business.
Gross profit in our Garden segment increased due to gross margin improvement which was partially offset by a $9.0
million decrease in net sales. The gross margin improvement was due primarily to increased grass seed sales, a favorable
product mix change in our grass seed and controls and fertilizer businesses and our exit from the holiday decor business.
Selling, General and Administrative
Selling, general and administrative expenses increased $32.6 million, or 8.4%, from $389.3 million in fiscal 2015 to
$421.9 million in fiscal 2016. As a percentage of net sales, selling, general and administrative expenses decreased from 23.6%
in fiscal 2015 to 23.1% in fiscal 2016. The increase in selling, general and administrative expenses was due to increases in
both selling and delivery expense and warehouse and administrative expense. Corporate expenses are included within
administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resource, and
information technology functions.
Selling and delivery expense increased $17.8 million, or 8.5%, from $210.2 million in fiscal 2015 to $228.0 million in
fiscal 2016 and as a percentage of net sales decreased from 12.7% in fiscal 2015 to 12.5% in fiscal 2016. The expense increase
was principally in our Pet segment due primarily to two recent acquisitions, increased selling and marketing expense in our
animal health category and increased delivery expenses in our distribution business to support its sales gains.
Warehouse and administrative expense increased $14.8 million, or 8.2%, from $179.1 million in fiscal 2015 to $193.9
million in fiscal 2016. As a percentage of net sales, warehouse and administrative expense decreased from 10.9% in fiscal
2015 to 10.6% in fiscal 2016. The expense increase was principally in our Pet segment, due primarily to two recent
acquisitions and increased administrative and warehouse spending to support growth in our business units, including spending
on new facilities and equipment impairment and depreciation amounts on equipment we do not intend to use going forward.
The increased expense was partially offset by a $4.9 million decrease in corporate expense. Corporate administrative expense
decreased due primarily to a decrease in third party provider costs and lower employee related costs principally related to
temporary management vacancies, including our CFO position.
Intangible Asset Impairment
We evaluate 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. Additionally, we evaluate indefinite-
lived intangible assets on an annual basis. In fiscal 2016, we recognized a non-cash $1.8 million impairment charge in our Pet
segment related to an indefinite-lived intangible asset as a result of declining sales and a change in management strategy. No
amount remains on our books related to this intangible asset.
In fiscal 2015, we recognized a non-cash $7.3 million impairment charge in our Pet segment related to certain indefinite-
lived intangible assets as a result of increased competition and an expected decline in the volume of sales.
Operating Income
Operating income increased $37.9 million in fiscal 2016, or 41.5% to $129.4 million. Increased sales of $178.3 million
and a 60 basis point gross margin improvement contributed to the improved operating income, partially offset by a $32.6
million increase in selling, general and administrative costs. Our operating margin improved to 7.1% for fiscal 2016 from 5.5%
for fiscal 2015 due primarily to the improved gross margin and lower selling, general and administrative expenses as a
34
percentage of net sales. The Pet and Garden segments and lower corporate expenses all contributed to the increase in operating
income.
Pet operating income increased $21.1 million, or 21.4%, to $119.9 million for fiscal 2016 from $98.8 million for fiscal
2015. The increase was due primarily to increased sales partially offset by a lower gross margin and higher selling, general and
administrative expenses. Pet operating margin increased to 11.1% for fiscal 2016 from 11.0% for fiscal 2015.
Garden operating income increased $10.2 million, or 16.9%, to $70.3 million for fiscal 2016 from $60.1 million for fiscal
2015 as an improvement in gross margin was partially offset by lower sales and a minor increase in selling, general and
administrative expenses. Garden operating margin increased to 9.4% for fiscal 2016 from 8.0% for fiscal 2015 due to the
improved gross margin which was only partially offset by higher selling, general and administrative expenses as a percentage
of net sales.
Net Interest Expense
Net interest expense increased $2.8 million, or 7.0%, from $39.9 million in fiscal 2015 to $42.7 million in fiscal 2016. 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.
Non-GAAP interest expense, which excludes 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, decreased $9.9 million due to both the lower interest rate on our 2023 Notes and
lower average debt outstanding during fiscal 2016 as a result of the redemption of $50.0 million of our 2018 Notes in March
2015. Debt outstanding on September 24, 2016 was $395.3 million compared to $397.0 million as of September 26, 2015. Our
average borrowing rate for fiscal 2016 decreased to 6.3% from 8.1% for fiscal 2015.
Other Income (Expense)
Other income (expense) is comprised of income from investments accounted for under the equity method of accounting,
including any associated impairments of equity method investments, foreign currency exchange gains and losses, and realized
and unrealized gains and losses from derivative contracts used to economically hedge anticipated commodity purchases for use
in our products. Other expense increased $17.0 million from fiscal 2015. During the fourth quarter of fiscal 2016, we
recognized a non-cash impairment charge of $16.6 million related to our investment in two joint ventures as a result of changes
in marketplace conditions, which impacted the expected cash flows and the recoverability of the investment. The impairment is
included within Other income (expense).
Income Taxes
Our effective income tax rate was 34.5% for fiscal 2016 compared to 36.0% for fiscal 2015. The decrease in our effective
income tax rate in fiscal 2016 as compared to fiscal 2015 was due primarily to the availability and usage of additional tax
credits and incentives in fiscal 2016.
Fiscal 2015 Compared to Fiscal 2014
Net Sales
Net sales for fiscal 2015 increased $46.3 million, or 2.9%, to $1,650.7 million from $1,604.4 million in fiscal 2014. Our
branded product sales increased $1,313.7 million, and sales of other manufacturers’ products increased $335.4 million. Branded
product sales include products we produce under Central brand names and products we produce under third party brands. Sales
of our branded products represented 79.7% of our total sales in fiscal 2015 compared with 0.1% in fiscal 2014. Private label
sales represented less than 10% of our consolidated net sales.
The following table indicates each class of similar products which represented approximately 10% or more of our
consolidated net sales in the fiscal years presented (in millions):
35
Category
Other pet products
Garden controls and fertilizer products
Wild bird feed
Other garden supplies
Grass seed
Dog and cat products
Total
2015
2014
2013
594.7
286.3
193.2
343.5
(1)
233.0
1,650.7
$
$
$
774.2
262.5
202.1
182.5
183.1
807.4
274.9
210.8
183.5
177.0
(1)
1,604.4
$
(1)
1,653.6
$
$
(1) The product category was less than 10% of our consolidated net sales in the respective period.
Our Pet segment’s net sales for fiscal 2015 increased $49.0 million, or 5.8%, to $894.5 million from $845.5 million in
fiscal 2014. Pet branded product sales increased $678.6 million from fiscal 2014 due principally to a $20.7 million increase in
our animal health category due primarily to growth in active ingredient sales and our Envincio acquisition in the prior year.
Also, our dog and cat category net sales increased approximately $12.5 million due primarily to our fourth quarter fiscal 2015
IMS acquisition. Collectively, the acquisition of IMS in fiscal 2015 and Envincio in fiscal 2014 contributed $17.3 million of the
$25.3 million increase in our Pet branded product sales in fiscal 2015. These increases were partially offset by a $4.6 million
price driven decrease in wild bird feed. Sales of other manufacturers’ products increased approximately $215.2 million in fiscal
2015 benefiting from expanded distribution.
Our Garden segment’s net sales for fiscal 2015 decreased $2.7 million, or 0.4%, to $756.2 million from $758.9 million in
fiscal 2014. Garden branded product sales decreased $15.0 million due primarily to decreases of $21.0 million in grass seed
and $11.1 million in Décor. Grass seed sales declined due primarily to weather related lower volumes and the impact of the
strong dollar on export sales. Lower volumes in Décor were due primarily to higher promotional sales in the prior year along
with an unfavorable change in product mix due to lost distribution. These declines were partially offset by a $23.8 million
increase in our controls and fertilizers category. The increase in controls and fertilizers was primarily volume related and also
reflects a $7.0 million charge to sales in the prior year for the impact on sales for two discontinued garden products. Sales of
other manufacturers’ products increased approximately $12.3 million compared to fiscal 2014 due primarily to increased
distribution to existing customers.
Gross Profit
Gross profit for fiscal 2015 increased $34.0 million, or 7.5%, to $488.1 million from $454.0 million in fiscal 2014. Gross
margin increased to 29.6% in fiscal 2015 from 28.3% in fiscal 2014, with improvement in both our Garden and Pet segments.
Gross profit for fiscal 2015 increased $17.1 million or 3.6%, from adjusted gross profit of $470.9 million in fiscal 2014, which
was impacted by the $16.9 million prior year garden charge. Gross margin for fiscal 2015 increased to 29.6% from the non-
GAAP gross margin of 29.2% for fiscal 2014.
In the Pet segment, gross profit increased in fiscal 2015 due to a $49.0 million increase in sales and an improved gross
margin. The improvement in gross profit was due primarily to increased sales in our animal health category, which includes our
professional business, and our dog and cat category. Because our animal health sales tend to be higher margin, the animal
health category’s increased sales had a positive impact on both our product mix and our gross margin. Gross margin also
improved in our dog and cat category, although the improvement was partially offset by the lower margin of the increased
sales.
In the Garden segment, gross profit increased in fiscal 2015 due to an improved gross margin which was partially offset
by a $2.7 million decrease in sales. The Garden segment gross profit and gross margin were impacted in fiscal 2014 by the
garden charge. After adjusting for the fiscal 2014 garden charge, the gross margin in the Garden segment was the same in both
fiscal years 2015 and 2014. Within the Garden segment, the garden controls and fertilizer gross profit improved, even after
adjusting for the prior year garden charge, primarily due to increased volumes and favorable product mix. These improvements
were partially offset by a decreased gross margin in Décor that, in addition to the decrease in sales, was also impacted in fiscal
2015 by an increase in excess and obsolete inventories.
36
Selling, General and Administrative
Selling, general and administrative expenses decreased $8.5 million, or 2.1%, from $397.8 million in fiscal 2014 to
$389.3 million in fiscal 2015. As a percentage of net sales, selling, general and administrative 2014 decreased from 24.8% in
fiscal 2014 to 23.6% in fiscal 2015. Non-GAAP selling, general and administrative expenses, which excludes the gain on the
sale of plant assets in fiscal 2014, decreased $13.4 million from fiscal 2014, and the expenses as a percentage of net sales
decreased from 25.0% in fiscal 2014. The change in selling, general and administrative expenses, discussed further below, was
due primarily to decreased selling and delivery expense. Corporate expenses are included within administrative expense and
relate to the costs of unallocated executive, administrative, finance, legal, human resource, and information technology
functions.
Selling and delivery expense decreased $6.2 million, or 2.9%, from $216.4 million in fiscal 2014 to $210.2 million in
fiscal 2015 and as a percentage of net sales decreased from 13.5% in fiscal 2014 to 12.7% in fiscal 2015. The decrease was due
primarily to decreased marketing expenditures and headcount reductions in our Garden segment.
Warehouse and administrative expense decreased $2.3 million, or 1.3%, from $181.4 million in fiscal 2014 to $179.1
million in fiscal 2015. A $5.9 million decrease in corporate costs was partially offset by increased costs in both our operating
segments. Corporate administrative expense decreased due primarily to the non-recurrence of a $5.9 million long-lived
software charge in fiscal 2014. Increased costs in our operating segments were due primarily to the non-recurrence of a $4.9
million gain recorded in fiscal 2014 in our Garden segment from the sale of plant assets and increased payroll related and third
party provider costs in our Pet segment.
Intangible Asset Impairment
We evaluate 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. Additionally, we evaluate indefinite-
lived intangible assets on an annual basis. In fiscal 2015, we recognized a non-cash $7.3 million impairment charge in our Pet
segment related to certain indefinite-lived intangible assets as a result of increased competition and an expected decline in the
volume of sales. The fair value of the indefinite-lived intangible assets exceeded the remaining $15.0 million carrying value at
September 26, 2015.
Operating Income
Operating income increased $35.2 million in fiscal 2015, or 62.7%, to $91.4 million from $56.2 million in fiscal 2014.
Increased sales of $46.3 million, a 130 basis point gross margin improvement and an $8.5 million decrease in selling, general
and administrative costs all contributed to the increase in operating income. Partially offsetting these improvements was a $7.3
million intangible asset impairment charge. Operating margin was 5.5% for fiscal 2015 and 3.5% for fiscal 2014. Adjusting for
the current year intangible asset impairment charge in our Pet segment and for the prior year garden charge and the gain on the
sale of plant assets in our Garden segment, non-GAAP operating income increased $30.5 million to $98.7 million in fiscal 2015
from $68.2 million in fiscal 2014. Non-GAAP operating margin improved to 6.0% from 4.2% in fiscal 2014.
Pet operating income increased $10.7 million, or 12.2%, to $98.8 million for fiscal 2015 from $88.1 million for fiscal
2014. The increase was due primarily to increased sales and improved gross margin, which were partially offset by an
intangible impairment charge and a slight increase in selling, general and administrative expenses. Pet operating margin
increased to 11.0% for fiscal 2015 from 10.4% for fiscal 2014. Adjusting for the current year intangible asset impairment
charge, fiscal 2015 operating income was $106.1 million and the operating margin was 11.9%.
Garden operating income increased $19.1 million, or 46.6%, to $60.1 million for fiscal 2015 from $41.0 million for fiscal
2014. Garden operating margin increased to 8.0% for fiscal 2015 from 5.4% for fiscal 2014. Adjusting the prior year for the
garden charge and the gain on the sale of plant assets, non-GAAP Garden operating income increased $7.1 million from $53.0
million in fiscal 2014 and the operating margin increased from 6.9% to 8.0%. The non-GAAP Garden operating income
increase of $7.1 million was due to a decrease in selling, general and administrative expenses, partially offset by lower net sales
as adjusted gross margin remained unchanged for both fiscal years.
Net Interest Expense
Net interest expense decreased $2.9 million, or 6.7%, from $42.8 million in fiscal 2014 to $39.9 million in fiscal 2015.
The decrease was due to lower interest expense due primarily to lower average debt outstanding during fiscal 2015 primarily as
a result of the redemption of $50 million of our 2018 notes in March 2015 partially offset by the related write-off of
37
unamortized deferred financing costs and a call premium of $1.6 million. Debt outstanding on September 26, 2015 was $397.0
million million compared to $445.2 million as of September 27, 2014.
Other Income (Expense)
Other income (expense) is comprised of income from investments accounted for under the equity method of accounting,
foreign currency exchange gains and losses, and realized and unrealized gains and losses from derivative contracts used to
economically hedge anticipated commodity purchases for use in our products. Other income decreased $0.4 million from fiscal
2014. The decrease was primarily due to equity method losses from the two newly formed entities we invested in during our
second quarter of fiscal 2015.
Income Taxes
Our effective income tax rate was 36.0% for fiscal 2015 compared to 29.2% for fiscal 2014. The increased effective
income tax rate in fiscal 2015 as compared to fiscal 2014 was due primarily to the removal of valuation allowances on
international deferred tax assets in fiscal 2014.
Inflation
Our revenues and margins are dependent on various economic factors, including 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 related to
domestic inflation, particularly relating to grain and seed prices, fuel prices and the ingredients used in our garden controls and
fertilizer. 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.
During fiscal years 2015 and 2016, commodity costs generally declined, but in past years we have been impacted by
volatility in a number of commodities, including grass seed and wild bird feed grains. For example, for most of fiscal 2013,
commodity costs increased substantially. In fiscal 2014, while commodity costs declined overall, we were impacted by
increases in our grass seed costs. 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 2016, 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 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 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 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.
38
Operating Activities
Net cash provided by operating activities increased $64.0 million, from $87.4 million in fiscal 2015 to $151.4 million in
fiscal 2016. The increase in cash provided by operating activities was due primarily to an increase in cash flows from working
capital accounts, primarily receivables, as compared to fiscal 2015, due to better management of working capital, as well as
stronger operating performance.
Net cash provided by operating activities decreased $39.1 million, from $126.5 million of cash used in operating
activities in fiscal 2014 to $87.4 million of cash provided by operating activities in fiscal 2015. The decrease in cash provided
by operating activities was due primarily to an increased use of cash related to working capital accounts. Increased sales for
fiscal 2015 drove an increase in accounts receivable for the current year as compared to the prior year. Inventory levels,
excluding the impact of inventory acquired through acquisitions, decreased in 2015, though not to the same extent as in the
prior year period. Elevated levels of inventory on-hand at the end of fiscal 2013 were brought down to lower levels by the end
of fiscal 2014, which generated a larger amount of cash in that year, compared to the change in inventory levels and cash
provided during fiscal 2015. We remain focused on bringing our investment in inventory down over time, while maintaining
high fill rates and service levels to our customers.
Investing Activities
Net cash used in investing activities increased $41.3 million from $49.9 million in fiscal 2015 to $91.2 million in fiscal
2016. The increase in cash used in investing activities was due primarily to two acquisitions during the first quarter of fiscal
2016. On September 30, 2015, we acquired Hydro-Organics 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 Consumer Outdoors Corp., formerly known
as Dallas Manufacturing Company ("DMC") for approximately $61 million. Additionally, our capital expenditures increased to
approximately $28 million, from $22 million in fiscal 2015, as we improve our existing infrastructure for planned growth and
make our manufacturing facilities more efficient.
Net cash used in investing activities increased $14.7 million, from $35.2 million in fiscal 2014 to $49.9 million in fiscal
2015. The increase in cash used in investing activities was due primarily to increased payments made to acquire businesses and
investments in joint ventures during fiscal 2015, as well as an increase in capital expenditures during fiscal 2015 related to
investments in our facilities. Additionally, there was a decrease in proceeds from the sale of certain property and equipment in
fiscal 2014 that did not recur during fiscal 2015.
Financing Activities
Net cash used in financing activities decreased $54.2 million from $68.4 million in fiscal 2015 to $14.2 million in fiscal
2016. The decrease in cash used was due primarily to our redemption 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 fiscal 2015 compared tofiscal
2016. These uses of cash were partially offset by the payment of financing costs associated with the issuance of our 2023
Notes, subsequent redemption of our 2018 Notes and amendment of our asset backed loan facility during fiscal 2016.
Net cash used in financing activities increased $40.6 million from $27.8 million in fiscal 2014 to $68.4 million in fiscal
2015. The increase in cash used was due primarily to our redemption of $50 million aggregate principal of our 2018 Notes in
March 2015 at 102.063%, as well as increased purchases of our common stock. During fiscal 2015, we repurchased $15.1
million of our common stock on the open market, which consisted of 0.5 million shares of our voting common stock (CENT) at
an aggregate cost of approximately $4.5 million, or approximately $9.00 per share, and 1.2 million shares of our non-voting
Class A common stock (CENTA) at an aggregate cost of approximately $10.6 million, or approximately $8.83 per share. We
also used $24.5 million for minimum statutory tax withholdings related to the net share settlement of our stock. These uses of
cash were partially offset by lower net borrowings under our revolving credit facility during fiscal 2015.
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
39
to plant and equipment and also investment in our continued implementation of a scalable enterprise-wide information
technology platform, will be approximately $40 million to $45 million over the next 12 months.
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.
Free Cash Flow - Non-GAAP Financial Measure
We have provided a comparison of our free cash flow, which can be used as a measure of liquidity and our operating
performance. We define free cash flow as net cash provided by operations less capital expenditures. Free cash flow does not
represent cash available only for discretionary expenditures, since we have mandatory debt service requirements and other
contractual and non-discretionary expenditures (in thousands).
Net cash provided by operations
Less: capital expenditures
Free cash flow
Free cash flow as a percentage of net sales
$
$
2016
151,426
(27,622)
123,804
$
$
6.8%
2015
87,449
(22,030)
65,419
$
$
4.0%
2014
126,467
(17,173)
109,294
6.8%
Free cash flow as a percentage of net sales increased in fiscal 2016, primarily due to better working capital management
and stronger operating performance. Free cash flow as a percentage of net sales decreased in fiscal 2015, primarily due to an
increase in working capital requirements due to increased sales and the inventory related to our acquisition of IMS. For fiscal
2014, the $109 million of free cash flow included a $66 million reduction in inventory.
Stock Repurchases
During fiscal 2016, we did not repurchase our common stock. In fiscal 2011, our Board of Directors authorized a $100
million share repurchase program, under which approximately $35.0 million remains available for repurchases in fiscal 2017
and thereafter.
Total Debt
At September 24, 2016, our total debt outstanding was $395.3 million versus $397.0 million at September 26, 2015.
Senior Notes and Redemption of Senior Subordinated Notes
In November 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 to 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 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 write off of unamortized
deferred financing costs and discount related to the 2018 Notes. These amounts are included in interest expense in the
consolidated statements of operations.
The 2023 Notes require semiannual interest payments, which commenced 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
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
40
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 September 24, 2016.
Asset-Based Loan Facility Amendment
In April 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. As of September 24, 2016, there were no borrowings outstanding and no letters of credit outstanding under
the Credit Facility. There were other letters of credit of $2.5 million outstanding as of September 24, 2016.
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 September 24, 2016, the borrowing base and remaining
borrowing availability was $318.2 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 1.0%), plus, in either case, an applicable margin based on our
consolidated senior leverage ratio. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25% - 1.5% and
was 1.25% as of September 24, 2016, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.5%
and was 0.25% as of September 24, 2016. As of September 24, 2016, the applicable interest rate related to Base Rate
borrowings was 3.75%, and the applicable interest rate related to LIBOR-based borrowings was 1.78%.
We incurred approximately $1.2 million of debt issuance costs in conjunction with this transaction, which included
underwriter fees, legal and accounting expenses. The debt issuance costs will be amortized over the term of the Amended
Credit Facility.
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 of our assets. We were in compliance with all financial covenants under the Amended Credit
Facility during the period ended September 24, 2016.
Contractual Obligations
The table below presents our significant contractual cash obligations by fiscal year:
Contractual Obligations
Fiscal
2017
Fiscal
2018
Fiscal
2019
Fiscal
2020
Fiscal
2021
Thereafter
Total
(in millions)
Long-term debt, including
current maturities (1)
Interest payment obligations (2)
Operating leases
Purchase commitments (3)
Performance-based payments (4)
$
0.5
$
0.3
$
— $
0.1
$
— $
400.0
$
24.5
23.8
104.6
—
24.5
17.3
37.3
—
24.5
14.8
20.5
—
24.5
12.7
14.1
—
24.5
8.4
6.7
—
52.1
29.3
0.6
—
400.9
174.6
106.3
183.8
—
Total
$
153.4
$
79.4
$
59.8
$
51.4
$
39.6
$
482.0
$
865.6
(1) Excludes $2.5 million of outstanding letters of credit related to normal business transactions. Excludes the unamortized
portion of deferred financing costs associated with the 2023 Notes of $5.6 million as of September 24, 2016, which is
amortizable until November 2023 and is included in the carrying value of long-term debt. See Note 10 to the consolidated
financial statements for further discussion of long-term debt.
41
(2) Estimated interest payments to be made on our 2023 Notes. See Note 10 to the consolidated financial statements for
description of interest rate terms.
(3) Contracts for purchases of grains, grass seed and pet food ingredients, used primarily to mitigate risk associated with
increases in market prices and commodity availability.
(4) Possible performance-based payments associated with prior acquisitions of businesses are not included in the above table,
because they are based on future performance of the businesses acquired, which is not yet known. Performance-based
payments of approximately $2.0 million were made in 2016 related to B2E, acquired in fiscal 2013 and Hydro-Organics
Wholesale, Inc., acquired in fiscal 2016. Potential performance-based periods extend through 2020 for B2E and 2025 for
Hydro-Organics Wholesale, Inc. Payments are capped at $1.0 million per year related to Hydro-Organics Wholesale, Inc.
As of September 24, 2016, we had unrecognized tax benefits of $0.2 million. These amounts have been excluded from
the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be
determined.
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees,
subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing
risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing,
liquidity, market risk or credit risk support to us.
Recent Accounting Pronouncements
Refer to the discussion under Part II, Item 8, Notes to Consolidated Financial Statements, Note 1 - Organization and
Significant Accounting Policies for a summary of recent accounting pronouncements.
Critical Accounting Policies, Estimates and Judgments
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported
amounts and related disclosures in the consolidated financial statements. Estimates and assumptions are required for, but are
not limited to, accounts receivable and inventory realizable values, fixed asset lives, long-lived asset valuation and
impairments, intangible asset lives, stock-based compensation, deferred and current income taxes, self-insurance accruals and
the impact of contingencies and litigation. We base our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the result of which forms the basis for making judgments about the
carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those
estimates under different assumptions or conditions.
Although not all inclusive, we believe that the following represent the more critical accounting policies, which are subject
to estimates and assumptions used in the preparation of our consolidated financial statements.
Allowance for Doubtful Accounts
We record an allowance for credit losses and disputed balances associated with our customers’ failure to make required
payments. Our allowance also includes amounts estimated for customer returns and deductions. We estimate our allowance
based on specific identification, historical experience, customer concentrations, customer credit-worthiness and current
economic trends. Generally, we require no collateral from our customers. If the financial condition of our customers were to
deteriorate, we were not able to demonstrate the validity of amounts due or future default rates on trade receivables in general
were to differ from those currently anticipated, additional allowances could be required, which would affect earnings in the
period the adjustments are made. For more information, see Note 5 to our consolidated financial statements.
Inventory
Inventory, which primarily consists of lawn and garden products, pet supplies, raw materials and finished goods, is stated
at the lower of first-in first-out (“FIFO”) cost or market. Cost includes certain indirect purchasing, merchandise handling and
storage costs incurred to acquire or manufacture inventory, costs to unload, process and put away shipments received to prepare
them to be picked for orders, and certain overhead costs. We compute the amount of such costs capitalized to inventory based
on an estimate of costs related to the procurement and processing of inventory to prepare it for sale compared to total product
purchases. When necessary, we have reduced the carrying value of our inventory if market conditions indicate that we will not
42
recover the carrying cost upon sale. Future adverse changes in market conditions related to our products could result in an
additional charge to income in the period in which such conditions occur.
Goodwill
Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and
intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business
combinations are recorded based on their fair values at the date of acquisition. Goodwill and identifiable intangible assets with
indefinite lives are not subject to amortization but must be evaluated for impairment.
We test goodwill for impairment annually (on the first day of the fourth fiscal quarter), 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, by
first assessing qualitative factors to determine whether it is more likely than not the fair value of the reporting unit is less than
its carrying amount. If it is determined that it is more likely than not the fair value of the reporting unit is greater than its
carrying amount, it is unnecessary to perform the two-step goodwill impairment test. If it is determined that it is more likely
than not that the fair value of the reporting unit is less than its carrying amount, the two-step test is performed to identify
potential goodwill impairment. Based on certain circumstances, we may elect to bypass the qualitative assessment and proceed
directly to performing the first step of the two-step goodwill impairment test, which compares the fair value of our reporting
units to their related carrying values, including goodwill. If the fair value of the reporting unit is less than its carrying value, we
perform an additional step to determine the implied fair value of goodwill associated with that reporting unit. The implied fair
value of goodwill is determined by first allocating the fair value of the reporting unit to all of its assets and liabilities and then
computing the excess of the reporting unit’s fair value over the amounts assigned to the assets and liabilities. If the carrying
value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment, and,
accordingly,we recognize such impairment. Our goodwill impairment analysis also includes a comparison of the aggregate
estimated fair value of its two reporting units to the Company’s total market capitalization.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimate of
fair value of each of our reporting units is based on our projection of revenues, gross margin, operating costs and cash flows
considering historical and estimated future results, general economic and market conditions as well as the impact of planned
business and operational strategies. We base our fair value estimates on assumptions we believe to be reasonable at the time,
but such assumptions are subject to inherent uncertainty. Assumptions critical to our fair value estimates were: (i) discount rates
used in determining the fair value of the reporting units; (ii) estimated future cash flows; and (iii) projected revenue and
operating profit growth rates used in the reporting unit models. Actual results may differ from those estimates. The valuations
employ present value techniques to measure fair value and consider market factors.
Our goodwill is associated with one of the reporting units within our Pet segment and one of the reporting units within
our Garden segment.
In connection with our annual goodwill impairment testing performed during fiscal 2016, we made a qualitative
evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the fair values of its
reporting units under the two-step goodwill impairment test. We completed our qualitative assessment of potential goodwill
impairment and it was determined that it was more likely than not the fair values of our reporting units were greater than their
carrying amounts, and accordingly, no further testing of goodwill was required.
In connection with our annual goodwill impairment testing performed during fiscal 2015 and 2014, the first step of such
testing indicated that the fair value of our reporting segments exceeded their carrying value by more than 10%, and accordingly,
no further testing of goodwill was required.
Changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including expected
future cash flows and discount rate, could result in a significantly different estimate of the fair value of the reporting units in the
future and could result in additional impairment of goodwill.
Intangible assets
Indefinite-lived intangible assets consist primarily of acquired trade names and trademarks. Indefinite-lived intangible
assets are tested annually for impairment or whenever events or changes in circumstances occur indicating that the carrying
amount of the asset may not be recoverable. An impairment loss would be recognized for an intangible asset with an indefinite
useful life if its carrying value exceeds its fair value.
Indefinite-lived intangible assets are tested for impairment by comparing the fair value of the asset to the carrying value.
Fair value is determined based on discounted cash flow analyses that include significant management assumptions such as
43
revenue growth rates, discount rates, weighted average cost of capital, and assumed royalty rates. Future net sales and short-
term growth rates are estimated for trade names based on management’s forecasted financial results which consider key
business drivers such as specific revenue growth initiatives, market share changes and general economic factors such as
consumer spending.
During fiscal 2016, 2015 and 2014, we performed evaluations of the fair value of our indefinite-lived trade names and
trademarks. Our expected revenues were based on our future operating plan and market growth or decline estimates for future
years. In fiscal 2016, we recognized a $1.8 million non-cash impairment charge related to certain indefinite-lived intangible
assets as a result of a decline in the volume of sales. In fiscal 2015, we recognized a $7.3 million non-cash impairment charge
related to certain indefinite-lived intangible assets as a result of increased competition in the marketplace and an expected
decline in the volume of sales. No impairment was indicated during our fiscal 2014 analysis of our indefinite-lived trade names
and trademarks.
Long-Lived Assets
We review our long-lived assets, including amortizable intangibles and property, plant and equipment, for potential
impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be
fully recoverable. An impairment loss would be recognized for amortizable intangible assets and property, plant and equipment
when estimated undiscounted future cash flows expected to result from use of the asset are less than its carrying amount.
Management determines fair value by estimating future cash flows as a result of forecasting sales and costs. Impairment, if any,
is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. No factors indicating the
carrying value of our tangible long-lived assets may not be recoverable were present in fiscal 2016, fiscal 2015 and fiscal 2014,
respectively, and accordingly, no impairment testing was performed on these assets. However, due to changes in our operations
and related plans for future SAP implementations, we determined that certain software costs previously incurred had no future
value and accordingly, a charge of $5.9 million was recorded in the fourth quarter of fiscal 2014. Should market conditions or
the assumptions used by us in determining the fair value of assets change, or management change plans regarding the future
usage of certain assets, additional charges to operations may be required in the period in which such conditions occur.
Accruals for Self-Insurance
We maintain insurance for certain risks, including workers’ compensation, general liability and vehicle liability, and are
self-insured for employee related health care benefits. Our workers’ compensation, general liability and vehicle liability
insurance policies include deductibles of $250,000 to $350,000 per occurrence, with a separate deductible of $50,000 for
physical damage. We maintain excess loss insurance that covers any health care claims in excess of $700,000 per person per
year. We maintain a self-insurance reserve for losses, determined with assistance from a third party actuary, based on claims
filed and actuarial estimates of the ultimate loss amount inherent in the claims, including losses for claims incurred but not
reported. Any actuarial projection of losses concerning workers’ compensation and general liability is subject to a high degree
of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount
rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. We do not believe there is a
reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insurance
liabilities. However, any differences in estimates and assumptions could result in accrual requirements materially different from
the calculated accruals.
Acquisitions
In connection with businesses we acquire, management must determine the fair values of assets acquired and liabilities
assumed. Considerable judgment and estimates are required to determine such amounts, particularly as they relate to
identifiable intangible assets, and the applicable useful lives related thereto. Under different assumptions, the resulting
valuations could be materially different, which could materially impact the operating results we report.
Our contractual commitments are presented under the caption Liquidity and Capital Resources.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risks, which include changes in U.S. interest rates and commodity prices and, to a lesser extent,
foreign exchange rates. We do not engage in financial transactions for trading or speculative purposes.
Interest Rate Risk. The interest payable on our Credit Facility is based on variable interest rates and therefore affected by
changes in market interest rates. We had no variable rate debt outstanding as of September 24, 2016 under our Credit Facility. If
interest rates on our average variable rate debt outstanding during fiscal 2016 had changed by 100 basis points compared to
44
actual rates, interest expense would have increased or decreased by approximately $0.4 million. In addition, we have
investments consisting of cash equivalents and short-term investments, which are also affected by changes in market interest
rates.
Commodity Prices. We are exposed to fluctuations in market prices for grains, grass seed, chemicals, fertilizer ingredients
and pet food ingredients. To mitigate risk associated with increases in market prices and commodity availability, we enter into
contracts for purchases, primarily to ensure commodity availability to us in the future. As of September 24, 2016, we had
entered into fixed purchase commitments for commodities totaling approximately $183.8 million. A 10% change in the market
price for these commodities would result in an additional pretax gain or loss of $18.4 million as the related inventory
containing those inputs is sold.
Foreign Currency Risks. Our market risk associated with foreign currency rates is not considered to be material. To date,
we have had minimal sales outside of the United States. Purchases made by our U.S. subsidiaries from foreign vendors are
primarily made in U.S. dollars. Our international subsidiary transacts most of its business in British pounds. Therefore, we have
only minimal exposure to foreign currency exchange risk. We do not hedge against foreign currency risks and believe that
foreign currency exchange risk is immaterial to our current business.
Item 8. Financial Statements and Supplementary Data
See pages beginning at F-1.
45
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Principal Financial Officer have
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 September 24, 2016.
(b) Changes in Internal Control Over Financial Reporting. Our management, with the participation of our Chief
Executive Officer and Principal Financial Officer, has evaluated whether any change in our internal control over financial
reporting occurred during the fourth 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 fourth quarter of fiscal 2016 that has materially
affected, or is reasonably likely to materially affect, our internal control over financial reporting.
(c) Management’s Report on Internal Control Over Financial Reporting. A copy of our management’s report and the
report of Deloitte & Touche LLP, our independent registered public accounting firm, are included in our Financial Statements
and Supplementary Data beginning on page F-1.
Item 9B. Other Information
None.
Item 10. Directors, Executive Officers and Corporate Governance
PART III
We have adopted a code of ethics that applies to all of our executive officers and directors, a copy of which is available
on our website at www.central.com/about/values-ethics/.
The remaining information required by this item is incorporated by reference from Central’s Definitive Proxy Statement
for its 2017 Annual Meeting of Stockholders under the captions “Election of Directors,” “Further Information Concerning the
Board of Directors – Committees of the Board”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of
Ethics.” See also Item 1 – Business above.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2017
Annual Meeting of Stockholders under the captions “Executive Compensation” and “Further Information Concerning the
Board of Directors – Compensation Committee Interlocks and Insider Participation.”
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2017
Annual Meeting of Stockholders under the captions “Ownership of Management and Principal Stockholders” and Executive
Compensation – “Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2017
Annual Meeting of Stockholders under the captions “Further Information Concerning the Board of Directors – Board
Independence” and “Transactions with the Company.”
46
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2017
Annual Meeting of Stockholders under the caption “Independent Registered Public Accounting Firm.”
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
PART IV
(i) Consolidated Financial Statements of Central Garden & Pet Company are attached to this Form 10-K beginning on
page F-1:
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
All other schedules are omitted because of the absence of conditions under which they are required or because the
required information is included in the consolidated financial statements or notes thereto.
(2) Exhibits:
See attached Exhibit Index.
47
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: December 1, 2016
CENTRAL GARDEN & PET COMPANY
By /s/ George C. Roeth
George C. Roeth
Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities indicated.
Signature
/s/ George C. Roeth
George C. Roeth
/s/ Howard A. Machek
Howard A. Machek
/s/ William E. Brown
William E. Brown
/s/ John B. Balousek
John B. Balousek
/s/ David N. Chichester
David N. Chichester
/s/ Thomas J. Colligan
Thomas J. Colligan
/s/ Brooks M. Pennington, III
Brooks M. Pennington, III
/s/ Alfred A. Piergallini
Alfred A. Piergallini
/s/ John R. Ranelli
John R. Ranelli
/s/ Mary Beth Springer
Mary Beth Springer
Capacity
Director, Chief Executive Officer and
President (Principal Executive Officer)
Date
December 1, 2016
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
December 1, 2016
Chairman
December 1, 2016
Director
December 1, 2016
Director
December 1, 2016
Director
December 1, 2016
Director
December 1, 2016
Director
December 1, 2016
Director
December 1, 2016
Director
December 1, 2016
48
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Central Garden & Pet Company
Management’s Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets, September 24, 2016 and September 26, 2015
Consolidated Statements of Operations for Fiscal Years Ended September 24, 2016, September 26, 2015 and
September 27, 2014
Consolidated Statements of Comprehensive Income (Loss) for Fiscal Years Ended September 24, 2016,
September 26, 2015 and September 27, 2014
Consolidated Statements of Equity for Fiscal Years Ended September 24, 2016, September 26, 2015 and
September 27, 2014
Consolidated Statements of Cash Flows for Fiscal Years Ended September 24, 2016, September 26, 2015 and
September 27, 2014
Notes to Consolidated Financial Statements for Fiscal Years Ended September 24, 2016, September 26, 2015
and September 27, 2014
F- 2
F- 3
F- 4
F- 5
F- 6
F- 7
F- 8
F- 9
F- 1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Central Garden & Pet Company’s management, under the supervision of Central’s Chief Executive Officer and Principal
Financial Officer, is responsible for establishing and maintaining effective internal control over financial reporting (as defined
in Rule 13a-15(f) or 15d-15(f) under the Exchange Act). Management evaluated the effectiveness of Central’s internal control
over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations (“COSO”) of the Treadway Commission. The scope of management's assessment of the
effectiveness of our internal control over financial reporting included all of our consolidated operations except for the
operations of Dallas Manufacturing Company ("DMC"), which we acquired on December 1, 2105. This exclusion is in
accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our scope
in the year of acquisition. DMC constituted six percent of the total assets and four percent of total net sales of the consolidated
financial statements of the Company as of and for the fiscal year ending September 24, 2016.
Based on evaluation of the criteria set forth by COSO in Internal Control – Integrated Framework (2013), management
concluded that our internal control over financial reporting was effective as of September 24, 2016.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued a report on our internal control
over financial reporting, which appears on page F-3 of this Form 10-K.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a
timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become ineffective because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
F- 2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Central Garden & Pet Company
Walnut Creek, California:
We have audited the accompanying consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company”)
as of September 24, 2016 and September 26, 2015, and the related consolidated statements of operations, comprehensive income,
equity and cash flows for each of the three fiscal years ended September 24, 2016. We also have audited the Company’s internal
control over financial reporting as of September 24, 2016, based on criteria established in Internal Control - Integrated Framework
(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in “Management’s Report
on Internal Control over Financial Reporting”, management excluded from its assessment the internal control over financial reporting
at Dallas Manufacturing Company (“DMC”), which was acquired on December 1, 2015, and whose financial statements constitute six
percent of total assets and four percent of net sales of the consolidated financial statement amounts as of and for the year ended
September 24, 2016. Accordingly, our audit did not include the internal control over financial reporting at DMC. The Company's
management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on
Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on
the Company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our
audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we
considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal
executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors,
management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally
accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial
statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper
management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis.
Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to
the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies
or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of
Central Garden & Pet Company and subsidiaries as of September 24, 2016 and September 26, 2015, and the results of their operations
and their cash flows for each of the three fiscal years in the period ended September 24, 2016, in conformity with accounting
principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of September 24, 2016, based on the criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
December 1, 2016
F- 3
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED BALANCE SHEETS
September 24,
2016
September 26,
2015
(in thousands)
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Prepaid expenses, deferred income taxes and other
Total current assets
Plant, property and equipment, net
Goodwill
Other intangible assets, net
Other assets
Total
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
Total current liabilities
Long-term debt
Deferred income taxes and other long-term obligations
Commitments and contingencies (Note 11)
Equity:
Common stock
Class A common stock
Class B stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss)
Total Central Garden & Pet shareholders’ equity
Noncontrolling interest
Total equity
Total
$
$
$
$
92,982
10,910
201,151
362,004
47,759
714,806
158,224
231,385
95,865
11,913
1,212,193
102,413
99,343
463
202,219
394,806
60,581
120
374
16
393,297
160,501
(1,294)
553,014
1,573
554,587
1,212,193
$
$
$
$
47,584
13,157
207,402
335,946
49,731
653,820
162,809
209,089
75,460
30,419
1,131,597
88,889
87,724
291
176,904
396,691
51,622
119
364
16
388,636
115,987
164
505,286
1,094
506,380
1,131,597
See notes to consolidated financial statements.
F- 4
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Net sales
Cost of goods sold and occupancy
Gross profit
Selling, general and administrative expenses
Intangible asset impairment
Operating income
Interest expense
Interest income
Other income (expense)
Income before income taxes and noncontrolling interest
Income tax expense
Net income including noncontrolling interest
Net income attributable to noncontrolling interest
Net income attributable to Central Garden & Pet Company
Net income per share attributable to Central Garden & Pet
Company:
Basic
Diluted
Weighted average shares used in the computation of net income
per share:
Basic
Diluted
September 24,
2016
Fiscal Year Ended
September 26,
2015
September 27,
2014
(in thousands, except per share amounts)
$
1,829,017
$
1,650,737
$
1,275,967
1,162,685
553,050
421,864
1,828
129,358
(42,847)
140
(17,013)
69,638
24,053
45,585
1,071
488,052
389,345
7,272
91,435
(40,027)
129
13
51,550
18,535
33,015
1,044
$
$
$
44,514
$
31,971
$
0.91
0.87
$
$
0.66
0.64
$
$
1,604,357
1,150,333
454,024
397,811
—
56,213
(42,844)
94
403
13,866
4,045
9,821
1,017
8,804
0.18
0.18
48,964
51,075
48,562
49,638
48,880
49,397
See notes to consolidated financial statements.
F- 5
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
Net income
Other comprehensive income (loss):
Foreign currency translation
Unrealized loss on securities
Reclassification of loss on available for sale securities to net
income
Total comprehensive income
Comprehensive income attributable to noncontrolling interests
Comprehensive income attributable to Central Garden & Pet
Company
September 24,
2016
Fiscal Year Ended
September 26,
2015
September 27,
2014
$
45,585
$
33,015
$
9,821
(1,458)
—
—
44,127
1,071
(1,078)
(10)
20
31,947
1,044
$
43,056
$
30,903
$
(200)
(10)
—
9,611
1,017
8,594
See notes to consolidated financial statements.
F- 6
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
(dollars in thousands)
Central Garden & Pet Company
Common Stock
Class A Common
Stock
Class B Stock
Shares
Amount
Shares
Amount
Shares
Amount
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Total
Noncontrolling
Interest
Total
12,246,751
$
122
35,291,001
$
353
1,652,262
$
16
$
389,153
$
77,592
$
1,442
$468,678
$
1,346
$470,024
Balance,
September 28, 2013
Amortization of
share-based awards
Tax deficiency on
exercise of stock
options, net of tax
benefit
Restricted share
activity
Issuance of common
stock
Repurchase of
common stock
Distribution to
noncontrolling
interest
Other comprehensive
loss
Net loss
Balance,
September 27, 2014
Amortization of
share-based awards
Tax deficiency on
exercise of stock
options, net of tax
benefit
Restricted share
activity
Issuance of common
stock
Repurchase of
common stock
Distribution to
noncontrolling
interest
Other comprehensive
loss
Net income
Balance,
September 26, 2015
Amortization of
share-based awards
Tax benefit on
exercise of stock
options, net of tax
deficiency
Restricted share
activity
Distribution to
noncontrolling
interest
Other comprehensive
loss
Net income
Balance,
September 24, 2016
—
—
190,556
—
—
—
—
—
—
2
—
—
—
—
—
—
1,232,105
364,505
(300)
—
—
—
—
12
4
—
—
—
—
—
—
—
—
—
12,437,307
124
36,887,311
369
1,652,262
—
—
(12,073)
641
—
—
—
—
—
—
156,477
536,827
—
—
2
5
(517,558)
(5)
(1,118,316)
(12)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
11,908,317
119
36,462,299
364
1,652,262
—
—
—
—
—
—
—
—
1
—
—
—
—
—
202,916
753,357
—
—
—
—
—
2
8
—
—
—
—
—
—
—
—
—
—
Issuance of common
stock
90,155
—
—
—
—
—
—
16
—
—
—
—
—
—
—
16
—
—
—
—
—
—
—
4,572
(1,973)
3,446
1,390
(2)
—
—
—
—
—
4,572
—
4,572
—
(1,973)
—
(1,973)
3,460
1,394
(2)
—
—
3,460
1,394
(2)
—
—
(633)
(633)
—
1,017
(210)
9,821
—
—
—
8,804
(210)
—
(210)
8,804
396,586
86,396
1,232
484,723
1,730
486,453
6,378
(358)
(1,233)
(10)
—
—
—
(12,727)
(2,380)
—
6,378
—
6,378
—
(358)
—
(358)
(1,231)
(5)
(15,124)
—
—
(1,231)
(5)
(15,124)
—
—
(1,680)
(1,680)
—
—
—
31,971
(1,068)
(1,068)
—
(1,068)
—
31,971
1,044
33,015
388,636
115,987
164
505,286
1,094
506,380
6,552
6,865
(1,341)
(7,415)
—
—
—
—
—
—
—
—
—
—
6,552
—
6,552
—
—
—
—
6,865
(1,339)
(7,406)
—
—
—
6,865
(1,339)
(7,406)
—
(592)
(592)
(1,458)
(1,458)
—
(1,458)
44,514
—
44,514
1,071
45,585
11,998,472
$
120
37,418,572
$
374
1,652,262
$
16
$
393,297
$ 160,501
$
(1,294)
$553,014
$
1,573
$554,587
See notes to consolidated financial statements
F- 7
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Amortization of deferred financing costs
Stock-based compensation
Excess tax benefits from stock-based awards
Deferred income taxes
Gain on sale of property and equipment
Loss on disposal of property, plant and equipment
Write-off of deferred financing costs
Asset impairments
Other
Changes in assets and liabilities (excluding businesses acquired):
Receivables
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued expenses
Other long-term obligations
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property, plant and equipment
Businesses acquired, net of cash acquired, and investments in joint ventures
Proceeds from disposals of real property
Change in restricted cash and cash equivalents.
Proceeds from short-term investments.
Investment in short-term investments
Other investing activities
Net cash used in investing activities
Cash flows from financing activities:
Repayments on revolving line of credit
Borrowings on revolving line of credit
Repayments of long-term debt
Issuance of long-term debt
Proceeds from issuance of common stock
Excess tax benefits from stock-based awards
Repurchase of common stock, including shares surrendered for tax withholding
Payments of contingent consideration
Distribution to noncontrolling interest
Payment of financing costs
Net cash used by financing activities
Effect of exchange rate changes on cash and equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
Supplemental information:
Cash paid for interest
Cash paid for income taxes – net of refunds
Non-cash investing and financing activities:
Capital expenditures incurred but not paid
Liability for contingent performance based payments
Restricted share stock bonus
September 24,
2016
Fiscal Year Ended
September 26,
2015
(in thousands)
September 27,
2014
$
45,585
$
33,015
$
9,821
40,001
1,504
8,356
(6,869)
3,189
(2,544)
1,163
3,337
19,367
987
27,444
(6,519)
6,901
(2,793)
11,234
1,083
151,426
(27,622)
(69,001)
3,911
2,247
—
—
(730)
(91,195)
(419,000)
419,000
(400,307)
400,000
324
6,869
(10,873)
(2,026)
(592)
(7,560)
(14,165)
(668)
45,398
47,584
92,982
32,995
10,399
2,743
2,590
—
$
$
33,703
1,996
8,315
(2,154)
15,566
—
702
537
7,272
(69)
(9,093)
4,403
(4,325)
(4,757)
1,485
853
87,449
(22,030)
(38,384)
—
1,126
9,997
(17)
(546)
(49,854)
(312,000)
312,000
(50,289)
—
200
2,154
(18,497)
—
(1,680)
(258)
(68,370)
(317)
(31,092)
78,676
47,584
39,855
3,192
2,087
(101)
—
$
$
35,781
2,107
7,678
(498)
5,548
(4,875)
1,063
1,731
5,870
249
2,655
69,698
(176)
(16,321)
8,442
(2,306)
126,467
(17,173)
(20,282)
8,737
(14,283)
17,820
(10,000)
—
(35,181)
(301,000)
278,000
(367)
—
1,165
498
(2,332)
—
(633)
(3,090)
(27,759)
(7)
63,520
15,156
78,676
41,549
826
238
249
4,086
$
$
See notes to consolidated financial statements.
F- 8
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended September 24, 2016,
September 26, 2015, and September 27, 2014
1. Organization and Significant Accounting Policies
Organization – Central Garden & Pet Company (“Central”), a Delaware corporation, and subsidiaries (the “Company”),
is a leading marketer and producer of quality branded products and distributor of third party products in the pet and lawn and
garden supplies markets.
Basis of Consolidation and Presentation – The consolidated financial statements include the accounts of Central and all
majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. The fiscal years ended
September 24, 2016, September 26, 2015 and September 27, 2014 each included 52 weeks.
Noncontrolling Interest – Noncontrolling interest in the Company’s consolidated financial statements represents the 20%
interest not owned by the Company 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 attributable to noncontrolling interest in the consolidated statements of operations.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in
the United States of America requires that management make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period including realization of accounts receivable and inventory and
valuation of goodwill and intangibles. Actual results could differ from those estimates.
Revenue Recognition – Sales are recognized when merchandise is shipped, risk of loss and title passes to the customer
and the Company has no further obligations to provide services related to such merchandise. Discounts, volume-based rebate
incentives and most cooperative advertising amounts are recorded as a reduction of sales. The Company’s practice on product
returns is to accept and credit the return of unopened cases of products from customers where the quantity is small, where the
product has been mis-shipped or the product is defective. Provisions are made for estimated sales returns which are deducted
from net sales at the time of shipment. Sales also include shipping and handling costs billed directly to customers. The amount
billed to customers for shipping and handling costs included in net sales for the fiscal years ended September 24,
2016, September 26, 2015 and September 27, 2014 was $3.8 million, $5.4 million and $8.0 million, respectively.
Cost of goods sold and occupancy consists of cost of product, inbound freight charges, purchasing and receiving costs,
certain indirect purchasing, merchandise handling and storage costs, internal transfer costs as well as allocations of overhead
costs, including depreciation, related to the Company’s facilities. Cost of goods sold excludes substantially all shipping and
handling and out-bound freight costs to customers, which are included in selling, general and administrative expenses as
delivery expenses. The cost of shipping and handling, including internal costs and payments to third parties, included in
delivery expenses within selling, general and administrative expenses for the fiscal years ended September 24,
2016, September 26, 2015 and September 27, 2014 was $48.9 million, $44.4 million and $45.6 million, respectively.
Advertising Costs – The Company expenses the costs of advertising as incurred. Advertising expenses were $30.0 million,
$25.0 million and $30.9 million in fiscal 2016, 2015 and 2014, respectively.
401(k) Plans – The Company sponsors several 401(k) plans which cover substantially all employees. The Company’s
matching contributions expensed under these plans were $1.7 million for fiscal 2016, $1.9 million for fiscal 2015 and $1.9
million for fiscal 2014. In fiscal 2016, 2015 and 2014, the Company’s matching contributions made in the Company’s Class A
common stock resulted in the issuance of approximately 99,000, 195,000 and 245,000 shares, respectively.
Other income (expense) consists principally of earnings from equity method investments and foreign exchange gains and
losses.
Income taxes are accounted for under the asset and liability method. Deferred income taxes result primarily from bad debt
allowances, inventory and goodwill write-downs, amortization and depreciation. The Company establishes a valuation
allowance for deferred tax assets when management believes it is more likely than not a deferred tax asset will not be realized.
F- 9
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
As of fiscal year-end 2016 and 2015, the Company had valuation allowances related to various state and foreign net deferred
tax assets of $6.6 million and $6.2 million, respectively.
U.S. income taxes have not been provided on undistributed earnings (approximately $3.0 million at September 24, 2016)
of our foreign subsidiary since all such earnings are considered indefinitely reinvested overseas. The potential deferred tax
liability associated with these earnings, net of foreign tax credits associated with the earnings, is approximately $0.5 million.
Cash and cash equivalents include cash and all highly liquid instruments with a maturity of three months or less at the
date of purchase.
Restricted cash and cash equivalents include cash and highly liquid instruments that are used as collateral for stand–alone
letter of credit agreements.
Short-term investments include investments with original maturities greater than three months and remaining maturities of
one year or less. The Company had no short-term investments as of September 24, 2016.
Accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term
basis; thus trade receivables do not bear interest, although a finance charge may be applied to such receivables that are past due.
Allowance for doubtful accounts – Trade accounts receivable are regularly evaluated for collectability based on past credit
history with customers, their expected returns and deductions and their current financial condition.
Inventories, which primarily consist of garden products and pet supplies finished goods, are stated at the lower of FIFO
cost or market. Cost includes certain indirect purchasing, merchandise handling and storage costs incurred to acquire or
manufacture inventory, costs to unload, process and put away shipments received in order to prepare them to be picked for
orders, and certain other overhead costs. The amount of such costs capitalized to inventory is computed based on an estimate of
costs related to the procurement and processing of inventory to prepare it for sale compared to total product purchases.
Land, buildings, improvements and equipment are stated at cost. Depreciation is computed by the straight-line method
over thirty years for buildings. Improvements are amortized on a straight-line basis over the shorter of the useful life of the
asset or the terms of the related leases. Depreciation on equipment and capitalized software is computed by the straight-line and
accelerated methods over the estimated useful lives of three to 10 years.
Long-Lived Assets – The Company reviews its long-lived assets, including amortizable and indefinite-lived intangible
assets and property, plant and equipment, for potential impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable, and annually for indefinite-lived intangible assets.
An impairment loss would be recognized for amortizable intangible assets and property, plant and equipment when estimated
undiscounted future cash flows expected to result from the use of the asset are less than its carrying amount. An impairment
loss would be recognized for an intangible asset with an indefinite useful life if its carrying value exceeds its fair value.
Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. In
fiscal 2016, the Company recognized non-cash asset impairment charges of approximately $1.8 million related to certain
indefinite-lived intangible assets due to changes in the Company's operational strategy and declining volume of sales. 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. Due to the changes in the Company’s
operations and related plans for future SAP implementations, the Company determined that certain software costs previously
capitalized had no future value, and accordingly, wrote off capitalized costs of $5.9 million in fiscal 2014. Should market
conditions or the assumptions used by the Company in determining the fair value of assets change, or management changes
plans regarding the future use of certain assets, additional charges to operations may be required in the period in which such
conditions occur. See Note 9 – Other Intangible Assets.
Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and
intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business
combinations are recorded based on their fair values at the date of acquisition. Goodwill is not subject to amortization but must
be evaluated for impairment annually. The Company tests for goodwill 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. See
Note 8– Goodwill.
Investments – The Company owns membership interests approximating 50% in four unconsolidated companies. The
Company accounts for its interest in these entities using the equity method. Equity income of $0.4 million in fiscal 2016, $0.4
million in fiscal 2015 and $0.6 million in fiscal 2014 is included in other income (expense) in the consolidated statements of
F- 10
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
operations. The Company’s investment in these entities was $0.5 million at September 24, 2016 and $16.5 million at
September 26, 2015. On a combined basis, the assets, liabilities, revenues and expenses of these entities are not significant.
During the fourth quarter of fiscal 2016, the Company determined that its equity method investments in two unconsolidated
companies were impaired as a result of changes in marketplace conditions, which impacted the expected cash flows and the
recoverability of the investment. Accordingly, the Company recorded a non cash charge of approximately $16.6 million to
bring the carrying value of these investments to zero. The impairment charge is included in Other income (expense) in the
Company's consolidated statements of operations. See Note 3 - Acquisitions.
Accruals For Insurance – The Company maintains insurance for certain risks, including workers’ compensation, general
liability and vehicle liability, and is self-insured for employee related health care benefits. The Company’s workers’
compensation, general liability and vehicle liability insurance policies include deductibles of $250,000 to $350,000 per
occurrence. The Company maintains excess loss insurance that covers any health care claims in excess of $700,000 per person
per year. The Company establishes reserves for losses based on its claims experience and actuarial estimates of the ultimate loss
amount inherent in the claims, including claims incurred but not yet reported. Costs are recognized in the period the claim is
incurred, and the financial statement accruals include an estimate of claims incurred but not yet reported.
Fair Value of Financial Instruments – At September 24, 2016 and September 26, 2015, the carrying amount of cash and
cash equivalents, short term investments, accounts receivable and payable, short term borrowings and accrued liabilities
approximates fair value because of the short term nature of these instruments. The estimated fair value of the Company’s senior
subordinated notes is based on quoted market prices for these instruments. See Note 2 - Fair Value Measurements for further
information regarding the fair value of the Company’s financial instruments.
Derivative Financial Instruments – The Company reports all derivative financial instruments on the balance sheet at fair
value. Changes in fair value are recognized in earnings, or are deferred, depending on the nature of the underlying exposure
being hedged and how effective the derivative is at offsetting a change in the underlying exposure.
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 also enters 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.
As of September 24, 2016 and September 26, 2015, the Company had no outstanding derivative instruments.
Stock-Based Compensation – Stock-based compensation cost is estimated at the grant date based on the fair value of the
award and is expensed ratably over the service period of the award. Total compensation costs recognized under all share-based
arrangements in fiscal 2016 was $8.4 million ($5.3 million after tax), fiscal 2015 was $8.3 million ($5.3 million after tax), and
fiscal 2014 was $7.7 million ($4.9 million after tax). See Note 13 - Stock-Based Compensation for further information.
Total Comprehensive Income (Loss) – Total comprehensive income (loss) consists of two components: net income and
other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that under generally accepted
accounting principles are recorded directly as an element of shareholders’ equity, but are excluded from net income. Other
comprehensive income (loss) is comprised of currency translation adjustments relating to the Company’s foreign subsidiary
whose functional currency is not the U.S. dollar, unrealized gains and losses on investments classified as available for sale, as
well as the reclassification of realized gains and losses on investments classified as available for sale to net income.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
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
F- 11
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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. 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.
In May 2016, the FASB issued ASU No. 2016-12 (ASU 2016-12), Revenue from Contracts with Customers (Topic 606) -
Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 is intended to clarify two aspects of Topic 606: first,
assessing the collectability criterion, options for the presentation of sales and similar taxes, non cash consideration, transition
contract modifications, transition contract completion and secondly, technical corrections.
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.
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 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
F- 12
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 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 requirements of ASU 2015-02 and does not believe the
adoption will have a material impact 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.
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.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash
Receipts and Cash Payments (ASU 2016-15) . The ASU provides additional clarification guidance on the classification of
certain cash receipts and payments in the statement of cash flows. The new guidance is effective for fiscal years and interim
periods within those years beginning after December 15, 2017 with early adoption permitted. The Company is currently
evaluating the impact the adoption of ASU 2016-15 will have on its consolidated financial statements.
Change in Accounting Principle
Prior to the 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 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 (in
thousands).
F- 13
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Financial Statement Line Item
Other assets
Total assets
Long term debt
Total liabilities and equity
2. Fair Value Measurements
Previously Reported
September 26, 2015
33,576
$
$
1,134,754
399,848
1,134,754
Reclassifications
As Adjusted
September 26, 2015
30,419
1,131,597
396,691
1,131,597
(3,157) $
(3,157)
(3,157)
(3,157)
Generally accepted accounting principles require 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, restricted cash and equivalents, short term
investments, 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 September 24, 2016 (in
thousands):
Liabilities:
Liability for contingent consideration (a)
Total liabilities
$
$
— $
— $
— $
— $
5,113
5,113
$
$
5,113
5,113
Level 1
Level 2
Level 3
Total
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 (in thousands):
Liabilities:
Liability for contingent consideration (a)
Total liabilities
$
$
— $
— $
— $
— $
3,625
3,625
$
$
3,625
3,625
Level 1
Level 2
Level 3
Total
(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 the Company's consolidated balance sheets.
F- 14
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table provides a summary of changes in fair value of the Company's Level 3 financial instruments for the
years ended September 24, 2016 and September 26, 2015 (in thousands):
Balance as of September 26, 2015
Estimated contingent performance-based consideration established at the time of acquisition
Changes in the fair value of contingent performance-based payments
Performance-based payments made
Balance as of September 24, 2016
Amount
3,625
2,590
924
(2,026)
5,113
$
$
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 using discounted cash flows
with Level 3 inputs in the fair value hierarchy. During the fiscal year ended September 24, 2016, the carrying value of $1.8
million of indefinite-lived intangible assets was written down to its estimated fair value, resulting in impairment charges of $1.8
million, which were included in earnings for the period. See Note 9– Other Intangible Assets.
During the fiscal year ended September 26, 2015, the carrying values of $22.3 million of indefinite-lived intangible assets
were written down to their estimated fair value of $15 million, resulting in an impairment charge of $7.3 million, which was
included in earnings for the period. See Note 9 – Other Intangible Assets.
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 September 24, 2016 was $430.3 million,
compared to a carrying value of $394.4 million. The estimated fair value is based on quoted market prices for these notes,
which are Level 1 inputs within the fair value hierarchy.
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 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.
3. Acquisitions and Investments in Joint Ventures
Fiscal 2016
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 purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $10.7 million, of
which $5.2 million was allocated to identified intangible assets and $5.5 million is included in goodwill in the Company’s
condensed consolidated balance sheet as of September 24, 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.
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. During the
F- 15
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
fourth quarter of fiscal 2016, the Company finalized the allocation of the purchase price to the fair value of the net tangible and
intangible assets acquired. The purchase price exceeded the estimated fair value of the net tangible assets acquired by
approximately $33.8 million, of which $18.7 million was allocated to identified intangible assets and $15.1 million is included
in goodwill in the Company’s condensed consolidated balance sheet as of September 24, 2016. Financial results for DMC have
been included in the results of operations within the Pet segment since the date of acquisition. The following table summarizes
the preliminary recording of 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
$
41,170
$
Fixed assets
Goodwill
Other assets
Other intangible assets, net
Current liabilities
521
—
33,810
—
(14,586)
156
$
17
15,058
(33,790)
18,700
(40)
41,326
538
15,058
20
18,700
(14,626)
Net assets acquired, less cash and cash equivalents
$
60,915
$
101
$
61,016
(1) As previously reported in the Company's Form 10-Q for the periods ended December 26, 2016, March 26, 2016 and June 25, 2016
The acquisitions of IMS Trading Corp, Hydro-Organics Wholesale Inc. and DMC were not considered individually or
collectively material to the Company's overall consolidated financial statements during the periods presented. The following
unaudited pro forma information presents the combined net sales as if the acquisitions of IMS Trading Corp and DMC had
occurred at the beginning of fiscal 2015. The pre-acquisition net sales of DMC and IMS Trading Corp have been added to the
Company's historical results. The following pro forma net sales information has been prepared for comparative purposes only
and is not necessarily indicative of the net sales of the Company as they would have been had the acquisitions occurred on the
assumed dates, nor are they necessarily an indication of future net sales.
Pro forma net sales
In thousands (unaudited)
Fiscal Year Ended
September 24, 2016
1,856,691
$
September 26, 2015
1,815,997
$
The impact of DMC and IMS on pro forma operating income for fiscal 2015 was not material. The impact of IMS and
DMC on the Company's operating income in fiscal 2016 was $10.6 million. The financial results of Hydro-Organics
Wholesale, Inc are not material to the Company's consolidated operating results.
Fiscal 2015
Purishield LLC and Ceregenin LLC
On December 30, 2014, the Company invested $16 million in cash for a 50% interest in two newly formed entities. The
two entities own rights to commercialize products which incorporate features covered by certain patents, technology and
associated intellectual property rights in the fields of animal health and pesticide applications. The investment is being
accounted for under the equity method of accounting.
During the fourth quarter of fiscal 2016, the Company determined that its equity method investments in these two entities
were impaired as a result of changes in marketplace conditions, which impacted the time line of the expected cash flows and the
recoverability of the investment. Accordingly, the Company recorded a non-cash charge of approximately $16.6 million,
included in Other income (expense) in the consolidated statements of operations, to bring the carrying value of these
investments to zero.
F- 16
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
IMS Trading Corp
On July 31, 2015, the Company purchased substantially all of the assets of IMS Trading Corp. for approximately $23.2
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
September 24, 2016. Financial results for IMS Trading Corp. have been included in the results of operations within the Pet
segment since the date of acquisition.
During the second fiscal quarter of 2016, the Company finalized the allocation of the purchase price to the fair value of
the tangible and intangible assets acquired. 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
$
315
$
20,773
Fixed assets
Goodwill
Other assets
Other intangible assets, net
Current liabilities
1,670
—
5,356
—
(5,100)
—
1,365
(5,356)
4,510
—
1,670
1,365
—
4,510
(5,100)
Net assets acquired, less cash and cash equivalents
$
22,384
$
834
$
23,218
(1) As previously reported in the Company's Form 10-K for the period ended September 26, 2015 and the Company's Form 10-Q for the period ended
December 26, 2015
Fiscal 2014
Envincio LLC
On April 1, 2014, the Company purchased certain assets of Envincio LLC, including brands, EPA registrations, inventory
and trade receivables, for approximately $20.3 million. The purchase price exceeded the fair value of the net tangible and
intangible assets acquired by approximately $3.3 million, which is recorded in goodwill. Financial results for Envincio have
been included in the results of operations within the Pet segment since the date of acquisition.
The following table summarizes the recording of the fair values of the assets acquired and liabilities assumed as of the
acquisition date and subsequent adjustments:
(In thousands)
Current assets, net of cash and cash equivalents acquired
Fixed assets
Goodwill
Intangible assets
Current liabilities
Net assets acquired, less cash and cash equivalents
F- 17
Amounts
Recognized as of
Acquisition Date
(as Adjusted)
$
$
6,650
20
3,333
11,450
(1,170)
20,283
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Concentration of Credit Risk and Significant Customers and Suppliers
Customer Concentration – Approximately 42% of the Company’s net sales for fiscal 2016, 40% for fiscal 2015 and 41%
for fiscal 2014 were derived from sales to the Company’s top five customers. The Company’s largest customer accounted for
approximately 15%, 16% and 17% of the Company’s net sales in fiscal years 2016, 2015 and 2014, respectively. The
Company’s second largest customer in 2016 accounted for approximately 8%, 8% and 7% of the Company’s net sales in 2016,
2015 and 2014, respectively. The Company’s third largest customer in 2016 accounted for approximately 8%, 7% and 8% of the
Company’s net sales in fiscal years 2016, 2015 and 2014, respectively. The loss of, or significant adverse change in, the
relationship between the Company and any of these three customers could have a material adverse effect on the Company’s
business and financial results. The loss of or reduction in orders from any significant customer, losses arising from customer
disputes regarding shipments, fees, merchandise condition or related matters, or the Company’s inability to collect accounts
receivable from any major customer could also have a material adverse impact on the Company’s business and financial results.
As of September 24, 2016 and September 26, 2015, accounts receivable from the Company’s top five customers comprised
approximately 41% and 35% of the Company’s total accounts receivable, including 11% and 12% from the Company’s largest
customer.
Supplier Concentration – While the Company purchases products from many different manufacturers and suppliers,
approximately 9%, 11% and 10% of the Company’s cost of goods sold in fiscal years 2016, 2015 and 2014, respectively, were
derived from products purchased from the Company’s five largest suppliers.
5. Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts are summarized below (in thousands):
Description
Fiscal Year Ended September 27, 2014
Fiscal Year Ended September 26, 2015
Fiscal Year Ended September 24, 2016
6. Inventories, net
Balances at
Beginning
of Period
Charged/
(Credited) to
Costs and
Expenses
Asset
Write-Offs,
Less
Recoveries
21,158
25,212
19,296
8,988
741
6,041
(4,934)
(6,657)
(4,268)
Balances at
End of
Period
25,212
19,296
21,069
Inventories, net of allowance for obsolescence, consist of the following (in thousands):
Raw materials
Work in progress
Finished goods
Supplies
Total inventories, net
September 24,
2016
September 26,
2015
$
$
120,786
17,378
217,788
6,052
362,004
$
$
94,969
15,268
215,673
10,036
335,946
F- 18
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7. Property and Equipment, Net
Property and equipment consists of the following (in thousands):
Land
Buildings and improvements
Transportation equipment
Machine and warehouse equipment
Capitalized software
Office furniture and equipment
Accumulated depreciation and amortization
September 24,
2016
September 26,
2015
$
$
8,825
115,965
5,574
193,525
109,641
25,282
458,812
(300,588)
158,224
$
$
9,306
111,605
5,130
184,556
107,965
26,556
445,118
(282,309)
162,809
Depreciation and amortization expense, including the amortization of intangible assets, charged to operations was $40.0
million, $33.7 million and $35.8 million for fiscal 2016, 2015 and 2014, respectively.
8. Goodwill
Changes in the carrying amount of goodwill for the fiscal years ended September 24, 2016, September 26, 2015 and
September 27, 2014 (in thousands):
Balance as of September 28, 2013
Goodwill
Accumulated impairment losses
Additions in fiscal 2014
Balance as of September 27, 2014
Goodwill
Accumulated impairment losses
Additions in fiscal 2015
Balance as of September 26, 2015
Goodwill
Accumulated impairment losses
Additions in fiscal 2016
Balance as of September 24, 2016
Goodwill
Accumulated impairment losses
Garden Products
Segment
Pet Products
Segment
Total
$
$
$
213,583
(213,583)
—
—
$
401,734
(195,978)
205,756
2,477
213,583
(213,583)
—
—
213,583
(213,583)
—
5,473
404,211
(195,978)
208,233
856
405,067
(195,978)
209,089
16,823
219,056
(213,583)
5,473
$
421,890
(195,978)
225,912
$
615,317
(409,561)
205,756
2,477
617,794
(409,561)
208,233
856
618,650
(409,561)
209,089
22,296
640,946
(409,561)
231,385
Additions or reductions to goodwill include acquisitions, purchase price adjustments and adjustments of amounts upon
finalization of purchase accounting.
The Company tests goodwill for impairment annually (on the first day of the fourth fiscal quarter), 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, by first assessing qualitative factors to determine whether it is more likely than not the fair value of the reporting unit is
less than its carrying amount. If it is determined that it is more likely than not the fair value of the reporting unit is greater than
its carrying amount, it is unnecessary to perform the two-step goodwill impairment test. If it is determined that it is more likely
F- 19
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
than not that the fair value of the reporting unit is less than its carrying amount, the two-step test is performed to identify
potential goodwill impairment. Based on certain circumstances, the Company may elect to bypass the qualitative assessment
and proceed directly to performing the first step of the two-step goodwill impairment test, which compares the fair value of the
Company’s reporting units to their related carrying values, including goodwill. If the fair value of the reporting unit is less than
its carrying value, the Company performs an additional step to determine the implied fair value of goodwill associated with that
reporting unit. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all of its
assets and liabilities and then computing the excess of the reporting unit’s fair value over the amounts assigned to the assets and
liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of
goodwill impairment, and, accordingly, the Company recognizes such impairment. The Company’s goodwill impairment
analysis also includes a comparison of the aggregate estimated fair value of its two reporting units to the Company’s total
market capitalization.
Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimate of
fair value of each of the Company’s reporting units is based on the Company’s projection of revenues, gross margin, operating
costs and cash flows considering historical and estimated future results, general economic and market conditions as well as the
impact of planned business and operational strategies. The Company bases its fair value estimates on assumptions the Company
believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Assumptions critical to the
Company’s fair value estimates were: (i) discount rates used in determining the fair value of the reporting units; (ii) estimated
future cash flows; and (iii) projected revenue and operating profit growth rates used in the reporting unit models. Actual results
may differ from those estimates. The valuations employ present value techniques to measure fair value and consider market
factors.
In connection with the Company’s annual goodwill impairment testing performed during fiscal 2016, the Company made
a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the fair
values of its reporting units under the two-step goodwill impairment test. The Company completed its qualitative assessment of
potential goodwill impairment and it was determined that it was more likely than not the fair values of the Company's reporting
units were greater than their carrying amounts, and accordingly, no further testing of goodwill was required.
In connection with the Company’s annual goodwill impairment testing performed during fiscal 2015, a qualitative
assessment was not performed by the Company and the first step of the goodwill impairment testing indicated that the fair value
of the Company’s reporting segments exceeded their carrying value by more than 10%. Accordingly, no further testing of
goodwill was required.
In connection with the Company’s annual goodwill impairment testing performed during fiscal 2014, a qualitative
assessment was not performed by the Company and the first step of the goodwill impairment testing indicated that the fair value
of the Company’s Pet segment reporting units exceeded their carrying value by more than 10%. Accordingly, no further testing
of goodwill was required.
Changes in the judgments and estimates underlying the Company’s analysis of goodwill for possible impairment,
including expected future cash flows and discount rate, could result in a significantly different estimate of the fair value of the
reporting units in the future and could result in additional impairment of goodwill.
F- 20
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
9. Other Intangible Assets
The following table summarizes the components of gross and net acquired intangible assets:
Gross
Accumulated
Amortization
(in millions)
Accumulated
Impairment
Net
Carrying
Value
September 24, 2016
Marketing-related intangible assets – amortizable
$
14.9
$
(11.3) $
— $
Marketing-related intangible assets –
nonamortizable
Total
Customer-related intangible assets – amortizable
Other acquired intangible assets – amortizable
Other acquired intangible assets – nonamortizable
Total
Total other intangible assets
September 26, 2015
Marketing-related intangible assets – amortizable
Marketing-related intangible assets –
nonamortizable
Total
Customer-related intangible assets – amortizable
Other acquired intangible assets – amortizable
Other acquired intangible assets – nonamortizable
Total
$
$
63.0
77.9
65.6
20.8
7.8
28.6
172.1
14.1
59.6
73.7
43.3
19.3
7.8
27.1
$
$
Total other intangible assets
$
144.1
$
—
(11.3)
(26.1)
(11.6)
—
(11.6)
(49.0) $
(26.0)
(26.0)
—
—
(1.2)
(1.2)
(27.2) $
(10.4) $
— $
—
(10.4)
(22.3)
(10.5)
—
(10.5)
(43.2) $
(24.2)
(24.2)
—
—
(1.2)
(1.2)
(25.4) $
3.6
37.0
40.6
39.5
9.2
6.6
15.8
95.9
3.7
35.4
39.1
21.0
8.8
6.6
15.4
75.5
Other acquired intangible assets include contract-based and technology-based intangible assets.
As part of its acquisitions of IMS Trading Corp during the fourth quarter of fiscal 2015, as well as Hydro Organics
Wholesale, Inc and DMC in the first quarter of fiscal 2016, the Company acquired approximately $4.2 million of marketing
related intangible assets, $22.7 million of customer related intangible assets and $1.5 million of other intangible assets. See
Note 3 – Acquisitions.
In fiscal 2016, the Company recognized a non-cash $1.8 million impairment charge to certain indefinite-lived intangible
assets as a result of declining volume of sales.
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 Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from four
years to 25 years; over weighted average remaining lives of six years for marketing-related intangibles, 11 years for customer-
related intangibles and 13 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was
approximately $5.8 million, $4.3 million and $4.3 million, for fiscal 2016, 2015 and 2014, respectively, and is classified within
operating expenses in the 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 $5 million per year from fiscal 2017
through fiscal 2021.
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. Other factors indicating the
carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in fiscal 2016, and
accordingly, no impairment testing was performed on these assets.
F- 21
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
10. Long-Term Debt
Long-term debt consists of the following:
Senior notes, interest at 6.125%, payable semi-annually, principal due November
2023
Senior subordinated notes, interest at 8.25%, payable semi-annually, repaid in
December 2015
Unamortized discount
Unamortized debt issuance costs
Net carrying value
September 24,
2016
September 26,
2015
(in thousands)
$
400,000
$
—
—
—
(5,635)
394,365
400,000
(309)
(3,157)
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%, amended in April 2016
—
—
Asset-based revolving credit facility, interest at LIBOR plus a margin of 1.25% to
1.50% or Base Rate plus a margin of 0.25% to 0.50%, final maturity April 2021
Other notes payable
Total
Less current portion
Long-term portion
$
—
904
395,269
(463)
394,806
$
—
448
396,982
(291)
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
write off of unamortized deferred financing costs and discount related to the 2018 Notes. These amounts are included in interest
expense in the consolidated statements of operations.
The 2023 Notes require semiannual interest payments, which commenced 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.
F- 22
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
September 24, 2016.
Asset-Based 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
(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. As of September 24, 2016, there were no borrowings
outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $2.5 million
outstanding as of September 24, 2016.
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 September 24, 2016, the borrowing base and
remaining borrowing availability was $318.2 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 1.0%), 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%
- 1.5% and was 1.25% as of September 24, 2016, and such applicable margin for Base Rate borrowings fluctuates between
0.25%-0.5% and was 0.25% as of September 24, 2016. As of September 24, 2016, the applicable interest rate related to Base
Rate borrowings was 3.75%, and the applicable interest rate related to LIBOR-based borrowings was 1.78%.
The Company incurred approximately $1.2 million of debt issuance costs in conjunction with this transaction,
which included underwriter fees, legal and accounting expenses. The debt issuance costs will be amortized over the term of the
Amended Credit Facility.
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. The Company was in compliance with all
financial covenants under the Amended Credit Facility during the period ended September 24, 2016.
The scheduled principal repayments on long-term debt as of September 24, 2016 are as follows:
Fiscal year:
2017
2018
2019
2020
2021
Thereafter
Total
(in thousands)
$
$
463
374
5
62
—
400,000
400,904 (1)
__________________________
(1) Debt repayments do not reflect the unamortized portion of deferred financing costs associated with the 2023 Notes of $5.6
million as of September 24, 2016, which is amortizable until November 2023 and is included in the carrying value.
F- 23
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
11. Commitments and Contingencies
Commitments
Letters of credit – The Company had $2.5 million of outstanding letters of credit related to normal business transactions at
September 24, 2016. These agreements require the Company to maintain specified amounts of cash as collateral in segregated
accounts to support the letters of credit issued thereunder, which will affect the amount of cash the Company has available for
other uses. The amount of cash collateral in these segregated accounts was $10.9 million and is reflected in “Restricted cash” on
the Consolidated Balance Sheets.
Purchase commitments – Production and purchase agreements (primarily for grass seed and grains) entered into in the
ordinary course of business obligate the Company to make future purchases based on estimated yields. The terms of these
contracts vary and have fixed prices or quantities. At September 24, 2016, estimated annual purchase commitments were $104.6
million for fiscal 2017, $37.3 million for fiscal 2018, $20.5 million for fiscal 2019, $14.1 million for fiscal 2020, $6.7 million
for fiscal 2021 and $0.6 million thereafter.
Leases – The Company has operating lease agreements principally for office and warehouse facilities and equipment.
Such leases have remaining terms of one to 13 years. Rental expense was $25.0 million for fiscal 2016, $23.1 million for fiscal
2015 and $21.3 million for fiscal 2014.
Certain facility leases have renewal options and include escalation clauses. Minimum lease payments include scheduled
rent increases pursuant to these escalation provisions.
Aggregate minimum annual payments on non-cancelable operating leases at September 24, 2016 are as follows:
Fiscal year:
2017
2018
2019
2020
2021
Thereafter
Total
Contingencies
(in thousands)
$
$
23,811
17,278
14,771
12,721
8,445
29,274
106,300
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 the resolution of which management believes would have a material effect
on the Company’s financial position or results of operations.
The Company has received notices from several states stating that they have appointed an agent to conduct an
examination of the books and records of the Company to determine whether it has complied with state unclaimed property
laws. In addition to seeking unclaimed property subject to escheat laws, the states may seek interest, penalties and other relief.
The examinations are at an early stage and, as such, management is unable to determine the impact, if any, on the Company’s
financial position or results of operations.
The Company has experienced, and may in the future experience, issues with products that may lead to product liability,
recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. The Company has not
experienced recent issues with products the resolution of which management believes would have a material effect on the
Company’s financial position or results of operations.
F- 24
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
12. Income Taxes
The provision for income tax expense (benefit) consists of the following:
Current:
Federal
State
Foreign
Total
Deferred:
Federal
State
Foreign
Total
Total
September 24,
2016
Fiscal Year Ended
September 26,
2015
(in thousands)
September 27,
2014
$
$
18,592
2,140
110
20,842
2,796
463
(48)
3,211
24,053
$
$
2,301
643
25
2,969
14,843
625
98
15,566
18,535
$
$
(329)
873
—
544
4,171
177
(847)
3,501
4,045
A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:
Statutory federal income tax rate
State income taxes, net of federal benefit
Other permanent differences
Adjustment of prior year accruals
Uncertain tax positions
Credits
Change in valuation allowances
Foreign rate differential
Effective income tax rate (benefit)
September 24,
2016
Fiscal Year Ended
September 26,
2015
September 27,
2014
35.0%
2.1
(1.6)
(0.6)
—
(1.0)
0.5
0.1
34.5%
35.0%
2.4
(0.5)
(0.5)
—
(0.3)
—
(0.1)
36.0%
35.0%
2.1
0.2
(0.2)
0.4
(1.6)
(5.4)
(1.3)
29.2%
F- 25
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Deferred income taxes reflect the impact of “temporary differences” between asset and liability amounts for financial
reporting purposes and such amounts as determined based on existing tax laws. The tax effect of temporary differences and
carryforwards which give rise to deferred tax assets and liabilities are as follows:
Current:
Allowance for doubtful accounts
Inventory write-downs
Prepaid expenses
Nondeductible reserves
State taxes
Employee benefits
Other
Total
Noncurrent:
Depreciation and amortization
Equity loss
State net operating loss carryforward
Stock based compensation
State credits
Other
Valuation allowance
Total
Total
September 24, 2016
September 26, 2015
Deferred
Tax
Assets
Deferred
Tax
Liabilities
Deferred
Tax
Assets
Deferred
Tax
Liabilities
$
$
7,634
9,869
—
1,632
19
10,544
3,000
32,698
—
5,070
4,939
2,642
2,317
2,303
(6,583)
10,688
43,386
$
$
(in thousands)
— $
—
1,188
—
—
—
—
1,188
62,778
—
—
—
—
—
—
62,778
63,966
$
7,054
11,366
—
936
—
9,411
2,754
31,521
—
—
5,032
3,422
2,348
2,463
(6,205)
7,060
38,581
$
$
—
—
651
—
385
—
—
1,036
52,415
305
—
—
—
—
—
52,720
53,756
The Company has state tax net operating losses of $101.8 million which expire at various times between 2016 and 2036,
and foreign losses of $0.4 million, which do not expire. Pursuant to authoritative guidance, the benefit of stock options will
only be recorded to stockholders’ equity when cash taxes payable are reduced.
The Company has state income tax credits of $3.6 million, which expire at various times beginning in 2016 through 2032.
In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative
evidence including past operating results, future taxable income, and ongoing prudent and feasible tax planning strategies in
assessing the need for a valuation allowance against any deferred tax assets. The Company has determined there will be
insufficient future separate state taxable income for the separate parent company to realize its deferred tax assets. Therefore,
valuation allowances of $6.6 million and $6.2 million (net of federal impact) at September 24, 2016 and September 26, 2015,
respectively, have been provided to reduce state deferred tax assets to amounts considered recoverable.
The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within
one year. The Company recognizes interest and/or penalties related to income tax matters as a component of pretax income. As
of September 24, 2016 and September 26, 2015, accrued interest was less than $0.1 million and no penalties were accrued
related to uncertain tax positions.
F- 26
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table, which excludes interest and penalties, summarizes the activity related to the Company’s
unrecognized tax benefits for fiscal years ended September 24, 2016 and September 26, 2015 (in thousands):
Balance as of September 27, 2014
Increases related to prior year tax positions
Increases related to current year tax positions
Decreases related to prior year tax positions
Settlements
Decreases related to lapse of statute of limitations
Balance as of September 26, 2015
Increases related to prior year tax positions
Increases related to current year tax positions
Decreases related to prior year tax positions
Settlements
Decreases related to lapse of statute of limitations
Balance as of September 24, 2016
$
$
$
87
55
20
—
(9)
(15)
138
51
66
—
(1)
—
254
As of September 24, 2016, unrecognized income tax benefits totaled approximately $0.2 million and all of the
unrecognized tax benefits would, if recognized, impact the Company’s effective income tax rate.
The Company is principally subject to taxation by the United States and various states within the United States. The
Company’s tax filings in major jurisdictions are open to examination by tax authorities by the Internal Revenue Service from
fiscal year ended 2013 forward and in various state taxing authorities generally from fiscal year ended 2012 forward.
The Company does not believe there will be any significant change in its unrecognized tax benefits within the next twelve
months.
13. Stock-Based Compensation
The Company’s 2003 Omnibus Equity Incentive Plan (the “2003 Plan”), as amended, provides for the grant of options
and restricted stock to key employees, directors and consultants of the Company. The 2003 Plan is administered by the
Compensation Committee of the Board of Directors, which is comprised only of independent directors, and which must
approve individual awards to be granted, vesting and exercise of share conditions.
There is a total of 5.8 million shares of Common Stock, 19.7 million shares of Class A Common Stock and 500,000
shares of Preferred Stock authorized under the 2003 Plan. If and when the Company issues any shares of Preferred Stock under
the 2003 Plan, it will reduce the amount of Class A Common Stock available for future issuance in an amount equal to the
number of shares of Class A Common Stock that are issuable upon conversion of such Preferred Stock.
The Company has a Nonemployee Director Stock Option Plan (the “Director Plan”) which provides for the grant of
options and restricted stock to nonemployee directors of the Company. The Director Plan, as amended, provides for the granting
to each independent director of options to purchase a number of shares equal to $200,000 divided by the fair market value of
the Company’s common stock on the date of each annual meeting of stockholders and a number of shares of restricted stock
equal to $20,000 divided by such fair market value.
As of September 24, 2016, there were approximately 0.6 million shares of Common Stock, 5.1 million shares of Class A
Common Stock and no shares of Preferred Stock reserved for outstanding equity awards, and there were approximately 4.1
million shares of Common Stock, 10.7 million shares of Class A Common Stock and 0.5 million shares of Preferred Stock
remaining for future awards.
Stock Option Awards
The Company recognized share-based compensation expense of $8.4 million, $8.3 million, and $7.7 million for the years
ended September 24, 2016, September 26, 2015 and September 27, 2014, respectively, as a component of selling, general and
administrative expenses. Share-based compensation expense in fiscal 2016, 2015 and 2014 consisted of $2.2 million, $3.3
F- 27
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
million, and $2.8 million, respectively, for stock options, and $4.5 million, $3.1 million and $3.0 million, respectively, for stock
awards. Share-based compensation expense in fiscal 2016, 2015 and 2014 also includes $1.7 million, $1.9 million and $1.9
million, respectively, for the Company’s 401(k) matching contributions.
From fiscal 2008 to fiscal 2011, the Company granted stock options under its 2003 Plan that included performance targets
and time-based vesting to key employees and executives. In March 2012, the Company eliminated all of the past and future
performance goals relating to stock options granted from fiscal 2008 to fiscal 2011, except for the performance goals relating to
the overall Company performance. The Company took this action because, as a result of the Company’s reorganization around
functional lines during 2011, the extent to which cumulative performance targets for segments or business units have been or
may be achieved became difficult or impossible to measure and the changes underway within the Company were not
contemplated when the Company granted the options. After the amendment, 20% of the shares covered by each award
continued to be performance-based. The time vested component of the options did not change. Approximately 250 employees
were affected by the modification, and no additional compensation cost was recorded.
The performance-based component of the options granted in fiscal 2008, 2009, 2010 and 2011 were 100%, 60% , 20%
and 0% achieved, respectively, and the related expense was recorded over the estimated service period. As of September 24,
2016, no unvested options remain for the options granted from fiscal 2008 to fiscal 2011 that were subject to performance based
vesting criteria.
During fiscal 2016, the Company granted time-based stock options with an exercise price based on the closing fair market
value on the date of the grant. The majority of the options granted in fiscal 2016 vest in four annual installments commencing
approximately one year from the date of grant and expire approximately six years after the grant date.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model.
Expected stock price volatilities are estimated based on the Company’s historical volatility. The expected term of options
granted is based on analyses of historical employee termination rates, option exercises and the contractual term of the option.
The risk-free rates are based on U.S. Treasury yields, for notes with comparable terms as the option grants, in effect at the time
of the grant. For purposes of this valuation model, no dividends have been assumed.
The Company’s calculations were made using the Black-Scholes option pricing model with the following weighted
average assumptions: expected life from the date of grant, 3.6 years in fiscal 2016 and 2015 and 3.5 years in fiscal 2014; stock
price volatility, 30.8% in fiscal 2016, 30.3% in fiscal 2015 and 34.3% in fiscal 2014; risk free interest rates, 1.3% in fiscal 2016
and 2015 and 1.6% in fiscal 2014; and no dividends during the expected term.
The following table summarizes option activity for the period ended September 24, 2016:
Outstanding at September 26, 2015
Granted
Exercised
Canceled or expired
Outstanding at September 24, 2016
Exercisable at September 27, 2014
Exercisable at September 26, 2015
Exercisable at September 24, 2016
Expected to vest after September 24, 2016
Number of
Shares
(in thousands)
Weighted
Average Exercise
Price per Share
Weighted Average
Remaining
Contractual Life
Aggregate
Intrinsic Value
(in thousands)
$
6,257
1,166
$
(2,646) $
(608) $
$
4,169
$
5,205
$
2,910
$
1,732
$
2,057
10.51
13.83
10.02
11.31
11.64
10.81
10.74
11.46
11.77
3 years $
38,663
3 years $
2 years
2 years
2 years
4 years $
53,705
390
17,226
22,954
25,948
The price of options to purchase shares of common stock and Class A common stock outstanding at September 24, 2016,
September 26, 2015 and September 27, 2014 was between $6.43 to $15.56 per share, $6.43 to $15.00 per share and $6.43 to
$16.23 per share per share, respectively. The weighted average grant date fair value of options granted during the fiscal years
ended September 24, 2016, September 26, 2015 and September 27, 2014 was $3.04, $2.51 and $1.93, respectively. The total
intrinsic value of options exercised during the fiscal years ended September 24, 2016, September 26, 2015 and September 27,
2014 was $22.6 million, $5.9 million and $1.4 million, respectively.
As of September 24, 2016, there was $5.2 million of total unrecognized compensation cost related to nonvested stock
options, which is expected to be recognized over a remaining weighted average vesting period of two years.
F- 28
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Restricted Stock Awards
As of September 24, 2016 and September 26, 2015, there were approximately 1.5 million and 1.6 million shares,
respectively, of restricted stock awards outstanding. Awards granted in fiscal 2016 and 2015 generally vest within four or five
years from the date of grant. In fiscal 2014, approximately $6.4 million of bonus amounts earned in fiscal 2013 were paid by
granting approximately 570,000 restricted shares that vested immediately.
Restricted stock award activity during the three fiscal years for the period ended September 24, 2016 is summarized as
follows:
Nonvested at September 28, 2013
Granted
Vested
Forfeited
Nonvested at September 27, 2014
Granted
Vested
Forfeited
Nonvested at September 26, 2015
Granted
Vested
Forfeited
Nonvested at September 24, 2016
Number of
Shares
(in thousands)
Weighted Average
Grant Date
Fair Value per
Share
$
894
1,021
$
(226) $
(80) $
$
1,609
$
493
(331) $
(221) $
$
1,550
$
373
(295) $
(88) $
$
1,540
9.35
7.98
9.92
8.93
8.43
10.55
8.63
8.84
9.00
16.32
9.32
9.53
10.68
As of September 24, 2016, there was $11.2 million of unrecognized compensation cost related to nonvested restricted
stock awards, which is expected to be recognized over a weighted average period of two years.
14. Shareholders’ Equity
At September 24, 2016, there were 80,000,000 shares of common stock ($0.01 par value) authorized, of which
11,998,472 were outstanding, and 100,000,000 shares of non-voting Class A common stock ($0.01 par value) authorized, of
which 37,418,572 were outstanding. The preferences and relative rights of the Class A common stock are identical to common
stock in all respects, except that the Class A common stock generally will have no voting rights unless otherwise required by
Delaware law.
There are 3,000,000 shares of Class B stock ($0.01 par value) authorized, of which 1,652,262 were outstanding at
September 24, 2016 and September 26, 2015. The voting powers, preferences and relative rights of the Class B stock are
identical to common stock in all respects except that (i) the holders of common stock are entitled to one vote per share and the
holders of Class B stock are entitled to the lesser of ten votes per share or 49% of the total votes cast, (ii) stock dividends on
common stock may be paid only in shares of common stock and stock dividends on Class B stock may be paid only in shares of
Class B stock and (iii) shares of Class B stock have certain conversion rights and are subject to certain restrictions on ownership
and transfer. Each share of Class B stock is convertible into one share of common stock, at the option of the holder. Additional
shares of Class B stock may only be issued with majority approval of the holders of the common stock and Class B stock,
voting as separate classes.
There are 1,000,000 shares of preferred stock ($0.01 par value) authorized, of which none were outstanding at
September 24, 2016 and September 26, 2015.
During fiscal 2011, the Company’s Board of Directors authorized a $100 million share repurchase program, in part, to
minimize the dilutive impact of the Company’s stock-based equity compensation programs over time. During the fiscal year
ended September 24, 2016, the Company did not repurchase any of its stock. In total, as of September 24, 2016, the Company
F- 29
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
had repurchased approximately 7.9 million shares for an aggregate price of approximately $65.0 million under the share
repurchase program.
15. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share
(EPS) computations:
Fiscal Year Ended
September 24, 2016
Fiscal Year Ended
September 26, 2015
Fiscal Year Ended
September 27, 2014
Net
Income
Shares
Per
Share
Net
Income
Shares
Per
Share
(in thousands, except per share amounts)
Net
Income
(Loss)
Shares
Per
Share
Basic EPS:
Net income (loss)
available to common
shareholders
Effect of dilutive
securities:
Options to purchase
common stock
Restricted shares
Diluted EPS:
Net income (loss)
available to common
shareholders
$ 44,514
48,964
$
0.91
$ 31,971
48,562
$
0.66
$ 8,804
48,880
$
0.18
1,335
776
(0.02)
(0.02)
520
556
(0.01)
(0.01)
69
448
0
0
$ 44,514
51,075
$
0.87
$ 31,971
49,638
$
0.64
$ 8,804
49,397
$
0.18
For fiscal 2016, all options outstanding were included in the computation of diluted earnings per share.
For fiscal 2015, 3.2 million options 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 of including these
options would be anti-dilutive.
For fiscal 2014, 9.7 million options 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 of including these
options would be anti-dilutive.
16. Quarterly Financial Data – Unaudited
st
1
Quarter
nd
2
Quarter
3
Quarter
th
4
Quarter
Fiscal 2016
rd
Net sales
Gross profit
Net income (loss) attributable to Central Garden & Pet
Company
Net income (loss) per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
(in thousands, except per share amounts)
$
359,812
$
541,249
$
99,786
169,339
514,544
163,745
(8,602) (1)
32,697
26,030 (2)
$
$
(0.18)
(0.18)
$
$
0.67
0.65
$
$
48,566
48,566
48,717
50,445
0.53
0.51
49,120
51,063
$
$
$
413,412
120,180
(5,611)
(3)
(0.11)
(0.11)
49,453
49,453
F- 30
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
st
1
Quarter
nd
2
Quarter
3
Quarter
Fiscal 2015
rd
th
4
Quarter
Net sales
Gross profit
Net income (loss) attributable to Central Garden & Pet Company
Net income (loss) per share:
Basic
Diluted
Weighted average common shares outstanding:
Basic
Diluted
(in thousands, except per share amounts)
$ 307,320
87,981
$ 497,602
150,062
$ 459,446
142,037
$ 386,369
107,972
(5,697)
23,237
18,800
(4,369)
(4)
$
$
(0.12) $
(0.12) $
0.48
0.47
$
$
0.39
0.38
$
$
(0.09)
(0.09)
49,379
49,379
48,384
49,439
48,167
49,290
48,322
48,322
_______________________________
(1) During the first quarter of fiscal 2016, the Company redeemed its 2018 Notes and issued senior notes due November 2023.
As a result of the bond redemption, the Company incurred incremental expenses of $14.3 million, comprised of a call
premium payment of $8.3 million, a $2.7 million payment of overlapping interest expense for 30 days and a $3.3 million
non-cash charge for the write off of unamortized deferred financing costs and discount related to the 2018 Notes.
(2) The Company recognized a $2.4 million gain in our Pet segment from the sale of a manufacturing plant resulting from
rationalizing our facilities to reduce excess capacity during the third quarter of fiscal 2016.
(3) The Company recognized a non-cash impairment charge of $16.6 million related to our investment in two joint ventures as
a result of changes in marketplace conditions, and a non-cash impairment charge in our Pet segment of $1.8 million related
to the impairment of certain indefinite-lived intangible assets due to declining sales volume during the fourth quarter of
fiscal 2016.
(4) The Company recognized a $7.3 million non-cash impairment charge to its indefinite-lived intangible assets as a result of
increased competition and declining sales volume in its Pet segment during the fourth quarter of fiscal 2015.
17. Transactions with Related Parties
During fiscal 2016, 2015 and 2014, Tech Pac, a subsidiary of the Company, made purchases from Contract Packaging,
Inc, (“CPI”), Tech Pac’s principal supplier and a minority 20% shareholder in Tech Pac. Tech Pac’s total purchases from CPI
were approximately $36.5 million, $35.2 million and $30.8 million for fiscal years 2016, 2015 and 2014, respectively. Amounts
due to CPI as of September 24, 2016 and September 26, 2015 were $1.5 million and $0.6 million, respectively.
18. Business Segment Data
The Company’s chief operating decision-maker is its Chief Executive Officer. Operating segments are managed
separately because each segment represents a strategic business that offers different products or services. The Company’s chief
operating decision maker evaluates performance based on operating income or loss. The Company’s Corporate division is
included in the following presentation since certain expenses of this division are not allocated separately to the two operating
segments. Segment assets exclude cash equivalents, short-term investments, goodwill, and deferred taxes.
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 the Pet segment and the Garden segment. Substantially all of
the Company’s assets and operations relate to its business in the United States.
The Pet segment consists of DMC, Four Paws Products, TFH Publications, Kaytee, Aquatics, Interpet, IMS, Pets
International, Breeder’s Choice and Life Sciences. These businesses are engaged in the manufacturing, purchase, sale and
delivery of internally and externally produced pet supplies, books and food principally to independent pet distributors, national
and regional retail chains, grocery stores, mass merchants and bookstores. The Garden segment consists of Pennington Seed,
Hydro Organics, AMBRANDS, Lilly Miller, the Pottery Group and Gulfstream. Products manufactured, designed and sourced,
or distributed are products found typically in the lawn and garden sections of mass merchandisers, warehouse-type clubs, home
improvement centers and nurseries and include grass seed, bird feed, clay pottery, outdoor wooden planters and trellises,
F- 31
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
herbicides and insecticides. These products are sold directly to national and regional retail chains, independent garden
distributors, grocery stores, nurseries and garden supply retailers.
The Corporate division includes expenses associated with corporate functions and projects, certain employee benefits,
interest income, interest expense and intersegment eliminations.
The following table indicates each class of similar products which represented approximately 10% or more of the
Company’s consolidated net sales in the fiscal years presented (in millions).
Category
Other pet products
Garden controls and fertilizer products
Wild bird feed
Grass seed
Other garden supplies
Dog and cat products
Total
2016
2015
2014
$
$
689.3
298.8
183.6
(1)
331.3
326.0
1,829.0
$
$
594.7
286.3
193.2
(1)
343.5
233.0
1,650.7
$
$
774.2
262.5
202.1
183.1
182.5
(1)
1,604.4
(1) The product category was less than 10% of our consolidated net sales in the respective period.
See Note 4 - Concentration of Credit Risk and Significant Customers and Suppliers for the Company’s largest customers
by segment.
F- 32
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Financial information relating to the Company’s business segments for each of the three most recent fiscal years is
presented in the table below (in thousands):
Net sales:
Pet segment
Garden segment
Total
Operating income (loss):
Pet segment
Garden segment
Corporate
Total
Interest expense
Interest income
Other income (expense)
Income (loss) before income taxes and noncontrolling interest
Income tax expense (benefit)
Net income (loss) including noncontrolling interest
Net income attributable to noncontrolling interest
Net income (loss) attributable to Central Garden & Pet Company
Assets:
Pet segment
Garden segment
Corporate and eliminations
Total
Depreciation and amortization:
Pet segment
Garden segment
Corporate
Total
Expenditures for long-lived assets:
Pet segment
Garden segment
Corporate
Total
Fiscal Year Ended
September 24,
2016
September 26,
2015
September 27,
2014
$ 1,081,853
747,164
$ 1,829,017
$
894,549
$
845,505
756,188
$ 1,650,737
758,852
$ 1,604,357
$
$
$
119,930 (1) $
70,317
(60,889)
129,358
(42,847)
140
(17,013) (3)
69,638
24,053
45,585
1,071
44,514
508,879
304,901
$
$
98,798 (1) $
60,145
(67,508)
91,435
(40,027)
129
88,077
41,020 (2)
(72,884)
56,213
(42,844)
94
13
51,550
18,535
33,015
1,044
31,971
465,171
310,981
403
13,866
4,045
9,821
1,017
8,804
414,279
337,461
$
$
398,413
$ 1,212,193
355,445
$ 1,131,597
396,987
$ 1,148,727
$
$
$
$
22,556
6,098
11,347
40,001
18,939
4,750
3,933
27,622
$
$
$
$
15,885
5,988
11,830
33,703
17,060
2,432
2,538
22,030
$
$
$
$
17,256
6,793
11,732
35,781
8,561
5,541
3,071
17,173
___________________________
Noncontrolling interest is associated with the Garden segment.
(1) Includes a $1.8 million impairment charge in fiscal 2016 and a $7.3 million impairment charge in fiscal 2015 to indefinite-
lived intangible assets as a result of increased competition and declining sales volume.
(2) Includes a $16.9 million charge related to certain products introduced in fiscal 2013 and a $4.9 million gain from the sale
of manufacturing plant assets.
(3) Includes a $16.6 million impairment charge related to two equity method investments.
F- 33
19. Consolidating Condensed Financial Information of Guarantor Subsidiaries
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 Notes. Those subsidiaries that are
guarantors and co-obligors of the 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, Inc.
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 status.
Net sales
Cost of goods sold and occupancy
Gross profit
Selling, general and administrative
expenses
Operating income (loss)
Interest expense
Interest income
Other income (expense)
Income (loss) before taxes and equity in
earnings of affiliates
Income tax expense (benefit)
Equity in earnings of affiliates
Net income including noncontrolling
interest
Noncontrolling interest
Net income (loss) attributable to Central
Garden & Pet Company
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 24, 2016
(in thousands)
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
587,579
$
82,567
$
1,238,339
$
466,543
121,036
138,556
(17,520)
(42,700)
136
(16,925)
(77,009)
(26,422)
95,101
44,514
—
62,727
19,840
18,077
1,763
(266)
4
(113)
1,388
923
—
465
1,071
820,573
417,766
272,651
145,115
119
—
25
145,259
49,552
624
96,331
—
(79,468) $
(73,876)
(5,592)
1,829,017
1,275,967
553,050
(5,592)
—
—
—
—
—
—
(95,725)
(95,725)
—
423,692
129,358
(42,847)
140
(17,013)
69,638
24,053
—
45,585
1,071
$
44,514
$
(606) $
96,331
$
(95,725) $
44,514
F- 34
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net sales
Cost of goods sold and occupancy
Gross profit
Selling, general and administrative
expenses
Operating income (loss)
Interest expense
Interest income
Other income (expense)
Income (loss) before taxes and equity in
earnings of affiliates
Income tax expense (benefit)
Equity in earnings of affiliates
Net income including noncontrolling
interest
Noncontrolling interest
Net income attributable to Central
Garden & Pet Company
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 26, 2015
(in thousands)
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
484,310
$
100,127
$
1,146,821
$
379,235
105,075
124,613
(19,538)
(39,893)
126
(372)
(59,677)
(21,500)
70,148
31,971
—
76,597
23,530
18,329
5,201
(268)
3
407
5,343
2,089
—
3,254
1,044
781,797
365,024
259,252
105,772
134
—
(22)
105,884
37,946
2,445
70,383
—
(80,521) $
(74,944)
(5,577)
1,650,737
1,162,685
488,052
(5,577)
—
—
—
—
—
—
(72,593)
(72,593)
—
396,617
91,435
(40,027)
129
13
51,550
18,535
—
33,015
1,044
$
31,971
$
2,210
$
70,383
$
(72,593) $
31,971
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 27, 2014
(in thousands)
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
Net sales
$
460,781
$
109,453
$
1,103,926
$
Cost of goods sold and occupancy
Gross profit
Selling, general and administrative
expenses
Operating income (loss)
Interest expense
Interest income
Other income (expense)
Income (loss) before taxes and equity in
earnings of affiliates
Income tax expense (benefit)
Equity in earnings of affiliates
Net income (loss) including
noncontrolling interest
Noncontrolling interest
Net income (loss) attributable to Central
Garden & Pet Company
370,492
90,289
117,240
(26,951)
(42,742)
92
186
(69,415)
(26,962)
51,257
8,804
—
87,028
22,425
18,230
4,195
(218)
2
583
4,562
756
—
3,806
1,017
757,217
346,709
267,740
78,969
116
—
(366)
78,719
30,251
1,506
49,974
—
(69,803) $
(64,404)
(5,399)
1,604,357
1,150,333
454,024
(5,399)
—
—
—
—
—
—
(52,763)
(52,763)
—
397,811
56,213
(42,844)
94
403
13,866
4,045
—
9,821
1,017
$
8,804
$
2,789
$
49,974
$
(52,763) $
8,804
F- 35
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net income
Other comprehensive income (loss):
Foreign currency translation
Total comprehensive income (loss)
Comprehensive income attributable to
noncontrolling interests
Comprehensive income attributable to
Central Garden & Pet Company
Net income
Other comprehensive income:
Unrealized loss on securities
Reclassification of realized loss on
securities included in net income
Foreign currency translation
Total comprehensive income
Comprehensive income attributable to
noncontrolling interests
Comprehensive income attributable to
Central Garden & Pet Company
CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
Fiscal Year Ended September 24, 2016
(in thousands)
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
44,514
$
465
$
96,331
$
(95,725) $
45,585
(1,458)
43,056
(1,132)
(667)
8
96,339
1,124
(94,601)
(1,458)
44,127
—
1,071
—
—
1,071
$
43,056
$
(1,738) $
96,339
$
(94,601) $
43,056
CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
Fiscal Year Ended September 26, 2015
(in thousands)
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
31,971
$
3,254
$
70,383
$
(72,593) $
33,015
(10)
20
(1,078)
30,903
—
—
—
(537)
2,717
1,044
—
(380)
70,003
—
917
(71,676)
(10)
20
(1,078)
31,947
—
—
1,044
$
30,903
$
1,673
$
70,003
$
(71,676) $
30,903
CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
Fiscal Year Ended September 27, 2014
(in thousands)
Net income (loss)
Other comprehensive loss:
Unrealized loss on securities
Foreign currency translation
Total comprehensive income (loss)
Comprehensive income attributable to
noncontrolling interests
Comprehensive loss attributable to Central
Garden & Pet Company
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
8,804
$
3,806
$
49,974
$
(52,763) $
9,821
(10)
—
8,794
—
—
(200)
3,606
1,017
—
—
49,974
—
—
(52,763)
—
—
(10)
(200)
9,611
1,017
$
8,794
$
2,589
$
49,974
$
(52,763) $
8,594
F- 36
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
September 24, 2016
(in thousands)
Parent
Non-
Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
82,158
$
9,695
$
1,129
$
$
$
10,910
59,617
113,317
20,978
286,980
41,083
15,058
30,555
32,778
1,176,990
1,583,444
34,096
47,862
88
82,046
394,364
553,964
—
56
553,014
—
553,014
$
$
$
1,583,444
$
—
5,156
11,752
817
27,420
3,897
—
2,980
—
—
34,297
3,953
1,410
—
5,363
—
46,188
—
—
(18,827)
1,573
(17,254)
34,297
$
$
—
136,378
236,935
25,964
400,406
113,244
216,327
85,701
567,374
—
1,383,052
64,364
50,071
375
114,810
442
—
16,126
71,983
1,179,691
—
1,179,691
$
$
$
1,383,052
$
— $
—
—
—
—
—
—
—
(11,458)
(600,152)
(1,176,990)
(1,788,600) $
— $
—
—
—
—
(600,152)
(16,126)
(11,458)
(1,160,864)
—
(1,160,864)
(1,788,600) $
92,982
10,910
201,151
362,004
47,759
714,806
158,224
231,385
107,778
—
—
1,212,193
102,413
99,343
463
202,219
394,806
—
—
60,581
553,014
1,573
554,587
1,212,193
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Prepaid expenses and other assets
Total current assets
Land, buildings, improvements and
equipment, net
Goodwill
Other long term assets
Intercompany receivable
Investment in subsidiaries
Total
LIABILITIES AND EQUITY
Accounts payable
Accrued expenses and other liabilities
Current portion of long term debt
Total current liabilities
Long-term debt
Intercompany payable
Losses in excess of investment in
subsidiaries
Other long-term obligations
Shareholders’ equity attributable to
Central Garden & Pet
Noncontrolling interest
Total equity
Total
F- 37
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET
Parent
Non-Guarantor
Subsidiaries
September 26, 2015
(in thousands)
Guarantor
Subsidiaries
Eliminations
Consolidated
$
36,280
$
10,022
$
1,282
$
$
$
13,157
46,326
86,109
22,926
204,798
51,409
—
25,881
32,695
1,075,028
1,389,811
20,506
38,723
261
59,490
396,626
426,639
—
1,770
505,286
—
505,286
$
$
$
1,389,811
$
—
6,775
11,690
848
29,335
3,663
—
3,662
—
—
36,660
2,543
1,789
—
4,332
—
43,441
—
—
(12,207)
1,094
(11,113)
36,660
$
$
—
154,301
238,147
25,957
419,687
107,737
209,089
82,436
437,385
—
1,256,334
65,840
47,212
30
113,082
65
—
11,867
55,952
1,075,368
—
1,075,368
$
$
$
1,256,334
$
— $
—
—
—
—
—
—
—
(6,100)
(470,080)
(1,075,028)
(1,551,208) $
— $
—
—
—
—
(470,080)
(11,867)
(6,100)
(1,063,161)
—
(1,063,161)
(1,551,208) $
47,584
13,157
207,402
335,946
49,731
653,820
162,809
209,089
105,879
—
—
1,131,597
88,889
87,724
291
176,904
396,691
—
—
51,622
505,286
1,094
506,380
1,131,597
ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Inventories
Prepaid expenses and other assets
Total current assets
Land, buildings, improvements
and equipment, net
Goodwill
Other long term assets
Intercompany receivable
Investment in subsidiaries
Total
LIABILITIES AND EQUITY
Accounts payable
Accrued expenses and other liabilities
Current portion of long term debt
Total current liabilities
Long-term debt
Intercompany payable
Losses in excess of investment in
subsidiaries
Other long-term obligations
Shareholders’ equity attributable to
Central Garden & Pet
Noncontrolling interest
Total equity
Total
F- 38
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 24, 2016
(in thousands)
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
3,514
$
2,654
$
150,141
$
(4,883) $
151,426
Net cash provided by operating activities
Additions to property, plant and
equipment
Payments to acquire companies, net of
expenses
Proceeds from disposal of land,
buildings, etc.
Change in restricted cash and cash
equivalents
Maturities of short term investments
Investment in short term investments
Other investing activities
Intercompany investing activities
Net cash used by investing activities
Repayments on revolving line of credit
Borrowings on revolving line of credit
Repayments of long-term debt
Issuance of long-term debt
Proceeds from issuance of common stock
Excess tax benefits from stock-based
awards
Repurchase of common stock
Payments of contingent consideration
Payment of deferred financing costs
Distribution to parent
Distribution to noncontrolling interest
Intercompany financing activities
Net cash provided (used) by financing
activities
Effect of exchange rates on cash
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning
of year
(4,513)
(717)
(22,392)
(69,001)
—
2,247
—
—
(730)
(83)
(72,080)
(419,000)
419,000
(400,286)
400,000
324
6,869
(10,873)
(7,560)
—
—
127,436
115,910
(1,466)
45,878
36,280
—
—
—
—
—
—
—
(717)
—
—
—
—
—
—
—
(4,883)
(592)
2,747
(2,728)
464
—
3,911
—
—
—
—
(130,100)
(148,581)
—
—
(21)
—
—
—
(2,026)
—
—
—
—
(2,047)
334
(327)
(153)
10,022
1,282
—
—
—
—
—
—
—
130,183
130,183
—
—
—
—
—
—
—
4,883
—
(130,183)
(125,300)
—
—
—
— $
(27,622)
(69,001)
3,911
2,247
—
—
(730)
—
(91,195)
(419,000)
419,000
(400,307)
400,000
324
6,869
(10,873)
(2,026)
(7,560)
—
(592)
—
(14,165)
(668)
45,398
47,584
92,982
Cash and cash equivalents at end of year
$
82,158
$
9,695
$
1,129
$
F- 39
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 26, 2015
(in thousands)
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
(16,823) $
7,372
$
103,619
$
(6,719) $
87,449
(2,721)
(405)
(18,904)
(38,384)
1,126
9,997
(17)
(546)
(15,789)
(46,334)
(312,000)
312,000
(50,262)
200
2,154
(18,497)
(258)
—
—
103,326
36,663
(697)
—
—
—
—
—
—
(405)
—
—
—
—
—
—
—
(6,719)
(1,680)
(1,574)
(9,973)
222
—
—
—
—
—
(85,963)
(104,867)
—
—
(27)
—
—
—
—
—
—
—
(27)
158
—
—
—
—
—
—
101,752
101,752
—
—
—
—
—
—
—
6,719
—
(101,752)
(95,033)
—
(22,030)
(38,384)
1,126
9,997
(17)
(546)
—
(49,854)
(312,000)
312,000
(50,289)
200
2,154
(18,497)
(258)
—
(1,680)
—
(68,370)
(317)
Net cash (used) provided by operating
activities
Additions to property, plant and
equipment
Payments to acquire companies, net of
expenses
Change in restricted cash and cash
equivalents
Maturities of short term investments
Investment in short term investments
Other investing activities
Intercompany investing activities
Net cash (used) provided by investing
activities
Repayments on revolving line of credit
Borrowings on revolving line of credit
Repayments of long-term debt
Proceeds from issuance of common
stock
Excess tax benefits from stock-based
awards
Repurchase of common stock
Payment of deferred financing costs
Distribution to parent
Distribution to noncontrolling interest
Intercompany financing activities
Net cash provided (used) by financing
activities
Effect of exchange rates on cash
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning
of year
Cash and cash equivalents at end of year $
(27,191)
(2,784)
(1,117)
—
(31,092)
63,471
12,806
2,399
36,280
$
10,022
$
1,282
$
—
— $
78,676
47,584
F- 40
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Net cash (used) provided by operating
activities
Additions to property, plant and
equipment
Businesses acquired, net of cash acquired
Proceeds from disposal of plant and
equipment
Change in restricted cash and cash
equivalents
Maturities of short term investments
Investment in short term investments
Intercompany investing activities
Net cash (used) provided by investing
activities
Repayments on revolving line of credit
Borrowings on revolving line of credit
Repayments of long-term debt
Proceeds from issuance of common stock
Excess tax benefits from stock-based
awards
Repurchase of common stock
Payment of deferred financing costs
Distribution to parent
Distribution to noncontrolling interest
Intercompany financing activities
Net cash provided (used) by financing
activities
Effect of exchange rates on cash
Net increase (decrease) in cash and cash
equivalents
Cash and cash equivalents at beginning of
year
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 27, 2014
(in thousands)
Parent
Non-Guarantor
Subsidiaries
Guarantor
Subsidiaries
Eliminations
Consolidated
$
(4,139) $
7,420
$
125,720
$
(2,534) $
126,467
(6,721)
(1,027)
(9,425)
—
—
(14,283)
17,820
(10,000)
(6,726)
—
—
—
—
—
—
(20,282)
8,737
—
—
—
(104,926)
—
—
—
—
—
—
111,652
(17,173)
(20,282)
8,737
(14,283)
17,820
(10,000)
—
(19,910)
(1,027)
(125,896)
111,652
(35,181)
(301,000)
278,000
(243)
1,165
498
(2,332)
(3,090)
—
—
—
—
—
—
—
—
(2,534)
—
(633)
109,057
2,595
82,055
27
58,033
5,438
(572)
(18)
5,803
7,003
—
—
(124)
—
—
—
—
—
—
—
(124)
(16)
(316)
2,715
—
—
—
—
—
—
—
2,534
—
(111,652)
(109,118)
—
—
—
— $
(301,000)
278,000
(367)
1,165
498
(2,332)
(3,090)
—
(633)
—
(27,759)
(7)
63,520
15,156
78,676
Cash and cash equivalents at end of year
$
63,471
$
12,806
$
2,399
$
20. Subsequent Events
F- 41
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Segrest Acquisition
On October 24, 2016, the Company purchased Segrest Inc., the leading wholesaler of aquarium fish, for a purchase price
of $60 million, of which $6.0 million is contingent upon future events. The Company has not completed its initial purchase
price allocation and, therefore, has not provided similar disclosures to those in Note 3 - Acquisitions and Investments in Joint
Ventures. The acquisition is expected to strengthen Central's position in the aquatics category and provide the opportunity for
significant synergies with the Company's existing aquatics business.
Veterinary Products Business
In November 2016, the Company sold a small veterinary products division, which had sales of $8.6 million in fiscal
2016. The business was not profitable over the last several years.
F- 42
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated by reference into this Form 10-K:
Exhibit
Number
3.1
3.2
4.1
4.2
4.3
4.4
4.5
10.1*
10.2
10.3*
10.4*
10.5*
10.6*
Exhibit
Fourth Amended and Restated Certificate of
Incorporation, including the Certificate of
Designation – Series A Convertible Preferred
Stock and Certificate of Designation – Series
B Convertible Preferred Stock.
Amended and Restated By-laws of Central
Garden & Pet Company, effective August 18,
2015.
Specimen Common Stock Certificate.
Specimen Class A Common Stock Certificate.
Indenture, dated as of March 8, 2010, by and
between the Company and Wells Fargo Bank,
National Association, as trustee.
Third Supplemental Indenture, dated as of
November 9, 2015, by and among the
Company, the guarantors named therein and
Wells Fargo Bank, National Association, as
trustee, relating to 6.125% Senior Notes due
2023.
Fourth Supplemental Indenture, dated as of
March 25, 2016, by and among the Company,
certain guarantors named therein and Wells
Fargo Bank, National Association, as trustee,
relating to 6.125% Senior Notes due 2023.
Form of Indemnification Agreement between
the Company and Executive Officers and
Directors.
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.
2003 Omnibus Equity Incentive Plan, as
amended and restated effective February 13,
2012.
Form of Nonstatutory Stock Option
Agreement for 2003 Omnibus Equity
Incentive Plan.
Form of Restricted Stock Agreement for 2003
Omnibus Equity Incentive Plan.
Form of Performance-Based Non-Statutory
Stock Option Agreement for 2003 Omnibus
Equity Incentive Plan
Incorporated by Reference
Form
10-K
File
No.
001-33268
Exhibit
3.1
Filing
Date
12/14/2006
Filed
Herewith
10-K
001-33268
3.2
12/10/2015
S-1
8-A
8-K
33-48070
001-33268
001-33268
4.1
1
4.2
5/21/1992
1/24/2007
3/8/2010
10-K
001-33268
4.6
12/10/2015
X
S-1
33-48070
10.18
5/21/1992
10-Q
001-33268
10.1
5/5/2016
8-K
001-33268
10.2
2/15/2012
10-K
000-20242
10/5/2001
12/9/2004
10-K
000-20242
10/5/2002
12/9/2004
10-K
001-33268
10/4/2003
11/19/2010
F- 43
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Exhibit
Number
10.7*
10.8*
10.9*
10.10*
Exhibit
Nonemployee Director Equity Incentive Plan,
as amended and restated effective December
10, 2008 (Incorporated by reference from
Exhibit 10.5 to the Company’s Form 10-Q for
the fiscal quarter ended March 28, 2009).
Form of Nonstatutory Stock Option
Agreement for Nonemployee Director Equity
Incentive Plan.
Form of Restricted Stock Agreement for
Nonemployee Director Equity Incentive Plan.
Employment Agreement dated as of February
27, 1998 between Pennington Seed, Inc. of
Delaware and Brooks Pennington III.
Incorporated by Reference
File
No.
001-33268
Exhibit
10.5
Form
10-Q
Filing
Date
5/7/2009
Filed
Herewith
10-Q
000-20242
10/6/2001
2/3/2005
10-Q
000-20242
10/6/2002
2/3/2005
10-K/A
000-20242
10.20
1/20/1999
10.11* Modification and Extension of Employment
10-Q
000-20242
10/7/2001
8/8/2003
Agreement dated as of February 27, 1998
between Pennington Seed, Inc. of Delaware
and Brooks Pennington III, dated as of May 6,
2003.
10.12* Modification and Extension of Employment
Agreement and Noncompetition Agreement,
dated as of April 10, 2006, between the
Company and Brooks M. Pennington III.
10.13* Modification and Extension of Employment
Agreement and Noncompetition Agreement,
dated as of July 1, 2008, between the
Company and Brooks M. Pennington III.
10.14*
Amendment of Employment Agreement and
Non-Competition Agreement between the
Company and Brooks M. Pennington III,
dated March 20, 2012.
10.15* Modification and Extension of Employment
Agreement and Noncompetition Agreement,
dated as of March 1, 2014, between the
Company and Brooks M. Pennington III.
10.16*
10.17*
10.18*
10.19*
10.20*
10.21*
10.22*
12
Form of Agreement to Protect Confidential
Information, Intellectual Property and
Business Relationships.
Form of Post-Termination Consulting
Agreement.
Employment Agreement between the
Company and John Ranelli, dated January 9,
2013.
Amendment to Employment Agreement dated
July 22, 2015 between the Company and John
R. Ranelli.
Employment Agreement between the
Company and David Chichester, effective
September 2, 2015.
Employment Agreement between the
Company and George A. Yuhas, effective
March 1, 2011.
Employment Agreement between the
Company and George Roeth, effective June 1,
2016.
Statement re Computation of Ratios of
Earnings to Fixed Charges.
F- 44
8-K
000-20242
10.1
4/14/2006
10-K
001-33268
10/7/2002
11/26/2008
10-Q
001-33268
10.1
2/7/2013
10-Q
001-33268
10.1
2/5/2015
8-K
000-20242
10.1
10/14/2005
8-K
000-20242
10.2
10/14/2005
10-Q
001-33268
10.3
2/7/2013
8-K
001-33268
10.1
7/27/2015
10-K
001-33268
10.23
12/10/2015
10-K
001-33268
10.24
12/10/2015
8-K
011-33268
10.25
5/6/2016
X
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Incorporated by Reference
Form
File
No.
Exhibit
Filing
Date
Filed
Herewith
X
X
X
X
X
X
X
X
X
X
X
X
Exhibit
Number
21
23
31.1
31.2
32.1
32.2
Exhibit
List of Subsidiaries.
Consent of Independent Registered Public
Accounting Firm.
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a).
Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a).
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350.
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350.
101.INS
XBRL Instance Document
101.SCH
101.CAL
XBRL Taxonomy Extension Schema
Document
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
*
Management contract or compensatory plan or arrangement.
F- 45
CORPORATE INFORMATION
Central Garden & Pet Company
BOARD OF DIRECTORS
CORPORATE OFFICE
Thomas J. Colligan
Former Vice Chairman of
PriceWaterhouse Coopers LLP,
Vice Dean of Executive
Education at the University of
Pennsylvania’s Wharton School
Alfred A. Piergallini
Consultant; Former President and
CEO Novartis Consumer Health
Worldwide; Former Chairman,
President and CEO, Gerber
Products Company
John R. Ranelli
Former CEO, Central Garden &
Pet; Former Chairman, Woolrich,
Inc.
M. Beth Springer
Former Executive Vice President
and Officer, The Clorox
Company
William E. Brown
Chairman
George C. Roeth
President & CEO
Former COO Lifestyle,
Household and Global Operating
Functions, The Clorox Company
David N. Chichester
Former Partner, Tatum, a
Randstad Company; Senior Vice
President Finance, Starbucks
Corporation; CFO, Starbucks
Coffee Japan, Ltd.; CFO, Red
Roof Inns, Inc.
Brooks M. Pennington, III
Director of Special Projects;
Former President,
Pennington Seed, Inc.
John B. Balousek
Former CEO/President of True
North Technologies, Digital and
Interactive Services Company;
Former President/ Chief
Operating Officer, Foote, Cone &
Belding Communications, Global
Communications Company
EXECUTIVE OFFICERS
William E. Brown
Chairman
George Yuhas
General Counsel & Secretary
George C. Roeth
President and
Chief Executive Officer
Michael A. Reed
Executive Vice President
Central Garden & Pet Company
1340 Treat Blvd., Suite 600
Walnut Creek, California 94597
(925) 948-4000
www.central.com
INDEPENDENT AUDITORS
Deloitte & Touche LLP
San Francisco, California
TRANSFER AGENT
Computershare Trust Company, N.A.
250 Royall Street
Canton, Massachusetts 02021
(877) 261-9290
www.computershare.com/investor
STOCK LISTING
NASDAQ Symbols CENT/CENTA
ANNUAL MEETING
The annual meeting of shareholders will
be held at 10:30 am Tuesday,
February 14, 2017 at:
Renaissance ClubSport
2805 Jones Road
Walnut Creek, California
For additional information, please visit
the Company’s website:
www.central.com
or contact Investor Relations:
(925) 948-4000