UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 26, 2009
Commission File Number 1-33268
CENTRAL GARDEN & PET COMPANY
(Exact name of registrant as specified in its charter)
Delaware | 68-0275553 | |
(State or other jurisdiction of incorporation or organization) | (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 |
Name of Each Exchange on Which Registered | |
Common Stock Class A Common Stock |
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 x No ¨
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 x
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 x 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 ¨ 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 registrants 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 ¨ |
Accelerated Filer x | |
Non-Accelerated Filer ¨ (Do not check if a smaller reporting company) |
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 x
At March 28, 2009, the aggregate market value of the registrants Common Stock, Class A Common Stock and Class B Stock held by non-affiliates of the registrant was approximately $142, 917,000, $343,283,000 and $50,000, respectively.
At November 13, 2009, the number of shares outstanding of the registrants Common Stock was 18,781,493 and the number of shares of Class A Common Stock was 47,580,896. 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 Companys 2010 Annual Meeting of Stockholders Part III of this Form 10-K.
Index to Annual Report on Form 10-K
For the fiscal year ended September 26, 2009
Page | ||||
PART I | ||||
Item 1. | 1 | |||
Item 1A. | 13 | |||
Item 1B. | 21 | |||
Item 2. | 21 | |||
Item 3. | 22 | |||
Item 4. | 22 | |||
PART II | ||||
Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 23 | ||
Item 6. | 26 | |||
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
28 | ||
Item 7A. | 44 | |||
Item 8. | 45 | |||
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
86 | ||
Item 9A. | 86 | |||
Item 9B. | 86 | |||
PART III | ||||
Item 10. | 86 | |||
Item 11. | 86 | |||
Item 12. | Security Ownership of Certain Beneficial Owners and Management |
86 | ||
Item 13. | 87 | |||
Item 14. | 87 | |||
PART IV | ||||
Item 15. | 87 |
i
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, 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 industry and economies 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 materialize, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in or imply by any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances. Presently known risk factors include, but are not limited to, the following factors:
| seasonality and fluctuations in our operating results and cash flow; |
| fluctuations in market prices for seeds and grains; |
| declines in consumer spending during economic downturns; |
| inflation, deflation and other adverse macro-economic conditions; |
| supply shortages in small animals and pet birds; |
| adverse weather conditions; |
| fluctuations in energy prices, fuel and related petrochemical costs; |
| our ability to refinance our indebtedness on reasonable terms; |
| future reductions in our debt capacity in the event of a future deterioration in operating results; |
| access to and cost of additional capital; |
| dependence on a few customers for a significant portion of our business; |
| consolidation trends in the retail industry; |
| uncertainty about new product innovations and marketing programs; |
| competition in our industries; |
| risks associated with our acquisition strategy; |
| dependence upon our key executive officers; |
| implementation of a new enterprise resource planning information technology system; |
| potential environmental liabilities; |
| risk associated with international sourcing; |
| litigation and product liability claims; |
| 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 Packaged Facts, Lawn & Garden Products in the U.S. 2009; Mintel, Lawn & Garden Products & Services 2007; Packaged Facts, Pet Supplies in the U.S. 2007 and Pet Food in the U.S. 2006; Mintel, Pet Food and Supplies 2007; American Pet Products Association (APPA) National Pet Owners Survey 2009-2010 and our estimates based on managements 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. We believe these estimates to be accurate as of the date of this Form 10-K. However, 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 in this Form 10-K, and estimates and beliefs based on that data, may not be reliable.
iii
PART I
BUSINESS
Our Company
Central Garden & Pet Company is a leading innovator, marketer and producer of quality branded products. We are one of the largest suppliers in the pet and lawn and garden supplies industries in the United States. The total pet industry is estimated to be approximately $31 billion in annual retail sales. We estimate the annual retail sales of the pet supplies and ultra-premium pet food markets in the categories in which we participate to be approximately $15 billion. As of 2009, the total lawn and garden industry in the United States is estimated to be approximately $24 billion in annual retail sales. We estimate the annual retail sales of the lawn and garden supplies markets in the categories in which we participate to be approximately $6.2 billion.
Our pet supplies products include products for dogs and cats, including edible bones, premium healthy edible and non-edible chews, ultra-premium dog and cat food and treats, leashes, collars, 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 a number of brand names including AdamsTM, All-Glass Aquarium®, Altosid, AqueonTM, BioSpot®, Breeders Choice®, Coralife®, Farnam®, Four Paws®, Interpet, Kaytee®, Kent Marine®, Nylabone®, Pet Select®, Pre-Strike®, Oceanic Systems®, Super Pet®, TFH®, ZillaTM 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 and lighting products including pottery, trellises and other wood products and holiday lighting. These products are sold under a number of brand names including AMDRO®, GKI/Bethlehem Lighting®, GrantsTM, Ironite®, Lilly Miller®, Matthews Four SeasonsTM, New England Pottery®, Norcal Pottery®, Pennington®, Overn Out®, Sevin®, Smart SeedTM and The Rebels®.
In fiscal 2009, our consolidated net sales were $1.6 billion, of which our lawn and garden segment, or Garden Products, accounted for approximately $781 million and our pet segment, or Pet Products, accounted for approximately $833 million. In fiscal 2009, our income from operations was $126.0 million, of which Garden Products accounted for $68.9 million and Pet Products accounted for $102.2 million, before corporate expenses and eliminations of $45.1 million. See Note 17 to our consolidated financial statements for financial information about our two operating segments.
Recent Developments
Fiscal 2009 Operating Performance Improvement. We showed improved performance in fiscal 2009 despite a challenging economic environment. We achieved our improved performance by maintaining a strict focus on our core operating objectives: reducing our investment in working capital; lowering expenses; and improving gross margins.
Financial highlights include:
| Net sales for fiscal 2009 decreased $91 million, or 5.3%, to $1.6 billion. |
| Net earnings for fiscal 2009 were $65.9 million, or $0.94 per share on a diluted basis. |
1
| Gross margin increased 210 basis points in fiscal 2009 to 32.7%. |
| Selling, general & administrative expenses decreased $15 million, or 3.5%, to $401 million in fiscal 2009. |
| We generated cash flows from operating activities of approximately $222 million during fiscal 2009, an increase of $107 million as compared to fiscal 2008. |
| We reduced our outstanding debt by $115 million. |
Repurchase of Company Stock. During fiscal 2009, we repurchased 2.2 million shares of our voting common stock (CENT) at an aggregate cost of approximately $19.3 million, or approximately $8.68 per share and 2.1 million shares of our non-voting Class A common stock (CENTA) at an aggregate cost of approximately $17.8 million, or approximately $8.55 per share.
Competitive Strengths
We believe we have the following competitive strengths which serve as the foundation of our business strategy:
| Market Leadership Positions Built on a Strong Brand Portfolio. We are one of the leaders in the premium branded U.S. pet supplies market and in the U.S. consumer lawn and garden supplies market. We have a diversified portfolio of brands, most 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 20 years. |
| Innovative New Products. We have developed a reputation for introducing innovative and high quality products. We continuously seek to introduce new products at a reasonable cost, both as complementary extensions of existing product lines and as new product categories. We have received approximately 21 industry awards for our new pet products in the last three years. |
| Strong Relationships with Retailers. We have developed strong relationships with major and independent retailers through product innovation, premium brand names, broad product offerings, captive 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. 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 Lowes. Our ability to service large retailers, to meet their unique needs for packaging and point of sale displays and to offer new innovative products provides us with a competitive advantage. Independent retailers value our high level of customer service and broad array of premium branded products. We are the largest supplier to independent pet supplies retailers in the United States. |
| Favorable Long-Term Industry Characteristics. The pet and lawn and garden supplies markets in the U.S. have grown and are expected to continue 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 who keep pets as companions and have more disposable income and leisure time available for both pets and garden activities. |
| 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: |
| acquisition and maintenance of premium shelf placement; |
| prompt product replenishment; |
2
| 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.
| Experienced and Incentivized Management Team. Our senior management team has significant experience in the pet and lawn and garden supplies industries. William E. Brown, our Chairman and Chief Executive Officer, has over 25 years of industry experience. Mr. Brown also owns approximately 9% of our outstanding stock. |
Business Strategy
Our objective is to increase market share, revenue, cash flow and profitability by enhancing our position as one of the leading companies in the U.S. pet supplies industry and lawn and garden supplies industry. To achieve our objective, we plan to capitalize on our strengths and the favorable industry trends by implementing the following key elements of our business strategy:
| Promote 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 retailers to increase shelf space and sales. 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 mass market, grocery and specialty pet store channels and 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 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 new product strategy seeks to capitalize on fulfilling consumer needs, our strong brand names, established customer relationships and history of product innovation. We have also made investments in our corporate sales and marketing infrastructure in the areas of product development, category management and key account sales support. |
| Improve Margins. We believe there are opportunities to improve our gross and operating margins through price increases, increased sales of our higher margin, innovative branded products and cost reductions and leveraging of our existing infrastructure. Since fiscal 2004, we have continued to consolidate our sales and logistics centers, made capital improvements and consolidated some of our manufacturing facilities to reduce costs and improve manufacturing efficiencies. As a result of our initiatives, gross margins have increased from 30.3% in fiscal 2004 to 32.7% in fiscal 2009. |
| Pursue Strategic Acquisitions. We plan to continue to make selected strategic acquisitions of branded product companies that complement our existing brands and product offerings. Management has substantial experience in acquiring branded products companies. By leveraging our marketing, manufacturing and sales and logistics capabilities, we believe we can increase the sales and improve the operating efficiencies of acquired companies. We look for companies with the potential to have the top one or two brands in their respective categories. The characteristics we seek when evaluating target companies are strong brand names, high quality and innovative product offerings, an experienced management team and a history of organic earnings growth. |
3
| Reduce Our Investment In Working Capital. We believe there are opportunities to continue to reduce our investment in working capital by focusing on specific balance sheet metrics. In fiscal 2009, each balance sheet metric improved substantially as we reduced inventory, collected receivables more efficiently and managed payables more effectively. As a result of our focus on working capital, we have strengthened our balance sheet. |
Products-General
The following table indicates each class of similar products which represented more than 10% of our consolidated net sales in the fiscal years presented (in millions).
Category |
2009 | 2008 | 2007 | ||||||
Grass seed |
$ | 174.5 | $ | 206.3 | $ | 195.7 | |||
Bird feed |
200.7 | 199.7 | 168.3 | ||||||
Garden chemicals and control products |
270.5 | 247.6 | 257.4 | ||||||
Other garden supplies |
211.8 | 232.6 | 221.5 | ||||||
Other pet supplies |
756.8 | 819.2 | 828.2 | ||||||
Total |
$ | 1,614.3 | $ | 1,705.4 | $ | 1,671.1 | |||
Pet Products Business
Overview
We are one of the leading marketers and producers of premium branded pet supplies in the United States. We believe that most of our brands are the number one or two brands in their respective U.S. market categories. In addition, Pet Products operates the largest sales and logistics network in the industry, which strategically supports its brands. In fiscal 2009, Pet Products accounted for $833.2 million of our consolidated net sales and $102.2 million of our consolidated income from operations before corporate expenses and eliminations.
Industry Background
According to the 2009-2010 APPA National Pet Owners Survey, U.S. pet ownership is at its highest level, with 71.4 million households, or 62%, owning a pet, an increase of 0.3 million households, or 0.4%, when compared to household pet ownership in 2006.
The pet industry includes live animals, food, supplies, veterinarian care and services. 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, leashes, collars, 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 and supplements, and information and knowledge resources; and products for horses and livestock. According to Mintel, U.S. retail sales of pet food and supplies in 2010 are expected to reach $31.3 billion, from $25.9 billion in 2007. Mintel also estimates that retail sales of pet supplies will reach $12.8 billion by 2013, a compounded annual growth rate of 4% from 2008. We also operate in the ultra-premium category of dog and cat food and treats. Mintel estimates the total pet food market to be $18.6 billion in 2010. Packaged Facts asserts the pet food market is experiencing an upscale thrust, featuring products that are natural, functional and address specific dietary needs of animals, primarily dogs and cats. We estimate the current applicable market opportunity for our high-end, ultra-premium dog and cat food and treats to be approximately $4 billion.
We believe this 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 recessionary pressures in the broader U.S. economy.
4
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 U.S. census data, 41% of the population will be 45 years or older by 2010. 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.
The U.S. pet supplies market is highly fragmented with over 2,000 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.
The pet food and supplies industry retail channel also remains fragmented, with over 15,000 independent pet supply stores in the United States and only two national specialty retailers, PETsMART and PETCO. These two pet superstores have been growing rapidly, and pet products have also become a growing category in mass merchandisers, discounters and grocery outlets. 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 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 aquatics, dog & cat, bird & small animal/specialty pet food and animal health and nutrition products.
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, Oceanic Systems Aquariums, Kent Marine, Coralife and Blagdon.
Dog & Cat. We are a leading marketer and producer of premium healthy edible and non-edible chews, ultra-premium dog and cat food, toys, collars, leashes, grooming supplies, pet carriers and other accessories, and information and knowledge resources featuring the brands Nylabone, Four Paws, TFH, Pet Select, Interpet, Pet Love and Mikki®. Nylabone has a strong history of developing innovative new products such as the NutriDent® Edible Dental Brush Chews, Toro and Lobo as well as numerous other award winning dog toys. Four Paws products include grooming supplies and toys, and TFH is a leading producer and publisher of pet books and magazines. Breeders Choice is regarded by the industry as one of the highest quality developers and manufacturers of ultra-premium natural pet food and treats. Breeders Choice brands include Pinnacle®, Avoderm® and Active Care® .
Bird & Small Animal/Specialty Pet. We are a leading marketer and producer of specialty pet food for birds, wild birds and small animals, vitamins and nutritional supplements, bird and small animal cages, habitats, transportation devices, toys and other accessories designed for the small animal marketplace featuring the brands Kaytee, Super Pet, Critter Trail® and Canopy Scientific®. Kaytee is one of the largest producers of specialty bird feed.
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 Zodiac, 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
5
Plus. In addition, through our Farnam operations, we are a leading manufacturer and marketer of innovative health care products for horses, household pets and livestock. Farnams portfolio of industry leading brands includes the Farnam umbrella brand, Equicare®, ComboCareTM, IverCare®, Bronco®, Super Mask® and Repel-X® for horses, D-WormTM, BioSpot® and Scratchex® for household pets, and Adams and Bite FreeTM insect controls for home and yard care.
Sales and Logistics Network
Our domestic sales and logistics network, consisting of ten facilities, exists primarily to promote our proprietary brands and provides value-added service to over 6,000 independent specialty retail stores for our branded products. 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 network also sells many other manufacturers brands of pet supplies and combines these products with our branded products into single shipments enabling our independent customers to deal with us on a cost effective basis to meet their pet supplies requirements. We also operate one 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 regional and national specialty pet stores, independent pet retailers, mass merchants and grocery stores, and professionals, such as manufacturers of insect control products, veterinarians, municipalities, farmers and other economic animal buyers. PETsMART accounted for approximately 10% of Pet Products net sales in each of fiscal years 2009, 2008 and 2007. PETCO is also a significant customer.
To maximize our product placement and visibility in retail stores, we market our products through the following complementary strategies:
| each of our categories has a dedicated sales force that focuses on their specific products across all trade channels; |
| our sales and logistics network, which includes sales and marketing personnel, focuses on gaining product and program placement at thousands of independent retailers; |
| dedicated account-managers and sales teams service several of our largest customers; and |
| independent distributors, who sell our brands. |
Our marketing strategy is consumer, brand and trade channel specific. Our focus is on innovation, product quality, premium packaging, product positioning and leveraging our high quality brand names with line extensions. To execute this strategy, we partner closely with our customers to identify their needs, jointly develop strategies to meet those needs, and deliver programs that include newspaper, radio, trade journals, and direct consumer mailings.
Manufacturing
Pet Products currently manufactures the majority of its branded products in 17 manufacturing facilities, located primarily in the United States. In addition, certain of our proprietary branded products are manufactured by contract manufacturers. We have entered into an exclusive arrangement with a third party to manufacture (S)-Methoprene, the active ingredient in our flea and tick control products.
Purchasing
Pet Products purchases most of its 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. Pet
6
Products maintains 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 Pet Products financial results.
The principal raw materials required for Kaytees bird feed manufacturing 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 to satisfy expected production volume, Kaytee enters into contracts to purchase a portion of its 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 2009, grain costs declined due primarily to deflationary pressures impacting the broader economy. Our weighted average cost per pound declined 13% compared to fiscal 2008 but remained 20% above fiscal 2007 levels. In fiscal 2008, our weighted average cost per pound increased 39% compared to fiscal 2007. In fiscal 2007 and 2008, we were adversely impacted by extraordinary increases in grain costs related primarily to our wild bird feed operations. The primary causes for the higher grain costs in fiscal 2008 were the inflationary pressures resulting from the macro-economic environment. The primary causes for the higher grain costs in fiscal 2007 were lower crop yields in 2006 due to drought conditions in key grain producing regions in the United States and farmers shifting to corn-based crops for the production of ethanol. For more information, see Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors.
Competition
The pet supplies industry is highly competitive and has experienced considerable consolidation in the last five years. Our branded pet products compete against national and regional branded products and private label products produced by various suppliers. Our largest competitors are Spectrum Brands and Hartz Mountain. Pet Products competes primarily on the basis of brand recognition, innovation, upscale packaging, quality and service. Pet Products sales and logistics operations compete with a number of smaller local and regional distributors, with competition based on product selection, price, value-added services and personal relationships.
Garden Products Business
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, Grants, Lilly Miller, Ironite, Sevin, Overn Out, Norcal Pottery, New England Pottery, GKI/Bethlehem Lighting and Matthews Four Seasons. We also produce value brands at lower prices, including some Wal*Mart private label brands. In addition, Garden Products operates a sales and logistics network that strategically supports its brands. In fiscal 2009, Garden Products accounted for $781.1 million of our consolidated net sales and $68.9 million of our consolidated income from operations before corporate expenses and eliminations.
Industry Background
We believe that gardening is one of the most popular leisure activities in the United States, with approximately 85 million or 80% of all U.S. households participating in one or more lawn and garden activities in 2005. We estimate the retail sales of the lawn and garden supplies industry in the categories in which we participate to be approximately $6.2 billion. We believe that the industry will continue to grow due to favorable demographic trends, albeit potentially at a slower rate due to recessionary pressures in the broader U.S. economy. The key demographic bolstering our lawn and garden market is the growth rate in the number of adults over age
7
55, who are 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 U.S. census data, 41% of the population will be 45 years or older in 2010. We believe that this demographic should increase the number of lawn and garden product users.
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 often carry one or two premium products and one value brand. Due to the rapid expansion and consolidation of mass merchants and home and garden centers in the last 15 years, 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 Lowes, and mass merchants, such as Wal*Mart, to continue to concentrate industry distribution.
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, decorative outdoor patio products and Christmas products and lighting. Our Pennington brand is one of the largest in grass seed and wild bird feed, and our Amdro brand is a leading portfolio of fire ant bait products. We are also a leading marketer of indoor and outdoor pottery products through our Norcal Pottery and New England Pottery brands.
Grass Seed. We are a leading marketer and producer 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 QualityCM , MasterTurf®, The Rebels, Palmers Pride and Smart SeedTM brand names. We also produce private label brands of grass seed, including Wal*Marts private label grass seed. The Pennington grass seed manufacturing facilities are some of the largest and most modern seed conditioning facilities in the industry. In fiscal 2008, Pennington Seed launched Smart Seed, a drought-tolerant grass seed product that develops strong, deep root systems and requires up to 30% less water.
Wild Bird Products. We are a leading marketer and producer 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. Our wild bird feed is treated with Bird-Kote®, a nutritious coating made up of vegetable oil fortified with oil-soluble vitamins and elements needed by wild birds.
Lawn and Garden Chemicals. We are a leading marketer of lawn and garden weed, moss, insect and pest control products and soil supplements and stimulants. We sell these products under the Knockout®, Strike®, Lilly Miller, Maxide®, Alaska Fish Fertilizer®, IMAGE®, Sevin, Overn Out and RooTone® brand names and the Eliminator private label for Wal*Mart. We are also a leading marketer of fire ant bait, sold primarily in the southern United States, under the AMDRO brand name. In addition, we market ant baits, animal repellents and garden aid products under the Grants brand name. We manufacture several lines of lawn and garden fertilizers and soil supplements, in granular and liquid form, under the Pennington, Pro Care, Ironite and other private and controlled labels.
Decorative Patio, Garden and Seasonal Products. We are a leading marketer of decorative indoor and outdoor pottery products in the United States. We sell these products under the Norcal Pottery and New England Pottery brand names which include terra cotta, stoneware, ceramic and porcelain pots. We also market seasonal Christmas products and lighting under the brand name GKI/Bethlehem Lighting, and we manufacture a complete line of wooden garden products, including planters, barrel fountains, arbors and trellises that are sold under the Matthews Four Seasons brand name. In addition, we manufacture wood pellets under the Pennington Natures HeatTM brand for use in home wood pellet stoves.
8
Sales and Logistics Network
Our sales and logistics network, consisting of 18 facilities, 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 innovation, upscale packaging, quality 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 32%, 30% and 31%, sales to Home Depot represented approximately 14%, 12% and 14%, and sales to Lowes represented approximately 22%, 18% and 17% of Garden Products net sales in fiscal 2009, 2008 and 2007, respectively.
To maximize our product placement and visibility in retail stores, we market our products through the following four complementary strategies:
| dedicated sales forces for each of our brand groups; |
| our sales and logistics network, which includes sales and merchandising personnel to service independent retailers on a weekly basis, especially during the prime spring and summer seasons; |
| dedicated account-managers and sales teams service several of our largest customers; and |
| independent distributors who sell our brands. |
Our marketing department develops our consumer and retailer support plans, including cooperative advertising. We also promote our products to consumers and retailers through advertisements in trade journals, magazines and seasonal radio and television commercials.
Manufacturing
Garden Products currently operates 23 manufacturing facilities. In addition, certain of our proprietary branded products are manufactured by contract manufacturers.
Purchasing
Most of the raw materials purchased by Garden Products are acquired from a number of different suppliers. The key ingredients in our fertilizer and insect and weed control products are commodity and specialty chemicals including phosphates, urea, potash, herbicides, insecticides and fungicides. Garden Products obtains grass seed from various sources. The principal raw materials required for Penningtons wild bird feed manufacturing operations are bulk commodity grains, including millet, milo and sunflower seeds, which are generally purchased from large national commodity companies and local grain cooperatives. Garden Products obtains its raw materials from various sources, which it presently considers to be adequate. No one source is considered to be essential to Garden Products. In order to ensure an adequate supply of seed to satisfy expected production volume, Pennington enters into contracts in advance to purchase a portion of its grass seed requirements at future
9
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 2009, grain costs declined due primarily to deflationary pressures impacting the broader economy. Our weighted average cost per pound declined 13% compared to fiscal 2008 but remained 20% above fiscal 2007 levels. In fiscal 2008, our weighted average cost per pound increased 39% compared to fiscal 2007. In fiscal 2007 and fiscal 2008, we were adversely impacted by extraordinary increases in grain costs related primarily to our wild bird feed operations. The primary cause for the higher grain costs in fiscal 2008 was the inflationary pressures resulting from the macro-economic environment. The primary causes for the higher grain costs in fiscal 2007 were lower crop yields in 2006 due to drought conditions in key grain producing regions in the United States and farmers shifting to corn-based crops for the production of ethanol. For more information, see Managements Discussion and Analysis of Financial Condition and Results of Operations and Risk Factors.
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 similar garden products. In addition, Spectrum Brands is a strong competitor with a broad product line. Garden Products competes primarily on the basis of its premium and value brands, quality, service, price, low cost manufacturing and strong brand names. Garden Products sales and logistics operations also compete with a large number of distributors, with competition based on price, service and personal relationships.
Significant Customers
Wal*Mart, our largest customer, represented approximately 18% of our total company net sales in fiscal 2009 and approximately 17% in fiscal 2008 and 2007, and represented approximately 32% of Garden Products net sales in fiscal 2009, 30% in fiscal 2008 and 31% in fiscal 2007. Sales to Home Depot represented approximately 14% of Garden Products net sales in fiscal 2009, 12% in fiscal 2008 and 14% in fiscal 2007. Sales to Lowes represented approximately 11% of our total company net sales in fiscal 2009, and represented approximately 22% of Garden Products net sales in fiscal 2009, 18% in fiscal 2008 and 17% in fiscal 2007. PETsMART represented approximately 10% of Pet Products net sales in fiscal 2009, 2008 and 2007. PETCO is also a significant customer.
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 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 to us from Novartis. This license is perpetual but non-exclusive. In addition, we have developed certain improvements that are proprietary to us relating to the synthesis of (S)-Methoprene. The success of certain portions of our business, especially our Wellmark 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.
10
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 26, 2009, we had approximately 4,300 employees of which approximately 3,900 were full-time employees and 400 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 approximately 30 employees at a Kaytee facility in Rialto, California, 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 products containing 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. All 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, enacted by the U.S. Congress in August 1996, 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 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.
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
11
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 November 1, 2009.
Name |
Age | Position | ||
William E. Brown |
68 | Chairman of the Board and Chief Executive Officer | ||
Jeffrey A. Blade |
48 | Senior Vice President, Chief Financial Officer and Secretary | ||
Glen R. Fleischer |
55 | President - Pet Products | ||
Michael A. Reed |
62 | Executive Vice President |
William E. Brown. Mr. Brown has been our Chairman since 1980. Since October 2007, Mr. Brown has also served as our Chief Executive Officer, a position he previously held from 1980 to June 2003. 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.
Jeffrey A. Blade. Mr. Blade has been our Senior Vice President, Chief Financial Officer and Secretary since September 2009. Prior to joining Central, Mr. Blade served as the Interim President of The Steak N Shake Company, a publicly-traded restaurant company, from March 2008 to July 2008, as its Executive Vice President, Chief Financial & Administrative Officer from 2007 to July 2008, and as its Senior Vice President and Chief Financial Officer from 2004 to 2007. From 1999 to 2004, Mr. Blade was Vice President of Finance for the U.S. operations of Cott Corporation.
Glen R. Fleischer. Mr. Fleischer has been our President, Pet Products division since January 2009. Prior to joining Central, Mr. Fleischer was with Kraft Foods/ Nabisco, Inc. serving as the Vice President Business Development, Snacks and Cereals from 2004 to 2008, as its Vice President, Marketing, Confections from 2003 through 2004, as its Vice President, Marketing for the Biscuit Division from 2001 through 2003 and Vice President and Managing Director of Grocery Products from 1996 through 2001. Prior to joining Kraft/Nabisco, Mr. Fleischer held general management and marketing positions with Kimberly-Clark Corporation and The Procter & Gamble Company.
Michael A. Reed. Mr. Reed has been Executive Vice President since June 2000 and President of the Garden Products division since October 2007. Mr. Reed joined Central in 2000 and served as President of the Pet Products division from 2003 to 2004. Since 2004, Mr. Reed also has provided executive oversight to the Life Sciences Business Unit and Tech Pac LLC, an 80% owned subsidiary of Central. From February 1991 to May 2000, Mr. Reed served as President and CEO of PM Ag Products, Inc., a wholly owned subsidiary of global agri-business Tate & Lyle, PLC. From 1985 to 1991, he was Vice President and Regional General Manager of the Pacific Molasses Company. From 1983 to 1985, Mr. Reed served as a divisional Vice President of Beatrice Foods Companys Agri-Products Division. Prior to joining Beatrice Foods, Mr. Reed practiced law in Springfield, Missouri.
Available Information
Our web site is http://www.central.com. We make available free of charge, on or through our web site, 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.
12
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 the most material. However, there may be additional risks that are viewed 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:
| fluctuations in prices of commodity grains and other input costs; |
| adverse weather conditions during peak gardening seasons and seasonality; |
| shifts in demand for lawn and garden products; |
| shifts in demand for pet products; |
| changes in product mix, service levels and pricing by us and our competitors; |
| the effect of acquisitions, including the costs of acquisitions that are not completed; and |
| economic stability of and strength of relationship 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 subsidiaries 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 up to approximately one-third of the 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.
13
From the fourth quarter of fiscal 2006 to fiscal 2008, prices for some of our key crops increased substantially. In fiscal 2009, grain costs declined due primarily to deflationary pressures impacting the broader economy. Our weighted average cost per pound declined 13% compared to fiscal 2008 but remained 20% above fiscal 2007 levels. We can provide no assurance as to the timing or extent of our ability to implement additional price adjustments in the context of rising costs or 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.
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. For fiscal 2009, we experienced declines in sales as the result of the economic downturn. Any material decline in the amount of consumer discretionary spending could reduce our sales and harm our business. Since substantially all of our sales are in the United States, a declining U.S. economy may have a greater impact on us than on our competitors, some of which may have a larger percentage of international sales. 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. For example, in the last three years, the demand for aquatics products has declined significantly. 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. In fiscal 2007 and 2008, we were 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 fertilizer and chemicals, and many of our other input costs. The rising costs made it difficult for us to increase prices to our retail customers at a pace to enable us to return to historical margins. More recently, our business has been negatively impacted by the current downturn in the housing market and by declining consumer confidence, as well as other macro-economic factors. 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 and small animals may negatively impact our sales.
The federal government and many state governments have increased restrictions on the importation of pet birds and the production of small animals. These restrictions have resulted in reduced supply of new pet birds and animals and thus reduced demand for pet bird and small animal food and supplies. If these restrictions continue or become more severe, 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 good and negatively impact our financial results
14
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, Garden Products business is seasonal. In fiscal 2009, approximately 66% of Garden Products net sales and 59% of our total net sales occurred during our second and third fiscal quarters. Substantially all of Garden Products 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 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, water shortages or floods.
Rising energy prices could adversely affect our operating results.
During fiscal 2007 and 2008, energy prices increased dramatically, which resulted in increased fuel costs for our businesses and raw materials costs for many of our branded products. Although energy prices have declined in 2009, 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, accounted for approximately 18% of our net sales in fiscal 2009 and approximately 17% in fiscal 2008 and 2007. Lowes accounted for approximately 11% of our net sales in fiscal 2009, and 8% in fiscal 2008 and 2007. In addition, Home Depot, PETsMART and PETCO are also significant customers, although each accounted for less than 10% of our net sales and, together with Wal*Mart and Lowes, accounted for approximately 46% of our net sales in fiscal 2009, and approximately 41% in fiscal 2008 and 2007. The market share of each of these key retailers has 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, income from operations 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 income from operations 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 bargaining strength 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, as a result of the desire of retailers to more closely manage inventory levels, there is a growing trend among retailers to 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.
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
15
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.
We cannot be certain that our product innovations and marketing successes will continue.
We believe that our past performance has been based on, and 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 innovations 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.
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 or resources than we do. Our products compete against national and regional products and private label products produced by various suppliers. Our largest competitors in pet supplies products are Spectrum Brands and Hartz Mountain, and our largest competitors in lawn and garden products are Scotts and Spectrum Brands.
To compete effectively, among other things, we must:
| develop and grow brands with leading market positions; |
| maintain our relationships with key retailers; |
| continually develop innovative new products that appeal to consumers; |
| 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 or 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 have completed numerous acquisitions and intend to grow through the acquisition of additional companies.
We are regularly engaged in acquisition discussions with a number of companies and anticipate that one or more potential acquisition opportunities, including those that would be material, 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:
| failure of the acquired business to achieve expected results; |
| diversion of managements attention; |
16
| 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.
We have faced, and expect to continue to face, intense competition for acquisition candidates, which may limit the number of opportunities 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.
Our success depends upon our retaining key personnel.
Our future performance is substantially dependent upon the continued services of William E. Brown, our Chairman and Chief Executive Officer, and our other senior officers. The loss of the services of any of these persons could have a material adverse effect upon us. In addition, our future performance depends on our ability to attract and retain skilled employees. We cannot assure you that we will be able to retain our existing personnel or attract additional qualified employees in the future.
We are implementing a new enterprise resource planning information technology system.
In fiscal 2005, we began incurring costs associated with designing and implementing SAP, a new company-wide enterprise resource planning software system with the objective of gradually migrating to the new system. Upon completion, this new system will replace our numerous existing accounting and financial reporting systems, most of which were obtained in connection with business acquisitions. We anticipate investing approximately an additional $5 million in fiscal 2010 for planned implementations. Capital expenditures for our new enterprise resource planning software system for fiscal 2011 and beyond will depend upon the pace of conversion for those remaining legacy systems. If we do not complete the implementation of the project timely and successfully, we may experience, among other things, 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 managements time, diverting their attention from our existing operations and strategy.
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 and local authorities. Such regulations are often complex and are subject to change. Environmental regulations may affect us by restricting the manufacture 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 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
17
regulations or incur increased operating costs in complying with such regulations. However, neither compliance with regulatory requirements nor with our environmental procedures can ensure that we will not be subject to claims for personal injury, property damages or governmental enforcement. In addition, while we do not anticipate having to make, and historically have not had to make, significant capital expenditures to comply with applicable environmental laws and regulations, 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. While we are not subject to any existing remediation obligations, 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 as a result of public health and contamination risks in China; 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. 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 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.
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 26, 2009, we had total indebtedness of approximately $408.1 million. This level of indebtedness and future borrowing needs could have material adverse consequences for our business, including:
| 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 continued grain price increases; |
18
| 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 bears 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.
Our $350 million revolving credit facility matures in February 2011. If the financial market conditions or our financial performance have deteriorated when we undertake to refinance this debt, we could experience difficulty refinancing on favorable terms, if at all.
We do not expect to pay dividends in the foreseeable future.
We have never declared nor 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 on our common stock. 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 common 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, could greatly influence control of the Company, 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.
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 13, 2009, William E. Brown, our Chairman, beneficially owned 1,600,459 shares of our Class B common stock (out of a total of 1,652,262 outstanding shares), 1,418,063 shares of our common stock and 3,169,885 shares of our Class A common stock and thereby controlled approximately 49.4% 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. Browns 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. Browns 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
19
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 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 could 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 the issuance of 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 the Class A common stock and the preferred 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.
20
Item 1B. Unresolved Staff Comments
None.
We currently operate 40 manufacturing facilities totaling approximately 4,218,000 square feet and 29 sales and logistics facilities totaling approximately 3,749,000 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.
The table below lists Pet Products manufacturing and sales and logistics facilities. Numbers in parenthesis represent multiple locations.
Location |
Type of Facility |
Owned or Leased | ||
Phoenix, AZ (2) |
Sales and Logistics | Owned | ||
Azusa, CA |
Manufacturing | Leased | ||
Carson, CA |
Manufacturing | Leased | ||
Irwindale, CA |
Manufacturing | Leased | ||
Rialto, CA |
Manufacturing | Owned | ||
Sacramento, CA |
Sales and Logistics | Leased | ||
Santa Fe Springs, CA |
Sales and Logistics | Leased | ||
Aurora, CO |
Sales and Logistics | Leased | ||
Tampa, FL |
Sales and Logistics | Leased | ||
Norcross, GA |
Sales and Logistics | Leased | ||
Elk Grove Village, IL |
Manufacturing | Leased | ||
Council Bluffs, IA |
Manufacturing | Owned | ||
Mahwah, NJ |
Sales and Logistics | Leased | ||
Neptune City, NJ |
Manufacturing | Owned | ||
Neptune City, NJ |
Manufacturing | Leased | ||
Hauppauge, NY (2) |
Manufacturing | Leased | ||
Cressona, PA |
Manufacturing | Owned | ||
Dallas, TX |
Manufacturing | Owned | ||
Dallas, TX |
Sales and Logistics | Leased | ||
Algona, WA |
Sales and Logistics | Leased | ||
Chilton, WI |
Manufacturing | Owned | ||
Franklin, WI |
Manufacturing | Owned | ||
Guangzhou, China |
Manufacturing | Leased | ||
Pune, India |
Manufacturing | Leased | ||
Dorking, Surrey, UK |
Manufacturing | Leased | ||
Somerset, UK |
Sales and Logistics | Leased |
21
The table below lists Garden Products manufacturing and sales and logistics facilities. Numbers in parenthesis represent multiple locations.
Location |
Type of Facility |
Owned or Leased | ||
Cullman, AL |
Sales and Logistics | Owned | ||
Roll, AZ |
Manufacturing | Owned | ||
Yuma, AZ |
Manufacturing | Leased | ||
El Centro, CA |
Manufacturing | Owned | ||
Ontario, CA |
Sales and Logistics | Leased | ||
Sacramento, CA |
Sales and Logistics | Leased | ||
San Leandro, CA |
Manufacturing | Leased | ||
Stockton, CA |
Manufacturing | Leased | ||
Longmont, CO |
Manufacturing | Owned | ||
Covington, GA |
Sales and Logistics | Leased | ||
Eatonton, GA |
Manufacturing | Owned | ||
Madison, GA (3) |
Manufacturing | Leased | ||
Madison, GA (2) |
Manufacturing | Owned | ||
Madison, GA |
Sales and Logistics | Owned | ||
Ligonier, IN |
Manufacturing | Owned | ||
Munster, IN |
Sales and Logistics | Leased | ||
Lexington, KY |
Sales and Logistics | Leased | ||
Foxboro, MA |
Sales and Logistics | Leased | ||
Taunton, MA |
Sales and Logistics | Leased | ||
Laurel, MD |
Sales and Logistics | Leased | ||
Greenfield, MO (2) |
Manufacturing | Owned | ||
Greenfield, MO |
Sales and Logistics | Owned | ||
Sidney, NE |
Manufacturing | Owned | ||
Peebles, OH (2) |
Manufacturing | Owned | ||
Piketon, OH |
Manufacturing | Leased | ||
Lebanon, OR |
Manufacturing | Leased | ||
Lebanon, OR (2) |
Manufacturing | Owned | ||
Portland, OR |
Sales and Logistics | Leased | ||
Columbia, SC (2) |
Sales and Logistics | Leased | ||
Grand Prairie, TX (2) |
Sales and Logistics | Leased | ||
Houston, TX |
Sales and Logistics | Leased | ||
Kenbridge, VA |
Sales and Logistics | Leased | ||
Northbend, WA |
Manufacturing | Leased |
We lease 19 of our manufacturing facilities and 24 of our sales and logistics facilities. These leases generally expire between 2010 and 2020. 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.
We may from time to time become involved in certain legal proceedings in the ordinary course of business. Currently, we are not a party to any other legal proceedings that management believes would have a material adverse effect on our financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Not applicable.
(b) Not applicable.
(c) Not applicable.
22
PART II
Item 5. | Market for the Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Our common stock has been traded on the NASDAQ Global Select Market under the symbol CENT since our initial public offering in July 1993. Our Class A common stock has been traded on the NASDAQ Global Select Market under the symbol CENTA since February 2007. 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. The stock prices have been adjusted to reflect the stock dividend of Class A common stock distributed to stockholders on February 5, 2007.
Common Stock | Class A Common Stock | |||||||||||
High | Low | High | Low | |||||||||
Fiscal 2008 |
||||||||||||
First Quarter |
$ | 9.44 | $ | 4.34 | $ | 9.49 | $ | 4.15 | ||||
Second Quarter |
6.26 | 3.97 | 5.51 | 3.84 | ||||||||
Third Quarter |
8.00 | 3.95 | 7.46 | 3.80 | ||||||||
Fourth Quarter |
6.35 | 4.46 | 6.14 | 3.99 | ||||||||
Fiscal 2009 |
||||||||||||
First Quarter |
$ | 5.91 | $ | 2.42 | $ | 6.01 | $ | 2.24 | ||||
Second Quarter |
8.04 | 5.52 | 7.76 | 5.69 | ||||||||
Third Quarter |
11.63 | 7.57 | 10.70 | 7.31 | ||||||||
Fourth Quarter |
13.52 | 9.92 | 12.14 | 8.97 |
As of November 13, 2009, there were approximately 163 holders of record of our common stock, approximately 198 holders of record of our Class A nonvoting common stock and five holders of record of our Class B stock.
We have not paid any cash dividends on our common stock or our Class A common stock. We currently intend to retain any earnings for use in our business and do not anticipate paying any cash dividends on our common stock or our Class A common stock in the foreseeable future. In addition, our credit facility and senior subordinated notes restrict our ability to pay dividends. See Note 9 to our fiscal 2009 consolidated financial statements.
23
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 25, 2004 to September 26, 2009 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
9/25/04 | 9/24/05 | 9/30/06 | 9/29/07 | 9/27/08 | 9/26/09 | |||||||
Central Garden & Pet Company |
100.0 | 141.8 | 155.3 | 84.9 | 58.3 | 112.2 | ||||||
NASDAQ Composite |
100.0 | 113.4 | 122.0 | 147.0 | 119.8 | 116.0 | ||||||
Dow Jones US Nondurable Household Products |
100.0 | 106.2 | 119.9 | 138.3 | 138.3 | 121.0 |
24
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 26, 2009 and the dollar amount of authorized share repurchases, remaining under our stock repurchase program.
Period |
Total Number of Shares (or Units) Purchased |
Average Price Paid per Share (or Units) |
Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs |
Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs(1) | |||||||
June 28, 2009 August 1, 2009 |
607 | (2) | $ | 9.97 | | $ | 66,288,000 | ||||
August 2, 2009 August 29, 2009 |
696,722 | (3) | 12.36 | 692,699 | 57,727,000 | ||||||
August 30, 2009 September 26, 2009 |
926,755 | 11.61 | 926,755 | 46,963,000 | |||||||
Total |
1,624,084 | $ | 11.93 | 1,619,454 | $ | 46,963,000 |
(1) | In December 2005, the Board of Directors authorized the repurchase of up to $100 million of Centrals common stock. 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 within our credit facility which restrict our ability to repurchase our stock. |
(2) | The 607 shares purchased during the period indicated represent withholding of a portion of shares to cover tax withholding obligations in connection with the vesting of restricted stock and the exercise of stock options. |
(3) | Includes 4,023 shares purchased during the period indicated representing withholding of a portion of shares to cover tax withholding obligations in connection with the vesting of restricted stock and the exercise of stock options. |
During the fourth quarter of fiscal 2009, we repurchased approximately 1.6 million shares of our common stock for approximately $19.3 million.
25
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 26, 2009 has 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 Managements Discussion and Analysis of Financial Condition and Results of Operations included elsewhere herein.
Fiscal Year Ended | ||||||||||||||||||||
September 24, 2005 |
September 30, 2006(6) |
September 29, 2007 |
September 27, 2008 |
September 26, 2009 |
||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||
Statement of Operations Data: |
||||||||||||||||||||
Net sales (1) |
$ | 1,380,644 | $ | 1,621,531 | $ | 1,671,145 | $ | 1,705,386 | $ | 1,614,300 | ||||||||||
Cost of goods sold and occupancy |
937,989 | 1,086,219 | 1,136,825 | 1,184,058 | 1,086,974 | |||||||||||||||
Gross profit |
442,655 | 535,312 | 534,320 | 521,328 | 527,326 | |||||||||||||||
Selling, general and administrative expenses |
342,526 | 398,510 | 434,903 | 415,978 | 401,340 | |||||||||||||||
Goodwill and other impairments (2) |
| | | 429,764 | | |||||||||||||||
Income (loss) from operations |
100,129 | 136,802 | 99,417 | (324,414 | ) | 125,986 | ||||||||||||||
Interest expense, net |
(20,660 | ) | (37,670 | ) | (48,147 | ) | (37,273 | ) | (22,061 | ) | ||||||||||
Other income |
4,576 | 3,083 | 2,402 | 2,116 | 52 | |||||||||||||||
Income (loss) before income taxes and minority interest |
84,045 | 102,215 | 53,672 | (359,571 | ) | 103,977 | ||||||||||||||
Income taxes (tax benefit) |
30,258 | 35,791 | 19,999 | (93,069 | ) | 36,368 | ||||||||||||||
Income (loss) before minority interest |
53,787 | 66,424 | 33,673 | (266,502 | ) | 67,609 | ||||||||||||||
Minority interest |
| 890 | 1,369 | 833 | 1,661 | |||||||||||||||
Net income (loss) |
$ | 53,787 | $ | 65,534 | $ | 32,304 | $ | (267,335 | ) | $ | 65,948 | |||||||||
Income (loss) per share (3): |
||||||||||||||||||||
Basic |
$ | 0.86 | $ | 0.97 | $ | 0.46 | $ | (3.76 | ) | $ | 0.95 | |||||||||
Diluted |
$ | 0.83 | $ | 0.95 | $ | 0.45 | $ | (3.76 | ) | $ | 0.94 | |||||||||
Weighted average shares used in the computation of income (loss) per share (3) : |
||||||||||||||||||||
Basic |
62,439 | 67,833 | 70,824 | 71,117 | 69,499 | |||||||||||||||
Diluted (4) |
64,578 | 69,054 | 72,050 | 71,117 | 70,264 | |||||||||||||||
Other Data: |
||||||||||||||||||||
Depreciation and amortization |
$ | 19,600 | $ | 23,957 | $ | 30,717 | $ | 32,517 | $ | 29,155 | ||||||||||
Capital expenditures |
$ | 18,676 | $ | 47,589 | $ | 60,038 | $ | 22,349 | $ | 16,505 | ||||||||||
Cash from operating activities |
$ | 57,659 | $ | 95,166 | $ | 38,535 | $ | 115,028 | $ | 221,638 | ||||||||||
Cash used in investing activities |
$ | (65,808 | ) | $ | (427,721 | ) | $ | (92,460 | ) | $ | (15,406 | ) | $ | (20,542 | ) | |||||
Cash from (used in) financing activities |
$ | 25,085 | $ | 332,239 | $ | 46,475 | $ | (93,935 | ) | $ | (142,011 | ) | ||||||||
Ratio of earnings to fixed charges (5) |
4.41 | 3.37 | 2.05 | | 5.36 |
26
September 24, 2005 |
September 30, 2006 |
September 29, 2007 |
September 27, 2008 |
September 26, 2009 | |||||||||||
Balance Sheet Data: |
|||||||||||||||
Cash |
$ | 28,792 | $ | 28,406 | $ | 21,055 | $ | 26,929 | $ | 85,668 | |||||
Working capital |
343,460 | 427,398 | 470,216 | 450,704 | 427,243 | ||||||||||
Total assets |
1,056,349 | 1,533,823 | 1,646,822 | 1,259,318 | 1,150,925 | ||||||||||
Total debt |
323,064 | 568,449 | 610,523 | 523,147 | 408,085 | ||||||||||
Shareholders equity |
547,178 | 727,359 | 776,973 | 508,758 | 545,085 |
(1) | Fiscal year 2006 included 53 weeks; fiscal years 2005, 2007, 2008 and 2009 included 52 weeks. |
(2) | During fiscal 2008, we recognized non-cash charges of $403 million related to goodwill impairments within our Pet Products and Garden Products segments and $27 million for impairments of long-lived assets in our Garden Products segment. |
(3) | All share and per share amounts have been retroactively adjusted to reflect the February 5, 2007 Class A Common stock dividend for all periods presented. |
(4) | The potential effects of stock awards are excluded from the diluted earnings per share calculation for the fiscal year ended September 27, 2008, because their inclusion in a net loss period would be anti-dilutive. |
(5) | For the purposes of determining the ratio of earnings to fixed charges, earnings consist of income (loss) before income taxes and minority 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 27, 2008, earnings were insufficient to cover fixed charges by approximately $360.5 million, and the ratio for that fiscal year is not considered meaningful. |
(6) | We completed five acquisitions during fiscal 2006. The consolidated financial statements include the effects of these acquired businesses from the dates of acquisition. |
27
Item 7. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following 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.
Overview
Central Garden & Pet Company is a leading innovator, marketer and producer of quality branded products. We are one of the largest suppliers in the pet and lawn and garden supplies industries in the United States. The total pet industry is estimated to be approximately $31 billion in annual retail sales. We estimate the annual retail sales of the pet supplies and ultra-premium pet food markets in the categories in which we participate to be approximately $15 billion. As of 2009, the total lawn and garden industry in the United States is estimated to be approximately $24 billion in annual retail sales. We estimate the annual retail sales of the lawn and garden supplies markets in the categories in which we participate to be approximately $6.2 billion.
Our pet supplies products include products for dogs and cats, including edible bones, premium healthy edible and non-edible chews, ultra-premium dog and cat food and treats, leashes, collars, 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 a number of brand names including AdamsTM, All-Glass Aquarium®, Altosid, AqueonTM, BioSpot®, Breeders Choice®, Coralife®, Farnam®, Four Paws®, Interpet, Kaytee®, Kent Marine®, Nylabone®, Pet Select®, Pre Strike®, Oceanic Systems®, Super Pet®, TFHTM, ZillaTM and Zodiac®.
Our lawn and garden 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 and lighting products including pottery, trellises and other wood products and holiday lighting. These products are sold under a number of brand names including: AMDRO®, GKI/Bethlehem Lighting, Grants, Ironite®, Lilly Miller®, Matthews Four SeasonsTM, New England Pottery®, Norcal Pottery®, Pennington®, Overn Out®, Sevin®, Smart SeedTM and The Rebels®.
In fiscal 2009, our consolidated net sales were $1.6 billion, of which our lawn and garden segment, or Garden Products, accounted for approximately $781.1 million and our pet segment, or Pet Products, accounted for approximately $833.2 million. In fiscal 2009, our branded product sales were approximately $1.4 billion, or approximately 85% of total sales, sales of other manufacturers products were approximately 15% of total sales, and our gross profit margins were 32.7%. In fiscal 2009, our income from operations was $126.0 million, of which Garden Products accounted for $68.9 million and Pet Products accounted for $102.2 million, before corporate expenses and eliminations of $45.1 million.
Background
We have transitioned our company to a leading marketer and producer of branded products from a traditional pet and lawn and garden supplies distributor. We made this transition because we recognized the opportunity to build a portfolio of leading brands and improve profitability by capitalizing on our knowledge of the pet and lawn and garden supplies sectors, strong relationships with retailers and nationwide sales and logistics network. Our goal was to diversify our business and improve operating margins by establishing a portfolio of leading brands. Since 1997, we have acquired numerous branded product companies and product lines, including: Wellmark and Four Paws in fiscal 1997; Kaytee Products, TFH and Pennington Seed in fiscal 1998; Norcal Pottery in fiscal 1999; AMDRO and All-Glass Aquarium in fiscal 2000; Lilly Miller in fiscal 2001;
28
Alaska Fish Fertilizer in fiscal 2002; Kent Marine, New England Pottery, Interpet, KRB Seed Company, (dba Budds Seed), and Energy Savers Unlimited in fiscal 2004; Pets International and Gulfstream Home & Garden in fiscal 2005; Farnam, Breeders Choice, Tech Pac, Ironite and Shirlo in fiscal 2006 and B2E Corporation, B2E Biotech LLC and DLF Trifolium Oregon (dba ASP Research) in fiscal 2007.
Recent Developments
Fiscal 2009 Operating Performance Improvement. We showed improved performance in fiscal 2009 despite a challenging economic environment. We achieved our improved performance by maintaining a strict focus on our core operating objectives: reducing our investment in working capital, lowering expenses and improving gross margins.
Financial highlights include:
| Net sales for fiscal 2009 decreased $91 million, or 5.3%, to $1.6 billion. |
| Net earnings for fiscal 2009 were $65.9 million, or $0.94 per share on a diluted basis. |
| Gross margin increased 210 basis points in fiscal 2009 to 32.7%. |
| Selling, general & administrative expenses decreased $15 million, or 3.5%, to $401 million in fiscal 2009. |
| We generated cash flows for operating activities of approximately $222 million during fiscal 2009, an increase of $107 million as compared to fiscal 2008. |
| We reduced our outstanding debt by $115 million. |
Repurchase of Company Stock. During fiscal 2009, we repurchased 2.2 million shares of our voting common stock (CENT) at an aggregate cost of approximately $19.3 million, or approximately $8.68 per share and 2.1 million shares of our non-voting Class A common stock (CENTA) at an aggregate cost of approximately $17.8 million, or approximately $8.55 per share.
Fiscal 2008 Reported Earnings and Significant Items.
In fiscal 2008, we reported a net loss of $267.3 million, or a loss of $3.76 per diluted share. During fiscal 2008, we recognized several significant items, including the impairment of goodwill, other intangibles and certain other long-lived assets as well as items that benefited us, such as the sale of property and a legal settlement.
The following transactions are included as goodwill and other impairments in fiscal 2008:
| Due to the continuing challenging business conditions and the significant decline in our market capitalization during the first quarter of fiscal 2008, we concluded there was an indication of possible impairment of goodwill at that date. Based on our analysis and the sustained decline in our market capitalization, we concluded that there was an impairment of goodwill and, thus, recognized a non-cash charge of $400 million in the first quarter of fiscal 2008, comprised of $202 million relating to Garden Products and $198 million relating to Pet Products. |
| We performed our annual goodwill impairment test as of June 29, 2008. Based on our analysis, we concluded there was an additional impairment of goodwill and recognized a non-cash charge of $5 million relating to goodwill in Garden Products. |
| Additionally, an accrued liability of $1.8 million was reclassified against goodwill in the Pet Products segment when the related uncertainty was resolved. |
29
| We also reviewed certain other long-lived assets, including intangibles and property, plant and equipment, for potential impairment. 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 an asset is less than its carrying amount. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. In fiscal 2008, indicators of impairment were identified within the Garden Products segment related to the current operating losses of a business unit and certain trade names. Accordingly, we recognized a $27 million impairment charge, related to those assets. |
The following transactions not in the ordinary course of business are included in selling, general and administrative expenses in fiscal 2008:
| In October 2007, we sold a facility for approximately $7.9 million in cash. In connection with the sale, we are leasing back the property from the purchaser for approximately two years. We are accounting for the leaseback as an operating lease. We recognized a gain of approximately $3.1 million in Pet Products and deferred approximately $1.5 million to be recognized ratably over the term of the lease. |
| In December 2007, we sold a facility for approximately $5.1 million. Proceeds were comprised of cash of $1.3 million and a $3.8 million recourse note payable due in full in January 2009. We are leasing back the property from the purchaser and are accounting for the leaseback as an operating lease. We recognized a gain of approximately $4.6 million in Garden Products. In January 2009 and through September 26, 2009, we extended the terms of the note payable on a month-to-month basis and are continuing to lease the property on a month-to-month basis. Although we retain our rights under the terms of the recourse note, it now appears the ultimate repayment may be dependent on the buyers sale of the facility. Accordingly, in fiscal 2009, we revised our accounting to reverse the previously recognized sale and associated gain for accounting purposes. |
| In December 2007, we received approximately $5.0 million in cash related to the settlement of a legal dispute that is included in Corporate. Additionally, we sold the net assets of our live bird business for approximately $1.2 million in cash and recognized a loss of approximately $1.6 million in Pet Products. |
Results of Operations
The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items bear to net sales:
Fiscal Year Ended | |||||||||
September 29, 2007 |
September 27, 2008 |
September 26, 2009 |
|||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | |||
Cost of goods sold and occupancy |
68.0 | 69.4 | 67.3 | ||||||
Gross profit |
32.0 | 30.6 | 32.7 | ||||||
Selling, general and administrative |
26.0 | 24.4 | 24.9 | ||||||
Goodwill and other impairments |
| 25.2 | | ||||||
Income (loss) from operations |
6.0 | (19.0 | ) | 7.8 | |||||
Interest expense, net |
(2.9 | ) | (2.1 | ) | (1.4 | ) | |||
Other income |
0.1 | 0.1 | | ||||||
Income (taxes) benefit |
(1.2 | ) | 5.4 | (2.2 | ) | ||||
Minority interest |
(0.1 | ) | (0.1 | ) | (0.1 | ) | |||
Net income (loss) |
1.9 | % | (15.7 | )% | 4.1 | % | |||
30
Fiscal 2009 Compared to Fiscal 2008
Net Sales
Net sales for fiscal 2009 decreased $91.1 million, or 5.3%, to $1,614.3 million from $1,705.4 million in fiscal 2008. This was due to a $78.6 million, or 5.4%, decrease in our branded product sales and a $12.5 million, or 4.9%, decrease in the sales of other manufacturers products. Branded product sales include products we manufacture under Central brand names and products we manufacture under third-party brands. Sales of our branded products represented 85% of our total sales in fiscal 2009.
The following table indicates each class of similar products which represented more than 10% of our consolidated net sales in the fiscal years presented (in millions).
Category |
2009 | 2008 | 2007 | ||||||
Grass seed |
$ | 174.5 | $ | 206.3 | $ | 195.7 | |||
Bird feed |
200.7 | 199.7 | 168.3 | ||||||
Garden chemicals and control products |
270.5 | 247.6 | 257.4 | ||||||
Other garden supplies |
211.8 | 232.6 | 221.5 | ||||||
Other pet supplies |
756.8 | 819.2 | 828.2 | ||||||
Total |
$ | 1,614.3 | $ | 1,705.4 | $ | 1,671.1 | |||
Garden Products sales for fiscal 2009 decreased $26.5 million, or 3.3%, to $781.1 million from $807.6 million in fiscal 2008. In fiscal 2009, garden branded product sales decreased $17.6 million and sales of other manufacturers products decreased $8.9 million. The decline in branded product sales was due primarily to lower grass seed sales and Christmas lighting products, due to reduced consumer spending resulting from the economic slow-down and continued tightening of retailer inventory, partially offset by increased sales of garden chemical and controls.
Pet Products sales for fiscal 2009 decreased $64.6 million, or 7.2%, to $833.2 million from $897.8 million in fiscal 2008. Pet branded product sales decreased $61.1 million and sales of other manufacturers products decreased $3.6 million in fiscal 2009 as compared with fiscal 2008. The decline in branded product sales was due primarily to decreased sales of approximately $15.8 million of aquatic products, pet professional products of approximately $14 million and $8.5 million of bird and small animal products. These decreases were due primarily to continued softness in the consumer and professional product categories, continued tightening of inventory at retailers and SKU rationalization.
Gross Profit
Gross profit increased $6.0 million, from $521.3 million in fiscal 2008 to $527.3 million in fiscal 2009. Gross profit increased $31.0 million, or 15.4%, in Garden Products and decreased $25.0 million, or 7.8%, in Pet Products. Gross profit as a percentage of net sales increased from 30.6% in fiscal 2008 to 32.7% in fiscal 2009. Garden Products margin increased 480 basis points, due primarily to increased sales of higher margin garden control products and a combination of lower input costs and improved pricing for several of our product lines, which was partially offset by lower sales of higher margin active ingredient-based products in Pet Products.
Selling, General and Administrative
Selling, general and administrative expenses decreased $14.7 million, or 3.5%, from $416.0 million in fiscal 2008 to $401.3 million in fiscal 2009. As a percentage of net sales, selling, general and administrative expenses increased from 24.4% in fiscal 2008 to 24.9% in fiscal 2009. The change in selling, general and administrative expenses, discussed further below, was due primarily to decreased selling and delivery expenses.
31
Selling and delivery expense decreased by $20.1 million, or 9.0%, from $222.1 million in fiscal 2008 to $202.0 million in fiscal 2009. The decreased expense was due primarily to lower freight and fuel related costs and lower advertising and marketing costs. Selling and delivery expenses as a percentage of net sales decreased from 13.0% in fiscal 2008 to 12.5% in fiscal 2009.
Facilities expense decreased $4.0 million, or 26.3%, from $15.2 million for fiscal year 2008 to $11.2 million for fiscal year 2009 due primarily to cost savings from the consolidation of our west coast distribution facilities.
Warehouse and administrative expense increased $9.4 million, or 5.3%, from $178.7 million in fiscal 2008 to $188.1 million in fiscal 2009. The increase in fiscal 2009 was due to the absence in 2009 of gains of $11.1 million from the sale of assets and a legal settlement in fiscal 2008. Absent the net gains in fiscal 2008, there was a minor decrease in warehouse and administrative expense with lower employee related costs and lower facility equipment costs offset by increased third party service expense and a reversal of a previously recognized gain from a property sold in fiscal 2008.
Other Income
Other income decreased $2.0 million from $2.1 million in fiscal 2008 to $0.1 million in fiscal 2009. The decrease was due primarily to lower earnings from investments accounted for under the equity method investment of accounting, one of which is no longer accounted for under the equity method of accounting.
Interest Expense
Net interest expense decreased $15.2 million, or 40.8%, from $37.3 million in fiscal 2008 to $22.1 million in fiscal 2009. The decrease was due primarily to lower interest rates on our floating rate debt and decreased average borrowings. Average borrowings for fiscal 2009 were $489.5 million compared to $619.1 million in fiscal 2008. Working capital requirements decreased due primarily to lower inventory levels and more efficient collection of receivables. The average interest rates for fiscal 2009 and 2008 were 4.4% and 5.8%, respectively.
Income Taxes
Our effective income tax rate in fiscal 2009 was 35.0%, compared to a benefit of 25.8% in fiscal 2008. Our 2009 tax expense rate is lower than our statutory rate due primarily to added utilization of research and development tax credits and a decrease to state valuation allowances. The fiscal 2008 rate was lower than the statutory rate due primarily to the non-deductible portion of the non-cash goodwill impairment charge.
Fiscal 2008 Compared to Fiscal 2007
Net Sales
Net sales for fiscal 2008 increased $34.3 million, or 2.1%, to $1,705.4 million from $1,671.1 million in fiscal 2007. This was due to a $47.1 million, or 3.4%, increase in our branded product sales partially offset by a $12.8 million decrease in the sales of other manufacturers products. Branded product sales include products we manufacture under Central brand names and products we manufacture under third-party brands. Incremental net sales in fiscal 2008 related to acquisitions were $5 million, and incremental net sales related to organic sales growth were $29 million. Sales of our own branded products represented 85% of our total net sales in fiscal 2008.
Garden Products sales for fiscal 2008 increased $29.7 million, or 3.8%, to $807.6 million from $777.9 million in fiscal 2007. In fiscal 2008, garden branded product sales increased $46.9 million, partially offset by a $17.2 million decrease in the sales of other manufacturers products. In both fiscal 2008 and 2007, Garden Products net sales were negatively impacted due primarily to unfavorable weather conditions in many parts of the United States. In fiscal 2008, moderating drought conditions in the Southeast, combined with the launch of
32
our new Smart Seed line of grass seed, resulted in improved grass seed sales. Additionally, we benefited from increased wild bird feed sales due to price increases, and higher sales of Christmas lighting products. These improvements were partially offset by decreased garden chemicals and controls sales.
Pet Products sales for fiscal 2008 increased $4.6 million, or 0.5%, to $897.8 million from $893.2 million in fiscal 2007. Pet branded product sales increased $0.2 million in fiscal 2008 and sales of other manufacturers products increased $4.4 million in fiscal 2008 as compared with fiscal 2007. Increased sales of approximately $32 million in the dog and cat, small animal and bird feed categories were partially offset by decreased sales in our aquatics business of approximately $20 million and in our equine business of approximately $6 million. The increase in bird feed sales was due to price increases, which more than offset decreased sales volume.
Gross Profit
Gross profit decreased $13.0 million, or 2.4%, from $534.3 million in fiscal 2007 to $521.3 million in fiscal 2008. Gross profit decreased $4.2 million in Pet Products and $8.8 million in Garden Products. Gross profit as a percentage of net sales decreased to 30.6% in fiscal 2008 from 32% in fiscal 2007 due primarily to rising costs. Our aquatics product margins continued to decline due to weak tank sales, and the cost of grains used in our wild bird feed operations continued to increase. Rising costs also negatively impacted our pottery and garden chemicals and controls margins.
Selling, General and Administrative
Selling, general and administrative expenses decreased $18.9 million, or 4.4%, from $434.9 million in fiscal 2007 to $416.0 million in fiscal 2008. As a percentage of net sales, selling, general and administrative expenses decreased from 26.0% during fiscal 2007 to 24.4% during fiscal 2008. The decrease in selling, general and administrative expenses is discussed below.
Selling and delivery expenses decreased by $6.4 million, or 2.8%, from $228.5 million in fiscal 2007 to $222.1 million in fiscal 2008. As a percentage of net sales, selling and delivery expense decreased to 13.0% from 13.7% of net sales due primarily to lower advertising and promotional costs and cost control measures partially offset by increased fuel costs.
Facilities expense was flat at $15.2 million in fiscal 2008 and 2007.
Warehouse and administrative expenses decreased $12.5 million, or 6.5% , from $191.2 million in fiscal 2007 to $178.7 million in fiscal 2008. Garden Products decreased $2.6 million, Pet Products decreased $7.3 million and Corporate decreased $2.6 million. The decrease was due to net gains of $6.1 million from the sale of two buildings and the net assets of our live bird business in the first quarter of fiscal 2008, a legal settlement of $5.0 million and reduced third party provider costs from an emphasis on cost-cutting measures.
Goodwill and other impairments
As of December 29, 2007, due to the continuing challenging business conditions and the significant decline in our market capitalization, we concluded there was an indication of possible impairment. Based on our analysis and the sustained decline in market capitalization, we concluded that there was an impairment of goodwill and, thus, recognized a non-cash charge of $400 million in the first quarter of fiscal 2008, comprised of $202 million relating to Garden Products and $198 million relating to Pet Products.
We performed our annual goodwill impairment test as of June 29, 2008. Based on our analysis, we concluded there was an impairment of goodwill and recognized a non-cash charge of $5 million relating to goodwill in Garden Products. Additionally, an accrued liability of $1.8 million was reclassified against goodwill in Pet Products when the related uncertainty was resolved.
33
In addition, we reviewed certain long-lived assets for potential impairment. As a result of this analysis, we concluded that there was an additional impairment of long-lived assets of $27 million, primarily comprised of property, plant and equipment.
Other Income
Other income decreased $0.3 million from $2.4 million in fiscal 2007 to $2.1 million in fiscal 2008. The decrease was due primarily to foreign currency exchange losses partially offset by increased earnings from investments accounted for under the equity method of accounting.
Interest Expense
Net interest expense decreased $10.8 million, or 22.5%, from $48.1 million in fiscal 2007 to $37.3 million in fiscal 2008. The decrease was due primarily to lower interest rates on our floating rate debt. Average borrowings for fiscal 2008 were $619.1 million compared to $633.1 million in fiscal 2007. The average interest rates for fiscal 2008 and 2007 were 5.8% and 7.5%, respectively.
Income Taxes
Our effective tax rate in fiscal 2008 was a benefit of 25.8% compared with a provision of 38.2% in fiscal 2007. The fiscal 2008 effective tax rate was lower due primarily to the non-deductibility of $112 million of goodwill impairment charges in the first quarter of fiscal 2008. In fiscal 2007, the difference between the combined statutory rate of 38.3% and the effective tax rate was due primarily to the utilization of state and federal credits and the impact of non-U.S. tax rates at our U.K. based subsidiary.
Inflation
The results of operations and financial condition are presented based upon historical cost. While it is difficult to accurately measure the impact of inflation, we believe that the effects of inflation, if any, on our operations were not material in fiscal 2009.
Weather and Seasonality
Historically, our sales of lawn and garden products have been influenced by weather and climate conditions in the different markets we serve. Additionally, our Garden Products business has historically been highly seasonal. In fiscal 2009, approximately 66% of Garden Products net sales and 59% of our total net sales occurred in the second and third fiscal quarters. Substantially all of Garden Products 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 bank borrowings, supplier credit, internally generated funds and sales of equity and debt securities to the public.
Historically, our business has been seasonal and our working capital requirements and capital resources tracked closely to this seasonal pattern. 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.
34
We service two broad markets: pet supplies and lawn and garden supplies. Our pet supplies businesses involve products that have a year round selling cycle with a slight degree of seasonality. As a result, it is not necessary to maintain large quantities of inventory to meet peak demands. On the other hand, our lawn and garden businesses are highly seasonal with approximately 66% of Garden Products net sales occurring during the second and third fiscal quarters. For many manufacturers of garden products, this seasonality requires them to ship large quantities of their product well ahead of the peak consumer buying periods. To encourage distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.
Cash provided by operating activities increased $106.6 million from $115.0 million in fiscal 2008 to $221.6 million in fiscal 2009. The increase was due to our strong operating performance as well as better working capital management, primarily due to the reduction of inventory levels and more efficient collection of receivables.
Net cash used in investing activities increased $5.1 million from approximately $15.4 million in fiscal 2008 to approximately $20.5 million in fiscal 2009. The increase was due primarily to the absence in 2009 of $12.1 million of proceeds from the sales of facilities in fiscal 2008, partially offset by lower capital spending in fiscal 2009.
Net cash used in financing activities increased $48.1 million from $93.9 million in fiscal 2008 to $142.0 million in fiscal 2009. The increase was due primarily to the use of additional operating cash flow generated in fiscal 2009, which enabled us to reduce our reliance on our revolving line of credit and pay down the balance. Additionally, during fiscal 2009, we repurchased 2.2 million shares of our voting common stock (CENT) at an aggregate cost of approximately $19.3 million and 2.1 million shares of our non-voting Class A common stock (CENTA) at an aggregate cost of approximately $17.8 million.
As of September 26, 2009, we have $650 million in senior secured credit facilities, consisting of a $350 million revolving credit facility maturing in February 2011 and a $300 million term loan maturing in September 2012. Interest on the revolving credit facility is based, at our option, on a rate equal to prime plus a margin, which fluctuates from 0% to 0.375%, or LIBOR plus a margin, which fluctuates from 0.75% to 1.50%, determined quarterly based on our consolidated total debt to consolidated EBITDA for the most recent trailing 12-month period. As of September 26, 2009, the applicable interest rate on the revolving credit facility related to base rate borrowings was 3.38%, and the applicable interest rate related to LIBOR rate borrowings was 1.77%. Interest on the term loan is based, at our option, on a rate equal to LIBOR plus a margin, which fluctuates from 1.50% to 1.75 %, or the prime rate plus a margin, which fluctuates from 0.50% to 0.75. As of September 26, 2009, the applicable interest rate on the term loan related to base rate borrowings was 3.75%, and the applicable rate related to LIBOR rate borrowings was 1.77%. The term loan is payable in quarterly installments of $750,000 with the balance payable in September 2012.
These facilities are secured by substantially all of our assets and contain certain financial covenants which require us to maintain minimum levels of interest coverage and maximum levels of total debt to EBITDA and that restrict our ability to repurchase our stock, make investments in or acquisitions of other businesses and pay dividends above certain levels over the life of the facilities. Under the terms of our senior secured credit facilities, we may make restricted payments, including cash dividends, in an aggregate amount not to exceed $75,000,000 over the life of the facilities; if the total leverage ratio for the fiscal quarter most recently ended is less than 3.00 to 1.00, the maximum restricted payment amount will be increased to $100,000,000 over the life of the facilities. Apart from the covenants limiting restricted payments and capital expenditures, the facilities do not restrict the use of retained earnings or net income.
We were in compliance with all financial covenants as of September 26, 2009. There was no outstanding balance at September 26, 2009 under the $350 million revolving credit facility. There were $16.4 million of outstanding letters of credit. After giving effect to the financial covenants in the credit agreement, the remaining potential borrowing capacity was $256.3 million. Additionally, as of September 26, 2009, we had cash and cash equivalents of $85.7 million.
35
Our credit facility contains mandatory prepayment provisions when the Company has excess cash flow. Accordingly, in December 2008, we repaid approximately $21.6 million of the term loan as required by this provision. As of September 26, 2009, the total outstanding balance of our term loan was $268.6 million.
We also have outstanding $150 million of 9-1/8% senior subordinated notes due 2013. In October 2003, we entered into a $75 million pay-floating interest rate swap effectively converting half of its $150 million fixed rate 9-1/8 % senior subordinated notes to a floating rate of LIBOR + 4.04%. In February 2009, the swap was terminated prior to its maturity by the counterparty in accordance with the terms of the interest rate swap agreement. As a result of this swap termination, we received cash proceeds and realized a settlement gain of $2.3 million that was recorded as an adjustment to the carrying amount of the related debt. The settlement gain is being amortized as an offset to interest expense over the remaining term of the debt, which matures in February 2013.
In connection with the 2006 purchase by a wholly-owned subsidiary of an additional 60% equity interest in Tech Pac L.L.C., we deposited approximately $15.5 million into an escrow for possible contingent performance-based payments. In March 2009, a net amount of $4.8 million in cash was paid in performance-based payments, which we recognized as additional goodwill. There are no remaining contingent performance-based payments due to the seller. As part of the resolution of the contingent payments, we became the beneficiary of the remaining funds in the escrow, which are comprised primarily of $12.8 million of aggregate principal amount of the senior subordinated notes. The senior subordinated notes contained within the escrow accounts have been recorded as a reduction of debt for accounting purposes against our outstanding senior subordinated notes balance as of September 26, 2009. The senior subordinated notes continue to be held in the escrow and have not been retired.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $350 million revolving credit facility. During the current economic downturn, some companies have experienced difficulties in drawing on lines of credit, issuing debt and raising capital. Based on our anticipated cash needs, availability under our revolving credit facility and the scheduled maturity of our debt, we believe that, notwithstanding these adverse market conditions, 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.
During fiscal 2009, we repurchased 2.2 million shares of our common stock for an aggregate price of approximately $19.3 million and 2.1 million shares of our Class A common stock for an aggregate price of approximately $17.8 million. Our Board of Directors has authorized the repurchase of up to a total of $100 million of our common stock, of which approximately $53.0 million have been repurchased to date. We expect to continue our repurchases from time to time depending on market conditions and subject to the ability to effect repurchases under our credit facility.
At September 26, 2009, our total debt outstanding was $408.1 million versus $523.1 million at September 27, 2008.
The table below presents our significant contractual cash obligations by fiscal year:
Contractual Obligations |
Fiscal 2010 |
Fiscal 2011 |
Fiscal 2012 |
Fiscal 2013 |
Fiscal 2014 |
Thereafter | Total | ||||||||||||||
(in millions) | |||||||||||||||||||||
Long-term debt, including current maturities (1) |
$ | 3.3 | $ | 3.1 | $ | 262.6 | $ | 137.2 | $ | | $ | | $ | 406.2 | |||||||
Interest payment obligations (2) |
19.0 | 18.9 | 18.9 | 5.7 | | 62.5 | |||||||||||||||
Operating leases |
23.4 | 15.5 | 9.2 | 6.6 | 4.1 | 8.8 | 67.6 | ||||||||||||||
Purchase commitments (3) |
72.2 | 39.1 | 30.3 | 20.3 | 14.8 | 10.3 | 187.0 | ||||||||||||||
Performance-based payments (4) |
| | | | | | | ||||||||||||||
Total |
$ | 117.9 | $ | 76.6 | $ | 321.0 | $ | 169.8 | $ | 18.9 | $ | 19.1 | $ | 723.3 | |||||||
36
(1) | Excludes $16.4 million of outstanding letters of credit related to normal business transactions. See Note 9 to the consolidated financial statements for further discussion of long-term debt. |
(2) | Estimated interest payments to be made on our long-term debt. Interest rates used to determine interest payments on variable rate debt are based on our estimates of future interest rates as of the end of fiscal 2009. See Note 9 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 in fiscal 2009 were approximately $6.5 million, approximately $4.0 million in fiscal 2008, and approximately $0.5 million in fiscal 2007. Performance-based periods extend through 2014. |
We adopted provisions of Accounting Standards Codification (ASC) 740, Income Taxes, on the first day of fiscal 2008, which resulted in a $0.5 million increase to our liability for uncertain tax position. The increase was recorded as a cumulative effect adjustment to retained earnings. As of September 26, 2009, we had unrecognized tax benefits of $0.9 million and accrued interest and penalties of $0.1 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.
We believe that cash flows from operating activities, funds available under our revolving credit 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 will not exceed $30 million for the next 12 months, which is related primarily to replacements and upgrades to plant and equipment and investment in our implementation of a scalable enterprise-wide information technology platform. We are investing in this information technology platform to improve existing operations, to support future growth and enable us to take advantage of new applications and technologies. We have invested approximately $42 million from fiscal 2005 through fiscal 2009 in this initiative and plan to invest up to an additional $5 million in fiscal 2010 for planned implementations. Capital expenditures for 2011 and beyond will depend upon the pace of conversion of those remaining legacy systems. This initiative, when complete, will combine our numerous information systems into one enterprise system and create a common business model and common data, which should create greater efficiency and effectiveness.
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.
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
Accounting Standards Codification
Effective July 1, 2009, the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) became the single official source of authoritative, nongovernmental generally accepted
37
accounting principles (GAAP) in the United States. The historical GAAP hierarchy was eliminated, and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. Our accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to our consolidated financial statements and this Form 10-K have been changed to refer to the appropriate section of ASC.
Fair Value Measurements
ASC 820, Fair Value Measurements and Disclosures, provides a consistent definition of fair value that focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-level hierarchy for fair value measurements. On September 28, 2008, we adopted the applicable sections of ASC 820 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. At that time, we elected to defer adoption of ASC 820 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. On September 27, 2009, we will adopt the sections of ASC 820 regarding nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The applicable sections of ASC 820 were applied prospectively. The adoption of the various sections of ASC 820 on September 28, 2008 did not have a material impact on our consolidated financial statements.
On June 27, 2009, we adopted ASC 820-10-65-4, Fair Value Measurements and Disclosures. This section provides additional guidance for estimating fair value when an asset or liability experiences a significant decrease in volume and activity in relation to their normal market activity. Additionally, this section provides guidance on identifying circumstances that may indicate if a transaction is not orderly. Retrospective application of this section to a prior interim or annual reporting period was not permitted. The adoption of this section did not have a material impact on our consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value. ASU 2009-05 amends ASC 820, Fair Value Measurements, by providing additional guidance on determining the fair value of liabilities when a quoted price in an active market for an identical liability is not available. This ASU became effective for us on September 27, 2009 and is not expected to have a significant impact on the measurement of our liabilities as of that date; however, the ASU may affect the fair value measurement of liabilities for future acquisitions and divestitures.
Financial Instruments
On June 27, 2009, we adopted ASC 825-10-65-1, Financial Instruments. This section requires disclosures about the fair value of financial instruments for interim reporting periods and annual financial statements. This section does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The adoption of this section did not have a material impact on our consolidated financial statements. Refer to Financial Note 3, Financial Instruments, for further discussion.
Debt and Equity Securities
On June 27, 2009, we adopted ASC 320-10-65-1, Investments Debt and Equity Securities. This section of the Codification revises guidance for determining how and when to recognize other-than-temporary impairments of debt securities for which changes in fair value are not regularly recognized in earnings and the financial statement presentation of such impairments. This section also expands and increases the frequency of disclosures related to other-than-temporary impairments of both debt and equity securities. Upon adoption, this section did not have a material impact on our consolidated financial statements.
38
Subsequent Events
On June 27, 2009, we adopted ASC 855-10, Subsequent Events. This ASC establishes general standards of accounting and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of this ASC requires us to evaluate all subsequent events that occur after the balance sheet date through the date and time our financial statements are issued.
Disclosures about Derivative Instruments and Hedging Activities
On September 27, 2009, we adopted provisions of ASC 815, Derivatives and Hedging, which requires entities to disclose: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. We do not anticipate the adoption of the provisions of this ASC to have a material impact on our consolidated financial statements.
Business Combinations
On September 27, 2009, we adopted the applicable sections of ASC 805, Business Combinations. ASC 805 provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in the acquiree in a business combination. Additionally, this ASC provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805 amends the applicable sections of ASC 740, Income Taxes, such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies related to acquisitions made prior to September 27, 2009 also fall within the scope of these sections. The adoption of the applicable sections of this ASC may have an impact on the accounting for any future acquisitions or divestitures.
On September 27, 2009, we adopted the applicable sections of ASC 805, Business Combinations, that address accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. These applicable sections address application issues raised on the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. These sections generally apply to assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of ASC 450, Contingencies, if not acquired or assumed in a business combination. The adoption of these applicable sections may have an impact on the accounting for any future acquisitions or divestitures.
Noncontrolling Interests in Consolidated Financial Statements
On September 27, 2009, we adopted ASC 810-10-65-1, Consolidation. This section requires reporting entities to present noncontrolling interests in any of its consolidated entities as equity (as opposed to a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. The adoption will impact the presentation format of our consolidated statements of operations and consolidated balance sheets, but will not have an impact on net earnings or equity attributable our shareholders.
Intangible Assets
On September 27, 2009, we adopted the applicable sections of ASC 275, Risks and Uncertainties, and ASC 350, Intangibles Goodwill and Other, that address the determination of the useful life of intangible assets. These sections address the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The adoption of these applicable sections may have an impact on the accounting for intangible assets that are a part of any future acquisitions.
39
Share-Based Payment Transactions
On September 27, 2009, we adopted the applicable sections of ASC 260-10, Earnings Per Share, that address whether instruments granted in share-based payment transactions are participating securities. These sections conclude that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of basic earnings per share pursuant to the two-class method. We do not anticipate the adoption of these applicable sections to have a material impact on our consolidated financial statements.
Transfers of Financial Assets
In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets. SFAS No. 166 is a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and amends the guidance on accounting for transfers of financial assets, including securitization transactions, where entities have continued exposure to risks related to transferred financial assets. SFAS No. 166 also expands the disclosure requirements for such transactions. SFAS No. 166 is currently not included in the Codification. This standard will become effective for us on September 26, 2010. We are currently evaluating the impact of this standard on our consolidated financial statements.
Variable Interest Entities
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and amends the guidance for consolidation of VIEs primarily related to the determination of the primary beneficiary of the VIE. This statement will become effective for us on September 26, 2010. SFAS No. 167 is currently not included in the Codification. We are currently evaluating the impact of this standard on our consolidated financial statements.
Critical Accounting Policies, Estimates and Judgments
Our discussion and analysis of our financial condition and results of operations are 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. We estimate our allowance based on both 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
40
demonstrate the validity of amounts due or if future default rates on trade receivables in general differ from those currently anticipated, additional allowances may be required, which would effect earnings in the period the adjustments are made. For more information, see Note 6 to our consolidated financial statements.
Inventory
Inventory, which primarily consists of lawn and garden products and pet supplies 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 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 initially comparing the fair value of each of our four reporting units to their related carrying values. 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 units 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 all four reporting units to our 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. Actual results may differ from those estimates. The valuations employ present value techniques to measure fair value and consider market factors.
Key assumptions used to determine the fair value of each reporting unit as of our fiscal 2007 annual testing date (July 1, 2007) were: (a) expected cash flow for the period from 2008 to 2013; and (b) a discount rate of 9%, which was based on managements best estimate of the after-tax weighted average cost of capital. Based upon the results of our July 1, 2007 analysis, no impairment of goodwill was indicated.
As of December 29, 2007, due to the continuing challenging business conditions and the significant decline in our market capitalization, we concluded there was an indication of possible impairment. Certain key assumptions used to determine the fair value of each reporting unit as of December 29, 2007 were revised to
41
reflect: (a) significant reductions in future expected cash flows for the period from 2008 to 2013 due to the continuing soft economy, weakness in the housing sector and other reasons; and (b) a discount rate of 15%, which was based on managements best estimate of the after-tax weighted average cost of capital, adjusted for our increased level of financial risk and the increased risk associated with our future operations. Based on our updated analysis and the sustained decline in market capitalization, we concluded that there was an impairment of goodwill and, thus, recognized a non-cash charge of $400 million in the first quarter of fiscal 2008, comprised of $202 million relating to Garden Products and $198 million relating to Pet Products.
We performed our fiscal 2008 annual goodwill impairment test as of June 29, 2008. Key assumptions used to determine the fair value of each reporting unit as of our fiscal 2008 annual testing date (June 29, 2008) were: (a) expected cash flow for the period from 2009 to 2014; and (b) a discount rate of 15%, which was based on managements best estimate of the after-tax weighted average cost of capital, adjusted for the increased risk associated with our future operations and credit profile. Based on our analysis, we concluded there was an additional impairment of goodwill and recognized a non-cash charge of $5 million relating to goodwill in Garden Products.
We performed our fiscal 2009 annual goodwill impairment test as of June 27, 2009. Key assumptions used to determine the fair value of each reporting unit as of our fiscal 2009 annual testing date were: (a) expected cash flow for the period from 2010 to 2015; and (b) a discount rate of 10%, which was based on managements best estimate of the after-tax weighted average cost of capital. Based on our analysis, we concluded there was no impairment of goodwill.
As of June 27, 2009, June 29, 2008 and December 29, 2007, if forecasted cash flows had been 10% lower than estimated, the resulting goodwill impairment, if any, would not have changed. As of June 27, 2009, June 29, 2008 and December 29, 2007, if the discount rate applied in our analysis had been 100 basis points higher than estimated, the resulting goodwill impairment, if any, would not have changed.
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.
We may need to reevaluate our goodwill impairment analysis in future quarters.
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, or annually for indefinite-lived intangibles. 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. 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. The fair value of the assets are estimated using the discounted future cash flows of the assets based upon a rate commensurate with the risk. Our estimate of future cash flows requires management to make assumptions and to apply judgment, including forecasting future sales and costs. Estimating the fair value further requires selecting the discount rate and other factors affecting the valuation of asset fair values, and is based upon our experience, knowledge and third-party data. We record asset impairment charges when the carrying value of an asset is in excess of its fair value. In fiscal 2009, we tested our indefinite-lived intangible assets and no impairment was indicated. In fiscal 2008, we recognized a $27.0 million impairment charge in Garden Products related to under-performing assets, including certain trademarks. 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.
42
Income Taxes
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, depreciation and nondeductible reserves. We establish a valuation allowance for deferred tax assets when management believes it is more likely than not a deferred tax asset will not be realized. As of fiscal 2009 and 2008, we had valuation allowances related to various state net deferred tax assets of $6.8 million and $10.9 million, respectively. United States income taxes have not been provided on undistributed earnings (approximately $2.6 million at September 26, 2009) 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 $0.3 million.
We adopted the provisions of ASC 740, Income Taxes on September 30, 2007, the first day of fiscal 2008, as required. This guidance changes the accounting for uncertainty in income taxes by creating a new framework for how companies should recognize, measure, present, and disclose uncertain tax positions in their financial statements. We may recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The standard also provides guidance on the reversal of previously recognized tax positions, balance sheet classifications, accounting for interest and penalties associated with tax positions, and income tax disclosures. We recognized a $0.5 million increase to its liabilities for uncertain tax positions and a cumulative effect adjustment to decrease retained earnings as of the adoption date.
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 vehicle liability deductible of $50,000 for physical damage. We maintain excess loss insurance that covers any health care costs in excess of $200,000 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.
Commitments and Contingencies
We are a party to certain legal proceedings considered routine to normal operations. In the opinion of management, the ultimate resolution of all such matters will not have a material adverse effect on operating results, financial condition or cash flows in the future.
Our contractual commitments are presented in Liquidity and Capital Resources.
43
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 facilities is based on variable interest rates and therefore affected by changes in market interest rates. If interest rates on our variable rate debt had changed by 10% compared to actual rates, interest expense would have increased or decreased by approximately $1.1 million in fiscal 2009. In addition, we have investments consisting of cash equivalents and short-term investments in marketable debt securities, which are also affected by changes in market interest rates.
Commodity Prices. We are exposed to fluctuations in market prices for grains, grass seed 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 26, 2009, we had entered into fixed purchase commitments for commodities totaling approximately $187 million. A 10% change in the market price for these commodities would have resulted in an additional pretax gain or loss of $18.7 million related to the contracts outstanding as of September 26, 2009.
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.
44
Item 8. Financial Statements and Supplementary Data
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Central Garden & Pet Company | ||
Managements Report on Internal Control Over Financial Reporting |
46 | |
47 | ||
Consolidated Balance Sheets, September 26, 2009 and September 27, 2008 |
49 | |
50 | ||
51 | ||
52 | ||
53 |
45
MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Central Garden & Pet Companys management, under the supervision of Centrals Chief Executive Officer and Chief 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 Centrals internal control over financial reporting based on the framework in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Based on evaluation of the criteria set forth by COSO in Internal Control Integrated Framework, management concluded that our internal control over financial reporting was effective as of September 26, 2009.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued a report on our internal control over financial reporting, which appears on page 47 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.
46
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Central Garden & Pet Company:
We have audited the accompanying consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the Company) as of September 26, 2009 and September 27, 2008, and the related consolidated statements of operations, shareholders equity, and cash flows for each of the three fiscal years in the period ended September 26, 2009. We also have audited the Companys internal control over financial reporting as of September 26, 2009, based on criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Companys 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 Managements Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Companys 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 companys internal control over financial reporting is a process designed by, or under the supervision of, the companys principal executive and principal financial officers, or persons performing similar functions, and effected by the companys 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 companys 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 companys 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 26, 2009 and September 27, 2008, and the results of their operations and their cash flows for each of the three fiscal years in
47
the period ended September 26, 2009, 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 26, 2009, based on the criteria established in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As discussed in Note 1 to the consolidated financial statements, on September 30, 2007, the Company adopted FASB ASC 740 Income Taxes.
/s/ Deloitte & Touche LLP
San Francisco, California
November 20, 2009
48
CONSOLIDATED BALANCE SHEETS
September 26, 2009 |
September 27, 2008 |
|||||||
(in thousands) | ||||||||
ASSETS | ||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 85,668 | $ | 26,929 | ||||
Accounts receivable, net |
206,565 | 260,639 | ||||||
Inventories |
284,834 | 349,499 | ||||||
Prepaid expenses, deferred income taxes and other |
44,425 | 34,686 | ||||||
Total current assets |
621,492 | 671,753 | ||||||
Land, buildings, improvements and equipment: |
||||||||
Land |
8,925 | 9,141 | ||||||
Buildings and improvements |
95,711 | 93,014 | ||||||
Transportation equipment |
3,734 | 4,139 | ||||||
Machinery and warehouse equipment |
142,051 | 138,889 | ||||||
Office furniture and equipment |
87,160 | 82,847 | ||||||
Total |
337,581 | 328,030 | ||||||
Less accumulated depreciation and amortization |
(172,847 | ) | (154,017 | ) | ||||
Land, buildings, improvements and equipment net |
164,734 | 174,013 | ||||||
Goodwill |
207,749 | 201,499 | ||||||
Other intangible assets, net |
103,366 | 107,404 | ||||||
Other assets |
53,584 | 104,649 | ||||||
Total |
$ | 1,150,925 | $ | 1,259,318 | ||||
LIABILITIES AND SHAREHOLDERS EQUITY | ||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 108,836 | $ | 133,364 | ||||
Accrued expenses |
82,143 | 84,345 | ||||||
Current portion of long-term debt |
3,270 | 3,340 | ||||||
Total current liabilities |
194,249 | 221,049 | ||||||
Long-term debt |
404,815 | 519,807 | ||||||
Deferred income taxes and other long-term obligations |
4,526 | 7,037 | ||||||
Minority interest |
2,250 | 2,667 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity: |
||||||||
Common stock |
188 | 210 | ||||||
Class A common stock |
475 | 485 | ||||||
Class B stock |
16 | 16 | ||||||
Additional paid-in capital |
531,300 | 555,310 | ||||||
Retained earnings (accumulated deficit) |
12,044 | (50,463 | ) | |||||
Accumulated other comprehensive income |
1,062 | 3,200 | ||||||
Total shareholders equity |
545,085 | 508,758 | ||||||
Total |
$ | 1,150,925 | $ | 1,259,318 | ||||
See notes to consolidated financial statements.
49
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended | ||||||||||||
September 26, 2009 |
September 27, 2008 |
September 29, 2007 |
||||||||||
(in thousands, except per share amounts) | ||||||||||||
Net sales |
$ | 1,614,300 | $ | 1,705,386 | $ | 1,671,145 | ||||||
Cost of goods sold and occupancy |
1,086,974 | 1,184,058 | 1,136,825 | |||||||||
Gross profit |
527,326 | 521,328 | 534,320 | |||||||||
Selling, general and administrative expenses |
401,340 | 415,978 | 434,903 | |||||||||
Goodwill and other impairments |
| 429,764 | | |||||||||
Income (loss) from operations |
125,986 | (324,414 | ) | 99,417 | ||||||||
Interest expense |
(22,710 | ) | (38,326 | ) | (49,685 | ) | ||||||
Interest income |
649 | 1,053 | 1,538 | |||||||||
Other income |
52 | 2,116 | 2,402 | |||||||||
Income (loss) before income taxes and minority interest |
103,977 | (359,571 | ) | 53,672 | ||||||||
Income taxes (tax benefit) |
36,368 | (93,069 | ) | 19,999 | ||||||||
Minority interest |
1,661 | 833 | 1,369 | |||||||||
Net income (loss) |
$ | 65,948 | $ | (267,335 | ) | $ | 32,304 | |||||
Net income (loss) per share: |
||||||||||||
Basic |
$ | 0.95 | $ | (3.76 | ) | $ | 0.46 | |||||
Diluted |
$ | 0.94 | $ | (3.76 | ) | $ | 0.45 | |||||
Weighted average shares used in the computation of net income (loss) per share: |
||||||||||||
Basic |
69,499 | 71,117 | 70,824 | |||||||||
Diluted |
70,264 | 71,117 | 72,050 |
See notes to consolidated financial statements.
50
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(dollars in thousands)
Common Stock | Class A Common Stock |
Class B Stock | Additional Paid-in Capital |
Retained Earnings (Accumulated Deficit) |
Accumulated Other Comprehensive Income |
Total | Comprehensive Income |
||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||
Balance, September 30, 2006 |
22,008,431 | $ | 218 | 47,321,386 | $ | 473 | 1,652,262 | $ | 16 | $ | 540,131 | $ | 185,031 | $ | 1,490 | $ | 727,359 | ||||||||||||||||||||||
Stock-based compensation |
4,985 | 4,985 | |||||||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
1,977 | 1,977 | |||||||||||||||||||||||||||||||||||||
Conversion of preferred stock into common stock |
64,803 | 1 | 129,606 | 1 | 2,248 | 2,250 | |||||||||||||||||||||||||||||||||
Issuance of common stock |
224,751 | 2 | 409,611 | 4 | 4,387 | 4,393 | |||||||||||||||||||||||||||||||||
Comprehensive income |
|||||||||||||||||||||||||||||||||||||||
Net change in foreign currency translation |
3,705 | 3,705 | $ | 3,705 | |||||||||||||||||||||||||||||||||||
Net income |
32,304 | 32,304 | 32,304 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income |
$ | 36,009 | |||||||||||||||||||||||||||||||||||||
Balance, September 29, 2007 |
22,297,985 | 221 | 47,860,603 | 478 | 1,652,262 | 16 | 553,728 | 217,335 | 5,195 | 776,973 | |||||||||||||||||||||||||||||
Stock-based compensation |
5,977 | 5,977 | |||||||||||||||||||||||||||||||||||||
Tax benefit from exercise of stock options |
68 | 68 | |||||||||||||||||||||||||||||||||||||
Issuance of common stock |
606,396 | 7 | 1,425 | 1,432 | |||||||||||||||||||||||||||||||||||
Repurchase of common stock |
(1,289,601 | ) | (11 | ) | (5,888 | ) | (5,899 | ) | |||||||||||||||||||||||||||||||
Cumulative effect of adoption of ASC 740, Income Taxes |
(463 | ) | (463 | ) | |||||||||||||||||||||||||||||||||||
Comprehensive income |
|||||||||||||||||||||||||||||||||||||||
Net change in foreign currency translation. |
(1,995 | ) | (1,995 | ) | $ | (1.995 | ) | ||||||||||||||||||||||||||||||||
Net loss |
(267,335 | ) | (267,335 | ) | (267,335 | ) | |||||||||||||||||||||||||||||||||
Total comprehensive loss |
$ | (269,330 | ) | ||||||||||||||||||||||||||||||||||||
Balance, September 27, 2008 |
21,008,384 | 210 | 48,466,999 | 485 | 1,652,262 | 16 | 555,310 | (50,463 | ) | 3,200 | 508,758 | ||||||||||||||||||||||||||||
Stock-based compensation |
4,567 | 4,567 | |||||||||||||||||||||||||||||||||||||
Tax deficiency on exercise of stock options, net of tax benefit |
(664 | ) | (664 | ) | |||||||||||||||||||||||||||||||||||
Restricted share activity |
(42,592 | ) | (1 | ) | 736,970 | 7 | 3,594 | 3,600 | |||||||||||||||||||||||||||||||
Issuance of common stock |
34,504 | 1 | 414,838 | 4 | 2,134 | 2,139 | |||||||||||||||||||||||||||||||||
Repurchase of common stock |
(2,223,141 | ) | (22 | ) | (2,085,853 | ) | (21 | ) | (33,641 | ) | (3,441 | ) | (37,125 | ) | |||||||||||||||||||||||||
Comprehensive income |
|||||||||||||||||||||||||||||||||||||||
Net change in foreign currency translation |
(2,138 | ) | (2,138 | ) | $ | (2,138 | ) | ||||||||||||||||||||||||||||||||
Net income |
65,948 | 65,948 | 65,948 | ||||||||||||||||||||||||||||||||||||
Total comprehensive income |
$ | 63,810 | |||||||||||||||||||||||||||||||||||||
Balance, September 26, 2009 |
18,777,155 | $ | 188 | 47,532,954 | $ | 475 | 1,652,262 | $ | 16 | $ | 531,300 | $ | 12,044 | $ | 1,062 | $ | 545,085 | ||||||||||||||||||||||
See notes to consolidated financial statements.
51
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended | ||||||||||||
September 26, 2009 |
September 27, 2008 |
September 29, 2007 |
||||||||||
(in thousands) | ||||||||||||
Cash flows from operating activities: |
||||||||||||
Net income (loss) |
$ | 65,948 | $ | (267,335 | ) | $ | 32,304 | |||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||||||
Depreciation and amortization |
29,155 | 32,517 | 30,717 | |||||||||
Stock-based compensation |
10,646 | 13,422 | 4,985 | |||||||||
Excess tax benefits from stock-based awards |
(542 | ) | (68 | ) | (1,977 | ) | ||||||
Minority interest |
1,661 | 833 | 1,369 | |||||||||
Deferred income taxes |
25,713 | (109,717 | ) | 16,606 | ||||||||
Reversal of property sale gain |
4,700 | | | |||||||||
(Gain) loss on sale of a business, property and equipment |
(805 | ) | (6,028 | ) | 124 | |||||||
Goodwill and other impairments |
| 429,764 | | |||||||||
Proceeds from interest rate swap termination, net of amounts reclassified into earnings |
1,901 | | | |||||||||
Changes in assets and liabilities (excluding businesses acquired): |
||||||||||||
Receivables |
50,046 | (13,223 | ) | (7,757 | ) | |||||||
Inventories |
62,886 | 29,832 | (51,525 | ) | ||||||||
Prepaid expenses and other assets |
672 | 8,397 | 5,681 | |||||||||
Accounts payable |
(24,517 | ) | (3,980 | ) | 13,212 | |||||||
Accrued expenses |
(3,315 | ) | (435 | ) | (4,253 | ) | ||||||
Other long-term obligations |
(2,511 | ) | 1,049 | (951 | ) | |||||||
Net cash provided by operating activities |
221,638 | 115,028 | 38,535 | |||||||||
Cash flows from investing activities: |
||||||||||||
Additions to property |
(16,505 | ) | (22,349 | ) | (60,038 | ) | ||||||
Businesses acquired, net of cash acquired |
(6,549 | ) | (5,010 | ) | (34,004 | ) | ||||||
Proceeds from business, property and equipment sales |
2,512 | 12,053 | | |||||||||
Collection of notes |
| | 3,340 | |||||||||
Issuance of note |
| | (2,025 | ) | ||||||||
Restricted investments |
| (100 | ) | 267 | ||||||||
Net cash used in investing activities |
(20,542 | ) | (15,406 | ) | (92,460 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Repayments on revolving line of credit |
(551,000 | ) | (804,000 | ) | (967,000 | ) | ||||||
Borrowings on revolving line of credit |
473,000 | 718,000 | 1,012,000 | |||||||||
Repayments of long-term debt |
(25,001 | ) | (2,611 | ) | (2,964 | ) | ||||||
Proceeds from issuance of common stock |
479 | 1,432 | 4,393 | |||||||||
Excess tax benefits from stock-based awards |
542 | 68 | 1,977 | |||||||||
Repurchase of common stock, including shares surrendered for tax withholding |
(37,821 | ) | (5,899 | ) | | |||||||
Redemption of preferred stock |
| (750 | ) | | ||||||||
Distribution to minority interest |
(2,082 | ) | | (800 | ) | |||||||
Payment of financing costs |
(128 | ) | (175 | ) | (1,131 | ) | ||||||
Net cash (used in) provided by financing activities |
(142,011 | ) | (93,935 | ) | 46,475 | |||||||
Effect of exchange rate changes on cash and equivalents |
(346 | ) | 187 | 99 | ||||||||
Net increase (decrease) in cash and cash equivalents |
58,739 | 5,874 | (7,351 | ) | ||||||||
Cash and cash equivalents at beginning of year |
26,929 | 21,055 | 28,406 | |||||||||
Cash and cash equivalents at end of year |
$ | 85,668 | $ | 26,929 | $ | 21,055 | ||||||
Supplemental information: |
||||||||||||
Cash paid for interest |
$ | 22,876 | $ | 39,818 | $ | 50,085 | ||||||
Cash paid for income taxes net of refunds |
18,168 | 9,511 | 3,958 | |||||||||
Non-cash investing activities: |
||||||||||||
Liabilities assumed in connection with acquisitions |
| 1,505 | 3 | |||||||||
Capital expenditures incurred but not paid |
1,248 | 1,126 | 2,483 | |||||||||
Note receivable from sale of property |
| 3,850 | | |||||||||
Non-cash financing activities: |
||||||||||||
Conversion of preferred stock to common stock |
| | 2,250 | |||||||||
Offset of subordinated notes with escrow |
12,825 | | | |||||||||
Restricted share stock bonus |
6,222 | | |
See notes to consolidated financial statements.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended September 26, 2009,
September 27, 2008 and September 29, 2007
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 for 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. Minority interests in consolidated entities are recognized for the share of assets, liabilities and operating results not owned by Central. All intercompany balances and transactions have been eliminated.
On January 3, 2007, the Company announced a stock dividend in the form of two shares of the Companys Class A common stock for each outstanding share of the Companys common stock and Class B stock to stockholders of record as of January 14, 2007. On February 5, 2007, the Company distributed the related Class A shares to the stockholders. All share and per share amounts in this Form 10-K have been retroactively adjusted to reflect the stock dividend for all periods presented.
Minority Interest Minority interest in the Companys consolidated financial statements represents the 20% interest not owned by Central in a consolidated subsidiary. Since the Company controls this subsidiary, its financial statements are fully consolidated with those of the Company, and the minority owners 20% share of the subsidiarys net assets and results of operations is reported as minority interest.
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. 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 Companys current 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 26, 2009, September 27, 2008 and September 29, 2007 was $1.1 million, $1.7 million and $3.4 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 Companys 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 26, 2009, September 27, 2008 and September 29, 2007 was $51.7 million, $62.7 million and $64.0 million, respectively. Amounts billed to customers for shipping and handling costs are included in net sales.
53
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Advertising Costs The Company expenses the costs of advertising as incurred. Advertising expenses were $31.4 million, $35.7 million and $35.7 million in fiscal 2009, 2008 and 2007, respectively.
401(k) Plans The Company sponsors several 401(k) plans which cover substantially all employees. The Companys matching contributions expensed under these plans were $2,040,000, $1,563,000 and $1,529,000 for fiscal years 2009, 2008 and 2007, respectively. In fiscal 2009 and fiscal 2008, the Companys matching contributions made in the Companys Class A common stock resulted in the issuance of approximately 300,000 and 190,000 shares, respectively.
Other income 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 nondeductible reserves. 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. As of fiscal 2009 and 2008, the Company had valuation allowances related to various state net deferred tax assets of $6.8 million and $10.9 million, respectively. United States income taxes have not been provided on undistributed earnings (approximately $2.6 million at September 26, 2009) of the Companys 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 $0.3 million.
The Company adopted the provisions of ASC 740, Income Taxes on September 30, 2007, the first day of fiscal 2008, as required. This guidance changes the accounting for uncertainty in income taxes by creating a new framework for how companies should recognize, measure, present, and disclose uncertain tax positions in their financial statements. The Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such positions are then measured based on the largest benefit that has a greater than 50% likelihood of being realized upon settlement. The standard also provides guidance on the reversal of previously recognized tax positions, balance sheet classifications, accounting for interest and penalties associated with tax positions, and income tax disclosures. The Company recognized a $0.5 million increase to its liabilities for uncertain tax positions and a cumulative effect adjustment to decrease retained earnings as of the adoption date. See Note 11, Income Taxes for additional information.
Cash and cash equivalents include all highly liquid debt instruments with a maturity of three months or less at the date of purchase.
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.
Long-Lived Assets The Company reviews its long-lived assets, including amortizable intangible assets, 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, or annually for indefinite-lived intangibles. An impairment loss would be recognized for amortizable intangible assets and property, plant and
54
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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. The Company has recorded asset impairment charges when the carrying value of an asset was in excess of its fair value. In fiscal 2009, the Company tested its indefinite-lived intangible assets and no impairment was indicated. In the fourth quarter of fiscal 2008, the Company recognized a $27.0 million impairment charge in the Companys Garden Products segment related to under-performing assets. 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.
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 3 to 10 years.
In October 2007, the Company sold a facility for approximately $7.9 million in cash. In connection with the sale, the Company is leasing back the property from the purchaser for a period of approximately two years. The Company is accounting for the leaseback as an operating lease. The Company recognized a gain of approximately $3.1 million in the Pet Products segment in the quarter ended December 29, 2007 and deferred approximately $1.5 million to be recognized ratably over the term of the lease.
In December 2007, the Company sold a facility for approximately $5.1 million and entered into a leaseback of the property from the purchaser for a period of approximately eight months. The Company is accounting for the leaseback as an operating lease. The Company received cash of $1.3 million and a $3.8 million interest bearing recourse note. The Company recognized a gain of approximately $4.6 million from this sale in the Garden Products segment in fiscal 2008. The note was due in full in January 2009. In January 2009 and through September 26, 2009, the Company extended the terms of the note payable on a month-to-month basis and is continuing to lease the property on a month-to-month basis. Although the Company retains its rights under the terms of the recourse note, it now appears the ultimate repayment may be dependent on the buyers sale of the facility. Accordingly, in fiscal 2009, the Company revised its accounting to reverse the previously recognized sale and associated gain for accounting purposes.
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 7 Goodwill.
Restricted Assets In connection with the purchase of an additional 60% of equity interest in Tech Pac LLC. in March 2006, the Company deposited approximately $15.5 million into an account for possible contingent performance-based payments. In fiscal 2009, a net amount of $4.8 million in cash was paid in performance based payments which the Company recognized as additional goodwill. There are no remaining contingent performance-based payments due to the seller. As part of the resolution of the contingent payments, the Company became the beneficiary of the remaining funds in the escrow, which are comprised primarily of $12.8 million of aggregate principal amount of the senior subordinated notes. Under the requirements of ASC
55
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
860, Transfers and Servicing, the senior subordinated notes contained within the escrow accounts have been recorded as a reduction of debt for accounting purposes against our senior subordinated notes balance as of September 26, 2009. The senior subordinated notes continue to be held in escrow and have not been retired. The balance of the escrow account was included in Other assets as of September 27, 2008.
Investments The Company owns membership interests (from 33% to 49%) in two unconsolidated companies. The Company accounts for its interest in these entities using the equity method. Equity income of $0.1 million in fiscal 2009, $2.7 million in fiscal 2008 and $1.9 million in fiscal 2007 is included in other income in the consolidated statements of operations. The Companys investment in these entities was $6.4 million at September 26, 2009 and $6.1 million at September 27, 2008. During fiscal 2008, the Company determined that the goodwill for one of these investments was impaired as a result of its annual impairment analysis. Accordingly, the Company recorded a non-cash charge of approximately $1.0 million in fiscal 2008. On a combined basis, the assets, liabilities, revenues and expenses of these entities are not significant.
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 Companys 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 costs in excess of $200,000 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 26, 2009 and September 27, 2008, the carrying amount of cash and cash equivalents, 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 Companys senior subordinated notes is based on quoted market prices for these instruments. The estimated fair value of the Companys term loan has been determined using inputs that were derived from available market information. See Note 3 for further information regarding the fair value of the Companys 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 does not enter into derivatives for trading or speculative purposes.
In October 2003, the Company entered into a $75 million pay-floating interest rate swap effectively converting 50% of its $150 million fixed rate 9-1/8% senior subordinated notes to a floating rate of LIBOR + 4.04%. When it was entered into, the swap was designated as a hedge of the underlying specific interest rate exposure on the senior subordinated debt. The differential paid or received on the swap is recognized in interest expense over the life of the swap, thereby adjusting the effective interest rate on the underlying obligation. The unrealized gain was approximately $1.2 million in fiscal year 2008, and the unrealized loss was approximately $0.5 million in fiscal year 2007, with corresponding adjustments made to the fair value of the related debt.
In February 2009, the Companys $75 million pay-floating interest rate swap was terminated prior to its maturity by the counterparty in accordance with the terms of the interest rate swap agreement. As a result of this swap termination, the Company received cash proceeds and realized a settlement gain of $2.3 million that was recorded as an adjustment to the carrying amount of the related debt. The settlement gain is being amortized as an offset to interest expense over the remaining term of the debt, which matures February 2013.
56
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 2009 was $10.6 million ($6.9 million after tax), fiscal 2008 was $13.4 million ($8.5 million after tax) and in fiscal 2007 was $5.0 million ($3.1 million after tax). See Note 12 for further information.
Total Comprehensive Income Total comprehensive income consists of two components: net income and other comprehensive income. Other comprehensive income refers to revenue, expenses, 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 is comprised of currency translation adjustments relating to the Companys foreign subsidiary whose functional currency is not the U.S. dollar. Deferred taxes are not provided on translation gains and losses, because the Company expects earnings of its foreign subsidiary to be permanently reinvested.
Recent Accounting Pronouncements Effective July 1, 2009, the Financial Accounting Standards Boards (FASB) Accounting Standards Codification (ASC) became the single official source of authoritative, nongovernmental generally accepted accounting principles (GAAP) in the United States. The historical GAAP hierarchy was eliminated and the ASC became the only level of authoritative GAAP, other than guidance issued by the Securities and Exchange Commission. The Companys accounting policies were not affected by the conversion to ASC. However, references to specific accounting standards in the footnotes to the consolidated financial statements have been changed to refer to the appropriate section of ASC.
ASC 820, Fair Value Measurements and Disclosures, provides a consistent definition of fair value that focuses on exit price, prioritizes the use of market-based inputs over entity-specific inputs for measuring fair value and establishes a three-level hierarchy for fair value measurements. On September 28, 2008, the Company adopted the applicable sections of ASC 820 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. At that time, the Company elected to defer adoption of ASC 820 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. On September 27, 2009, the Company adopted the sections of ASC 820 regarding nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The applicable sections of ASC 820 were applied prospectively. The adoption of the various sections of ASC 820 on September 28, 2008 did not have a material impact on the Companys consolidated financial statements.
On June 27, 2009, the Company adopted ASC 320-10-65-1, Investments Debt and Equity Securities. This section of the Codification revises guidance for determining how and when to recognize other-than-temporary impairments of debt securities for which changes in fair value are not regularly recognized in earnings and the financial statement presentation of such impairments. This section also expands and increases the frequency of disclosures related to other-than-temporary impairments of both debt and equity securities. Upon adoption, this section did not have a material impact on the Companys consolidated financial statements.
On June 27, 2009, the Company adopted ASC 820-10-65-4, Fair Value Measurements and Disclosures. This section provides additional guidance for estimating fair value when an asset or liability experiences a significant decrease in volume and activity in relation to their normal market activity. Additionally, this section provides guidance on identifying circumstances that may indicate if a transaction is not orderly. Retrospective application of this section to a prior interim or annual reporting period was not permitted. The adoption of this section did not have a material impact on the Companys consolidated financial statements.
57
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
On June 27, 2009, the Company adopted ASC 825-10-65-1, Financial Instruments. This section requires disclosures about the fair value of financial instruments for interim reporting periods and annual financial statements. This section does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The adoption of this section did not have a material impact on the Companys consolidated financial statements. See to Financial Note 3, Financial Instruments, for further discussion.
On June 27, 2009, the Company adopted ASC 855-10, Subsequent Events. This ASC establishes general standards of accounting and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The adoption of this ASC requires the Company to evaluate all subsequent events that occur after the balance sheet date through the date and time the Companys financial statements are issued. Subsequent events were evaluated through November 20, 2009, the date the financial statements were issued.
On September 27, 2009, the Company adopted the applicable sections of ASC 805, Business Combinations. ASC 805 provides revised guidance for recognizing and measuring identifiable assets and goodwill acquired, liabilities assumed and any noncontrolling interest in the acquiree in a business combination. Additionally, this ASC provides disclosure requirements to enable users of the financial statements to evaluate the nature and financial effects of the business combination. ASC 805 amends the applicable sections of ASC 740, Income Taxes, such that adjustments made to valuation allowances on deferred taxes and acquired tax contingencies related to acquisitions made prior to September 27, 2009 also fall within the scope of these sections. The adoption of the applicable sections of this ASC may have an impact on the accounting for any future acquisitions or divestitures.
On September 27, 2009, the Company adopted the applicable sections of ASC 805, Business Combinations, that address accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies. These applicable sections address application issues raised on the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. These sections generally apply to assets acquired and liabilities assumed in a business combination that arise from contingencies that would be within the scope of ASC 450, Contingencies, if not acquired or assumed in a business combination. The adoption of these applicable sections may have an impact on the accounting for any future acquisitions or divestitures.
On September 27, 2009, the Company adopted ASC 810-10-65-1, Consolidation. This section requires reporting entities to present noncontrolling interests in any of its consolidated entities as equity (as opposed to a liability or mezzanine equity) and provides guidance on the accounting for transactions between an entity and noncontrolling interests. The adoption will impact the presentation format of the Companys consolidated statements of operations and consolidated balance sheets, but will not have an impact on net earnings or equity attributable to the Companys shareholders.
On September 27, 2009, the Company adopted provisions of ASC 815, Derivatives and Hedging, which requires entities to disclose: (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for, and (c) how derivative instruments and related hedged items affect an entitys financial position, financial performance and cash flows. The Company does not anticipate the adoption of the provisions of this ASC to have a material impact on its consolidated financial statements.
On September 27, 2009, the Company adopted the applicable sections of ASC 275, Risks and Uncertainties, and ASC 350, Intangibles Goodwill and Other, that address the determination of the useful life of intangible
58
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
assets. These sections address the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The adoption of these applicable sections may have an impact on the accounting for intangible assets that are a part of any future acquisitions.
On September 27, 2009, the Company adopted the applicable sections of ASC 260-10, Earnings Per Share, that address whether instruments granted in share-based payment transactions are participating securities. These sections conclude that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of basic earnings per share pursuant to the two-class method. The Company does not anticipate the adoption of these applicable sections to have a material impact on our consolidated financial statements.
In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166, Accounting for Transfers of Financial Assets. SFAS No. 166 is a revision to SFAS No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, and amends the guidance on accounting for transfers of financial assets, including securitization transactions, where entities have continued exposure to risks related to transferred financial assets. SFAS No. 166 also expands the disclosure requirements for such transactions. SFAS No. 166 is currently not included in the Codification. This standard will become effective for the Company on September 26, 2010. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). SFAS No. 167 is a revision to FASB Interpretation No. 46(R), Consolidation of Variable Interest Entities, and amends the guidance for consolidation of VIEs primarily related to the determination of the primary beneficiary of the VIE. This statement will become effective for the Company on September 26, 2010. SFAS No. 167 is currently not included in the Codification. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05, Measuring Liabilities at Fair Value. ASU 2009-05 amends ASC 820, Fair Value Measurements, by providing additional guidance on determining the fair value of liabilities when a quoted price in an active market for an identical liability is not available. This ASU will become effective for the Company on September 27, 2009 and is not expected to have a significant impact on the measurement of its liabilities as of that date; however, the ASU may affect the fair value measurement of liabilities for future acquisitions and divestitures.
2. Fair Value Measurements
Effective September 28, 2008, the Company adopted expanded disclosure requirements for financial assets and liabilities measured at fair value on a recurring basis. Financial assets and liabilities are 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 Companys own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
59
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
In February 2009, the Companys $75 million pay-floating interest rate swap was terminated prior to its maturity by the counterparty in accordance with the terms of the interest rate swap agreement. Prior to its termination, the swap was measured under Level 2 inputs in the fair value hierarchy. As a result of this swap termination, the Company received cash proceeds and realized a settlement gain of $2.3 million that was recorded as an adjustment to the carrying amount of the related debt. The settlement gain is being amortized as an offset to interest expense over the remaining term of the debt, which matures February 2013.
3. Financial Instruments
Effective March 29, 2009, the Company adopted expanded disclosure requirements regarding the fair value of financial instruments in interim as well as annual financial statements.
The Companys financial instruments include cash and equivalents, accounts receivable and payable, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
The estimated fair value of the Companys senior subordinated notes as of September 26, 2009 and September 27, 2008 is $138.5 million and $123.0 million, respectively, compared to a carrying value of $139.1 million and $150.0 million, respectively. The estimated fair value is based on quoted market prices for these instruments.
The estimated fair value of the Companys term loan, including current portion, as of September 26, 2009 and September 27, 2008 is $249.8 million and $281.5 million, respectively, compared to a carrying value of $268.6 million and $293.2 million, respectively. The estimated fair value has been determined using inputs that were derived from available market information and may not be representative of actual values that could have been or will be realized in the future.
4. Acquisitions
Fiscal 2009
The Company made no acquisitions during fiscal 2009. Contingent performance payments of $6.5 million were paid for acquisitions made in prior years which were recorded as goodwill in fiscal 2009.
Fiscal 2008
In October 2007, the Company acquired the remaining 51% interest in Matson L.L.C. (Matson) for approximately $5.1 million. The Company previously acquired its 49% interest in Matson in July 2003, and accounted for the investment under the equity method. Matson is engaged primarily in the formulation and manufacture of controls for garden use. The purchase price exceeded the fair value of net tangible and identified intangible assets acquired by approximately $3.8 million, which was recorded as goodwill.
Fiscal 2007
In September 2007, the Company acquired B2E Corporation for approximately $13.9 million of which approximately $3.5 million was deposited into an escrow account for possible contingent performance-based payments over the next four years. B2E develops and markets pest control products for horn flies, mosquitoes, and mushroom pests. The purchase price exceeded the fair value of net tangible and identified intangible assets acquired by approximately $6.3 million, which was recorded as goodwill.
60
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
5. Concentration of Credit Risk and Significant Customers and Suppliers
Customer Concentration Approximately 46% of the Companys net sales for fiscal year 2009, and 41% for fiscal years 2008 and 2007, were derived from sales to the Companys top five customers. The Companys largest customer accounted for approximately 18% of the Companys net sales in fiscal 2009, and 17% in fiscal years 2008 and 2007. The Companys second largest customer accounted for approximately 11% of the Companys net sales in fiscal 2009 and approximately 8% in fiscal years 2008 and 2007. The Companys third largest customer accounted for approximately 7%, 6% and 6% of the Companys net sales in each of the fiscal years 2009, 2008 and 2007, 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 Companys 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 Companys inability to collect accounts receivable from any major customer could also have a material adverse impact on the Companys business and financial results. As of September 26, 2009 and September 27, 2008 accounts receivable from the Companys top five customers comprised 44% and 40% of the Companys total accounts receivable, including 13% and 10% from the Companys largest customer, respectively.
Supplier Concentration While the Company purchases products from many different manufacturers and suppliers, approximately 8%, 6% and 7% of the Companys cost of goods sold in fiscal years 2009, 2008 and 2007, respectively, were derived from products purchased from the Companys five largest suppliers.
6. Allowance for Doubtful Accounts
Changes in the allowance for doubtful accounts are summarized below (in thousands):
Description |
Balances at Beginning of Period |
Charged to Costs and Expenses |
Asset Write-Offs, Less Recoveries |
Balances at End of Period | |||||||||
Fiscal year ended September 29, 2007 |
$ | 12,798 | $ | 9,807 | $ | (8,802 | ) | $ | 13,803 | ||||
Fiscal year ended September 27, 2008 |
13,803 | 6,381 | (5,003 | ) | 15,181 | ||||||||
Fiscal year ended September 26, 2009 |
15,181 | 6,730 | (3,897 | ) | 18,014 |
7. Goodwill
Changes in the carrying amount of goodwill for the fiscal years ended September 26, 2009 and September 27, 2008 are as follows (in thousands):
Garden Products Segment |
Pet Products Segment |
Total | ||||||||||
Balance as of September 29, 2007 |
$ | 195,043 | $ | 403,715 | $ | 598,758 | ||||||
Additions (reductions) |
10,831 | (5,630 | ) | 5,201 | ||||||||
Currency translation |
| (608 | ) | (608 | ) | |||||||
Impairments (1) |
(205,874 | ) | (195,978 | ) | (401,852 | ) | ||||||
Balance as of September 27, 2008 |
| $ | 201,499 | $ | 201,499 | |||||||
Additions |
4,799 | 1,451 | 6,250 | |||||||||
Balance as of September 26, 2009 |
$ | 4,799 | $ | 202,950 | $ | 207,749 | ||||||
(1) | Total goodwill impaired during fiscal year 2008 was approximately $403 million. Approximately $1 million related to an equity method investment recorded in Other assets. (See Note 1 Organization and Significant Accounting Policies.) |
61
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Additions or reductions to goodwill include acquisitions, purchase price adjustments and reclassifications of amounts upon finalization of purchase accounting. Substantially all goodwill is expected to be fully deductible for income tax purposes.
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 initially comparing the fair value of each of the Companys four reporting units to their related carrying values. 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 units 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 Companys goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all four reporting units to the Companys 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 Companys reporting units is based on the Companys 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. Actual results may differ from those estimates. The valuations employ present value techniques to measure fair value and consider market factors.
Key assumptions used to determine the fair value of each reporting unit as of the Companys fiscal 2007 annual testing date (July 1, 2007) were: (a) expected cash flow for the period from 2008 to 2013; and (b) a discount rate of 9%, which was based on managements best estimate of the after-tax weighted average cost of capital. Based upon the results of the Companys July 1, 2007 analysis, no impairment of goodwill was indicated.
As of December 29, 2007, due to the continuing challenging business conditions and the significant decline in the Companys market capitalization, the Company concluded there was an indication of possible impairment. Certain key assumptions used to determine the fair value of each reporting unit as of December 29, 2007 were revised to reflect: (a) significant reductions in future expected cash flows for the period from 2008 to 2013 due to the continuing soft economy, weakness in the housing sector and other reasons; and (b) a discount rate of 15%, which was based on managements best estimate of the after-tax weighted average cost of capital, adjusted for the Companys increased level of financial risk and the increased risk associated with the Companys future operations. Based on the Companys updated analysis and the sustained decline in market capitalization, the Company concluded that there was an impairment of goodwill and, thus, recognized a non-cash charge of $400 million in the first quarter of fiscal 2008, comprised of $202 million relating to the Companys Garden Products segment and $198 million relating to the Companys Pet Products segment.
The Company performed its annual fiscal 2008 goodwill impairment test as of June 29, 2008. Key assumptions used to determine the fair value of each reporting unit as of the Companys fiscal 2008 annual testing date (June 29, 2008) were: (a) expected cash flow for the period from 2009 to 2014; and (b) a discount rate of 15%, which was based on managements best estimate of the after-tax weighted average cost of capital, adjusted for the increased risk associated with the Companys future operations and credit profile. Based on the Companys analysis, it was concluded there was an impairment of goodwill and recognized a non-cash charge of $5 million relating to goodwill in the Companys Garden Products segment. Additionally, an accrued liability of $1.8 million was applied against goodwill in the Pet Products segment when the related uncertainty was resolved.
62
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Company performed its fiscal 2009 annual goodwill impairment test as of June 27, 2009. Key assumptions used to determine the fair value of each reporting unit as of our fiscal 2009 annual testing date were: (a) expected cash flow for the period from 2010 to 2015; and (b) a discount rate of 10%, which was based on managements best estimate of the after-tax weighted average cost of capital. Based on the Companys analysis, it concluded there was no impairment of goodwill.
As of June 27, 2009, June 29, 2008 and December 29, 2007, if forecasted cash flows had been 10% lower than estimated, the resulting goodwill impairment, if any, would not have changed. As of June 27, 2009, June 29, 2008 and December 29, 2007, if the discount rate applied in our analysis had been 100 basis points higher than estimated, the resulting goodwill impairment, if any, would not have changed.
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.
The Company will need to assess goodwill for further impairment in the future if indicators are present.
8. Other Intangible Assets
The following table summarizes the components of gross and net acquired intangible assets:
Gross | Accumulated Amortization |
Impairment | Net Carrying Value | |||||||||||
(in millions) | ||||||||||||||
September 26, 2009 |
||||||||||||||
Marketing-related intangible assets amortizable |
$ | 10.5 | $ | (3.6 | ) | $ | | $ | 6.9 | |||||
Marketing-related intangible assets nonamortizable |
61.4 | | (4.9 | ) | 56.5 | |||||||||
Total |
71.9 | (3.6 | ) | (4.9 | ) | 63.4 | ||||||||
Customer-related intangible assets amortizable |
41.6 | (8.7 | ) | | 32.9 | |||||||||
Customer-related intangible assets nonamortizable |
| | | | ||||||||||
Total |
41.6 | (8.7 | ) | | 32.9 | |||||||||
Other acquired intangible assets amortizable |
9.2 | (2.1 | ) | | 7.1 | |||||||||
Other acquired intangible assets nonamortizable |
1.2 | | (1.2 | ) | | |||||||||
Total |
10.4 | (2.1 | ) | (1.2 | ) | 7.1 | ||||||||
Total other intangible assets |
$ | 123.9 | $ | (14.4 | ) | $ | (6.1 | ) | $ | 103.4 | ||||
September 27, 2008 |
||||||||||||||
Marketing-related intangible assets amortizable |
$ | 10.5 | $ | (2.7 | ) | $ | | $ | 7.8 | |||||
Marketing-related intangible assets nonamortizable |
61.4 | | (4.9 | ) | 56.5 | |||||||||
Total |
71.9 | (2.7 | ) | (4.9 | ) | 64.3 | ||||||||
Customer-related intangible assets amortizable |
41.6 | (6.4 | ) | | 35.2 | |||||||||
Customer-related intangible assets nonamortizable |
| | | | ||||||||||
Total |
41.6 | (6.4 | ) | | 35.2 | |||||||||
Other acquired intangible assets amortizable |
9.2 | (1.3 | ) | | 7.9 | |||||||||
Other acquired intangible assets nonamortizable |
1.2 | | (1.2 | ) | | |||||||||
Total |
10.4 | (1.3 | ) | (1.2 | ) | 7.9 | ||||||||
Total other intangible assets |
$ | 123.9 | $ | (10.4 | ) | $ | (6.1 | ) | $ | 107.4 | ||||
Other intangible assets acquired include contract-based and technology-based intangible assets.
63
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Certain adjustments to intangible assets were made during fiscal 2008 upon finalization of purchase accounting.
The Company evaluates long-lived assets, including amortizable intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates indefinite-lived intangible assets on an annual basis and no impairment of its indefinite-lived intangible assets was indicated during its fiscal 2009 review. Other factors indicating the carrying value of our amortizable intangible assets may not be recoverable were not present during fiscal 2009, and accordingly, no impairment charges were recognized during fiscal 2009. In fiscal 2008, indicators of impairment were identified within the Garden Products segment related to current operating losses in certain operations. Accordingly, the Company recognized a $6.1 million impairment charge related to certain trade names.
The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 1 to 25 years; over weighted average lives of 13 years for marketing-related intangibles, 22 years for customer-related intangibles and nine years for other acquired intangibles. Amortization expense for intangibles subject to amortization for fiscal 2009 was approximately $4.0 million 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 $4 million per year from fiscal 2010 through fiscal 2014.
9. Long-Term Debt
As of September 26, 2009, the Company has $650 million in senior secured credit facilities, consisting of a $350 million revolving credit facility maturing in February 2011 and a $300 million term loan maturing in September 2012. Interest on the revolving credit facility is based, at the Companys option, on a rate equal to prime plus a margin, which fluctuates from 0% to 0.375%, or LIBOR plus a margin, which fluctuates from 0.75% to 1.50%, determined quarterly based on consolidated total debt to consolidated EBITDA for the most recent trailing 12-month period. As of September 26, 2009, the applicable interest rate on the revolving credit facility related to base rate borrowings was 3.38%, and the applicable interest rate related to LIBOR rate borrowings was 1.77%. Interest on the term loan is based, at the Companys option, on a rate equal to LIBOR plus a margin, which fluctuates from 1.50% to 1.75 %, or the prime rate plus a margin, which fluctuates from 0.50% to 0.75. As of September 26, 2009, the applicable interest rate on the term loan related to base rate borrowings was 3.75%, and the applicable rate related to LIBOR rate borrowings was 1.77%. The term loan is payable in quarterly installments of $750,000 with the balance payable in September 2012. As of September 26, 2009, $268.6 million of the term loan was outstanding.
These facilities are secured by substantially all of the Companys assets and contain certain financial covenants which require the Company to maintain minimum levels of interest coverage and maximum levels of total debt to EBITDA and that restrict the Companys ability to repurchase its stock, make investments in or acquisitions of other businesses and pay dividends above certain levels over the life of the facilities. Under the terms of the Companys senior secured credit facilities, it may make restricted payments, including cash dividends, in an aggregate amount not to exceed $75,000,000 over the life of the facilities; if the total leverage ratio for the fiscal quarter most recently ended is less than 3.00 to 1.00, the maximum restricted payment amount will be increased to $100,000,000 over the life of the facilities. Apart from the covenants limiting restricted payments and capital expenditures, the facilities do not restrict the use of retained earnings or net income.
The Company was in compliance with all financial covenants as of September 26, 2009. There was no outstanding balance at September 26, 2009 under the $350 million revolving credit facility. There were $16.4 million of outstanding letters of credit. After giving effect to the financial covenants in the credit agreement, the remaining potential borrowing capacity was $256.3 million.
64
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The Companys credit facility contains mandatory prepayment provisions when it has excess cash flow, as defined in the credit agreement, during the fiscal year. Accordingly, in December of 2008, the Company repaid approximately $21.6 million of the term loan per this provision.
The Company also has outstanding $150 million of 9-1/8% senior subordinated notes due 2013. In October 2003, the Company entered into a $75 million pay-floating interest rate swap effectively converting half of its $150 million fixed rate 9-1/8 % senior subordinated notes to a floating rate of LIBOR + 4.04%. In February 2009, the swap was terminated prior to its maturity by the counterparty in accordance with the terms of the interest rate swap agreement. As a result of this swap termination, the Company received cash proceeds and realized a settlement gain of $2.3 million that was recorded as an adjustment to the carrying amount of the related debt. The settlement gain is being amortized as an offset to interest expense over the remaining term of the debt, which matures in February 2013.
In connection with the 2006 purchase by a wholly-owned subsidiary of an additional 60% equity interest in Tech Pac L.L.C., the Company deposited approximately $15.5 million into an escrow for possible contingent performance-based payments. In March 2009, a net amount of $4.8 million in cash was paid in performance-based payments, which the Company recognized as additional goodwill. There are no remaining contingent performance-based payments due to the seller. As part of the resolution of the contingent payments, the Company became the beneficiary of the remaining funds in the escrow, which are comprised primarily of $12.8 million of aggregate principal amount of the senior subordinated notes. Under the requirements of ASC 860, Transfers and Servicing, the senior subordinated notes contained within the escrow accounts have been recorded as a reduction of debt for accounting purposes against the Companys outstanding senior subordinated notes balance as of September 26, 2009. The senior subordinated notes continue to be held in the escrow and have not been retired.
Long-term debt consists of the following:
September 26, 2009 |
September 27, 2008 |
|||||||
(in thousands) | ||||||||
Senior subordinated notes, interest at 9-1/8% payable semi-annually, principal due February 2013 |
$ | 137,175 | $ | 150,000 | ||||
Term loan, interest at LIBOR + 1.50% or the prime rate plus 0.50%, quarterly principal payments of $750,000 remaining balance due September 2012 |
268,602 | 293,250 | ||||||
Revolving credit facility, interest at prime plus 0% to 0.25% or LIBOR + 0.75% to 1.375%, final maturity February 2011 |
| 78,000 | ||||||
Pay- floating interest rate swap |
| 1,236 | ||||||
Unamortized deferred gain on pay-floating interest rate swap termination, maturing February 2013 |
1,901 | | ||||||
Other notes payable |
407 | 661 | ||||||
Total |
408,085 | 523,147 | ||||||
Less current portion |
(3,270 | ) | (3,340 | ) | ||||
Long-term portion |
$ | 404,815 | $ | 519,807 | ||||
65
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The scheduled principal repayments on long-term debt as of September 26, 2009 are as follows:
(in thousands) | |||
Fiscal year: |
|||
2010 |
$ | 3,270 | |
2011 |
3,080 | ||
2012 |
262,628 | ||
2013 |
137,193 | ||
2014 |
13 | ||
Thereafter |
| ||
Total |
$ | 406,184 | |
10. Commitments and Contingencies
Commitments
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 26, 2009, estimated annual purchase commitments were $72.2 million for fiscal 2010, $39.1 million for fiscal 2011, $30.3 million for fiscal 2012, $20.3 million for fiscal 2013 and $14.8 million for fiscal 2014.
Leases The Company has operating lease agreements principally for office and warehouse facilities and equipment. Such leases have remaining terms of 1 to 11 years. Rental expense was $29.1 million for fiscal year 2009, $30.2 million for fiscal year 2008 and $28.1 million for fiscal year 2007.
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 26, 2009 are as follows:
(in thousands) | |||
Fiscal year: |
|||
2010 |
$ | 23,403 | |
2011 |
15,503 | ||
2012 |
9,235 | ||
2013 |
6,600 | ||
2014 |
4,095 | ||
Thereafter |
8,770 | ||
Total |
$ | 67,606 | |
Contingencies
On February 11, 2008, Central Garden & Pet Company and two of its affiliates were named as defendants in an action filed in United States District Court in the Western District of Texas in a matter entitled Perfect Birds LLC v. Kaytee Products, Inc., Pets International, Ltd. and Central Garden & Pet Co., No. W08CA042 (W.D. Texas Waco Division). This matter was settled in September 2009 and did not have a material impact on our financial position or results of operations.
66
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
We may from time to time become involved in certain legal proceedings in the ordinary course of business. Currently, we are not a party to any legal proceedings that management believes would have a material adverse effect on our financial position or results of operations.
11. Income Taxes
The provision for income tax expense (benefit) consists of the following:
Fiscal Year Ended | ||||||||||||
September 26, 2009 |
September 27, 2008 |
September 29, 2007 |
||||||||||
(in thousands) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | 9,887 | $ | 13,340 | $ | 2,142 | ||||||
State |
2,082 | 2,973 | 1,386 | |||||||||
Foreign |
(82 | ) | (176 | ) | (135 | ) | ||||||
Total |
11,887 | 16,137 | 3,393 | |||||||||
Deferred: |
||||||||||||
Federal |
21,584 | (101,586 | ) | 16,263 | ||||||||
State |
3,157 | (7,401 | ) | 338 | ||||||||
Foreign |
(260 | ) | (219 | ) | 5 | |||||||
Total |
24,481 | (109,206 | ) | 16,606 | ||||||||
Total |
$ | 36,368 | $ | (93,069 | ) | $ | 19,999 | |||||
A reconciliation of the statutory federal income tax rate to the Companys effective income tax rate is as follows:
Fiscal Year Ended | |||||||||
September 26, 2009 |
September 27, 2008 |
September 29, 2007 |
|||||||
Statutory federal income tax rate (benefit) |
35.0 | % | (35.0 | )% | 35.0 | % | |||
State income taxes, net of federal benefit |
4.4 | (1.5 | ) | 3.0 | |||||
Permanent differences goodwill impairment |
| 10.9 | | ||||||
Other permanent differences |
(1.0 | ) | (0.1 | ) | 0.1 | ||||
Adjustment of prior year accruals |
| (0.1 | ) | 0.1 | |||||
Uncertain tax positions |
(0.9 | ) | | | |||||
Credits |
(2.3 | ) | | | |||||
Other |
(0.2 | ) | | | |||||
Effective income tax rate (benefit) |
35.0 | % | (25.8 | )% | 38.2 | % | |||
67
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:
September 26, 2009 | September 27, 2008 | |||||||||||||
Deferred Tax Assets |
Deferred Tax Liabilities |
Deferred Tax Assets |
Deferred Tax Liabilities | |||||||||||
(in thousands) | ||||||||||||||
Current: |
||||||||||||||
Allowance for doubtful accounts |
$ | 6,679 | $ | | $ | 5,793 | $ | | ||||||
Inventory write-downs |
8,764 | | 9,292 | | ||||||||||
Prepaid expenses |
886 | | | 528 | ||||||||||
Nondeductible reserves |
1,794 | | 1,035 | | ||||||||||
State taxes |
| 157 | | 379 | ||||||||||
Other |
11,157 | | 11,464 | | ||||||||||
Valuation allowance |
| | (701 | ) | | |||||||||
Total |
29,280 | 157 | 26,883 | 907 | ||||||||||
Noncurrent: |
||||||||||||||
Depreciation and amortization |
24,686 | | 59,442 | | ||||||||||
Equity income |
| 932 | | 3,567 | ||||||||||
State net operating loss carryforward |
4,165 | | 5,232 | | ||||||||||
Stock based compensation |
5,043 | | 5,149 | | ||||||||||
Other |
5,854 | | 4,767 | | ||||||||||
Valuation allowance |
(6,837 | ) | | (10,184 | ) | | ||||||||
Total |
32,911 | 932 | 64,406 | 3,567 | ||||||||||
Total |
$ | 62,191 | $ | 1,089 | $ | 91,289 | $ | 4,474 | ||||||
The Companys state tax net operating losses of $74.5 million expire at various times between 2009 and 2029. In evaluating the Companys 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 absorb its separate company state deferred tax assets. Therefore, valuation allowances of $6.8 million and $10.9 million (net of federal impact) at September 26, 2009 and September 27, 2008, respectively, have been provided to reduce state deferred tax assets to amounts considered recoverable. The Company also has state income tax credits of $4.3 million. $1.9 million of these credits expire at various times beginning in 2010 through 2027. Credits of $2.4 million do not expire.
As of September 26, 2009, unrecognized income tax benefits totaled approximately $0.9 million. Of that amount, approximately $0.8 million represents the amount of unrecognized tax benefits that would, if recognized, impact the Companys effective income tax rate.
The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year. The Company also recognizes interest and/or penalties related to income tax matters as a component of income tax expense. As of September 26, 2009 and September 27, 2008, the total balance of accrued interest and penalties related to uncertain tax positions was $0.1 million and $0.6 million, respectively.
68
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table, which excludes interest and penalties, summarizes the activity related to the Companys unrecognized tax benefits for fiscal years ended September 27, 2008 and September 26, 2009 (in thousands):
Balance as of September 29,2007 (date of adoption) |
$ | 1,574 | ||
Decreases related to prior year tax positions |
(191 | ) | ||
Decreases related to expiration of statute of limitations |
(25 | ) | ||
Balance as of September 27, 2008 |
1,358 | |||
Increases related to prior year tax positions |
806 | |||
Increases related to current year tax positions |
125 | |||
Decreases related to prior year tax positions |
(505 | ) | ||
Settlements |
(854 | ) | ||
Balance as of September 26, 2009 |
$ | 930 | ||
The Company is principally subject to taxation by the United States and various states within the United States. The Companys tax filings in major jurisdictions are open to examination by tax authorities by the Internal Revenue Service from 2005 forward and in various state taxing authorities generally from 2004 forward.
Management believes that an adequate provision has been made for possible adjustments that may result from tax examinations. However, the outcome of tax audits cannot be predicted with certainty. If any issue addressed in the Companys tax audits are resolved in a manner not consistent with managements expectations, the Company could be required to adjust its income tax provision in the period such resolution occurs. The closure of audits is highly uncertain; however, the Company believes it is reasonably possible that $0.3 million of its unrecognized tax benefits may be settled in the next twelve months.
12. Stock-Based Compensation
In February 2003, the Company adopted the 2003 Omnibus Equity Incentive Plan (the 2003 Plan) which provides for the grant of options and restricted stock to key employees, directors and consultants of the Company up to an aggregate of 2.5 million shares of common stock 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. The 2003 Plan replaced the 1993 Omnibus Equity Incentive Plan (the 1993 Plan) which, through January 2003, provided for the grant of options to key employees and consultants of the Company for the purchase of up to an aggregate of 4.8 million shares of common stock of the Company. Upon adoption of the 2003 plan, the Company terminated the 1993 Plan, subject to the remaining outstanding option grants. In February 2005, the Companys shareholders approved an amendment to the 2003 Plan to increase the number of shares authorized for issuance there under by 3.3 million shares, resulting in a total of 5.8 million shares authorized for issuance under the 2003 Plan.
In connection with a dividend payable in the form of two shares of the Class A Common Stock for each outstanding share of Common Stock and Class B Common Stock on February 5, 2007, the 2003 Plan was amended to include 9,734,982 shares of Class A Common Stock authorized for issuance. In February 2009, the Companys shareholders approved an increase in the number of shares authorized for issuance under the 2003 Plan by an additional 5,000,000 shares of Class A Common Stock and to authorize for issuance 500,000 shares of Preferred Stock. As a result of these amendments, there is a total of 5,800,000 shares of Common Stock, 14,734,982 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
69
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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. As of September 26, 2009, there were 2,289,875 shares of Common Stock, 8,233,500 shares of Class A Common Stock and no shares of Preferred Stock reserved for outstanding equity awards, and there were 2,688,777 shares of Common Stock, 5,626,097 shares of Class A Common Stock and 500,000 shares of Preferred Stock remaining for future awards.
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 in 2001 and 2006, provides for the granting of options equal to $200,000 divided by the fair market value of the Companys 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.
Stock Option Awards
The Company recognized share-based compensation expense of $10.6 million, $13.4 million and $5.0 million for the years ended September 26, 2009, September 27, 2008 and September 29, 2007, respectively, as a component of selling, general and administrative expenses. Share-based compensation expense in fiscal 2009, 2008 and 2007 consisted of $4.0 million, $3.9 million and $3.6 million for stock options, and $4.6 million, $8.7 million and $1.4 million for restricted stock awards. Additionally, in fiscal 2009 and fiscal 2008, share-based compensation expense includes $2.0 million and $0.8 million for the Companys 401(k) matching contributions.
Prior to fiscal 2008, stock options granted were generally exercisable with a 30 month cliff vesting and 42 month expiration, but were also granted with vesting increments of 20%, 25% or 33% per year beginning two, three or four years from the date of grant and expiring one year after the last increment has vested.
In fiscal 2008 and fiscal 2009, the Company granted performance-based options under its 2003 Plan to key employees and executives whose vesting is contingent upon service and meeting various business unit, segment and company-wide performance goals, including adjusted earnings before taxes and net controllable assets. The options were granted at the then-current market price, except for 3.0 million shares granted at prices significantly above the current market price. The options contingently vest up to 20% each year over the next 5 years dependent upon the achievement of the target performance measures and have contractual lives of 6 years. Of the options granted in fiscal 2008, approximately 216,000 options scheduled to possibly vest in each of fiscal years 2009 and 2010 were amended and are now only subject to service vesting conditions. If any of the options subject to the performance target measurements do not vest on any particular vesting date because the Company, segment and/or business unit performance has not been achieved, such options will vest and become exercisable if at the end of the following fiscal year, the cumulative target for that later fiscal year has been achieved. The fair value of each option granted was estimated on the date of grant using the same option valuation model used for options granted under the 2003 Plan without performance-based targets and assumes performance goals are probable of achievement. We currently estimate the performance-based options are probable of achievement and are recording the related expense over the estimated service period using the accelerated method. In fiscal 2009, approximately 78% of the performance options granted in fiscal 2008 that were eligible to vest in 2009 vested. To the extent Company goals are not achieved, the amount of stock-based compensation recognized in the future will be adjusted.
During fiscal 2004 and 2005, respectively, the Company granted service-based nonvested stock option awards that were due to expire June 2008 and June 2009, respectively. The grant prices of the option awards were approximately $12 to $15 per share, significantly in excess of the then current market price. In fiscal 2008, the Company modified approximately 1.4 million options held by non-executive employees to extend the expiration dates of these awards by three years to encourage retention. The change to the expiration terms resulted in an increase in stock-based compensation expense of approximately $0.1 million in fiscal 2008.
70
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 Companys historical volatility. The expected term of options granted is based on analyses of historical employee termination rates and option exercises. 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 Companys calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life from the date of grant, 3.5 years in fiscal 2009, 4 years in fiscal 2008, and 3.9 years in fiscal 2007; stock price volatility, 36.7% in fiscal 2009, 30.5 % in fiscal 2008, and 28.3% in fiscal 2007; risk free interest rates, 1.6% in fiscal 2009, 2.7% in fiscal 2008, and 4.6% in fiscal 2007; and no dividends during the expected term.
The following table summarizes option activity for the period ended September 26, 2009:
Number of Shares (in thousands) |
Weighted Average Exercise Price per Share |
Weighted Average Remaining Contractual Life |
Aggregate Intrinsic Value (in thousands) | ||||||||
Outstanding at September 27, 2008 |
7,599 | $ | 10.36 | 5 years | $ | 17,926 | |||||
Granted |
3,652 | $ | 10.17 | ||||||||
Exercised |
(268 | ) | $ | 4.89 | |||||||
Cancelled or expired |
(460 | ) | $ | 11.36 | |||||||
Outstanding at September 26, 2009 |
10,523 | $ | 10.39 | 4 years | $ | 21,093 | |||||
Exercisable at September 29, 2007 |
978 | $ | 12.40 | 1 year | $ | 12,123 | |||||
Exercisable at September 27, 2008 |
1,646 | $ | 13.33 | 3 years | $ | 136 | |||||
Exercisable at September 26, 2009 |
2,302 | $ | 11.96 | 3 years | $ | 3,004 | |||||
Expected to vest after September 26, 2009 |
7,849 | $ | 9.94 | 5 years | $ | 17,270 |
The weighted average grant date fair value of options granted during the fiscal years ended September 26, 2009, September 27, 2008, and September 29, 2007 was $1.90, $0.81, and $4.12, respectively. The total intrinsic value of options exercised during the fiscal years ended September 26, 2009, September 27, 2008, and September 29, 2007 was $1.5 million, $0.2 million, and $5.5 million, respectively.
As of September 26, 2009, there was $9.2 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 4 years.
Restricted Stock Awards
As of September 26, 2009 and September 27, 2008, there were 517,850 and 562,813 shares, respectively, of restricted stock awards outstanding. The awards generally vest in 20% or 25% increments, after a two or three year waiting period, over a six or seven year period of employment after the grant date. In fiscal 2009 and fiscal 2008, approximately $6.2 million and $2.5 million of bonus amounts earned in fiscal 2008 and fiscal 2007, respectively, were paid by granting approximately 620,000 and 370,000 of restricted shares that vested immediately.
71
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Restricted stock award activity during the three fiscal years in the period ended September 26, 2009 is summarized as follows:
Number of Shares (in thousands) |
Weighted Average Grant Date Fair Value per Share | |||||
Nonvested at September 30, 2006 |
731 | $ | 14.24 | |||
Granted |
23 | $ | 15.60 | |||
Vested |
(16 | ) | $ | 11.12 | ||
Forfeited |
(90 | ) | $ | 10.78 | ||
Nonvested at September 29, 2007 |
648 | $ | 14.84 | |||
Granted |
454 | $ | 4.29 | |||
Vested |
(479 | ) | $ | 6.14 | ||
Forfeited |
(60 | ) | $ | 13.92 | ||
Nonvested at September 27, 2008 |
563 | $ | 13.84 | |||
Granted |
905 | $ | 7.06 | |||
Vested |
(778 | ) | $ | 7.36 | ||
Forfeited |
(172 | ) | $ | 14.87 | ||
Nonvested at September 26, 2009 |
518 | $ | 11.39 | |||
The weighted average grant date fair value of restricted stock awards granted during the fiscal years ended September 26, 2009, September 27, 2008 and September 29, 2007 was $7.06, $4.29 and $15.60, respectively. The aggregate fair value as of the vesting date of restricted shares that vested was $5.0 million, $2.1 million and $0.2 million for fiscal 2009, 2008 and 2007, respectively.
As of September 26, 2009, there was $4.2 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.
13. Shareholders Equity
At September 26, 2009, there were 80,000,000 shares of common stock ($0.01 par value) authorized, of which 18,777,155 were outstanding, and 100,000,000 shares of non-voting Class A common stock ($0.01 par value) authorized, of which 47,532,954 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 26, 2009 and September 27, 2008. 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.
72
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
There are 1,000,000 shares of preferred stock ($0.01 par value) authorized, of which no shares were outstanding at September 26, 2009 and September 27, 2008, and 25 shares were outstanding at September 29, 2007. In January 2008, the 25 shares of Series B preferred stock of Series B preferred stock outstanding at September 29, 2007 were redeemed by the Company for $750,000.
The shares of Series B preferred stock outstanding at September 29, 2007 were convertible into approximately 21,601 shares of the Companys common stock and 43,202 shares of the Companys Class A common stock. Each share of Series B preferred stock was entitled to a liquidation preference equal to the greater of (i) $30,000 per share plus all declared but unpaid dividends on the Series B preferred stock or (ii) such amount per share as would have been payable with respect to such shares of Series B preferred stock had each share of the then outstanding Series B preferred stock been converted to common stock immediately prior to such event whether or not the Series B preferred stock is then so convertible. Except as otherwise required by law, the holders of Series B preferred stock were not entitled to vote. The Series B preferred stock was entitled to receive dividends when and as declared by the Board of Directors, subject to the prior rights of holders of all classes of stock at the time outstanding having prior rights as to dividends. The Series B preferred stock was redeemable at the option of the holder starting on February 26, 2005 for a period extending until February 26, 2009 at a price equal to $30,000 per share. The Series B preferred stock was not redeemable at the option of the Company. As a result, the Series B preferred stock was excluded from shareholders equity as of September 29, 2007.
In November 2006, holders of 75 shares of the Companys Series B convertible preferred stock converted their shares to 64,803 shares of the Companys common stock. As of September 29, 2007, 25 shares of the Companys Series B convertible preferred stock remained outstanding which were fully redeemed during fiscal 2008.
Under the Companys stock repurchase program, the Company is authorized to repurchase up to $100 million of its common stock, in part, to minimize the dilutive impact of the Companys stock-based equity compensation programs over time. During the fiscal year ended September 26, 2009, the Company repurchased 2.2 million shares of its voting common stock for an aggregate price of approximately $19.3 million and 2.1 million shares of its Class A non-voting common stock for an aggregate price of approximately $17.8 million. In total, as of September 26, 2009, the Company had repurchased approximately 6.3 million shares under the program for approximately $53.0 million.
On January 3, 2007, the Company declared a stock dividend on the Companys common stock and Class B stock to stockholders of record as of January 14, 2007. The stock dividend was in the form of two shares of the Companys Class A common stock for each outstanding share of the Companys common stock and Class B stock. Class A common stock certificates were distributed to stockholders on February 5, 2007.
73
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
14. 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 26, 2009 |
Fiscal Year Ended September 27, 2008 |
Fiscal Year Ended September 29, 2007 |
||||||||||||||||||||||||||
Net Income |
Shares | Per Share |
Net Loss |
Shares | Per Share |
Net Income |
Shares | Per Share |
||||||||||||||||||||
(in thousands, except per share amounts) | ||||||||||||||||||||||||||||
Basic EPS: |
||||||||||||||||||||||||||||
Net income (loss) available to common shareholders |
$ | 65,948 | 69,499 | $ | 0.95 | $ | (267,335 | ) | 71,117 | $ | (3.76 | ) | $ | 32,304 | 70,824 | $ | 0.46 | |||||||||||
Effect of dilutive securities: |
||||||||||||||||||||||||||||
Options to purchase common stock |
506 | (0.01 | ) | | | 485 | | |||||||||||||||||||||
Restricted shares |
259 | | | | 676 | (0.01 | ) | |||||||||||||||||||||
Convertible preferred stock |
| | | | 65 | | ||||||||||||||||||||||
Diluted EPS: |
||||||||||||||||||||||||||||
Net income (loss) available to common shareholders |
$ | 65,948 | 70,264 | $ | 0.94 | $ | (267,335 | ) | 71,117 | $ | (3.76 | ) | $ | 32,304 | 72,050 | $ | 0.45 | |||||||||||
Options to purchase 10.5 million shares of common stock and Class A common stock at prices ranging from $4.26 to $17.99 per share were outstanding at September 26, 2009. Of these shares, 6.7 million 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. Options to purchase 7.6 million shares of common stock and Class A common stock at prices ranging from $4.26 to $17.99 per share were outstanding at September 27, 2008. The potential effects of stock awards and the assumed conversion of the Companys convertible preferred stock were excluded from the diluted earnings per share calculation for the fiscal year ended September 27, 2008, because their inclusion in a net loss period would be anti-dilutive to the earnings per share calculation. Options to purchase 4.7 million shares of common stock and Class A common stock at prices ranging from $4.26 to $17.99 per share were outstanding at September 29, 2007. Of these shares, 1.8 million 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.
74
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
15. Quarterly Financial Data Unaudited
Fiscal 2009 | ||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||
(in thousands, except per share amounts) | ||||||||||||||
Net sales |
$ | 292,542 | $ | 476,425 | $ | 482,162 | $ | 363,171 | ||||||
Gross profit |
85,481 | 160,553 | 165,054 | 116,238 | ||||||||||
Net income (loss) |
(6,184 | ) | 33,020 | 31,076 | 8,036 | |||||||||
Net income (loss) per share: |
||||||||||||||
Basic |
$ | (0.09 | ) | $ | 0.48 | $ | 0.45 | $ | 0.12 | |||||
Diluted |
$ | (0.09 | ) | $ | 0.47 | $ | 0.44 | $ | 0.12 | |||||
Weighted average common shares outstanding: |
||||||||||||||
Basic |
70,519 | 69,122 | 69,345 | 68,502 | ||||||||||
Diluted |
70,519 | 69,872 | 70,449 | 69,768 | ||||||||||
Fiscal 2008 | ||||||||||||||
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||
(in thousands, except per share amounts) | ||||||||||||||
Net sales |
$ | 313,785 | $ | 484,688 | $ | 492,937 | $ | 413,976 | ||||||
Gross profit |
94,322 | 159,810 | 152,947 | 114,249 | ||||||||||
Net income (loss) |
(289,526 | )(1) | 20,453 | 15,648 | (13,910 | )(2) | ||||||||
Net income (loss) per share: |
||||||||||||||
Basic |
$ | (4.07 | )(1) | $ | 0.29 | $ | 0.22 | $ | (0.20 | )(2) | ||||
Diluted |
$ | (4.07 | )(1) | $ | 0.28 | $ | 0.22 | $ | (0.20 | )(2) | ||||
Weighted average shares outstanding: |
||||||||||||||
Basic |
71,178 | 71,427 | 71,493 | 70,330 | ||||||||||
Diluted |
71,178 | 72,035 | 72,148 | 70,330 |
(1) | Includes goodwill impairment of $400,000 ($288,700 net of taxes, or $4.06 per share). |
(2) | Includes goodwill and long-lived asset impairment of $29,800 ($18,900 net of taxes or $0.27 per share). |
16. Transactions with Related Parties
During fiscal 2009, 2008 and 2007, subsidiaries of the Company purchased approximately $1.1 million, $1.2 million and $1.5 million, respectively, of products from Bio Plus, Inc., a company that produces granular peanut hulls. As of September 26, 2009 and September 27, 2008, the amounts owed to BioPlus, Inc for such purchases were not material. A director of the Company is a minority shareholder and a director of Bio Plus, Inc.
During fiscal 2009, 2008 and 2007, Tech Pac, a subsidiary of the Company, made purchases from Contract Packaging, Inc, (CPI), Tech Pacs principal supplier and a minority 20% shareholder. Tech Pacs total purchases from CPI were approximately $29 million, $18 million and $37 million for fiscal years 2009, 2008 and 2007, respectively. Amounts due to CPI as of September 26, 2009 and September 27, 2008 were $3.6 million and $1.5 million, respectively.
17. Business Segment Data
An operating segment is defined as a portion of an enterprise engaged in business activities about which separate financial information is available and evaluated regularly by the chief operating decision-maker in determining how to allocate resources and in assessing performance. The Companys chief operating decision-maker is its Chief Executive Officer. Operating segments are managed separately because each segment
75
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
represents a strategic business that offers different products or services. The Companys Chief Executive Officer evaluates performance based on profit or loss from operations. The Companys 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, deferred taxes and goodwill.
Management has determined that the Company has two operating segments which are also reportable segments based on the level at which the Chief Executive Officer reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are the Pet Products Group and the Garden Products Group. Substantially all of the Companys assets and operations relate to its business in the United States.
The Pet Products Group segment consists of Four Paws Products, TFH Publications, Kaytee, Aquatics, Interpet, Pets International, Breeders 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 Products segment consists of Pennington Seed, Matthews Four Seasons, Grants, AMBRANDS, Lilly Miller, the Pottery Group, Gulfstream and GKI/Bethlehem Lighting. 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, 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, goodwill, interest income, interest expense and intersegment eliminations.
The following table indicates each class of similar products which represented more than 10% of the Companys consolidated net sales in the fiscal years presented (in millions).
Category |
2009 | 2008 | 2007 | ||||||
Grass seed |
$ | 174.5 | $ | 206.3 | $ | 195.7 | |||
Bird feed |
200.7 | 199.7 | 168.3 | ||||||
Garden chemicals and control products |
270.5 | 247.6 | 257.4 | ||||||
Other garden supplies |
211.8 | 232.6 | 221.5 | ||||||
Other pet supplies |
756.8 | 819.2 | 828.2 | ||||||
Total |
$ | 1,614.3 | $ | 1,705.4 | $ | 1,671.1 | |||
Wal*Mart, our largest customer, represented approximately 18% of our total company net sales in fiscal 2009 and approximately 17% in fiscal 2008 and 2007, and represented approximately 32% of Garden Products net sales in fiscal 2009, 30% in fiscal 2008 and 31% in fiscal 2007. Sales to Home Depot represented approximately 14% of Garden Products net sales in fiscal 2009, 12% in fiscal 2008 and 14% in fiscal 2007. Sales to Lowes represented approximately 11% of our total company net sales in fiscal 2009, and represented approximately 22% of Garden Products net sales in fiscal 2009, 18% in fiscal 2008 and 17% in fiscal 2007. PETsMART represented approximately 10% of Pet Products net sales in fiscal 2009, 2008 and 2007. PETCO is also a significant customer.
76
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Financial information relating to the Companys business segments for each of the three most recent fiscal years is presented in the table below.
Fiscal Year Ended | ||||||||||||
September 26, 2009 |
September 27, 2008 |
September 29, 2007 |
||||||||||
(in thousands) | ||||||||||||
Net sales: |
||||||||||||
Pet Products |
$ | 833,178 | $ | 897,826 | $ | 893,193 | ||||||
Garden Products |
781,122 | 807,560 | 777,952 | |||||||||
Total |
$ | 1,614,300 | $ | 1,705,386 | $ | 1,671,145 | ||||||
Income (loss) from operations: |
||||||||||||
Pet Products |
$ | 102,156 | $ | (88,201 | )(1) | $ | 94,329 | |||||
Garden Products |
68,927 | (198,210 | )(2) | 45,616 | ||||||||
Corporate |
(45,097 | ) | (38,003 | ) | (40,528 | ) | ||||||
Total |
125,986 | (324,414 | ) | 99,417 | ||||||||
Interest expense |
(22,710 | ) | (38,326 | ) | (49,685 | ) | ||||||
Interest income |
649 | 1,053 | 1,538 | |||||||||
Other income |
52 | 2,116 | 2,402 | |||||||||
Income taxes |
(36,368 | ) | 93,069 | (19,999 | ) | |||||||
Minority interest |
(1,661 | ) | (833 | ) | (1,369 | ) | ||||||
Net income (loss) |
$ | 65,948 | $ | (267,335 | ) | $ | 32,304 | |||||
Assets: |
||||||||||||
Pet Products |
$ | 394,150 | $ | 472,415 | $ | 478,714 | ||||||
Garden Products |
348,825 | 409,646 | 456,484 | |||||||||
Corporate and eliminations |
407,950 | 377,257 | 711,624 | |||||||||
Total |
$ | 1,150,925 | $ | 1,259,318 | $ | 1,646,822 | ||||||
Depreciation and amortization: |
||||||||||||
Pet Products |
$ | 15,844 | $ | 17,278 | $ | 18,227 | ||||||
Garden Products |
6,571 | 8,739 | 7,757 | |||||||||
Corporate |
6,740 | 6,500 | 4,733 | |||||||||
Total |
$ | 29,155 | $ | 32,517 | $ | 30,717 | ||||||
Expenditures for long-lived assets: |
||||||||||||
Pet Products |
$ | 7,148 | $ | 6,890 | $ | 17,498 | ||||||
Garden Products |
3,154 | 4,473 | 20,533 | |||||||||
Corporate |
6,203 | 10,986 | 22,007 | |||||||||
Total |
$ | 16,505 | $ | 22,349 | $ | 60,038 | ||||||
Minority interest is associated with Garden Products.
(1) | Includes goodwill impairment of $195,978,000. |
(2) | Includes goodwill and long-lived asset impairment of $233,786,000. |
77
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
18. Consolidating Condensed Financial Information of Guarantor Subsidiaries
Certain 100% wholly-owned subsidiaries of the Company (as listed below, collectively the Guarantor Subsidiaries) have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest on the Companys $150,000,000 9-1/8% Senior Subordinated Notes (the Notes) issued on January 30, 2003. Certain subsidiaries and operating divisions are not guarantors of the Notes and have been included in the financial results of the Parent in the information below. These Non-Guarantor entities are not material to the Parent. Those subsidiaries that are guarantors of the Notes are as follows:
Farnam Companies, Inc. (including Thompsons Veterinary Supplies, Inc.)
Four Paws Products Ltd.
Grant Laboratories, Inc.
Gulfstream Home & Garden, Inc.
Interpet USA, LLC
Kaytee Products, Inc.
Matthews Redwood & Nursery Supply, Inc.
Matson, LLC
New England Pottery, LLC
Norcal Pottery Products, Inc.
Pennington Seed, Inc. (including Phaeton Corporation (dba Unicorn Labs), Pennington Seed, Inc. of Nebraska, Gro Tec, Inc., Seeds West, Inc., All-Glass Aquarium Co., Inc. (including Oceanic Systems, Inc.) and Cedar Works, LLC.)
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 Companys understanding of the Securities and Exchange Commissions interpretation and application of Rule 3-10 of the Securities and Exchange Commissions Regulation S-X.
The consolidating condensed financial statements for 2008 and 2007 incorrectly reflected cash and cash equivalents of the Guarantor Subsidiaries as that of the Parent. As a result, the consolidating condensed balance sheets and consolidating condensed statements of cash flows for fiscal 2008 and 2007 have been adjusted. Specifically, cash and cash equivalents, accounts payable, and net cash provided by (used in) operating activities for the Parent and Guarantor Subsidiaries were revised by $3.9 million and $0.7 million in fiscal 2008 and fiscal 2007, respectively.
78
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Fiscal Year Ended September 26, 2009 (in thousands) |
|||||||||||||||
Unconsolidated | |||||||||||||||
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||
Net sales |
$ | 489,717 | $ | 1,264,278 | $ | (139,695 | ) | $ | 1,614,300 | ||||||
Cost of goods sold and occupancy |
358,153 | 868,516 | (139,695 | ) | 1,086,974 | ||||||||||
Gross profit |
131,564 | 395,762 | | 527,326 | |||||||||||
Selling, general and administrative expenses |
122,654 | 278,686 | | 401,340 | |||||||||||
Income from operations |
8,910 | 117,076 | | 125,986 | |||||||||||
Interest net |
(22,370 | ) | 309 | | (22,061 | ) | |||||||||
Other income (expense) |
(6,642 | ) | 6,694 | | 52 | ||||||||||
Income (loss) before income taxes and minority interest |
(20,102 | ) | 124,079 | | 103,977 | ||||||||||
Income taxes (tax benefit) |
(7,711 | ) | 44,079 | | 36,368 | ||||||||||
Minority interest |
1,661 | | | 1,661 | |||||||||||
Net income (loss) before equity in undistributed income of guarantor subsidiaries |
(14,052 | ) | 80,000 | | 65,948 | ||||||||||
Equity in undistributed income of guarantor subsidiaries |
80,000 | | (80,000 | ) | | ||||||||||
Net income |
$ | 65,948 | $ | 80,000 | $ | (80,000 | ) | $ | 65,948 | ||||||
79
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Fiscal Year Ended September 27, 2008 (in thousands) |
||||||||||||||||
Unconsolidated | Consolidated | |||||||||||||||
Parent |
|
Guarantor Subsidiaries |
|
Eliminations | ||||||||||||
Net sales |
$ | 481,684 | $ | 1,331,918 | $ | (108,216 | ) | $ | 1,705,386 | |||||||
Cost of goods sold and occupancy |
355,855 | 936,419 | (108,216 | ) | 1,184,058 | |||||||||||
Gross profit |
125,829 | 395,499 | | 521,328 | ||||||||||||
Selling, general and administrative expenses |
123,622 | 292,356 | | 415,978 | ||||||||||||
Goodwill and other impairments |
91,481 | 338,283 | | 429,764 | ||||||||||||
Loss from operations |
(89,274 | ) | (235,140 | ) | | (324,414 | ) | |||||||||
Interest net |
(36,918 | ) | (355 | ) | | (37,273 | ) | |||||||||
Other income (expense) |
(2,281 | ) | 4,397 | | 2,116 | |||||||||||
Loss before income taxes |
(128,473 | ) | (231,098 | ) | | (359,571 | ) | |||||||||
Income taxes (tax benefit) |
(33,225 | ) | (59,844 | ) | | (93,069 | ) | |||||||||
Minority interest |
833 | | | 833 | ||||||||||||
Net income (loss) before equity in undistributed income of guarantor subsidiaries |
(96,081 | ) | (171,254 | ) | | (267,335 | ) | |||||||||
Equity in undistributed (loss) income of guarantor subsidiaries |
(171,254 | ) | | 171,254 | | |||||||||||
Net loss |
$ | (267,335 | ) | $ | (171,254 | ) | $ | 171,254 | $ | (267,335 | ) | |||||
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS Fiscal Year Ended September 29, 2007 (in thousands) |
||||||||||||||||
Unconsolidated | Consolidated | |||||||||||||||
Parent |
|
Guarantor Subsidiaries |
|
Eliminations | ||||||||||||
Net sales |
$ | 499,083 | $ | 1,282,781 | $ | (110,719 | ) | $ | 1,671,145 | |||||||
Cost of goods sold and occupancy |
354,020 | 893,524 | (110,719 | ) | 1,136,825 | |||||||||||
Gross profit |
145,063 | 389,257 | | 534,320 | ||||||||||||
Selling, general and administrative expenses |
131,814 | 303,089 | | 434,903 | ||||||||||||
Income from operations |
13,249 | 86,168 | | 99,417 | ||||||||||||
Interest net |
(48,599 | ) | 452 | | (48,147 | ) | ||||||||||
Other income (expense) |
(4,499 | ) | 6,901 | | 2,402 | |||||||||||
Income (loss) before income taxes and minority interest |
(39,849 | ) | 93,521 | | 53,672 | |||||||||||
Income taxes (tax benefit) |
(15,794 | ) | 35,793 | | 19,999 | |||||||||||
Minority interest |
1,369 | | | 1,369 | ||||||||||||
Net income (loss) before equity in undistributed income of guarantor subsidiaries |
(25,424 | ) | 57,728 | | 32,304 | |||||||||||
Equity in undistributed income of guarantor subsidiaries |
57,728 | | (57,728 | ) | | |||||||||||
Net income |
$ | 32,304 | $ | 57,728 | $ | (57,728 | ) | $ | 32,304 | |||||||
80
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET September 26, 2009 (in thousands) | |||||||||||||
Unconsolidated | Consolidated | ||||||||||||
Parent | Guarantor Subsidiaries |
Eliminations | |||||||||||
ASSETS | |||||||||||||
Cash and cash equivalents |
$ | 82,958 | $ | 2,710 | $ | | $ | 85,668 | |||||
Accounts receivable, net |
43,759 | 169,554 | (6,748 | ) | 206,565 | ||||||||
Inventories |
80,512 | 204,322 | | 284,834 | |||||||||
Prepaid expenses and other assets |
26,341 | 18,084 | | 44,425 | |||||||||
Total current assets |
233,570 | 394,670 | (6,748 | ) | 621,492 | ||||||||
Land, buildings, improvements and equipment, net |
55,644 | 109,090 | | 164,734 | |||||||||
Goodwill |
| 207,749 | | 207,749 | |||||||||
Investment in guarantors |
692,723 | | (692,723 | ) | | ||||||||
Other assets |
49,266 | 107,684 | | 156,950 | |||||||||
Total |
$ | 1,031,203 | $ | 819,193 | $ | (699,471 | ) | $ | 1,150,925 | ||||
LIABILITIES | |||||||||||||
Accounts payable |
$ | 38,675 | $ | 76,909 | $ | (6,748 | ) | $ | 108,836 | ||||
Accrued expenses and other liabilities |
38,343 | 47,070 | | 85,413 | |||||||||
Total current liabilities |
77,018 | 123,979 | (6,748 | ) | 194,249 | ||||||||
Long-term debt |
404,687 | 128 | | 404,815 | |||||||||
Other long-term obligations |
2,163 | 2,363 | | 4,526 | |||||||||
Minority interest |
2,250 | | | 2,250 | |||||||||
Total shareholders equity |
545,085 | 692,723 | (692,723 | ) | 545,085 | ||||||||
Total |
$ | 1,031,203 | $ | 819,193 | $ | (699,471 | ) | $ | 1,150,925 | ||||
81
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONSOLIDATING CONDENSED BALANCE SHEET September 27, 2008 (in thousands) | |||||||||||||
Unconsolidated | |||||||||||||
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||
ASSETS |
|||||||||||||
Cash and cash equivalents |
$ | 22,866 | $ | 4,063 | $ | | $ | 26,929 | |||||
Accounts receivable, net |
55,325 | 215,832 | (10,518 | ) | 260,639 | ||||||||
Inventories |
93,366 | 256,133 | | 349,499 | |||||||||
Prepaid expenses and other assets |
17,929 | 16,757 | | 34,686 | |||||||||
Total current assets |
189,486 | 492,785 | (10,518 | ) | 671,753 | ||||||||
Land, buildings, improvements and equipment, net |
56,693 | 117,320 | | 174,013 | |||||||||
Goodwill |
| 201,499 | | 201,499 | |||||||||
Investment in guarantors |
724,868 | | (724,868 | ) | | ||||||||
Other assets |
145,977 | 107,632 | (41,556 | ) | 212,053 | ||||||||
Total |
$ | 1,117,024 | $ | 919,236 | $ | (776,942 | ) | $ | 1,259,318 | ||||
LIABILITIES |
|||||||||||||
Accounts payable |
$ | 42,954 | $ | 100,928 | $ | (10,518 | ) | $ | 133,364 | ||||
Accrued expenses and other liabilities |
38,924 | 48,761 | | 87,685 | |||||||||
Total current liabilities |
81,878 | 149,689 | (10,518 | ) | 221,049 | ||||||||
Long-term debt |
519,583 | 224 | | 519,807 | |||||||||
Other long-term obligations |
4,138 | 44,455 | (41,556 | ) | 7,037 | ||||||||
Minority interest |
2,667 | | | 2,667 | |||||||||
Total shareholders equity |
508,758 | 724,868 | (724,868 | ) | 508,758 | ||||||||
Total |
$ | 1,117,024 | $ | 919,236 | $ | (776,942 | ) | $ | 1,259,318 | ||||
82
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Fiscal Year Ended September 26, 2009 (in thousands) |
||||||||||||||||
Unconsolidated | ||||||||||||||||
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net cash provided (used) by operating activities |
$ | 179,757 | $ | 121,881 | $ | (80,000 | ) | $ | 221,638 | |||||||
Additions to property |
(7,882 | ) | (8,623 | ) | | (16,505 | ) | |||||||||
Businesses acquired, net of cash acquired |
| (6,549 | ) | | (6,549 | ) | ||||||||||
Proceeds from disposals of property |
| 2,512 | | 2,512 | ||||||||||||
Investment in guarantor |
30,007 | (110,007 | ) | 80,000 | | |||||||||||
Net cash provided (used) by investing activities |
22,125 | (122,667 | ) | 80,000 | (20,542 | ) | ||||||||||
Repayments on revolving line of credit |
(551,000 | ) | | | (551,000 | ) | ||||||||||
Borrowings on revolving line of credit |
473,000 | | | 473,000 | ||||||||||||
Repayments of long-term debt |
(24,780 | ) | (221 | ) | | (25,001 | ) | |||||||||
Proceeds from issuance of common stock |
479 | | | 479 | ||||||||||||
Excess tax benefits from stock-based awards |
542 | | | 542 | ||||||||||||
Repurchase of common stock |
(37,821 | ) | | | (37,821 | ) | ||||||||||
Payment of financing costs |
(128 | ) | | | (128 | ) | ||||||||||
Distribution to minority interest |
(2,082 | ) | | | (2,082 | ) | ||||||||||
Net cash used in financing activities |
(141,790 | ) | (221 | ) | | (142,011 | ) | |||||||||
Effect of exchange rates on cash |
| (346 | ) | | (346 | ) | ||||||||||
Net increase (decrease) in cash and cash equivalents |
60,092 | (1,353 | ) | | 58,739 | |||||||||||
Cash and cash equivalents at beginning of year |
22,866 | 4,063 | | 26,929 | ||||||||||||
Cash and cash equivalents at end of year |
$ | 82,958 | $ | 2,710 | $ | | $ | 85,668 | ||||||||
83
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Fiscal Year Ended September 27, 2008 (in thousands) |
||||||||||||||||
Unconsolidated | ||||||||||||||||
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net cash provided (used) by operating activities |
$ | (254,189 | ) | $ | 197,963 | $ | 171,254 | $ | 115,028 | |||||||
Additions to property |
(11,642 | ) | (10,707 | ) | | (22,349 | ) | |||||||||
Proceeds from disposal of Property |
| 12,053 | | 12,053 | ||||||||||||
Businesses acquired, net of cash acquired |
| (5,010 | ) | | (5,010 | ) | ||||||||||
Restricted investments |
(100 | ) | | | (100 | ) | ||||||||||
Investment in guarantor |
368,472 | (197,218 | ) | (171,254 | ) | | ||||||||||
Net cash provided (used) by investing activities |
356,730 | (200,882 | ) | (171,254 | ) | (15,406 | ) | |||||||||
Repayments on revolving line of credit |
(804,000 | ) | | | (804,000 | ) | ||||||||||
Borrowings on revolving line of credit |
718,000 | | | 718,000 | ||||||||||||
Repayments of long-term debt |
(2,399 | ) | (212 | ) | | (2,611 | ) | |||||||||
Redemption of preferred stock |
(750 | ) | | | (750 | ) | ||||||||||
Proceeds from issuance of common stock |
1,432 | | | 1,432 | ||||||||||||
Excess tax benefits from stock-based awards |
68 | | | 68 | ||||||||||||
Repurchase of common stock |
(5,899 | ) | | | (5,899 | ) | ||||||||||
Payment of financing costs |
(175 | ) | | | (175 | ) | ||||||||||
Net cash provided by financing activities |
(93,723 | ) | (212 | ) | | (93,935 | ) | |||||||||
Effect of exchange rates on cash |
| 187 | | 187 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
8,818 | (2,944 | ) | | 5,874 | |||||||||||
Cash and cash equivalents at beginning of year |
14,048 | 7,007 | | 21,055 | ||||||||||||
Cash and cash equivalents at end of year |
$ | 22,866 | $ | 4,063 | $ | | $ | 26,929 | ||||||||
84
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS Fiscal Year Ended September 29, 2007 (in thousands) |
||||||||||||||||
Unconsolidated | ||||||||||||||||
Parent | Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||||
Net cash provided (used) by operating activities |
$ | 46,707 | $ | 49,556 | $ | (57,728 | ) | $ | 38,535 | |||||||
Additions to property |
(23,574 | ) | (36,464 | ) | | (60,038 | ) | |||||||||
Businesses acquired, net of cash acquired |
(1,465 | ) | (32,539 | ) | | (34,004 | ) | |||||||||
Collection of note |
3,340 | | | 3,340 | ||||||||||||
Issuance of note |
| (2,025 | ) | | (2,025 | ) | ||||||||||
Restricted investments |
267 | | | 267 | ||||||||||||
Investment in guarantor |
(72,173 | ) | 14,445 | 57,728 | | |||||||||||
Net cash provided (used) by investing activities |
(93,605 | ) | (56,583 | ) | 57,728 | (92,460 | ) | |||||||||
Repayments on revolving line of credit |
(967,000 | ) | | | (967,000 | ) | ||||||||||
Borrowings on revolving line of credit |
1,012,000 | | | 1,012,000 | ||||||||||||
Repayments of long-term debt |
(3,411 | ) | 447 | | (2,964 | ) | ||||||||||
Proceeds from issuance of common stock |
4,393 | | | 4,393 | ||||||||||||
Excess tax benefits from stock-based awards |
1,977 | | | 1,977 | ||||||||||||
Distribution to minority interest |
(800 | ) | | | (800 | ) | ||||||||||
Payment of financing costs |
(1,131 | ) | | | (1,131 | ) | ||||||||||
Net cash provided by financing activities |
46,028 | 447 | | 46,475 | ||||||||||||
Effect of exchange rates on cash |
| 99 | | 99 | ||||||||||||
Net increase (decrease) in cash and cash equivalents |
(870 | ) | (6,481 | ) | | (7,351 | ) | |||||||||
Cash and cash equivalents at beginning of year |
14,918 | 13,488 | | 28,406 | ||||||||||||
Cash and cash equivalents at end of year |
$ | 14,048 | $ | 7,007 | $ | | $ | 21,055 | ||||||||
85
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 Chief 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 Chief 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 26, 2009.
(b) Changes in Internal Control Over Financial Reporting. Centrals management, with the participation of Centrals Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in Centrals internal control over financial reporting occurred during the fourth quarter of fiscal 2009. Based on that evaluation, management concluded that there has been no change in Centrals internal control over financial reporting during the fourth quarter of fiscal 2009 that has materially affected, or is reasonably likely to materially affect, Centrals internal control over financial reporting.
(c) Managements Report on Internal Control Over Financial Reporting. A copy of our managements report and the report of Deloitte & Touche LLP, our independent registered public accounting firm, are included in Item 8 Financial Statements and Supplementary Data.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
We have adopted a code of ethics that applies to all of our executive officers and directors, a copy of which was filed as Exhibit 14 to our Form 10-K for the fiscal year ended September 24, 2005.
The remaining information required by this item is incorporated by reference from Centrals Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders under the captions Election of Directors, Further Information Concerning the Board of Directors Committees of the Board and Section 16(a) Beneficial Ownership Reporting Compliance. See also Item 1 Business above.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from Centrals Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders under the caption Executive Compensation.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated by reference from Centrals Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders under the captions Ownership of Management and Principal Stockholders and Equity Compensation Plan Information.
86
Item 13. Certain Relationships and Related Transactions
The information required by this item is incorporated by reference from Centrals Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders under the captions Compensation Committee Interlocks and Insider Participation and Transactions with the Company.
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from Centrals Definitive Proxy Statement for its 2010 Annual Meeting of Stockholders under the caption Independent Registered Public Accounting Firm.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) | The following documents are filed as part of this report: |
(1) | Consolidated Financial Statements of Central Garden & Pet Company are included in Part II, Item 8: |
Managements Report on Internal Control Over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
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.
87
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: November 20, 2009
CENTRAL GARDEN & PET COMPANY | ||
By | /s/ WILLIAM E. BROWN | |
William E. Brown | ||
Chairman and Chief Executive Officer |
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 |
Capacity |
Date | ||
/s/ WILLIAM E. BROWN William E. Brown |
Chairman and Chief Executive Officer (Principal Executive Officer) | November 20, 2009 | ||
/s/ JEFFREY A. BLADE Jeffrey A. Blade |
Senior Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) |
November 20, 2009 | ||
/s/ JOHN B. BALOUSEK John B. Balousek |
Director | November 20, 2009 | ||
/s/ DAVID N. CHICHESTER David N. Chichester |
Director | November 20, 2009 | ||
/s/ BROOKS M. PENNINGTON, III Brooks M. Pennington, III |
Director | November 20, 2009 | ||
/s/ ALFRED A. PIERGALLINI Alfred A. Piergallini |
Director | November 20, 2009 |
88
EXHIBIT INDEX
Set forth below is a list of exhibits that are being filed or incorporated by reference into this Form 10-K:
Exhibit |
Exhibit | |
3.1 | 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 (Incorporated by reference from Exhibit 3.1 to the Companys Form 10-K for the fiscal year ended September 30, 2006). | |
3.2 | Amended and Restated By-laws of Central Garden & Pet Company, effective February 10, 2009 (Incorporated by reference from Exhibit 3.2 to the Companys Form 10-Q for the fiscal quarter ended March 28, 2009). | |
4.1 | Specimen Common Stock Certificate (Incorporated by reference from Exhibit 4.1 to Registration Statement No. 33-48070). | |
4.2 | Specimen Class A Common Stock Certificate (Incorporated by reference from Exhibit 1 to the Companys Form 8-A filed January 24, 2007). | |
4.3 | Indenture dated as of January 30, 2003 between the Company, Wells Fargo and the Subsidiary Guarantors name therein (Incorporated by reference from Exhibit 4.1 to Registration Statement on Form S-4 No. 333-103835). | |
10.1* | Form of Indemnification Agreement between the Company and Executive Officers and Directors (Incorporated by reference from Exhibit 10.18 to Registration Statement No. 33-48070). | |
10.2 | Credit Agreement dated as of February 28, 2006 among Central Garden & Pet Company, the Subsidiary Borrowers from time to time party thereto, the Lenders from time to time party thereto, JPMorgan Chase Bank, National Association, as Administrative Agent, Bank of America, N.A., as Syndication Agent, CIBC World Markets Corp., Suntrust Bank and Union Bank of California, N.A., as Co-Documentation Agents, and J.P. Morgan Securities Inc. and Banc of America Securities LLC, as Joint Bookrunners and Joint Lead Arrangers (Incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed March 2, 2006). | |
10.2.1 | Amendment No. 1 dated May 16, 2006 to the Credit Agreement, dated February 28, 2006, among Central Garden & Pet Company, the Subsidiary Guarantors and lenders thereto (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed March 20, 2007). | |
10.2.2 | Amendment No. 2 dated August 24, 2006 to the Credit Agreement, dated February 28, 2006, among Central Garden & Pet Company, the Subsidiary Guarantors and lenders thereto (incorporated by reference from Exhibit 10.2 to the Companys Current Report on Form 8-K filed March 20, 2007). | |
10.2.3 | Amendment No. 3 dated December 8, 2006 to the Credit Agreement, dated February 28, 2006, among Central Garden & Pet Company, the Subsidiary Guarantors and lenders thereto (incorporated by reference from Exhibit 10.3 to the Companys Current Report on Form 8-K filed March 20, 2007). | |
10.2.4 | Amendment No. 4 dated March 15, 2007 to the Credit Agreement, dated February 28, 2006, among Central Garden & Pet Company, the Subsidiary Guarantors and lenders thereto (incorporated by reference from Exhibit 10.4 to the Companys Current Report on Form 8-K filed March 20, 2007). | |
10.2.5 | Amendment No. 5 dated August 27, 2007 to the Credit Agreement, dated February 28, 2006, among Central Garden & Pet Company, the Subsidiary Guarantors and lenders thereto (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed August 30, 2007). | |
10.2.6 | Amendment No. 6 dated March 18, 2008 to the Credit Agreement, dated February 28, 2006, among Central Garden & Pet Company, the Subsidiary Guarantors and lenders thereto (incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed August 30, 2007). |
89
Exhibit |
Exhibit | |
10.3* | 1993 Omnibus Equity Incentive Plan, as amended (Incorporated by reference from Exhibits 4.1 to the Companys Registration Statements Nos. 33-7236, 33-89216, 333-1238 and 333-41931). | |
10.4* | 2003 Omnibus Equity Incentive Plan, as amended and restated effective December 10, 2008 (Incorporated by reference from Exhibit 10.4 to the Companys Form 10-Q for the fiscal quarter ended March 28, 2009). | |
10.4.1* | Form of Nonstatutory Stock Option Agreement for 2003 Omnibus Equity Incentive Plan. (Incorporated by reference from Exhibit 10.5.1 to the Companys Form 10-K for the fiscal year ended September 25, 2004). | |
10.4.2* | Form of Restricted Stock Agreement for 2003 Omnibus Equity Incentive Plan. (Incorporated by reference from Exhibit 10.5.2 to the Companys Form 10-K for the fiscal year ended September 25, 2004). | |
10.5* | Nonemployee Director Equity Incentive Plan, as amended and restated effective December 10, 2008 (Incorporated by reference from Exhibit 10.5 to the Companys Form 10-Q for the fiscal quarter ended March 28, 2009). | |
10.5.1* | Form of Nonstatutory Stock Option Agreement for Nonemployee Director Equity Incentive Plan (Incorporated by reference from Exhibit 10.6.1 to the Companys Form 10-Q for the fiscal quarter ended December 25, 2004). | |
10.5.2* | Form of Restricted Stock Agreement for Nonemployee Director Equity Incentive Plan (Incorporated by reference from Exhibit 10.6.2 to the Companys Form 10-Q for the fiscal quarter ended December 25, 2004). | |
10.6* | Employment Agreement dated as of February 27, 1998 between Pennington Seed, Inc. of Delaware and Brooks Pennington III (Incorporated by reference from Exhibit 10.20 to the Companys Form 10-K/A for the fiscal year ended September 26, 1998). | |
10.7* | Modification and Extension of Employment Agreement dated as of February 27, 1998 between Pennington Seed, Inc. of Delaware and Brooks Pennington III, dated as of May 6, 2003 (Incorporated by reference from Exhibit 10.7.1 to the Companys Form 10-Q for the fiscal quarter ended June 28, 2003). | |
10.7.1* | Modification and Extension of Employment Agreement and Noncompetition Agreement, dated as of April 10, 2006, between the Company and Brooks M. Pennington III (Incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed April 10, 2006). | |
10.7.2* | Modification and Extension of Employment Agreement and Noncompetition Agreement, dated as of July 1, 2008, between the Company and Brooks M. Pennington III (Incorporated by reference from Exhibit 10.7.2 to the Companys Annual Report on Form 10-K for the fiscal year ended September 27, 2008). | |
10.8* | Employment Agreement dated as of July 9, 2004 between the Company and James V. Heim. (Incorporated by reference from Exhibit 10.9 to the Companys Form 10-K for the fiscal year ended September 25, 2004). | |
10.8.1* | Amendment to Employment Agreement between the Company and James V. Heim (Incorporated by reference from Exhibit 10.1 to the Companys Form 10-Q for the fiscal quarter ended December 27, 2008). | |
10.9* | Form of Agreement to Protect Confidential Information, Intellectual Property and Business Relationships (Incorporated by reference from Exhibit 10.1 to the Companys Current Report on Form 8-K filed October 14, 2005). | |
10.10* | Form of Post-Termination Consulting Agreement (Incorporated by reference from Exhibit 10.2 to the Companys Current Report on Form 8-K filed October 14, 2005). |
90
Exhibit |
Exhibit | |
10.11* | Employment Agreement between the Company and Glen R. Fleischer dated January 14, 2009 (Incorporated by reference from Exhibit 10.1 to the Companys Form 10-Q for the fiscal quarter ended March 28, 2009). | |
10.12* | Separation Agreement between the Company and Stuart W. Booth dated April 1, 2009 (Incorporated by reference from Exhibit 99.2 to the Companys Current Report on Form 8-K filed April 7, 2009). | |
10.13* | Employment Offer Letter between Jeffrey A. Blade and the Company, dated September 1, 2009 (Incorporated by reference from Exhibit 99.1 to the Companys Current Report on Form 8-K filed September 8, 2009). | |
12 | Statement re Computation of Ratios of Earnings to Fixed Charges. | |
14 | Code of Ethics (Incorporated by reference from Exhibit 14 to the Companys Form 10-K for the fiscal year ended September 24, 2005). | |
21 | List of Subsidiaries. | |
23 | Consent of Independent Registered Public Accounting Firm. | |
31.1 | Certification of Principal Executive Officer Pursuant to Rule 13a-14(a). | |
31.2 | Certification of Principal Financial Officer Pursuant to Rule 13a-14(a). | |
32.1 | Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350. | |
32.2 | Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350. |
* | Management contract or compensatory plan or arrangement. |
91