Document


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

FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 24, 2017
or
¨
TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-33268
CENTRAL GARDEN & PET COMPANY 
Delaware
 
68-0275553
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1340 Treat Blvd., Suite 600, Walnut Creek, California 94597
(Address of principal executive offices)
(925) 948-4000
(Registrant’s telephone number, including area code)
_________ ______________________________________________________________ 

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨  Yes    ý  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
Common Stock Outstanding as of July 25, 2017
12,160,023

 
 
Class A Common Stock Outstanding as of July 25, 2017
37,962,372

 
 
Class B Stock Outstanding as of July 25, 2017
1,652,262

 
 

Table of Contents

 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Form 10-Q includes “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries in which we operate and other information that is not historical information. When used in this Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our future earnings expectations, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-Q are set forth in the Form 10-K for the fiscal year ended September 24, 2016, including the factors described in the section entitled “Item 1A – Risk Factors.” If any of these risks or uncertainties materializes, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in, or imply by, any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances, except as required by law. Presently known risk factors include, but are not limited to, the following factors:
 
•
seasonality and fluctuations in our operating results and cash flow;
•fluctuations in market prices for seeds and grains and other raw materials;
•our inability to pass through cost increases in a timely manner;
•
our dependence upon key executives;

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

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Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
 
 
June 24,
2017
 
June 25,
2016
 
September 24,
2016
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
14,473

 
$
40,000

 
$
92,982

Restricted cash
10,999

 
12,029

 
10,910

Accounts receivable (less allowance for doubtful accounts of $21,277, $25,429 and $21,069)
279,504

 
241,954

 
201,151

Inventories
383,449

 
361,813

 
362,004

Deferred taxes, prepaid expenses and other
51,964

 
45,075

 
47,759

Total current assets
740,389

 
700,871

 
714,806

Land, buildings, improvements and equipment—net
177,784

 
159,430

 
158,224

Goodwill
230,385

 
233,011

 
231,385

Other intangible assets—net
90,004

 
95,070

 
95,865

Other assets
113,185

 
28,525

 
11,913

Total
$
1,351,747

 
$
1,216,907

 
$
1,212,193

LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
106,408

 
$
96,906

 
$
102,413

Accrued expenses
112,091

 
102,953

 
99,343

Current portion of long-term debt
375

 
530

 
463

Total current liabilities
218,874

 
200,389

 
202,219

Long-term debt
435,074

 
394,603

 
394,806

Deferred taxes and other long-term obligations
68,792

 
63,975

 
60,581

Equity:
 
 
 
 
 
Common stock, 12,160,023, 11,998,472, and 11,998,472 shares outstanding at June 24, 2017, June 25, 2016 and September 24, 2016
122

 
120

 
120

Class A common stock, $0.01 par value: 37,933,970, 37,197,569 and 37,418,572 shares outstanding at June 24, 2017, June 25, 2016 and September 24, 2016
379

 
371

 
374

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

 
16

 
16

Additional paid-in capital
392,995

 
390,270

 
393,297

Accumulated earnings
235,070

 
166,112

 
160,501

Accumulated other comprehensive income (loss)
(1,487
)
 
(805
)
 
(1,294
)
Total Central Garden & Pet Company shareholders’ equity
627,095

 
556,084

 
553,014

Noncontrolling interest
1,912

 
1,856

 
1,573

Total equity
629,007

 
557,940

 
554,587

Total
$
1,351,747

 
$
1,216,907

 
$
1,212,193

See notes to condensed consolidated financial statements.

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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
June 24,
2017
 
June 25,
2016
 
June 24,
2017
 
June 25,
2016
Net sales
$
574,592

 
$
514,544

 
$
1,564,014

 
$
1,415,605

Cost of goods sold and occupancy
391,319

 
350,799

 
1,076,534

 
982,735

Gross profit
183,273

 
163,745

 
487,480

 
432,870

Selling, general and administrative expenses
125,340

 
115,560

 
345,749

 
316,509

Operating income
57,933

 
48,185

 
141,731

 
116,361

Interest expense
(7,273
)
 
(6,964
)
 
(20,976
)
 
(36,205
)
Interest income
53

 
43

 
99

 
74

Other income (expense)
1,626

 
318

 
(306
)
 
(243
)
Income before income taxes and noncontrolling interest
52,339

 
41,582

 
120,548

 
79,987

Income tax expense
19,450

 
14,916

 
44,621

 
28,509

Income including noncontrolling interest
32,889

 
26,666

 
75,927

 
51,478

Net income attributable to noncontrolling interest
641

 
636

 
1,358

 
1,353

Net income attributable to Central Garden & Pet Company
$
32,248

 
$
26,030

 
$
74,569

 
$
50,125

Net income per share attributable to Central Garden & Pet Company:
 
 
 
 
 
 
 
Basic
$
0.64

 
$
0.53

 
$
1.49

 
$
1.03

Diluted
$
0.62

 
$
0.51

 
$
1.44

 
$
0.99

Weighted average shares used in the computation of net income per share:
 
 
 
 
 
 
 
Basic
50,507

 
49,120

 
50,084

 
48,801

Diluted
51,825

 
51,063

 
51,769

 
50,743

See notes to condensed consolidated financial statements.


5


CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
June 24,
2017
 
June 25,
2016
 
June 24,
2017
 
June 25,
2016
Income including noncontrolling interest
$
32,889

 
$
26,666

 
$
75,927

 
$
51,478

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
172

 
(277
)
 
(193
)
 
(969
)
Total comprehensive income
33,061

 
26,389

 
75,734

 
50,509

Comprehensive income attributable to noncontrolling interest
641

 
636

 
1,358

 
1,353

Comprehensive income attributable to Central Garden & Pet Company
$
32,420

 
$
25,753

 
$
74,376

 
$
49,156

See notes to condensed consolidated financial statements.


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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
 
Nine Months Ended
 
June 24,
2017
 
June 25,
2016
Cash flows from operating activities:
 
 
 
Net income
$
75,927

 
$
51,478

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
Depreciation and amortization
31,374

 
29,286

Amortization of deferred financing costs
1,021

 
1,164

Stock-based compensation
8,189

 
6,069

Excess tax benefits from stock-based awards
(17,205
)
 
(4,726
)
Deferred income taxes
10,420

 
12,305

Write-off of deferred financing costs
—

 
3,337

Loss on sale of property and equipment
96

 
788

Gain on sale of facility
(2,050
)
 
(2,544
)
Other
1,241

 
190

Change in assets and liabilities (excluding businesses acquired):
 
 
 
Accounts receivable
(74,234
)
 
(13,236
)
Inventories
(17,347
)
 
(5,928
)
Prepaid expenses and other assets
11,774

 
6,493

Accounts payable
2,901

 
(8,027
)
Accrued expenses
10,629

 
14,812

Other long-term obligations
(88
)
 
(1,878
)
Net cash provided by operating activities
42,648

 
89,583

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(37,087
)
 
(19,486
)
Payments to acquire companies, net of cash acquired
(106,821
)
 
(68,901
)
Proceeds from the sale of business, facility and other assets
8,301

 
3,899

Change in restricted cash
(89
)
 
1,129

Investment in equity method investee
(11,495
)
 
—

Other investing activities
(2,735
)
 
(550
)
Net cash used in investing activities
(149,926
)
 
(83,909
)
Cash flows from financing activities:
 
 
 
Repayments of long-term debt
(456
)
 
(400,230
)
Proceeds from issuance of long-term debt
—

 
400,000

Borrowings under revolving line of credit
456,000

 
419,000

Repayments under revolving line of credit
(416,000
)
 
(419,000
)
Proceeds from issuance of common stock
—

 
280

Repurchase of common stock, including shares surrendered for tax withholding
(25,654
)
 
(9,429
)
Payment of contingent consideration liability
(1,222
)
 
—

Distribution to noncontrolling interest
(1,019
)
 
(592
)
Payment of financing costs
—

 
(7,560
)
Excess tax benefits from stock-based awards
17,205

 
4,726

Net cash provided (used) by financing activities
28,854

 
(12,805
)
Effect of exchange rate changes on cash and cash equivalents
(85
)
 
(453
)
Net decrease in cash and cash equivalents
(78,509
)
 
(7,584
)
Cash and equivalents at beginning of period
92,982

 
47,584

Cash and equivalents at end of period
$
14,473

 
$
40,000

Supplemental information:
 
 
 
Cash paid for interest
$
27,075

 
$
32,440

See notes to condensed consolidated financial statements.

7


CENTRAL GARDEN & PET COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended June 24, 2017
(Unaudited)
1.
Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of June 24, 2017 and June 25, 2016, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the three and nine months ended June 24, 2017 and June 25, 2016, and the condensed consolidated statements of cash flows for the nine months ended June 24, 2017 and June 25, 2016 have been prepared by the Company, without audit. In the opinion of management, the interim financial statements include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented.
For the Company’s foreign business in the UK, the local currency is the functional currency. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Deferred taxes are not provided on translation gains and losses because the Company expects earnings of its foreign subsidiary to be permanently reinvested. Transaction gains and losses are included in results of operations. See Note 8, Supplemental Equity Information, for further detail.
Due to the seasonal nature of the Company’s garden business, the results of operations for the three and nine months ended June 24, 2017 are not indicative of the operating results that may be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2016 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 24, 2016 balance sheet presented herein was derived from the audited financial statements.
Noncontrolling Interest
Noncontrolling interest in the Company’s condensed consolidated financial statements represents the 20% interest not owned by Central in a consolidated subsidiary. Since the Company controls this subsidiary, its financial statements are consolidated with those of the Company, and the noncontrolling owner’s 20% share of the subsidiary’s net assets and results of operations is deducted and reported as noncontrolling interest on the consolidated balance sheets and as net income (loss) attributable to noncontrolling interest in the consolidated statements of operations. See Note 8, Supplemental Equity Information, for additional information.
Restricted Cash
Restricted cash includes cash and highly liquid instruments that are used as collateral for stand-alone letter of credit agreements related to normal business transactions. These agreements require the Company to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash the Company has available for other uses. The amount of cash collateral in these segregated accounts was approximately $11.0 million, $12.0 million and $10.9 million as of June 24, 2017, June 25, 2016 and September 24, 2016, respectively, and is reflected in Restricted cash on the condensed consolidated balance sheets.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Consolidation
In February 2015, the FASB issued ASU 2015-02 (ASU 2015-02), Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 became effective during the Company’s first quarter of fiscal 2017, and the adoption of the standard had no impact on the Company's condensed consolidated financial statements.


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Stock Based Compensation
In June 2014, the FASB issued ASU No. 2014-12 (ASU 2014-12), Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 became effective during the Company’s first quarter of fiscal 2017, and the adoption of the standard had no impact on the Company's condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. This update was issued as Accounting Standards Codification Topic 606. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09 for one year. ASU 2014-09 is now effective for the Company beginning in the first quarter of its fiscal year ending September 28, 2019.
Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
Leases
In February 2016, the FASB issued ASU 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for the Company in our first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements, and it currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02.
Stock Compensation
In March 2016, the FASB issued ASU 2016-09 (ASU 2016-09), Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, or the Company's first quarter of fiscal 2018. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-09 and has not yet determined the impact on its consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09 (ASU 2017-09), Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarity on which changes to the terms or conditions of share-based payment awards require an entity to apply the modification accounting provisions required in Topic 718. The standard is effective for all entities for annual periods beginning after December 15, 2017, with early adoption permitted, including adoption in any interim period for which financial statements have not yet been issued. The Company does not expect the adoption of this ASU will have a material impact on its consolidated financial statements.
Inventory Measurement
In July 2015, the FASB issued ASU 2015-11 (ASU 2015-11), Simplifying the Measurement of Inventory. Under ASU 2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The standard defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after

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December 15, 2016, or the Company’s first quarter of fiscal 2018. Early application is permitted and should be applied prospectively. The Company does not expect the adoption of ASU 2015-11 will have a material impact on its condensed consolidated financial statements and related disclosures.
Balance Sheet Classification of Deferred Taxes.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU eliminates the current requirement for entities to present deferred tax liabilities and assets as current and noncurrent in a classified statement of financial position and instead requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, or the Company's first quarter of fiscal 2018, and interim periods within those annual periods. The standard allows for either a retrospective or prospective transition method and is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows. As of June 24, 2017, June 25, 2016 and September 24, 2016, net current deferred tax assets classified within deferred taxes, prepaid expenses and other current assets were $30.4 million, $29.7 million and $31.5 million, respectively.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) . The ASU provides additional clarification guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017, or the Company's first quarter of fiscal 2019, with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2016-15 will have on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-18). This ASU clarifies the presentation of restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending cash balances on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017, or the Company's first quarter of fiscal 2019, with early adoption permitted. The Company does not expect that ASU 2016-18 will have a material impact on its condensed consolidated financial statements and related disclosures.
Business Combinations

In January 2017, the FASB issued ASU No. 2017-01, Clarifying the Definition of a Business (ASU 2017-01), which requires an evaluation of whether substantially all of the fair value of assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the transaction does not qualify as a business. The guidance also requires an acquired business to include at least one substantive process and narrows the definition of outputs. The Company is required to apply this guidance to annual periods beginning after December 15, 2017, including interim periods within those periods, or the Company's first quarter of fiscal 2019. The Company is currently evaluating the impact the adoption of ASU 2017-01 will have on its consolidated financial statements.

Goodwill
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance will be effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, or the Company's first quarter of fiscal 2021. The amendment should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company will adopt this guidance in its fourth quarter of fiscal 2017 as part of its annual goodwill impairment testing.



10


2.
Fair Value Measurements

ASC 820 establishes a single authoritative definition of fair value, a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 requires financial assets and liabilities to be categorized based on the inputs used to calculate their fair values as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company’s financial instruments include cash and equivalents, short term investments consisting of bank certificates of deposit, accounts receivable and payable, derivative instruments, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of June 24, 2017 (in thousands):
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
4,095

 
$
4,095

Total liabilities
 
$
0

 
$
0

 
$
4,095

 
$
4,095

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of June 25, 2016 (in thousands):
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
6,355

 
$
6,355

Total liabilities
 
$
0

 
$
0

 
$
6,355

 
$
6,355

The following table presents our financial assets and liabilities at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of September 24, 2016:
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
5,113

 
$
5,113

Total liabilities
 
$
0

 
$
0

 
$
5,113

 
$
5,113

 

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


11


The following table provides a summary of the changes in fair value of the Company's Level 3 financial instruments for the periods ended June 24, 2017 and June 25, 2016 (in thousands):
 
 
Amount
Balance September 24, 2016
$
5,113

Estimated contingent performance-based consideration established at the time of acquisition
—

Changes in the fair value of contingent performance-based payments established at the time of acquisition
204

Performance-based payments
(1,222
)
Balance June 24, 2017
$
4,095

 
 
 
Amount
Balance September 26, 2015
$
3,625

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

Changes in the fair value of contingent performance-based payments established at the time of acquisition
140

Balance June 25, 2016
$
6,355

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company measures certain non-financial assets and liabilities, including long-lived assets, goodwill and intangible assets, at fair value on a non-recurring basis. Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived assets, goodwill and other intangible assets. During the periods ended June 24, 2017 and June 25, 2016, the Company was not required to measure any significant non-financial assets and liabilities at fair value.
Fair Value of Other Financial Instruments
In November 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023 (the “2023 Notes”). The estimated fair value of the Company’s 2023 Notes as of June 24, 2017, June 25, 2016 and September 24, 2016 was $430.5 million, $417 million and $430.3 million, respectively, compared to a carrying value of $395.0 million, $394.2 million and $394.4 million, respectively.


12


3.
Acquisitions
K&H Manufacturing
On April 28, 2017, the Company purchased K&H Manufacturing, a producer of premium pet supplies and the largest marketer of heated pet products in the country, for a purchase price of approximately $48.0 million. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $41.8 million, which is included in other assets in the Company’s condensed consolidated balance sheet as of June 24, 2017. The Company has not yet finalized the allocation of the purchase price to the fair value of the intangible assets acquired. K&H sells branded pet products under the K&H and K&H Pet brands. The acquisition is expected to complement the Company's existing dog and cat business.
Segrest Inc.
On October 24, 2016, the Company acquired Segrest, Inc., a wholesaler of aquarium fish, for a purchase price of approximately $60.0 million, of which $6.0 million is in an escrow account managed by an independent trustee and is payable contingent upon future events. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $47.7 million, which is included in other assets in the Company’s condensed consolidated balance sheet as of June 24, 2017. The Company has not yet finalized the allocation of the purchase price to the fair value of the intangible assets acquired. This acquisition is expected to strengthen the Company's position in the aquatics category and provide the opportunity for synergies with the Company's existing aquatics business.
Proforma financial information has not been presented as the Segrest and K&H acquisitions were not considered material to the Company's overall consolidated financial statements during the periods presented.


4.
Inventories, net
Inventories, net of allowance for obsolescence, consist of the following (in thousands):
 
 
 
June 24, 2017
 
June 25, 2016
 
September 24, 2016
Raw materials
 
$
118,097

 
$
110,095

 
$
120,786

Work in progress
 
16,573

 
16,604

 
17,378

Finished goods
 
243,053

 
225,814

 
217,788

Supplies
 
5,726

 
9,300

 
6,052

Total inventories, net
 
$
383,449

 
$
361,813

 
$
362,004

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

13


6.
Other Intangible Assets

The following table summarizes the components of gross and net acquired intangible assets:
 
 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
 
 
(in millions)
 
 
June 24, 2017
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.9

 
$
(11.9
)
 
$
—

 
$
3.0

Marketing-related intangible assets – nonamortizable
 
62.7

 
—

 
(26.0
)
 
36.7

Total
 
77.6

 
(11.9
)
 
(26.0
)
 
39.7

Customer-related intangible assets – amortizable
 
64.3

 
(29.0
)
 
—

 
35.3

Other acquired intangible assets – amortizable
 
20.8

 
(12.4
)
 
—

 
8.4

Other acquired intangible assets – nonamortizable
 
7.8

 
—

 
(1.2
)
 
6.6

Total
 
28.6

 
(12.4
)
 
(1.2
)
 
15.0

Total other intangible assets
 
$
170.5

 
$
(53.3
)
 
$
(27.2
)
 
$
90.0

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
 
 
(in millions)
 
 
June 25, 2016
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.9

 
$
(11.1
)
 
$
—

 
$
3.8

Marketing-related intangible assets – nonamortizable
 
63.0

 
—

 
(24.2
)
 
38.8

Total
 
77.9

 
(11.1
)
 
(24.2
)
 
42.6

Customer-related intangible assets – amortizable
 
62.1

 
(25.8
)
 
—

 
36.3

Other acquired intangible assets – amortizable
 
20.8

 
(11.2
)
 
—

 
9.6

Other acquired intangible assets – nonamortizable
 
7.8

 
—

 
(1.2
)
 
6.6

Total
 
28.6

 
(11.2
)
 
(1.2
)
 
16.2

Total other intangible assets
 
$
168.6

 
$
(48.1
)
 
$
(25.4
)
 
$
95.1

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
 
 
(in millions)
 
 
September 24, 2016
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.9

 
$
(11.3
)
 
$
—

 
$
3.6

Marketing-related intangible assets – nonamortizable
 
63.0

 
—

 
(26.0
)
 
37.0

Total
 
77.9

 
(11.3
)
 
(26.0
)
 
40.6

Customer-related intangible assets – amortizable
 
65.6

 
(26.1
)
 
—

 
39.5

Other acquired intangible assets – amortizable
 
20.8

 
(11.6
)
 
—

 
9.2

Other acquired intangible assets – nonamortizable
 
7.8

 
—

 
(1.2
)
 
6.6

Total
 
28.6

 
(11.6
)
 
(1.2
)
 
15.8

Total other intangible assets
 
$
172.1

 
$
(49.0
)
 
$
(27.2
)
 
$
95.9


14


Other acquired intangible assets include contract-based and technology-based intangible assets.
The Company evaluates long-lived assets, including amortizable and indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates indefinite-lived intangible assets on an annual basis. In the fourth quarter of fiscal 2016, the Company recognized a non-cash $1.8 million impairment charge to certain indefinite-lived intangible assets as a result of increased competition in the marketplace and declining volume of sales. Other factors indicating the carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in fiscal 2016 or during the nine months ended June 24, 2017, and accordingly, no impairment testing was performed on these assets.
The Company amortizes its acquired intangible assets with definite lives over periods ranging from four years to 25 years; over weighted average remaining lives of six years for marketing-related intangibles, 11 years for customer-related intangibles and 13 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $1.4 million and $2.7 million for the three months ended June 24, 2017 and June 25, 2016, respectively, and $4.3 million and $4.9 million for the nine months ended June 24, 2017 and June 25, 2016, respectively, and is classified within operating expenses in the condensed consolidated statements of operations. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $5 million per year from fiscal 2017 through fiscal 2021.


7.
Long-Term Debt
Long-term debt consists of the following:
 
 
 
June 24, 2017
 
June 25, 2016
 
September 24, 2016
 
 
(in thousands)
Senior notes, interest at 6.125%, payable semi-annually, principal due November 2023
 
$
400,000

 
$
400,000

 
$
400,000

Unamortized debt issuance costs
 
(5,039
)
 
(5,834
)
 
(5,635
)
Net carrying value
 
394,961

 
394,166

 
394,365

Asset-based revolving credit facility, interest at LIBOR plus a margin of 1.25% to 1.50% or Base Rate plus a margin of 0.25% to 0.50%, final maturity April 2021
 
40,000

 
—

 
—

Other notes payable
 
488

 
967

 
904

Total
 
435,449

 
395,133

 
395,269

Less current portion
 
(375
)
 
(530
)
 
(463
)
Long-term portion
 
$
435,074

 
$
394,603

 
$
394,806

Senior Notes and Redemption of Senior Subordinated Notes
On November 9, 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023. In December 2015, the Company used the net proceeds from the offering, together with available cash, to redeem its $400 million aggregate principal amount of 8.25% senior subordinated notes due March 1, 2018 (2018 Notes) at a price of 102.063% of the principal amount and to pay fees and expenses related to the offering.
The Company incurred approximately $6.3 million of debt issuance costs in conjunction with these transactions, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2023 Notes.
As a result of the Company’s redemption of the 2018 Notes, the Company incurred a call premium payment of $8.3 million, overlapping interest expense for 30 days of approximately $2.7 million and a $3.3 million non-cash charge for the write off of unamortized deferred financing costs and discount related to the 2018 Notes. These amounts are included in interest expense in the condensed consolidated statements of operations for the nine months ended June 25, 2016.

15


The 2023 Notes require semiannual interest payments on May 15 and November 15. The 2023 Notes are unconditionally guaranteed on a senior basis by each of the Company’s existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central’s senior secured revolving credit facility. The 2023 Notes are unsecured senior obligations and are subordinated to all of the Company’s existing and future secured debt, including the Company’s Credit Facility, to the extent of the value of the collateral securing such indebtedness.
The Company may redeem some or all of the 2023 Notes at any time, at its option, prior to November 15, 2018 at the principal amount plus a “make whole” premium. At any time prior to November 15, 2018, the Company may also redeem, at its option, up to 35% of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of 106.125% of the principal amount of the notes. The Company may redeem some or all of the 2023 Notes, at its option, at any time on or after November 15, 2018 for 104.594%, on or after November 15, 2019 for 103.063%, on or after November 15, 2020 for 101.531% and on or after November 15, 2021 for 100%, plus accrued and unpaid interest.
The holders of the 2023 Notes have the right to require the Company to repurchase all or a portion of the 2023 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2023 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all covenants as of June 24, 2017.
Asset-Based Loan Facility Amendment
On April 22, 2016, the Company entered into an amended and restated credit agreement which provides up to a $400 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if the Company exercises the accordion feature set forth therein (collectively, the “Amended Credit Facility”). The Amended Credit Facility matures on April 22, 2021. The Company may borrow, repay and reborrow amounts under the Amended Credit Facility until its maturity date, at which time all amounts outstanding under the Amended Credit Facility must be repaid in full. As of June 24, 2017, there were borrowings of $40.0 million outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $2.6 million outstanding as of June 24, 2017.
The Amended Credit Facility is subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. As of June 24, 2017, the borrowing base and remaining borrowing availability was $360.0 million. Borrowings under the Amended Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s consolidated senior leverage ratio. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25% - 1.50%, and was 1.25% as of June 24, 2017, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.5%, and was 0.25% as of June 24, 2017. As of June 24, 2017, the applicable interest rate related to Base Rate borrowings was 4.5%, and the applicable interest rate related to LIBOR-based borrowings was 2.3%.
The Company incurred approximately $1.2 million of debt issuance costs in conjunction with this transaction, which included underwriter fees, legal and accounting expenses. The debt issuance costs will be amortized over the term of the Amended Credit Facility.
The Amended Credit Facility contains customary covenants, including financial covenants which require the Company to maintain a minimum fixed charge coverage ratio of 1.00:1.00 upon reaching certain borrowing levels. The Amended Credit Facility is secured by substantially all assets of the Company. The Company was in compliance with all financial covenants under the Amended Credit Facility during the quarter ended June 24, 2017.

16


8.
Supplemental Equity Information

The following table provides a summary of the changes in the carrying amounts of equity attributable to controlling interest and noncontrolling interest for the nine months ended June 24, 2017 and June 25, 2016
 
 
Controlling Interest
 
 
 
 
(in thousands)
 
Common
Stock
 
Class A
Common
Stock
 
Class
B
Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Noncontrolling
Interest
 
Total
Balance September 24, 2016
 
$
120

 
$
374

 
$
16

 
$
393,297

 
$
160,501

 
$
(1,294
)
 
$
553,014

 
$
1,573

 
$
554,587

Comprehensive income
 
 
 
 
 
 
 
 
 
74,569

 
(193
)
 
74,376

 
1,358

 
75,734

Amortization of share-based awards
 
 
 
 
 
 
 
6,377

 
 
 
 
 
6,377

 
 
 
6,377

Restricted share activity, including net share settlement
 
 
 
(1
)
 
 
 
(7,491
)
 
 
 
 
 
(7,492
)
 
 
 
(7,492
)
Issuance of common stock, including net share settlement of stock options
 
2

 
6

 
 
 
(16,358
)
 
 
 
 
 
(16,350
)
 
 
 
(16,350
)
Tax benefit on stock option exercise, net of tax deficiency
 
 
 
 
 
 
 
17,170

 
 
 
 
 
17,170

 
 
 
17,170

Distribution to Noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,019
)
 
(1,019
)
Balance June 24, 2017
 
$
122

 
$
379

 
$
16

 
$
392,995

 
$
235,070

 
$
(1,487
)
 
$
627,095

 
$
1,912

 
$
629,007

 
 
Controlling Interest
 
 
 
 
(in thousands)
 
Common
Stock
 
Class A
Common
Stock
 
Class
B
Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Noncontrolling
Interest
 
Total
Balance September 26, 2015
 
$
119

 
$
364

 
$
16

 
$
388,636

 
$
115,987

 
$
164

 
$
505,286

 
$
1,094

 
$
506,380

Comprehensive income
 
 
 
 
 
 
 
 
 
50,125

 
(969
)
 
49,156

 
1,353

 
50,509

Amortization of share-based awards
 
 
 
 
 
 
 
4,796

 
 
 
 
 
4,796

 
 
 
4,796

Restricted share activity, including net share settlement
 
 
 
1

 
 
 
(1,230
)
 
 
 
 
 
(1,229
)
 
 
 
(1,229
)
Issuance of common stock, including net share settlement of stock options
 
1

 
6

 
 
 
(6,654
)
 
 
 
 
 
(6,647
)
 
 
 
(6,647
)
Tax benefit on stock option exercise, net of tax deficiency
 
 
 
 
 
 
 
4,722

 
 
 
 
 
4,722

 
 
 
4,722

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

 
1

Balance June 25, 2016
 
$
120

 
$
371

 
$
16

 
$
390,270

 
$
166,112

 
$
(805
)
 
$
556,084

 
$
1,856

 
$
557,940

 
9.
Stock-Based Compensation

The Company recognized share-based compensation expense of $8.2 million and $6.1 million for the nine months ended June 24, 2017 and June 25, 2016, respectively, as a component of selling, general and administrative expenses. The tax benefit associated with share-based compensation expense for the nine months ended June 24, 2017 and June 25, 2016 was $3.0 million and $2.2 million, respectively.
 

17


10.
Earnings Per Share


The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income from continuing operations.
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 24, 2017
 
June 24, 2017
 
 
Income
 
Shares
 
Per Share
 
Income

Shares

Per Share
Basic EPS:
 
 
 
 
 
 
 





     Net income available to common shareholders
 
$
32,248

 
50,507

 
$
0.64

 
$
74,569


50,084


$
1.49

Effect of dilutive securities:
 
 
 
 
 
 
 





     Options to purchase common stock
 

 
810

 
(0.01
)
 
—


1,080


(0.03
)
     Restricted shares
 

 
508

 
(0.01
)
 
—


605


(0.02
)
Diluted EPS:
 

 

 

 
—





     Net income available to common shareholders
 
$
32,248

 
51,825

 
$
0.62

 
$
74,569


51,769


$
1.44

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 25, 2016
 
June 25, 2016
 
 
Income

Shares

Per Share
 
Income

Shares

Per Share
Basic EPS:






 





     Net income available to common shareholders

$
26,030


49,120


$
0.53

 
$
50,125


48,801


$
1.03

Effect of dilutive securities:






 





     Options to purchase common stock



1,211


(0.01
)
 


1,201


(0.03
)
     Restricted shares



732


(0.01
)
 


741


(0.01
)
Diluted EPS:






 





     Net income available to common shareholders

$
26,030


51,063


$
0.51

 
$
50,125


50,743


$
0.99

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Options to purchase 2.7 million shares of common stock at prices ranging from $6.43 to $31.76 per share were outstanding at June 24, 2017, and options to purchase 4.5 million shares of common stock at prices ranging from $6.43 to $15.56 per share were outstanding at June 25, 2016.

For the three months ended June 24, 2017, options to purchase 0.6 million shares of common stock were outstanding but were not included in the computation of diluted earnings per share, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive. For the three months ended June 25, 2016, all options outstanding were included in the computation of diluted earnings per share.

For the nine month period ended June 24, 2017, options to purchase 0.6 million shares of common stock were outstanding but were not included in the computation of diluted earnings per share, because the option exercise prices were greater than

18


the average market price of the common shares and, therefore, the effect would be anti-dilutive. For the nine month period ended June 25, 2016, all options outstanding were included in the computation of diluted earnings per share.

11.
Segment Information

Management has determined that the Company has two operating segments, which are also reportable segments based on the level at which the Chief Operating Decision Maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are Pet segment and Garden segment and are presented in the table below (in thousands).
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 24,
2017
 
June 25,
2016
 
June 24,
2017
 
June 25,
2016
Net sales:
 
 
 
 
 
 
 
 
Pet segment
 
$
313,437

 
$
287,213

 
$
915,876

 
$
811,203

Garden segment
 
261,155

 
227,331

 
648,138

 
604,402

Total net sales
 
$
574,592

 
$
514,544

 
$
1,564,014

 
$
1,415,605

Operating income:
 
 
 
 
 
 
 
 
Pet segment
 
36,092

 
38,759

 
104,143

 
97,363

Garden segment
 
38,369

 
26,452

 
87,050

 
67,605

Corporate
 
(16,528
)
 
(17,026
)
 
(49,462
)
 
(48,607
)
Total income from operations
 
57,933

 
48,185

 
141,731

 
116,361

Interest expense - net
 
(7,220
)
 
(6,921
)
 
(20,877
)
 
(36,131
)
Other income (expense)
 
1,626

 
318

 
(306
)
 
(243
)
Income tax expense
 
19,450

 
14,916

 
44,621

 
28,509

Income including noncontrolling interest
 
32,889

 
26,666

 
75,927

 
51,478

Net income attributable to noncontrolling interest
 
641

 
636

 
1,358

 
1,353

Net income attributable to Central Garden & Pet Company
 
$
32,248

 
$
26,030

 
$
74,569

 
$
50,125

Depreciation and amortization:
 
 
 
 
 
 
 
 
Pet segment
 
$
6,794

 
6,700

 
$
18,798

 
$
16,120

Garden segment
 
1,651

 
1,542

 
4,686

 
4,586

Corporate
 
2,585

 
2,842

 
7,890

 
8,580

Total depreciation and amortization
 
$
11,030

 
$
11,084

 
$
31,374

 
$
29,286

 
 
 
June 24,
2017
 
June 25,
2016
 
September 24,
2016
Assets:
 
 
 
 
 
 
Pet segment
 
$
622,567

 
$
523,281

 
$
508,879

Garden segment
 
368,365

 
327,768

 
304,901

Corporate
 
360,815

 
365,858

 
398,413

Total assets
 
$
1,351,747

 
$
1,216,907

 
$
1,212,193

Goodwill (included in corporate assets above):
 
 
 
 
 
 
Pet segment
 
$
224,912

 
$
229,713

 
$
225,912

Garden segment
 
5,473

 
3,298

 
5,473

Total goodwill
 
$
230,385

 
$
233,011

 
$
231,385



19


12.
Consolidating Condensed Financial Information of Guarantor Subsidiaries

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

In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying consolidating condensed financial statements based on the Company’s understanding of the Securities and Exchange Commission’s interpretation and application of Rule 3-10 of the Securities and Exchange Commission’s Regulation S-X.


 

20


 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
Three Months Ended June 24, 2017
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
184,719

 
$
29,067

 
$
387,333

 
$
(26,527
)
 
$
574,592

Cost of goods sold and occupancy
 
142,533

 
20,636

 
252,678

 
(24,528
)
 
391,319

Gross profit
 
42,186

 
8,431

 
134,655

 
(1,999
)
 
183,273

Selling, general and administrative expenses
 
39,234

 
5,476

 
82,629

 
(1,999
)
 
125,340

Operating income
 
2,952

 
2,955

 
52,026

 
—

 
57,933

Interest expense
 
(7,213
)
 
(54
)
 
(6
)
 
—

 
(7,273
)
Interest income
 
53

 
—

 
—

 
—

 
53

Other income
 
1,064

 
86

 
476

 
—

 
1,626

Income (loss) before taxes and equity in earnings of affiliates
 
(3,144
)
 
2,987

 
52,496

 
—

 
52,339

Income tax expense (benefit)
 
(1,178
)
 
1,096

 
19,532

 
—

 
19,450

Equity in earnings of affiliates
 
34,214

 
—

 
1,302

 
(35,516
)
 
—

Net income including noncontrolling interest
 
32,248

 
1,891

 
34,266

 
(35,516
)
 
32,889

Net income attributable to noncontrolling interest
 
—

 
641

 
—

 
—

 
641

Net income attributable to Central Garden & Pet Company
 
$
32,248

 
$
1,250

 
$
34,266

 
$
(35,516
)
 
$
32,248

 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
Three Months Ended June 25, 2016
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
162,751

 
$
28,052

 
$
350,013

 
$
(26,272
)
 
$
514,544

Cost of goods sold and occupancy
 
128,517

 
18,274

 
228,343

 
(24,335
)
 
350,799

Gross profit
 
34,234

 
9,778

 
121,670

 
(1,937
)
 
163,745

Selling, general and administrative expenses
 
36,826

 
5,380

 
75,291

 
(1,937
)
 
115,560

Operating income (loss)
 
(2,592
)
 
4,398

 
46,379

 
—

 
48,185

Interest expense
 
(6,904
)
 
(53
)
 
(7
)
 
—

 
(6,964
)
Interest income
 
42

 
1

 
—

 
—

 
43

Other income (expense)
 
(108
)
 
(146
)
 
572

 
—

 
318

Income (loss) before taxes and equity in earnings of affiliates
 
(9,562
)
 
4,200

 
46,944

 
—

 
41,582

Income tax expense (benefit)
 
(3,517
)
 
1,552

 
16,881

 
—

 
14,916

Equity in earnings of affiliates
 
32,075

 
—

 
2,148

 
(34,223
)
 
—

Net income including noncontrolling interest
 
26,030

 
2,648

 
32,211

 
(34,223
)
 
26,666

Net income attributable to noncontrolling interest
 
—

 
636

 
—

 
—

 
636

Net income attributable to Central Garden & Pet Company
 
$
26,030

 
$
2,012

 
$
32,211

 
$
(34,223
)
 
$
26,030



21


 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
 
 
Nine Months Ended June 24, 2017
 
 
 
 
(in thousands)
 
 
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
531,028

 
$
69,183

 
$
1,032,444

 
$
(68,641
)
 
$
1,564,014

Cost of goods sold and occupancy
 
409,262

 
52,442

 
678,798

 
(63,968
)
 
1,076,534

Gross profit
 
121,766

 
16,741

 
353,646

 
(4,673
)
 
487,480

Selling, general and administrative expenses
 
114,546

 
14,014

 
221,862

 
(4,673
)
 
345,749

Operating income
 
7,220

 
2,727

 
131,784

 
—

 
141,731

Interest expense
 
(20,823
)
 
(136
)
 
(17
)
 
—

 
(20,976
)
Interest income
 
98

 
1

 
—

 
—

 
99

Other income (expense)
 
(276
)
 
(301
)
 
271

 
—

 
(306
)
Income (loss) before taxes and equity in earnings of affiliates
 
(13,781
)
 
2,291

 
132,038

 
—

 
120,548

Income tax expense (benefit)
 
(5,088
)
 
1,133

 
48,576

 
—

 
44,621

Equity in earnings of affiliates
 
83,262

 
—

 
875

 
(84,137
)
 
—

Net income including noncontrolling interest
 
74,569

 
1,158

 
84,337

 
(84,137
)
 
75,927

Net income attributable to noncontrolling interest
 
—

 
1,358

 
—

 
—

 
1,358

Net income (loss) attributable to Central Garden & Pet Company
 
$
74,569

 
$
(200
)
 
$
84,337

 
$
(84,137
)
 
$
74,569

 
 
 
 
 
 
 
 
 
 
 

 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
 
 
Nine Months Ended June 25, 2016
 
 
 
 
(in thousands)
 
 
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
456,568

 
$
73,324

 
$
953,925

 
$
(68,212
)
 
$
1,415,605

Cost of goods sold and occupancy
 
360,745

 
54,319

 
631,251

 
(63,580
)
 
982,735

Gross profit
 
95,823

 
19,005

 
322,674

 
(4,632
)
 
432,870

Selling, general and administrative expenses
 
102,990

 
14,283

 
203,868

 
(4,632
)
 
316,509

Operating income (loss)
 
(7,167
)
 
4,722

 
118,806