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| CENT > SEC Filings for CENT > Form 10-Q on 4-Aug-2011 | All Recent SEC Filings |
4-Aug-2011
Quarterly Report
Our Company
Central Garden & Pet Company ("Central") 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 $28 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 $17 billion. As of 2010, 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 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, Altosid®, Aqueon®, Avoderm ®, BioSpot®, Coralife®, Farnam ®, Four Paws®, Interpet, Kaytee®, Kent Marine®, Nylabone®, Oceanic Systems®, Pet Select ®, Pre-Strike®, Pinnacle®, Super Pet ®, TFH®, Zilla® 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®, Grant'sTM, Ironite®, Lilly Miller ®, Matthews Four SeasonsTM, New England Pottery®, Norcal Pottery®, Pennington ®, Over'n Out®, Sevin®, Smart Seed ® and The Rebels®.
Recent Developments
Senior Credit Facility-On June 9, 2011, we announced the amendment of our $275 million five-year senior secured revolving credit facility (the "Credit Facility") effective June 8, 2011. Under the modified terms, our borrowing capacity under the Credit Facility is $375 million, an increase of $100 million, and the maturity date was extended by approximately one year to June 2016. Further, the Credit Facility bears lower interest rates and commitment fees and requires less interest coverage.
Interest on the amended Credit Facility is based, at our option, on a rate equal to the Alternate Base Rate (ABR), which is the greater of: the Prime Rate, the Federal Funds rate plus 1/2 of 1%, or one month LIBOR plus 1%, all of which have an additional fluctuating margin of 0.75% to 1.75%. Alternatively, we could choose a rate of LIBOR plus a margin, which would fluctuate from 1.75% to 2.75%. The minimum interest coverage requirement was reduced to 2.50 times EBITDA from 2.75 times EBITDA.
We continue to have the option to increase the size of the Credit Facility by an additional $200 million should we exercise our option and one or more lenders are willing to make such increased amounts available to us.
Fiscal 2011 Third Quarter Financial Performance-In the third quarter of fiscal 2011, net income decreased to $17.1 million compared to $25.9 million in the third quarter of fiscal 2010. Earnings per share on a fully diluted basis decreased from $0.40 in the prior year quarter to $0.31 in the current year quarter. Our revenues increased approximately $18.8 million, with sales growth in both our operating segments, but income from operations decreased $16.0 million from the prior year quarter. The decrease in operating income was due primarily to increased grain and other raw material prices, adverse changes in product mix, and increased marketing and brand building expenditures, partially offset by the increased revenues.
Newly Authorized $100Million Share Repurchase Program-During the third quarter of fiscal 2011, we completed the $100 million share repurchase program our Board of Directors authorized in July 2010, and our Board of Directors authorized a new $100 million share repurchase program. We may repurchase shares of our common stock in the open market at times and prices considered appropriate by management.
Repurchase of Company Stock-During the three months ended June 25, 2011, we repurchased $30.1 million of our common stock, which consisted of 1.1 million shares of our voting common stock (CENT) at an aggregate cost of approximately $10.6 million, or approximately $9.64 per share, and 2.0 million shares of our non-voting Class A common stock (CENTA) at an aggregate cost of approximately $19.5 million, or approximately $9.79 per share. As of June 25, 2011, under our current share repurchase program authorization, approximately $97 million remains available for repurchases in 2011 and thereafter.
Results of Operations
Net Sales
Net sales for the three months ended June 25, 2011 increased $18.8 million, or 4.0%, to $484.3 million from $465.5 million for the three months ended June 26, 2010. Our branded product sales increased $25.2 million and sales of other manufacturers' products decreased $6.4 million.
Pet Products' net sales increased $4.6 million, or 2.1%, to $227.3 million for the three months ended June 25, 2011 from $222.7 million in the comparable fiscal 2010 period. Pet branded product sales increased $4.4 million and sales of other manufacturers' products increased $0.2 million. Sales increases in almost all of our Pet categories were partially offset by a sales decrease of pet health products. The sales decrease of pet health products was due primarily to sales decline in our flea and tick business, which was negatively impacted by the presence of generic fipronil in the marketplace and unfavorable weather.
Garden Products' net sales increased $14.2 million, or 5.8%, to $257.0 million for the three months ended June 25, 2011 from $242.8 million in the comparable fiscal 2010 period. Garden branded product sales increased $20.8 million, partially offset by a decrease of $6.6 million in sales of other manufacturers' products. Sales increased due primarily to a $14.5 million increase in grass seed, an $11.4 million increase in bird feed and a $7.8 million increase of seasonal décor products, partially offset by an $18.1 million decrease in sales of garden chemicals and control products. Grass seed sales increased due primarily to volume increases resulting from product and packaging innovation and marketing investment, and bird feed sales increased due to both price and volume increases. Sales of Garden chemicals and control products, which increased in the second fiscal quarter compared to the same quarter in the prior year, decreased in the third quarter of fiscal 2011 primarily due to unfavorable weather conditions and inventory reduction initiatives initiated late in the third quarter by a number of our major retail customers.
Gross Profit
Gross profit for the three months ended June 25, 2011 decreased $13.4 million, or 8.2%, to $149.4 million from $162.8 million for the three months ended June 26, 2010. Gross profit as a percentage of net sales declined from 35.0% for the three months ended June 25, 2010 to 30.8% for the three months ended June 25, 2011. Gross profit as a percentage of net sales decreased in both segments. Although we have been able to implement price increases throughout the fiscal year, input costs have continued to rise. The continual climb of these inputs has been very challenging and will continue to put pressure on margins in the near term. For example, since October of 2010, market prices of sunflowers are up over 120% and millet over 70%. Corn and milo are up significantly as well. We expect margins to continue to be impacted in the fourth quarter.
Both gross profit and gross margin decreased in Pet Products due primarily to higher prices of key commodity ingredients, such as milo, millet, sunflower and corn and to decreased sales and a change in product mix in our pet health products , and shift away from sales of higher margin flea and tick products towards increased sales of lower margin products.
Both gross profit and gross margin decreased in Garden Products due primarily to higher commodity ingredient prices and the reduced sales of garden chemicals and control products. The higher ingredient prices impacted both bird feed and garden chemicals and control products. The decrease in higher margin garden chemical and control products, which adversely affected our gross margin, occurred very late in the quarter.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2.7 million, or 2.4%, to $112.8 million for the three months ended June 25, 2011 from $110.1 million for the three months ended June 26, 2010. As a percentage of net sales, selling, general and administrative expenses decreased to 23.3% for the three months ended June 25, 2011, compared to 23.7% in the comparable prior year quarter due primarily to the increase in net sales. The increase in selling, general and administrative expenses, discussed further below, was due to increased selling expenses associated with higher sales.
Selling and delivery expense increased $7.8 million, or 12.4%, from $62.9 million for the three months ended June 26, 2010 to $70.7 million for the three months ended June 25, 2011. The increased expense was due primarily to increased brand building activities and increased variable expenses related to the increase in sales.
Facilities expense declined $0.3 million to $2.5 million in the quarter ended June 25, 2011 from $2.8 million for the quarter ended June 26, 2010. The decrease was due primarily to cost savings from warehouse consolidations in our garden segment.
Warehouse and administrative expense decreased $4.8 million to $39.6 million for the quarter ended June 25, 2011 from $44.4 million in the quarter ended June 26, 2010 due primarily to a reduction in performance-based compensation expense and reduced legal and litigation costs.
Net Interest Expense
Net interest expense for both the three months ended June 25, 2011 and for the three months ended June 26, 2010 was approximately $9.8 million. The impact of our higher total debt balance for the three months ended June 25, 2011, as compared to the prior year quarter, was offset by our lower average borrowing rate. Debt outstanding at June 25, 2011 was $450.5 million compared to $400.3 million as of June 26, 2010. Our average borrowing rate for the current quarter was 7.4% compared to 8.4% for the prior year quarter.
Other Income
Other income increased $0.3 million for the quarter ended June 25, 2011. The increase was due primarily to increased earnings from an investment accounted for under the equity method of accounting.
Income Taxes
Our effective income tax benefit rate was 36.4% for the quarter ended June 25, 2011 and 37.0% for the quarter ended June 26, 2010. Our 2011 tax rate benefited primarily from additional tax credits in fiscal 2011.
Net Sales
Net sales for the nine months ended June 25, 2011 increased $75.0 million, or 6.4%, to $1,251.7 million from $1,176.7 million for the nine months ended June 26, 2010. Our branded product sales increased $84.9 million and sales of other manufacturers' products decreased $9.9 million.
Pet Products' net sales increased $12.8 million, or 2.0%, to $639.4 million for the nine months ended June 25, 2011 from $626.6 million in the comparable fiscal 2010 period. Pet branded product sales increased $12.1 million from the prior year period, due primarily to a sales increase of $4.0 million of bird feed products and $4.2 million of aquatic products. The increased sales were due primarily to increased brand building and marketing investment and expanded product distribution. Sales of other manufacturer's products increased $0.7 million.
Garden Products' net sales increased $62.2 million, or 11.3%, to $612.3 million for the nine months ended June 25, 2011 from $550.1 million in the comparable fiscal 2010 period. Garden branded product sales increased $72.8 million due primarily to a $40.3 million sales increase in grass seed, which was supported by increased marketing investment, a $12.7 million increase in bird feed and a $15.5 million increase in other garden supplies partially offset by decreased sales of garden chemicals and control products. Sales of Garden chemicals and control products decreased primarily due to unfavorable weather conditions and inventory reduction initiatives initiated late in the third quarter by a number of our major retail customers combined with the larger sales we experienced in our second fiscal quarter of 2011. Sales of other manufacturer's products decreased $10.6 million.
Gross Profit
Gross profit for the nine months ended June 25, 2011 decreased $16.0 million, or 3.9%, to $395.7 million from $411.7 million for the nine months ended June 26, 2010. Gross profit as a percentage of net sales declined from 35.0% for the nine months ended June 26, 2010 to 31.6% for the nine months ended June 25, 2011. Gross profit as a percentage of net sales decreased in both segments. Gross profit decreased in Pet Products despite increased sales due primarily to higher input prices (including milo, sunflower and corn) which impacted both our wild bird feed business and our ultra- premium pet food, and a product mix change in our higher margin pet health products. Gross profit increased in Garden Products, due to increased sales, but gross margin was impacted by higher input prices, primarily in bird feed and secondarily in garden chemicals and control products. Although we have been able to implement price increases throughout the fiscal year, input costs have continued to rise. The continual climb of these inputs has been very challenging and will continue to put pressure on margins in the near term. For example, since October of 2010, market prices of sunflowers are up over 120% and millet over 70%. Corn and milo are up significantly as well.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $7.9 million, or 2.7%, to $306.0 million for the nine months ended June 25, 2011 from $298.1 million for the nine months ended June 26, 2010. As a percentage of net sales, selling, general and administrative expenses decreased to 24.4% for the nine months ended June 25, 2011, compared to 25.3% in the comparable prior year quarter due to the increase in net sales. The increase in selling, general and administrative expenses, discussed further below, was due to increased selling expenses.
Selling and delivery expense increased $19.4 million, or 12.7%, from $153.0 million for the nine months ended June 26, 2010 to $172.4 million for the nine months ended June 25, 2011. The increased expense was due primarily to increased advertising and marketing program expenditures, including brand building activities and increased variable expenses related to the increase in sales.
Facilities expense declined $0.7 million to $7.3 million in the nine months ended June 25, 2011 from $8.0 million for the nine months ended June 26, 2010. The decrease was due primarily to cost savings from warehouse consolidations in our garden segment.
Warehouse and administrative expense decreased $10.8 million to $126.3 million for the nine months ended June 25, 2011 from $137.1 million in the nine months ended June 26, 2010 due primarily to a reduction in performance-based compensation expense and reduced legal and litigation costs.
Net Interest Expense
Net interest expense for the nine months ended June 25, 2011 increased $3.5 million or 14.1%, to $28.0 million from $24.5 million for the nine months ended June 26, 2010. The increase in interest expense resulted from both higher interest rates and increased borrowings in the current fiscal year, partially offset by increased interest charges in the second fiscal quarter of the prior year due to the expensing of the remaining unamortized deferred charges related to retired debt and the premium paid for the a tender call on our 2013 Notes. In March 2010, we issued $400 million of 8.25% 2018 Notes, tendered for our outstanding 9.125% 2013 Notes and paid the outstanding indebtedness under our senior term loan. As a result of this refinancing, our average borrowing rate for the nine months ended June 25, 2011 increased to 8.0% compared to 6.2% for the prior year period. Debt outstanding on June 25, 2011 was $450.5 million compared to $400.3 million as of June 26, 2010.
Other Income
Other income decreased from $0.4 million for the nine months ended June 26, 2010, to $0.1 million for the nine months ended June 25, 2011. The decrease was due primarily to investments accounted for under the equity method of accounting that generated more income in the fiscal 2010 period.
Income Taxes
Our effective income tax benefit rate was 35.5% for the nine months ended June 25, 2011 and 36.9% for the nine months ended June 26, 2010. Our 2011 tax rate benefited primarily from additional tax credits in fiscal 2011. We expect our effective income tax rate for fiscal 2011 to be similar to the 37% reported for fiscal 2010.
Inflation
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. Historically, in certain fiscal periods, we have been adversely impacted by rising input costs related to domestic inflation, particularly relating to grain and seed prices, fuel prices and the ingredients used in our garden fertilizer and chemicals, and many of our other inputs. Rising costs have made it difficult for us to increase prices to our retail customers at a pace to enable us to maintain margins.
In fiscal 2009, 2010 and fiscal 2011, our business was negatively impacted by low consumer confidence, as well as other macro-economic factors. In fiscal 2011, we are being impacted by rapidly rising raw materials costs. We are continuing to seek selective price increases to mitigate the impact of the increasing raw materials costs.
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 2010, approximately 68% of Garden Products' net sales and 60% 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 internally generated funds, bank borrowings, supplier credit 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.
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 68% 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 retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.
Net cash used in operating activities increased $92.9 million, from $91.3 million of cash provided by operating activities for the nine months ended June 26, 2010, to $1.5 million of cash used in operating activities for the nine months ended June 25, 2011. The increase in cash used by operating activities was due primarily to an increase in working capital, principally accounts receivable and inventory, as we have entered our lawn and garden selling season and from the increased sales in the current year period. Our working capital accounts increased approximately $106 million from fiscal year end 2010, compared to an increase of $5.4 million for the first nine months of fiscal year 2010, due primarily to increased inventory, resulting primarily from higher input costs and the decreased sales of garden chemicals and controls products and increased accounts receivable.
Net cash used in investing activities increased $29.0 million, from $15.6 million for the nine months ended June 26, 2010 to $44.6 million during the nine months ended June 25, 2011. The increase in cash used in investing activities was due to our acquisition of certain assets of a privately-held maker of premium fertilizer for the professional and retail markets for approximately $23 million in cash in our Garden Products business, as well as increases in capital expenditures in the current year as a result of the conversion of our legacy systems to an enterprise-wide information technology platform.
Net cash used by financing activities decreased $29.5 million, from $69.6 million for the nine months ended June 26, 2010, to $34.1 million for the nine months ended June 25, 2011. The decrease in cash used was due primarily to an increase in borrowings under our revolving line of credit of $50 million, partially offset by higher repurchases of our common stock during the nine months ended June 25, 2011. For the nine month period ending June 25, 2011, we repurchased and retired 2.5 million shares of our voting common stock at an aggregate cost of approximately $24.0 million, or approximately $9.58 per share, and 6.2 million shares of our non-voting Class A common stock at an aggregate cost of approximately $60.0 million, or approximately $9.63 per share.
Senior Credit Facility
On June 8, 2011, we amended our $275 million, five-year senior secured revolving credit facility (the "Credit Facility") included in our Amended and Restated Credit Agreement (the "Credit Agreement"). Under the modified terms, the Credit Facility has a borrowing capacity of $375 million, an increase of $100 million, and an extension of maturity date by approximately one year, to June 2016. The Credit Facility bears lower interest rates and commitment fees and requires less interest coverage. We continue to have the option to increase the size of the Credit Facility by an additional $200 million of incremental term loans and/or revolving loans should we exercise our option and one or more lenders are willing to make such increased amounts available to us. There was an outstanding balance of $50.0 million as of June 25, 2011 under the Credit Facility. There were also $5.6 million of letters of credit outstanding. After giving effect to the financial covenants in the Credit Agreement, the remaining potential borrowing capacity was $211.4 million.
Interest on the amended Credit Facility is based, at our option, on a rate equal to the Alternate Base Rate (ABR), which is the greatest of the prime rate, the Federal Funds rate plus 1/2 of 1% or one month LIBOR plus 1%, plus a margin, which fluctuates from 0.75% to 1.75%, or LIBOR plus a margin, which fluctuates from 1.75% to 2.75% and commitment fees that range from 0.30% to 0.50%, determined quarterly based on consolidated total debt to consolidated EBITDA for the most recent trailing 12-month period. As of June 25, 2011, the applicable interest rate on the Credit Facility related to alternate base rate borrowings was 5.0%, and the applicable interest rate related to LIBOR rate borrowings was 2.9%.
The Credit Facility is guaranteed by our material subsidiaries and is secured by our assets, excluding real property but including substantially all of the capital stock of our subsidiaries. The Credit Agreement contains certain financial and other covenants which require us to maintain minimum levels of interest coverage and maximum levels of senior 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 Credit Facility. Under the terms of our Credit Facility, we may make restricted payments, including cash dividends and stock repurchases, in an aggregate amount initially not to exceed $200 million over the life of the Credit Facility, subject to qualifications and baskets as defined in the Credit Agreement. As of June 25, 2011, our Total Leverage Ratio, as defined in the Credit Agreement, was 3.4 to 1.0, and our Senior Secured Leverage Ratio, as defined in the Credit Agreement with a maximum of 2.0 to 1.0, was 0.4 to 1.0. Our minimum Interest Coverage Ratio was reduced to 2.50 times, from 2.75 times as part of the modification of the Credit Facility. As of June 25, 2011, our Interest Coverage ratio was 3.8 times. Apart from the covenants limiting restricted payments and capital expenditures, the Credit Facility does not restrict the use of retained earnings or net income. We were in compliance with all financial covenants as of June 25, 2011.
We recorded a loss on extinguishment of debt of $0.1 million for the period ended June 25, 2011, as part of interest expense, related to the portion of unamortized deferred financing costs for a lender under the existing facility that is not a lender under the modified Credit Facility. We will amortize the remaining $2.4 million of unamortized deferred financing costs related to the . . .
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