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Central Garden & Pet
10-Q 2018-12-29 Quarter: 2018-12-29
10-K 2018-09-29 Annual: 2018-09-29
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-Q 2017-12-30 Quarter: 2017-12-30
10-K 2017-09-30 Annual: 2017-09-30
10-Q 2017-06-24 Quarter: 2017-06-24
10-Q 2017-03-25 Quarter: 2017-03-25
10-Q 2016-12-24 Quarter: 2016-12-24
10-K 2016-09-24 Annual: 2016-09-24
10-Q 2016-06-25 Quarter: 2016-06-25
10-Q 2016-03-26 Quarter: 2016-03-26
10-Q 2015-12-26 Quarter: 2015-12-26
10-K 2015-09-26 Annual: 2015-09-26
10-Q 2015-06-27 Quarter: 2015-06-27
10-Q 2015-03-28 Quarter: 2015-03-28
10-Q 2014-12-27 Quarter: 2014-12-27
10-K 2014-09-27 Annual: 2014-09-27
10-Q 2014-06-28 Quarter: 2014-06-28
10-Q 2014-03-29 Quarter: 2014-03-29
10-Q 2013-12-28 Quarter: 2013-12-28
8-K 2019-02-08 Officers, Shareholder Vote, Regulation FD, Exhibits
8-K 2019-02-06 Earnings, Exhibits
8-K 2018-11-27 Earnings, Exhibits
8-K 2018-11-02 Officers, Exhibits
8-K 2018-08-06 Enter Agreement, Regulation FD, Exhibits
8-K 2018-08-01 Earnings, Exhibits
8-K 2018-05-07 Earnings, Exhibits
8-K 2018-02-12 Officers, Shareholder Vote
8-K 2018-02-07 Earnings, Exhibits
LXRP Lexaria Bioscience 0
OZSC Ozop Surgical 0
DRIO Dariohealth 0
TGE Tallgrass Energy 0
GTIM Good Times Restaurants 0
PHLD Phillips Edison & Company 0
RIVEX Rivex Technology 0
KODK Eastman Kodak 0
JJSF J&J Snack Foods 0
HBKA Highlands Bankshares 0
CENT 2018-12-29
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
EX-31.1 q12019exhibit311.htm
EX-31.2 q12019exhibit312.htm
EX-32.1 q12019exhibit321.htm
EX-32.2 q12019exhibit322.htm

Central Garden & Pet Earnings 2018-12-29

CENT 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2019-q1x10xq.htm 10-Q 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 December 29, 2018
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
centralgardenlogoa05.jpg
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 every Interactive Data File required to be submitted 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 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
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
  
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 January 31, 2019
12,145,135

 
 
Class A Common Stock Outstanding as of January 31, 2019
44,114,166

 
 
Class B Stock Outstanding as of January 31, 2019
1,652,262

 
 



 
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 29, 2018, 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;

2


risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;
fluctuations in energy prices, fuel and related petrochemical costs;
declines in consumer spending during economic downturns;
inflation, deflation and other adverse macro-economic conditions;
supply shortages in pet birds, small animals and fish;
adverse weather conditions;
risks associated with our acquisition strategy;
access to and cost of additional capital;
dependence on a small number of customers for a significant portion of our business;
potential impacts of tariffs or trade war;
consolidation trends in the retail industry;
competition in our industries;
potential goodwill or intangible asset impairment;
continuing implementation of an enterprise resource planning information technology system;
our inability to protect our trademarks and other proprietary 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 potential cyber attacks;
the impact of new accounting regulations and the U.S. Tax Cuts and Jobs Act on the Company's tax rate;
the voting power associated with our Class B stock; and
potential dilution from issuance of authorized shares.


3


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)
 
 
December 29,
2018
 
December 30,
2017
 
September 29,
2018
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
478,737

 
$
283,466

 
$
482,106

Restricted cash
10,921

 
12,419

 
10,899

Accounts receivable (less allowance for doubtful accounts of $18,030, $20,481 and $24,125)
250,223

 
235,075

 
275,908

Inventories
493,745

 
440,421

 
427,823

Prepaid expenses and other
38,398

 
22,519

 
20,562

Total current assets
1,272,024

 
993,900

 
1,217,298

Land, buildings, improvements and equipment—net
211,560

 
179,230

 
217,647

Goodwill
281,177

 
256,275

 
281,177

Other intangible assets—net
148,782

 
113,726

 
152,265

Other assets
37,303

 
74,221

 
38,822

Total
$
1,950,846

 
$
1,617,352

 
$
1,907,209

LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
141,186

 
$
124,583

 
$
110,259

Accrued expenses
108,245

 
100,004

 
102,583

Current portion of long-term debt
117

 
372

 
122

Total current liabilities
249,548

 
224,959

 
212,964

Long-term debt
692,332

 
690,964

 
692,031

Deferred taxes and other long-term obligations
52,482

 
39,478

 
49,380

Equity:
 
 
 
 
 
Common stock, $0.01 par value: 12,145,135, 12,160,023 and 12,145,135 shares outstanding at December 29, 2018, December 30, 2017 and September 29, 2018
121

 
122

 
121

Class A common stock, $0.01 par value: 44,059,803, 38,029,367 and 43,953,265 shares outstanding at December 29, 2018, December 30, 2017 and September 29, 2018
441

 
380

 
439

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

 
16

 
16

Additional paid-in capital
592,451

 
396,702

 
590,168

Accumulated earnings
364,726

 
265,576

 
362,923

Accumulated other comprehensive loss
(1,492
)
 
(907
)
 
(1,218
)
Total Central Garden & Pet Company shareholders’ equity
956,263

 
661,889

 
952,449

Noncontrolling interest
221

 
62

 
385

Total equity
956,484

 
661,951

 
952,834

Total
$
1,950,846

 
$
1,617,352

 
$
1,907,209

See notes to condensed consolidated financial statements.

4


CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
December 29,
2018

December 30,
2017
Net sales
$
461,990

 
$
442,011

Cost of goods sold and occupancy
331,808

 
310,174

Gross profit
130,182

 
131,837

Selling, general and administrative expenses
120,001

 
109,316

Operating income
10,181

 
22,521

Interest expense
(10,614
)
 
(7,405
)
Interest income
2,537

 
187

Other expense
(192
)
 
(3,089
)
Income before income taxes and noncontrolling interest
1,912

 
12,214

Income tax expense (benefit)
273

 
(14,236
)
Income including noncontrolling interest
1,639

 
26,450

Net income (loss) attributable to noncontrolling interest
(164
)
 
203

Net income attributable to Central Garden & Pet Company
$
1,803

 
$
26,247

Net income per share attributable to Central Garden & Pet Company:
 
 
 
Basic
$
0.03

 
$
0.52

Diluted
$
0.03

 
$
0.50

Weighted average shares used in the computation of net income per share:
 
 
 
Basic
56,903

 
50,730

Diluted
58,001

 
52,695

See notes to condensed consolidated financial statements.


5



CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 
Three Months Ended
 
December 29,
2018

December 30,
2017
Income including noncontrolling interest
$
1,639

 
$
26,450

Other comprehensive income (loss):
 
 
 
Foreign currency translation
(274
)
 
44

Total comprehensive income
1,365

 
26,494

Comprehensive income (loss) attributable to noncontrolling interest
(164
)
 
203

Comprehensive income attributable to Central Garden & Pet Company
$
1,529

 
$
26,291

See notes to condensed consolidated financial statements.


6


CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
 
Three Months Ended
 
December 29,
2018
 
December 30,
2017
Cash flows from operating activities:
 
 
 
Net income
$
1,639

 
$
26,450

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
Depreciation and amortization
12,352

 
11,163

Amortization of deferred financing costs
458

 
377

Stock-based compensation
2,832

 
2,680

Deferred income taxes
3,330

 
(15,765
)
(Gain) loss on sale of property and equipment
42

 
(18
)
Other
(492
)
 
820

Change in assets and liabilities (excluding businesses acquired):
 
 
 
Accounts receivable
25,578

 
2,822

Inventories
(66,136
)
 
(58,252
)
Prepaid expenses and other assets
(11,705
)
 
(2,252
)
Accounts payable
32,855

 
23,059

Accrued expenses
5,667

 
(16,546
)
Other long-term obligations
380

 
1,249

Net cash provided (used) by operating activities
6,800

 
(24,213
)
Cash flows from investing activities:
 
 
 
Additions to property and equipment
(7,838
)
 
(8,186
)
Investments
(1,499
)
 
(6,555
)
Other investing activities
(50
)
 
(1,200
)
Net cash used in investing activities
(9,387
)
 
(15,941
)
Cash flows from financing activities:
 
 
 
Repayments of long-term debt
(34
)
 
(7
)
Proceeds from issuance of long-term debt

 
300,000

Borrowings under revolving line of credit

 
23,000

Repayments under revolving line of credit

 
(23,000
)
Repurchase of common stock, including shares surrendered for tax withholding
(547
)
 
(2,768
)
Payment of contingent consideration liability
(54
)
 
(93
)
Distribution to noncontrolling interest

 
(1,597
)
Payment of financing costs

 
(4,558
)
Net cash (used) provided by financing activities
(635
)
 
290,977

Effect of exchange rate changes on cash and cash equivalents
(125
)
 
20

Net increase (decrease) in cash, cash equivalents and restricted cash
(3,347
)
 
250,843

Cash, cash equivalents and restricted cash at beginning of period
493,005

 
45,042

Cash, cash equivalents and restricted cash at end of period
$
489,658

 
$
295,885

Supplemental information:
 
 
 
Cash paid for interest
$
12,917

 
$
12,757

 
 
 
 
See notes to condensed consolidated financial statements.

7



CENTRAL GARDEN & PET COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended December 29, 2018
(Unaudited)
1.
Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of December 29, 2018 and December 30, 2017, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the three months ended December 29, 2018 and December 30, 2017 and the condensed consolidated statements of cash flows for the three months ended December 29, 2018 and December 30, 2017 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.
Due to the seasonal nature of the Company’s garden business, the results of operations for the three months ended December 29, 2018 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 2018 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 29, 2018 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.
Cash, Cash Equivalents and Restricted Cash
The Company considers cash and all highly liquid investments with an original maturity of three months or less at date of purchase to be cash and cash equivalents. 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 following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the condensed consolidated statements of cash flows as of December 29, 2018, December 30, 2017 and September 29, 2018, respectively (in thousands).
 
 
December 29, 2018


December 30, 2017


September 29, 2018

Cash and cash equivalents
 
$
478,737


$
283,466


$
482,106

Restricted cash
 
10,921


12,419


10,899

Total Cash, cash equivalents and restricted cash
 
$
489,658


$
295,885


$
493,005

 
 
 
 
 
 
 

Revenue Recognition

Revenue Recognition and Nature of Products and Services

The Company manufactures, markets and distributes a wide variety of branded, private label and third-party pet and garden products to wholesalers, distributors and retailers, primarily in the United States. The majority of the Company’s revenue is generated from the sale of finished pet and garden products. The Company also recognizes a minor amount of non-product revenue (less than one percent of consolidated net sales) comprising third-party logistics services, merchandising services and royalty income from sales-based licensing arrangements. Product and non-product revenue is recognized when performance obligations under the terms of the contracts with customers are satisfied. The Company recognizes product revenue when control over the finished goods transfers to its customers, which

8


generally occurs upon shipment to, or receipt at, customers’ locations, as determined by the specific terms of the contract. These revenue contracts generally have single performance obligations. Non-product revenue is recognized as the services are provided to the customer in the case of third-party logistics services and merchandising services or as third-party licensee sales occur for royalty income. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to our customers, including applicable discounts, returns, allowances, trade promotion, unsaleable product, consumer coupon redemption and rebates. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.
Key sales terms are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, the Company does not capitalize contract inception costs. Product fulfillment costs are capitalized as a part of inventoriable costs in accordance with US GAAP and our inventory policies. The Company generally does not have unbilled receivables at the end of a period. Deferred revenues are not material and primarily include advance payments for services that have yet to be rendered. The Company does not receive noncash consideration for the sale of goods. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis; therefore, the Company does not have any significant financing components.

Sales Incentives and Other Promotional Programs

The Company routinely offers sales incentives and discounts through various regional and national programs to our customers and consumers. These programs include product discounts or allowances, product rebates, product returns, one-time or ongoing trade-promotion programs with customers and consumer coupon programs that require the Company to estimate and accrue the expected costs of such programs. The costs associated with these activities are accounted for as reductions to the transaction price of the Company’s products and are, therefore, recorded as reductions to gross sales at the time of sale. The Company bases its estimates of incentive costs on historical trend experience with similar programs, actual incentive terms per customer contractual obligations and expected levels of performance of trade promotions, utilizing customer and sales organization inputs. The Company maintains liabilities at the end of each period for the estimated incentive costs incurred but unpaid for these programs. Differences between estimated and actual incentive costs are generally not material and are recognized in earnings in the period such differences are determined. Reserves for product returns, accrued rebates and promotional accruals are included in the condensed consolidated balance sheets as part of accrued expenses, and the value of inventory associated with reserves for sales returns is included within prepaid and other current assets on the condensed consolidated balance sheets.

Practical Expedients

The Company elected the following practical expedients upon its adoption of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (ASC Topic 606).

Significant financing component - The Company elected not to adjust the promised amount of consideration for the effects of a significant financing component as the Company expects, at contract inception, that the period between the transfer of a promised good or service to a customer and when the customer pays for that good or service will be one year or less.
Shipping and handling costs - The company elected to account for shipping and handling activities that occur before the customer has obtained control of a good as fulfillment activities rather than as a promised service.
Measurement of transaction price - The Company has elected to exclude from the measurement of transaction price all taxes assessed by a governmental authority that are both imposed on, and concurrent with, a specific revenue-producing transaction and collected by the Company from a customer for sales taxes.
Income Taxes
On December 22, 2017, the U.S. Government enacted the 2017 Tax Act, which was comprehensive new tax legislation. The SEC Staff issued guidance on income tax accounting for the 2017 Tax Act on December 22, 2017, which allows companies to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. During the first quarter of fiscal 2019, the Company has not made any measurement period adjustments. The Company's accounting for the impact of the 2017 Tax Act has now been completed as of the period ending December 29, 2018.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Revenue Recognition

In May 2014, the Financial Accounting Standards Board ("FASB") ASC Topic 606, which replaces numerous requirements in U.S. GAAP, including industry-specific requirements, and provides companies with a single revenue recognition model for recognizing revenue

9


from contracts with customers. On September 30, 2018, the beginning of the Company’s fiscal year 2019, the Company adopted the requirements of ASC Topic 606 using the modified retrospective method. Upon completing its implementation assessment of Topic ASC 606, the Company concluded that no adjustment was required to the opening balance of retained earnings at the date of initial application. The comparative information has also not been restated and continues to be reported under the accounting standards in effect for those periods. Additional disclosures required by ASC Topic 606 are presented within the Revenue Recognition policy disclosure and in Note 11 Segment Information.
On the Company’s condensed consolidated balance sheets, reserves for customer product returns and return allowances are now included as part of accrued expenses, rather than accounts receivable, net, and the value of inventory associated with reserves for sales returns is included within prepaid and other current assets
Had the Company not adopted the provisions under this ASU, its condensed consolidated balance sheet as of December 29, 2018 would have been presented as follows (in thousands):

 
As Presented December 29, 2018
 
Adjustments
 
Balances without Adoption of ASC 606 December 29, 2018
Current assets
 
 
 
 
 
Receivables, less allowance for doubtful accounts
$
250,223

 
$
(5,786
)
 
$
244,437

Prepaid expenses and other
$
38,398

 
$
(4,096
)
 
$
34,302

Total current assets
$
1,272,024

 
$
(9,882
)
 
$
1,262,142

 
 
 
 
 
 
Current liabilities
 
 
 
 
 
Accrued expenses
$
108,245

 
$
(9,882
)
 
$
98,363

Total current liabilities
$
249,548

 
$
(9,882
)
 
$
239,666

 
 
 
 
 
 
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 Company adopted the provisions of this guidance as of September 30, 2018 on a retrospective basis. The adoption of this guidance did not have a material impact on the Company's condensed 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. The Company adopted the provisions under this ASU on September 30, 2018, on a retrospective basis. This resulted in an increase in beginning of period and end of period cash, cash equivalents and restricted cash of $12.6 million and $12.4 million, respectively, and a decrease of $0.2 million of cash used in investing activities to the condensed consolidated statement of cash flows for the three months ended December 30, 2017.
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 adopted the provisions of this guidance as of September 30, 2018. The adoption of this ASU had no impact on the Company's condensed consolidated financial statements for the period ended December 29, 2018, but may have an impact on accounting for any future acquisitions the Company may have.

Stock-Based Compensation

In May 2017, the FASB issued ASU 2017-09, Compensation - Stock Compensation (Topic 718) Scope of Modification Accounting (Topic 718).  This update amends the scope of modification accounting surrounding share-based payment arrangements as issued in ASU

10


2016-09 by providing guidance on the various types of changes which would trigger modification accounting for share-based payment awards. Adoption of this guidance in the first quarter of fiscal 2019 did not have a material impact on the Company’s condensed consolidated financial statements.

Income Taxes

In October 2016, the FASB issued ASU 2016-16, Accounting for Income Taxes: Intra-Entity Asset Transfers of Assets Other Than Inventory (Topic 740).  ASU 2016-16 amends accounting guidance for intra-entity transfers of assets other than inventory to require the recognition of taxes when the transfer occurs.  The amendment was effective for us September 30, 2018.  A modified retrospective approach is required for transition to the new guidance, with a cumulative-effect adjustment consisting of the net impact from (1) the write-off of any unamortized expense previously deferred and (2) recognition of any previously unrecognized deferred tax assets, net of any valuation allowance.  The new guidance does not include any specific new disclosure requirements.  Adoption of this guidance in the first quarter of fiscal 2019 did not have an impact on the Company’s condensed consolidated financial statements.

Financial Instruments

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The updated guidance enhances the reporting model for financial instruments, which includes amendments to address aspects of recognition, measurement, presentation and disclosure. The guidance requires equity investments, excluding equity method investments or investees that are consolidated, to be measured at fair value with changes in fair value recognized in net income and enhanced disclosures about those investments. The guidance also simplifies the impairment assessments of equity investments without readily determinable fair value. The Company adopted the ASU in the first quarter of fiscal 2019, and the adoption of the new guidance did not have a material impact on the Company’s condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
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. The Company will adopt ASU 2016-02 on September 29, 2019 and expects to elect certain practical expedients permitted under the transition guidance. The Company will elect the optional transition method that allows for a cumulative-effect adjustment in the period of adoption and will not restate prior periods. The Company is implementing a new lease system in connection with the adoption of this standard and is currently in the design phase. The Company currently expects that most of its operating lease commitments will be subject to the new standard and the Company will record material long-term operating lease liabilities and long-term right-of-use assets upon the adoption of ASU 2016-02.
Goodwill and Intangible Assets
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 is 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. Based on the Company's most recent annual goodwill impairment test performed as of July 1, 2018, there were no reporting units for which the carrying amount of the reporting unit exceeded its fair value; therefore, this ASU would not currently have an impact on the Company's condensed consolidated financial statements and related disclosures. However, if upon adoption the carrying amount of a reporting unit exceeds its fair value, the Company would be impacted by the amount of impairment recognized.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted, and is effective for the Company in fiscal 2021. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the effect that ASU 2018-15 will have on its condensed consolidated financial statements and related disclosures.

11


Fair Value Disclosures
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted and is effective for the Company in fiscal 2021. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the effect that ASU 2018-13 will have on its condensed consolidated financial statements and related disclosures.

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 December 29, 2018 (in thousands): 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$

 
$

 
$
7,616

 
$
7,616

Total liabilities
 
$

 
$

 
$
7,616

 
$
7,616

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 December 30, 2017 (in thousands): 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$

 
$

 
$
9,058

 
$
9,058

Total liabilities
 
$

 
$

 
$
9,058

 
$
9,058

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 29, 2018: 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (b)
 
$

 
$

 
$
8,224

 
$
8,224

Total liabilities
 
$

 
$

 
$
8,224

 
$
8,224

 
(a)
The liability for contingent consideration relates to an earn-out for B2E, acquired in December 2012, future performance-based contingent payments for Hydro-Organics Wholesale, Inc., acquired in October 2015 and future performance-based contingent payment for Segrest, Inc., acquired in October 2016. The fair value of the estimated contingent consideration arrangement is determined based

12



on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. This is presented as part of long-term liabilities in the Company's consolidated balance sheets.
(b)
The liability for contingent consideration relates to an earn-out for B2E, acquired in December 2012, future performance-based contingent payments for Hydro-Organics Wholesale, Inc., acquired in October 2015, future performance-based contingent payment for Segrest, Inc., acquired in October 2016, and future performance-based contingent payments for Bell Nursery, acquired in March 2018. The fair value of the estimated contingent consideration arrangement is determined based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. This is presented as part of long-term liabilities in the Company's consolidated balance sheets.
The following table provides a summary of the changes in fair value of the Company's Level 3 financial instruments for the periods ended December 29, 2018 and December 30, 2017 (in thousands):
 
Amount
Balance September 29, 2018
$
8,224

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
(554
)
Performance-based payments
(54
)
Balance December 29, 2018
$
7,616

 
 
 
Amount
Balance September 30, 2017
$
9,343

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
(192
)
Performance-based payments
(93
)
Balance December 30, 2017
$
9,058

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 December 29, 2018 and December 30, 2017, the Company was not required to measure any significant non-financial assets and liabilities at fair value.
Fair Value of Other Financial Instruments
In December 2017, the Company issued $300 million aggregate principal amount of 5.125% senior notes due February 2028 (the "2028 Notes"). The estimated fair value of the Company's 2028 Notes as of December 29, 2018, December 30, 2017 and September 29, 2018 was $273.6 million, $300.8 million and $285.5 million, respectively, compared to a carrying value of $295.7 million, $295.5 million and $295.6 million, respectively.
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 December 29, 2018, December 30, 2017 and September 29, 2018 was $402.0 million, $424.2 million and $414.4 million, respectively, compared to a carrying value of $396.2 million, $395.4 million and $396 million, respectively.


13



3.
Inventories, net
Inventories, net of allowance for obsolescence, consist of the following (in thousands):
 
 
 
December 29, 2018
 
December 30, 2017
 
September 29, 2018
Raw materials
 
$
134,955

 
$
120,710

 
$
117,539

Work in progress
 
34,553

 
13,778

 
35,691

Finished goods
 
306,181

 
291,812

 
263,845

Supplies
 
18,056

 
14,121

 
10,748

Total inventories, net
 
$
493,745

 
$
440,421

 
$
427,823

 
4.
Goodwill
The Company tests goodwill for impairment annually (as of the first day of the fourth fiscal quarter), or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, by first assessing qualitative factors to determine whether it is more likely than not the fair value of the reporting unit is less than its carrying amount. If it is determined that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, it is unnecessary to perform the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the two-step test is performed to identify potential goodwill impairment. Based on certain circumstances, the Company may elect to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test, which compares the fair value of the Company’s reporting units to their related carrying values, including goodwill. If the fair value of the reporting unit is less than its carrying value, the Company performs an additional step to determine the implied fair value of goodwill associated with that reporting unit. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all of its assets and liabilities and then computing the excess of the reporting unit’s fair value over the amounts assigned to the assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment, and, accordingly, the Company recognizes such impairment. The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of its two reporting units to the Company’s total market capitalization. No impairment of goodwill was recorded for the three months ended December 29, 2018 and December 30, 2017.
   

14



5.
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)
 
 
December 29, 2018
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
18.6

 
$
(14.6
)
 
$

 
$
4.0

Marketing-related intangible assets – nonamortizable
 
70.6

 

 
(26.0
)
 
44.6

Total
 
89.2

 
(14.6
)
 
(26.0
)
 
48.6

Customer-related intangible assets – amortizable
 
128.3

 
(45.1
)
 

 
83.2

Other acquired intangible assets – amortizable
 
25.4

 
(15.0
)
 

 
10.4

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
33.2

 
(15.0
)
 
(1.2
)
 
17.0

Total other intangible assets
 
$
250.7

 
$
(74.7
)
 
$
(27.2
)
 
$
148.8

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
 
 
(in millions)
 
 
December 30, 2017
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
16.9

 
$
(13.1
)
 
$

 
$
3.8

Marketing-related intangible assets – nonamortizable
 
62.7

 

 
(26.0
)
 
36.7

Total
 
79.6

 
(13.1
)
 
(26.0
)
 
40.5

Customer-related intangible assets – amortizable
 
91.6

 
(33.9
)
 

 
57.7

Other acquired intangible assets – amortizable
 
22.1

 
(13.2
)
 

 
8.9

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
29.9

 
(13.2
)
 
(1.2
)
 
15.5

Total other intangible assets
 
$
201.1

 
$
(60.2
)
 
$
(27.2
)
 
$
113.7

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
 
 
(in millions)
 
 
September 29, 2018
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
18.6

 
$
(14.2
)
 
$

 
$
4.4

Marketing-related intangible assets – nonamortizable
 
70.6

 

 
(26.0
)
 
44.6

Total
 
89.2

 
(14.2
)
 
(26.0
)
 
49.0

Customer-related intangible assets – amortizable
 
128.3

 
(42.5
)
 

 
85.8

Other acquired intangible assets – amortizable
 
25.4

 
(14.5
)
 

 
10.9

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
33.2

 
(14.5
)
 
(1.2
)
 
17.5

Total other intangible assets
 
$
250.7

 
$
(71.2
)
 
$
(27.2
)
 
$
152.3

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. Factors indicating the carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in fiscal 2018 or during the three months ended December 29, 2018, and accordingly, no impairment testing was performed on these assets.

15



The Company amortizes its acquired intangible assets with definite lives over periods ranging from 3 to 25 years; over weighted average remaining lives of 4 years for marketing-related intangibles, 10 years for customer-related intangibles and 11 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $3.5 million and $2.3 million for the three months ended December 29, 2018 and December 30, 2017 and is classified within selling, general and administrative 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 $10 million per year from fiscal 2019 through fiscal 2023.
.
6.
Long-Term Debt
Long-term debt consists of the following:
 
 
December 29, 2018
 
December 30, 2017
 
September 29, 2018
 
 
(in thousands)
Senior notes, interest at 6.125%, payable semi-annually, principal due November 2023
 
$
400,000

 
$
400,000

 
$
400,000

Senior notes, interest at 5.125%, payable semi-annually, principal due February 2028
 
300,000

 
300,000

 
300,000

Unamortized debt issuance costs
 
(8,108
)
 
(9,161
)
 
(8,425
)
Net carrying value
 
691,892

 
690,839

 
691,575

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

 

 

Other notes payable
 
557

 
497

 
578

Total
 
692,449

 
691,336

 
692,153

Less current portion
 
(117
)
 
(372
)
 
(122
)
Long-term portion
 
$
692,332

 
$
690,964

 
$
692,031

Senior Notes
$300 Million 5.125% Senior Notes
On December 14, 2017, the Company issued $300 million aggregate principal amount of 5.125% senior notes due February 2028 (the "2028 Notes"). The Company will use the net proceeds from the offering to finance future acquisitions and for general corporate purposes.
The Company incurred approximately $4.8 million of debt issuance costs in conjunction with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2028 Notes.
The 2028 Notes require semiannual interest payments on February 1 and August 1, commencing August 1, 2018. The 2028 Notes are unconditionally guaranteed on a senior basis by the Company's existing and future domestic restricted subsidiaries who are borrowers under or guarantors of Central's senior secured revolving credit facility or who guarantee the 2023 Notes.
The Company may redeem some or all of the 2028 Notes at any time, at its option, prior to January 1, 2023 at the principal amount plus a “make whole” premium. At any time prior to January 1, 2021, 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 105.125% of the principal amount of the notes. The Company may redeem some or all of the 2028 Notes, at its option, at any time on or after January 1, 2023 for 102.563%, on or after January 1, 2024 for 101.708%, on or after January 1, 2025 for 100.854%, and on or after January 1, 2026 for 100.0%, plus accrued and unpaid interest.
The holders of the 2028 Notes have the right to require us to repurchase all or a portion of the 2028 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2028 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all financial covenants as of December 29, 2018.

16



$400 Million 6.125% Senior Notes
On November 9, 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023 (the "2023 Notes"). 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 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 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.
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, at any time on or after November 15, 2018 for 104.594%, at any time 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 financial covenants as of December 29, 2018.
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 “Credit Facility”). The Credit Facility matures on April 22, 2021. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. As of December 29, 2018, there were no borrowings outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $3.2 million outstanding as of December 29, 2018.
The 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 December 29, 2018, the borrowing base and remaining borrowing availability was $356.6 million. Borrowings under the 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 December 29, 2018, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.5%, and was 0.25% as of December 29, 2018. As of December 29, 2018, the applicable interest rate related to Base Rate borrowings was 5.8%, and the applicable interest rate related to LIBOR-based borrowings was 3.8%.
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 unamortized debt issuance costs are included in other assets in the condensed consolidated balance sheets and are being amortized over the term of the Credit Facility.
The 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 Credit Facility is secured by substantially all assets of the Company. The Company was in compliance with all financial covenants under the Credit Facility during the quarter ended December 29, 2018.

17



7.
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 three months ended December 29, 2018 and December 30, 2017.
 
 
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 29, 2018
 
$
121

 
$
439

 
$
16

 
$
590,168

 
$
362,923

 
$
(1,218
)
 
$
952,449

 
$
385

 
$
952,834

Comprehensive income
 
 
 
 
 
 
 
 
 
1,803

 
(274
)
 
1,529

 
(164
)
 
1,365

Amortization of share-based awards
 
 
 
 
 
 
 
2,261

 
 
 
 
 
2,261

 
 
 
2,261

Restricted share activity, including net share settlement
 

 
1

 
 
 
(386
)
 
 
 
 
 
(385
)
 
 
 
(385
)
Issuance of common stock, including net share settlement of stock options
 


 
1

 
 
 
408

 
 
 
 
 
409

 
 
 
409

Balance December 29, 2018
 
$
121

 
$
441

 
$
16

 
$
592,451

 
$
364,726

 
$
(1,492
)
 
$
956,263

 
$
221

 
$
956,484


 
 
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 30, 2017
 
$
122

 
$
380

 
$
16

 
$
396,790

 
$
239,329

 
$
(951
)
 
$
635,686

 
$
1,456

 
$
637,142

Comprehensive income
 
 
 
 
 
 
 
 
 
26,247

 
44

 
26,291

 
203

 
26,494

Amortization of share-based awards
 
 
 
 
 
 
 
2,143

 
 
 
 
 
2,143

 
 
 
2,143

Restricted share activity, including net share settlement
 
 
 

 
 
 
(2,397
)
 
 
 
 
 
(2,397
)
 
 
 
(2,397
)
Issuance of common stock, including net share settlement of stock options
 

 

 
 
 
166

 
 
 
 
 
166

 
 
 
166

Distribution to Noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,597
)
 
(1,597
)
Balance December 30, 2017
 
$
122

 
$
380

 
$
16

 
$
396,702

 
$
265,576

 
$
(907
)
 
$
661,889

 
$
62

 
$
661,951

 
8.
Stock-Based Compensation
The Company recognized share-based compensation expense of $2.8 million and $2.7 million for the three months ended December 29, 2018 and December 30, 2017, respectively, as a component of selling, general and administrative expenses. The tax benefit associated with share-based compensation expense for the three months ended December 29, 2018 and December 30, 2017 was $0.7 million and $0.7 million, respectively.
 

18




9.
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 (in thousands except share and per share amounts).
 
 
Three Months Ended
 
 
December 29, 2018
 
 
Income
 
Shares
 
Per Share
Basic EPS:
 
 
 
 
 
 
Net income available to common shareholders
 
$
1,803

 
56,903

 
$
0.03

Effect of dilutive securities:
 
 
 
 
 
 
     Options to purchase common stock
 

 
667

 

     Restricted shares
 

 
431

 

Diluted EPS:
 

 

 

     Net income available to common shareholders
 
$
1,803

 
58,001

 
$
0.03

 
 
 
 
 
 
 
 
 
Three Months Ended
 
 
December 30, 2017
 
 
Income

Shares

Per Share
Basic EPS:






     Net income available to common shareholders

$
26,247


50,730


$
0.52

Effect of dilutive securities:






     Options to purchase common stock



1,147


(0.01
)
     Restricted shares



818


(0.01
)
Diluted EPS:






     Net income available to common shareholders

$
26,247


52,695


$
0.50

 
 
 
 
 
 
 

Options to purchase 2.3 million shares of common stock at prices ranging from $6.43 to $38.10 per share were outstanding at December 29, 2018, and options to purchase 2.4 million shares of common stock at prices ranging from $6.43 to $33.15 per share were outstanding at December 30, 2017.

For the three months ended December 29, 2018, 1.1 million options were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and therefore, the effect of including these options would be antidilutive. For the three months ended December 30, 2017, all options outstanding were included in the computation of diluted earnings per share.


19



10.
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
 
 
December 29,
2018
 
December 30,
2017
Net sales:
 
 
 
 
Pet segment
 
$
340,416

 
$
325,084

Garden segment
 
121,574

 
116,927

Total net sales
 
$
461,990

 
$
442,011

Operating Income
 
 
 
 
Pet segment
 
29,755

 
36,176

Garden segment
 
(4,637
)
 
2,300

Corporate
 
(14,937
)
 
(15,955
)
Total operating income
 
10,181

 
22,521

Interest expense - net
 
(8,077
)
 
(7,218
)
Other expense
 
(192
)
 
(3,089
)
Income tax expense (benefit)
 
273

 
(14,236
)
Income including noncontrolling interest
 
1,639

 
26,450

Net income (loss) attributable to noncontrolling interest
 
(164
)
 
203

Net income attributable to Central Garden & Pet Company
 
$
1,803

 
$
26,247

Depreciation and amortization:
 
 
 
 
Pet segment
 
$
8,056

 
$
7,145

Garden segment
 
2,826

 
1,569

Corporate
 
1,470

 
2,449

Total depreciation and amortization
 
$
12,352

 
$
11,163

 
 
 
December 29,
2018
 
December 30,
2017
 
September 29,
2018
Assets:
 
 
 
 
 
 
Pet segment
 
$
677,647

 
$
620,681

 
$
683,938

Garden segment
 
453,331

 
356,821

 
407,483

Corporate
 
819,868

 
639,850

 
815,788

Total assets
 
$
1,950,846

 
$
1,617,352

 
$
1,907,209

Goodwill (included in corporate assets above):
 
 
 
 
 
 
Pet segment
 
$
268,289

 
$
250,802

 
$
268,289

Garden segment
 
12,888

 
5,473

 
12,888

Total goodwill
 
$
281,177

 
$
256,275

 
$
281,177



20



The tables below present the Company's disaggregated revenues by segment:


 
Three Months Ended December 29, 2018

 
Pet Segment
 
Garden Segment
 
Total

 

 

 

Other pet products
 
$
209.3

 
$

 
$
209.3

Dog and cat products
 
131.1

 

 
131.1

Garden controls and fertilizer products
 

 
24.3

 
24.3

Other garden supplies
 

 
97.3

 
97.3

     Total
 
$
340.4

 
$
121.6

 
$
462.0

 
 
 
 
 
 
 

 
 
Three Months Ended December 30, 2017
 
 
Pet Segment
 
Garden Segment
 
Total
 
 
 
 
 
 
 
Other pet products
 
$
195.1

 
$

 
$
195.1

Dog and cat products
 
130.0

 

 
130.0

Garden controls and fertilizer products
 

 
29.6

 
29.6

Other garden supplies
 

 
87.3

 
87.3

     Total
 
$
325.1

 
$
116.9

 
$
442.0

 
 
 
 
 
 
 

11.
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 and 2028 Notes. Certain subsidiaries and operating divisions are not guarantors of the 2023 Notes and 2028 Notes. Those subsidiaries that are guarantors and co-obligors of the 2023 Notes and 2028 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., NEXGEN Turf Research, LLC 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, Aquatica Tropicals, Inc., Quality Pets, LLC and Midwest Tropicals, LLC)
T.F.H. Publications, Inc.
Wellmark International (including B2E Corporation, B2E Microbials, LLC, B2E Manufacturing, LLC, Four Star Microbial Products, LLC 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.


21



 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
Three Months Ended December 29, 2018
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales

$
173,406


$
23,629


$
279,834


$
(14,879
)

$
461,990

Cost of goods sold and occupancy

136,013


22,003


187,683


(13,891
)

331,808

Gross profit

37,393


1,626


92,151


(988
)

130,182

Selling, general and administrative expenses

43,665


7,351


69,973


(988
)

120,001

Operating income (loss)

(6,272
)

(5,725
)

22,178




10,181

Interest expense

(10,497
)

(114
)

(3
)



(10,614
)
Interest income

2,533


4






2,537

Other (expense) income

37


(216
)

(13
)



(192
)
Income (loss) before taxes and equity in earnings (losses) of affiliates

(14,199
)

(6,051
)

22,162




1,912

Income tax expense (benefit)

(2,088
)

(256
)

2,617




273

Equity in earnings (losses) of affiliates

13,914




(1,112
)

(12,802
)


Net income (loss) including noncontrolling interest

1,803


(5,795
)

18,433


(12,802
)

1,639

Net loss attributable to noncontrolling interest



(164
)





(164
)
Net income (loss) attributable to Central Garden & Pet Company

$
1,803


$
(5,631
)

$
18,433


$
(12,802
)

$
1,803


 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
Three Months Ended December 30, 2017
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales

$
159,061


$
13,743


$
286,424


$
(17,217
)

$
442,011

Cost of goods sold and occupancy

125,479


11,816


189,051


(16,172
)

310,174

Gross profit

33,582


1,927


97,373


(1,045
)

131,837

Selling, general and administrative expenses

36,639


3,905


69,817


(1,045
)

109,316

Operating income (loss)

(3,057
)

(1,978
)

27,556




22,521

Interest expense

(7,385
)

(16
)

(4
)



(7,405
)
Interest income

186


1






187

Other (expense) income

(2,918
)

54


(225
)



(3,089
)
Income (loss) before taxes and equity in earnings (losses) of affiliates

(13,174
)

(1,939
)

27,327




12,214

Income tax expense (benefit)

14,425


1,282


(29,943
)



(14,236
)
Equity in earnings (losses) of affiliates

53,846




(2,900
)

(50,946
)


Net income (loss) including noncontrolling interest

26,247


(3,221
)

54,370


(50,946
)

26,450

Net income attributable to noncontrolling interest



203






203

Net income (loss) attributable to Central Garden & Pet Company

$
26,247


$
(3,424
)

$
54,370


$
(50,946
)

$
26,247



22




 
 
CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended December 29, 2018
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
 
$
1,803

 
$
(5,795
)
 
$
18,433

 
$
(12,802
)
 
$
1,639

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
Foreign currency translation
 
(274
)
 
(129
)
 
(95
)
 
224

 
(274
)
Total comprehensive income (loss)
 
1,529

 
(5,924
)
 
18,338

 
(12,578
)
 
1,365

Comprehensive loss attributable to noncontrolling interests
 

 
(164
)
 

 

 
(164
)
Comprehensive income (loss) attributable to Central Garden & Pet Company
 
$
1,529

 
$
(5,760
)
 
$
18,338

 
$
(12,578
)
 
$
1,529

 
 
CONSOLIDATING CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
 
 
Three Months Ended December 30, 2017
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net income (loss)
 
$
26,247

 
$
(3,221
)
 
$
54,370

 
$
(50,946
)
 
$
26,450

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
Foreign currency translation

44


43


(16
)

(27
)

44

Total comprehensive income (loss)
 
26,291

 
(3,178
)
 
54,354

 
(50,973
)
 
26,494

Comprehensive income attributable to noncontrolling interests
 

 
203

 

 

 
203

Comprehensive income (loss) attributable to Central Garden & Pet Company
 
$
26,291

 
$
(3,381
)
 
$
54,354

 
$
(50,973
)
 
$
26,291




23



 
 
CONSOLIDATING CONDENSED BALANCE SHEET
 
 
December 29, 2018
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
470,049

 
$
6,500

 
$
2,188

 
$

 
$
478,737

Restricted cash
 
10,921

 

 

 

 
10,921

Accounts receivable, net
 
95,399

 
9,736

 
145,088

 

 
250,223

Inventories
 
137,158

 
36,698

 
319,889

 

 
493,745

Prepaid expenses and other
 
16,268

 
1,635

 
20,495

 

 
38,398