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Section 1: 10-Q (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 June 30, 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
394507004_centralgardenlogoa03.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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
 
Common Stock Outstanding as of July 27, 2018
12,145,135

 
 
Class A Common Stock Outstanding as of July 27, 2018
38,400,485

 
 
Class B Stock Outstanding as of July 27, 2018
1,652,262

 
 


Table of Contents

 
PART I. FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
PART II. OTHER INFORMATION
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Form 10-Q includes “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries in which we operate and other information that is not historical information. When used in this Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our future earnings expectations, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-Q are set forth in the Form 10-K for the fiscal year ended September 30, 2017, including the factors described in the section entitled “Item 1A – Risk Factors.” If any of these risks or uncertainties materializes, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in, or imply by, any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances, except as required by law. Presently known risk factors include, but are not limited to, the following factors:
 
seasonality and fluctuations in our operating results and cash flow;
fluctuations in market prices for seeds and grains and other raw materials;
our inability to pass through cost increases in a timely manner;
our dependence upon key executives;

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Table of Contents

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


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Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
 
 
June 30,
2018
 
June 24,
2017
 
September 30,
2017
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
204,388

 
$
14,473

 
$
32,397

Restricted cash
13,978

 
10,999

 
12,645

Accounts receivable (less allowance for doubtful accounts of $22,021, $21,277 and $21,436)
348,781

 
279,504

 
237,868

Inventories
428,007

 
383,449

 
382,101

Prepaid expenses and other
26,735

 
21,558

 
18,045

Total current assets
1,021,889

 
709,983

 
683,056

Land, buildings, improvements and equipment—net
211,817

 
177,784

 
180,913

Goodwill
268,243

 
230,385

 
256,275

Other intangible assets—net
138,610

 
90,004

 
116,067

Other assets
67,846

 
113,185

 
70,595

Total
$
1,708,405

 
$
1,321,341

 
$
1,306,906

LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
108,129

 
$
106,408

 
$
103,283

Accrued expenses
122,897

 
112,091

 
116,549

Current portion of long-term debt
119

 
375

 
375

Total current liabilities
231,145

 
218,874

 
220,207

Long-term debt
691,741

 
435,074

 
395,278

Deferred taxes and other long-term obligations
40,798

 
38,386

 
54,279

Equity:
 
 
 
 
 
Common stock, $0.01 par value: 12,145,135, 12,160,023, and 12,160,023 shares outstanding at June 30, 2018, June 24, 2017 and September 30, 2017
121

 
122

 
122

Class A common stock, $0.01 par value: 38,373,324, 37,933,970 and 38,019,736 shares outstanding at June 30, 2018, June 24, 2017 and September 30, 2017
384

 
379

 
380

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

 
16

 
16

Additional paid-in capital
392,412

 
392,995

 
396,790

Accumulated earnings
352,355

 
235,070

 
239,329

Accumulated other comprehensive loss
(1,153
)
 
(1,487
)
 
(951
)
Total Central Garden & Pet Company shareholders’ equity
744,135

 
627,095

 
635,686

Noncontrolling interest
586

 
1,912

 
1,456

Total equity
744,721

 
629,007

 
637,142

Total
$
1,708,405

 
$
1,321,341

 
$
1,306,906

See notes to condensed consolidated financial statements.

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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2018

June 24,
2017
 
June 30,
2018
 
June 24,
2017
Net sales
$
657,943

 
$
574,592

 
$
1,713,048

 
$
1,564,014

Cost of goods sold and occupancy
455,879

 
391,319

 
1,184,690

 
1,076,534

Gross profit
202,064

 
183,273

 
528,358

 
487,480

Selling, general and administrative expenses
141,245

 
125,340

 
379,232

 
345,749

Operating income
60,819

 
57,933

 
149,126

 
141,731

Interest expense
(10,597
)
 
(7,273
)
 
(28,577
)
 
(20,976
)
Interest income
584

 
53

 
1,464

 
99

Other income (expense)
2,126

 
1,626

 
542

 
(306
)
Income before income taxes and noncontrolling interest
52,932

 
52,339

 
122,555

 
120,548

Income tax expense
11,395

 
19,450

 
8,802

 
44,621

Income including noncontrolling interest
41,537

 
32,889

 
113,753

 
75,927

Net income (loss) attributable to noncontrolling interest
(8
)
 
641

 
727

 
1,358

Net income attributable to Central Garden & Pet Company
$
41,545

 
$
32,248

 
$
113,026

 
$
74,569

Net income per share attributable to Central Garden & Pet Company:
 
 
 
 
 
 
 
Basic
$
0.81

 
$
0.64

 
$
2.22

 
$
1.49

Diluted
$
0.79

 
$
0.62

 
$
2.15

 
$
1.44

Weighted average shares used in the computation of net income per share:
 
 
 
 
 
 
 
Basic
51,134

 
50,507

 
50,938

 
50,084

Diluted
52,575

 
51,825

 
52,670

 
51,769

See notes to condensed consolidated financial statements.


5



CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
June 30,
2018

June 24,
2017
 
June 30,
2018
 
June 24,
2017
Income including noncontrolling interest
$
41,537

 
$
32,889

 
$
113,753

 
$
75,927

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation
(480
)
 
172

 
(202
)
 
(193
)
Total comprehensive income
41,057

 
33,061

 
113,551

 
75,734

Comprehensive income (loss) attributable to noncontrolling interest
(8
)
 
641

 
727

 
1,358

Comprehensive income attributable to Central Garden & Pet Company
$
41,065

 
$
32,420

 
$
112,824

 
$
74,376

See notes to condensed consolidated financial statements.


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Table of Contents

CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
 
Nine Months Ended
 
June 30,
2018
 
June 24,
2017
Cash flows from operating activities:
 
 
 
Net income
$
113,753

 
$
75,927

Adjustments to reconcile net income to net cash used by operating activities:
 
 
 
Depreciation and amortization
34,872

 
31,374

Amortization of deferred financing costs
1,290

 
1,021

Stock-based compensation
8,567

 
8,189

Excess tax benefits from stock-based awards

 
(17,205
)
Deferred income taxes
(13,447
)
 
10,420

(Gain) loss on sale of property and equipment
(18
)
 
96

Gain on sale of facility

 
(2,050
)
Other
2,732

 
1,241

Change in assets and liabilities (excluding businesses acquired):
 
 
 
Accounts receivable
(101,608
)
 
(74,234
)
Inventories
(14,856
)
 
(17,347
)
Prepaid expenses and other assets
(14,290
)
 
11,774

Accounts payable
(1,113
)
 
2,901

Accrued expenses
216

 
10,629

Other long-term obligations
1,664

 
(88
)
Net cash provided by operating activities
17,762

 
42,648

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(27,003
)
 
(37,087
)
Payments to acquire companies, net of cash acquired
(86,777
)
 
(106,821
)
Proceeds from the sale of business, facility and other assets

 
8,301

Change in restricted cash
(1,333
)
 
(89
)
Investments
(8,048
)
 
(11,495
)
Other investing activities
(2,655
)
 
(2,735
)
Net cash used in investing activities
(125,816
)
 
(149,926
)
Cash flows from financing activities:
 
 
 
Repayments of long-term debt
(395
)
 
(456
)
Proceeds from issuance of long-term debt
300,000

 

Borrowings under revolving line of credit
23,000

 
456,000

Repayments under revolving line of credit
(23,000
)
 
(416,000
)
Repurchase of common stock, including shares surrendered for tax withholding
(12,942
)
 
(25,654
)
Payment of contingent consideration liability
(204
)
 
(1,222
)
Distribution to noncontrolling interest
(1,597
)
 
(1,019
)
Payment of financing costs
(4,770
)
 

Excess tax benefits from stock-based awards

 
17,205

Net cash provided by financing activities
280,092

 
28,854

Effect of exchange rate changes on cash and cash equivalents
(47
)
 
(85
)
Net increase (decrease) in cash and cash equivalents
171,991

 
(78,509
)
Cash and equivalents at beginning of period
32,397

 
92,982

Cash and equivalents at end of period
$
204,388

 
$
14,473

Supplemental information:
 
 
 
Cash paid for interest
$
26,297

 
$
27,075

Cash paid for income taxes
$
18,474

 
$
5,414

See notes to condensed consolidated financial statements.

7



CENTRAL GARDEN & PET COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended June 30, 2018
(Unaudited)
1.
Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of June 30, 2018 and June 24, 2017, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the three and nine months ended June 30, 2018 and June 24, 2017 and the condensed consolidated statements of cash flows for the nine months ended June 30, 2018 and June 24, 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 and nine months ended June 30, 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 2017 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 30, 2017 balance sheet presented herein was derived from the audited financial statements.
Noncontrolling Interest
Noncontrolling interest in the Company’s condensed consolidated financial statements represents the 20% interest not owned by Central in a consolidated subsidiary. Since the Company controls this subsidiary, its financial statements are consolidated with those of the Company, and the noncontrolling owner’s 20% share of the subsidiary’s net assets and results of operations is deducted and reported as noncontrolling interest on the consolidated balance sheets and as net income (loss) attributable to noncontrolling interest in the consolidated statements of operations. See Note 8, Supplemental Equity Information, for additional information.
Restricted Cash
Restricted cash includes cash and highly liquid instruments that are used as collateral for stand-alone letter of credit agreements related to normal business transactions. These agreements require the Company to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash the Company has available for other uses. The amount of cash collateral in these segregated accounts was approximately $14.0 million, $11.0 million and $12.6 million as of June 30, 2018, June 24, 2017 and September 30, 2017, respectively, and is reflected in restricted cash on the condensed consolidated balance sheets.
Recent Accounting Pronouncements and U.S. Tax Reform
Accounting Pronouncements Recently Adopted
Stock Based Compensation

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Stock Compensation, which is intended to simplify several aspects of the accounting for share-based payment award transactions. ASU 2016-09 (i) requires all income tax effects of awards to be recognized in the income statement when the awards vest or are settled, (ii) requires classification of excess tax benefits as an operating activity in the statement of cash flows rather than a financing activity, (iii) eliminates the requirement to defer recognition of an excess tax benefit until the benefit is realized through a reduction to taxes payable, (iv) modifies statutory withholding tax requirements and (v) provides for a policy election to account for forfeitures as they occur. The Company adopted ASU 2016-09 on October 1, 2017. As a result of the adoption of ASU 2016-09, the Company now records excess tax benefits currently in its provision for income taxes. Upon adoption, the Company determined it had no previously unrecognized excess tax benefits. Additionally, the Company elected to account for forfeitures as they occur using a modified retrospective transition method, which requires the Company to record a cumulative-effect adjustment to accumulated earnings, and the Company determined that the cumulative impact was immaterial. The Company presents its excess tax benefits as a component of operating cash flows rather than financing cash flows on a prospective basis.

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Inventory Measurement
In July 2015, the FASB issued ASU 2015-11 (ASU 2015-11), Simplifying the Measurement of Inventory. Under ASU 2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The standard defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. The Company adopted ASU 2015-11 on October 1, 2017. The adoption of ASU 2015-11 did not have a material impact on the Company's consolidated financial statements.
Accounting Standards Not Yet Adopted
Revenue Recognition
In May 2014, the FASB issued Accounting Standards Update No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers. This update was issued as Accounting Standards Codification Topic 606. The core principle of this amendment is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB deferred the effective date of ASU 2014-09 for one year. ASU 2014-09 is now effective for the Company in the first quarter of its fiscal year ending September 28, 2019.

The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company expects to adopt under the modified retrospective approach, which recognizes the cumulative effect of adoption as an adjustment to retained earnings at the date of initial application. The Company has made progress on its evaluation of the amended guidance, including identification of revenue streams and customer contract reviews. The Company is applying the five-step model to those contracts and revenue streams to evaluate the quantitative and qualitative impacts the new standard will have on its business and reported revenues. Additionally, the Company is also analyzing the impact of the new standard on its current accounting policies and internal controls.

The majority of the Company's revenue is generated from sales of pet and garden products, which will continue to be recognized when control of the goods is transferred to the customer. The Company generally anticipates having substantially similar performance obligations under the amended guidance as compared with deliverables and units of account currently being recognized. The Company intends to make policy elections within the amended standard that are consistent with its current accounting. The Company does not expect the adoption of this amended standard to have a material impact on its condensed consolidated financial statements. The Company anticipates adopting this amended standard on a modified retrospective basis in its first quarter of fiscal 2019.
Leases
In February 2016, the FASB issued ASU 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for the Company in its first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements, and it currently expects that most of its operating lease commitments will be subject to the new standard and the Company will record material long-term operating lease liabilities and long-term right-of-use assets upon the adoption of ASU 2016-02.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) . The ASU provides additional clarification guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is effective for the Company in the first quarter of its fiscal year ending September 28, 2019. The Company is currently evaluating the impact the adoption of ASU 2016-15 will have on its consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-18). This ASU clarifies the presentation of restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending cash balances on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017, or the Company's first quarter of fiscal 2019. The Company held restricted cash balances of $14.0 million, $11.0 million and $12.6 million as of June 30, 2018, June 24, 2017 and September 30, 2017, respectively. The Company does not anticipate the adoption of ASU 2016-18 will have a material impact on its consolidated financial statements and related disclosures.

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Business Combinations

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

    Goodwill

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance 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 June 25, 2017, 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 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.

Income Taxes

On December 22, 2017, the U.S. Tax Cuts and Jobs Act (the “Tax Reform Act”) was signed into law by the U.S. government. The Tax Reform Act significantly revised the U.S. corporate income tax code by, among other things, lowering the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018. U.S. GAAP requires that the impact of tax legislation be recognized in the period in which the law was enacted.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (“SAB 118”) on December 22, 2017.  This guidance allows registrants a “measurement period,” not to exceed one year from the date of enactment, to complete their accounting for the tax effects of the Tax Reform Act.  SAB 118 further directs that during the measurement period, registrants who are able to make reasonable estimates of the tax effects of the Tax Reform Act should include those amounts in their financial statements as “provisional” amounts.  Registrants should reflect adjustments over subsequent periods as they are able to refine their estimates and complete their accounting for the tax effects of the Tax Reform Act.  The Company has made reasonable estimates and recorded provisional amounts within the meaning of SAB 118.  Any adjustments recorded to the provisional amounts through the first quarter of fiscal 2019 will be included as an adjustment to tax expense. The provisional amounts incorporate assumptions made based upon the Company’s current interpretation of the Tax Reform Act and may change as the Company receives additional clarification and implementation guidance.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118. This ASU adds guidance that answers questions regarding how certain income tax effects from the Tax Reform Act should be applied to companies’ financial statements. The guidance also lists which financial statement disclosures are required under a measurement period approach.

As a result of the Tax Reform Act, the Company recorded a provisional tax benefit of $16.3 million due to the remeasurement of its deferred tax assets and liabilities in the three months ended December 30, 2017. The Company has not made any changes to this provisional tax benefit during the period ended June 30, 2018. This tax benefit represents provisional amounts and the Company’s current best estimates.


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.

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Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company’s financial instruments include cash and equivalents, short term investments consisting of bank certificates of deposit, accounts receivable and payable, derivative instruments, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of June 30, 2018 (in thousands): 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$

 
$

 
$
7,645

 
$
7,645

Total liabilities
 
$

 
$

 
$
7,645

 
$
7,645

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of June 24, 2017 (in thousands): 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$

 
$

 
$
4,095

 
$
4,095

Total liabilities
 
$

 
$

 
$
4,095

 
$
4,095

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

 
$

 
$
9,343

 
$
9,343

Total liabilities
 
$

 
$

 
$
9,343

 
$
9,343

 
(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 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.

11



The following table provides a summary of the changes in fair value of the Company's Level 3 financial instruments for the periods ended June 30, 2018 and June 24, 2017 (in thousands):
 
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
(1,494
)
Performance-based payments
(204
)
Balance June 30, 2018
$
7,645

 
 
 
Amount
Balance September 24, 2016
$
5,113

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

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

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

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company measures certain non-financial assets and liabilities, including long-lived assets, goodwill and intangible assets, at fair value on a non-recurring basis. Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived assets, goodwill and other intangible assets. During the periods ended June 30, 2018 and June 24, 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 June 30, 2018 was $278.7 million compared to a carrying value of $295.5 million.
In November 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023 (the “2023 Notes”). The estimated fair value of the Company’s 2023 Notes as of June 30, 2018, June 24, 2017 and September 30, 2017 was $414.5 million, $430.5 million and $427.9 million, respectively, compared to a carrying value of $395.8 million, $395.0 million and $395.2 million, respectively.


12



3.
Acquisitions
General Pet Supply
On April 2, 2018, the Company purchased all of the business assets of General Pet Supply, a leading Midwestern U.S. supplier of pet food and supplies for a purchase price of approximately $24.5 million. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $14.1 million, which is included in other assets in the Company’s condensed consolidated balance sheet as of June 30, 2018. The Company has not yet finalized the allocation of the purchase price to the fair value of the tangible assets, intangible assets and liabilities acquired. Financial results of General Pet Supply have been included in the results of operations within the Pet segment since the date of acquisition. The acquisition is expected to broaden Central's national pet supplies distribution footprint, expand its food distribution business, and provide the Company with access to the veterinary channel.
Bell Nursery Holdings, LLC
On March 12, 2018, the Company purchased Bell Nursery Holdings, LLC ("Bell"), a leading grower and distributor of live flowers and plants in the mid-Atlantic region of the United States, for a purchase price of approximately $61 million plus contingent consideration of up to $10 million. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $11.6 million, which is included in other assets in the condensed consolidated balance sheet as of June 30, 2018. The Company has not yet finalized the allocation of the purchase price to the fair value of the tangible assets, intangible assets and liabilities acquired. Financial results of Bell have been included in the results of operations within the Garden segment since the date of acquisition. The acquisition is expected to complement the Company's existing garden portfolio.
K&H Manufacturing
On April 28, 2017, the Company purchased K&H Manufacturing ("K&H"), a producer of premium pet supplies and the largest marketer of heated pet products in the country, for a purchase price of approximately $48.0 million. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $41.8 million, of which $29.2 million was allocated to identified intangible assets and approximately $12 million is included in goodwill in the Company’s condensed consolidated balance sheet as of June 30, 2018. Financial results of K&H have been included in the results of operations within the Pet segment since the date of acquisition. The following table summarizes the purchase price and recording of fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments.
In thousands
 
Amounts Previously Recognized as of Acquisition Date (1)
 
Measurement Period Adjustments
 
Amounts Recognized as of Acquisition Date (as Adjusted)
Current assets, net of cash and cash equivalents acquired
 
$
5,439

 
$
613

 
$
6,052

Land, buildings, improvements and equipment - net
 
315

 

 
315

Goodwill
 

 
11,968

 
11,968

Other assets
 
41,781

 
(41,781
)
 

Other intangible assets - net
 

 
29,200

 
29,200

Current liabilities
 
(757
)
 

 
(757
)
Net assets acquired, less cash and cash equivalents
 
$
46,778

 
$

 
$
46,778

(1) As previously reported in the Company's Form 10-Q for the periods ended June 24, 2017 and December 30, 2017, and the Company's Form 10-K for the period ended September 30, 2017.
Proforma financial information has not been presented as the General Pet Supply, Bell and K&H acquisitions were not considered material to the Company's overall consolidated financial statements during the periods presented.


13



4.
Inventories, net
Inventories, net of allowance for obsolescence, consist of the following (in thousands):
 
 
 
June 30, 2018
 
June 24, 2017
 
September 30, 2017
Raw materials
 
$
118,826

 
$
118,097

 
$
116,591

Work in progress
 
33,306

 
16,573

 
16,394

Finished goods
 
263,416

 
243,053

 
241,420

Supplies
 
12,459

 
5,726

 
7,696

Total inventories, net
 
$
428,007

 
$
383,449

 
$
382,101

 
5.
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.
   

14



6.
Other Intangible Assets

The following table summarizes the components of gross and net acquired intangible assets:
 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
 
 
(in millions)
 
 
June 30, 2018
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
16.9

 
$
(13.8
)
 
$

 
$
3.1

Marketing-related intangible assets – nonamortizable
 
70.6

 

 
(26.0
)
 
44.6

Total
 
87.5

 
(13.8
)
 
(26.0
)
 
47.7

Customer-related intangible assets – amortizable
 
115.7

 
(39.7
)
 


 
76.0

Other acquired intangible assets – amortizable
 
22.1

 
(13.8
)
 


 
8.3

Other acquired intangible assets – nonamortizable
 
7.8

 


 
(1.2
)
 
6.6

Total
 
29.9

 
(13.8
)
 
(1.2
)
 
14.9

Total other intangible assets
 
$
233.1

 
$
(67.3
)
 
$
(27.2
)
 
$
138.6

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
 
 
(in millions)
 
 
June 24, 2017
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.9

 
$
(11.9
)
 
$

 
$
3.0

Marketing-related intangible assets – nonamortizable
 
62.7

 

 
(26.0
)
 
36.7

Total
 
77.6

 
(11.9
)
 
(26.0
)
 
39.7

Customer-related intangible assets – amortizable
 
64.3

 
(29.0
)
 

 
35.3

Other acquired intangible assets – amortizable
 
20.8

 
(12.4
)
 

 
8.4

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
28.6

 
(12.4
)
 
(1.2
)
 
15.0

Total other intangible assets
 
$
170.5

 
$
(53.3
)
 
$
(27.2
)
 
$
90.0

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

 
$
(12.7
)
 
$

 
$
4.2

Marketing-related intangible assets – nonamortizable
 
62.7

 

 
(26.0
)
 
36.7

Total
 
79.6

 
(12.7
)
 
(26.0
)
 
40.9

Customer-related intangible assets – amortizable
 
91.6

 
(32.2
)
 

 
59.4

Other acquired intangible assets – amortizable
 
22.1

 
(12.9
)
 

 
9.2

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
29.9

 
(12.9
)
 
(1.2
)
 
15.8

Total other intangible assets
 
$
201.1

 
$
(57.8
)
 
$
(27.2
)
 
$
116.1


15



Other acquired intangible assets include contract-based and technology-based intangible assets.
As part of its acquisition of K&H in the second quarter of fiscal 2017, the Company acquired approximately $7.9 million of indefinite-lived marketing- related intangible assets and $21.3 million of customer-related intangible assets, which will be amortized over a ten year life.
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. Other factors indicating the carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in fiscal 2017 or during the nine months ended June 30, 2018, and accordingly, no impairment testing was performed on these assets.
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 $2.9 million and $1.4 million for the three months ended June 30, 2018 and June 24, 2017, respectively, and $8.7 million and $4.3 million for the nine months ended June 30, 2018 and June 24, 2017, respectively, and is classified within operating expenses in the condensed consolidated statements of operations. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $10 million per year from fiscal 2018 through fiscal 2022.
.
7.
Long-Term Debt
Long-term debt consists of the following:
 
 
June 30, 2018
 
June 24, 2017
 
September 30, 2017
 
 
(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

 

 

Unamortized debt issuance costs
 
(8,741
)
 
(5,039
)
 
(4,840
)
Net carrying value
 
691,259

 
394,961

 
395,160

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

 
40,000

 

Other notes payable
 
601

 
488

 
493

Total
 
691,860

 
435,449

 
395,653

Less current portion
 
(119
)
 
(375
)
 
(375
)
Long-term portion
 
$
691,741

 
$
435,074

 
$
395,278

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

16



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 June 30, 2018.
$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, prior to November 15, 2018 at the principal amount plus a “make whole” premium. At any time prior to November 15, 2018, the Company may also redeem, at its option, up to 35% of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of 106.125% of the principal amount of the notes. The Company may redeem some or all of the 2023 Notes, at its option, at any time on or after November 15, 2018 for 104.594%, on or after November 15, 2019 for 103.063%, on or after November 15, 2020 for 101.531% and on or after November 15, 2021 for 100%, plus accrued and unpaid interest.
The holders of the 2023 Notes have the right to require the Company to repurchase all or a portion of the 2023 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2023 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all financial covenants as of June 30, 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 June 30, 2018, there were no borrowings outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $3.3 million outstanding as of June 30, 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 June 30, 2018, the borrowing base and remaining borrowing availability was $400.0 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 June 30, 2018, and such applicable margin for Base Rate borrowings fluctuates

17



between 0.25%-0.5%, and was 0.25% as of June 30, 2018. As of June 30, 2018, the applicable interest rate related to Base Rate borrowings was 5.3%, and the applicable interest rate related to LIBOR-based borrowings was 3.3%.
The Company incurred approximately $1.2 million of debt issuance costs in conjunction with this transaction, which included underwriter fees, legal and accounting expenses. The debt issuance costs 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 June 30, 2018.

18



8.
Supplemental Equity Information
The following table provides a summary of the changes in the carrying amounts of equity attributable to controlling interest and noncontrolling interest for the six months ended June 30, 2018 and June 24, 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 30, 2017
 
$
122

 
$
380

 
$
16

 
$
396,790

 
$
239,329

 
$
(951
)
 
$
635,686

 
$
1,456

 
$
637,142

Comprehensive income
 
 
 
 
 
 
 
 
 
113,026

 
(202
)
 
112,824

 
727

 
113,551

Amortization of share-based awards
 
 
 
 
 
 
 
6,865

 
 
 
 
 
6,865

 
 
 
6,865

Restricted share activity, including net share settlement
 
(1
)
 
1

 
 
 
(7,135
)
 
 
 
 
 
(7,135
)
 
 
 
(7,135
)
Issuance of common stock, including net share settlement of stock options
 


 
3

 
 
 
(4,108
)
 
 
 
 
 
(4,105
)
 
 
 
(4,105
)
Distribution to Noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,597
)
 
(1,597
)
Balance June 30, 2018
 
$
121

 
$
384

 
$
16

 
$
392,412

 
$
352,355

 
$
(1,153
)
 
$
744,135

 
$
586

 
$
744,721


 
 
Controlling Interest
 
 
 
 
(in thousands)
 
Common
Stock
 
Class A
Common
Stock
 
Class
B
Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
 
Noncontrolling
Interest
 
Total
Balance September 24, 2016
 
$
120

 
$
374

 
$
16

 
$
393,297

 
$
160,501

 
$
(1,294
)
 
$
553,014

 
$
1,573

 
$
554,587

Comprehensive income
 
 
 
 
 
 
 
 
 
74,569

 
(193
)
 
74,376

 
1,358

 
75,734

Amortization of share-based awards
 
 
 
 
 
 
 
6,377

 
 
 
 
 
6,377

 
 
 
6,377

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

 
6

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

 
 
 
 
 
17,170

 
 
 
17,170

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

 
$
379

 
$
16

 
$
392,995

 
$
235,070

 
$
(1,487
)
 
$
627,095

 
$
1,912

 
$
629,007

 
9.
Stock-Based Compensation
The Company recognized share-based compensation expense of $8.6 million and $8.2 million for the nine months ended June 30, 2018 and June 24, 2017, respectively, as a component of selling, general and administrative expenses. The tax benefit associated with share-based compensation expense for the nine months ended June 30, 2018 and June 24, 2017 was $2.4 million and $3.0 million, respectively.
 

19





10.
Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income from continuing operations.
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30, 2018
 
June 30, 2018
 
 
Income
 
Shares
 
Per Share
 
Income

Shares

Per Share
Basic EPS:
 
 
 
 
 
 
 





     Net income available to common shareholders
 
$
41,545

 
51,134

 
$
0.81

 
$
113,026


50,938


$
2.22

Effect of dilutive securities:
 
 
 
 
 
 
 





     Options to purchase common stock
 

 
932

 
(0.01
)
 


1,058


(0.05
)
     Restricted shares
 

 
509

 
(0.01
)
 


674


(0.02
)
Diluted EPS:
 

 

 

 





     Net income available to common shareholders
 
$
41,545

 
52,575

 
$
0.79

 
$
113,026


52,670


$
2.15

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 24, 2017
 
June 24, 2017
 
 
Income

Shares

Per Share
 
Income

Shares

Per Share
Basic EPS:






 





     Net income available to common shareholders

$
32,248


50,507


$
0.64

 
$
74,569


50,084


$
1.49

Effect of dilutive securities:






 





     Options to purchase common stock



810


(0.01
)
 
 

1,080


(0.03
)
     Restricted shares



508


(0.01
)
 
 

605


(0.02
)
Diluted EPS:






 
 




     Net income available to common shareholders

$
32,248


51,825


$
0.62

 
$
74,569


51,769


$
1.44

 
 
 
 
 
 
 
 
 
 
 
 
 

Options to purchase 2.4 million shares of common stock at prices ranging from $6.43 to $38.10 per share were outstanding at June 30, 2018, and options to purchase 2.7 million shares of common stock at prices ranging from $6.43 to $31.76 per share were outstanding at June 24, 2017.

For each of the three month periods ended June 30, 2018 and June 24, 2017, options to purchase 0.6 million shares of common stock were outstanding but were not included in the computation of diluted earnings per share, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.

For the nine months ended June 30, 2018 and June 24, 2017, options to purchase 0.6 million shares of common stock were outstanding but were not included in the computation of diluted earnings per share, because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect would be anti-dilutive.


20



11.
Segment Information

Management has determined that the Company has two operating segments, which are also reportable segments based on the level at which the Chief Operating Decision Maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are Pet segment and Garden segment and are presented in the table below (in thousands).
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
June 30,
2018
 
June 24,
2017
 
June 30,
2018
 
June 24,
2017
Net sales:
 
 
 
 
 
 
 
 
Pet segment
 
$
354,760

 
$
313,437

 
$
1,001,497

 
$
915,876

Garden segment
 
303,183

 
261,155

 
711,551

 
648,138

Total net sales
 
$
657,943

 
$
574,592

 
$
1,713,048

 
$
1,564,014

Operating Income
 
 
 
 
 
 
 
 
Pet segment
 
39,242

 
36,092

 
108,202

 
104,143

Garden segment
 
40,929

 
38,369

 
93,975

 
87,050

Corporate
 
(19,352
)
 
(16,528
)
 
(53,051
)
 
(49,462
)
Total operating income
 
60,819

 
57,933

 
149,126

 
141,731

Interest expense - net
 
(10,013
)
 
(7,220
)
 
(27,113
)
 
(20,877
)
Other income (expense)
 
2,126

 
1,626

 
542

 
(306
)
Income tax expense
 
11,395

 
19,450

 
8,802

 
44,621

Income including noncontrolling interest
 
41,537

 
32,889

 
113,753

 
75,927

Net income (loss) attributable to noncontrolling interest
 
(8
)
 
641

 
727

 
1,358

Net income attributable to Central Garden & Pet Company
 
$
41,545

 
$
32,248

 
$
113,026

 
$
74,569

Depreciation and amortization:
 
 
 
 
 
 
 
 
Pet segment
 
$
7,626

 
6,794

 
$
21,715

 
$
18,798

Garden segment
 
2,789

 
1,651

 
6,065

 
4,686

Corporate
 
2,172

 
2,585

 
7,092

 
7,890

Total depreciation and amortization
 
$
12,587

 
$
11,030

 
$
34,872

 
$
31,374

 
 
 
June 30,
2018
 
June 24,
2017
 
September 30,
2017
Assets:
 
 
 
 
 
 
Pet segment
 
$
687,561

 
$
622,567

 
$
612,337

Garden segment
 
486,603

 
368,365

 
311,026

Corporate
 
534,241

 
330,409

 
383,543

Total assets
 
$
1,708,405

 
$
1,321,341

 
$
1,306,906

Goodwill (included in corporate assets above):
 
 
 
 
 
 
Pet segment
 
$
262,770

 
$
224,912

 
$
250,802

Garden segment
 
5,473

 
5,473

 
5,473

Total goodwill
 
$
268,243

 
$
230,385

 
$
256,275



21



12.
Consolidating Condensed Financial Information of Guarantor Subsidiaries

Certain 100% wholly-owned subsidiaries of the Company (as listed below, collectively the “Guarantor Subsidiaries”) have guaranteed fully and unconditionally, on a joint and several basis, the obligation to pay principal and interest on the Company’s 2023 Notes 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.


 

22



 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
Three Months Ended June 30, 2018
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
208,095

 
$
93,122

 
$
379,059

 
$
(22,333
)
 
$
657,943

Cost of goods sold and occupancy
 
161,192

 
67,308

 
247,559

 
(20,180
)
 
455,879

Gross profit
 
46,903

 
25,814

 
131,500

 
(2,153
)
 
202,064

Selling, general and administrative expenses
 
45,974

 
14,837

 
82,587

 
(2,153
)
 
141,245

Operating income (loss)
 
929

 
10,977

 
48,913

 

 
60,819

Interest expense
 
(10,470
)
 
(125
)
 
(2
)
 


 
(10,597
)
Interest income
 
583

 
1

 

 


 
584

Other (expense) income
 
1,965

 
(394
)
 
555

 


 
2,126

Income (loss) before taxes and equity in earnings (losses) of affiliates
 
(6,993
)
 
10,459

 
49,466

 

 
52,932

Income tax expense (benefit)
 
(2,633
)
 
236

 
13,792

 


 
11,395

Equity in earnings (losses) of affiliates
 
45,905

 

 
261

 
(46,166
)
 

Net income (loss) including noncontrolling interest
 
41,545

 
10,223

 
35,935

 
(46,166
)
 
41,537

Net income attributable to noncontrolling interest
 

 
(8
)
 

 

 
(8
)
Net income (loss) attributable to Central Garden & Pet Company
 
$
41,545

 
$
10,231

 
$
35,935

 
$
(46,166
)
 
$
41,545

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

 
$
29,067

 
$
387,333

 
$
(26,527
)
 
$
574,592

Cost of goods sold and occupancy
 
142,533

 
20,636

 
252,678

 
(24,528
)
 
391,319

Gross profit
 
42,186

 
8,431

 
134,655

 
(1,999
)
 
183,273

Selling, general and administrative expenses
 
39,234

 
5,476

 
82,629

 
(1,999
)
 
125,340

Operating income (loss)
 
2,952

 
2,955

 
52,026

 

 
57,933

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

 
(7,273
)
Interest income
 
53

 

 

 

 
53

Other expense
 
1,064

 
86

 
476

 

 
1,626

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

 
52,496

 

 
52,339

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

 
19,532

 

 
19,450

Equity in earnings (losses) of affiliates
 
34,214

 

 
1,302

 
(35,516
)
 

Net income (loss) including noncontrolling interest
 
32,248

 
1,891

 
34,266

 
(35,516
)
 
32,889

Net income attributable to noncontrolling interest
 

 
641

 

 

 
641

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

 
$
1,250

 
$
34,266

 
$
(35,516
)
 
$
32,248



23



 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
Nine Months Ended June 30, 2018
 
 
(in thousands)
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
562,620

 
$
139,298

 
$
1,077,831

 
$
(66,701
)
 
$
1,713,048

Cost of goods sold and occupancy
 
438,539

 
103,316

 
704,682

 
(61,847
)
 
1,184,690

Gross profit
 
124,081

 
35,982

 
373,149

 
(4,854
)
 
528,358

Selling, general and administrative expenses
 
124,290

 
25,274

 
234,522

 
(4,854
)
 
379,232

Operating income (loss)
 
(209
)
 
10,708

 
138,627

 

 
149,126

Interest expense
 
(28,365
)
 
(203
)
 
(9
)
 

 
(28,577
)
Interest income
 
1,461

 
3

 

 

 
1,464

Other income (expense)
 
155

 
(140
)
 
527

 

 
542

Income (loss) before taxes and equity in earnings of affiliates
 
(26,958
)
 
10,368

 
139,145

 

 
122,555

Income tax expense (benefit)
 
(1,961
)
 
(31
)
 
10,794

 

 
8,802

Equity in earnings of affiliates
 
138,023

 

 
1,202

 
(139,225
)
 

Net income including noncontrolling interest
 
113,026

 
10,399