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 25, 2016
or
¨
TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-33268
CENTRAL GARDEN & PET COMPANY 
 
 
 
Delaware
 
68-0275553
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer
Identification No.)
1340 Treat Blvd., Suite 600, Walnut Creek, California 94597
(Address of principal executive offices)
(925) 948-4000
(Registrant’s telephone number, including area code)
_________ ______________________________________________________________ 

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    ý  Yes    ¨  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
¨
  
Accelerated filer
 
ý
 
 
 
 
Non-accelerated filer
 
¨
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    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 26, 2016
11,998,472

 
 
Class A Common Stock Outstanding as of July 26, 2016
37,230,889

 
 
Class B Stock Outstanding as of July 26, 2016
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 examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-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 26, 2015, 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;
the recent transition to a new CEO and our dependence upon our key executives;

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risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;
declines in consumer spending during economic downturns;
inflation, deflation and other adverse macro-economic conditions;
supply shortages in small animals and pet birds;
adverse weather conditions;
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 ability to protect our intellectual property rights;
potential environmental liabilities;
risk associated with international sourcing;
litigation and product liability claims;
regulatory issues;
the impact of product recalls;
potential costs and risks associated with actual or anticipated cyber attacks;
the voting power associated with our Class B stock; and
potential dilution from issuance of authorized shares.

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Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements

CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
(Unaudited)
 
 
June 25,
2016
 
June 27,
2015
 
September 26,
2015
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
40,000

 
$
43,841

 
$
47,584

Restricted cash
12,029

 
12,590

 
13,157

Accounts receivable (less allowance for doubtful accounts of $25,429, $18,573 and $19,296)
241,954

 
223,149

 
207,402

Inventories
361,813

 
340,233

 
335,946

Prepaid expenses and other
45,075

 
54,558

 
49,731

Total current assets
700,871

 
674,371

 
653,820

Land, buildings, improvements and equipment—net
159,430

 
162,969

 
162,809

Goodwill
233,011

 
209,089

 
209,089

Other intangible assets—net
95,070

 
83,841

 
75,460

Other assets
28,525

 
25,467

 
30,419

Total
$
1,216,907

 
$
1,155,737

 
$
1,131,597

LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
96,906

 
$
90,423

 
$
88,889

Accrued expenses
102,953

 
110,070

 
87,724

Current portion of long-term debt
530

 
290

 
291

Total current liabilities
200,389

 
200,783

 
176,904

Long-term debt
394,603

 
396,395

 
396,691

Other long-term obligations
63,975

 
47,147

 
51,622

Equity:
 
 
 
 
 
Common stock, $0.01 par value: 11,998,472, 11,908,317, and 11,908,317 shares outstanding at June 25, 2016, June 27, 2015 and September 26, 2015
120

 
119

 
119

Class A common stock, $0.01 par value: 37,197,569, 35,970,174 and 36,462,299 shares outstanding at June 25, 2016, June 27, 2015 and September 26, 2015
371

 
360

 
364

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

 
16

 
16

Additional paid-in capital
390,270

 
388,762

 
388,636

Accumulated earnings
166,112

 
120,356

 
115,987

Accumulated other comprehensive income (loss)
(805
)
 
679

 
164

Total Central Garden & Pet Company shareholders’ equity
556,084

 
510,292

 
505,286

Noncontrolling interest
1,856

 
1,120

 
1,094

Total equity
557,940

 
511,412

 
506,380

Total
$
1,216,907

 
$
1,155,737

 
$
1,131,597

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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Net sales
$
514,544

 
$
459,446

 
$
1,415,605

 
$
1,264,368

Cost of goods sold and occupancy
350,799

 
317,409

 
982,735

 
884,288

Gross profit
163,745

 
142,037

 
432,870

 
380,080

Selling, general and administrative expenses
115,560

 
103,044

 
316,509

 
289,978

Income from operations
48,185

 
38,993

 
116,361

 
90,102

Interest expense
(6,964
)
 
(8,978
)
 
(36,205
)
 
(31,357
)
Interest income
43

 
7

 
74

 
96

Other income (expense)
318

 
585

 
(243
)
 
96

Income before income taxes and noncontrolling interest
41,582

 
30,607

 
79,987

 
58,937

Income tax expense
14,916

 
11,484

 
28,509

 
21,527

Income including noncontrolling interest
26,666

 
19,123

 
51,478

 
37,410

Net income attributable to noncontrolling interest
636

 
323

 
1,353

 
1,070

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

 
$
18,800

 
$
50,125

 
$
36,340

Net income per share attributable to Central Garden & Pet Company:
 
 
 
 
 
 
 
Basic
$
0.53

 
$
0.39

 
$
1.03

 
$
0.75

Diluted
$
0.51

 
$
0.38

 
$
0.99

 
$
0.73

Weighted average shares used in the computation of net income per share:
 
 
 
 
 
 
 
Basic
49,120

 
48,167

 
48,801

 
48,642

Diluted
51,063

 
49,290

 
50,743

 
49,496

See notes to condensed consolidated financial statements.


5



CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
June 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Net income
$
26,666

 
$
19,123

 
$
51,478

 
$
37,410

Other comprehensive income (loss):
 
 
 
 

 

Unrealized loss on securities

 

 

 
(10
)
Reclassification of realized loss on securities included in net income

 

 

 
20

Foreign currency translation
(277
)
 
615

 
(969
)
 
(563
)
Total comprehensive income
26,389

 
19,738

 
50,509

 
36,857

Comprehensive income attributable to noncontrolling interest
636

 
323

 
1,353

 
1,070

Comprehensive income attributable to Central Garden & Pet Company
$
25,753

 
$
19,415

 
$
49,156

 
$
35,787

See notes to condensed consolidated financial statements.


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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
 
 
Nine Months Ended
 
June 25,
2016
 
June 27,
2015
Cash flows from operating activities:
 
 
 
Net income
$
51,478

 
$
37,410

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,286

 
25,076

Amortization of deferred financing costs
1,164

 
2,005

Stock-based compensation
6,069

 
5,970

Excess tax benefits from stock-based awards
(4,726
)
 
(685
)
Deferred income taxes
12,305

 
6,416

Write-off of deferred financing costs
3,337

 
537

Loss on sale of property and equipment
788

 
662

Gain on sale of manufacturing plant
(2,544
)
 

Other
190

 
(51
)
Change in assets and liabilities (excluding businesses acquired):
 
 
 
Accounts receivable
(13,236
)
 
(29,468
)
Inventories
(5,928
)
 
(13,791
)
Prepaid expenses and other assets
6,493

 
(4,824
)
Accounts payable
(8,027
)
 
1,694

Accrued expenses
14,812

 
25,733

Other long-term obligations
(1,878
)
 
(87
)
Net cash provided by operating activities
89,583

 
56,597

Cash flows from investing activities:
 
 
 
Additions to property and equipment
(19,486
)
 
(18,160
)
Payments to acquire companies, net of cash acquired
(68,901
)
 
(16,000
)
Proceeds from the sale of facility
3,899




Change in restricted cash
1,129

 
1,693

Proceeds from short-term investments

 
9,997

Investment in short-term investments

 
(17
)
Other investing activities
(550
)
 
(489
)
Net cash used in investing activities
(83,909
)
 
(22,976
)
Cash flows from financing activities:
 
 
 
Repayments of long-term debt
(400,230
)
 
(50,216
)
Proceeds from issuance of long-term debt
400,000

 

Borrowings under revolving line of credit
419,000

 
312,000

Repayments under revolving line of credit
(419,000
)
 
(312,000
)
Proceeds from issuance of common stock
280

 
2,148

Repurchase of common stock, including shares surrendered for tax withholding
(9,429
)
 
(19,021
)
Distribution to noncontrolling interest
(592
)
 
(1,680
)
Payment of financing costs
(7,560
)
 

Excess tax benefits from stock-based awards
4,726

 
685

Net cash used in financing activities
(12,805
)
 
(68,084
)
Effect of exchange rate changes on cash and cash equivalents
(453
)
 
(372
)
Net decrease in cash and cash equivalents
(7,584
)
 
(34,835
)
Cash and equivalents at beginning of period
47,584

 
78,676

Cash and equivalents at end of period
$
40,000

 
$
43,841

Supplemental information:
 
 
 
Cash paid for interest
$
32,440

 
$
22,470

See notes to condensed consolidated financial statements.

7



CENTRAL GARDEN & PET COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Nine Months Ended June 25, 2016
(Unaudited)
 
1.
Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of June 25, 2016 and June 27, 2015, the condensed consolidated statements of operations for the three and nine months ended June 25, 2016 and June 27, 2015, the condensed consolidated statements of comprehensive income for the three and nine months ended June 25, 2016 and June 27, 2015 and the condensed consolidated statements of cash flows for the nine months ended June 25, 2016 and June 27, 2015 have been prepared by the Company, without audit. In the opinion of management, the interim financial statements include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented.
For the Company’s foreign business in the UK, the local currency is the functional currency. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Deferred taxes are not provided on translation gains and losses because the Company expects earnings of its foreign subsidiary to be permanently reinvested. Transaction gains and losses are included in results of operations. See Note 8, Supplemental Equity Information, for further detail.
Due to the seasonal nature of the Company’s garden business, the results of operations for the three and nine months ended June 25, 2016 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 2015 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 26, 2015 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.
Derivative Instruments
The Company principally uses a combination of purchase orders and various short and long-term supply arrangements in connection with the purchase of raw materials, including certain commodities. The Company may also enter into commodity futures, options and swap contracts to reduce the volatility of price fluctuations of corn, which impacts the cost of raw materials. The Company’s primary objective when entering into these derivative contracts is to achieve greater certainty with regard to the future price of commodities purchased for use in its supply chain. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into derivative contracts for speculative purposes and does not use leveraged instruments.
The Company does not perform the assessments required to achieve hedge accounting for commodity derivative positions. Accordingly, the changes in the values of these derivatives are recorded currently in other income (expense) in its condensed consolidated statements of operations. As of June 25, 2016 and June 27, 2015, the Company had no outstanding derivative instruments.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Discontinued Operations
In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of

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Disposals of Components of an Entity. ASU 2014-08 provides amended guidance for reporting discontinued operations and disclosures of disposals of components. The amended guidance raises the threshold for disposals to qualify as discontinued operations and permits significant continuing involvement and continuing cash flows with the discontinued operation. In addition, the amended guidance requires additional disclosures for discontinued operations and new disclosures for individually material disposal transactions that do not meet the definition of a discontinued operation. The amended guidance became effective for annual periods and interim periods beginning September 27, 2015. The adoption of the applicable sections of this ASC will have an impact on the presentation of any future discontinued operations the Company may have.
Debt Issuance Costs
In April 2015, the FASB issued ASU No. 2015-03 (ASU 2015-03), Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This standard amends the existing guidance to require that debt issuance costs be presented in the balance sheet as a deduction from the carrying amount of the related debt liability instead of as a deferred charge. In August 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-15, Interest – Imputation of Interest (Subtopic 835-30). This ASU provides additional guidance on ASU 2015-03 with respect to line of credit arrangements, whereby specify debt issuance costs as part of line-of-credit arrangements may continue to be deferred and presented as an asset on the balance sheet. Recognition and measurement guidance for debt issuance costs are not affected. The Company adopted the guidance in ASU’s 2015-03 and 2015-15 as of September 27, 2015. See “Change in Accounting Principle” below.
Business Combinations
In September 2015, the FASB issued ASU No. 2015-16 (ASU 2015-16), Simplifying the Accounting for Measurement-Period Adjustments. ASU 2015-16 requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period after an acquisition within the reporting period they are determined. This is a change from the previous requirement that the adjustments be recorded retrospectively. The ASU also requires disclosure of the effect on earnings of changes in depreciation, amortization or other income effects, if any, as a result of the adjustment to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. ASU 2015-16 is effective for annual reporting periods (including interim reporting periods within those periods) beginning after December 15, 2015; early adoption is permitted. The Company has early adopted the guidance prospectively as of September 27, 2015. The adoption of this standard will impact the Company’s presentation of measurement period adjustments for any future business combinations.
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.
In March 2016, the FASB issued ASU 2016-08 (ASU 2016-08), Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). ASU 2016-08 clarifies the implementation guidance on principal versus agent considerations.
In April 2016, the FASB issued ASU 2016-10 (ASU 2016-10), Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. ASU 2016-10 clarifies the implementation guidance on identifying performance obligations. These ASUs apply to all companies that enter into contracts with customers to transfer goods or services.
In May 2016, the FASB issued ASU No. 2016-12 (ASU 2016-12), Revenue from Contracts with Customers (Topic 606) - Narrow-Scope Improvements and Practical Expedients. ASU 2016-12 is intended to clarify two aspects of Topic 606: first, assessing the collectability criterion, options for the presentation of sales and similar taxes, noncash consideration, transition contract modifications, transition contract completion and secondly, technical corrections.
Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016. The guidance permits two implementation approaches, one requiring retrospective application of the new standard with restatement of prior years and one requiring prospective application of the new standard with disclosure of results under old standards. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.

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Leases
In February 2016, the FASB issued ASU 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for the Company in our first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements, and it currently expects that most of its operating lease commitments will be subject to the new standard and recognized as operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02.
Stock Based Compensation
In June 2014, the FASB issued ASU No. 2014-12 (ASU 2014-12), Compensation - Stock Compensation (Topic 718): Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period. ASU 2014-12 requires that a performance target that affects vesting and that could be achieved after the requisite service period should be treated as a performance condition. A reporting entity should apply existing guidance in Topic 718 as it relates to awards with performance conditions that affect vesting to account for such awards. As such, the performance target should not be reflected in estimating the grant-date fair value of the award. ASU 2014-12 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015, or the Company’s first quarter of fiscal 2017. Earlier adoption is permitted. The Company is currently evaluating the impact that the adoption of this standard will have on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09 (ASU 2016-09), Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies the accounting for share-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2016, or the Company's first quarter of fiscal 2018. Early adoption is permitted. The Company is currently evaluating the requirements of ASU 2016-09 and has not yet determined the impact on its consolidated financial statements.
Consolidation
In February 2015, the FASB issued ASU 2015-02 (ASU 2015-02), Amendments to the Consolidation Analysis to ASC Topic 810, Consolidation. ASU 2015-02 modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. ASU 2015-02 is effective for fiscal years that begin after December 15, 2015, or the Company’s first quarter of fiscal 2017. The Company is currently evaluating the impact the adoption of ASU 2015-02 will have on its consolidated financial statements.

Cloud Computing Costs
In April 2015, the FASB issued ASU No. 2015-05 (ASU 2015-05), Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This standard clarifies the circumstances under which a cloud computing customer would account for the arrangement as a license of internal-use software under ASC 350-40. ASU 2015-05 is effective for public entities for annual and interim periods therein beginning after December 15, 2015, or the Company’s first quarter of fiscal 2017. Early adoption is permitted. Entities may adopt the guidance either retrospectively or prospectively to arrangements entered into, or materially modified after the effective date. The Company is currently evaluating the impact the adoption of ASU 2015-05 will have on its consolidated financial statements.
Inventory Measurement
In July 2015, the FASB issued ASU 2015-11 (ASU 2015-11), Simplifying the Measurement of Inventory. Under ASU 2015-11, inventory will be measured at the “lower of cost and net realizable value” and options that currently exist for “market value” will be eliminated. The standard defines net realizable value as the “estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation.” No other changes were made to the current guidance on inventory measurement. ASU 2015-11 is effective for interim and annual periods beginning after December 15, 2016, or the Company’s first quarter of fiscal 2018. Early application is permitted and should be applied prospectively. The Company is currently evaluating the impact the adoption of ASU 2015-11 will have on its consolidated financial statements.

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Balance Sheet Classification of Deferred Taxes.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. This ASU eliminates the current requirement for entities to present deferred tax liabilities and assets as current and noncurrent in a classified statement of financial position and instead requires that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, or the Company's first quarter of fiscal 2018, and interim periods within those annual periods. Earlier application is permitted as of the beginning of an interim or annual reporting period. The Company is currently evaluating the impact the adoption of ASU 2015-17 will have on its consolidated financial statements.
Change in Accounting Principle
Prior to its early adoption of ASU 2015-03, the Company recorded issuance costs associated with its long-term debt as a long-term asset on its consolidated balance sheet. The guidance in ASU 2015-03 requires the Company to present debt issuance costs in the consolidated balance sheet as a direct deduction from the carrying amount of the related debt liability. Changes in accounting principles are to be reported through retrospective application of the new principle to all prior financial statement periods presented. Accordingly, the condensed consolidated balance sheets have been adjusted to reflect the effects of reclassifying debt issuance costs from long-term assets to a direct deduction from the carrying amount of the related debt liability as follows. 
Financial Statement Line Item
 
Previously Reported
September 26, 2015
 
Reclassifications
 
As Adjusted
September 26, 2015
Other assets
 
$
33,576

 
$
(3,157
)
 
$
30,419

Total assets
 
1,134,754

 
(3,157
)
 
1,131,597

Long term debt
 
399,848

 
(3,157
)
 
396,691

Total liabilities and equity
 
1,134,754

 
(3,157
)
 
1,131,597

 
 
 
 
 
 
 
Financial Statement Line Item
 
Previously Reported
June 27, 2015
 
Reclassifications
 
As Adjusted
June 27, 2015
Other assets
 
$
28,951

 
$
(3,484
)
 
$
25,467

Total assets
 
1,159,221

 
(3,484
)
 
1,155,737

Long term debt
 
399,879

 
(3,484
)
 
396,395

Total liabilities and equity
 
1,159,221

 
(3,484
)
 
1,155,737


2.
Fair Value Measurements

ASC 820 establishes a single authoritative definition of fair value, a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 requires financial assets and liabilities to be categorized based on the inputs used to calculate their fair values as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company’s financial instruments include cash and equivalents, short term investments consisting of bank certificates of deposit, accounts receivable and payable, derivative instruments, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of June 25, 2016 (in thousands):
 

11



 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
6,355

 
$
6,355

Total liabilities
 
$
0

 
$
0

 
$
6,355

 
$
6,355

The following table presents 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 27, 2015 (in thousands):
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
4,343

 
$
4,343

Total liabilities
 
$
0

 
$
0

 
$
4,343

 
$
4,343

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 26, 2015:
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
Liabilities:
 
 
 
 
 
 
 
 
Liability for contingent consideration (a)
 
$
0

 
$
0

 
$
3,625

 
$
3,625

Total liabilities
 
$
0

 
$
0

 
$
3,625

 
$
3,625

 

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

The following table provides a summary of the changes in fair value of our Level 3 financial instruments for the periods ended June 25, 2016 and June 27, 2015 (in thousands):
 
 
Amount
Balance as of September 26, 2015
$
3,625

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

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

Balance as of June 25, 2016
$
6,355

 
 
 
Amount
Balance as of September 27, 2014
$
4,414

Changes in the fair value of contingent performance-based payments established at the time of acquisition
(71
)
Balance as of June 27, 2015
$
4,343

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 25, 2016 and June 27, 2015, the Company was not required to measure any significant non-financial assets and liabilities at fair value.

12



Fair Value of Other Financial Instruments
In November 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023 (the “2023 Notes”). The estimated fair value of the Company’s 2023 Notes as of June 25, 2016 was $417.0 million, compared to a carrying value of $394.2 million.
In January 2015, the Company called $50 million aggregate principal amount of the Company’s senior subordinated notes due 2018 (the “2018 Notes”) for redemption on March 1, 2015 at a price of 102.063%. In December 2015, the Company redeemed the remaining $400 million aggregate principal amount of the 2018 Notes at a price of 102.063%. The estimated fair value of the Company’s $400 million principal amount of 2018 Notes as of June 27, 2015 was $406.0 million, compared to a carrying value of $396.2 million. The estimated fair value of the Company’s $400 million aggregate principal amount of 2018 Notes as of September 26, 2015 was $410.5 million, compared to a carrying value of $396.5 million. The estimated fair value is based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.


13



3.
Acquisitions

IMS Trading Corp
On July 31, 2015, the Company purchased substantially all of the assets of IMS Trading Corp. for approximately $23 million. IMS Trading Corp was a manufacturer, importer and distributor of rawhide, natural dog treats and pet products throughout the United States and internationally. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by approximately $1.4 million, which is included in goodwill in our consolidated balance sheet as of June 25, 2016. Financial results for IMS Trading Corp. have been included in the results of operations within the Pet segment since the date of acquisition. This acquisition is expected to complement the Company's existing dog and cat business.
During the second fiscal quarter of 2016, the Company finalized the allocation of the purchase price to the fair value of the tangible and intangible assets acquired. The following table summarizes the preliminary recording of the 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
$
20,458


$
315


$
20,773

Fixed assets
1,670




1,670

Goodwill


1,365


1,365

Other assets
5,356


(5,356
)


Other intangible assets, net


4,510


4,510

Current liabilities
(5,100
)



(5,100
)
Net assets acquired, less cash and cash equivalents
$
22,384


$
834


$
23,218

(1) As previously reported in our Form 10-K for the period ended September 26, 2015 and our Form 10-Q for the period ended December 26, 2015.
Hydro-Organics Wholesale Inc.
On September 30, 2015, the Company purchased Hydro-Organics Wholesale, Inc., an organic fertilizer business, for approximately $7.8 million cash and approximately $2.6 million of estimated contingent future performance-based payments. During the second fiscal quarter of 2016, the Company finalized the allocation of the purchase price to the fair value of the net tangible and intangible assets acquired. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $8.5 million, of which $5.2 million was allocated to identified intangible assets and $3.3 million is included in goodwill in the Company’s condensed consolidated balance sheet as of June 25, 2016. Financial results for Hydro-Organics Wholesale Inc. have been included in the results of operations within the Garden segment since the date of acquisition. This acquisition is expected to complement the Company's existing garden fertilizer business.
DMC
On December 1, 2015, the Company purchased the pet bedding business and certain other assets of National Consumers Outdoors Corp., formerly known as Dallas Manufacturing Company (“DMC”), for approximately $61 million. The purchase price exceeded the estimated fair value of the net tangible and intangible assets acquired by approximately $18.9 million, which is included in goodwill in the Company’s condensed consolidated balance sheet as of June 25, 2016. The Company has not yet finalized the allocation of the purchase price to the fair value of the intangible assets acquired. This acquisition is expected to complement the Company's existing dog and cat business.
Proforma financial information has not been presented as the IMS Trading Corp, Hydro-Organics Wholesale Inc. and DMC acquisitions were not considered individually or collectively material to the Company's overall consolidated financial statements during the periods presented.


14



4.
Inventories, net
Inventories, net of allowance for obsolescence, consist of the following (in thousands):
 
 
 
June 25, 2016
 
June 27, 2015
 
September 26, 2015
Raw materials
 
$
110,095

 
$
98,293

 
$
94,969

Work in progress
 
16,604

 
16,624

 
15,268

Finished goods
 
225,814

 
216,668

 
215,673

Supplies
 
9,300

 
8,648

 
10,036

Total inventories, net
 
$
361,813

 
$
340,233

 
$
335,946

 
5.
Goodwill
The Company accounts for goodwill in accordance with ASC 350, “Intangibles – Goodwill and Other,” and tests goodwill for impairment annually, or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This assessment involves the use of significant accounting judgments and estimates as to future operating results and discount rates. Changes in estimates or use of different assumptions could produce significantly different results. An impairment loss is generally recognized when the carrying amount of the reporting unit’s net assets exceeds the estimated fair value of the reporting unit. The Company uses discounted cash flow analysis to estimate the fair value of our reporting units. The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of its reporting units to the Company’s total market capitalization. Acquisitions finalized by the Company during fiscal 2016 increased goodwill by approximately $23.9 million. See Note 3, Acquisitions and Note 11, Segment Information for more detail.

15



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 25, 2016
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.9

 
$
(11.1
)
 
$

 
$
3.8

Marketing-related intangible assets – nonamortizable
 
63.0

 

 
(24.2
)
 
38.8

Total
 
77.9

 
(11.1
)
 
(24.2
)
 
42.6

Customer-related intangible assets – amortizable
 
62.1

 
(25.8
)
 

 
36.3

Other acquired intangible assets – amortizable
 
20.8

 
(11.2
)
 

 
9.6

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
28.6

 
(11.2
)
 
(1.2
)
 
16.2

Total other intangible assets
 
$
168.6

 
$
(48.1
)
 
$
(25.4
)
 
$
95.1

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
(in millions)
 
 
 
 
June 27, 2015
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.1

 
$
(10.4
)
 
$

 
$
3.7

Marketing-related intangible assets – nonamortizable
 
59.6

 

 
(16.9
)
 
42.7

Total
 
73.7

 
(10.4
)
 
(16.9
)
 
46.4

Customer-related intangible assets – amortizable
 
43.3

 
(21.8
)
 

 
21.5

Other acquired intangible assets – amortizable
 
19.3

 
(10.0
)
 

 
9.3

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
27.1

 
(10.0
)
 
(1.2
)
 
15.9

Total other intangible assets
 
$
144.1

 
$
(42.2
)
 
$
(18.1
)
 
$
83.8

 
 
Gross
 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
 
 
 
 
(in millions)
 
 
 
 
September 26, 2015
 
 
 
 
 
 
 
 
Marketing-related intangible assets – amortizable
 
$
14.1

 
$
(10.4
)
 
$

 
$
3.7

Marketing-related intangible assets – nonamortizable
 
59.6

 

 
(24.2
)
 
35.4

Total
 
73.7

 
(10.4
)
 
(24.2
)
 
39.1

Customer-related intangible assets – amortizable
 
43.3

 
(22.3
)
 

 
21.0

Other acquired intangible assets – amortizable
 
19.3

 
(10.5
)
 

 
8.8

Other acquired intangible assets – nonamortizable
 
7.8

 

 
(1.2
)
 
6.6

Total
 
27.1

 
(10.5
)
 
(1.2
)
 
15.4

Total other intangible assets
 
$
144.1

 
$
(43.2
)
 
$
(25.4
)
 
$
75.5


16



Other acquired intangible assets include contract-based and technology-based intangible assets.
The Company evaluates long-lived assets, including amortizable and indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates indefinite-lived intangible assets on an annual basis. In fiscal 2015, the Company recognized a non-cash $7.3 million impairment charge to certain indefinite-lived intangible assets as a result of increased competition in the marketplace and declining volume of sales. The fair value of the remaining $15.0 million of indefinite-lived intangible assets that were impaired exceeded their carrying value at September 26, 2015.
Other factors indicating the carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in fiscal 2015 or during the nine months ended June 25, 2016, and accordingly, no impairment testing was performed on these assets.
The Company amortizes its acquired intangible assets with definite lives over periods ranging from 1 to 25 years; over weighted average remaining lives of six years for marketing-related intangibles, 12 years for customer-related intangibles and 13 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $2.7 million and $1.4 million for the three month periods ended June 25, 2016 and June 27, 2015, respectively, and $4.9 million and $3.3 million for the nine months ended June 25, 2016 and June 27, 2015, and is classified within operating expenses in the condensed consolidated statements of operations. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $5 million per year from fiscal 2016 through fiscal 2020.

7.
Long-Term Debt
Long-term debt consists of the following:
 
 
 
June 25, 2016
 
June 27, 2015
 
September 26, 2015
 
 
(in thousands)
Senior notes, interest at 6.125%, payable semi-annually, principal due May 2023
 
$
400,000

 
$

 
$

Senior subordinated notes, interest at 8.25%, payable semi-annually, repaid in December 2015
 

 
400,000

 
400,000

Unamortized discount
 

 
(336
)
 
(309
)
Unamortized debt issuance costs
 
(5,834
)
 
(3,484
)
 
(3,157
)
Net carrying value
 
394,166

 
396,180

 
396,534

Asset-based revolving credit facility, interest at LIBOR plus a margin of 1.25% to 1.75% or Base Rate plus a margin of 0.25% to 0.75%, final maturity December 2018
 

 

 

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
 
967

 
505

 
448

Total
 
395,133

 
396,685

 
396,982

Less current portion
 
(530
)
 
(290
)
 
(291
)
Long-term portion
 
$
394,603

 
$
396,395

 
$
396,691

Senior Notes and Redemption of Senior Subordinated Notes
On November 9, 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023. In December 2015, the Company used the net proceeds from the offering, together with available cash, to redeem its $400 million aggregate principal amount of 8.25% senior subordinated notes due March 1, 2018 at a price of 102.063% of the principal amount and to pay fees and expenses related to the offering.
The Company incurred approximately $6.3 million of debt issuance costs in conjunction with these transactions, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs will be amortized over the term of the 2023 Notes.

17



As a result of the Company’s redemption of the 2018 Notes, the Company incurred a call premium payment of $8.3 million, overlapping interest expense for 30 days of approximately $2.7 million and a $3.3 million non-cash charge for the write off of unamortized deferred financing costs and discount related to the 2018 Notes. These amounts are included in interest expense in the condensed consolidated statements of operations.
The 2023 Notes require semiannual interest payments, which commenced on May 15, 2016. The 2023 Notes are unconditionally guaranteed on a senior basis by each of the Company’s existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central’s senior secured revolving credit facility. The 2023 Notes are unsecured senior obligations and are subordinated to all of the Company’s existing and future secured debt, including the Company’s Credit Facility, to the extent of the value of the collateral securing such indebtedness.
The Company may redeem some or all of the 2023 Notes at any time, at its option, prior to November 15, 2018 at the principal amount plus a “make whole” premium. At any time prior to November 15, 2018, the Company may also redeem, at its option, up to 35% of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of 106.125% of the principal amount of the notes. The Company may redeem some or all of the 2023 Notes, at its option, at any time on or after November 15, 2018 for 104.594%, on or after November 15, 2019 for 103.063%, on or after November 15, 2020 for 101.531% and on or after November 15, 2021 for 100%, plus accrued and unpaid interest.
The holders of the 2023 Notes have the right to require the Company to repurchase all or a portion of the 2023 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2023 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all covenants as of June 25, 2016.
Asset-Based Loan Facility Amendment
On April 22, 2016, the Company entered into an amended and restated credit agreement which provides up to a $400 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if the Company exercises the accordion feature set forth therein (collectively, the “Amended Credit Facility”). The Amended Credit Facility matures on April 22, 2021. The Company may borrow, repay and reborrow amounts under the Amended Credit Facility until its maturity date, at which time all amounts outstanding under the Amended Credit Facility must be repaid in full. As of June 25, 2016, there were no borrowings outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $6.0 million outstanding as of June 25, 2016.
The Amended Credit Facility is subject to a borrowing base, calculated using a formula based upon eligible receivables and inventory, minus certain reserves and subject to restrictions. As of June 25, 2016, the borrowing base and remaining borrowing availability was $400.0 million. Borrowings under the Amended Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s consolidated senior leverage ratio. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25% - 1.50% and was 1.25% as of June 25, 2016, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.5% and was 0.25% as of June 25, 2016. As of June 25, 2016, the applicable interest rate related to Base Rate borrowings was 3.75%, and the applicable interest rate related to LIBOR-based borrowings was 1.69%.
The Company incurred approximately $1.2 million of debt issuance costs in conjunction with this transaction, which included underwriter fees, legal and accounting expenses. The debt issuance costs will be amortized over the term of the Amended Credit Facility.
The Amended Credit Facility contains customary covenants, including financial covenants which require the Company to maintain a minimum fixed charge coverage ratio of 1.00 :1.00 upon reaching certain borrowing levels. The Amended Credit Facility is secured by substantially all assets of the Company. The Company was in compliance with all financial covenants under the Amended Credit Facility during the period ended June 25, 2016.

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 three months ended June 25, 2016 and June 27, 2015
 
 
Controlling Interest
 
 
 
 
(in thousands)
 
Common
Stock
 
Class A
Common
Stock
 
Class
B
Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
 
Noncontrolling
Interest
 
Total
Balance September 26, 2015
 
$
119

 
$
364

 
$
16

 
$
388,636

 
$
115,987

 
$
164

 
$
505,286

 
$
1,094

 
$
506,380

Comprehensive income
 
 
 
 
 
 
 
 
 
50,125

 
(969
)
 
49,156

 
1,353

 
50,509

Amortization of share-based awards
 
 
 
 
 
 
 
4,796

 
 
 
 
 
4,796

 
 
 
4,796

Restricted share activity
 
 
 
1

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

 
6

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

 
 
 
 
 
4,722

 
 
 
4,722

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

 
1

Balance June 25, 2016
 
$
120

 
$
371

 
$
16

 
$
390,270

 
$
166,112

 
$
(805
)
 
$
556,084

 
$
1,856

 
$
557,940

 
 
Controlling Interest
 
 
 
 
(in thousands)
 
Common
Stock
 
Class A
Common
Stock
 
Class
B
Stock
 
Additional
Paid In
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
 
Noncontrolling
Interest
 
Total
Balance September 27, 2014
 
$
124

 
$
369

 
$
16

 
$
396,586

 
$
86,396

 
$
1,232

 
$
484,723

 
$
1,730

 
$
486,453

Comprehensive income
 
 
 
 
 
 
 
 
 
36,340

 
(553
)
 
35,787

 
1,070

 
36,857

Amortization of share-based awards
 
 
 
 
 
 
 
4,513

 
 
 
 
 
4,513

 
 
 
4,513

Restricted share activity
 
 
 

 
 
 
(1,200
)
 
 
 
 
 
(1,200
)
 
 
 
(1,200
)
Issuance of common stock, including net share settlement of stock options
 
 
 
3

 
 
 
904

 
 
 
 
 
907

 
 
 
907

Repurchase of common stock
 
(5
)
 
(12
)
 
 
 
(12,726
)
 
(2,380
)
 
 
 
(15,123
)
 
 
 
(15,123
)
Tax benefit on stock option exercise, net of tax deficiency
 
 
 
 
 
 
 
685

 
 
 
 
 
685

 
 
 
685

Distribution to Noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(1,680
)
 
(1,680
)
Balance June 27, 2015
 
$
119

 
$
360

 
$
16

 
$
388,762

 
$
120,356

 
$
679

 
$
510,292

 
$
1,120

 
$
511,412

 
9.
Stock-Based Compensation

The Company recognized share-based compensation expense of $6.1 million and $6.0 million for the nine month periods ended June 25, 2016 and June 27, 2015, respectively, as a component of selling, general and administrative expenses. The tax benefit associated with share-based compensation expense for the nine month periods ended June 25, 2016 and June 27, 2015 was $2.2 million and $2.1 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 25, 2016
 
June 25, 2016
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
     Net income available to common shareholders
 
$
26,030

 
49,120

 
$
0.53


$
50,125

 
48,801

 
$
1.03

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
     Options to purchase common stock
 

 
1,211

 
(0.01
)


 
1,201

 
(0.03
)
     Restricted shares
 

 
732

 
(0.01
)


 
741

 
(0.01
)
Diluted EPS:
 

 

 



 

 

     Net income available to common shareholders
 
$
26,030

 
51,063

 
$
0.51


$
50,125

 
50,743

 
$
0.99

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
Three Months Ended
 
Nine Months Ended
 
 
June 27, 2015
 
June 27, 2015
 
 
Income
 
Shares
 
Per Share
 
Income
 
Shares
 
Per Share
Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
     Net income available to common shareholders
 
$
18,800

 
48,167

 
$
0.39

 
$
36,340

 
48,642

 
$
0.75

Effect of dilutive securities:
 
 
 
 
 
 
 
 
 
 
 
 
     Options to purchase common stock
 

 
538

 

 

 
309

 
(0.01
)
     Restricted shares
 

 
585

 
(0.01
)
 

 
545

 
(0.01
)
Diluted EPS:
 

 

 

 

 

 

     Net income available to common shareholders
 
$
18,800

 
49,290

 
$
0.38

 
$
36,340

 
49,496

 
$
0.73

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Options to purchase 4.5 million shares of common stock at prices ranging from $6.43 to $15.56 per share were outstanding at June 25, 2016, and options to purchase 7.4 million shares of common stock at prices ranging from $6.43 to $15.00 per share were outstanding at June 27, 2015.

For the three month period ended June 25, 2016 all options outstanding were included in the computation of diluted earnings per share. For the three month period ended June 27, 2015, options to purchase 3.2 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 month period ended June 25, 2016 all options outstanding were included in the computation of diluted earnings per share. For the nine month period ended June 27, 2015, options to purchase 4.8 million shares of common stock were outstanding

20



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.


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 25,
2016
 
June 27,
2015
 
June 25,
2016
 
June 27,
2015
Net sales:
 
 
 
 
 
 
 
 
Pet segment
 
$
287,213

 
$
238,126

 
$
811,203

 
$
658,931

Garden segment
 
227,331

 
221,320

 
604,402

 
605,437

Total net sales
 
$
514,544

 
$
459,446

 
$
1,415,605

 
$
1,264,368

Income (loss) from operations:
 
 
 
 
 
 
 
 
Pet segment
 
38,759

 
32,939

 
97,363

 
80,565

Garden segment
 
26,452

 
23,458

 
67,605

 
59,248

Corporate
 
(17,026
)
 
(17,404
)
 
(48,607
)
 
(49,711
)
Total income from operations
 
48,185

 
38,993

 
116,361

 
90,102

Interest expense - net
 
(6,921
)
 
(8,971
)
 
(36,131
)
 
(31,261
)
Other income (expense)
 
318

 
585

 
(243
)
 
96

Income tax expense
 
14,916

 
11,484

 
28,509

 
21,527

Income including noncontrolling interest
 
26,666

 
19,123

 
51,478

 
37,410

Net income attributable to noncontrolling interest
 
636

 
323

 
1,353

 
1,070

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

 
$
18,800

 
$
50,125

 
$
36,340

Depreciation and amortization:
 
 
 
 
 
 
 
 
Pet segment
 
$
6,700

 
3,891

 
$
16,120

 
$
11,710

Garden segment
 
1,542

 
1,465

 
4,586

 
4,514

Corporate
 
2,842

 
2,906

 
8,580

 
8,852

Total depreciation and amortization
 
$
11,084

 
$
8,262

 
$
29,286

 
$
25,076

 
 
 
June 25,
2016
 
June 27,
2015
 
September 26,
2015
Assets:
 
 
 
 
 
 
Pet segment
 
$
523,281

 
$
450,198

 
$
465,171

Garden segment
 
327,768

 
352,147

 
310,981

Corporate
 
365,858

 
353,392

 
355,445

Total assets
 
$
1,216,907

 
$
1,155,737

 
$
1,131,597

Goodwill (included in corporate assets above):
 
 
 
 
 
 
Pet segment
 
$
229,713

 
$
209,089

 
$
209,089

Garden segment
 
3,298

 

 

Total goodwill
 
$
233,011

 
$
209,089

 
$
209,089



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. Certain subsidiaries and operating divisions are not guarantors of the 2023 Notes. Those subsidiaries that are guarantors and co-obligors of the 2023 Notes are as follows:
Farnam Companies, Inc.
Four Paws Products Ltd.
Gulfstream Home & Garden, Inc.
Hydro-Organics Wholesale, Inc.
IMS Trading, LLC
IMS Southern, LLC
Kaytee Products, Incorporated
Matson, LLC
New England Pottery, LLC
Pennington Seed, Inc. (including Gro Tec, Inc. and All-Glass Aquarium Co., Inc.)
Pets International, Ltd.
T.F.H. Publications, Inc.
Wellmark International (including B2E Corporation and B2E Biotech LLC)

In lieu of providing separate audited financial statements for the Guarantor Subsidiaries, the Company has included the accompanying consolidating condensed financial statements based on the 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.
During the second quarter of fiscal 2016, the Company added Hydro-Organics Wholesale, Inc., IMS Trading, LLC and IMS Southern, LLC as guarantors of the 2023 Notes. Fiscal year ended September 26, 2015 financial results previously reflected IMS Trading, LLC and IMS Southern, LLC as part of the Parent. In accordance with Rule 3-10 of the Securities and Exchange Commissions Regulation S-X, financial results presented herein for the fiscal year ended September 26, 2015 have been adjusted to reflect the current Guarantor status.

 

22



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

 
$
28,052

 
$
350,013

 
$
(26,272
)
 
$
514,544

Cost of goods sold and occupancy
 
128,517

 
18,274

 
228,343

 
(24,335
)
 
350,799

Gross profit
 
34,234

 
9,778

 
121,670

 
(1,937
)
 
163,745

Selling, general and administrative expenses
 
36,826

 
5,380

 
75,291

 
(1,937
)
 
115,560

Income (loss) from operations
 
(2,592
)
 
4,398

 
46,379

 

 
48,185

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

 
(6,964
)
Interest income
 
42

 
1

 

 

 
43

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

 

 
318

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

 
46,944

 

 
41,582

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

 
16,881

 

 
14,916

Equity in earnings of affiliates
 
32,075

 

 
2,148

 
(34,223
)
 

Net income including noncontrolling interest
 
26,030

 
2,648

 
32,211

 
(34,223
)
 
26,666

Net income attributable to noncontrolling interest
 

 
636

 

 

 
636

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

 
$
2,012

 
$
32,211

 
$
(34,223
)
 
$
26,030

 
 
CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 
 
 
 
Three Months Ended June 27, 2015
 
 
 
 
(in thousands)
 
 
 
 
Parent
 
Non-
Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net sales
 
$
133,886

 
$
31,291

 
$
319,470

 
$
(25,201
)
 
$
459,446

Cost of goods sold and occupancy
 
104,121

 
22,399

 
214,110

 
(23,221
)
 
317,409

Gross profit
 
29,765

 
8,892

 
105,360

 
(1,980
)
 
142,037

Selling, general and administrative expenses
 
31,223

 
5,461

 
68,340

 
(1,980
)
 
103,044

Income (loss) from operations
 
(1,458
)
 
3,431

 
37,020

 

 
38,993

Interest expense
 
(8,924
)
 
(52
)
 
(2
)
 

 
(8,978
)
Interest income
 
6

 
1

 

 

 
7

Other income
 
318

 

 
267

 

 
585

Income (loss) before taxes and equity in earnings of affiliates
 
(10,058
)
 
3,380

 
37,285

 

 
30,607

Income tax expense (benefit)
 
(3,982
)
 
1,265

 
14,201

 

 
11,484

Equity in earnings of affiliates
 
24,876

 

 
1,780

 
(26,656
)
 

Net income including noncontrolling interest
 
18,800

 
2,115

 
24,864

 
(26,656
)
 
19,123

Net income attributable to noncontrolling interest
 

 
323

 

 

 
323

Net income attributable to Central Garden & Pet Company
 
$
18,800

 
$
1,792

 
$
24,864

 
$
(26,656
)
 
$
18,800



23



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

 
$
73,324

 
$
953,925

 
$
(68,212
)
 
$
1,415,605

Cost of goods sold and occupancy
 
360,745

 
54,319

 
631,251

 
(63,580
)
 
982,735

Gross profit
 
95,823

 
19,005

 
322,674

 
(4,632
)
 
432,870

Selling, general and administrative expenses
 
102,990

 
14,283