Central Garden & Pet Company Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Goodwill

Goodwill

12 Months Ended

Sep. 24, 2016

Goodwill and Intangible Assets Disclosure [Abstract]

Changes in the carrying amount of goodwill for the fiscal years ended September 24, 2016, September 26, 2015 and September 27, 2014 (in thousands):



	Garden Products Segment			Pet Products Segment			Total
Balance as of September 28, 2013
Goodwill	$	213,583		$	401,734		$	615,317
Accumulated impairment losses	(213,583		)	(195,978		)	(409,561		)
	—			205,756			205,756
Additions in fiscal 2014	—			2,477			2,477
Balance as of September 27, 2014
Goodwill	213,583			404,211			617,794
Accumulated impairment losses	(213,583		)	(195,978		)	(409,561		)
	—			208,233			208,233
Additions in fiscal 2015	—			856			856
Balance as of September 26, 2015
Goodwill	213,583			405,067			618,650
Accumulated impairment losses	(213,583		)	(195,978		)	(409,561		)
	—			209,089			209,089
Additions in fiscal 2016	5,473			16,823			22,296
Balance as of September 24, 2016
Goodwill	219,056			421,890			640,946
Accumulated impairment losses	(213,583		)	(195,978		)	(409,561		)
	$	5,473		$	225,912		$	231,385

Additions or reductions to goodwill include acquisitions, purchase price adjustments and adjustments of amounts upon finalization of purchase accounting.

The Company tests goodwill for impairment annually (on 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.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimate of fair value of each of the Company’s reporting units is based on the Company’s projection of revenues, gross margin, operating costs and cash flows considering historical and estimated future results, general economic and market conditions as well as the impact of planned business and operational strategies. The Company bases its fair value estimates on assumptions the Company believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Assumptions critical to the Company’s fair value estimates were: (i) discount rates used in determining the fair value of the reporting units; (ii) estimated future cash flows; and (iii) projected revenue and operating profit growth rates used in the reporting unit models. Actual results may differ from those estimates. The valuations employ present value techniques to measure fair value and consider market factors.

In connection with the Company’s annual goodwill impairment testing performed during fiscal 2016, the Company made a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the fair values of its reporting units under the two-step goodwill impairment test. The Company completed its qualitative assessment of potential goodwill impairment and it was determined that it was more likely than not the fair values of the Company's reporting units were greater than their carrying amounts, and accordingly, no further testing of goodwill was required.

In connection with the Company’s annual goodwill impairment testing performed during fiscal 2015, a qualitative assessment was not performed by the Company and the first step of the goodwill impairment testing indicated that the fair value of the Company’s reporting segments exceeded their carrying value by more than 10%. Accordingly, no further testing of goodwill was required.

In connection with the Company’s annual goodwill impairment testing performed during fiscal 2014, a qualitative assessment was not performed by the Company and the first step of the goodwill impairment testing indicated that the fair value of the Company’s Pet segment reporting units exceeded their carrying value by more than 10%. Accordingly, no further testing of goodwill was required.

Changes in the judgments and estimates underlying the Company’s analysis of goodwill for possible impairment, including expected future cash flows and discount rate, could result in a significantly different estimate of the fair value of the reporting units in the future and could result in additional impairment of goodwill.