UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended December 27, 2014
or
For the transition period from to
Commission File Number: 001-33268
CENTRAL GARDEN & PET COMPANY
1340 Treat Blvd., Suite 600, Walnut Creek, California 94597
(Address of principle 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. x 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). x 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):
Indicate by check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Exchange Act). ¨ Yes x No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Common Stock Outstanding as of January 31, 2015
Class A Common Stock Outstanding as of January 31, 2015
Class B Stock Outstanding as of January 31, 2015
Item 1.
Item 2.
Item 3.
Item 4.
PART II. OTHER INFORMATION
Item 1A.
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, projected cost savings, capital expenditures, financing needs, 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 thisForm 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 27, 2014, 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 is 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. Presently known risk factors include, but are not limited to, the following factors:
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
Unaudited
ASSETS
Current assets:
Cash and cash equivalents
Restricted cash
Short term investments
Accounts receivable (less allowance for doubtful accounts of $24,184, $20,547 and $25,212)
Inventories
Prepaid expenses and other
Total current assets
Land, buildings, improvements and equipment—net
Goodwill
Other intangible assets—net
Deferred income taxes and other assets
Total
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable
Accrued expenses
Current portion of long-term debt
Total current liabilities
Long-term debt
Other long-term obligations
Equity:
Common stock, $.01 par value: 12,220,627, 12,246,751 and 12,437,307 shares outstanding at December 27, 2014, December 28, 2013 and September 27, 2014
Class A common stock, $.01 par value: 36,445,726, 35,423,560 and 36,887,311 shares outstanding at December 27, 2014, December 28, 2013 and September 27, 2014
Class B stock, $.01 par value: 1,652,262 shares outstanding
Additional paid-in capital
Accumulated earnings
Accumulated other comprehensive income
Total Central Garden & Pet Company shareholders’ equity
Noncontrolling interest
Total equity
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
Net sales
Cost of goods sold and occupancy
Gross profit
Selling, general and administrative expenses
Income (loss) from operations
Interest expense
Interest income
Other expense
Loss before income taxes and noncontrolling interest
Income tax benefit
Loss including noncontrolling interest
Net income (loss) attributable to noncontrolling interest
Net loss attributable to Central Garden & Pet Company
Net loss per share attributable to Central Garden & Pet Company:
Basic and diluted
Weighted average shares used in the computation of net loss per share:
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Net loss
Other comprehensive income (loss):
Foreign currency translation
Unrealized loss on securities
Total comprehensive loss
Comprehensive income (loss) attributable to noncontrolling interest
Comprehensive loss attributable to Central Garden & Pet Company
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Cash flows from operating activities:
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
Stock-based compensation
Excess tax benefits from stock-based awards
Deferred income taxes
Write-off of deferred financing costs
Loss on sale of property and equipment
Change in assets and liabilities:
Accounts receivable
Prepaid expenses and other assets
Net cash provided by operating activities
Cash flows from investing activities:
Additions to property and equipment
Change in restricted cash
Investment in short term investments
Proceeds from short term investments
Net cash used in investing activities
Cash flows from financing activities:
Repayments of long-term debt
Proceeds from issuance of common stock
Borrowings under revolving line of credit
Repayments under revolving line of credit
Payment of deferred financing costs
Repurchase of common stock
Distribution to noncontrolling interest
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net increase in cash and cash equivalents
Cash and equivalents at beginning of period
Cash and equivalents at end of period
Supplemental information:
Cash paid for interest
Cash paid for income taxes, net of refunds
Non-cash investing activities:
Capital expenditures incurred but not paid
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended December 27, 2014
1. Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of December 27, 2014 and December 28, 2013 , the condensed consolidated statements of operations for the three months ended December 27, 2014 and December 28, 2013 , the condensed consolidated statements of comprehensive income (loss) for the three months ended December 27, 2014 and December 28, 2013 and the condensed consolidated statements of cash flows for the three months ended December 27, 2014 and December 28, 2013 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 month period ended December 27, 2014 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 2014 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 27, 2014 balance sheet presented herein was derived from the audited 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 also enters 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 December 27, 2014 and December 28, 2013, the Company had no outstanding derivative instruments.
Recent Accounting Pronouncements
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 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
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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 the Company during the first quarter of fiscal 2015. The adoption of the applicable sections of this ASC may have an impact on the accounting for any future discontinued operations the Company may have.
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.ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted. 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 adoption of this guidance is not expected to have a significant impact on the Company’s consolidated financial statements.
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 No. 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. Earlier adoption is permitted. The Company is currently evaluating the effect that the adoption of this standard will have on its financial statements.
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, restricted cash used for collateral requirements for stand-alone letter of credit agreements, 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.
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Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of December 27, 2014 (in thousands):
Assets:
Short term investments(a)
Total assets
Liabilities:
Liability for contingent consideration(b)
Total liabilities
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of December 28, 2013:
Certificates of deposit(c)
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 27, 2014:
Short-term investments(a)
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The following table provides a summary of changes in fair value of our Level 3 financial instruments for the period ended December 27, 2014 and December 28, 2013 (in thousands):
Balance as of September 27, 2014
Changes in the fair value of contingent performance-based payments established at the time of acquisition
Balance as of December 27, 2014
Balance as of September 28, 2013
Balance as of December 28, 2013
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company measures certain non-financial assets and liabilities, including long-lived assets, goodwill and intangible assets, at fair value on a non-recurring basis. Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived assets, goodwill and other intangible assets. During the periods ended December 27, 2014 and December 28, 2013, the Company was not required to measure any significant non-financial assets and liabilities at fair value.
Fair Value of Other Financial Instruments
The estimated fair value of the Company’s $450.0 million 8.25% senior subordinated notes due 2018 as of December 27, 2014, December 28, 2013 and September 27, 2014, was $461.9 million, $434.3 million and $459.5 million, respectively, compared to a carrying value of $449.6 million, $449.4 million and $449.5 million, respectively. The estimated fair value is based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.
3. Acquisitions
Envincio
On April 1, 2014, the Company purchased certain assets of Envincio LLC, including brands, EPA registrations, inventory and trade receivables, for approximately $20.3 million. The purchase price exceeded the fair value of the net tangible and intangible assets acquired by approximately $2.5 million, which is recorded in goodwill. The operating results of this acquisition did not have a material impact on the Company’s consolidated financial statements. Financial results for Envincio have been included in the results of operations within the Pet segment since the date of acquisition. This acquisition is expected to enable the Company to be a key supplier and product innovator in the growing natural insecticides product market, often characterized as EPA-exempt products, and expand its offerings in traditional pesticides.
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)
Current assets, net of cash and cash equivalents acquired
Fixed assets
Intangible assets
Current liabilities
Net assets acquired, less cash and cash equivalents
As of December 27, 2014, the fair values of the assets acquired and liabilities assumed related to this acquisition had not been
finalized. Therefore, the values presented above are subject to change as the Company finalizes its fair value assessments during the measurement period.
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4. Inventories, net
Inventories, net of allowance for obsolescence, consist of the following (in thousands):
Raw materials
Work in progress
Finished goods
Supplies
Total inventories, net
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.
6. Other Intangible Assets
The following table summarizes the components of gross and net acquired intangible assets:
December 27, 2014
Marketing-related intangible assets—amortizable
Marketing-related intangible assets—nonamortizable
Customer-related intangible assets—amortizable
Other acquired intangible assets—amortizable
Other acquired intangible assets—nonamortizable
Total other intangible assets
December 28, 2013
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September 27, 2014
Other intangible assets acquired 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 2014, the Company tested its indefinite-lived intangible assets and no impairment was indicated. Other factors indicating the carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in fiscal 2014 or during the three months ended December 27, 2014, and accordingly, no impairment testing was performed on these assets.
The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 1 to 25 years; over weighted average remaining lives of eight years for marketing-related intangibles, 15 years for customer-related intangibles and 14 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $0.9 million and $1.0 million for the three months ended December 27, 2014 and December 28, 2013, 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 $4 million to $5 million per year from fiscal 2015 through fiscal 2019.
7. Long-Term Debt
Long-term debt consists of the following:
Senior subordinated notes, net of unamortized discount(1), interest at 8.25%, payable semi-annually, principal due March 2018
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
Other notes payable
Less current portion
Long-term portion
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Senior Subordinated Notes
On March 8, 2010, the Company issued $400 million aggregate principal amount of 8.25% senior subordinated notes due March 1, 2018 (the “2018 Notes”). On February 13, 2012, the Company issued an additional $50 million aggregate principal amount of its 2018 Notes at a price of 98.501%, plus accrued interest from September 1, 2011, in a private placement. The Company used the net proceeds from the offering to pay a portion of the outstanding balance under its prior revolving credit facility.
The 2018 Notes require semiannual interest payments, which commenced on September 1, 2010. The 2018 Notes are unsecured senior subordinated obligations and are subordinated to all of the Company’s existing and future senior debt, including the Company’s Credit Facility. The obligations under the 2018 Notes are fully and unconditionally guaranteed on a senior subordinated basis by each of the Company’s existing and future domestic restricted subsidiaries with certain exceptions. The guarantees are general unsecured senior subordinated obligations of the guarantors and are subordinated to all existing and future senior debt of the guarantors.
The Company may redeem some or all of the 2018 Notes at any time before March 1, 2015 for 104.125%, on or after March 1, 2015 for 102.063% and on or after March 1, 2016 for 100%, plus accrued and unpaid interest. The holders of the 2018 Notes have the right to require the Company to repurchase all or a portion of the 2018 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.
In January 2015, the Company called $50 million aggregate principal amount of the 2018 Notes for redemption on March 1, 2015 at a price of 102.063%. In conjunction with this transaction, the Company expects to recognize a charge of approximately $1.5 million in its second fiscal quarter related to the payment of the call premium and the write-off of unamortized financing costs. Accordingly, the Company has reclassified the $50 million expected to be redeemed to current portion of long-term debt in its condensed consolidated balance sheet for the period ended December 27, 2014.
The 2018 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 in the 2018 Notes indenture as of December 27, 2014.
Asset Backed Loan Facility
On December 5, 2013, the Company entered into a credit agreement which provides up to a $390 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 December 5, 2018 and replaced the Company’s prior revolving credit facility. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. As of December 27, 2014, there were no borrowings or letters of credit outstanding under the Credit Facility. There were other letters of credit of $12.6 million outstanding as of December 27, 2014.
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. The borrowing availability as of December 27, 2014 was $293.6 million. Borrowings under the Credit Facility bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the SunTrust prime rate, (b) the Federal Funds Rate plus 0.5% and (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s total outstanding borrowings. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.75% (and was 1.25% at December 27, 2014) and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.75% (and was 0.25% at December 27, 2014). As of December 27, 2014, the applicable interest rate related to Base Rate borrowings was 3.5%, and the applicable interest rate related to LIBOR-based borrowings was 1.4%.
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 covenants under the Credit Facility during the period ended December 27, 2014.
The Company incurred approximately $3.1 million of costs in conjunction with this transaction, which included banking fees and legal expenses. These costs are being amortized over the term of the Credit Facility.
The Company recorded a non-cash charge of $1.7 million for the three month period ended December 28, 2013 as part of interest expense, related to the write-off of unamortized deferred financing costs under the prior revolving credit facility.
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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 December 27, 2014 and December 28, 2013:
Balance September 27, 2014
Comprehensive loss
Stock based compensation
Restricted share activity
Issuance of common stock
Tax benefit on stock option exercise
Distribution to Noncontrolling interest
Other
Balance December 27, 2014
Balance September 28, 2013
Balance December 28, 2013
9. Stock-Based Compensation
The Company recognized share-based compensation expense of $1.6 million and $1.8 million for the three month periods ended December 27, 2014 and December 28, 2013, respectively, as a component of selling, general and administrative expenses. The tax benefit associated with share-based compensation expense for the three month periods ended December 27, 2014 and December 28, 2013 was $0.6 million and $0.7 million, respectively.
10. Earnings Per Share
The potential effects of stock awards were excluded from the diluted earnings per share calculation for the three month periods ended December 27, 2014 and December 28, 2013 because their inclusion in a net loss period would be anti-dilutive to the earnings per share calculation.
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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).
Net sales:
Pet segment
Garden segment
Total net sales
Income (loss) from operations:
Corporate
Total income (loss) from operations
Interest expense—net
Depreciation and amortization:
Total depreciation and amortization
Goodwill (included in corporate assets above):
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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 2018 Notes. Certain subsidiaries and operating divisions are not guarantors of the Notes. Those subsidiaries that are guarantors and co-obligors of the Notes are as follows:
Farnam Companies, Inc.
Four Paws Products Ltd.
Gulfstream Home & Garden, Inc.
Kaytee Products, Inc.
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.
Income (loss) before taxes and equity in earnings (loss) of affiliates
Income tax expense (benefit)
Equity in earnings (loss) of affiliates
Net income (loss) including noncontrolling interest
Net income attributable to noncontrolling interest
Net income (loss) attributable to Central Garden & Pet Company
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Income (loss) before taxes and equity in loss of affiliates
Equity in loss of affiliates
Net loss attributable to noncontrolling interest
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Net income (loss)
Other comprehensive loss:
Total comprehensive income (loss)
Comprehensive income attributable to noncontrolling interests
Comprehensive income (loss) attributable to Central Garden & Pet Company
Other comprehensive income:
Comprehensive loss attributable to noncontrolling interests
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Accounts receivable, net
Land, buildings, improvements and equipment, net
Other long term assets
Intercompany receivable
Investment in subsidiaries
Intercompany payable
Losses in excess of investment in subsidiaries
Central Garden & Pet shareholders’ equity
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Current portion of long term debt
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Net cash (used) provided by operating activities
Additions to property, plant and equipment
Businesses acquired, net of cash acquired
Proceeds from disposal of plant and equipment
Change in restricted cash and cash equivalents
Maturities of short term investments
Intercompany investing activities
Net cash (used) provided by investing activities
Repayments on revolving line of credit
Borrowings on revolving line of credit
Distribution to parent
Intercompany financing activities
Net cash provided (used) by financing activities
Effect of exchange rates on cash
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
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Guarantor
Subsidiaries
Subsequent to the issuance of the Form 10-Q for the quarterly period ended June 28, 2014, management identified certain corrections that were needed in the presentation of the Consolidating Condensed Financial Statements. The Company revised its Consolidating Condensed Financial Statements to correct the presentation of intercompany activities and other classification items between the Parent, Guarantors and Non-Guarantor subsidiaries for intercompany activities. The Company has also included a new column in its Consolidating Condensed Financial Statements to present separate results for Non-Guarantor subsidiaries. There were no changes to any of the Company’s Consolidated Financial Statements. The Company assessed the materiality of these items on previously issued financial statements in accordance with SEC Staff Accounting Bulletins No. 99 and No. 108, and concluded that the revisions were not material to the Consolidating Condensed Financial Statements. The impact of these revisions is shown in the following tables:
CONSOLIDATING CONDENSED
STATEMENT OF OPERATIONS
Three Months Ended December 28, 2013
Parent
Non-guarantor subsidiaries
Guarantor subsidiaries
Eliminations
In the Consolidating Condensed Statement of Operations, the Company now presents the Non-Guarantor subsidiaries separate from the Parent. The Company also recorded the equity in earnings of Non-Guarantor subsidiaries, which are owned by Guarantor subsidiaries, within the Guarantor subsidiary column, and have appropriately eliminated intercompany earnings between Non-Guarantor and Guarantor subsidiaries.
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STATEMENT OF COMPREHENSIVE INCOME
Comprehensive loss Central Garden & Pet Company
In the Consolidating Condensed Statement of Comprehensive Income, the Company now presents the Non-Guarantor subsidiaries separate from the Parent. The Company also recorded an adjustment to correct the beginning net income of the Parent to reflect equity in the earnings from affiliates.
BALANCE SHEET
Current assets
Total stockholders’ equity
In the Consolidating Condensed Balance Sheet, the Company now presents the Non-Guarantor subsidiaries separate from the Parent. The Company also recorded adjustments to present intercompany receivables and payables between legal entities of the Guarantor, Non-Guarantor and Parent on a gross basis instead of net. These adjustments impacted the Parent’s total long term assets and liabilities and the Guarantor subsidiaries’ total long term assets and equity. The Company also corrected the presentation of certain deferred tax balances to present on a gross basis by legal entity.
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CONSOLIDATING CONDENSED STATEMENTOF CASH FLOWS
Net cash provided by (used in) operating activities
Net cash provided by (used in) investing activities
Net cash provided by (used in) financing activities
In the Consolidating Condensed Statement of Cash Flows, the Company now presents the Non-Guarantor subsidiaries separate from the Parent. The Company also presents changes in receivable balances between affiliates as investing activities and changes in payable balances between affiliates as financing activities because these changes are a result of subsidiaries’ deposits to or borrowings from the Parent’s cash account under a cash pooling arrangement. The Company also corrected the presentation of the Parent’s cash flow from operating activities to reflect equity in earnings of affiliates as a non-cash operating activity. The Company previously presented changes of intercompany receivables and payables in investing activities.
13. Contingencies
The Company may from time to time become involved in legal proceedings in the ordinary course of business. Currently, the Company is not a party to any legal proceedings that management believes would have a material effect on the Company’s financial position or results of operations.
The Company has received notices from several states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking unclaimed property subject to escheat laws, the states may seek interest, penalties and other relief. The examinations are at an early state and, as such, management is unable to determine the impact, if any, on the Company’s financial position or results of operations.
14. Subsequent Events
In January 2015, the Company called $50 million of its 8.25% senior subordinated notes due March 2018 for redemption on March 1, 2015 at a price of 102.063%. The Company expects to record a charge of approximately $1.5 million in its second quarter related to the payment of the call premium and the write-off of unamortized deferred financing costs.
Subsequent to the quarter ended December 27, 2014, the Company invested $16 million in cash in two related joint ventures which possess proprietary, patent and other intellectual property rights in substances for use in pet, animal health and pesticide products. This investment is intended to help the Company to develop new products in each of the these categories.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Company
Central Garden & Pet Company (“Central”) is a leading innovator, marketer and producer, of quality branded products and distributor of third-party products in the pet and lawn and garden supplies industries in the United States. The total pet food and supplies industry in 2013 was estimated to have been over $42.0 billion in annual retail sales. We estimate the annual retail sales of the pet supplies and super premium pet food markets in the categories in which we participate to be approximately $25.4 billion. According to The Freedonia Group, the total lawn and garden consumables industry in the United States is estimated to be approximately $17.2 billion in annual retail sales, including fertilizer, pesticides, growing media, seeds, mulch and other consumables. We estimate the annual retail sales of the lawn and garden consumables markets in the categories in which we participate to be approximately $10.2 billion. In addition, we participate in the pottery and seasonal décor markets.
Our pet supplies products include products for dogs and cats, including edible bones, premium healthy edible and non-edible chews, super premium dog and cat food and treats, toys, pet carriers, grooming supplies and other accessories; products for birds, small animals and specialty pets, including food, cages and habitats, toys, chews and related accessories; animal and household health and insect control products; products for fish, reptiles and other aquarium-based pets, including aquariums, furniture and lighting fixtures, pumps, filters, water conditioners, food and supplements, and information and knowledge resources; and products for horses and livestock. These products are sold under the master brands including Adams™, Aqueon®, Avoderm®, Bio Spot Active Care™, Farnam®, Four Paws®, Kaytee®, Nylabone®, Pinnacle®, TFH™, Zilla® as well as a number of other brands including Altosid, Comfort Zone®, Coralife®, Interpet, Kent Marine®, Oceanic Systems®, Pet Select®, Pre-Strike®, Super Pet®, and Zodiac®.
Our lawn and garden supplies products include proprietary and non-proprietary grass seed; wild bird feed, bird feeders, bird houses and other birding accessories; weed, grass, ant and other herbicide, insecticide and pesticide products; and decorative outdoor lifestyle and lighting products including pottery, trellises and other wood products and holiday lighting. These products are sold under the master brands AMDRO®, GKI/Bethlehem Lighting®, Ironite®, Pennington®, and Sevin®, as well as a number of other brand names including Lilly Miller®, Over-N-Out®, Smart Seed® and The Rebels®.
In fiscal 2014, our consolidated net sales were $1.6 billion, of which our Pet segment, or Pet, accounted for approximately $846 million and our Lawn and Garden segment, or Garden, accounted for approximately $759 million. In fiscal 2014, our income from operations before corporate expenses and eliminations of $72.9 million was $129.1 million, of which the Pet segment accounted for $88.1 million and the Garden segment accounted for $41.0 million. See Note 11 to our consolidated financial statements for financial information about our two operating segments.
We were incorporated in Delaware in June 1992 as the successor to a California corporation that was formed in 1955. Our executive offices are located at 1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597, and our telephone number is (925) 948-4000. Our website is www.central.com. The information on our website is not incorporated by reference in this annual report.
Recent Developments
Fiscal 2015 First Quarter Financial Performance:
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Stock Repurchase — During the three months ended December 27, 2014, we repurchased $5.1 million of our common stock, which consisted of 0.2 million shares of our voting common stock (CENT) at an aggregate cost of approximately $1.8 million, or approximately $8.36 per share, and 0.4 million shares of our non-voting Class A common stock (CENTA) at an aggregate cost of approximately $3.3 million, or approximately $8.99 per share. Approximately $45.0 million remained available under our current share repurchase authorization for future repurchases as of December 27, 2014.
Bond Redemption — In January 2015, we called $50.0 million of our 8.25% senior subordinated notes due March 2018 for redemption on March 1, 2015 at a price of 102.063%. We expect to record a charge of approximately $1.5 million in our second quarter related to the payment of the call premium and the write-off of unamortized deferred financing costs, and recognize interest expense savings in future quarters.
Harbinger Communication — In January 2015, Harbinger Group Inc. notified our board of directors that it had decided not to pursue the transaction it had proposed in June 2014.
Investment in Joint Ventures— Subsequent to the quarter ended December 27, 2014, we invested $16 million in cash in two related joint ventures which possess proprietary, patent and other intellectual property rights in substances for use in pet, animal health and pesticide products. This investment is intended to help us develop new products in each of these categories.
Results of Operations
Compared with Three Months Ended December 28, 2013
Net Sales
Net sales for the three months ended December 27, 2014 increased $16.8 million, or 5.8%, to $307.3 million from $290.5 million for the three months ended December 28, 2013. Our branded product sales increased $3.7 million and sales of other manufacturers’ products increased $13.1 million.
Pet segment net sales increased $14.7 million, or 8.0%, to $199.3 million for the three months ended December 27, 2014 from $184.6 million for the three months ended December 28, 2013. Pet branded product sales increased $6.2 million, due primarily to a $7.6 million sales increase in our animal health category which was favorably impacted by increased volumes in the professional subcategory. Sales of other manufacturers’ products increased $8.5 million.
Garden segment net sales increased $2.1 million, or 2.0%, to $108.0 million for the three months ended December 27, 2014 from $105.9 million for the three months ended December 28, 2013. Garden branded product sales decreased $2.5 million and sales of other manufacturers’ products increased $4.6 million. The sales decrease in our garden branded products was due primarily to a $3.7 million decrease in décor products and a $2.5 million decrease in bird feed, partially offset by increased sales in garden chemicals and controls. The decrease in seasonal décor products was primarily volume driven and reflects the impact of the reduction of non-profitable SKUs and the change to a new vendor for a product line. The decrease in bird feed was primarily price driven as reduced commodity prices were passed on to retailers.
Gross Profit
Gross profit for the three months ended December 27, 2014 increased $8.3 million, or 10.3%, to $88.0 million from $79.7 million for the three months ended December 28, 2013. Gross margin increased to 28.6% for the three months ended December 27, 2014 from 27.4% for the three months ended December 28, 2013. Gross profit and gross margin increased in our Pet segment while both gross profit and gross margin declined in our Garden segment.
Gross profit and gross margin improved in the Pet segment due to a favorable shift in sales mix towards higher-margin products including products with active ingredients in our animal health category and dog treats in our dog and cat category. Gross profit declined in the Garden segment due primarily to declines in our seasonal décor category and our controls and fertilizer category, partially offset by increases in grass seed and wild bird feed. Seasonal décor was negatively impacted in the quarter by a timing shift in the ordering pattern of a customer and by sales lost as we moved to a new supplier of a seasonal product line. These declines were partially offset by increased gross profit and gross margin our grass seed and wild bird feed businesses.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $1.3 million, or 1.4%, to $86.8 million for the three months ended December 27, 2014 from $88.1 million for the three months ended December 28, 2013. As a percentage of net sales, selling, general and administrative expenses decreased to 28.3% for the three months ended December 27, 2014, compared to 30.3% in the comparable prior year quarter. The reduction in selling, general and administrative expenses, discussed further below, was due to decreased warehouse and administrative expense. Corporate expenses are included within administrative expense and include the costs of unallocated executive, administrative, finance, legal, human resource, and information technology functions.
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Selling and delivery expense decreased $0.2 million, or 0.5%, to $44.5 million for the three months ended December 27, 2014 from $44.7 million for the three months ended December 28, 2013. Decreased marketing expenditures of approximately $2 million were partially offset by increased selling expenses in the Pet segment related to the increased sales. Selling and delivery expense as a percentage of net sales decreased to 14.5% in the current year quarter from 15.4% in the prior year quarter.
Warehouse and administrative expense decreased $1.1 million, or 2.4%, to $42.3 million for the three months ended December 27, 2014 from $43.4 million for the three months ended December 28, 2013. Decreased expenses at corporate, due primarily to lower insurance program expenses, and in our Garden segment, due to lower headcount related costs, were partially offset by increased expenses in our Pet segment due primarily to increased research and development expenses.
Income from Operations
Income from operations improved by $9.5 million for the three months ended December 27, 2014 to income of $1.1 million from a loss of $8.4 million for the three months ended December 28, 2013. Operating income for the quarter increased in our Pet segment by $6.2 million due to increased sales and improved gross margin partially offset by increased selling, general and administrative expenses. The operating loss in our Garden segment decreased $2.7 million and in corporate decreased $0.6 million, due primarily to decreased selling, general and administrative expenses.
Net Interest Expense
Net interest expense for the three months ended December 27, 2014 decreased $1.8 million, or 14.5%, to $10.4 million from $12.2 million for the three months ended December 28, 2013. The decrease was due to a non-cash charge of $1.7 million in the quarter ended December 28, 2013, related to the write-off of unamortized deferred financing costs related to our prior revolving credit facility. Our average borrowing rate for the current quarter declined to 8.5% compared to 8.6% in the prior year quarter.
Debt outstanding on December 27, 2014 was $450.2 million compared to $449.5 million as of December 28, 2013.
Other Expense
Other expense increased $0.2 million to $0.4 million for the quarter ended December 27, 2014, from $0.2 million for the quarter ended December 28, 2013. The increase was due primarily to losses from investments accounted for under the equity method of accounting and foreign currency exchange losses.
Income Taxes
Our effective income tax benefit rate was 41.1% for the quarter ended December 27, 2014 compared to a 38.2% income tax benefit rate for the quarter ended December 28, 2013. The more favorable income tax benefit rate was due primarily to a discrete tax credit benefit received in the current quarter.
Inflation
Our revenues and margins are dependent on various economic factors, including rates of inflation, energy costs, consumer attitudes toward discretionary spending, currency fluctuations, and other macro-economic factors which may impact levels of consumer spending. Historically, in certain fiscal periods, we have been adversely impacted by rising input costs related to domestic inflation, particularly relating to grain and seed prices, fuel prices and the ingredients used in our garden controls and fertilizer. Rising costs have made it difficult for us to increase prices to our retail customers at a pace sufficient to enable us to maintain margins.
In recent years, our business has been negatively impacted by low consumer confidence, as well as other macro-economic factors. In fiscal 2012 and throughout most of fiscal 2013, commodity costs continued to increase. Recently, commodity costs have been declining although we have seen increases in our grass seed costs. We continue to monitor commodity prices in order to take action to mitigate the impact of increasing raw material costs.
Weather and Seasonality
Our sales of lawn and garden products are influenced by weather and climate conditions in the different markets we serve. Additionally, our Garden segment’s business is highly seasonal. In fiscal 2014, approximately 65% of our Garden segment’s net sales and 59% of our total net sales occurred during our second and third fiscal quarters. Substantially all of the Garden segment’s operating income is typically generated in this period, which has historically offset the operating loss incurred during the first fiscal quarter of the year.
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Liquidity and Capital Resources
We have financed our growth through a combination of internally generated funds, bank borrowings, supplier credit, and sales of equity and debt securities to the public.
Our business is seasonal and our working capital requirements and capital resources track closely to this seasonal pattern. Generally, during the first fiscal quarter, accounts receivable reach their lowest level while inventory, accounts payable and short-term borrowings begin to increase. During the second fiscal quarter, receivables, accounts payable and short-term borrowings increase, reflecting the build-up of inventory and related payables in anticipation of the peak lawn and garden selling season. During the third fiscal quarter, inventory levels remain relatively constant while accounts receivable peak and short-term borrowings start to decline as cash collections are received during the peak selling season. During the fourth fiscal quarter, inventory levels are at their lowest, and accounts receivable and payables are substantially reduced through conversion of receivables to cash.
We service two broad markets: pet supplies and lawn and garden supplies. Our pet supplies businesses involve products that have a year round selling cycle with a slight degree of seasonality. As a result, it is not necessary to maintain large quantities of inventory to meet peak demands. On the other hand, our lawn and garden businesses are highly seasonal with approximately 65% of our Garden segment’s net sales occurring during the second and third fiscal quarters. This seasonality requires the shipment of large quantities of product well ahead of the peak consumer buying periods. To encourage retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.
Operating Activities
Net cash provided by operating activities decreased by $14.1 million, from $30.0 million of cash provided by operating activities for the three months ended December 28, 2013 to $15.9 million for the three months ended December 27, 2014. The decrease in cash provided by operating activities was due primarily to an increased inventory build in the current period compared to the prior year period, partially offset by increased payables in support of the inventory build. We remain focused on bringing our investment in inventory down over time, consistent with maintaining high fill rates and service levels to our customers.
Investing Activities
Net cash used in investing activities increased $7.7 million, from $1.8 million for the three months ended December 28, 2013 to $9.5 million for the three months ended December 27, 2014. The increase in cash used in investing activities was due primarily to a temporary change in restricted cash related to our collateralized letters of credit.
Financing Activities
Net cash used in financing activities decreased $21.4 million, from $26.7 million of cash used in financing activities for the three months ended December 28, 2013 to $5.3 million for the three months ended December 27, 2014. The decrease in cash used was due primarily to net repayments under our revolving credit facility during the three months ended December 28, 2013 compared to the three months ended December 27, 2014, in which there was no activity, or balance outstanding, on our revolving credit facility.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $390 million asset backed loan facility. Based on our anticipated cash needs, availability under our asset backed loan facility and the scheduled maturity of our debt, we believe that our sources of liquidity should be adequate to meet our working capital, capital spending and other cash needs for at least the next 12 months. However, we cannot assure you that these sources will continue to provide us with sufficient liquidity and, should we require it, that we will be able to obtain financing on terms satisfactory to us, or at all.
We believe that cash flows from operating activities, funds available under our asset backed loan facility, and arrangements with suppliers will be adequate to fund our presently anticipated working capital requirements for the foreseeable future. We anticipate that our capital expenditures, which are related primarily to replacements and upgrades to plant and equipment and investment in our implementation of a scalable enterprise-wide information technology platform, will not exceed $30 million during fiscal 2015. We are investing in this information technology platform to improve existing operations, support future growth and enable us to take advantage of new applications and technologies. We invested approximately $83 million from fiscal 2005 through fiscal 2014 in this initiative. Capital expenditures for 2015 and beyond will depend upon the pace of conversion of those remaining legacy systems. This initiative, when complete, will combine our numerous information systems, which should create greater efficiency and effectiveness.
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As part of our growth strategy, we have acquired a number of companies in the past, and we anticipate that we will continue to evaluate potential acquisition candidates in the future. If one or more potential acquisition opportunities, including those that would be material, become available in the near future, we may require additional external capital. In addition, such acquisitions would subject us to the general risks associated with acquiring companies, particularly if the acquisitions are relatively large.
At December 27, 2014, our total debt outstanding was $450.2 million, as compared with $449.5 million at December 28, 2013.
On December 5, 2013, we entered into a credit agreement which provides up to a $390 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 we exercise the accordion feature set forth therein (collectively, the “Credit Facility”). The Credit Facility matures on December 5, 2018 and replaced our prior revolving credit facility. We may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full. As of December 27, 2014, there were no borrowings or letters of credit outstanding under the Credit Facility. There were other letters of credit of $12.6 million outstanding as of December 27, 2014.
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. The borrowing availability as of December 27, 2014 was $294 million. Borrowings under the Credit Facility bear interest at an index based on LIBOR or, at our option, 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 our total outstanding borrowings. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.75% (1.25% at December 27, 2014) and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.75% (0.25% at December 27, 2014). As of December 27, 2014, the applicable interest rate related to Base Rate borrowings was 3.5%, and the applicable interest rate related to LIBOR-based borrowings was 1.4%.
The Credit Facility contains customary covenants, including financial covenants which require us 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 of our assets. We were in compliance with all covenants under the Credit Facility during the period ended December 27, 2014.
We incurred approximately $3.1 million of costs in conjunction with the new facility, which included banking fees and legal expenses. These costs will be amortized over the term of the Credit Facility.
We recorded a non-cash charge of $1.7 million for the three month period ended December 28, 2013 as part of interest expense, related to the write-off of unamortized deferred financing costs under the prior revolving credit facility.
On March 8, 2010, we issued $400 million aggregate principal amount of 8.25% senior subordinated notes due March 1, 2018 (the “2018 Notes”). On February 13, 2012, we issued an additional $50 million aggregate principal amount of our 2018 Notes at a price of 98.501%, plus accrued interest from September 1, 2011, in a private placement. We used the net proceeds from the offering to pay a portion of the outstanding balance under our prior credit facility.
The estimated fair value of our $450 million of 2018 Notes as of December 27, 2014 was approximately $461.9 million. The estimated fair value is based on quoted market prices for these notes.
The 2018 Notes require semiannual interest payments, which commenced on September 1, 2010. The 2018 Notes are unsecured senior subordinated obligations and are subordinated to all of our existing and future senior debt, including our Credit Facility. The obligations under the 2018 Notes are fully and unconditionally guaranteed on a senior subordinated basis by each of our existing and future domestic restricted subsidiaries with certain exceptions. The guarantees are general unsecured senior subordinated obligations of the guarantors and are subordinated to all existing and future senior debt of the guarantors.
We may redeem some or all of the 2018 Notes at any time before March 1, 2015 for 104.125%, on or after March 1, 2015 for 102.063% and on or after March 1, 2016 for 100%, plus accrued and unpaid interest. The holders of the 2018 Notes have the right to require us to repurchase all or a portion of the 2018 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 2018 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all financial covenants as of December 27, 2014.
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In January 2015, we called $50.0 million of our 8.25% senior subordinated notes due March 2018 for redemption on March 1, 2015 at a price of 102.063%. We expect to record a charge of approximately $1.5 million in our second quarter related to the payment of the call premium and the write-off of unamortized deferred financing costs, and recognize interest expense savings in future quarters.
Off-Balance Sheet Arrangements
There have been no material changes to the information provided in our Annual Report on Form 10-Kfor the fiscal year ended September 27, 2014 regarding off-balance sheet arrangements.
Contractual Obligations
There have been no material changes outside the ordinary course of business in our contractual obligations set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended September 27, 2014.
New Accounting Pronouncements
Refer to Footnote 1 in the notes to the condensed consolidated financial statements for new accounting pronouncements.
Critical Accounting Policies, Estimates and Judgments
There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended September 27, 2014.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in our exposure to market risk from that discussed in our Annual Report onForm 10-K for the fiscal year ended September 27, 2014.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and Chief Financial Officer have reviewed, as of the end of the period covered by this report, the “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and15d-15(e)) that ensure that information relating to the Company required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported in a timely and proper manner and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon this review, such officers concluded that our disclosure controls and procedures were effective as of December 27, 2014.
(b) Changes in Internal Control Over Financial Reporting. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated whether any change in our internal control over financial reporting occurred during the first quarter of fiscal 2015. Based on that evaluation, management concluded that there has been no change in our internal control over financial reporting during the first quarter of fiscal 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
From time to time, we are involved in certain legal proceedings in the ordinary course of business. Currently, we are not a party to any legal proceedings that management believes would have a material effect on our financial position or results of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the fiscal year ended September 27, 2014.
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the repurchases of any equity securities during the fiscal quarter ended December 27, 2014 and the dollar amount of authorized share repurchases remaining under our stock repurchase program.
Period
September 28, 2014 – November 1, 2014
November 2, 2014 – November 29, 2014
November 30, 2014 – December 27, 2014
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Item 5. Other Information
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Item 6. Exhibits
* Management contract or compensatory plan or arrangement.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.
Registrant
Dated: February 5, 2015
John R. Ranelli
President and Chief Executive Officer
(Principal Executive Officer)
Lori A. Varlas
Chief Financial Officer
(Principal Financial Officer)
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