UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K
ý

xANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended September 27, 201430, 2017

Commission File Number 1-33268

CENTRAL GARDEN & PET COMPANY

(Exact name of registrant as specified in its charter)

Delaware68-0275553
(State or other jurisdiction of incorporation or organization)(IRS Employer Identification Number)

Delaware    68-0275553
(State or other jurisdiction of incorporation or organization)    (IRS Employer Identification Number)
1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597

(Address of principal executive offices) (Zip Code)

Telephone Number: (925) 948-4000

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of Each Class

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock

Class A Common Stock

Nasdaq

Nasdaq

Name of Each Exchange on Which Registered

Common Stock    Nasdaq
Class A Common Stock    Nasdaq
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý   No  ¨    No  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  xý

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.    Yes  xý    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).    Yes  xý    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form10-K.  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See definitionthe definitions of “large accelerated filer,” “accelerated filer” andfiler,” “smaller reporting company”company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer  ¨

Accelerated Filer  x

Non-Accelerated Filer  ¨ (Do not check if a smaller reporting company)

Smaller Reporting Company  ¨

Large accelerated filer  ý    Accelerated filer  ¨    Non-accelerated filer  ¨    (Do not check if a smaller reporting company)
Smaller reporting company  ¨    Emerging growth company  ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  xý

At March 29, 2014,25, 2017, the aggregate market value of the registrant’s Common Stock, Class A Common Stock and Class B Stock held by non-affiliates of the registrant was approximately $84.8$372 million, $266.6$1,183 million and $50,000,$227,000, respectively.

At November 30, 2014,17, 2017, the number of shares outstanding of the registrant’s Common Stock was 12,437,30712,160,023 and the number of shares of Class A Common Stock was 36,936,817.38,035,517. In addition, on such date, the registrant had outstanding 1,652,262 shares of its Class B Stock, which are convertible into Common Stock on a share-for-share basis.

DOCUMENTS INCORPORATED BY REFERENCE

Definitive Proxy Statement for the Company’s 20152018 Annual Meeting of Stockholders – Part III of this Form 10-K.


10-K


Central Garden & Pet Company

Index to Annual Report on Form 10-K

For the fiscal year ended September 27, 2014

30, 2017
   
 PagePage
PART I 
Item 1.

Item 1A.

13
Item 1B.

23
Item 2.

23
Item 3.

24
Item 4.

  24
PART II 
Item 5.25
Item 6.

28
Item 7.

30
Item 7A.

48
Item 8.

49
Item 9.

50
Item 9A.

50
Item 9B.

  50
PART III 
Item 10.

50
Item 11.

50
Item 12.50
Item 13.

51
Item 14.

51
PART IV 
Item 15.

51


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FORWARD-LOOKING STATEMENTS

This Form 10-K 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 industryindustries and economiesmarkets in which we operate and other information that is not historical information. When used in this Form 10-K, 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 thisForm 10-K. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in thisForm 10-K are set forth in thisForm 10-K, including the factors described in the section entitled “Item 1A – Risk Factors.” If any of these risks or uncertainties materialize,materializes, or if any of our underlying assumptions areis 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.circumstances, except as required by law. Presently known risk factors include, but are not limited to, the following factors:

seasonality and fluctuations in our operating results and cash flow;

fluctuations in market prices for seeds and grains and other raw materials;

our inability to pass through cost increases in a timely manner;

our dependence upon key executives;

risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;

the impact on our financial results of costs incurred to consider and respond to the unsolicited Harbinger proposals, and the impact of the Harbinger proposals on our business, employees and customer relationships;

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;

fluctuations in energy prices, fuel and related petrochemical costs;

declines in consumer spending during economic downturns;

inflation, deflation and other adverse macro-economic conditions;
supply shortages in pet birds, small animals and fish;
adverse weather conditions;
risks associated with our acquisition strategy;
access to and cost of additional capital;

dependence on a small number of customers for a significant portion of our business;

disruptions in our business arising from the implementation of our change initiatives and the resulting consequences to our business and results of operations;

increased costs and expenses associated with our change initiatives;

consolidation trends in the retail industry;

competition in our industries;

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risks associated with our acquisition strategy;

potential goodwill or intangible asset impairment;

dependence upon our key executives;

continuing implementation of a newan enterprise resource planning information technology system;

our abilityinability to protect our intellectual propertytrademarks and other proprietary rights;

potential environmental liabilities;


ii




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 anticipatedpotential cyber attacks;

the impact of the corporate tax reform being considered by the U.S. Congress and Trump administration;

the voting power associated with our Class B stock; and

potential dilution from issuance of authorized shares.



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MARKET, RANKING AND OTHER DATA

The data included in this Form 10-K regarding markets and ranking, including the size of certain markets and our position and the position of our competitors and products within these markets, are based on both independent industry publications, including The Freedonia Group U.S. Lawn & Garden Consumables July 2014;- Custom Update (2017); The Freedonia Group Landscaping Products in the U.S., 5th Edition (2017); 2017 National Gardening Survey; Packaged Facts U.S. Pet Market Outlook, 2014-2015; Simmons Fall 2013 National Consumer Survey;2017-2018 May 2017; Packaged Facts Pet Treats and Chews in the U.S., 2nd Edition August 2017; Packaged Facts Durable Dog and Cat Petcare Products in the U.S. December 2016; Packaged Facts Pet Litter, Clean Up, and Odor Products: U.S. Market Trends May 2016; Packaged Facts Pet Medications in the U.S., 5th Edition August 2017; American Pet Products Association (APPA) National Pet Owners Survey 2013-2014;2017-2018; U.S. Census Bureau, and our estimates based on management’s knowledge and experience in the markets in which we operate. Our estimates have been based on information provided by customers, suppliers, trade and business organizations and other contacts in the markets in which we operate. We believe theseWhile we are not aware of any misstatements regarding our market and ranking data presented herein, our estimates involve risks and uncertainties and are subject to be accurate as ofchange based on various factors, including those discussed under the date ofheading “Risk factors” in this Form 10-K. However, thisThis information may prove to be inaccurate because of the method by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on the availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size. As a result, you should be aware that market, ranking and other similar data included in this Form 10-K,herein, and estimates and beliefs based on that data, may not be reliable.

We cannot guarantee the accuracy or completeness of such information contained herein.


iv





PART I

Item 1. Business

BUSINESS

Our Company

Central Garden & Pet Company (“Central”) is a leading innovator, marketer and producer of quality branded products and distributor of third-partybranded and private label products infor the lawn & garden and pet and lawn and garden supplies industriesmarkets in the United States. The total pet food, treats and supplies industry in 20132016 was estimated by Packaged Facts and the pet industry to have been over $42.0approximately $55.9 billion in annual retail sales. We estimate the annual retail sales of the pet supplies, live animal, and super premiumconsumables and natural pet food markets in the categories in which we participate to be approximately $25.4$28.0 billion. According to The Freedonia Group, the total lawn and garden consumables and decorative products industry in the United States wasis estimated to be approximately $17.2$27.6 billion in 2013 in annual retail sales, including fertilizer, pesticides, growing media, seeds, mulch, other consumables and other consumables.decorative products. We estimate the annual retail sales of the lawn and garden consumables and decorative products markets in the categories in which we participate to be approximately $10.2$18.9 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; live fish and 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 AdamsTM, Aqueon®, Avoderm®, Bio Spot Active CareTM, Cadet®, Farnam®, Four Paws®, Kaytee®, NylaboneK&H Pet Products®, PinnacleNylabone®, Pinnacle®, TFHTM, Zilla® as well as a number of other brands including Altosid Comfort Zone®, CoralifeComfort Zone®, Interpet, Kent MarineCoralife®, Oceanic SystemsInterpet®, Kent Marine®, Pet Select®, Pre-StrikeSuper Pet®, Super Petand Zodiac®, 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,herbicides, insecticide and pesticide products; fertilizers; and decorative outdoor lifestyle and lighting products including pottery, trellises and other wood products and holiday lighting.products. These products are sold under the master brands AMDRO®, GKI/Bethlehem LightingIronite®, IronitePennington®, Penningtonand Sevin®, and Sevin®, as well as a number of other brand names including Lilly Miller®, Over-N-Out®, Smart Seed® and The Rebels®.

In fiscal 2014,2017, our consolidated net sales were $1.6 billion,$2,054 million, of which our Pet segment, or Pet, accounted for approximately $846$1,246 million and our Lawn and Garden segment, or Garden, accounted for approximately $759$808 million. In fiscal 2014,2017, our operating income was $156 million consisting of income from operations beforeour Pet segment of $132 million, income from our Garden segment of $87 million and 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$63 million. See Note 1918 to our consolidated financial statements for financial information about our two operating segments.

We were incorporated in Delaware in JuneMay 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 iswww.central.com. The information on our website is not incorporated by reference in this annual report.



Recent Developments

Fiscal 2014 Operating Performance.

Earnings per fully diluted share increased $0.22$0.65 per share to $1.52 per share, and our operating earningsincome increased 40% as$26.8 million to $156.1 million compared to fiscal 20132016, due primarily to increased earnings in both our Garden segment. The Garden segment was impacted in bothsegments. Certain charges and gains impacting fiscal 20142017 and 2013 by individually significant items (i.e., charges in

fiscal 2014 and 2013 related to the discontinuance of certain products introduced in 2013, the gain on sale of manufacturing plant assets in 2014 and the impairment of goodwill in 2013) which2016 are excluded for purposes of the non-GAAP presentation elsewhere in this Form 10-K.

Financial summary:

Net sales for fiscal 2014 decreased $49.22017 increased $225.5 million, or 3.0%12.3%, to $1,604.4$2,054.5 million. Our Pet segment sales decreased 4.8%increased 15.2%, and our Garden segment sales decreased 0.8%increased 8.2%.

Gross profit for fiscal 2017 increased $79.8 million, or 14.4%, to $632.8 million from $553.0 million in fiscal 2016. Gross margin increased 2060 basis points in fiscal 20142017 to 28.3%30.8%, from 28.1%30.2% in 2013.

fiscal 2016.

Our operating earningsincome increased $16.0$26.8 million, or 40.0%20.7%, to $56.2$156.1 million in fiscal 2014,2017, and increased as a percentage of net sales to 3.5%7.6% from 2.4%7.1%.

Non-GAAP operating income increased $25.2 million, or 19.6%.

Net income was $8.8$78.8 million, or $0.18 per share on a diluted basis compared to a net loss in fiscal 2013 of $1.9 million, or $0.04$1.52 per share on a fully diluted basis, compared to net income in fiscal 2016 of $44.5 million, or $0.87 per share on a fully diluted basis.

Non-GAAP net income increased to $77.5 million, or $1.50 per share, in fiscal 2017 from $64.4 million, or $1.26 per share, in fiscal 2016.

Our net cash provided by operating activities was $126.5 million, an increase of $154.8$114.3 million in fiscal 2014. 2017 compared to $151.4 million in fiscal 2016.


Acquisitions and Dispositions
K&H Manufacturing
In fiscal 2013,April 2017, we had $28.3purchased K&H Manufacturing, a producer of premium pet supplies and the largest marketer of heated pet products in the country. K&H sells brands under the K&H and K&H Pet brands. The acquisition is expected to complement our existing dog and cat business.
Segrest, Inc.
In October 2016, we purchased Segrest Inc. for a purchase price of $60 million, of cash used in operating activities. Our cashwhich $6 million is contingent upon future events. Segrest is the leading wholesaler of aquarium fish and short term investments at September 27, 2014 were approximately $88.7 million, compared with approximately $33.0 million at September 28, 2013.

Organizational Change. In fiscal 2011 and 2012, we were focused on transforming the company from a portfolio of separately run businesses into an integrated, multi-brand company. During fiscal 2013 and fiscal 2014, we adopted a balanced approachis expected to improving profitability through a focus on increasing sales and improving margins, providing superior customer service and delivering innovative new products. We expect to continue this balanced approachstrengthen our position in the futureaquatics category and to continue to focus on eliminating inefficiencies and on increasing consumer take-awayprovide the opportunity for synergies with our existing aquatics business.

Veterinary Products Business
In November 2016, we sold a small veterinary products division, which had sales of our products.

Harbinger Proposals. In June 2014, we received an unsolicited letter from Harbinger Group Inc. requesting that we discuss with Harbinger a possible acquisition by Harbinger of all outstanding shares of Central’s common stock at $10 per share in cash or, alternatively, the acquisition of our Pet segment for $750$8.6 million in cash, subject to due diligence. Our Board retained independent financial and legal advisors to assist it in its review offiscal 2016. The business was not profitable over the two proposals. With the assistance of its advisors, the Board of Directors engaged in a comprehensive review which included consideration of current and expected operations, capital structure, and market opportunities. In addition, the financial advisor and our outside legal counsel met with Harbinger representatives to provide an opportunity to supplement or clarify their proposal. After this extensive review, the Board of Directors unanimously concluded in October that it would not pursue either of the two proposals received from Harbinger Group Inc. We incurred significant legal expenses and advisory fees during fiscal 2014 in connection with the review and expect to incur significant additional fees and expenses in the future. In addition, the uncertainty created by the proposals could cause current and prospective employees to experience uncertainty about their future roles with us, which may materially adversely affect our ability to attract and retain key employees and could continue to have a negative impact on our customer relationships, which could adversely impact our sales and financial results.last several years.

Competitive Strengths

We believe we have the followinga number of competitive strengths, which serve as the foundation of our business strategy:

strategy, including the following:

Market Leadership Positions Built on a Strong Brand PortfolioMarket Leadership Positions Built on a Strong Brand Portfolio. We are one of the leaders in the premium branded U.S. pet supplies market and in the U.S. consumer lawn and garden supplies market. We have a diversified portfolio of brands, many of which we believe are among the leading brands in their respective U.S. market categories. The majority of our brands have been marketed and sold for more than 25 years.
History of Innovative New Products and Customer Service. We continuously seek to introduce new products, both as complementary extensions of existing product lines and in new product categories. Over the last three years, we have received a number of awards for innovation, customer service and marketing.
For innovation in 2017, Central won Wal*Mart's Innovation Award for a private label program. Also in 2017, the Pet segment's Kaytee brand won awards at Global Pet for the LED Run-About Ball, the CritterHome Habitat and the CritterTrail Display; the CritterTrail LED Habitat won the Pet Business Industry Recognition Award; Zilla's Front Opening Terrarium won a Global Pet Award while its Floating Basking Platforms won the Pet Business Editor's Choice and Aqueon


won the Pet Product News Editor's Choice Award for QuietFlow LED Pro Filters and Pro Sol Light Fixtures as well as the Pet Retail Brands' Best New Product Award for the Aqueon Betta Puzzle modular enclosure. In 2016, the Pet segment received awards at both Global Pet Expo and Super Zoo in the reptile category for Zilla Turtle Trunk and in the aquatics category for Aqueon NeoGlow aquariums. Aqueon's OptiBright won Pet Product News Editor's Choice award and both Aqueon Jukebox 5 aquarium kit and Herptile Habitat Accessories for Zilla Turtle Trunk won the Pet Business Industry Recognition Award. Also in 2016, we won Best in Show at Global Pet for the small animal category for Kaytee Critter Trail LED. In 2015, we received best new aquatic product at Global Pet Expo 2015 for the Aqueon Jukebox.
For customer service in 2017, the Garden segment won several awards from our largest customers including one of Lowe's three highest awards as Seasonal Vendor of the Year; Supplier of the Year in Lawn & Garden at Lowe's in both 2016 and 2017 and Wal*Mart in 2017 as well as Wal*Mart's H3 (Humble, Hustle & Hungry) Award. In 2017, the Pet segment won the Pet Retail Brands Specialty Pet Vendor Partner of the Year Award for efforts in building strategic relationships and offering the highest level of support and collaboration. Also in 2016, at the Wal*Mart Lawn & Garden Supplier Summit, Central was recognized for both e-commerce and collaboration.
For Marketing in 2017, Central won Summit Creative Awards for its S.L.A.P. Public Service Campaign for Mosquito Awareness and its Bug Free Grains Ad Campaign in the B2B category as well as numerous American Horse Publications Awards for print, e-newsletter, website and brand multi-media ad campaigns.
Strong Relationships with Retailers. We have developed strong relationships with major and independent retailers, as well as e-commerce retailers, through product innovation, premium brands, broad product offerings, private label programs, proprietary sales and logistics capabilities and a high level of customer service. Major retailers value the efficiency of dealing with suppliers with national scope and strong brands. We believe our brands have been marketed and sold for more than 25 years.

History of Innovative New Products and Customer Service. We continuously seek to introduce new products at a reasonable cost, both as complementary extensions of existing product lines and as new product categories. Over the last three years, we have received a number of awards for innovation, customer service and marketing. For innovation, the Pet segment received back to back Product of the Year awards in 2014 for the Adams Flea and Tick Home Spray and in 2013 for the Adams Smartshield innovation. For customer service, in 2013, we received awards for PetSmart Vendor of the Year in Canada for Specialty (Aquatics, Small Animal, Pet Bird), PETCO’s 2013 Best Business Performance Award for Aqueon & Zilla brands, Wal*Mart’s Outdoor Living Supplier of the Year and Wal*Mart’s People Award for its home division. In 2012, we were named the Wal*Mart Home Division Replenishment Team of the Year. For marketing, in 2013, the National Agri-Marketing Association (NAMA) recognized our professional products group for outstanding marketing communications for the new product introduction of Centynal as well as a W3 Award, in the Consumer Goods category, for the Adams website.

Strong Relationships with Retailers. We have developed strong relationships with major and independent retailers through product innovation, premium brands, broad product offerings, private label programs, proprietary sales and logistics capabilities and a high level of customer service. Major retailers value the efficiency of dealing with suppliers with national scope and strong brands. Our ability to meet their unique needs for packaging and point of sale displays provides us with a competitive advantage. Independent retailers value our high level of customer service and broad array of premium branded products. We believe these strengths have assisted us in becoming one of the largest pet supplies vendors to PetSmart, PETCO and Wal*Mart and among the largest lawn and garden supplies vendors to Wal*Mart, Home Depot and Lowe’s, as well as a leading supplier to independent pet and garden supplies retailers in the United States.

Favorable Long-Term Industry Characteristics. We believe the U.S. pet supplies market is expected to grow over the long term due to favorable demographic and leisure trends. The key demographics bolstering our markets are the growth rates in the number of millennials who now account for 35% of pet owners and account for more than half of small animal, reptile and saltwater fish owners. According to the 2017-2018 APPA National Pet Owners Survey, the number of U.S. pet owners in recent years has reached record highs, with 84.6 million, or 68% of total households owning a pet-an increase of almost five million households in two years.
Sales and Logistics Networks. We are a leading supplier to independent specialty retailers for the pet and lawn and garden supplies markets through our sales and logistics networks. We believe our sales and logistics networks give us a significant competitive advantage over other suppliers. These networks provide us with key access to independent pet specialty retail stores and retail lawn and garden customers that require two-step distribution for our branded products facilitating:
acquisition and maintenance of premium branded products. These strengths have made us oneshelf placement;
prompt product replenishment;
customization of the largest pet supplies vendorsretailer programs;
quick responses to PetSmart, PETCOchanging customer and Wal*Martretailer preferences;
rapid deployment and among the largest lawnfeedback for new products; and garden supplies vendors to Wal*Mart, Home Depot and Lowe’s, as well as a leading supplier to independent pet and garden supplies retailers in the United States.

Favorable Long-Term Industry Characteristics. The petimmediate exposure for new internally developed and lawn and garden supplies markets in the U.S. are expected to grow over the long-term due to favorable demographic and leisure trends. The key demographics bolstering our markets are the growth rates in the number of children under 18 and the number of adults over age 55. Households with children tend to own more pets, and adults over 55 are more likely to be “empty nesters” that keep pets as companions and have more disposable income and leisure time available for both pets and garden activities. According to the 2013-2014 APPA National Pet Owners Survey, the number of U.S. pet owners in recent years has reached record highs, with 82.5 million households, or 68%, owning a pet.

acquired brands.

Sales and Logistics Networks. We are a leading supplier to independent specialty retailers for the pet and lawn and garden supplies markets through our sales and logistics networks. We believe our sales and logistics networks give us a significant competitive advantage over other suppliers. These networks provide us with key access to independent pet specialty retail stores and retail lawn and garden customers that require two-step distribution for our branded products facilitating:

acquisition and maintenance of premium shelf placement;

prompt product replenishment;

customization of retailer programs;

quick responses to changing customer and retailer preferences;

rapid deployment and feedback for new products; and

immediate exposure for new internally developed and acquired brands.

We plan to continue to utilize our team of dedicated sales people and our sales and logistics networks to expand sales of our branded products.

Experienced and Incentivized Management Team. Our senior management team has significant experience in the consumer goods, pet, and lawn and garden supplies industries. John R. Ranelli, our

President, Chief Executive Officer and President – Pet Segment, has extensive experience leading mid- to large-sized consumer companies. William E. Brown, our Chairman, has over 30 years of industry experience. Mr. Brown also owns approximately 12% of our outstanding stock.



Business Strategy

Our objective is to increase market share, revenue,grow revenues, profits, and cash flow by enhancing our position as one of the leading companies in the U.S. pet supplies and lawn and garden supplies industries. We seek to do so by developing new products, increasing market share, and working in partnership with our customers to grow the categories in which we participate. To achieve our objective, we plan to capitalize on our strengths and favorable industry trends by implementingexecuting on the following five key elementsstrategic pillars to drive our growth:
Accelerate the Growth Momentum of Our Portfolio.
We are managing each business differentially, based on its role and its strategy within our business portfolio. We have assessed the profitability and profit growth potential of each of our businesses. All businesses will have a clear role in the portfolio and a strategy that is consistent with that role. Some of our businesses are managed to optimize topline growth, whereas others should be more focused on reducing costs and maximizing operating income. For example, businesses that have higher margins, higher profit potential and higher growth potential are strategic growth engines for us. We have aligned our resources and initiatives with these roles for each business.
We are seeking to acquire businesses that are accretive to our growth. Our M&A model is one of our key strengths. Since 1992, we have completed over 50 acquisitions to create a company of approximately $2.1 billion in sales. We are patient and disciplined value buyers, typically focused on closing manageable-sized opportunities in the garden and pet areas, which can leverage our capabilities and where we can add value through our low-cost manufacturing capabilities, operating synergies, or strong distribution network. We generally prefer to acquire businesses with proven, seasoned management teams, which are committed to stay with the acquired business after closing.
We will exit businesses where we cannot find a path to profitability and have exited two businesses in the past two years. We continually review our businesses to ensure they can meet our expectations and in some cases have implemented strategies to reverse sub-par performance.
Build on Strong Customer Relationships.
Strong customer relationships have been a key pillar of our company. Our Customer-First mindset entails listening to our customers and being flexible, fast and principled. Partnering with our customers is a key initiative in our efforts to grow both our customers’ and our revenues and profits. A unique aspect of our business strategy:

Balanced Organizational Change. We have adopted a balanced approach to improving profitability through a focus on increasing sales and improving margins, providing superior customer service and innovative new products while improving our operations and reducing costs. We expect to continue this balanced approach in the future and to continue to focus on profit, our customers, and eliminating inefficiencies.

Build Existing Brands. With our broad product assortment, strong brand names, strong sell-through and innovative products and packaging, we believe we can further strengthen our relationships with existing retailers to increase shelf space and sales. Under our master branding strategy, we have consolidated certain brands and expanded others. At the same time, we are developing private label programs for key retailers to complement our proprietary brands, strengthen our relationships with key retailers and increase sales and profits. We believe that the strength of our major customers provides us with a solid foundation for future growth. We intend to gain market share in the home centers, mass market, grocery, specialty pet store and independent channels. We intend to add new retailers through marketing and sales personnel dedicated to these channels, as well as our innovative product introductions and packaging. We will continue to focus on using our sales and logistics network to emphasize sales of our higher margin, proprietary brands and to use efficient supply chain capabilities that enable us to provide retailers with high service levels and consistent in-stock positions.

Continue New Product and Packaging Innovation. We will continue to build and leverage the strength of our leading brand names by introducing innovative new products and packaging, extending existing product lines and entering new product categories. Our product strategy seeks to capitalize on fulfilling consumer needs, leveraging our strong brand names, utilizing our established customer relationships and continuing our history of product innovation.

Improve Margins. We believe there are opportunities to improve our gross and operating margins through increased sales of our higher margin, innovative branded products, timely price increases and cost reductions and leveraging our existing infrastructure. Although gross margins improved from fiscal 2004 through fiscal 2010, they have declined significantly since then as we continued to experience fluctuations in the costs of raw materials and incurred costs in our Garden segment in fiscal 2014 and 2013 related to the discontinuance of certain products introduced in 2013. During fiscal 2013, we conducted a systematic review of pricing in our Pet segment and selectively raised prices consistent with market conditions. We will continue to work with our key retail partners to implement appropriate price increases on our products as we strive to strike the right balance between pricing and delivering value to the consumer.

Pursue Strategic Acquisitions. We plan to continue to make selected strategic acquisitions of companies that complement our existing brands and product offerings. By leveraging our marketing, manufacturing and sales and logistics capabilities, we believe we can increase the sales and improve the operating efficiencies of acquired companies. We look for companies with the potential to have the top one or two brands in their respective categories. The characteristics we generally seek when evaluating target companies are strong brand names, high quality and innovative product offerings, an experienced management team and a history of organic earnings growth.

Reduce Our Investment In Working Capital. We believe there are opportunities to reduce our investment in working capital over the long term by focusing on specific balance sheet metrics. In particular, we believe that the improvement in our fill rates as a result of tighter linkage between our businesses and supply chain will enable us to substantially reduce our investment in inventory without compromising the level of the service we provide to our customers. During fiscal 2014, we reduced our inventory level from $391.9 million to $326.4 million while maintaining high fill rates.

model which is of significant value to many of our customers is that in addition to our branded manufactured products, we also produce private label products and distribute products produced by third-party manufacturers. This enables us to provide a wide variety of products across multiple categories for our customers. We are also expanding our category management capabilities to provide direction fueled by consumer insights and specific customer understanding to grow our retail partners’ category sales and profits. We are expanding this capability across the Company to make recommendations around merchandising, assortment, pricing and shelving to grow our customers’ categories.

Increase Innovation Output and Success Rates.
We are seeking to develop more differentiated and more defensible new products; and increasing our overall investment in innovation, consumer insights, and demand creation to an appropriate level for each business. We emphasize having a three-year line-of-sight on our initiatives, enabling us to best fund and allocate our resources to make sure we have the ability to deliver on our innovation goals.
We continuously strive to get a deeper understanding of our consumers, comprehending what products and features they desire and how they make their purchasing decisions. We are making incremental investments in people and dollars to accomplish this goal. Additionally, we are increasing our digital capabilities to better reach consumers-making sure we are listening in the right places on the internet and enhancing our search engine optimization and digital marketing communication.
Drive Cost Savings and Productivity Improvements to Fuel Growth.
We believe we have the opportunity to reduce our cost of goods sold and administrative spending by 1% to 2% per year. We expect these cost savings to fund growth levers on our business which provides us the opportunity to invest more in our business.
We have begun optimizing our supply-chain footprint, improving our operating efficiency with a continuous improvement mindset, and improving coordination by sharing best practices and aligning for scale. While we value being a decentralized company, we


believe we have significant opportunities to improve our performance by driving the processes and programs to allow us to align for scale and to facilitate activities to share knowledge and resources.
Attract, Retain and Develop Exceptional Employees.
We have 4,100 employees in approximately 80 locations. People work at Central because they love the categories in which we operate and that creates a passionate and effective group. We also have a strong leadership team representing a mix of successful entrepreneurs and classically trained CPG executives that have delivered favorable growth over the last few years. We place an emphasis on helping our employees develop their skills and focus on succession planning to ensure we can grow sustainably year-after-year.
Products – General

The following table indicates each class of similar products which represented approximately 10% or more than 10% of our consolidated net sales in the fiscal years presented (in millions).

Category

  2014   2013   2012 

Pet supplies (excluding wild bird feed)

  $774.2    $807.4    $847.1  

Garden controls and fertilizer products

   262.5     274.9     281.7  

Wild bird feed

   202.1     210.8     205.1  

Other garden supplies

   182.5     183.5     185.7  

Grass seed

   183.1     177.0     180.4  
  

 

 

   

 

 

   

 

 

 

Total

  $1,604.4    $1,653.6    $1,700.0  
  

 

 

   

 

 

   

 

 

 

Category
2017
2016
2015
Other pet products
$841.4

$689.3

$594.7

Other garden supplies
464.9

331.3

343.5

Dog and cat products
405.0

326.0

233.0

Garden controls and fertilizer products
343.2

298.8

286.3

Wild bird feed

(1) 
183.6

193.2

Total
$2,054.5

$1,829.0

$1,650.7

(1) The product category was less than 10% of our consolidated net sales in the respective period.
Pet Segment

Overview

We are one of the leading marketers and producers of premium branded pet supplies in the United States. In addition, our Pet segment operates one of the largest sales and logistics networks in the industry strategically supporting itsour brands. In fiscal 2014, the2017, Pet segment accounted for $846 million of our consolidated net sales were $1,246.4 million and $88 million of our consolidatedoperating income from operations before corporate expenses and eliminations.

was $131.6 million.

Industry Background

According to the Simmons Fall 2013 National Consumer Survey,Packaged Facts U.S. Pet Market Outlook, 2017 - 2018, the number of U.S. households with dogs or cats hitin 2016 increased to nearly 55% from a new high in 2013previous range of 53.3%, up from 51.3% from the prior year.

51-54% since 2011.

The pet industry includes food, supplies, veterinarian care, and services and live animals. We operate primarily in the pet supplies segment of the industry. This segment includes: products for dogs and cats, including edible bones, premium healthy edible and non-edible chews, rawhide, toys, pet beds, 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 and supplements, and information and knowledge resources; and products for horses and livestock. According to Packaged Facts estimates the pet supplies segment was $14.1$16.5 billion in revenue in 2013, up 4.2% from 2012 with dogs accounting for 61%; cats at 31% and 8% all other animals.2016. We also operate in the super premiumnatural category of dog and cat food and treats.

treats and chews.

We believe this industry growth isthe U.S. pet supplies market will grow over the long-term due in significant part to favorable demographic and leisure trends, which we expect to continue, albeit potentially at a slower rate due to recessionary pressures in the broader U.S. economy.trends. The key demographics bolstering the U.S. pet supplies marketour markets are the growth rates in the number of children under 18millennials who now account for 35% of pet owners and account for more than half of small animal, reptile and saltwater fish owners. According to the 2017 - 2018 APPA National Pet Owners Survey, the number of adults over age 55. According to 2010 U.S. census data, approximately 40% of the population is 45pet owners in recent years has reached record highs, with 84.6 million households, or older. Households with children tend to own more pets, and adults over 55 are more likely to be “empty nesters” who keep pets as companions and have more disposable income and leisure time available for pets.68%, owning a pet. In addition, many pet supplies products (e.g., dog and cat food, dog chews, bird food, grooming supplies, pest control, etc.) are routinely consumed and replenished.

For example, as many as 82% of dog owners and 65% of cat owners regularly purchase some type of treat.

The U.S. pet supplies market is highly fragmented with approximately 1,400 manufacturers, consisting primarily of small companies with limited product lines. The majority of these manufacturers do not have a captive sales and logistics network and must rely on us or other independent distributors to supply their products to regional pet specialty chains and independent retailers. According to Packaged Facts, pet supplies sales are up 14 percent over the last five years.increased 24% from 2012 to 2016. Sales are expected to increase an additional 13%19% to $19.6 billion by 2018,2021, indicating the strength of this category.



The pet food and supplies industry retail channel also remains fragmented, with approximately 6,8007,800 independent pet supply stores in the United States and only two national specialty retailers, PetSmart and PETCO. TheseAccording to Packaged Facts, these two “pet superstores” have grown rapidly,declined from 24% in 2014 and 2015 to 23% of overall pet product sales in 2016, and are expected to decline to 21% by 2017. Pet products have also become a growing category in mass merchandisers, discounters, grocery outlets and grocery outlets. PetSmart and PETCO typically offer the broadest product selection with competitive prices and a growing array of pet services.e-commerce channel. Mass merchandisers, supermarkets and discounters have historically carried a limited product assortment that features primarily pet food, but we believe these retailers are devoting more shelf space to meet increased consumer demand for premium pet supplies. Independent pet stores typically have a relatively broad product selection and attempt to differentiate themselves by offering premier brands and knowledgeable service.

Proprietary Branded Pet Products

Our principal pet supplies categories are dog and cat, aquatics, bird and small animal, foodwild bird feed and animal health products.

Dog & Cat.The dog and cat division,category, featuring the brands Nylabone, Four Paws, Cadet, Dallas Manufacturing Company (DMC), K&H Pet Products, TFH Publications, Pet Select, Pet Love and Mikki®, is an industry leader in manufacturing and marketing premium edible and non-edible chews, interactive toys, super premium dog and cat food, grooming supplies and pet-care print and digital content.

Nylabone is made in the United States and has a strong history of developing innovative products such as NutriDent® Edible Dental Brush Chews, as well as numerous other award-winning dog toys and healthy chews.

IMS is a manufacturer and supplier of a full-line of quality rawhide and other natural dog chews, and treats.

Four Paws Products include industry leaders in grooming and waste management products under the Wee Wee and Magic Coat Brands.

DMC, the industry-leading dog & cat bed company and supplier to many of the largest retailers for private label and branded bedding.

K&H is a producer of premium pet supplies and the largest marketer of heated pet products in the country.
TFH Publications is a globally recognized publisher of both pet books and an aquatics magazine.

Breeder’s Choice, featuring the Pinnacle® and AvoDerm®, AvoDerm®, Simply Natural® and Active Care® brands, is a manufacturer of super premium natural pet food and treats.food.

Aquatics. We are a leading supplier of aquariums and related fixtures and furniture, water conditioners and supplements, sophisticated lighting systems and accessories featuring the brands Aqueon, Zilla, Oceanic Systems, Kent Marine, Coralife and Blagdon. In October 2016, we purchased Segrest Inc., the leading supplier of aquarium fish.

Small Animal, Pet Bird & Wild Bird Feed. We are a leading marketer and producer of specialtysupplies and pet food for pet birds, small animals and wild birdsbirds. We offer a full range of products including species specific diets, treats, habitats, bedding, hay and small animals, vitamins and nutritional supplements, bird and small animal cages, habitats, transportation devices, toys and other accessories designed forunder the small animal marketplace featuring the brands Kaytee®, Super PetForti-Diet and Critter Trail®, Critter Trail® brands. Many of our branded Kaytee wild bird mixes are treated with a proprietary blend of vitamins and Canopy Scientific®.minerals. Kaytee is one of the largest producers of specialty bird feed.most widely recognized and trusted brands for birds and small animals.

Animal Health. We are a leading marketer and producer of flea, tick, mosquito and other insect control products produced by Wellmark International and sold primarily under the Bio Spot Active CareTM, Adams, Altosid, Comfort Zone® , Pre Strike and Extinguish® brand names. Wellmark is the only domestic producer of (S)-Methoprene, which is an active ingredient to control mosquitoes, fleas, ticks, ants and mites in many professional and consumer insect control applications. We also sell (S)-Methoprene to manufacturers of other insect control

products, including Frontline Plus. In addition, through our Farnam operations, we are a leading manufacturer and marketer of innovative health care products for horses. Farnam’s portfolio of industry leading brands includes the Farnam umbrella brand, IverCare®, Bronco®e,, Super Mask® II, Endure®, Horseshoer’s Secret® and Vetrolin®.

Sales Network

Our domestic sales and logistics network exists primarily to promote both our proprietary brands and third party partner brands. It provides value-added service to approximately 4,3006,000 customers, the majority of which are independent specialty retail stores for our branded products.with fewer than 10 locations. This includes acquisition and maintenance of premium shelf placement, prompt product replenishment, customization of retailer programs, quick response to changing customer and retailer preferences, rapid deployment and feedback for new products and immediate exposure for acquired brands. The combination of brands in the network also sells many other manufacturers’ brands of pet supplies and combines these products with our branded products intosupplied in single shipments enablingenables our independent customers to dealwork with us on a cost effective basis to meet their pet supplies requirements. We also operate a sales and logistics facility in the United Kingdom.



Sales and Marketing

Our sales strategy is multi-tiered and designed to capture maximum market share with retailers. Our customers include retailers, such as club, regional and national specialty pet stores, independent pet retailers, mass merchants, grocery and drug stores.stores, as well as the e-commerce channel. In addition, we also serve the professional market with insect control and health and wellness products for use by veterinarians, municipalities, farmers and equine product suppliers. PetSmartCostco Wholesale accounted for approximately 10%11% of our Pet segment’ssegment's net sales in fiscal 2014, 11% in fiscal 20132017. PetSmart, PETCO and 12% in fiscal 2012. PETCO isWal*Mart are also a significant customer.

customers.

To optimize our product placement and visibility in retail stores, our focused sales resources are segmented as follows:

a sales organization operating by category and channel;

dedicated account teams servicing our largest customers;

a group of account managers focused on regional chains;

a geographic based group of territory managers dedicated to the independent retailer; and

a specialized group of account managers dedicated to the professional and equine markets.

These sales teams deliver our marketing strategy that is consumer, brand and channel driven. We provide value creation with a focus on innovation, product quality and performance, premium packaging, product positioning and consumer value. We collaborate closely with our customers to identify their needs, jointly develop strategies to meet those needs and deliver programs that include print, broadcast, direct mail and digital execution.

Competition

The pet supplies industry is highly competitive and has experienced considerable consolidation coupled with the emergence of the e-commerce channel in recent years. Our branded pet products compete against national and regional branded products and private label products produced by various suppliers. Our largest competitors in mostthe product categories we participate in are Spectrum Brands and Hartz Mountain. The Pet segment competes primarily on the basis of brand recognition, innovation, upscale packaging, quality and service. Our Pet segment’s sales and logistics operations compete with Animal Supply Co., Phillips Pet Food & Supplies and a number of smaller local and regional distributors, with competition based on product selection, price, value-added services and personal relationships.

Garden Segment

Overview

We are a leading company in the consumer lawn and garden market in the United States and offer both premium and value-oriented branded products. We market and produce a broad array of premium brands, including Pennington, The Rebels, AMDRO, Lilly Miller, Ironite, Sevin, Over-N-Out, and GKI/Bethlehem Lighting.Over-N-Out. We also produce value brands at lower prices, including numerous private label brands. In addition, our Garden segment operates a sales and logistics network that strategically supports its brands. In fiscal 2014, the2017, Garden segment accounted for $759 million of our consolidated net sales were $808.1 million and $41 million of our consolidatedoperating income from operations before corporate expenses and eliminations.

was $87.3 million.

Industry Background

We believe that gardening is one of the most popular leisure activities in the United States, although in recent years our garden segment has been adversely impacted by fluctuations in input costs and weather. The Freedonia Group predicts that household participationStates. According to the National Gardening Survey, 74% of U.S. households participate in lawn and garden activities will rebound slightly through 2018. The keyactivities. Participation is highest amongst married households, people aged 55 and older, and those with no children. This demographic bolstering our lawn and garden market is the growth rateexpected to increase from 89 million in the number of adults over age 55, who are more likely2015 to be “empty nesters” and have more disposable income and leisure time available for garden activities.99 million in 2020. As the baby boom generation ages, this segment is expected to grow faster than the total population. According to 2010 U.S. census data, approximately 40% of the population is 45 years or older. We believe that this demographic shouldwill result in an increase in the number of lawn and garden product users. With more people gardening in their yards and the potential trends of food gardening and organic gardening, we perceive this market as staying intact and showing slow positive growth. Although in the past, the Garden segment has been adversely impacted by fluctuations in input costs and weather, more recently the impact has been negligible. We estimate the retail sales of the lawn and garden supplies industry in the categories in which we participate to be approximately $10.2 billion. In addition, we participate in the pottery and seasonal décor markets.$18.9 billion. We believe that the industry will continue to grow, albeit at a slower rate in the near term due to industry dynamics.

slow rate.

Lawn and garden products are sold to consumers through a number of distribution channels, including home centers, mass merchants, independent nurseries and hardware stores. Home and garden centers and mass merchants typically carry multiple premium and value brands. Due to the rapid expansion and consolidation of mass merchants and home and garden centers, in the last 15 years, the concentration of purchasing power for the lawn and garden category has increased dramatically. We expect the growth of home and garden centers, such as Home Depot and Lowe’s, and mass merchants, such as Wal*Mart, to continue to concentrate industry distribution.




Proprietary Branded Lawn and Garden Products

Our principal lawn and garden product lines are grass seed, wild bird feed, insect control products, lawn and garden care products, including fertilizers, and decorative outdoor patio products and Christmas products and lighting.products. Our Pennington brand is one of the largest in grass seed, pottery and wild bird feed, and our Amdro brand is a leading portfolio of ant control products.

Grass Seed. We are a leading marketer, producer and distributor of numerous mixtures and blends of cool and warm season turf grass for both the residential and professional markets, as well as forage and wild game seed mixtures. We sell these products under the Pennington Seed, Pennington, Penkoted®, Max-Q®, ProSelect ™,TM, Tournament Quality CM, MasterTurf®, The Rebels and Smart Seed® brand names. We also produce numerous private label brands of grass seed. The Pennington grass seed manufacturing facilities are some of the largest and most modern seed coating and conditioning facilities in the industry.

Wild Bird Products. We are athe leading marketer, producer and distributor of wild bird feed, bird feeders, bird houses and other birding accessories in the United States. These products are sold primarily under the Pennington brand name. MostMany of our branded Pennington wild bird feed ismixes are treated with a proprietary blend of vitamins and minerals. An example is our Pennington brand mixes which are enriched with Bird-Kote®, our exclusive process which literally seals each seed with a a nutritious coating made up of vegetable oil fortified with oil-solublecontaining vitamins and elements needed byminerals that are beneficial to the health of wild birds.

Fertilizers and Controls. We are a leading marketer, producer and distributor of lawn and garden weed, moss, insect and pest control products and soil supplements and stimulants. We sell these products under the AMDRO®, Lilly Miller, Moss Out®, Corry’s®, IMAGE®, Sevin, Over-N-Out, Rootboost®., Knockout®, Strike® brand names, and the Eliminator private label for Wal*Mart.Mart and the Sta-Green brand for Lowe's. We manufacture several lines of lawn and garden fertilizers and soil supplements, in granular and liquid form, under the Pennington, Alaska Fish Fertilizer®,, Pro Care, Green Care, Green Charm, Ironite and other private and controlled labels.

Outdoor & Seasonal Decor. We are a leading marketer and distributor of decorative indoor and outdoor pottery products in the United States. These products, sold under the Pennington name, include terra cotta, stoneware, ceramic and porcelain pots. We also market seasonal Christmas products and lighting under the brand name GKI/Bethlehem Lighting, and manufacture a complete line of wooden garden products, including planters, barrel fountains, arbors and trellises under the Pennington brand name.

Sales Network

Our sales and logistics network exists primarily to promote our proprietary brands and provides us with key access to retail stores for our branded products, acquisition and maintenance of premium shelf placement, prompt product replenishment, customization of retailer programs, quick responses to changing customer and retailer preferences, rapid deployment and feedback for new products, immediate exposure for acquired brands and comprehensive and strategic information. The network also sells other manufacturers’ brands of lawn and garden supplies and combines these products with our branded products into single shipments enabling our customers to deal with us on a cost-effective basis to meet their lawn and garden supplies requirements.

requirements.

Sales and Marketing

The marketing strategy for our premium products is focused on meeting consumer needs through product performance, innovation, quality, upscale packaging and retail shelf placement. The marketing strategy for our value products is focused on promotion of the quality and efficacy of our value brands at a lower cost relative to premium brands. Our customers include retailers, such as mass merchants, home improvement centers, independent lawn and garden nurseries, drug and grocery stores, and professional end users. Sales to Wal*Mart represented approximately 31%, 30%31% and 30%31%, sales to Lowe’s represented approximately 21%, 20% and 18%, and sales to Home Depot represented approximately 17%20%, 18%19% and 16%, and sales to Lowe’s represented approximately 15%, 17% and 20%, of our Garden segment’s net sales in fiscal 2014, 20132017, 2016 and 2012,2015, respectively.

To maximize our product placement and visibility in retail stores, we market our products through the following four complementary strategies:

dedicated sales forces represent our combined brand groups;

retail sales and logistics network, which provides in-store training and merchandising for our customers, especially during the prime spring and summer seasons;

dedicated account-managers and sales teams located near and dedicated to serve several of our largest customers; and

selected independent distributors who sell our brands.



Competition

The lawn and garden products industry is highly competitive. Our lawn and garden products compete against national and regional products and private label products produced by various suppliers. Our turf and forage grass seed products, fertilizers, pesticides and combination products compete principally against products marketed by The Scotts Miracle-Gro Company (“Scotts”). Scotts’ dominant position in the lawn and garden industry is a significant competitive disadvantage for our garden products. In addition, Spectrum Brands is a

strong competitor in yard and household insecticides. Our Garden segment competes primarily on the basis of its strong premium and value brands, quality, service, price and low cost manufacturing. Our Garden segment’s sales and logistics operations also compete with a large number of distributors, with competition based on price, service and personal relationships.

Manufacturing

We manufacture the majority of our branded products in 3135 manufacturing facilities, located primarily in the United States. In addition, certain of our proprietary branded products are manufactured by contract manufacturers. We have also entered into an exclusive arrangement with a third party to manufacture one of our registered active ingredients, (S)-Methoprene,‑Methoprene, for use in that third party’s flea and tick control products.

Purchasing

We purchase most of our raw materials from a number of different suppliers. In addition, we purchase one of the raw materials used to manufacture (S)-Methoprene‑Methoprene from a single source of supply. We maintain an inventory of this raw material (in addition to our (S)-Methoprene‑Methoprene inventory) to reduce the possibility of any interruption in the availability of (S)-Methoprene,‑Methoprene, but a prolonged delay in obtaining (S)-Methoprene‑Methoprene or this raw material could result in a temporary delay in product shipments and have an adverse effect on our Pet segment’s financial results.

The key ingredients in our fertilizer and insect and weed control products are commodity and specialty chemicals, including phosphates, urea, potash, phosphates, herbicides, insecticides and fungicides.

The principal raw materials required for theour wild bird feed operations are bulk commodity grains, including millet, milo and sunflower seeds, which are generally purchased from large national commodity companies and local grain cooperatives. In order to ensure an adequate supply of grains and seed to satisfy expected production volume, we enter into contracts to purchase a portion of our expected grain and seed requirements at future dates by fixing the quantity, and often the price, at the commitment date. Although we have never experienced a severe interruption of supply, we are exposed to price risk with respect to the portion of our supply which is not covered by contracts with a fixed price.

During the last three fiscal 2012, prices for some of our key inputs increased substantially. In fiscal 2013, prices continued to increase due in part to drought conditions throughout much ofyears, the United States. Although by the end of the year, prices began to decline for certain commodities. In fiscal 2014, prices decreased substantially compared to fiscal 2013. Our weighted average cost per pound for our primary bird feed grains has decreased approximately 32% for fiscal year 2014 compared to fiscal 2013.slightly. The decreasedecreases in commodity costs isgenerally are reflected in decreased salelower prices to our retailers.

Logistics Network

Our distribution network consists of 2637 facilities strategically placed across the United States, and one facility in the United Kingdom, one facility in Canada and one facility in China to allow us to service both our mass market customers as well as our independent specialty retail stores for our branded products. This network also supports distribution of many other manufacturers’ brands and combines these products with our branded products into single shipments, enabling us to serve our customers in an effective and cost efficient manner.

Significant Customers

Wal*Mart, our largest customer, represented approximately 17%16%, 16%15% and 17%16% of our total company net sales in fiscal 2014, 20132017, 2016 and 2012, respectively,2015, respectively. In addition, Lowe's, Home Depot, Costco and representedPetSmart are also significant customers, and together with Wal*Mart, accounted for approximately 31%44% of our Garden segment’s net sales in fiscal 2014 and 30% in both fiscal 2013 and 2012. Sales to Home Depot represented approximately

8% of our total company net sales2017, 42% in fiscal 20142016 and 2013 and 7%40% in fiscal 2012, and represented approximately 17%, 18% and 16% of our Garden segment’s net sales in fiscal 2014, 2013 and 2012, respectively. Sales to Lowe’s represented approximately 7%, 8% and 9% of our total company net sales in fiscal 2014, 2013 and 2012, respectively, and represented approximately 15%, 17% and 20% of our Garden segment’s net sales in fiscal 2014, 2013 and 2012, respectively. PetSmart represented approximately 10% of our Pet segment’s net sales in fiscal 2014, 11% in fiscal 2013 and 12% in fiscal 2012. PETCO is also a significant customer.

2015.

Patents and Other Proprietary Rights

Our branded products companies hold numerous patents in the United States and in other countries and have several patent applications pending. We consider the development of patents through creative research and the maintenance of an active patent program to be advantageous to our business, but we do not regard the holding of any particular patent as essential to our operations.

In addition to patents, we have numerous active ingredient registrations, end-use product registrations and trade secrets, including certain technology used in the Wellmark operations for the production of (S)-Methoprene, which has been licensed from Novartis. This license is perpetual but non-exclusive. In addition, we have developed certain proprietary improvements relating to the synthesis of (S)-Methoprene. The success of certain portions of our business, especially our Wellmarkanimal health operations, partly depends on our ability to


continue to maintain trade secret information which has been licensed to us, and to keep both licensed and owned trade secret information confidential.

Along with patents, active ingredient registrations, end use product registrations and trade secrets, we own a number of trademarks, service marks, trade names and logotypes. Many of our trademarks are registered but some are not. We are not aware of any reason we cannot continue to use our trademarks, service marks and trade names in the way that we have been using them.

Employees

As of September 27, 2014,30, 2017, we had approximately 3,3004,100 employees, of which approximately 3,1004,000 were full-time employees and 200100 were temporary or part-time employees. We also hire substantial numbers of additional temporary employees for the peak lawn and garden shipping season of February through June to meet the increased demand experienced during the spring and summer months. The majority of our temporary employees are paid on an hourly basis. NoneExcept for 49 employees at a facility in Puebla, Mexico, none of our employees isare represented by a labor union. We consider our relationships with our employees to be good.

Environmental and Regulatory Considerations

Many of the products that we manufacture or distribute are subject to local, state, federal and foreign laws and regulations relating to environmental matters. Such regulations are often complex and are subject to change. In the United States, all pesticides must be registered with the United States Environmental Protection Agency (the “EPA”), in addition to individual state and/or foreign agency registrations, before they can be sold. Fertilizer products are also subject to state Department of Agriculture registration and foreign labeling regulations. Grass seed is also subject to state, federal and foreign labeling regulations.

The Food Quality Protection Act (FQPA),("FQPA") establishes a standard for food-use pesticides, which is a reasonable certainty that no harm will result from the cumulative effect of pesticide exposures. Under this Act, the EPA is evaluating the cumulative risks from dietary and non-dietary exposures to pesticides. The pesticides in our products, which are also used on foods, will be evaluated by the EPA as part of this non-dietary exposure risk assessment.

In addition, the use of certain pesticide and fertilizer products is regulated by various local, state, federal and foreign environmental and public health agencies. These regulations may include requirements that only certified or professional users apply the product or that certain products be used only on certain types of locations (such as “not for use on sod farms or golf courses”), may require users to post notices on properties to which products have been or will be applied, may require notification of individuals in the vicinity that products will be applied in the future or may ban the use of certain ingredients. We believe we are operating in substantial compliance with, or taking action aimed at ensuring compliance with, these laws and regulations.

Various federal, state and local laws, including the federal Food Safety Modernization Act (“FSMA”), also regulate pet food products and give regulatory authorities the power to recall or require re-labeling of products.  Several new FSMA regulations became effective during the last two years.   We believe we are in substantial compliance orwith all currently effective requirements and are taking steps to ensure that we are in compliance with these provisions.

all regulatory requirements going forward.

Various local, state, federal and foreign environmental laws also impose obligations on various entities to clean up contaminated properties or to pay for the cost of such remediation, often upon parties that did not actually cause the contamination. Accordingly, we may become liable, either contractually or by operation of law, for remediation costs even if the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or operation of the property. With our extensive acquisition history, we have acquired a number of manufacturing and distribution facilities, and most of these facilities have not been subjected to Phase II environmental tests to determine whether they are contaminated.

Environmental regulations may affect us by restricting the manufacturing or use of our products or regulating their disposal. Regulatory or legislative changes may cause future increases in our operating costs or otherwise affect operations. Although we believe we are and have been in substantial compliance with such regulations and have strict internal guidelines on the handling and disposal of our products, there is no assurance that in the future we may not be adversely affected by such regulations or incur increased operating costs in complying with such regulations. However, neither the compliance with regulatory requirements nor our environmental procedures can ensure that we will not be subject to claims for personal injury, property damages or governmental enforcement.



Executive Officers

The following table sets forth the name, age and position of our executive officers as of December 1, 2014.

November 28, 2017.

Name

 Age 

Position

John R. Ranelli

George C. Roeth
 5668
 President & Chief Executive Officer and President – Pet Segment

William E. Brown

 7673
 Chairman of the Board
Nicholas Lahanas49
Chief Financial Officer

Michael A. Reed

 6966
 Executive Vice President

Lori A. Varlas

Kay M. Schwichtenberg
 6453
 SeniorExecutive Vice President Chief Financial Officer and Secretary

George Yuhas

 6562
 General Counsel and Secretary

John R. RanelliGeorge C. Roeth. Mr. Ranelli has beenRoth became our President and Chief Executive Officer since February 2013. Since Marchin June 2016. Mr. Roeth is a 27-year veteran of The Clorox Company, most recently, from 2013 to 2014, serving as Chief Operating Officer and Executive Vice President. Previously Mr. Ranelli has also been our President – Pet Segment. From 2011 to 2012, Mr. Ranelli wasRoeth served as Senior Vice President and CEOGeneral Manager, during which time he was also Chairman of Woolrich Inc., an outdoor clothing company. From 2008the Board for the Clorox and Proctor & Gamble Joint Venture. Prior to 2011,that, Mr. Ranelli was an advisor to a number of companiesRoeth served in senior-level marketing and private equity firms. From 2007 to 2008, Mr. Ranelli wasoperating roles at Clorox, including Vice President and CEO of Mikasa Inc., a global dinnerware, crystal and home accessories company. From 1999 to 2006, Mr. Ranelli was Chairman, Chief Executive Officer andGeneral Manager, Vice President of FGX International, a global opticalGrowth and jewelry company. Previously, he served in senior executive capacities with Stride Rite Corporation, Deckers Outdoor Corporation, TLC BeatriceMarketing, and The Timberland Company. Mr. Ranelli is a directorVice President of Woolrich, Inc. and serves as its non-executive Chairman.Brand Development among others.

William E. Brown. Mr. Brown has been our Chairman since 1980. From 1980 to June 2003 and from October 2007 to February 2013, Mr. Brown served as our Chief Executive Officer. From 1977 to 1980, Mr. Brown was Senior Vice President of the Vivitar Corporation with responsibility for Finance, Operations, and Research & Development. From 1972 to 1977, he was with McKesson Corporation where he was responsible for its 200-site data processing organization. Prior to joining McKesson Corporation, Mr. Brown spent the first 10 years of his business career at McCormick, Inc. in manufacturing, engineering and data processing.

Nicholas "Niko" Lahanas. Mr. Lahanas became our Chief Financial Officer in May 2017. Mr. Lahanas served as Senior Vice President of Finance and Chief Financial Officer of our Pet segment from April 2014 to May 2017 and, Vice President of Corporate Financial Planning & Analysis from October 2011 to March 2014. Mr. Lahanas was the Director of Business Performance from March 2008 to October 2011, where his primary focus was on business unit profitability and, Finance Manager from October 2006 to March 2008 in our Garden segment. Prior to joining Central, Mr. Lahanas worked in private equity and investment banking.
Michael A. Reed. Mr. Reed has been our Executive Vice President since June 2000 and was President of the Garden Products division from October 2007 to May 2012.2012 and from January 2014 to September 2016. Mr. Reed served as President of the Pet Products division from 2003 to 2004. Previously, Mr. Reed served as President and CEO of PM Ag Products, Inc., a wholly owned subsidiary of global agri-business Tate & Lyle, PLC.

Lori A. Varlas.Kay M. Schwichtenberg. Ms. Varlas has been SeniorSchwichtenberg became our Executive Vice President, Chief Financial Officer and Secretary since December 2010. From 2006Animal & Public Health in April 2014.  Prior to 2010, Ms. Varlas served asbecoming Executive Vice President, Finance at Sun Microsystems. Prior to joining Sun,she held several positions for Central including Special Projects Advisor, President & CEO of Central Life Sciences and President of Wellmark International.  Ms. VarlasSchwichtenberg joined Central in the acquisition of the Consumer and Animal Health Division from Sandoz Agro, Inc., a worldwide leader in pharmaceuticals where she was the Vice President of Finance at PeopleSoft and heldGeneral Manager.  She has also served in a variety of senior finance positions from 1998 to 2005. Ms. Varlas also held positions at Chironsales and marketing capacities for Brunswick Corporation, Specialty FoodsSkokie, Illinois, and Price Waterhouse.Market Facts, Inc., Chicago, Illinois.

George Yuhas. Mr. Yuhas has been our General Counsel since March 2011.2011 and our Secretary since September 2015. From 1984 to March 2011, he was a partner specializing in litigation at Orrick, Herrington & Sutcliffe LLP.

Available Information

Our web site iswww.central.com. We make available free of charge, on or through our web site,website, our annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing or furnishing such reports with the Securities and Exchange Commission. Information contained on our web site is not part of this report.


Item 1A. Risk Factors.

This Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of factors both in and out of our control, including the risks faced by us described below and elsewhere in this Form 10-K.



You should carefully consider the risks described below. In addition, the risks described below are not the only ones facing us. We have only described the risks we consider to be material. However, there may be additional risks that are viewed by us as not material at the present time or are not presently known to us. Conditions could change in the future, or new information may come to our attention that could impact our assessment of these risks.

If any of the events described below were to occur, our business, prospects, financial condition and/or results of operations could be materially adversely affected. When we say below that something could or will have a material adverse effect on us, we mean that it could or will have one or more of these effects. In any such case, the price of our common stock could decline, and you could lose all or part of your investment in our company.

The implementation of our change initiatives has resulted in increased expenses during the last few years that could continue.

In fiscal 2011 and 2012, we were engaged in a process of transformational change which was focused on transforming the Company from a portfolio of separately run businesses into an integrated, multi-brand company.

During fiscal 2013 and 2014, we adopted a more balanced approach to improving profitability through a focus on increasing sales and improving margins, providing superior customer service, and innovative new products all while improving our operations and reducing costs. We expect to continue this balanced approach in the future and to continue to focus on profitability, our customers and eliminating inefficiencies.

During fiscal 2012 and 2013, we closed 15 distribution and manufacturing facilities, while opening and upgrading others, leaving us with a net reduction of eight facilities at the end of fiscal year 2013. The operational issues associated with the closures, along with other supply chain issues, resulted in significant disruptions and adversely affected our revenues and operating earnings. We may experience other operational issues as we continue to implement our change initiatives. These operational issues could have a material adverse effect on our performance and financial results.

There can be no assurance that we will be able to successfully execute our change initiatives or that we will be able to do so within the anticipated time period or without incurring substantial transitional costs. We anticipate that these investments and transitional costs will adversely affect our operating results.

Our operating results and cash flow are susceptible to fluctuations.

We expect to continue to experience variability in our net sales, net income and cash flow on a quarterly basis. Factors that may contribute to this variability include:

seasonality and adverse weather conditions;

fluctuations in prices of commodity grains and other input costs;

seasonality and adverse weather conditions;

costs or operational problems arising from our change initiatives;

problems;

shifts in demand for lawn and garden and pet products;

changes in product mix, service levels, marketing and pricing by us and our competitors;

the effect of acquisitions; and

economic stability of and strength of our relationships with key retailers.

These fluctuations could negatively impact our business and the market price of our common stock.

We have experienced a significant increase in legal and other third party costs relating to unsolicited proposals received from Harbinger and could experience additional fees in the future, and the proposals could have an adverse impact on our employees and customers.

In June 2014, we received an unsolicited letter from Harbinger Group Inc. requesting that we discuss with Harbinger a possible acquisition by Harbinger of all outstanding shares of Central’s common stock at $10 per share in cash or, alternatively, the acquisition of our Pet segment for $750 million in cash, subject to due diligence. Our Board retained independent financial and legal advisors to assist it in its review of the two proposals. Our Board announced in October 2014 that it will not pursue the Harbinger proposals. We incurred significant legal expenses and advisory fees as part of the review and expect to incur additional fees and expenses in the future. In addition, the uncertainty created by the proposals could cause current and prospective employees to experience uncertainty about their future roles with us, which may materially adversely affect our ability to attract and retain key employees, and could have a negative impact on our customer relationships, which could adversely impact our sales and financial results.

Seeds and grains we use to produce bird feed and grass seed are commodity products subject to price volatility that has had, and could have, a negative impact on us.

Our financial results are partially dependent upon the cost of raw materials and our ability to pass along increases in these costs to our customers. In particular, our Pennington and Kaytee businesses are exposed to fluctuations in market prices for commodity seeds and grains used to produce bird feed. Historically, market

prices for commodity seeds and grains have fluctuated in response to a number of factors, including changes in United States government farm support programs, changes in international agricultural and trading policies and weather conditions during the growing and harvesting seasons.

To mitigate our exposure to changes in market prices, we enter into purchase contracts for grains, bird feed and grass seed to cover a limited portion of our purchase requirements for a selling season. Since these contracts cover only a portion of our purchase requirements, as market prices for such products increase, our cost of production increases as well. In contrast, if market prices for such products decrease, we may end up purchasing grains and seeds pursuant to the purchase contracts at prices above market.

In

During the last three fiscal 2012, prices for some of our key crops increased substantially. In fiscal 2013, ouryears, the weighted average cost per pound for our primary bird feed grains increased approximately 15% for fiscal year 2013 comparedhas decreased slightly. The decreases in commodity costs generally are reflected in lower prices to fiscal 2012. In fiscal 2014, our weighted average cost per pound for our primary bird feed grains decreased approximately 32% compared with fiscal year 2013. retailers.
Although we have been able to negotiate some price increases in the past with our retailers, it is possible that price increases may not fully offset rising costs in the future, resulting in margin erosion. We can provide no assurance as to the timing or extent of our ability to implement additional price adjustments in the event of increased costs in the future. Similarly, we can provide no assurance of our ability to retain pricing with our retailers in the context of declining costs. We also cannot predict to what extent price increases may negatively affect our sales volume. As retailers pass along price increases, consumers may shift to our lower margin bird feed, switch to competing products or reduce purchases of wild bird feed products.

Our success depends upon our retaining and recruiting key personnel.
Our performance is substantially dependent upon the continued services of George C. Roeth, our President and Chief Executive Officer, and our senior management team. The loss of the services of these persons could have a material adverse effect on our business.


Our future performance depends on our ability to attract and retain skilled employees. We cannot assure you that we will be able to retain our existing personnel or attract additional qualified employees in the future.
We are subject to significant risks associated with innovation, including the risk that our new product innovations will not produce sufficient sales to recoup our investment.

We believe that our future success will depend upon, in part, our ability to continue to improve our existing products through product innovation and to develop, market and produce new products. We cannot assure you that we will be successful in the introduction, marketing and production of any new products or product innovations, or that we will develop and introduce in a timely manner improvements to our existing products which satisfy customer needs or achieve market acceptance. Our failure to develop new products and introduce them successfully and in a timely manner could harm our ability to grow our business and could have a material adverse effect on our business, results of operations and financial condition.

During fiscal 2013,

In December 2014, we introducedinvested $16 million in cash for a 50% interest in two new Garden products. Despite enthusiastic support from our retailersnewly formed entities that own rights to commercialize products, covered by certain patents, technology and substantial marketing spend,associated intellectual property rights in the new products did not sell through as expected,fields of animal health and we took a significant charge related to inventory and product and packaging changes at the end ofpesticide applications. During the fourth quarter of fiscal 2013 relating2016, we recognized a non-cash impairment charge of $16.6 million related to our investment in these two joint ventures as a result of changes in marketplace conditions, which impacted the new products. Despite a concerted effort to improve consumer takeawayexpected cash flows and recoverability of the products through product, packaging and placement changes, as well as aggressive promotions, we continued to experience weak consumer sales of the products in their second season and late in the third quarter major retailers indicated that they would not support the products going forward. Consequently, we made the decision to discontinue the two products at the end of the 2014 garden season. As a result, we recorded a $16.9 million charge to operating income in fiscal 2014, to write off the remaining inventory of these products and to account for product returns, promotional allowances and other costs related to the discontinuance of the products. investment.
We believe that the period of time to gain consumer acceptance of major innovations is longer in the garden industry than in many industries, which compounds the risks generally associated with major new product innovations.

A decline in consumers’ discretionary spending or a change in consumer preferences could reduce our sales and harm our business.

Our sales ultimately depend on consumer discretionary spending, which is influenced by factors beyond our control, including general economic conditions, the availability of discretionary income and credit, weather, consumer confidence and unemployment levels. Any material decline in the amount of consumer discretionary

spending could reduce our sales and harm our business. These economic and market conditions, combined with continuing difficulties in the credit markets and the resulting pressures on liquidity, may also place a number of our key retail customers under financial stress, which would increase our credit risk and potential bad debt exposure.

The success of our business also depends in part on our ability to identify and respond to evolving trends in demographics and consumer preferences. Our failure to timely identify or effectively respond to changing consumer tastes, preferences, spending patterns and lawn and garden and pet care needs could adversely affect the demand for our products and our profitability.

Inflation, deflation, economic uncertainty and other adverse macro-economic conditions may harm our business.

Our revenues and margins are dependent on various economic factors, including rates of inflation or deflation, energy costs, consumer attitudes toward discretionary spending, currency fluctuations, and other macro-economic factors which may impact levels of consumer spending. In recent years, we have experienced a significant increase in raw material input costs. Although we increased prices for many of our products, our price increases did not fully offset the increases in our costs, and our margins and profitability suffered as a result. If we are unable to pass through rising input costs and raise the price of our products, or consumer confidence continues to weaken,weakens, we may experience gross margin declines.

Supply disruptions in pet birds, and small animals and fish may negatively impact our sales.

The federal government and many state governments have increased restrictions on the importation of pet birds and the supply of small animals. These restrictions have resulted in reduced availability of new pet birds and animals and thus reduced demand for pet bird and small animal food and supplies. If these restrictions become more severe, or similar restrictions become applicable to live pet fish, our future sales of these products would likely suffer, which would negatively impact our profitability. In addition, some countries have experienced outbreaks of avian flu. While the number of cases worldwide has declined, a significant outbreak in the United States would reduce demand for our pet and wild bird food and negatively impact our financial results.

Our recently acquired Segrest subsidiary is the largest supplier of aquarium fish in the United States and also supplies pet birds and small animals. The sale of fish, pet birds and small animals subjects us to additional risk, including risks associated with sourcing, developing captive breeding programs, health of the fish, pet birds and small animals supplied by us and future governmental regulation of the sale of fish, pet birds and small animals.
Our lawn and garden sales are highly seasonal and subject to adverse weather.

Because our lawn and garden products are used primarily in the spring and summer, the Garden business is seasonal. In fiscal 2014,2017, approximately 65%66% of our Garden segment’s net sales and 59%56% of our total net sales occurred during our second and third fiscal quarters. Substantially all of the Garden segment’s operating income is generated in this period. Our working capital needs and our borrowings


generally peak in our second fiscal quarter, because we are generating lower revenues while incurring expenses in preparation for the spring selling season. If cash on hand and borrowings under our credit facility are ever insufficient to meet our seasonal needs or if cash flow generated during the spring and summer is insufficient to repay our borrowings on a timely basis, this seasonality could have a material adverse effect on our business.

Because demand for lawn and garden products is significantly influenced by weather, particularly weekend weather during the peak gardening season, our results of operations and cash flow could also be adversely affected by certain weather patterns such as unseasonably cool or warm temperatures, heavy rains, water shortages or floods.

Rising energy prices could adversely affect our operating results.

During fiscal 2012,

In the past, energy prices have increased substantially, which resulted in increased fuel costs for our businesses and increased raw materials costs for many of our branded products. These substantial increases did not recur in 2013 or 2014. RisingAlthough energy prices have declined significantly since then, rising energy prices in the future could adversely affect consumer spending and demand for our products and increase our operating costs, both of which would reduce our sales and operating income.

We depend on a few customers for a significant portion of our business.

Wal*Mart, our largest customer, accounted forrepresented approximately 17%16%, 15% and 16% of our total company net sales in fiscal 2014, 16% in fiscal 20132017, 2016 and 17% in fiscal 2012.2015, respectively. In addition, Lowe's, Home Depot, accounted for approximately 8% of our net sales in fiscal 2014, 8% in fiscal 2013Costco, and 7% in fiscal year 2012. Lowe’s accounted for approximately 7% of our net sales in fiscal 2014, 8% in fiscal 2013 and 9% in fiscal 2012. In addition, PetSmart and PETCO are also significant customers, and together with Wal*Mart, Lowe’s and Home Depot, accounted for approximately 41%44% of our net sales in fiscal 2014, 43%2017, 42% in fiscal 20132016 and 45%40% in fiscal 2012.2015. The market shares of many of these key retailers have increased and may continue to increase in future years.

The loss of, or significant adverse change in, our relationship with any of these key retailers could cause our net sales, operating income from operations and cash flow to decline. The loss of, or reduction in, orders from any significant customer, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or our inability to collect accounts receivable from any major customer could reduce our operating income from operations and cash flow.

We may be adversely affected by trends in the retail industry.

With the growing trend towards retail trade consolidation, we are increasingly dependent upon key retailers whose leverage is growing. Our business may be negatively affected by changes in the policies of our retailers, such as inventory destocking, limitations on access to shelf space, price demands and other conditions. In addition, as a result of the desire of retailers continue to more closely manage inventory levels there is a growing trend among retailers toand make purchases on a “just-in-time” basis. This requires us to shorten our lead time for production in certain cases and to more closely anticipate demand, which could in the future require the carrying of additional inventories and an increase in our working capital and related financing requirements. This shift to “just-in-time” can also cause retailers to delay purchase orders, which can cause a shift in sales from quarter to quarter. Decisions to move in or out of a market category by leading retailers can also have a significant impact on our business.

Additionally, some retailers are increasing their emphasis on private label products. While we view private label as an opportunity and supply many private label products to retailers, we could lose sales in the event that key retailers replace our branded products with private label product manufactured by others.

The emerging e-commerce channel continues to grow rapidly. To the extent that the key retailers on which we depend lose share to the e-commerce channel, we could lose sales. If the e-commerce channel continues its rapid growth, we may need to make additional investments to access this channel more effectively, and there can be no assurances that any such investments will be successful.
A significant deterioration in the financial condition of one of our major customers could have a material adverse effect on our sales, profitability and cash flow. We continually monitor and evaluate the credit status of our customers and attempt to adjust sales terms as appropriate. Despite these efforts, a bankruptcy filing or liquidation by a key customer could have a material adverse effect on our business, results of operations and financial condition in the future.



Issues with products may lead to product liability, personal injury or property damage claims, recalls, withdrawals, replacements of products, regulatory actions by governmental authorities that could divert resources, affect business operations, decrease sales, increase costs, and put us at a competitive disadvantage, any of which could have a significant adverse effect on our results of operations and financial condition.

We have experienced, and may in the future experience, issues with products that may lead to product liability, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. Product recalls or other governmental regulatory action directed at product sales could result in increased governmental scrutiny, reputational harm, reduced demand by consumers for our products, decreased willingness by retailer customers to purchase or provide marketing support for those products, unavailability or increased cost of insurance, or additional safety and testing requirements. Such results could divert development and management resources, adversely affect our business operations, decrease sales, increase legal fees and other costs, and put us at a competitive disadvantage compared to other manufacturers not affected by similar issues with products, any of which could have a significant adverse effect on our results of operations and financial condition.

Competition in our industries may hinder our ability to execute our business strategy, increase our profitability or maintain relationships with existing customers.

We operate in highly competitive industries, which have experienced increased consolidation in recent years. We compete against numerous other companies, some of which are more established in their industries

and have substantially greater revenue and resources than we do. Our products compete against national and regional products and private label products produced by various suppliers. Our largest competitors in the Pet segment are Spectrum Brands and Hartz Mountain, and our largest competitors in the Garden segment are Scotts and Spectrum Brands.

To compete effectively, among other things, we must:

develop and grow brands with leading market positions;

grow market share;

maintain and expand our relationships with key retailers;

continually develop innovative new products that appeal to consumers;

implement effective marketing and sales promotion programs;

maintain strict quality standards;

deliver products on a reliable basis at competitive prices; and

effectively integrate acquired companies.

Competition could lead to lower sales volumes, price reductions, reduced profits, losses, or loss of market share. Our inability to compete effectively could have a material adverse effect on our business, results of operations and financial condition.

Our acquisition strategy involves a number of risks.

We have completed numerous acquisitions and intend further growth through the acquisition of additional companies.

We are regularly engaged in acquisition discussions with other companies and anticipate that one or more potential acquisition opportunities, including those that would be material or could involve businesses with operating characteristics that differ from our existing business operations, may become available in the near future. If and when appropriate acquisition opportunities become available, we intend to pursue them actively. Acquisitions involve a number of special risks, including:

failure of the acquired business to achieve expected results, as well as the potential impairment of the acquired assets if operating results decline after an acquisition;

diversion of management’s attention;

failure to retain key personnel of the acquired business;



additional financing, if necessary and available, which could increase leverage and costs, dilute equity, or both;

the potential negative effect on our financial statements from the increase in goodwill and other intangibles;

the high cost and expenses of identifying, negotiating and completing acquisitions; and

risks associated with unanticipated events or liabilities.

These risks could have a material adverse effect on our business, results of operations and financial condition.

We have faced, and expect to continue to face, intense competition for acquisition candidates, which may limit our ability to make acquisitions and may lead to higher acquisition prices. We cannot assure you that we will be able to identify, acquire or manage profitably additional businesses or to integrate successfully any

acquired businesses into our existing business without substantial costs, delays or other operational or financial difficulties. In future acquisitions, we also could incur additional indebtedness or pay consideration in excess of fair value, which could have a material adverse effect on our business, results of operations and financial condition.

If our goodwill, indefinite-lived intangible assets or other long-term assets become impaired, we will be required to record impairment charges, which may be significant.

A significant portion of our long-term assets consists of goodwill and other intangible assets recorded as a result of past acquisitions. We do not amortize goodwill and indefinite-lived intangible assets, but rather review them for impairment on a periodic basis or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We consider whether circumstances or conditions exist which suggest that the carrying value of our goodwill and other long-lived intangible assets might be impaired. If such circumstances or conditions exist, further steps are required to determine whether the carrying value of each of the individual assets exceeds its fair value. If analysis indicates that an individual asset’s carrying value does exceed its fair value, we would record a loss equal to the excess of the individual asset’s carrying value over its fair value.

The steps required by GAAP entail significant amounts of judgment and subjectivity. Events and changes in circumstances that may indicate that there may be an impairment and that interim impairment testing is necessary include, but are not limited to: competitive conditions; the impact of the economic environment on our customer base and on broad market conditions that drive valuation considerations by market participants; our internal expectations with regard to future revenue growth and the assumptions we make when performing impairment reviews; a significant decrease in the market pricevalue of our assets; a significant adverse change in the extent or manner in which our assets are used; a significant adverse change in the business climate that could affect our assets; and significant changes in the cash flows associated with an asset. As a result of such circumstances, we may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill, indefinite-lived intangible assets or other long-term assets is determined. Any such impairment charges could have a material adverse effect on our results of operations and financial condition.

During fiscal 2017, 2016 and 2015, we performed evaluations of the fair value of our indefinite-lived trade names and trademarks. Our expected revenues were based on our future operating plan and market growth or decline estimates for future years. In fiscal 2016, we recognized a $1.8 million non-cash impairment charge related to certain indefinite-lived intangible assets in our Pet segment as a result a decline in volume of sales, as well as a non-cash impairment charge of $16.6 million related to our investment in two joint ventures as a result of changes in marketplace conditions, which impacted the expected cash flows and recoverability of the investment. In fiscal 2015, we recognized a $7.3 million non-cash impairment charge related to certain indefinite-lived intangible assets in our Pet segment as a result of increased competition in the marketplace and an expected decline in the volume of sales.
Most of our goodwill is associated with one of the reporting units within our Pet segment. During fiscal 2014, the reporting unit’s operating income declined approximately 50% from the comparable fiscal 2013 period. In connection with our annual goodwill impairment testing performed during fiscal 2014,2017 and fiscal 2016, we 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. We completed our qualitative assessment of potential goodwill impairment and it was determined that it was more likely than not the fair values of our reporting units were greater than their carrying amounts, and accordingly, no further testing of goodwill was required. During fiscal 2015, the first step of such testing indicated that the fair value of our reporting segmentsunits exceeded their carrying value by more than 10%, and accordingly, no further testing of goodwill was required. If the decline in income of the reporting unit continues in fiscal 2015, and our forecast of future operating performance further declines, there is the potential for goodwill impairment related
We continue to our Pet segment’s reporting unit.

Our success depends upon our retaining key personnel.

Our future performance is substantially dependent upon the continued services of John R. Ranelli, our President, Chief Executive Officer and President – Pet Segment, William E. Brown, our Chairman, and our other senior officers. The loss of the services of any of these persons could have a material adverse effect on our business. In addition, our future performance depends on our ability to attract and retain skilled employees. We cannot assure you that we will be able to retain our existing personnel or attract additional qualified employees in the future.

We are implementing a newimplement an enterprise resource planning information technology system.

In fiscal 2005, we began incurring costs associated with designing and implementing SAP, a new company-wide enterprise resource planning (ERP) software system with the objective of gradually migrating to the new

system. Upon completion, thisThis new system will replacereplaces numerous existing accounting and financial reporting systems, most of which were obtained in connection with business acquisitions. To date, we have reduced the number of ERP systems from 2631 to 6.8. Capital expenditures for our new enterprise resource planning software system for fiscal 20152018 and beyond will depend upon the pace of conversion for those remaining legacy systems. If the balance of the implementation is not executed successfully,



we could experience business interruptions. If we do not complete the implementation of the project timely and successfully, we may experience, among other things, additional costs associated with completing this project and a delay in our ability to improve existing operations, support future growth and enable us to take advantage of new applications and technologies. All of this may also result in a distraction of management’s time, diverting their attention from our operations and strategy.

Our inability to protect our trademarks and any other proprietary rights may have a significant, negative impact on our business.

We consider our trademarks to be of significant importance in our business. Although we devote resources to the establishment and protection of our trademarks, we cannot assure you that the actions we have taken or will take in the future will be adequate to prevent violation of our trademarks and proprietary rights by others or prevent others from seeking to block sales of our products as an alleged violation of their trademarks and proprietary rights. There can be no assurance that future litigation will not be necessary to enforce our trademarks or proprietary rights or to defend ourselves against claimed infringement or the rights of others. Any future litigation of this type could result in adverse determinations that could have a material adverse effect on our business, financial condition or results of operations. Our inability to use our trademarks and other proprietary rights could also harm our business and sales through reduced demand for our products and reduced revenues.

Some of the products that we manufacture and distribute require governmental permits and also subject us to potential environmental liabilities.

Some of the products that we manufacture and distribute are subject to regulation by federal, state, foreign and local authorities. Environmental health and safety laws and regulations are often complex and are subject to change. Environmental health and safety laws and regulations may affect us by restricting the manufacture, sale or use of our products or regulating their disposal. Regulatory or legislative changes may cause future increases in our operating costs or otherwise affect operations. There is no assurance that in the future we may not be adversely affected by such laws or regulations, incur increased operating costs in complying with such regulations or not be subject to claims for personal injury, property damages or governmental enforcement. In addition, due to the nature of our operations and the frequently changing nature of environmental compliance standards and technology, we cannot predict with any certainty that future material capital expenditures will not be required.

In addition to operational standards, environmental laws also impose obligations on various entities to clean up contaminated properties or to pay for the cost of such remediation, often upon parties that did not actually cause the contamination. Accordingly, we may become liable, either contractually or by operation of law, for remediation costs even if the contaminated property is not presently owned or operated by us, or if the contamination was caused by third parties during or prior to our ownership or operation of the property. With our extensive acquisition history, we have acquired a number of manufacturing and distribution facilities. Given the nature of the past operations conducted by us and others at these properties, there can be no assurance that all potential instances of soil or groundwater contamination have been identified, even for those properties where an environmental site assessment has been conducted. Future events, such as changes in existing laws or policies or their enforcement, or the discovery of currently unknown contamination, may give rise to future remediation liabilities that may be material.

Our business is dependent upon our ability to continue to source products from China.

We outsource a significant amount of our manufacturing requirements to third party manufacturers located in China. This international sourcing subjects us to a number of risks, including: the impact on sourcing or

manufacturing of public health and contamination risks in China; quality control issues; social and political disturbances and instability; export duties, import controls, tariffs, quotas and other trade barriers; shipping and transportation problems; and fluctuations in currency values. These risks may be heightened by changes in the United States government's trade policies. Because we rely on Chinese third-partythird party manufacturers for a substantial portion of our product needs, any disruption in our relationships with these manufacturers could adversely affect our operations.

The products that we manufacture and distribute could expose us to product liability claims.

Our business exposes us to potential product liability risks in the manufacture and distribution of certain of our products. Although we generally seek to insure against such risks, there can be no assurance that such coverage iswill be adequate or that we will be able to maintain such insurance on acceptable terms. A successful product liability claim in excess of our insurance coverage could have a material adverse effect on us and could prevent us from obtaining adequate product liability insurance in the future on commercially reasonable terms.



Deterioration in operating results could prevent us from fulfilling our obligations under the terms of our indebtedness or impact our ability to refinance our debt on favorable terms as it matures.

We have, and we will continue to have, a significant amount of indebtedness. As of September 27, 2014,30, 2017, we had total indebtedness of approximately $450$400 million. This level of indebtedness and our future borrowing needs could have material adverse consequences for our business, including:

make it more difficult for us to satisfy our obligations with respect to the terms of our indebtedness;

require us to dedicate a large portion of our cash flow to pay principal and interest on our indebtedness, which would reduce the availability of our cash flow to fund working capital, capital expenditures, acquisitions and other business activities;

increase our vulnerability to adverse industry conditions, including unfavorable weather conditions or commodity price increases;

limit our flexibility in planning for, or reacting to, changes in our business and the industries in which we operate;

restrict us from making strategic acquisitions or exploiting business opportunities;

place us at a competitive disadvantage compared to competitors that have less debt; and

limit our ability to borrow additional funds at reasonable rates, if at all.

In addition, since a portion of our debt commitments bear interest at variable rates, an increase in interest rates or interest rate margins as defined under theour credit agreement will create higher debt service requirements, which would adversely affect our cash flow.

We are subject to cyber security risks and may incur increasing costs in an effort to minimize those risks.

Our business employs systems and websites that allow for the secure storage and transmission of proprietary or confidential information regarding our customers, employees, suppliers and others, including personal identification information. Security breaches could expose us to a risk of loss or misuse of this information, litigation, and potential liability. We may not have the resources or technical sophistication to anticipate or prevent rapidly-evolving types of cyber attacks. Attacks may be targeted at us, our customers and suppliers, or others who have entrusted us with information. Actual or anticipated attacks may cause us to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third-partythird party experts and consultants. Advances in computer capabilities, new technological discoveries, or other developments may result in the technology used by us to protect transaction or other data being breached or compromised. In addition, data and security breaches can also occur as a result of non-technical issues, including

breach by us or by persons with whom we have commercial relationships that result in the unauthorized release of personal or confidential information. Any compromise or breach of our security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, and a loss of confidence in our security measures, which could have an adverse effect on our results of operations and our reputation.

We do not presently expect to pay dividends in the foreseeable future.

We have never paid any cash dividends on our common stock or Class A common stock and currently do not intend to do so. Provisions of our credit facility and the indenture governing our senior subordinated notes restrict our ability to pay cash dividends. Any future determination to pay cash dividends will be at the discretion of our Board of Directors, subject to limitations under applicable law and contractual restrictions, and will depend upon our results of operations, financial condition and other factors deemed relevant by our Board of Directors.

We may issue additional shares of our common stock or Class A common stock that could dilute the value and market price of your stock.

We may decide or be required to issue, including upon the exercise of any outstanding stock options, or in connection with any acquisition made by us, additional shares of our common stock or Class A common stock that could dilute the value of your common stock or Class A common stock and may adversely affect the market price of our common stock or Class A common stock.



Our Chairman, through his holdings of our Class B common stock, exercises effective control of the Company, which may discourage potential acquisitions of our business and could have an adverse effect on the market price of our stock.

Holders of our Class B common stock are entitled to the lesser of ten votes per share or 49% of the total votes cast, and each share of Class B common stock is convertible at any time into one share of our common stock. Holders of our common stock are entitled to one vote for each share owned. Holders of our Class A common stock and Series B preferred stock have no voting rights, except as required by Delaware law.

As of NovemberSeptember 30, 2014,2017, William E. Brown, our Chairman, beneficially owned 1,600,459 shares of our Class B common stock (out of a total of 1,652,262 outstanding shares), 1,418,063 shares of our common stock and 3,102,717 shares of our Class A common stock and thereby controlled approximately 55% of the voting power of our capital stock. Accordingly, except to the extent that a class vote of the common stock is required by applicable law or our charter, he can effectively control all matters requiring stockholder approval, including the election of our directors, and can exert substantial control over our management and policies. The disproportionate voting rights of our common stock and Class B common stock and Mr. Brown’s substantial holdings of Class B common stock could have an adverse effect on the market price of our common stock and Class A common stock. Also, such disproportionate voting rights and Mr. Brown’s controlling interest may make us a less attractive target for a takeover than we otherwise might be, or render more difficult or discourage a merger proposal, tender offer or proxy contest, even if such actions were favored by our other stockholders, which could thereby deprive holders of common stock or Class A common stock of an opportunity to sell their shares for a “take-over” premium.

We have authorized the issuance of shares of common stock, Class A common stock and preferred stock, which may discourage potential acquisitions of our business and could have an adverse effect on the market price of our common stock and our Class A common stock.

Pursuant to our Fourth Amended and Restated Certificate of Incorporation, the Board of Directors is authorized to issue up to 80,000,000 shares of our common stock, 100,000,000 shares of our nonvoting Class A common stock, 3,000,000 shares of our Class B common stock and up to 1,000,000 additional shares of preferred stock without seeking the approval or consent of our stockholders, unless required by the NASDAQ Global Market. Although the issuance of the additional shares of nonvoting

Class A common stock would not dilute the voting rights of the existing stockholders, it would have a dilutive effect on the economic interest of currently outstanding shares of common stock and Class B common stock similar to the dilutive effect of subsequent issuances of ordinary common stock. The issuance of the preferred stock could, depending on the rights and privileges designated by the board with respect to any particular series, have a dilutive effect on the voting interests of the common stock and Class B common stock and the economic interests of our common stock, Class A common stock and Class B common stock. In addition, the disproportionate voting rights of our common stock, preferred stock, Class B common stock and Class A common stock, and the ability of the board to issue stock to persons friendly to current management, may make us a less attractive target for a takeover than we otherwise might be or render more difficult or discourage a merger proposal, tender offer or proxy contest, even if such actions were favored by our common stockholders, which could thereby deprive holders of common stock of an opportunity to sell their shares for a “take-over” premium.


Item 1B. Unresolved Staff Comments

None.


Item 2. Properties

We currently operate 3135 manufacturing facilities totaling approximately 3.54.0 million square feet and 2740 sales and logistics facilities totaling approximately 3.44.4 million square feet. Most sales and logistics centers consist of office and warehouse space, and several large bays for loading and unloading. Each sales and logistics center provides warehouse, distribution, sales and support functions for its geographic area. Our executive offices are located in Walnut Creek, California.



The table below lists the Pet segment’s manufacturing and sales and logistics facilities. Numbers in parentheses represent multiple locations.

Location

  

Type of Facility

  

Owned or Leased

Phoenix, AZ (2)

  Sales and Logistics  Owned

Irwindale, CA

  Manufacturing  Leased

Sacramento, CA

  Sales and Logistics  Leased

Santa Fe Springs, CA

  Sales and Logistics  Leased

Aurora, CO

  Sales and Logistics  Leased

Tampa, FL

Colorado Springs, CO (2)
 Sales and Logistics Leased

Council Bluffs, IA

Gibsonton, FL
Sales and LogisticsOwned
Lakeland, FL (2) Manufacturing OwnedLeased

Jamesburg, NJ

Plant City, FL (2)
ManufacturingLeased
Ruskin, FLManufacturingLeased
Ruskin, FL Sales and Logistics Leased

Neptune City, NJ

ManufacturingOwned

Neptune City, NJ

ManufacturingLeased

Bend, OR

ManufacturingLeased

Cressona, PA

ManufacturingOwned

Pottsville, PA

Tampa, FL
  Sales and Logistics  Leased

Dallas, TX

ManufacturingOwned

Dallas, TX

Atlanta, GA (2)
 Sales and Logistics Leased

Algona, WA

Atlanta, GA
Sales and LogisticsOwned
Council Bluffs, IAManufacturingOwned
Hamilton, NJ  Sales and Logistics  Leased

Chilton, WI

Neptune City, NJ
  Manufacturing  Owned

Franklin, WI

Neptune City, NJ
  Manufacturing  Leased

Franklin, WI

ManufacturingOwned

Menasha, WI

South Brunswick, NJ
  Sales and Logistics  Leased

Guelph, Ontario, Canada

Fairfield, OH
Sales and LogisticsLeased
Cressona, PAManufacturingOwned
Pottsville, PASales and LogisticsLeased
Athens, TX   Manufacturing  Leased

Guangzhou, China

Athens, TX (2)
Sales and LogisticsLeased
Dallas, TXManufacturingOwned
Dallas, TXSales and LogisticsLeased
Algona, WASales and LogisticsLeased
Chilton, WIManufacturingOwned
Franklin, WI  Manufacturing  Leased

Dorking, Surrey, UK

Franklin, WI
ManufacturingOwned
Guelph, Ontario, CanadaSales and LogisticsLeased
Guangzhou, China  Manufacturing  Leased

Shanghai, China

Sales and LogisticsLeased
Atlixco, Puebla, MexicoManufacturingOwned
Dorking, Surrey, UKManufacturingLeased
Taunton, Somerset, UK

  Sales and Logistics  Leased




The table below lists the Garden segment’s manufacturing and sales and logistics facilities. Numbers in parentheses represent multiple locations.

Location

  

Type of Facility

  

Owned or Leased

Cullman, AL

  Sales and Logistics  Owned

Roll, AZ

ManufacturingOwned

Yuma, AZ

ManufacturingLeased

El Centro, CA

ManufacturingOwned

Ontario, CA

Cullman, AL
  Sales and Logistics  Leased

Longmont, CO

Roll, AZ
  Manufacturing  Owned

Covington, GA

Chico, CA
ManufacturingLeased
El Centro, CAManufacturingOwned
Ontario, CA  Sales and Logistics  Leased

Eatonton, GA

Longmont, CO
  Manufacturing  Owned

Eatonton,Covington, GA

  Sales and Logistics  Leased

Eatonton, GA

ManufacturingOwned
Eatonton, GASales and LogisticsLeased
Madison, GA (2)

  Manufacturing  Leased

Madison, GA (2)

  Manufacturing  Owned

Madison, GA

  Sales and Logistics  Owned

St. Charles, IL

Madison, GA
 Sales and Logistics Leased

Taunton, MA

 Sales and Logistics Leased

Laurel, MD

  Sales and Logistics  Leased

Greenfield, MO (2)

  Manufacturing  Owned

Greenfield, MO

  Sales and Logistics  Owned

Neosho, MO

  Manufacturing  Owned

Charlotte, NC

  Sales and Logistics  Leased

Sidney, NE

  Manufacturing  Owned

Fairfield, OH

  Sales and Logistics  Leased

Peebles, OH

  Manufacturing  Owned

Piketon,Peebles, OH

 Manufacturing Leased

Albany, OR

  Manufacturing  Owned

Lebanon, OR

  Manufacturing  Owned

Portland, OR

  Sales and Logistics  Leased

Columbia, SC

Sales and LogisticsOwned

Grand Prairie, TX

Easton, PA
 Sales and Logistics Leased

Kenbridge, VA

Grand Prairie, TX
  Sales and Logistics  Leased

Kenbridge, VA

Sales and LogisticsLeased
Northbend, WA

  Manufacturing  Leased

We are reviewingcontinually review the number, location and size of our manufacturing facilities and expect to make changes over time in order to optimize our manufacturing footprint. We lease 1215 of our manufacturing facilities and 2133 of our sales and logistics facilities. These leases generally expire between 20152018 and 2020.2029. Substantially all of the leases contain renewal provisions with automatic rent escalation clauses. The facilities we own are subject to major encumbrances under our principal credit facility. In addition to the facilities that are owned, our fixed assets are comprised primarily of machinery and equipment, trucks and warehousing, transportation and computer equipment.


Item 3. Legal Proceedings

We may from time to time become involved in 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 adverse effect on our financial position or results of operations.


Item 4. Mine Safety Disclosures

Not applicable.



PART II

Item 5.Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NASDAQ Stock Market under the symbol CENT, and our class A common stock is traded on the NASDAQ Stock Market under the symbol CENTA. Our Class B stock is not listed on any market and generally cannot be transferred unless converted to common stock on a one-for-one basis. The following table sets forth the high and low closing sale prices for our common stock and our Class A common stock, as reported by the NASDAQ Global Select Market, for each quarterly period during our fiscal years set forth below.

   Common Stock   Class A
Common Stock
 
   High   Low   High   Low 

Fiscal 2013

    

First Quarter

  $12.18    $9.19    $12.37    $9.61  

Second Quarter

   10.12     8.55     10.71     8.18  

Third Quarter

   9.10     7.10     9.14     6.90  

Fourth Quarter

   8.04     6.27     7.81     6.09  

Fiscal 2014

    

First Quarter

  $7.80    $6.16    $7.93    $6.18  

Second Quarter

   8.01     6.08     8.15     6.04  

Third Quarter

   9.58     7.40     9.58     7.64  

Fourth Quarter

   9.19     7.66     9.43     8.04  

  Common Stock 
Class A
Common Stock
  High Low High Low
Fiscal 2017    
First Quarter $34.25
 $23.21
 $31.97
 $22.27
Second Quarter 37.67
 31.86
 35.16
 30.00
Third Quarter 39.09
 29.50
 36.55
 28.51
Fourth Quarter 38.84
 30.71
 37.19
 29.29
Fiscal 2016    
First Quarter $17.93
 $13.35
 $18.54
 $13.65
Second Quarter 16.21
 12.05
 16.14
 12.02
Third Quarter 22.54
 14.82
 21.29
 14.80
Fourth Quarter 27.62
 21.21
 25.51
 20.12
As of November 30, 2014,17, 2017, there were approximately 11195 holders of record of our common stock, approximately 176315 holders of record of our Class A nonvoting common stock and 5 holders of record of our Class B stock.

We have not paid any cash dividends on our common stock, our Class A common stock or our Class B Stock. We currently intend to retain any earnings for use in our business and do not presently anticipate paying any cash dividends on our common stock, our Class A common or our Class B stock in the foreseeable future. In addition, our credit facility and the indenture governing our senior subordinated notes restrict our ability to pay dividends. See Note 1110 to our consolidated financial statements.




Stock Performance Graph

The following graph compares the percentage change of our cumulative total stockholder return on our Common Stock (“CENT”) for the period from September 26, 200929, 2012 to September 27, 201430, 2017 with the cumulative total return of the NASDAQ Composite (U.S.) Index and the Dow Jones Non-Durable Household Products Index, a peer group index consisting of approximately 30 manufacturers and distributors of household products.

The comparisons in the graph below are based on historical data and are not indicative of, or intended to forecast, the possible future performance of our Common Stock.

Total Return Analysis

   9/26/09   9/25/10   9/24/11   9/29/12   9/28/13   9/27/14 

Central Garden & Pet Company

   100.00     85.88     56.89     101.11     59.78     65.39  

NASDAQ Composite

   100.00     114.91     120.98     153.63     189.10     228.38  

Dow Jones US Nondurable Household Products

   100.00     110.27     113.82     132.88     153.16     174.64  

  9/29/2012 9/28/2013 9/27/2014 9/26/2015 9/24/2016 9/30/2017
Central Garden & Pet Company 100.00
 59.13
 64.68
 137.85
 213.37
 326.66
NASDAQ Composite 100.00
 123.09
 148.66
 156.18
 179.05
 221.75
Dow Jones US Nondurable Household Products 100.00
 115.26
 131.43
 121.32
 150.01
 159.45



Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth the repurchases of any equity securities during the fourth quarter of the fiscal year ended September 27, 201430, 2017 and the dollar amount of authorized share repurchases, remaining under our stock repurchase program.

Period

  Total Number
of Shares

(or Units)
Purchased
  Average
Price Paid
per Share
(or Unit)
   Total Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs
   Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs (1)
 

June 29, 2014 – August 2, 2014

   64,218 (2)  $7.42     —      $50,091,000  

August 3, 2014 – August 30, 2014

   1,645 (2)   8.87     —       50,091,000  

August 31, 2014 – September 27, 2014

   —   (2)   —       —       50,091,000  
  

 

 

  

 

 

   

 

 

   

 

 

 

Total

   65,863   $7.46     —      $50,091,000  

Period 
Total Number
of Shares
(or Units)
Purchased
  
Average
Price Paid
per Share
(or Unit)
 
Total Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced Plans
or Programs
 
Maximum Number
(or Approximate
Dollar Value) of
Shares (or Units)
that May Yet Be
Purchased Under
the Plans or
Programs (1)
June 25, 2017 - July 29, 2017 
  $
 
 $34,968,000
July 30, 2017 - August 26, 2017 4,897
 (2)31.75
 
 34,968,000
August 27, 2017 - September 30, 2017 3,485
 (2)34.33
 
 34,968,000
Total 8,382
   $32.82
 
 $34,968,000
(1)During the third quarter of fiscal 2011, our Board of Directors authorized a $100 million share repurchase program. The program has no fixed expiration date and expires when the amount authorized has been used or the Board withdraws its authorization. The repurchase of shares may be limited by certain financial covenants in our credit facility that restrict our ability to repurchase our stock.
(2)Shares purchased during the period indicated represent withholding of a portion of shares to cover taxes in connection with the vesting of restricted stock.stock and do not reduce the dollar value of shares that may be purchased under our stock repurchase plan.



Item 6. Selected Financial Data

The following selected statement of operations and balance sheet data as of and for the five fiscal years in the period ended September 27, 201430, 2017 have been derived from our audited consolidated financial statements. The financial data set forth below should be read in conjunction with our consolidated financial statements and related notes thereto in “Item 8 – Financial Statements and Supplementary Data” and “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere herein.

  Fiscal Year Ended 
  September 27,
2014
  September 28,
2013
  September 29,
2012
  September 24,
2011
  September 25,
2010
 
  (in thousands, except per share amounts) 

Statement of Operations Data (1):

     

Net sales

 $1,604,357   $1,653,633   $1,700,013   $1,628,652   $1,523,648  

Cost of goods sold and occupancy

  1,150,333    1,189,731    1,185,855    1,134,733    1,008,482  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  454,024    463,902    514,158    493,919    515,166  

Selling, general and administrative expenses

  397,811    416,038    439,737    408,744    394,092  

Goodwill and other impairments (2)

  —      7,709    —      —      12,000  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from operations (3)

  56,213    40,155    74,421    85,175    109,074  

Interest expense, net

  (42,750  (42,970  (40,170  (37,748  (33,587

Other income (expense)

  403    (677  678    550    419  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes and noncontrolling interest

  13,866    (3,492  34,929    47,977    75,906  

Income tax expense (benefit)

  4,045    (2,592  12,816    19,595    28,110  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) including noncontrolling interest

  9,821    (900  22,113    28,382    47,796  

Net income attributable to noncontrolling interest

  1,017    1,029    940    59    1,963  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) attributable to Central Garden & Pet

 $8,804   $(1,929 $21,173   $28,323   $45,833  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) per share attributable to Central Garden & Pet:

     

Basic

 $0.18   $(0.04 $0.44   $0.50   $0.71  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Diluted

 $0.18   $(0.04 $0.44   $0.50   $0.70  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Weighted average shares used in the computation of income (loss) per share:

     

Basic

  48,880    48,094    47,622    56,217    64,272  

Diluted

  49,397    48,094    48,374    56,645    65,091  

Other Data:

     

Depreciation and amortization

 $35,781   $32,968   $30,425   $28,566   $28,869  

Capital expenditures

 $17,173   $25,172   $39,592   $31,563   $24,190  

Cash provided (used) by operating activities

 $126,467   $(28,282 $89,169   $51,008   $135,229  

Cash used in investing activities

 $(35,181 $(25,122 $(44,477 $(56,237 $(41,266

Cash provided (used) by financing activities

 $(27,759 $20,309   $(8,575 $(73,997 $(88,167

Ratio of earnings to fixed charges (4)

  1.32    —      1.84    2.23    3.20  

   September 27,
2014
   September 28,
2013
   September 29,
2012
   September 24,
2011
   September 25,
2010
 

Balance Sheet Data:

          

Cash and short term investments

  $88,666    $32,976    $71,180    $29,851    $106,780  

Working capital

   498,454     490,325     445,299     410,655     433,705  

Total assets

   1,148,727     1,161,160     1,149,547     1,093,003     1,130,884  

Total debt

   450,239     472,587     449,814     435,609     400,271  

Equity

   486,453     470,024     464,883     456,782     532,143  

  Fiscal Year Ended
  September 30, 2017 September 24, 2016 September 26, 2015 September 27, 2014 September 28, 2013
  (in thousands, except per share amounts)
Statement of Operations Data (1):          
Net sales $2,054,478
 $1,829,017
 $1,650,737
 $1,604,357
 $1,653,633
Cost of goods sold and occupancy 1,421,670
 1,275,967
 1,162,685
 1,150,333
 1,189,731
Gross profit 632,808
 553,050
 488,052
 454,024
 463,902
Selling, general and administrative expenses 476,696
 421,864
 389,345
 397,811
 416,038
Intangible asset and goodwill impairments (2) 
 1,828
 7,272
 
 7,709
Operating income (3) 156,112
 129,358
 91,435
 56,213
 40,155
Interest expense, net (4) (28,062) (42,707) (39,898) (42,750) (42,970)
Other income (expense) (5) (1,621) (17,013) 13
 403
 (677)
Income (loss) before income taxes and noncontrolling interest 126,429
 69,638
 51,550
 13,866
 (3,492)
Income tax expense (benefit) 46,699
 24,053
 18,535
 4,045
 (2,592)
Income (loss) including noncontrolling interest 79,730
 45,585
 33,015
 9,821
 (900)
Net income attributable to noncontrolling interest 902
 1,071
 1,044
 1,017
 1,029
Net income (loss) attributable to Central Garden & Pet $78,828
 $44,514
 $31,971
 $8,804
 $(1,929)
Net income (loss) per share attributable to Central Garden & Pet:          
Basic $1.57
 $0.91
 $0.66
 $0.18
 $(0.04)
Diluted $1.52
 $0.87
 $0.64
 $0.18
 $(0.04)
Weighted average shares used in the computation of income (loss) per share:          
Basic 50,230
 48,964
 48,562
 48,880
 48,094
Diluted 51,820
 51,075
 49,638
 49,397
 48,094
Other Data:          
Depreciation and amortization $42,719
 $40,001
 $33,703
 $35,781
 $32,968
Capital expenditures $44,659
 $27,622
 $22,030
 $17,173
 $25,172
Cash provided (used) by operating activities $114,309
 $151,426
 $87,449
 $126,467
 $(28,282)
Cash used in investing activities $(164,577) $(91,195) $(49,854) $(35,181) $(25,122)
Cash provided (used) by financing activities $(10,392) $(14,165) $(68,370) $(27,759) $20,309
Ratio of earnings to fixed charges (6) 5.4x
 2.6x
 2.3x
 1.3x
 


  Fiscal Year Ended
  September 30, 2017 September 24, 2016 September 26, 2015 September 27, 2014 September 28, 2013
  (in thousands)
Balance Sheet Data:          
Cash and short term investments $32,397
 $92,982
 $47,584
 $88,666
 $32,976
Working capital (8) 462,849
 481,077
 446,431
 464,050
 455,296
Total assets (7)(8) 1,306,906
 1,180,683
 1,101,112
 1,157,715
 1,167,774
Total debt (7) 395,653
 395,269
 396,982
 445,214
 467,333
Equity 637,142
 554,587
 506,380
 486,453
 470,024
(1)Fiscal years 2010, 2011, 2013, 2014, 2015 and 20142016 included 52 weeks. Fiscal year 20122017 included 53 weeks.
(2)During fiscal 2010,2016, we recognized a non-cash charge of $12.0$1.8 million related to the impairment of ana certain indefinite-lived intangible asset in our Pet segment. During fiscal 2015, we recognized a non-cash charge of $7.3 million related to the impairment of certain indefinite-lived intangible assets in our Pet segment. During fiscal 2013, we recognized a non-cash charge of $7.7 million related to impairment of goodwill in our Garden segment.
(3)During fiscal 2013, we recognized an $11.2 million charge related to certain products introduced in fiscal 2013 in our Garden segment. During fiscal 2014, we recognized a $16.9 million charge related to certain products introduced in fiscal 2013 in our garden segment.these products. We recognized a $4.9 million gain in fiscal 2014 as a gain from the sale of manufacturing plant assets. During fiscal 2016, we recognized a $2.4 million gain in our Pet segment from the sale of a manufacturing plant. During fiscal 2017, we recognized a $2.0 million gain in our Garden segment from the sale of a distribution facility.
(4)During fiscal 2016, we incurred incremental expenses of $14.3 million, comprised of a call premium payment of $8.3 million, a $2.7 million payment of overlapping interest expense for 30 days and a $3.3 million non-cash charge for the write-off of unamortized deferred financing costs and discount on our 2018 Notes, as a result of the redemption of our 2018 Notes and issuance of our 2023 Notes.
(5)During fiscal 2016, we recognized a non-cash impairment charge of $16.6 million related to our investment in two joint ventures as a result of changes in marketplace conditions, which impacted expected cash flows and the recoverability of the investment.
(6)For the purposes of determining the ratio of earnings to fixed charges, earnings consist of income (loss) before income taxes and noncontrolling interest and after eliminating undistributed earnings of equity method investees and before fixed charges. Fixed charges consist of interest expense incurred, the portion of rental expense under operating leases deemed by management to be representative of the interest factor and amortization of deferred financing costs. For the fiscal year ended September 28, 2013, earnings were insufficient to cover fixed charges by approximately $3.2 million, and the ratio is not meaningful.

(7)In fiscal 2016, we retrospectively adopted new accounting guidance, which requires classification of debt issuance costs as a reduction of the carrying value of the debt. In doing so, $3.2 million, $5.0 million and $5.3 million of deferred issuance costs have been reclassified from Other assets to Long-term debt in our Consolidated Balance Sheets for fiscal 2015, 2014 and 2013, respectively.
(8)On September 30, 2017, we retrospectively adopted new accounting guidance (Accounting Standards Update 2015-17) which requires classification of deferred tax assets as non-current assets and non-current liabilities. In doing so, $31.5 million and $30.5 million of net current deferred tax assets have been reclassified to deferred taxes and other long term liabilities in our Consolidated Balance Sheets for fiscal 2016 and 2015, respectively. $34.4 million and $35.0 million of net current deferred tax assets have been partially offset by deferred tax liabilities and reclassified to other assets in our Consolidated Balance Sheets for fiscal 2014 and 2013, respectively. Working capital amounts have been changed by the amounts above for the respective years.





Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion of the financial results, liquidity and other key items related to our performance. This discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-K. This Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Forward-Looking Statements” and “Item 1A – Risk Factors.”

Business Overview

Central Garden & Pet Company (“Central”) is a leading innovator, marketer and producer of quality branded products and distributor of third-partybranded and private label products infor the lawn & garden and pet and lawn and garden supplies industriesmarkets in the United States. The total pet food, treats and supplies industry in 20132016 was estimated by Packaged Facts and the pet industry to have been over $42.0approximately $55.9 billion in annual retail sales. We estimate the annual retail sales of the pet supplies, live animal, and super premiumconsumables and natural pet food markets in the categories in which we participate to be approximately $25.4$28.0 billion. According to The Freedonia Group, the total lawn and garden consumables and decorative products industry in the United States is estimated to be approximately $17.2$27.6 billion in annual retail sales, including fertilizer, pesticides, growing media, seeds, mulch, other consumables and other consumables.decorative products. We estimate the annual retail sales of the lawn and garden consumables and decorative products markets in the categories in which we participate to be approximately $10.2$18.9 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; live fish and 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 AdamsTM, Aqueon®, Avoderm®, Bio Spot Active CareTM, Cadet®, Farnam®, Four Paws®, Kaytee®, NylaboneK&H Pet Products®, PinnacleNylabone®, Pinnacle®, TFHTM, Zilla® as well as a number of other brands including Altosid Comfort Zone®, CoralifeComfort Zone®, Interpet, Kent MarineCoralife®, Oceanic SystemsInterpet®, Kent Marine®, Pet Select®, Pre-StrikeSuper Pet®, Super Petand Zodiac®, 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,herbicides, insecticide and pesticide products; fertilizers; and decorative outdoor lifestyle and lighting products including pottery, trellises and other wood products and holiday lighting.products. These products are sold under the master brands AMDRO®, GKI/Bethlehem LightingIronite®, IronitePennington®, Penningtonand Sevin®, and Sevin®, as well as a number of other brand names including Lilly Miller®, Over-N-Out®, Smart Seed® and The Rebels®.

In fiscal 2014,2017, our consolidated net sales were $1.6 billion,$2,054 million, of which our Pet segment, or Pet, accounted for approximately $846$1,246 million and our Lawn and Garden segment, or Garden, accounted for approximately $759$808 million. In fiscal 2014,2017, our operating income was $156 million consisting of income from operations beforeour Pet segment of $132 million, income from our Garden segment of $87 million and 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$63 million.

Fiscal 20142017 Financial Highlights

Earnings per fully diluted share increased $0.22$0.65 per share to $1.52 per share, and our operating earningsincome increased 40% as$26.8 million to $156.1 million compared to fiscal 20132016, due primarily to increased earnings in both our Garden segment. The Garden segment was impacted in bothoperating segments. Certain charges and gains impacting fiscal 20142017 and 2013 by individually significant items (i.e., charges in fiscal 2014 and 2013 related to the discontinuance of certain products introduced in 2013, the gain on sale of manufacturing plant assets in 2014 and the impairment of goodwill in 2013) which2016 are excluded for purposes of the non-GAAP presentation elsewhere in this Form 10-K.

Financial summary:

Net sales for fiscal 2014 decreased $49.22017 increased $225.5 million, or 3.0%12.3%, to $1,604.4$2,054.5 million. Our Pet segment sales decreased 4.8%increased 15.2%, and our Garden segment sales decreased 0.8%increased 8.2%.

Gross profit for fiscal 2017 increased $79.8 million, or 14.4%, to $632.8 million from $553.0 million in fiscal 2016. Gross margin increased 2060 basis points in fiscal 20142017 to 28.3%30.8%, from 28.1%30.2% in 2013.

fiscal 2016.

Our operating earningsincome increased $16.0$26.8 million, or 40.0%20.7%, to $56.2$156.1 million in fiscal 2014,2017, and increased as a percentage of net sales to 3.5%7.6% from 2.4%7.1%.

Non-GAAP operating income increased $25.2 million, or 19.6%.



Net income was $8.8$78.8 million, or $0.18 per share on a diluted basis compared to a net loss in fiscal 2013 of $1.9 million, or $0.04$1.52 per share on a fully diluted basis, compared to net income in fiscal 2016 of $44.5 million, or $0.87 per share on a fully diluted basis.

Non-GAAP net income increased to $77.5 million, or $1.50 per share, in fiscal 2017 from $64.4 million, or $1.26 per share, in fiscal 2016.

Our net cash provided by operating activities was $126.5 million, an increase of $154.8$114.3 million in fiscal 2014. 2017 compared to $151.4 million in fiscal 2016.

Recent Developments
Acquisitions and Dispositions
K&H Manufacturing
In fiscal 2013,April 2017, we had $28.3purchased K&H Manufacturing, a producer of premium pet supplies and the largest marketer of heated pet products in the country. K&H sells brands under the K&H and K&H Pet brands. The acquisition is expected to complement our existing dog and cat business.
Segrest, Inc.
In October 2016, we purchased Segrest Inc. for a purchase price of $60 million, of cash used in operating activities. Our cashwhich $6 million is contingent upon future events. Segrest is the leading wholesaler of aquarium fish and short term investments at September 27, 2014 were approximately $88.7 million, compared with approximately $33.0 million at September 28, 2013.

Recent Developments

Organizational Change. In fiscal 2011 and 2012, we were focused on transforming the company from a portfolio of separately run businesses into an integrated, multi-brand company. During fiscal 2013 and fiscal 2014, we adopted a balanced approachis expected to improving profitability through a focus on increasing sales and improving margins, providing superior customer service and delivering innovative new products. We expect to continue this balanced approachstrengthen our position in the futureaquatics category and to continue to focus on eliminating inefficiencies and on increasing consumer take-awayprovide the opportunity for synergies with our existing aquatics business.

Veterinary Products Business
In November 2016, we sold a small veterinary products division, which had sales of our products.

Harbinger Proposals. In June 2014, we received an unsolicited letter from Harbinger Group Inc. requesting that we discuss with Harbinger a possible acquisition by Harbinger of all outstanding shares of Central’s common stock at $10 per share in cash or, alternatively, the acquisition of our Pet segment for $750$8.6 million in cash, subject to due diligence. Our Board retained independent financial and legal advisors to assist it in its review offiscal 2016. The business was not profitable over the two proposals. With the assistance of its advisors, the Board of Directors engaged in a comprehensive review which included consideration of current and expected operations, capital structure, and market opportunities. In addition, the financial advisor and our outside legal counsel met with Harbinger representatives to provide an opportunity to supplement or clarify their proposal. After this extensive review, the Board of Directors unanimously concluded in October that it would not pursue either of the two proposals received from Harbinger Group Inc. We incurred significant legal expenses and advisory fees during fiscal 2014 in connection with the review and expect to incur significant additional fees and expenses in the future. In addition, the uncertainty created by the proposals could cause current and prospective employees to experience uncertainty about their future roles with us, which may materially adversely affect our ability to attract and retain key employees and could continue to have a negative impact on our customer relationships, which could adversely impact our sales and financial results.last several years.


Use of Non-GAAP Financial Measures.

Measures

We report our financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, managementto supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including non-GAAP net sales on a consolidated and segment basis, non-GAAP selling, general and administrative (SG&A) expense, non-GAAP operating income on a consolidated and segment basis, non-GAAP interest expense, non-GAAP other income (expense) and non-GAAP net income and diluted net income per share. Management believes that certainthese non-GAAP financial measures that exclude the impact of garden charges in fiscal 2014 and 2013, the gain from the sale of manufacturing plant assets in 2014 and the goodwill impairment in the garden segment in 2013specific items (described below) may be useful to investors in certain instances totheir assessment of our ongoing operating performance and provide additional meaningful comparisons between current results and results in prior operating periods that should be considered when assessing our ongoing performance. Additionally, we have provided a comparisonperiods.
The reconciliations of our free cash flow which can be used as a measure of our operating performance on page 40. Free cash flow does not represent cash available only for discretionary expenditures, since we have mandatory debt service requirementsthese non-GAAP measures to the most directly comparable financial measures calculated and other contractual and non-discretionary expenditures.presented in accordance with GAAP are shown in the tables below. We believe that thesethe non-GAAP financial measures provide useful information to investors and other users of itsour financial statements, such as lenders.by allowing for greater transparency in the review of our financial and operating performance. Management also uses

these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating our performance.performance, and we believe these measures similarly may be useful to investors in evaluating our financial and operating performance and the trends in our business from management's point of view. While our management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our GAAP financial results and should be read in conjunction with those GAAP results.

Garden Segment Discontinued Product ChargeNon-GAAP financial measures reflect adjustments based on the following items:

During fiscal 2013,

Asset impairment charges: we introduced two new Garden products. Despite enthusiastic supporthave excluded the impact of asset impairments on intangible assets and equity method investments as such non-cash amounts are inconsistent in amount and frequency. We believe that the adjustment of these charges supplements the GAAP information with a measure that can be used to assess the sustainability of our operating performance.
Gains on disposals of significant plant assets: we have excluded the impact of gains on the disposal of significant plant assets as these represent infrequent transactions that impact the comparability between operating periods. We believe the adjustment of these gains supplements the GAAP information with a measure that may be used to assess the sustainability of our operating performance.
Loss on early extinguishment of debt: we have excluded the charges associated with the refinancing of our 2018 Notes as the amount and frequency of such charges is not consistent and is significantly impacted by the timing and size of debt financing transactions.


Tax impact: adjustment represents the impact of the tax effect of the pre-tax non-GAAP adjustments excluded from our retailers and substantial marketing spend,non-GAAP net income. The tax impact of the new products did not sell through as expected, and we recorded an $11.2 million charge (“2013 garden charge”) to operating income relatingnon-GAAP adjustments is calculated based on the consolidated effective tax rate on a GAAP basis, applied to the new products. Despitenon-GAAP adjustments, unless the underlying item has a concerted effortmaterially different tax treatment.
We have also provided organic net sales, a non-GAAP measure that excludes the impact of businesses purchased or exited in the prior 12 months, because we believe it permits investors to improve consumer takeawaybetter understand the performance of our historical business without the impact of recent acquisitions or dispositions. For fiscal 2017, we have also adjusted our organic net sales for our estimate of the products through product, packaging and placement changes, as well as aggressive promotions, we continued to experience weak consumer salesimpact of the products in their second season. Lateextra week on our 2017 fiscal year net sales.
Additionally, we have provided a comparison of our free cash flow, a non-GAAP measure which may be used as an assessment of liquidity and which we use internally to evaluate our operating performance. We define free cash flow as net cash provided by operations less capital expenditures. Free cash flow does not represent cash available only for discretionary expenditures, since we have mandatory debt service requirements and other contractual and non-discretionary expenditures.
From time to time in the third quarterfuture, there may be other items that we may exclude if we believe that doing so is consistent with the goal of fiscal 2014, major retailers indicated that they would not supportproviding useful information to investors and management.
The non-GAAP adjustments made reflect the products going forward. Consequently, we made the decision to discontinue the two products at the end of the 2014 garden season. As a result, we recorded a $16.9 million charge (“2014 garden charge”) to operating income in the quarter ended June 28, 2014 to write off the remaining inventory of these products and to account for product returns, promotional allowances and other costs related to the discontinuance of the products. The 2013 and 2014 garden charges are collectively referred to as “the garden charges”. We may incur additional disposal costs which would be reflected in future quarters.

Gain on Sale of Manufacturing Plant Assetsfollowing:

During fiscal 2014, we recorded a $4.9

(1)
During the fourth quarter of fiscal 2016 and fiscal 2015, we recognized non-cash impairment charges in our Pet segment of $1.8 million and $7.3 million, respectively, related to the impairment of intangible assets caused by increased competition and declining volume of sales. These impairments are included within intangible asset impairment.
(2)
During fiscal 2017, we recognized a $2.0 million gain ($2.0 million recognized in the quarter ended June 28, 2014 and $2.9 million recognized in the quarter ended September 27, 2014) in our Garden segment from the sale of manufacturing plant assets related to a seasonal product we intend to purchase rather than produce.

Goodwill Impairment

During the fourth quarter of fiscal 2013, we recognized a non-cash charge of $7.7 million related to the impairment of goodwill within our Garden segment due to its continuing poor performance.

  GAAP to Non-GAAP Reconciliation
(unaudited, in thousands, except per share amounts) For
the Year Ended September 27, 2014
 
  Fiscal 2014
GAAP
  Garden
Charge  (A)
  Gain on Sale
of Plant
Assets (B)
  Fiscal 2014
As Adjusted
 

Net sales

 $1,604,357   $7,035    $1,611,392  

Cost of goods sold and occupancy

  1,150,333    (9,873   1,140,460  
 

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  454,024    16,908     470,932  

Selling, general and administrative expenses

  397,811     4,875    402,686  
 

 

 

  

 

 

  

 

 

  

 

 

 

Income from operations

 $56,213   $16,908   $(4,875 $68,246  
 

 

 

  

 

 

  

 

 

  

 

 

 

Net income

 $8,804   $10,652   $(3,071 $16,385  
 

 

 

  

 

 

  

 

 

  

 

 

 

Net loss per share attributable to Central Garden & Pet Co.:

    

Earnings per share – Diluted

 $0.18     $0.33  

Weighted shares outstanding

  49,397      49,397  

Gross margin

  28.3    29.2

Selling, general and administrative expenses as a percentage of sales

  24.8    25.0

Operating margin

  3.5    4.2

  GAAP to Non-GAAP Reconciliation
(unaudited, in thousands, except per share amounts)
For the Year Ended September 28, 2013
 
  Fiscal 2013
GAAP
  Garden
Charge (A)
  Goodwill
Impairment
  Fiscal 2013
As Adjusted
 

Net sales

 $1,653,633   $3,204   $—     $1,656,837  

Cost of goods sold and occupancy

  1,189,731    (7,956  —      1,181,775  
 

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

 $463,902   $11,160   $—     $475,062  

Selling, general and administrative expenses & impairment

  423,747    —      (7,710  416,037  
 

 

 

  

 

 

  

 

 

  

 

 

 

Income from operations

 $40,155   $11,160   $7,710   $59,025  
 

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss)

 $(1,929 $7,031   $4,857   $9,959  
 

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share – Diluted

 $(0.04   $0.20  

Weighted shares outstanding

  48,094      48,781  

Gross margin

  28.1    28.7

Selling, general and administrative expenses as a percentage of sales

  25.6    25.1

Operating margin

  2.4    3.6

  Non-GAAP Consolidated Comparative  Summary
(unaudited, $ in thousands)
 
      Fiscal 2014          Fiscal 2013     

Adjusted net sales

 $1,611,392   $1,656,837  

Adjusted gross profit

 $470,932   $475,062  

Adjusted gross margin

  29.2  28.7

Adjusted selling, general and administrative expenses

 $402,686   $416,037  

Adjusted selling, general and administrative as a percentage of sales

  25.0  25.1

Adjusted income from operations

 $68,246   $59,025  

Adjusted operating margin

  4.2  3.6

Adjusted EPS – diluted

 $0.33   $0.20  

Garden Segment:  Fiscal 2014
Net Sales
   Fiscal 2013
Net Sales
 

Fiscal year as reported (GAAP)

  $758,852    $765,405  

Garden charge (A)

   7,035     3,204  
  

 

 

   

 

 

 

Fiscal year as adjusted

  $765,887    $768,609  
  

 

 

   

 

 

 

   Income from
Operations
  Operating
Margin
  Income from
Operations
   Operating
Margin
 

Fiscal year as reported (GAAP)

  $41,020    5.4 $8,286     1.1

Garden charge (A)

   16,908     11,160    

Gain on sale of plant assets (B)

   (4,875    

Goodwill impairment charge (C)

     7,710    
  

 

 

   

 

 

   

Fiscal year as adjusted

  $53,053    6.9 $27,156     3.5
  

 

 

   

 

 

   

(A)The garden charges reflect the impact of Garden segment charges in fiscal 2014 and 2013 related to the discontinuance of certain products introduced in 2013.
(B)In fiscal 2014, we recognized a gain from the sale of a distribution facility. During fiscal 2016, we recorded a $2.4 million gain in our Pet segment from the sale of a manufacturing plant assets relatedresulting from rationalizing our facilities to a product the Garden segment will now purchase rather than produce.reduce excess capacity. These adjustments were recorded as part of selling, general and administrative costs.
(C)In
(3)
During the first quarter of fiscal 2013,2016, we redeemed our 2018 Notes and issued senior notes due November 2023. As a result of the bond redemption, we incurred incremental expenses of $14.3 million, comprised of a call premium payment of $8.3 million, a $2.7 million payment of overlapping interest expense for 30 days 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 consolidated statements of operations.
(4)
During the fourth quarter of fiscal 2016, we recognized a goodwillnon-cash impairment charge of $16.6 million related to our investment in two joint ventures as a result of changes in marketplace conditions, which impacted the expected cash flows and recoverability of the investment. The impairment is included within our Garden segment.other income (expense).



GAAP to Non-GAAP Reconciliation
(in thousands)
For the Fiscal Year Ended September
Non-GAAP Adjustments
2017
2016
2015
Impairments of intangible assets
(1) 
$

$1,828

$7,272
(Gain)/loss on disposal of plant assets
(2) 
(2,050)
(2,363)

Incremental expenses from note redemption and issuance
(3) 


14,339


Impairment of equity method investments
(4) 


16,572


Total non-GAAP adjustments
(2,050)
30,376

7,272
Tax effects of non-GAAP adjustments
(757)
(10,492)
(2,618)
Total net income impact from non-GAAP adjustments
$(1,293)
$19,884

$4,654
       
       
       
       


SG&A Expense Reconciliation
GAAP to Non-GAAP Reconciliation
(in thousands)
For the Fiscal Year Ended September


2017
2016
2015
GAAP SG&A expense
$476,696

$421,864

$389,345
SG&A expense impact from non-GAAP adjustments
(1) (2) 
2,050

2,363


Non-GAAP SG&A expense
$478,746

$424,227

$389,345
GAAP SG&A expense as a percentage of net sales
23.2%
23.1%
24.0%
Non-GAAP SG&A expense as a percentage of net sales
23.3%
23.2%
24.0%







Operating Income Reconciliation

GAAP operating income
$156,112

$129,358

$91,435
Total operating income impact from non-GAAP adjustments
(1)(2) 
(2,050)
(535)
7,272
Non-GAAP operating income
$154,062

$128,823

$98,707
GAAP operating margin
7.6%
7.1%
5.5%
Non-GAAP operating margin
7.5%
7.0%
6.0%







Pet Segment Operating Income Reconciliation

GAAP Pet segment operating income
$131,622

$119,930

$98,798
Total operating income impact from non-GAAP adjustments
(1)(2) 
N/A
(535)
7,272
Non-GAAP Pet segment operating income
N/A
$119,395

$106,070
GAAP Pet segment operating margin


11.1%
11.0%
Non-GAAP Pet operating margin


11.0%
11.9%







Garden Segment Operating Income Reconciliation

GAAP Garden segment operating income
$87,298

$70,317

$60,145
Total operating income impact from non-GAAP adjustments
(2) 
(2,050)
N/A
N/A
Non-GAAP Garden segment operating income
$85,248

N/A
N/A
GAAP Garden segment operating margin
10.8%



Non-GAAP Garden segment operating margin
10.5%










Interest Expense Reconciliation

GAAP interest expense
$(28,209)
$(42,847)
$(40,027)
Impact from non-GAAP adjustment
(3) 
N/A
14,339

N/A
Non-GAAP interest expense
N/A
$(28,508)
N/A









GAAP to Non-GAAP Reconciliation
(in thousands, except per share amounts)
For the Fiscal Year Ended September
Other Income (Expense) Reconciliation
2017
2016
2015
GAAP other income (expense)
$(1,621)
$(17,013)
$13
Impact from non-GAAP adjustment
(4) 
N/A
16,572

N/A
Non-GAAP other income (expense)
N/A
$(441)
N/A







Net Income and Diluted Net Income Per Share Reconciliation

GAAP net income attributable to Central Garden & Pet
$78,828

$44,514

$31,971
Total non-GAAP adjustments
(1)(2) (3)(4) 
(2,050)
30,376

7,272
Tax effects of non-GAAP adjustments
757

(10,492)
(2,618)
Total net income impact from non-GAAP adjustments
(1,293)
19,884

4,654
Non-GAAP net income attributable to Central Garden & Pet
$77,535

$64,398

$36,625
GAAP diluted net income per share
$1.52

$0.87

$0.64
Non-GAAP diluted net income per share
$1.50

$1.26

$0.74
Shares used in GAAP and non-GAAP diluted net earnings per share calculation
51,820

51,075

49,638
Organic Net Sales Reconciliation
We have provided organic net sales, a non-GAAP measure that excludes the impact of acquisitions and dispositions, because we believe it permits investors to better understand the performance of our historical business. We define organic net sales as net sales from our historical business derived by excluding the net sales from businesses acquired or exited in the preceding 12 months. After an acquired business has been part of our consolidated results for 12 months, the change in net sales thereafter is considered part of the increase or decrease in organic net sales.


GAAP to Non-GAAP Reconciliation
For the Fiscal Year Ended September 30, 2017


Consolidated
Pet Segment
Garden Segment




Percent Change


Percent Change


Percent Change
Reported net sales FY 2017 (GAAP)
$2,054.5



$1,246.4



$808.1


Reported net sales FY 2016 (GAAP)
1,829.0



1,081.8



747.2


Increase in net sales
225.5

12.3%
164.6

15.2%
60.9

8.2%
Effect of acquisitions and dispositions on increase in net sales
104.7



110.3



(5.6)

Increase in organic net sales
120.8

6.6%
54.3

5.0%
66.5

8.9%
Estimated impact of extra week in fiscal 2017 on organic sales
32.8



21.4



11.4


Organic net sales adjusted for extra week
$88.0

4.8%
$32.9

3.0%
$55.1

7.4%




Results of Operations (GAAP)

The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items bear to net sales:

   Fiscal Year Ended 
   September 27,
2014
  September 28,
2013
  September 29,
2012
 

Net sales

   100.0  100.0  100.0

Cost of goods sold and occupancy

   71.7    71.9    69.8  
  

 

 

  

 

 

  

 

 

 

Gross profit

   28.3    28.1    30.2  

Selling, general and administrative

   24.8    25.2    25.9  

Goodwill impairment

   —      0.5    —    
  

 

 

  

 

 

  

 

 

 

Income from operations

   3.5    2.4    4.3  

Interest expense, net

   (2.7  (2.6  (2.4

Other income

   —      —      0.1  

Income taxes

   0.3    (0.2  (0.7

Noncontrolling interest

   0.1    0.1    (0.1
  

 

 

  

 

 

  

 

 

 

Net income (loss)

   0.5  (0.1)%   1.2

 
Fiscal Year Ended
 
September 30, 2017
September 24, 2016
September 26, 2015
Net sales
100.0 %
100.0 %
100.0 %
Cost of goods sold and occupancy
69.2

69.8

70.4
Gross profit
30.8

30.2

29.6
Selling, general and administrative
23.2

23.1

23.6
Intangible asset impairment




0.5
Operating income
7.6

7.1

5.5
Interest expense, net
(1.4)
(2.3)
(2.4)
Other income (expense)
(0.1)
(0.9)

Income taxes
2.3

1.3

1.1
Noncontrolling interest


0.2

0.1
Net income (loss)
3.8 %
2.4 %
1.9 %

Fiscal 20142017 Compared to Fiscal 20132016

Net Sales

Net sales for fiscal 2014 decreased $49.22017 increased $225.5 million, or 3.0%12.3%, to $1,604.4$2,054.5 million from $1,653.6$1,829.0 million in fiscal 2013.2016. Our branded product sales decreased $70.7increased $203.5 million, and sales of other manufacturers’ products increased $21.5$22.0 million. Branded product sales include products we manufactureproduce under Central brand names and products we manufactureproduce under third-partythird party brands. Sales of our branded products represented 81.3%80.1% of our total sales in fiscal 20142017 compared with 83.2%78.9% in fiscal 2013.

2016. Fiscal 2017 included 53 weeks while fiscal 2016 included 52 weeks. We estimate the impact of the extra week in fiscal 2017 to be approximately $35 million on total net sales, $32.8 million of which is the impact on organic sales. Private label sales represented 10% to 15% of our consolidated net sales.

Organic net sales, which excludes the impact of acquisitions and divestitures in the last 12 months, increased $120.8 million, or 6.6%, as compared to fiscal 2016. In addition, fiscal 2017 included an extra week as compared to fiscal 2016. We estimate the impact on fiscal 2017 of the extra week of net sales on organic net sales to be $32.8 million. Adjusting for the extra week in fiscal 2017, organic net sales increased approximately 4.8%.
The following table indicates each class of similar products which represented approximately 10% or more than 10% of our consolidated net sales in the fiscal years presented (in millions):

Category

  2014   2013   2012 

Pet supplies (excluding wild bird feed)

  $774.2    $807.4    $847.1  

Garden controls and fertilizers

   262.5     274.9     281.7  

Wild bird feed

   202.1     210.8     205.1  

Other garden supplies

   182.5     183.5     185.7  

Grass seed

   183.1     177.0     180.4  
  

 

 

   

 

 

   

 

 

 

Total

  $1,604.4    $1,653.6    $1,700.0  
  

 

 

   

 

 

   

 

 

 

Category
2017
2016
2015
Other pet products
$841.4

$689.3

$594.7

Other garden supplies
464.9

331.3

343.5

Dog and cat products
405.0

326.0

233.0

Garden controls and fertilizer products
343.2

298.8

286.3

Wild bird feed

(1)183.6

193.2

Total
$2,054.5

$1,829.0

$1,650.7

(1) The product category was less than 10% of our consolidated net sales in the respective period.
Our Pet segment’s net sales for fiscal 2014 decreased $42.72017 increased $164.6 million, or 4.8%15.2%, to $845.5$1,246.4 million from $888.2$1,081.8 million in fiscal 2013. The decline in pet sales was due principally to industry weakness, lost shelf space and increased competition in the categories in which we participate.2016. Pet branded product sales decreased $63.4increased $161.6 million from fiscal 20132016. The impact of acquisitions and dispositions was $110.3 million due to two fiscal 2017 acquisitions, two months of a fiscal 2016 acquisition and a business we exited in fiscal 2016. Organic net sales increased


$54.2 million, or 5.0%, due primarily to a $20.2 million decreasevolume-based increased sales in our dog & cat category, driven by increased sales of toys, treats and pet beds, and our animal health category, an $18.0 million decreasebusiness. Adjusting for the extra week in our bird and small animal category and a $15.4 million decrease in our aquatics category; all of these decreases were primarily volume driven. Our animal health category was impacted by lowerfiscal 2017, organic net sales in the flea and tick category, which resulted from a weak flea and tick season, lost shelf space, rebranding and repackaging resulting in return of the superceded product and increased competition. Sales of other manufacturers’ products increased approximately $20.7 million benefitting from expanded distribution.

3.0%.

Our Garden segment’s net sales for fiscal 2014 decreased $6.52017 increased $60.9 million, or 0.9%8.2%, to $758.9$808.1 million from $765.4$747.2 million in fiscal 2013.2016. Garden branded product sales increased $41.9 million and sales of other manufacturer's products increased $19.0 million as compared to fiscal 2016. Organic net sales increased $66.5 million, or 8.9%, due primarily to volume-based increased sales in our controls and fertilizer category, favorably impacted by new listings of branded and private label products with existing customers, higher sales of other manufacturer's products and increased revenue in our grass seed business. Adjusting for the extra week in fiscal 2017, organic net sales increased approximately 7.4%.
Gross Profit
Gross profit for fiscal 2017 increased $79.8 million, or 14.4%, to $632.8 million from $553.0 million in fiscal 2016. The increase in gross profit was due primarily to the Pet segment, though both operating segments contributed to the increased gross profit. Gross margin increased 60 basis points to 30.8% in fiscal 2017 from 30.2% in fiscal 2016. Both the Pet and Garden segments contributed to the increased gross margin.
In the Pet segment, gross profit increased in fiscal 2017 due primarily to a $164.6 million increase in sales. The Pet segment gross margin also improved, aided by the two fiscal 2017 acquisitions as their gross margins were slightly above the Pet segment's as a whole.
In the Garden segment, gross profit increased in fiscal 2017 due to a $60.9 million increase in net sales and an improved gross margin. Increased sales volume, a favorable product mix, and manufacturing efficiencies and costing favorably impacted the Garden segment gross margin, primarily in our controls and fertilizer business and secondly in our grass seed business.
Selling, General and Administrative
Selling, general and administrative expenses increased $54.8 million, or 13.0%, from $421.9 million in fiscal 2016 to $476.7 million in fiscal 2017. As a percentage of net sales, selling, general and administrative expenses increased from 23.1% in fiscal 2016 to 23.2% in fiscal 2017. The increase in selling, general and administrative expenses was due to increases in both selling and delivery expense and warehouse and administrative expense. Both fiscal 2017 and fiscal 2016 include a gain on the sale of a facility of approximately $2 million. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resource, and information technology functions.
Selling and delivery expense increased $25.4 million, or 11.1%, from $228.0 million in fiscal 2016 to $253.4 million in fiscal 2017 and as a percentage of net sales decreased from 12.5% in fiscal 2016 to 12.3% in fiscal 2017. The expense increase was principally in our Pet segment due primarily to recent acquisitions, although both our Pet and Garden segments had increases in both selling and delivery expenses in support of the increased sales volumes and increased marketing and advertising expenses.
Warehouse and administrative expense increased $29.4 million, or 15.2%, from $193.9 million in fiscal 2016 to $223.3 million in fiscal 2017. As a percentage of net sales, warehouse and administrative expense increased from 10.6% in fiscal 2016 to 10.9% in fiscal 2017. The expense increase was principally in our Pet segment, due primarily to recent acquisitions, including an expense of $2.3 million related to a contingent earn-out for a fiscal 2017 acquisition, and increased warehouse and facility spend in our dog & cat business and our distribution business to support growth and facility transitions. The Pet segment also had a $2.4 million gain from the sale of a manufacturing facility that reduced expenses in fiscal 2016. The Garden segment had a decline in warehouse and administrative expense due to a $2.0 million gain from the sale of a distribution facility in fiscal 2017. Corporate administrative expense increased $1.9 million due primarily to increased non-cash equity compensation expense. On a consolidated basis for fiscal 2017, the $2.0 million gain from the sale of the distribution facility in the Garden segment was essentially offset by the $2.3 million of additional expense for the contingent earn-out amount.
Operating Income
Operating income increased $26.8 million in fiscal 2017, or 20.7% to $156.1 million. Increased sales of $225.5 million and a 60 basis point gross margin improvement contributed to the improved operating income, partially offset by a $54.8 million increase in selling, general and administrative costs. Operating income increased in both the Pet and Garden segments partially offset by a $1.9 million increase in corporate expenses. Our operating margin improved to 7.6% for fiscal 2017 from 7.1% for fiscal 2016 due to the improved gross margin partially offset by a 10 bps increase in selling, general and administrative expenses as a percentage of net sales.
Pet operating income increased $11.7 million, or 9.7%, to $131.6 million for fiscal 2017 from $119.9 million for fiscal 2016. The increase was due primarily to increased sales and slightly higher gross margin partially offset by higher selling, general and administrative expenses. Pet operating margin declined to 10.6% for fiscal 2017 from 11.1% for fiscal 2016.
Garden operating income increased $17.0 million, or 24.1%, to $87.3 million for fiscal 2017 from $70.3 million for fiscal 2016 due to increased sales and an improved gross margin partially offset by an increase in selling, general and administrative expenses. Garden


operating margin increased to 10.8% for fiscal 2017 from 9.4% for fiscal 2016 due to the improved gross margin and lower selling, general and administrative expenses as a percentage of net sales.
Net Interest Expense
Net interest expense decreased $14.6 million, or 34.3%, from $42.7 million in fiscal 2016 to $28.1 million in fiscal 2017. In November 2015, we issued $400 million aggregate principal amount of 2023 Notes. We used the net proceeds from the offering, together with available cash, to redeem our outstanding 2018 Notes and pay fees and expenses related to the offering. As a result of our redemption of the 2018 Notes, we recognized incremental interest expense of approximately $14.3 million in fiscal 2016 comprised of an $8.3 million call premium, $2.7 million related to the 30 days of overlapping interest expense and a $3.3 million non-cash charge for the write-off of unamortized financing costs.
Non-GAAP interest expense, which excludes the $14.3 million of incremental expense related to the issuance and redemption of our fixed rate debt in fiscal 2016, decreased $0.3 million. Debt outstanding on September 30, 2017 was $395.7 million compared to $395.3 million as of September 24, 2016. Our average borrowing rate for fiscal 2017 decreased to 6.0% from 6.3% for fiscal 2016.
Other Income (Expense)
Other income (expense) is comprised of income from investments accounted for under the equity method of accounting, including any associated impairments of equity method investments and foreign currency exchange gains and losses. Other expense decreased $15.4 million from fiscal 2016. During the fourth quarter of fiscal 2016, we recognized a non-cash impairment charge of $16.6 million related to our investment in two joint ventures as a result of changes in marketplace conditions, which impacted the expected cash flows and the recoverability of the investment. The impairment is included within Other income (expense). The $1.6 million expense in fiscal 2017 is due primarily to an investment in a start-up made in fiscal 2017. A separate investment made in our fiscal 2017 third quarter is expected to contribute to earnings over a full fiscal year, but because it is seasonal in nature, did not have a material impact on the fiscal 2017 year.
Income Taxes
Our effective income tax rate was 36.9% for fiscal 2017 compared to 34.5% for fiscal 2016. The increase in our effective income tax rate in fiscal 2017 as compared to fiscal 2016 was due primarily to a significant increase in our fiscal 2017 pretax earnings while our tax credits and incentives remained similar to those in fiscal 2016. Non-deductible costs associated with acquisitions also impacted the fiscal 2017 tax rate.

Fiscal 2016 Compared to Fiscal 2015
Net Sales
Net sales for fiscal 2016 increased $178.3 million, or 10.8%, to $1,829.0 million from $1,650.7 million in fiscal 2015. Our branded product sales increased $127.8 million, and sales of other manufacturers’ products increased $50.5 million. Branded product sales include products we produce under Central brand names and products we produce under third party brands. Sales of our branded products represented 78.9% of our total sales in fiscal 2016 compared with 79.7% in fiscal 2015. Private label sales represented less than 10% of our consolidated net sales.
Our Pet segment’s net sales for fiscal 2016 increased $187.3 million, or 20.9%, to $1,081.8 million from $894.5 million in fiscal 2015. Pet branded product sales increased $168.6 million from fiscal 2015. Two recent acquisitions in the dog & cat category, accounted for approximately $133.3 million of the increase. Organic sales growth of $54.0 million, or 6.0% was volume-based and primarily driven by a $13.4 million increase in our dog & cat category and an $18.7 million increase in sales of other manufacturers’ products benefiting from expanded distribution.
Our Garden segment’s net sales for fiscal 2016 decreased $9.0 million, or 1.2%, to $747.2 million from $756.2 million in fiscal 2015. Garden branded product sales decreased $7.3$40.8 million due primarily to a $12.4$28.2 million decrease due to our exit from the holiday decor business in January 2016, a $12.7 million decrease in our controls and fertilizer category which was impacted by reduced volumesdue primarily to our exit from a private label relationship in the fertilizer category and increased

charges related to returns and promotional allowances for two discontinued garden products introduced in 2013. Thean $8.6 million decrease in controls and fertilizers waswild bird feed due primarily to lower prices precipitated by lower raw material costs. These decreases were partially offset by an $18.0 million increase in grass seed salesdue primarily due to increased pricing.the comparison to a weather related weak fiscal 2015. Sales of other manufacturers’ products increased approximately $0.8$31.8 million compared to fiscal 2013.

2015 due primarily to increased distribution to existing customers.

Gross Profit

Gross profit decreased $9.9for fiscal 2016 increased $65.0 million, or 2.1%13.3%, to $454.0$553.0 million from $463.9$488.0 million in fiscal 2013.2015. Both our operating segments contributed to the increase in gross profit, primarily the Pet segment. Gross profit as a percentage of net salesmargin increased 60 basis points to 30.2% in fiscal


2016 from 28.1%29.6% in fiscal 2013 to 28.3% for fiscal 2014, with both the Pet segment and the Garden segment, including the garden charge, contributing to the small increase. Adjusting for the charges and gains reflected in the adjusted results,2015. While our gross profit for fiscal 2014 decreased $4.1 million, or 0.9%, to $470.9 million from fiscal 2013. Adjusted gross margin increased from 28.7% for fiscal 2013 to 29.2% for fiscal 2014.

Gross profit decreasedincrease was primarily in the Pet segment, in fiscal 2014 due to a $42.7 million decrease in sales, partially offset by improvedour gross margin. Most of our pet businesses had increased gross margins. The largest contributor to the margin increase was our bird and small animal business which benefitted from operational improvements in small animal and from lower commodity costs in bird feed. These grossdue to an improved Garden segment margin, increases were partially offset by a lower gross margin in the Pet segment.

In the Pet segment, gross profit increased in fiscal 2016 due to a $187.3 million increase in sales. Although increased sales from our animal health category which wasrecently acquired businesses favorably impacted byour gross profit, as expected, they had a mix shift in professional and anegative impact on our gross margin, as these businesses historically have lower gross margins than our historical segment average. The gross margin in our flea and tick categoryPet segment would have improved absent the impact of the recent acquisitions compared to fiscal 2015 due primarily to the rebranding and packaging efforts undertakenpositive impact of increased sales in fiscal 2014.

In theour professional business.

Gross profit in our Garden segment gross profit remained relatively constant as the 0.9% decrease in net sales was offset by increased gross margin. The Garden segment gross profit and gross margin were impacted in both fiscal 2014 and fiscal 2013 by the garden charges. The Garden segment gross margin improved slightly due primarily to an improved gross margin in wild bird feed, which benefitted from lower commodity costs and seasonal décor, due primarily to the elimination of less profitable products. These improvements to gross margin wereimprovement which was partially offset by a decreased$9.0 million decrease in net sales. The gross margin in grass seed,improvement was due primarily to higher costs,increased grass seed sales, a favorable product mix change in our grass seed and in controls and fertilizers, impacted by lower sales volumes,fertilizer businesses and a sales mix shift adversely affected gross profit and gross margin.

our exit from the holiday decor business.

Selling, General and Administrative

Selling, general and administrative expenses decreased $18.2increased $32.6 million, or 4.4%8.4%, from $416.0$389.3 million in fiscal 20132015 to $397.8$421.9 million in fiscal 2014.2016. As a percentage of net sales, selling, general and administrative expenses decreased from 25.2%23.6% in fiscal 20132015 to 24.8%23.1% in fiscal 2014.2016. The changeincrease in selling, general and administrative expenses discussed further below, was due primarily to decreasedincreases in both selling and delivery expense and warehouse and administrative expense. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resource, and information technology functions.

Selling and delivery expense decreased $17.6increased $17.8 million, or 7.5%8.5%, from $234.0$210.2 million in fiscal 20132015 to $216.4$228.0 million in fiscal 2014. Selling2016 and delivery expense as a percentage of net sales decreased from 14.2%12.7% in fiscal 20132015 to 13.5%12.5% in fiscal 2014.2016. The decreaseexpense increase was principally in our Pet segment due primarily to decreasedtwo recent acquisitions, increased selling and marketing expenses, primarily advertising, associated with the controls and fertilizers and grass seed categoriesexpense in our Garden segment.

animal health category and increased delivery expenses in our distribution business to support its sales gains.

Warehouse and administrative expense decreased $0.6increased $14.8 million, or 0.3%8.2%, from $182.0$179.1 million in fiscal 20132015 to $181.4$193.9 million in fiscal 2014. Decreased costs2016. As a percentage of net sales, warehouse and administrative expense decreased from 10.9% in bothfiscal 2015 to 10.6% in fiscal 2016. The expense increase was principally in our operating segments werePet segment, due primarily to two recent acquisitions and increased administrative and warehouse spending to support growth in our business units, including spending on new facilities and equipment impairment and depreciation amounts on equipment we do not intend to use going forward. The increased expense was partially offset by a $9.3$4.9 million increasedecrease in corporate costs.expense. Corporate administrative expense decreased due primarily to a decrease in third party provider costs and lower employee related costs principally related to temporary management vacancies, including our CFO position.
Intangible Asset Impairment
We evaluate 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. Additionally, we evaluate indefinite-lived intangible assets on an annual basis. In fiscal 2016, we recognized a non-cash $1.8 million impairment charge in our Pet segment the prior year warehouse consolidations are now yielding savings, and in our Garden segment, we recorded a $4.9 million gain from the sale of manufacturing plant assets related to a seasonal product we intend to purchase rather than produce. Corporate operating expense increased $9.3 millionan indefinite-lived intangible asset as a result of $5.9 million of software costs expensed (due primarily to changesdeclining sales and a change in management strategy. No amount remains on our operations and related plans for future SAP implementations), increased medical insurance program costs and information technology third party provider costsbooks related to our SAP implementation.

Impairment

We perform an annual goodwill test for impairment. An impairment loss is recognized for goodwill if its carrying value exceeds its fair value. The goodwill fair values are estimated using the discounted cash flow related to the assets. During the fourth quarter ofthis intangible asset.

In fiscal 2013,2015, we recognized a non-cash charge of $7.7$7.3 million related to the impairment of goodwill within our Garden segment due to its continuing poor performance. We did not have an impairment charge in fiscal 2014.

our Pet segment related to certain indefinite-lived intangible assets as a result of increased competition and an expected decline in the volume of sales.

Operating Income

Operating income increased $16.0$37.9 million in fiscal 2014,2016, or 40.0%,41.5% to $56.2$129.4 million. Increased sales of $178.3 million and a 60 basis point gross margin improvement contributed to the improved operating income, partially offset by a $32.6 million increase in selling, general and administrative costs. Our operating margin improved to 7.1% for fiscal 2016 from $40.2 million in5.5% for fiscal 2013. Lower2015 due primarily to the improved gross margin and lower selling, general and administrative expenses as a percentage of net sales. The Pet and increased gross margin were partially offset byGarden segments and lower sales andcorporate expenses all contributed to the $16.9 million garden charge. Operating margin was 3.5% for fiscal 2014 and 2.4% for fiscal 2013. Excluding the garden charges, the gain on the sale of manufacturing plant assets and the goodwill impairmentincrease in the Garden segment, adjustedoperating income.
Pet operating income was $68.2 million, as compared to $59.0 million in the prior year, and operating margin improved to 4.2% as compared to 3.6% in the prior year.

Pet segment operating income decreased $7.3increased $21.1 million, or 7.7%21.4%, to $88.1$119.9 million for fiscal 20142016 from $95.4$98.8 million for fiscal 2013.2015. The decreaseincrease was due primarily to decreasedincreased sales which drove lower gross profit, partially offset by decreaseda lower gross margin and higher selling, general and administrative expenses. Pet operating margin decreased from 10.7%increased to 11.1% for fiscal 2013 to 10.4%2016 from 11.0% for fiscal 2014. 2015.

Garden operating income increased $32.7$10.2 million, or 395%16.9%, to $41.0$70.3 million for fiscal 20142016 from $8.3$60.1 million for fiscal 2013. Adjusted operating income2015 as an improvement in Garden increased $25.9 million to $53.1 million for fiscal 2014 from $27.2 million in fiscal 2013, and the adjusted operatinggross margin was 6.9% as compared to 3.5% in fiscal 2013. Garden adjusted operating income increased due primarily topartially offset by lower sales and a $20.1 million decreaseminor increase in selling, general and administrative expenses. CorporateGarden operating margin increased to 9.4% for fiscal 2016 from 8.0% for fiscal 2015 due to the improved gross margin which was only partially offset by higher selling, general and administrative expenses increased $9.3 million due primarily toas a $5.9 million long-lived software charge, increased medical insurance program costs and information technology third party provider costs.

percentage of net sales.



Net Interest Expense

Net interest expense decreased $0.2increased $2.8 million, or 0.5%7.0%, from $43.0$39.9 million in fiscal 20132015 to $42.8$42.7 million in fiscal 2014. The decrease was2016. In November 2015, we issued $400 million aggregate principal amount of 2023 Notes. We used the net proceeds from the offering, together with available cash, to redeem our outstanding 2018 Notes and pay fees and expenses related to the offering. As a result of our redemption of the 2018 Notes, we recognized incremental interest expense of approximately $14.3 million comprised of an $8.3 million call premium, $2.7 million related to the 30 days of overlapping interest expense and a $3.3 million non-cash charge for the write-off of unamortized financing costs in interest expense. In March 2015, we redeemed $50.0 million of our 2018 Notes. As a result of the $50.0 million redemption, we recognized incremental interest expense of approximately $1.6 million in the second quarter of fiscal 2015.
Non-GAAP interest expense, which excludes the $14.3 million of incremental expense related to the issuance and redemption of our fixed rate debt in fiscal 2016 and the $1.6 million of incremental expense related to the redemption of $50 million of our fixed rate debt in fiscal 2015, decreased $9.9 million due to both the lower interest expense due primarily torate on our 2023 Notes and lower average debt outstanding during fiscal 20142016 as compared to fiscal 2013 partially offset bya result of the write-offredemption of unamortized deferred financing costs related to$50.0 million of our prior revolving credit facility resulting2018 Notes in a non-cash charge of $1.7 million in the first quarter of fiscal 2014.March 2015. Debt outstanding on September 27, 201424, 2016 was $450.2$395.3 million compared to $472.6$397.0 million as of September 28, 2013.

26, 2015. Our average borrowing rate for fiscal 2016 decreased to 6.3% from 8.1% for fiscal 2015.

Other Income (Expense)

Other income (expense) is comprised of income from investments accounted for under the equity method of accounting, including any associated impairments of equity method investments, foreign currency exchange gains and losses, and realized and unrealized gains and losses from derivative contracts used to economically hedge anticipated commodity purchases for use in our products. Other incomeexpense increased $1.1$17.0 million from $0.7fiscal 2015. During the fourth quarter of fiscal 2016, we recognized a non-cash impairment charge of $16.6 million related to our investment in two joint ventures as a result of expensechanges in fiscal 2013 to $0.4 millionmarketplace conditions, which impacted the expected cash flows and the recoverability of the investment. The impairment is included within Other income in fiscal 2014. The improvement was due primarily to realized and unrealized losses incurred in fiscal 2013 from derivative contracts used to economically hedge anticipated commodity purchases that did not reoccur in fiscal 2014.

(expense).

Income Taxes

Our effective income tax rate was 29.2%34.5% for fiscal 20142016 compared to a 74.2% benefit36.0% for fiscal 2013. Our 2014 tax rate benefited from the removal of valuation allowances on international deferred tax assets, and our 2013 tax rate benefited primarily from additional tax credits available in 2013.

Fiscal 2013 Compared to Fiscal 2012

Net Sales

Net sales for fiscal 2013 decreased $46.4 million, or 2.7%, to $1,653.6 million from $1,700.0 million in fiscal 2012. Fiscal 2013, which was a 52-week year, included one less week than fiscal 2012. Our branded product sales decreased $44.6 million, and sales of other manufacturers’ products decreased $1.8 million. Branded product sales include products we manufacture under Central brand names and products we manufacture under third-party brands. Sales of our branded products represented 83.2% of our total sales in fiscal 2013 compared with 83.5% in fiscal 2012.

The following table indicates each class of similar products which represented more than 10% of our consolidated net sales in the fiscal years presented (in millions):

Category

  2013   2012   2011 

Pet supplies (excluding wild bird feed)

  $807.4    $847.1    $773.1  

Garden Controls and fertilizers

   274.9     281.7     260.0  

Wild bird feed

   210.8     205.1     197.5  

Other garden supplies

   183.5     185.7     212.1  

Grass seed

   177.0     180.4     185.9  
  

 

 

   

 

 

   

 

 

 

Total

  $1,653.6    $1,700.0    $1,628.6  
  

 

 

   

 

 

   

 

 

 

Our Pet segment’s net sales for fiscal 2013 decreased $42.5 million, or 4.6%, to $888.2 million from $930.7 million in fiscal 2012. The absence of the extra week impacted Pet segment sales in fiscal 2013 by approximately $16.9 million. Pet branded product sales declined due primarily to decreased sales of $13.3 million in our animal health category, and $7.6 million in our pet nutrition category.2015. The decrease in animal health sales reflected lower direct advertising and promotional spending as well as the non-recurrence of the prior year initial sell-in to a new channel, while the decrease in pet nutrition sales was principally due to lost distribution. Sales of other manufacturers’ products decreased approximately $2.8 million as compared with fiscal 2012.

Our Garden segment’s net sales for fiscal 2013 decreased $3.9 million, or 0.5%, to $765.4 million from $769.3 million in fiscal 2012. The absence of the extra week impacted Garden segment sales in fiscal 2013 by approximately $11.4 million. Garden branded product sales increased, after taking into account the $11.4 million attributable to the extra week in the prior fiscal year, due primarily to an $8.5 million increase in wild bird feed attributable to both volume and price gains. Sales of other manufacturers’ products increased approximately $1.0 million compared to fiscal 2012.

Gross Profit

Gross profit decreased $50.2 million, or 9.8%, to $463.9 million from $514.1 million in fiscal 2012. Gross profit as a percentage of net sales declined from 30.2% in fiscal 2012 to 28.1% for fiscal 2013.

Gross profit decreased in the Pet segment for fiscal 2013 due to decreased sales and a lower gross margin than in fiscal 2012. The largest contributor to the lower gross profit and gross margin was our animal health products, which were impacted primarily by decreased sales volume of our flea and tick products and small animal products. Flea and tick product sales in the prior year included the initial sell-in to a new channel and our small animal category was impacted by increased competition and product manufacturing issues related to the closure and relocation of a production facility.

Gross profit and gross margin declined in the Garden segment due primarily to the lower profitability in our controls and fertilizer category. This category was impacted by a decline in margin, including an $11.2 million charge in the fourth quarter of fiscal 2013 related to products introduced in fiscal 2013. The fourth quarter charge related to the costs associated with inventory and product and packaging changes to certain products introduced in fiscal 2013.

Selling, General and Administrative

Selling, general and administrative expenses decreased $23.7 million, or 5.4%, from $439.7 million in fiscal 2012 to $416.0 million in fiscal 2013. As a percentage of net sales, selling, general and administrative expenses decreased from 25.9% in fiscal 2012 to 25.2% in fiscal 2013. Fiscal 2012 included an extra week, which impacted selling, general and administrative expenses by approximately $8.0 million. The change in selling, general and administrative expenses, discussed further below, was due primarily to decreased selling and delivery expense. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resource, and information technology functions.

Selling and delivery expense decreased $22.0 million, or 8.6%, from $256.0 million in fiscal 2012 to $234.0 million in fiscal 2013. Selling and delivery expense as a percentage of net sales decreased from 15.1% in fiscal 2012 to 14.2% in fiscal 2013. The decrease was due to decreased advertising and promotional expenditures in our Pet segment, headcount reductions and lower selling and delivery expense resulting from our lower sales volume.

Warehouse and administrative expense decreased $1.7 million, or 0.9%, from $183.7 million in fiscal 2012 to $182.0 million in fiscal 2013. The decrease was due primarily to payroll related and third party provider costs, partially offset by higher corporate expenses, due primarily to insurance program, information technology and payroll related costs. Increased information technology costs were primarily related to increased payroll and amortization expense related to our SAP implementation.

Impairment

We reviewed our goodwill for impairment. An impairment loss is recognized for goodwill if its carrying value exceeds its fair value. The goodwill fair values are estimated using the discounted cash flow related to the assets. During the fourth quarter of fiscal 2013, we recognized a non-cash charge of $7.7 million related to the impairment of goodwill within our Garden segment due to its continuing poor performance.

Operating Income

Operating income decreased $34.2 million in fiscal 2013, or 46.0%, to $40.2 million from $74.4 million in fiscal 2012, due to a decrease in gross profit, as the impact of the decrease in sales was amplified by a decline in gross margin, partially offset by a decrease in selling, general and administrative expenses. Pet operating income increased $7.8 million, or 8.9%, in fiscal 2013 to $95.4 million, as a decrease in selling, general and administrative costs, more than offset the impact of decreased net sales and a 50 basis point decline in gross margin. Garden operating income decreased $32.0 million, or 79.2%, in fiscal 2013 to $8.4 million due primarily to the decline in gross margin. Garden operating income was impacted by an $11.2 million charge in the fourth quarter of fiscal 2013 related to new control and fertilizer products introduced in fiscal 2013 and a $7.7 million noncash goodwill impairment charge. Corporate operating expense increased $10.0 million in fiscal 2013, or 18.7%, due primarily to an increase in insurance program costs and increased information technology expenses.

Net Interest Expense

Net interest expense increased $2.8 million, or 7.2%, from $40.2 million in fiscal 2012 to $43.0 million in fiscal 2013. Interest expense increased due to an increase in the average debt outstanding to $506 million in fiscal 2013 compared to $474 million in fiscal 2012. Our average interest rates for fiscal 2013 and 2012 were 8.1% and 8.2%, respectively. Debt outstanding on September 28, 2013 was $472.6 million compared to $499.8 million as of September 29, 2012.

Other Income (Expense)

Other income decreased $1.4 million from $0.7 million of income in fiscal 2012 to $0.7 million of expense in fiscal 2013. The decrease was due primarily to realized and unrealized gains and losses from derivative contracts used to economically hedge anticipated commodity purchases for use in our products. Other income

(expense) is comprised of income from investments accounted for under the equity method of accounting, foreign currency exchange gains and losses, and realized and unrealized gains and losses from derivative contracts used to economically hedge anticipated commodity purchases for use in our products.

Income Taxes

Our effective income tax rate in fiscal 2013 was a 74.3% benefit,2016 as compared to 36.7% expensefiscal 2015 was due primarily to the availability and usage of additional tax credits and incentives in fiscal 2012. The tax rate in fiscal 2013 was impacted by tax credits available in the current year applied to the fiscal 2013 loss.

2016.

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. 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 in those periods 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

During fiscal years our business was negatively2015 through 2017, commodity costs generally declined, but in past years we have been impacted by low consumer confidence, as well as other macro-economic factors. Throughout mostvolatility in a number of fiscal 2013, commodity costs continued to increase. In fiscal 2014, commodity costs declined overall, although we were impacted by increases in ourcommodities, including grass seed costs.and wild bird feed grains. We continue to monitor commodity prices in order to be in a position 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 2014,2017, approximately 65%66% of our Garden segment’s net sales and 59%56% 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.

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, ourOur lawn and garden businesses are highly seasonal with approximately 65%66% 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 $37.1 million, from $151.4 million in fiscal 2016 to $114.3 million in fiscal 2017. The decrease in cash provided by operating activities was due primarily to a decrease in cash flows from working capital accounts, primarily receivables, as compared to fiscal 2016. An increase in fourth quarter sales during fiscal 2017 drove an increase in accounts receivable in the current year compared to the prior year.
Net cash provided by operating activities increased $154.8$64.0 million, from $28.3$87.4 million of cash used in operating activities in fiscal 20132015 to $126.5$151.4 million of cash provided by operating activities in fiscal 2014.2016. The increase in cash provided by operating activities was due primarily to decreased working capital investment, specifically our decreased investment in inventory. In fiscal 2013, we built safety stock to ensure our ability to service our customers would not be disrupted. In fiscal 2014, we managed our inventory to lower levels. We continue to focus on bringing our investment in inventory down over time, while maintaining high fill rates and service levels to our customers.

Cash used in operating activities increased $117.5 million from $89.2 million of cash provided by operating activities in fiscal 2012 to $28.3 million of cash used in operating activities in fiscal 2013. Thean increase in cash used in operating activities was due primarily to increases in ourflows from working capital accounts, principally inventory. Inventory balances increased over the prior yearprimarily receivables, as we built safety stockcompared to ensure we could meet the anticipated needsfiscal 2015, due to better management of our customers. Higher inventory levels also reflected a weaker than anticipated Garden season and poor sell-through of our two newly introduced garden products. Additionally, strategic purchases and cost inflation impacted our inventory levels.

working capital, as well as stronger operating performance.

Investing Activities

Net cash used in investing activities increased $10.1$73.4 million from $25.1$91.2 million in fiscal 20132016 to $35.2$164.6 million in fiscal 2014.2017. The increase in cash used in investing activities was due primarily to ourincreased acquisition of certain assets of Envincio LLCand investment activity in April 2014 for approximately $20 millionthe current year compared to the prior year and an increase in amounts invested in restricted cash and short term investments. These increases werecapital expenditures during the current year, partially offset by an increase in proceeds received from the sale of thea small veterinary division and a distribution facility in our Garden segment manufacturing plant assetsduring the first fiscal quarter of 2017. During fiscal 2017, we acquired Segrest Inc., a supplier of aquarium fish, and lowerK&H Manufacturing, a producer of premium pet supplies and the largest marketer of heated pet products in the country, for total aggregate consideration of $109.9 million. During fiscal 2017, we also made investments in two strategic joint ventures for $12.5 million. Additionally, our capital expenditures increased to approximately $45 million from $28 million in fiscal 2014 compared to fiscal 2013 due to reduced expenditures related to2016, as we improve our existing infrastructure for planned growth and make our manufacturing facilities and our SAP implementation.

more efficient.

Net cash used in investing activities decreased $19.4increased $41.3 million from approximately $44.5$49.9 million in fiscal 20122015 to approximately $25.1$91.2 million in fiscal 2013.2016. The decreaseincrease in cash used in investing activities in fiscal 2013 was due primarily to a decrease in capital expenditures. The amount invested in facility consolidation and our ERP implementation intwo acquisitions during the first quarter of fiscal 2012 was below the amount invested in fiscal 2013. During fiscal 2013, we received proceeds from the sale of short term investments, which were offset by payments made related to the acquisition of FourStar Microbial Products, LLC (“Four Star Microbial”). In December 2012,2016. On September 30, 2015, we acquired the remaining majority interest in FourStar MicrobialHydro-Organics Wholesale, Inc, an organic fertilizer company, for approximately $4.8$7.8 million in cash with possibleand approximately $2.6 million of estimated contingent future performance-based payments.

In December 2015, we purchased the pet bedding business and certain other assets of National Consumer Outdoors Corp., formerly known as Dallas Manufacturing Company ("DMC") for approximately $61 million. Additionally, our capital expenditures increased to approximately $28 million, from $22 million in fiscal 2015, as we improve our existing infrastructure for planned growth and make our manufacturing facilities more efficient.

Financing Activities

Net cash used in financing activities increased $48.1decreased $3.8 million from $20.3$14.2 million ofin fiscal 2016 to $10.4 million in fiscal 2017. The decrease in cash providedused by financing activities was due primarily to an increase in fiscal 2013 to $27.8 millioncash flows from the excess tax benefits associated with the increase in stock option exercise activity during the current year period, partially offset by taxes paid for shares withheld in connection with the net share settlement of vested restricted stock and exercised options during the current year, as well as the payment of financing costs associated with the issuance of our 2023 Notes and amendment of our asset backed loan facility during the prior year period.
Net cash used in financing activities decreased $54.2 million from $68.4 million in fiscal 2014.2015 to $14.2 million in fiscal 2016. The increasedecrease in cash used was due primarily to net repayments under our revolving credit facilityredemption of $50 million aggregate principal of our 2018 Notes during fiscal 2014 compared to net borrowingsthe prior year period at 102.063%, as well as increased purchases of our common stock in fiscal 2013.

Net cash provided by financing activities increased $28.9 million from $8.6 million of cash used in financing activities in fiscal 2012 to $20.3 million of cash provided by financing activities in fiscal 2013. The increase in cash provided was due primarily to increased net borrowings under our revolving credit facility in fiscal 20132015 compared to fiscal 2012. The higher net borrowings in fiscal 20132016. These uses of cash were partially offset by lower repurchasesthe payment of financing costs associated with the issuance of our common stock. During fiscal 2013, our repurchases2023 Notes, subsequent redemption of our common stock totaled $1.5 million, compared to $36.2 million in2018 Notes and amendment of our asset backed loan facility during fiscal 2012.

2016.

We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $390$400 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 expansion of and upgrades to plant and equipment and also investment


in our continued implementation of a scalable enterprise-wide information technology platform, will not exceed $30be approximately $40 million forover the next 12 months. 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 have invested approximately $83 million from fiscal 2005 through fiscal 2014 in this initiative. Capital expenditures for fiscal 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 and create a common business model and common data, which should create greater efficiency and effectiveness.

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.

Free Cash Flow

   2014  2013  2012 

Net cash provided by operations

  $126,467   $(28,282 $89,169  

Less: capital expenditures

   (17,173  (25,172  (39,592
  

 

 

  

 

 

  

 

 

 

Free cash flow

  $109,294   $(53,454 $49,577  
  

 

 

  

 

 

  

 

 

 

Free cash flow as a percentage of net sales

   6.8  (3.2%)   2.9

- Non-GAAP Financial Measure

We have provided a comparison of our free cash flow, which can be used as a measure of liquidity and our operating performance. We define free cash flow as net cash provided by operations less capital expenditures. Free cash flow does not represent cash available only for discretionary expenditures, since we have mandatory debt service requirements and other contractual and non-discretionary expenditures (in thousands).
  2017 2016 2015
Net cash provided by operations $114,309
 $151,426
 $87,449
Less: capital expenditures (44,659) (27,622) (22,030)
Free cash flow $69,650
 $123,804
 $65,419
Free cash flow as a percentage of net sales 3.4% 6.8% 4.0%
Free cash flow as a percentage of net sales decreased in fiscal 2017, primarily due to increased sales, which drove an increase in receivables, as well as an increase in capital expenditures made during fiscal 2017. Free cash flow as a percentage of net sales increased in fiscal year 2014,2016, primarily due to favorable changes inbetter working capital management and increased earnings. Free cash flow as a percentage of net sales decreased in fiscal year 2013, primarily due to unfavorable changes in working capital and decreased earnings.

stronger operating performance.

Stock Repurchases

During fiscal 2014,2017, we repurchased 300 shares ofdid not repurchase our non-voting Class A common stock (CENTA) pursuant to our share repurchase program at an aggregate cost of approximately $2,000 , or approximately $7.26 per share, as compared to fiscal 2013 when we repurchased 0.2 million shares of CENTA at an aggregate cost of approximately $1.5 million, or approximately $9.06 per share. During the third quarter ofstock. In fiscal 2011, our Board of Directors authorized a $100 million share repurchase program, under which approximately $50.1$35.0 million remains available for repurchases in fiscal 20152017 and thereafter.

Total Debt

At September 27, 2014,30, 2017, our total debt outstanding was $450.2$395.7 million versus $472.6$395.3 million at September 28, 2013.

24, 2016.

Senior Notes and Redemption of Senior Subordinated Notes

On March 8, 2010,

In November 2015, we issued $400 million aggregate principal amount of 6.125% senior notes due November 2023. In December 2015, we used the net proceeds from the offering, together with available cash, to redeem our $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 used102.063% of the net proceeds from the offeringprincipal amount and to pay a portionfees and expenses related to the offering.
We 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 outstanding balance under our Old Credit Facility.

The estimated fair value2023 Notes.

As a result of our $450 millionredemption of the 2018 Notes, aswe incurred a call premium payment of September 27, 2014 was$8.3 million, overlapping interest expense for 30 days of approximately $459.5 million. $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 consolidated statements of operations.
The estimated fair value is based on quoted market prices for these notes.

The 20182023 Notes require semiannual interest payments, which commenced on September 1, 2010.May 15, 2016. The 20182023 Notes are unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries which are borrowers under or guarantors of our senior secured revolving credit facility. The 2023 Notes are unsecured senior subordinated obligations and are subordinated to all of our existing and future seniorsecured debt, including our Credit Facility. The obligations underFacility, to 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 obligationsextent of the guarantors and are subordinated to all existing and future senior debtvalue of the guarantors.

collateral securing such indebtedness.

We may redeem some or all of the 2023 Notes at any time, at our option, prior to November 15, 2018 at the principal amount plus a “make whole” premium. At any time prior to November 15, 2018, we may also redeem, at our 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. We may redeem some or all of the 2023 Notes, at our option, at any time on or after March 1, 2014November 15, 2018 for 104.125%104.594%, on or after March 1, 2015November 15, 2019 for 102.063%103.063%, on or after November 15, 2020 for 101.531% and on or after March 1, 2016November 15, 2021 for 100%, plus accrued and unpaid interest.
The holders of the 20182023 Notes have the right to require us to repurchase all or a portion of the 20182023 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 20182023 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 September 27, 2014.

In November 2014, our Board of Directors authorized the purchase from time to time of up to $50 million principal amount of the Company’s 8.25% senior subordinated notes due March 2018.

Asset Backed30, 2017.



Asset-Based Loan Facility

On December 5, 2013, Amendment

In April 2016, we entered into aan amended and restated credit agreement which provides up to a $390$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 we exercise the accordion feature set forth therein (collectively, the “Credit“Amended Credit Facility”). The Amended Credit Facility matures on December 5, 2018 and replaced our prior revolving credit facility.April 22, 2021. We 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 September 27, 2014,30, 2017, there were no borrowings oroutstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $12.6$1.8 million outstanding as of September 27, 2014.

30, 2017.

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. TheAs of September 30, 2017, the borrowing base and remaining borrowing availability as of September 27, 2014 was $330$368.9 million. Borrowings under the Amended Credit Facility bear interest at an index based on LIBOR or, at ourthe 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%1.0%), plus, in either case, an applicable margin based on our total outstanding borrowings.consolidated senior leverage ratio. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.75% (1.25% at - 1.5% and was 1.25% as of September 27, 2014)30, 2017, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.75% (0.25% at-0.5% and was 0.25% as of September 27, 2014).30, 2017. As of September 27, 2014,30, 2017, the applicable interest rate related to Base Rate borrowings was 3.5%4.5%, and the applicable interest rate related to LIBOR-based borrowings was 1.4%2.5%.

We 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 us to maintain a minimum fixed charge coverage ratio of 1.00:1.00 :1.00 upon reaching certain borrowing levels. The Amended Credit Facility is secured by substantially all of our assets. We were in compliance with all financial covenants under the Amended Credit Facility during the period ended September 27, 2014.

We incurred approximately $3.1 million of costs in conjunction with this transaction, 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.

30, 2017.

Contractual Obligations

The table below presents our significant contractual cash obligations by fiscal year:

Contractual Obligations

 Fiscal
2015
  Fiscal
2016
  Fiscal
2017
  Fiscal
2018
  Fiscal
2019
  Thereafter  Total 
  (in millions) 

Long-term debt, including current maturities (1)

 $0.3   $0.3   $0.1   $450.0   $0   $—     $450.7  

Interest payment obligations (2)

  37.1    37.1    37.1    18.6    0    —      129.9  

Operating leases

  17.6    14.1    10.9    5.4    4.0    1.5    53.5  

Purchase commitments (3)

  98.5    35.0    20.5    13.4    7.4    1.9    176.7  

Performance-based payments (4)

  —      —      —      —      —      —      —    
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $153.5   $86.5   $68.6   $487.4   $11.4   $3.4   $810.8  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Contractual Obligations 
Fiscal
2018
 
Fiscal
2019
 
Fiscal
2020
 
Fiscal
2021
 
Fiscal
2022
 Thereafter Total
  (in millions)
Long-term debt, including current maturities (1) $0.4
 $
 $0.1
 $
 $
 $400.0
 $400.5
Interest payment obligations (2) 24.5
 24.5
 24.5
 24.5
 24.5
 2.0
 124.5
Operating leases 26.5
 21.4
 16.6
 12.2
 8.8
 25.9
 111.4
Purchase commitments (3) 104.4
 31.3
 18.9
 11.4
 4.3
 0.8
 171.1
Performance-based payments (4) 
 
 
 
 
 
 
Total $155.8
 $77.2
 $60.1
 $48.1
 $37.6
 $428.7
 $807.5
(1)
Excludes $12.6$1.8 million of outstanding letters of credit related to normal business transactions. Excludes the unamortized discountportion of $0.5deferred financing costs associated with the 2023 Notes of $4.8 million related toas of September 30, 2017, which is amortizable until November 2023 and is included in the 2018 Notes.carrying value of long-term debt. See Note 1110 to the consolidated financial statements for further discussion of long-term debt.
(2)
Estimated interest payments to be made on our long-term debt.2023 Notes. See Note 1110 to the consolidated financial statements for description of interest rate terms.
(3)Contracts for purchases of grains, grass seed and pet food ingredients, used primarily to mitigate risk associated with increases in market prices and commodity availability.
(4)Possible performance-based payments associated with prior acquisitions of businesses are not included in the above table, because they are based on future performance of the businesses acquired, which is not yet known. Performance-based payments of approximately $1.3 million were not owed or made in fiscal 2014,2017 related to B2E, acquired in fiscal 2013, and 2012.Hydro-Organics Wholesale, Inc., acquired in fiscal 2016. Potential performance-based periods extend through 2020. In addition, we may be obligated2020 for B2E and 2025 for Hydro-Organics Wholesale, Inc. Payments are capped at $1.0 million per year related to pay up to $5.1 million in future performance payments if and when certain revenue and performance targets are achieved.Hydro-Organics Wholesale, Inc.



As of September 27, 2014,30, 2017, we had unrecognized tax benefits of $0.1$0.3 million. These amounts have been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us.

Recent Accounting Pronouncements

Comprehensive Income

In February 2013, the FASB issued Accounting Standards Update No. 2013-02, Comprehensive Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02). This guidance requires entities to disclose, either in the notesRefer to the consolidated financial statements or parenthetically on the face of the statement that reports comprehensive income (loss), items reclassified out of accumulated other comprehensive income (loss) and into net earnings in their entirety and the effect of the reclassification on each affected statement of operations line item. In addition, for accumulated other comprehensive income (loss) reclassification items that are not reclassified in their entirety into net earnings, a cross referencediscussion under Part II, Item 8, Notes to other required accounting standard disclosures is required. This guidance became effective for the Company on September 29, 2013. This new guidance did not have a material impact on the Company’s consolidated financial statements.

Discontinued Operations

In April 2014, the FASB issued Accounting Standards Update No. 2014-08 (ASU 2014-08),Presentation ofConsolidated Financial Statements, (Topic 205)Note 1 - Organization and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and DisclosuresSignificant Accounting Policies for a summary 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 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 is effective for the Company prospectively commencing in the first quarter of fiscal 2015. Early adoption is permitted. The adoption of the applicable sections of this ASC may have an impact on therecent accounting for any future discontinued operations the Company may have.pronouncements.

Revenue Recognition

In May 2014, the Financial Accounting Standards Board (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.

Critical Accounting Policies, Estimates and Judgments

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts and related disclosures in the consolidated financial statements. Estimates and assumptions are required for, but are not limited to, accounts receivable and inventory realizable values, fixed asset lives, long-lived asset valuation and impairments, intangible asset lives, stock-based compensation, deferred and current income taxes, self-insurance accruals and the impact of contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

Although not all inclusive, we believe that the following represent the more critical accounting policies, which are subject to estimates and assumptions used in the preparation of our consolidated financial statements.

Allowance for Doubtful Accounts

We record an allowance for credit losses and disputed balances associated with our customers’ failure to make required payments. Our allowance also includes amounts estimated for customer returns and deductions. We estimate our allowance based on specific identification, historical experience, customer concentrations, customer credit-worthiness and current economic trends. Generally, we require no collateral from our customers. If the financial condition of our customers were to deteriorate, we were not able to demonstrate the validity of amounts due or future default rates on trade receivables in general were to differ from those currently anticipated, additional allowances could be required, which would affect earnings in the period the adjustments are made. For more information, see Note 65 to our consolidated financial statements.

Inventory

Inventory, which primarily consists of lawn and garden products, and pet supplies, raw materials and finished goods, is stated at the lower of first-in first-out (“FIFO”) cost or market. Cost includes certain indirect purchasing, merchandise handling and storage costs incurred to acquire or manufacture inventory, costs to unload, process and put away shipments received to prepare them to be picked for orders, and certain overhead costs. We compute the amount of such costs capitalized to inventory based on an estimate of costs related to the procurement and processing of inventory to prepare it for sale compared to total product purchases. When necessary, we have reduced the carrying value of our inventory if market conditions indicate that we will not recover the carrying cost upon sale. Future adverse changes in market conditions related to our products could result in an additional charge to income in the period in which such conditions occur.

Goodwill

Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. Goodwill and identifiable intangible assets with indefinite lives are not subject to amortization but must be evaluated for impairment.

We test goodwill for impairment annually (on(as of the first day of the fourth fiscal quarter), or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, by initially comparingfirst assessing qualitative factors to determine whether it is more likely than not the fair value of eachthe 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, we 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 our four reporting units to their related carrying values.values, including goodwill. If the fair value of the reporting unit is less than its carrying value, we perform 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,we recognize such impairment. Our goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of all fourits two reporting units to ourthe 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 our reporting units is based on our 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. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Assumptions critical to our 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.

Our

Most of our goodwill is associated with one of the reporting units within our Pet segment. During fiscal 2014, the reporting unit’s operating income declined approximately 50% from the comparable fiscal 2013 period. In connection with our annual goodwill impairment testing performed during fiscal 2014,2017 and 2016, we 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. We completed our qualitative assessment of potential goodwill impairment and it was determined that it was more likely than not the fair values of our reporting units were greater than their carrying amounts, and accordingly, no further testing of goodwill was required.
In connection with our annual goodwill impairment testing performed during fiscal 2015, the first step of such testing indicated that the fair value of our reporting segments exceeded their carrying value by more than 10%, and accordingly, no further testing of goodwill was required. If the decline in income of the reporting unit continues in fiscal 2015, and our forecast of future operating performance further declines, there is the potential for goodwill impairment related to our Pet segment’s reporting unit.

In connection with our annual goodwill impairment testing performed during fiscal 2013, the first step of such testing indicated that the fair value of our Pet segment reporting units exceeded their carrying value, and accordingly, no further testing of goodwill was required for the Pet segment. However, the carrying value of our Garden segment reporting units exceeded their estimated fair value, indicating potential impairment. Based on further analysis, it was determined that the entire carrying value of our Garden segment goodwill was impaired, resulting in a non-cash goodwill impairment charge of $7.7 million in fiscal 2013.

Changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including expected future cash flows and discount rate,rates, 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.

Intangible assets

Indefinite-lived intangible assets consist primarily of acquired trade names and trademarks. Indefinite-lived intangible assets are tested annually for impairment or whenever events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized for an intangible asset with an indefinite useful life if its carrying value exceeds its fair value.

Indefinite-lived intangible assets are primarily tested for impairment by comparing the fair value of the asset to the carrying value. Fair value is determined based on discounted cash flow analyses that include significant management assumptions such as revenue growth rates, discount rates, weighted average cost of capital, and assumed royalty rates. Future net sales and short-term growth rates are estimated for trade names based on management’s forecasted financial results which consider key business drivers such as specific revenue growth initiatives, market share changes and general economic factors such as consumer spending.

During fiscal 2014, 20132017, 2016 and 2012,2015, we performed an evaluationevaluations of the fair value of our indefinite-lived trade names and trademarks. Our expected revenues were based on our future operating plan and market growth or decline estimates for future years. No impairment was indicated during our fiscal 2014, 2013 or 20122017 analysis of our indefinite-lived trade names and trademarks.

In fiscal 2016, we recognized a $1.8 million non-cash impairment charge related to certain indefinite-lived intangible assets as a result of a decline in the volume of sales. In fiscal 2015, we recognized a $7.3 million non-cash impairment charge related to certain indefinite-lived intangible assets as a result of increased competition in the marketplace and an expected decline in the volume of sales.

Long-Lived Assets

We review our long-lived assets, including amortizable intangibles and property, plant and equipment, for potential impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. An impairment loss would be recognized for amortizable intangible assets and property, plant and equipment when estimated undiscounted future cash flows expected to result from use of the asset are less than its carrying amount. Management determines fair value by estimating future cash flows as a result of forecasting sales and costs. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. No factors indicating the carrying value of our tangible long-lived assets may not be recoverable were present in fiscal 2014,2017, fiscal 2016 and fiscal 2015, respectively, and accordingly, no impairment testing was performed on these assets. No factors indicating the carrying value of our long-lived assets may not be recoverable were present in fiscal 2013, and accordingly, no impairment testing was performed on these assets. However, due to changes in our operations and related plans for future SAP implementations, we determined that certain software costs previously incurred had no future value and accordingly, a charge of $5.9 million was recorded in the fourth quarter of fiscal 2014. Should market conditions or the assumptions used by us in determining the fair value of assets change, or management change plans regarding the future usage of certain assets, additional charges to operations may be required in the period in which such conditions occur.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred income taxes result primarily from bad debt allowances, inventory and goodwill write-downs, depreciation and nondeductible reserves. We establish a valuation allowance for deferred tax assets when management believes it is more likely than not a deferred tax asset will not be realized. As of fiscal 2014 and 2013, we had valuation allowances related to various state net deferred tax assets of $6.2 million and $7.0 million, respectively.

United States income taxes have not been provided on undistributed earnings (approximately $2.1 million at September 27, 2014) of our foreign subsidiary since all such earnings are considered indefinitely reinvested overseas. The potential deferred tax liability associated with these earnings, net of foreign tax credits associated with the earnings, is approximately $0.3 million.



Accruals for Self-Insurance

We maintain insurance for certain risks, including workers’ compensation, general liability and vehicle liability, and are self-insured for employee related health care benefits. Our workers’ compensation, general liability and vehicle liability insurance policies include deductibles of $250,000 to $350,000 per occurrence, with a separate deductible of $50,000 for physical damage. We maintain excess loss insurance that covers any health care claims in excess of $700,000 per person per year. We maintain a self-insurance reserve for losses, determined with assistance from a third-partythird party actuary, based on claims filed and actuarial estimates of the ultimate loss amount inherent in the claims, including losses for claims incurred but not reported. Any actuarial projection of losses concerning workers’ compensation and general liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors affecting future inflation rates, discount rates, litigation trends, legal interpretations, benefit level changes and claim settlement patterns. We do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions we use to calculate our self-insurance liabilities. However, any differences in estimates and assumptions could result in accrual requirements materially different from the calculated accruals.

Acquisitions

In connection with businesses we acquire, management must determine the fair values of assets acquired and liabilities assumed. Considerable judgment and estimates are required to determine such amounts, particularly as they relate to identifiable intangible assets, and the applicable useful lives related thereto. Under different assumptions, the resulting valuations could be materially different, which could materially impact the operating results we report.

Our contractual commitments are presented under the caption Liquidity and Capital Resources.


Item 7A. Quantitative and Qualitative Disclosure About Market Risk

We are exposed to market risks, which include changes in U.S. interest rates and commodity prices and, to a lesser extent, foreign exchange rates. We do not engage in financial transactions for trading or speculative purposes.

Interest Rate Risk. The interest payable on our Credit Facility is based on variable interest rates and therefore affected by changes in market interest rates. We had no variable rate debt outstanding as of September 27, 201430, 2017 under our Credit Facility. We had average variable rate debt outstanding during fiscal 2014 of approximately $28 million. If interest rates on our average variable rate debt outstanding during fiscal 20142017 had changed by 100 basis points compared to actual rates, interest expense would have increased or decreased by approximately $0.3$0.4 million. In addition, we have investments consisting of cash equivalents and short-term investments, which are also affected by changes in market interest rates.

Commodity Prices.We are exposed to fluctuations in market prices for grains, grass seed, chemicals, fertilizer ingredients and pet food ingredients. To mitigate risk associated with increases in market prices and commodity availability, we enter into contracts for purchases, primarily to ensure commodity availability to us in the future. As of September 27, 2014,30, 2017, we had entered into fixed purchase commitments for commodities totaling approximately $176.7$171.1 million. A 10% change in the market price for these commodities would result in an additional pretax gain or loss of $17.7$17.1 million as the related inventory containing those inputs is sold.

Foreign Currency Risks.Our market risk associated with foreign currency rates is not considered to be material.To date, we have had minimal sales outside of the United States. Purchases made by our U.S. subsidiaries from foreign vendors are primarily made in U.S. dollars. Our international subsidiary transacts most of its business in British pounds. Therefore, we have only minimal exposure to foreign currency exchange risk. We do not hedge against foreign currency risks and believe that foreign currency exchange risk is immaterial to our current business.


Item 8. Financial Statements and Supplementary Data

See pages beginning at F-1.




Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

None.


Item 9A. Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and ChiefPrincipal 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) and 15d-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 ChiefPrincipal 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 September 27, 2014.30, 2017.

(b)Changes in Internal Control Over Financial Reporting. Our management, with the participation of our Chief Executive Officer and ChiefPrincipal Financial Officer, has evaluated whether any change in our internal control over financial reporting occurred during the fourth quarter of fiscal 2014.2017. Based on that evaluation, management concluded that there has been no change in our internal control over financial reporting during the fourth quarter of fiscal 20142017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

(c)Management’s Report on Internal Control Over Financial Reporting. A copy of our management’s report and the report of Deloitte & Touche LLP, our independent registered public accounting firm, are included in our Financial Statements and Supplementary Data beginning on page F-1.


Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

We have adopted a code of ethics that applies to all of our executive officers and directors, a copy of which is filed as Exhibit 14.

available on our website at https://www.central.com/about-us/responsibility#values-and-ethics.

The remaining information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 20152018 Annual Meeting of Stockholders under the captions “Election of Directors,” “Further Information Concerning the Board of Directors – Committees of the Board”, “Section 16(a) Beneficial Ownership Reporting Compliance” and “Code of Ethics.” See also Item 1 – Business above.


Item 11. Executive Compensation

The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 20152018 Annual Meeting of Stockholders under the captions “Executive Compensation” and “Further Information Concerning the Board of Directors – Compensation Committee Interlocks and Insider Participation.”

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 20152018 Annual Meeting of Stockholders under the captions “Ownership of Management and Principal Stockholders” and Executive Compensation – “Equity Compensation Plan Information.”




Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 20152018 Annual Meeting of Stockholders under the captions “Further Information Concerning the Board of Directors – Board Independence” and “Transactions with the Company.”


Item 14. Principal Accountant Fees and Services

The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 20152018 Annual Meeting of Stockholders under the caption “Independent Registered Public Accounting Firm.”


PART IV


Item 15. Exhibits and Financial Statement Schedules

(a)The following documents are filed as part of this report:

(1)
(i)Consolidated Financial Statements of Central Garden & Pet Company are attached to this Form 10-K beginning on page F-1:

Management’s Report on Internal Control Over Financial Reporting

Report of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Operations

Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.

(2)Exhibits:

See attached Exhibit Index.

Set forth below is a list of exhibits that are being filed or incorporated by reference into this Form 10-K:


Exhibit
Number
 Exhibit Form 
File
No.
 Exhibit 
Filing
Date
 
Filed
Herewith
  8-K 001-33268 4.2 3/8/2010  
  10-K 001-33268 4.6 12/10/2015  
  10-K 001-33268 4.5 12/2/2016  
  10-Q 001-33268 4.1 2/2/2017  
  10-Q 001-33268 4.1 8/3/2017  
          X
  10-Q 001-33268 10.1 5/5/2016  
  8-K 001-33268 10.2 2/15/2012  
  10-K 000-20242 10/5/2001 12/9/2004  
  10-K 000-20242 10/5/2002 12/9/2004  
  10-K 001-33268 10/4/2003 11/19/2010  
  10-Q 001-33268 10.1 5/4/2017  
  10-Q 000-20242 10/6/2001 2/3/2005  
  10-Q 000-20242 10/6/2002 2/3/2005  
  10-K/A 000-20242 10.20 1/20/1999  
  10-Q 000-20242 10/7/2001 8/8/2003  
  8-K 000-20242 10.1 4/14/2006  


Exhibit
Number
ExhibitForm
File
No.
Exhibit
Filing
Date
Filed
Herewith
10-K001-3326810/7/200211/26/2008
10-Q001-3326810.12/7/2013
10-Q001-3326810.12/5/2015
X
8-K000-2024210.110/14/2005
8-K000-2024210.210/14/2005
10-Q001-3326810.32/7/2013
8-K001-3326810.17/27/2015
10-K001-3326810.2412/10/2015
8-K011-3326810.255/6/2016
X
X
X
X
X
X
X
101.INSXBRL Instance DocumentX
101.SCHXBRL Taxonomy Extension Schema DocumentX
101.CALXBRL Taxonomy Extension Calculation Linkbase DocumentX
101.DEFXBRL Taxonomy Extension Definition Linkbase DocumentX
101.LABXBRL Taxonomy Extension Label Linkbase DocumentX
101.PREXBRL Taxonomy Extension Presentation Linkbase DocumentX
*Management contract or compensatory plan or arrangement.



SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: December 11, 2014

November 29, 2017

CENTRAL GARDEN & PET COMPANY

By

/s/ George C. Roeth
 

/S/    JOHN R. RANELLI

George C. Roeth
 

John R. Ranelli

Chief Executive Officer and President

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

Signature

 

Capacity

 

Date

Signature

CapacityDate
/S/    JOHN R. RANELLI

John R. Ranelli

s/ George C. Roeth
  Director, Chief Executive Officer and President (Principal Executive Officer)  December 11, 2014November 29, 2017

/S/    LORI A. VARLAS

Lori A. Varlas

George C. Roeth
 Senior Vice President and
/s/ Nicholas LahanasChief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
 December 11, 2014November 29, 2017
Nicholas Lahanas

/Ss/ Howard A. Machek
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer)
November 29, 2017
Howard A. Machek
/    WILLIAM E. BROWN

s/ William E. Brown

 Chairman December 11, 2014November 29, 2017
William E. Brown

/S/    JOHN B. BALOUSEK

s/ John B. Balousek

  Director  December 11, 2014November 29, 2017
John B. Balousek

/S/    DAVID N. CHICHESTER

David N. Chichester

s/ Thomas J. Colligan
  Director  December 11, 2014November 29, 2017
Thomas J. Colligan

/S/    BROOKS M. PENNINGTON, III

s/ Brooks M. Pennington, III

  Director  December 11, 2014November 29, 2017
Brooks M. Pennington, III

/S/    ALFRED A. PIERGALLINI

s/ Alfred A. Piergallini

  Director  December 11, 2014November 29, 2017
Alfred A. Piergallini

/S/    M. BETH SPRINGER

M. Beth Springer

s/ John R. Ranelli
  Director  December 11, 2014November 29, 2017
John R. Ranelli


/s/ Mary Beth SpringerDirectorNovember 29, 2017
Mary Beth Springer
/s/ Andrew K. WoeberDirectorNovember 29, 2017
Andrew K. Woeber



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS




MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

Central Garden & Pet Company’s management, under the supervision of Central’s Chief Executive Officer and ChiefPrincipal Financial Officer, is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act). Management evaluated the effectiveness of Central’s internal control over financial reporting based on the framework inInternalControl –Integrated Framework (1992) (2013) issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. The scope of management's assessment of the effectiveness of our internal control over financial reporting included all of our consolidated operations except for the operations of Segrest Inc, which we acquired on October 21, 2016 and K&H Manufacturing LLC, which we acquired on April 28, 2017. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition. Segrest Inc. and K&H Manufacturing LLC combined constituted six percent of the total assets and four percent of total net sales of the consolidated financial statements of the Company as of and for the fiscal year ended September 30, 2017.

Based on evaluation of the criteria set forth by COSO inInternal ControlIntegrated Framework (1992) (2013), management concluded that our internal control over financial reporting was effective as of September 27, 2014.30, 2017.

Our independent registered public accounting firm, Deloitte & Touche LLP, has issued a report on our internal control over financial reporting, which appears on page F-3 of this Form 10-K.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become ineffective because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.




REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Shareholders of

Central Garden & Pet Company:

Company

Walnut Creek, California

We have audited the accompanying consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company”) as of September 27, 201430, 2017 and September 28, 2013,24, 2016, and the related consolidated statements of operations, comprehensive income, (loss), equity and cash flows for each of the three fiscal years in the period ended September 27, 2014.30, 2017. We also have audited the Company’s internal control over financial reporting as of September 27, 2014,30, 2017, based on criteria established inInternal Control - Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described inManagement’s Report on Internal Control over Financial Reporting,” management excluded from its assessment the internal control over financial reporting at Segrest, Inc. and K&H Manufacturing, LLC which were acquired during fiscal 2017, and whose combined financial statements constitute six percent of total assets and four percent of net sales of the consolidated financial statement amounts as of and for the year ended September 30, 2017. Accordingly, our audit did not include the internal control over financial reporting at Segrest, Inc. or K&H Manufacturing, LLC.The Company’sCompany's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits.


We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.


A company’scompany's internal control over financial reporting is a process designed by, or under the supervision of, the company’scompany's principal executive and principal financial officers, or persons performing similar functions, and effected by the company’scompany's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’scompany's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’scompany's assets that could have a material effect on the financial statements.


Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.


In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Garden & Pet Company and subsidiaries as of September 27, 201430, 2017 and September 28, 2013,24, 2016, and the results of their operations and their cash flows for each of the three fiscal years in the period ended September 27, 2014,30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 27, 2014,30, 2017, based on the criteria established inInternal Control - Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.


/s/ DELOITTE & TOUCHE LLP



San Francisco, California

December 11, 2014

November 29, 2017



CENTRAL GARDEN & PET COMPANY

CONSOLIDATED BALANCE SHEETS

   September 27,
2014
   September 28,
2013
 
   (in thousands) 
ASSETS  

Current assets:

    

Cash and cash equivalents

  $78,676    $15,156  

Restricted cash

   14,283     0  

Short term investments

   9,990     17,820  

Accounts receivable, net

   193,729     194,260  

Inventories

   326,386     391,934  

Prepaid expenses, deferred income taxes and other

   48,488     53,484  
  

 

 

   

 

 

 

Total current assets

   671,552     672,654  

Plant, property and equipment, net

   166,849     188,913  

Goodwill

   208,233     205,756  

Other intangible assets, net

   87,997     79,868  

Other assets

   14,096     13,969  
  

 

 

   

 

 

 

Total

  $1,148,727    $1,161,160  
  

 

 

   

 

 

 
LIABILITIES AND EQUITY    

Current liabilities:

    

Accounts payable

  $88,428    $103,569  

Accrued expenses

   84,379     78,618  

Current portion of long-term debt

   291     142  
  

 

 

   

 

 

 

Total current liabilities

   173,098     182,329  

Long-term debt

   449,948     472,445  

Deferred income taxes and other long-term obligations

   39,228     36,362  

Commitments and contingencies (Note 12)

    

Equity:

    

Common stock

   124     122  

Class A common stock

   369     353  

Class B stock

   16     16  

Additional paid-in capital

   396,586     389,153  

Retained earnings

   86,396     77,592  

Accumulated other comprehensive income

   1,232     1,442  
  

 

 

   

 

 

 

Total Central Garden & Pet shareholders’ equity

   484,723     468,678  

Noncontrolling interest

   1,730     1,346  
  

 

 

   

 

 

 

Total equity

   486,453     470,024  
  

 

 

   

 

 

 

Total

  $1,148,727    $1,161,160  
  

 

 

   

 

 

 

  September 30,
2017
 September 24,
2016
  (in thousands)
ASSETS  
Current assets:    
Cash and cash equivalents $32,397
 $92,982
Restricted cash 12,645
 10,910
Accounts receivable, net 237,868
 201,151
Inventories 382,101
 362,004
Prepaid expenses and other 18,045
 16,249
Total current assets 683,056
 683,296
Plant, property and equipment, net 180,913
 158,224
Goodwill 256,275
 231,385
Other intangible assets, net 116,067
 95,865
Other assets 70,595
 11,913
Total $1,306,906
 $1,180,683
LIABILITIES AND EQUITY    
Current liabilities:    
Accounts payable $103,283
 $102,413
Accrued expenses 116,549
 99,343
Current portion of long-term debt 375
 463
Total current liabilities 220,207
 202,219
Long-term debt 395,278
 394,806
Deferred income taxes and other long-term obligations 54,279
 29,071
Commitments and contingencies (Note 11)
 
 
Equity:    
Common stock 122
 120
Class A common stock 380
 374
Class B stock 16
 16
Additional paid-in capital 396,790
 393,297
Retained earnings 239,329
 160,501
Accumulated other comprehensive loss (951) (1,294)
Total Central Garden & Pet shareholders’ equity 635,686
 553,014
Noncontrolling interest 1,456
 1,573
Total equity 637,142
 554,587
Total $1,306,906
 $1,180,683
See notes to consolidated financial statements.



CENTRAL GARDEN & PET COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

   Fiscal Year Ended 
   September 27,
2014
  September 28,
2013
  September 29,
2012
 
   (in thousands, except per share amounts) 

Net sales

  $1,604,357   $1,653,633   $1,700,013  

Cost of goods sold and occupancy

   1,150,333    1,189,731    1,185,855  
  

 

 

  

 

 

  

 

 

 

Gross profit

   454,024    463,902    514,158  

Selling, general and administrative expenses

   397,811    416,038    439,737  

Goodwill impairment

   0    7,709    0  
  

 

 

  

 

 

  

 

 

 

Income from operations

   56,213    40,155    74,421  

Interest expense

   (42,844  (43,112  (40,315

Interest income

   94    142    145  

Other income (expense)

   403    (677  678  
  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes and noncontrolling interest

   13,866    (3,492  34,929  

Income tax expense (benefit)

   4,045    (2,592  12,816  
  

 

 

  

 

 

  

 

 

 

Net income (loss) including noncontrolling interest

   9,821    (900  22,113  

Net income attributable to noncontrolling interest

   1,017    1,029    940  
  

 

 

  

 

 

  

 

 

 

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

  $8,804   $(1,929 $21,173  
  

 

 

  

 

 

  

 

 

 

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

    

Basic

  $0.18   $(0.04 $0.44  

Diluted

  $0.18   $(0.04 $0.44  

Weighted average shares used in the computation of net income per share:

    

Basic

   48,880    48,094    47,622  

Diluted

   49,397    48,094    48,374  

  Fiscal Year Ended
  September 30,
2017
 September 24,
2016
 September 26,
2015
  (in thousands, except per share amounts)
Net sales $2,054,478
 $1,829,017
 $1,650,737
Cost of goods sold and occupancy 1,421,670
 1,275,967
 1,162,685
Gross profit 632,808
 553,050
 488,052
Selling, general and administrative expenses 476,696
 421,864
 389,345
Intangible asset impairment 
 1,828
 7,272
Operating income 156,112
 129,358
 91,435
Interest expense (28,209) (42,847) (40,027)
Interest income 147
 140
 129
Other income (expense) (1,621) (17,013) 13
Income before income taxes and noncontrolling interest 126,429
 69,638
 51,550
Income tax expense 46,699
 24,053
 18,535
Net income including noncontrolling interest 79,730
 45,585
 33,015
Net income attributable to noncontrolling interest 902
 1,071
 1,044
Net income attributable to Central Garden & Pet Company $78,828
 $44,514
 $31,971
Net income per share attributable to Central Garden & Pet Company:      
Basic $1.57
 $0.91
 $0.66
Diluted $1.52
 $0.87
 $0.64
Weighted average shares used in the computation of net income per share:      
Basic 50,230
 48,964
 48,562
Diluted 51,820
 51,075
 49,638

See notes to consolidated financial statements.



CENTRAL GARDEN & PET COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(in thousands, except per share amounts)

   Fiscal Year Ended 
   September 27,
2014
  September 28,
2013
  September 29,
2012
 

Net income (loss)

  $9,821   $(900 $22,113  

Other comprehensive income (loss):

    

Foreign currency translation

   (200  (97  520  

Unrealized loss on securities

   (10  0    0  
  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss)

   9,611    (997  22,633  

Comprehensive income attributable to noncontrolling interests

   1,017    1,029    940  
  

 

 

  

 

 

  

 

 

 

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

  $8,594   $(2,026 $21,693  
  

 

 

  

 

 

  

 

 

 

  Fiscal Year Ended
  September 30,
2017
 September 24,
2016
 September 26,
2015
Net income $79,730
 $45,585
 $33,015
Other comprehensive income (loss):      
Foreign currency translation 343
 (1,458) (1,078)
Unrealized loss on securities 
 
 (10)
Reclassification of loss on available for sale securities to net income 
 
 20
Total comprehensive income 80,073
 44,127
 31,947
Comprehensive income attributable to noncontrolling interests 902
 1,071
 1,044
Comprehensive income attributable to Central Garden & Pet Company $79,171
 $43,056
 $30,903

See notes to consolidated financial statements.



CENTRAL GARDEN & PET COMPANY

CONSOLIDATED STATEMENTS OF EQUITY

(dollars in thousands)

  Central Garden & Pet Company       
  Common Stock  Class A Common
Stock
  Class B Stock  Additional
Paid-in
Capital
  Retained
Earnings
  Accumulated
Other
Comprehensive
Income
  Total  Noncontrolling
Interest
  Total 
  Shares  Amount  Shares  Amount  Shares  Amount       

Balance, September 24, 2011

  12,949,593   $129    35,941,360   $359    1,652,262   $16   $396,208   $59,045   $1,019   $456,776    6   $456,782  

Stock-based compensation

  0    0    0    0    0    0    5,449    0    0    5,449    0    5,449  

Tax benefit on exercise of stock options

  0    0    0    0    0    0    56    0    0    56    0    56  

Restricted share activity

  (9,722  (0  90,540    1      369      370     370  

Issuance of common stock

  0    0    579,702    6    0    0    471    0    0    477    0    477  

Repurchase of common stock

  (692,300  (7  (1,904,700  (19  0    0    (20,358  (500  0    (20,884  0    (20,884

Other comprehensive income.

  0    0    0    0    0    0    0    0    520    520    0    520  

Net income

  0    0    0    0    0    0    0    21,173    0    21,173    940    22,113  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 29, 2012

  12,247,571    122    34,706,902    347    1,652,262    16    382,195    79,718    1,539    463,937    946    464,883  

Stock-based compensation

  0    0    0    0    0    0    4,210    0    0    4,210    0    4,210  

Tax deficiency on exercise of stock options, net of tax benefit

  0    0    0    0    0    0    (90  0    0    (90  0    (90

Restricted share activity

  (820  0    442,238    4      2,460      2,464     2,464  

Issuance of common stock

  0    0    307,761    3    0    0    1,683    0    0    1,686    0    1,686  

Repurchase of common stock

  0    0    (165,900  (1  0    0    (1,305  (197  0    (1,503  0    (1,503

Distribution to noncontrolling interest

            (629  (629

Other comprehensive loss

  0    0    0    0    0    0    0    0    (97  (97  0    (97

Net loss

  0    0    0    0    0    0    0    (1,929  0    (1,929  1,029    (900
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 28, 2013

  12,246,751    122    35,291,001    353    1,652,262    16    389,153    77,592    1,442    468,678    1,346    470,024  

Stock-based compensation

  0    0    0    0    0    0    4,572    0    0    4,572    0    4,572  

Tax deficiency on exercise of stock options, net of tax benefit

  0    0    0    0    0    0    (1,973  0    0    (1,973  0    (1,973

Restricted share activity

  190,556    2    1,232,105    12    0    0    3,446      3,460     3,460  

Issuance of common stock

  0    0    364,505    4    0    0    1,390    0    0    1,394    0    1,394  

Repurchase of common stock

  0    0    (300  0    0    0    (2  (0  0    (2  0    (2

Distribution to noncontrolling interest

            (633  (633

Other comprehensive loss

  0    0    0    0    0    0    0    0    (210  (210  0    (210

Net income

  0    0    0    0    0    0    0    8,804    0    8,804    1,017    9,821  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Balance, September 27, 2014

  12,437,307   $124    36,887,311   $369    1,652,262   $16   $396,586   $86,396   $1,232   $484,723   $1,730   $486,453  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 Central Garden & Pet Company    
 Common Stock Class A Common
Stock
 Class B Stock Additional
Paid-in
Capital
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income (Loss)
 Total Non-controlling
Interest
 Total
 Shares Amount Shares Amount Shares Amount 
Balance,
September 27, 2014
12,437,307
 $124
 36,887,311
 $369
 1,652,262
 $16
 $396,586
 $86,396
 $1,232
 $484,723
 $1,730
 $486,453
Amortization of share-based awards
 
 
 
 
 
 6,378
 
 
 6,378
 
 6,378
Tax deficiency on exercise of stock options, net of tax benefit
 
 
 
 
 
 (358) 
 
 (358) 
 (358)
Restricted share activity(12,073) 
 156,477
 2
     (1,233)     (1,231)   (1,231)
Issuance of common stock641
 
 536,827
 5
 
 
 (10) 
 
 (5) 
 (5)
Repurchase of common stock(517,558) (5) (1,118,316) (12) 
 
 (12,727) (2,380) 
 (15,124) 
 (15,124)
Distribution to noncontrolling interest                    (1,680) (1,680)
Other comprehensive loss
 
 
 
 
 
 
 
 (1,068) (1,068) 
 (1,068)
Net income
 
 
 
 
 
 
 31,971
 
 31,971
 1,044
 33,015
Balance,
September 26, 2015
11,908,317
 119
 36,462,299
 364
 1,652,262
 16
 388,636
 115,987
 164
 505,286
 1,094
 506,380
Amortization of share-based awards
 
 
 
 
 
 6,552
 
 
 6,552
 
 6,552
Tax benefit on exercise of stock options, net of tax deficiency
 
 
 
 
 
 6,865
 
 
 6,865
 
 6,865
Restricted share activity

 
 202,916
 2
 
 
 (1,341)     (1,339)   (1,339)
Issuance of common stock90,155
 1
 753,357
 8
 
 
 (7,415) 
 
 (7,406) 
 (7,406)
Distribution to noncontrolling interest                    (592) (592)
Other comprehensive loss
 
 
 
 
 
 
 
 (1,458) (1,458) 
 (1,458)
Net income
 
 
 
 
 
 
 44,514
 
 44,514
 1,071
 45,585
Balance,
September 24, 2016
11,998,472
 120
 37,418,572
 374
 1,652,262
 16
 393,297
 160,501
 (1,294) 553,014
 1,573
 554,587
Amortization of share-based awards
 
 
 
 
 
 8,700
 
 
 8,700
 
 8,700
Tax benefit on exercise of stock options, net of tax deficiency
 
 
 
 
 
 19,942
 
 
 19,942
 
 19,942
Restricted share activity(16,764) 
 (79,362) 
 
 
 (7,765) 
 
 (7,765) 
 (7,765)
Issuance of common stock178,315
 2
 680,526
 6
 
 
 (17,384) 
 
 (17,376) 
 (17,376)
Distribution to noncontrolling interest
 
 
 
 
 
 
 
 
 
 (1,019) (1,019)
Other comprehensive income
 
 
 
 
 
 
 
 343
 343
 
 343
Net income
 
 
 
 
 
 
 78,828
 
 78,828
 902
 79,730
Balance,
September 30, 2017
12,160,023
 $122
 38,019,736
 $380
 1,652,262
 $16
 $396,790
 $239,329
 $(951) $635,686
 $1,456
 $637,142
See notes to consolidated financial statements



CENTRAL GARDEN & PET COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

  Fiscal Year Ended 
  September 27,
2014
  September 28,
2013
  September 29,
2012
 
  (in thousands) 

Cash flows from operating activities:

   

Net income (loss)

 $9,821   $(900 $22,113  

Adjustments to reconcile net income (loss) to net cash provided (used) by operating activities:

   

Depreciation and amortization

  35,781    32,968    30,425  

Stock-based compensation

  7,678    15,892    7,510  

Excess tax benefits from stock-based awards

  (498  (388  (1,881

Deferred income taxes

  5,548    (3,233  14,411  

Gain on sale of property and equipment

  (4,875  0    0  

Loss on disposal of property, plant and equipment

  1,063    547    180  

Write-off of deferred financing costs

  1,731    0    0  

Other long-lived asset impairments

  5,870    0    0  

Unrealized (gains) losses on derivative financial instruments

  0    0    (83

Goodwill impairment

  0    7,709    0  

Other

  249    370    0  

Changes in assets and liabilities (excluding businesses acquired):

   

Receivables

  2,655    8,185    (6,841

Inventories

  69,698    (61,697  (164

Prepaid expenses and other assets

  1,931    4,798    7,549  

Accounts payable

  (16,321  (23,866  9,805  

Accrued expenses

  8,442    (7,781  4,955  

Other long-term obligations

  (2,306  (886  1,190  
 

 

 

  

 

 

  

 

 

 

Net cash provided (used) by operating activities

  126,467    (28,282  89,169  
 

 

 

  

 

 

  

 

 

 

Cash flows from investing activities:

   

Additions to property, plant and equipment

  (17,173  (25,172  (39,592

Businesses acquired, net of cash acquired

  (20,282  (4,835  0  

Proceeds from disposals of land, buildings, etc.

  8,737    0    0  

Change in restricted cash and cash equivalents.

  (14,283  0    0  

Maturities of short-term investments.

  17,820    4,885    0  

Investment in short-term investments

  (10,000  0    (4,885
 

 

 

  

 

 

  

 

 

 

Net cash used in investing activities

  (35,181  (25,122  (44,477
 

 

 

  

 

 

  

 

 

 

Cash flows from financing activities:

   

Repayments on revolving line of credit

  (301,000  (368,000  (339,000

Borrowings on revolving line of credit

  278,000    391,000    304,000  

Repayments of long-term debt

  (367  (332  (353

Issuance of long-term debt

  0    0    49,312  

Proceeds from issuance of common stock

  1,165    613    2,129  

Excess tax benefits from stock-based awards

  498    388    1,881  

Repurchase of common stock, including shares surrendered for tax withholding

  (2,332  (2,731  (24,829

Distribution to noncontrolling interest

  (633  (629  0  

Payment of financing costs

  (3,090  0    (1,715
 

 

 

  

 

 

  

 

 

 

Net cash provided (used) by financing activities

  (27,759  20,309    (8,575
 

 

 

  

 

 

  

 

 

 

Effect of exchange rate changes on cash and equivalents

  (7  (224  327  
 

 

 

  

 

 

  

 

 

 

Net (decrease) increase in cash and cash equivalents

  63,520    (33,319  36,444  

Cash and cash equivalents at beginning of year

  15,156    48,475    12,031  
 

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

 $78,676   $15,156   $48,475  
 

 

 

  

 

 

  

 

 

 

Supplemental information:

   

Cash paid for interest

 $41,549   $42,960   $40,930  

Cash paid for income taxes – net of refunds

  826    (2,493  (8,048

Non-cash investing and financing activities:

   

Capital expenditures incurred but not paid

  238    926    1,677  

Liability for contingent performance based payments

  249    4,165    0  

Restricted share stock bonus

  4,086    9,579    948  

 Fiscal Year Ended
 September 30,
2017
 September 24,
2016
 September 26,
2015
 (in thousands)
Cash flows from operating activities:     
Net income$79,730
 $45,585
 $33,015
Adjustments to reconcile net income to net cash provided by operating activities:     
Depreciation and amortization42,719
 40,001
 33,703
Amortization of deferred financing costs1,361
 1,504
 1,996
Stock-based compensation11,115
 8,356
 8,315
Excess tax benefits from stock-based awards(19,946) (6,869) (2,154)
Deferred income taxes10,789
 3,189
 15,566
Gain on sale of property and equipment(2,050) (2,544) 
Loss on disposal of property, plant and equipment65
 1,163
 702
Write-off of deferred financing costs
 3,337
 537
Asset impairments
 19,367
 7,272
Other3,999
 987
 (69)
Changes in assets and liabilities (excluding businesses acquired):     
Receivables(32,419) 27,444
 (9,093)
Inventories(15,885) (6,519) 4,403
Prepaid expenses and other assets2,845
 6,901
 (4,325)
Accounts payable(2,143) (2,793) (4,757)
Accrued expenses35,018
 11,234
 1,485
Other long-term obligations(889) 1,083
 853
Net cash provided by operating activities114,309
 151,426
 87,449
Cash flows from investing activities:     
Additions to property, plant and equipment(44,659) (27,622) (22,030)
Businesses acquired, net of cash acquired(103,880) (69,001) (38,384)
Escrow deposit for acquisition-related contingent consideration(6,000) 
 
Proceeds from asset sales8,547
 3,911
 
Change in restricted cash and cash equivalents.(1,735) 2,247
 1,126
Investment in equity method investees(12,495) 
 
Proceeds from short-term investments.
 
 9,997
Investment in short-term investments
 
 (17)
Other investing activities(4,355) (730) (546)
Net cash used in investing activities(164,577) (91,195) (49,854)
Cash flows from financing activities:     
Repayments on revolving line of credit(552,000) (419,000) (312,000)
Borrowings on revolving line of credit552,000
 419,000
 312,000
Repayments of long-term debt(463) (400,307) (50,289)
Issuance of long-term debt
 400,000
 
Proceeds from issuance of common stock
 324
 200
Excess tax benefits from stock-based awards19,946
 6,869
 2,154
Repurchase of common stock, including shares surrendered for tax withholding(27,556) (10,873) (18,497)
Payments of contingent consideration(1,300) (2,026) 
Distribution to noncontrolling interest(1,019) (592) (1,680)
Payment of financing costs
 (7,560) (258)
Net cash used by financing activities(10,392) (14,165) (68,370)
Effect of exchange rate changes on cash and equivalents75
 (668) (317)
Net (decrease) increase in cash and cash equivalents(60,585) 45,398
 (31,092)
Cash and cash equivalents at beginning of year92,982
 47,584
 78,676
Cash and cash equivalents at end of year$32,397
 $92,982
 $47,584
Supplemental information:     
Cash paid for interest$27,878
 $32,995
 $39,855
Cash paid for income taxes – net of refunds10,560
 10,399
 3,192
Non-cash investing and financing activities:     
Capital expenditures incurred but not paid3,106
 2,743
 2,087
Liability for contingent performance based payments2,830
 2,590
 (101)
See notes to consolidated financial statements.



CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fiscal Years Ended September 27, 2014,

30, 2017,

September 28, 2013,24, 2016, and September 29, 201226, 2015

1. Organization and Significant Accounting Policies

Organization

Organization – Central Garden & Pet Company (“Central”), a Delaware corporation, and subsidiaries (the “Company”), is a leading marketer and producer of quality branded products forand distributor of third party products in the pet and lawn and garden supplies markets.

Basis of Consolidation and Presentation – The consolidated financial statements include the accounts of Central and all majority-owned subsidiaries. All intercompany balances and transactions have been eliminated. The fiscal year ended September 30, 2017 included 53 weeks. The fiscal years ended September 27, 2014,24, 2016 and September 28, 201326, 2015 each included 52 weeks; the fiscal year ended September 29, 2012 included 53 weeks.

Noncontrolling Interest – Noncontrolling interest in the Company’s consolidated financial statements represents the 20% interest not owned by the Company 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.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including realization of accounts receivable and inventory and valuation of goodwill and intangibles. Actual results could differ from those estimates.

Revenue Recognition – Sales are recognized when merchandise is shipped, risk of loss and title passes to the customer and the Company has no further obligations to provide services related to such merchandise. Discounts, volume-based rebate incentives and most cooperative advertising amounts are recorded as a reduction of sales. The Company’s practice on product returns is to accept and credit the return of unopened cases of products from customers where the quantity is small, where the product has been mis-shipped or the product is defective. Provisions are made for estimated sales returns which are deducted from net sales at the time of shipment. Sales also include shipping and handling costs billed directly to customers. The amount billed to customers for shipping and handling costs included in net sales for the fiscal years ended September 27, 2014,30, 2017, September 28, 2013,24, 2016 and September 29, 201226, 2015 was $8.0$9.4 million, $6.9$3.8 million and $4.8$5.4 million, respectively.

Cost of goods sold and occupancy consists of cost of product, inbound freight charges, purchasing and receiving costs, certain indirect purchasing, merchandise handling and storage costs, internal transfer costs as well as allocations of overhead costs, including depreciation, related to the Company’s facilities. Cost of goods sold excludes substantially all shipping and handling and out-bound freight costs to customers, which are included in selling, general and administrative expenses as delivery expenses. The cost of shipping and handling, including internal costs and payments to third parties, included in delivery expenses within selling, general and administrative expenses for the fiscal years ended September 27, 2014,30, 2017, September 28, 2013,24, 2016 and September 29, 201226, 2015 was $45.6$59.3 million, $47.7$48.9 million and $54.6$44.4 million, respectively.

Advertising Costs – The Company expenses the costs of advertising as incurred. Advertising expenses were $30.9$34.5 million, $44.5$30.0 million and $54.4$25.0 million in fiscal 2014, 2013,2017, 2016 and 2012,2015, respectively.

401(k) Plans – The Company sponsors several 401(k) plans which cover substantially all employees. The Company’s matching contributions expensed under these plans were $2.4 million for fiscal 2017, $1.7 million for fiscal 2016 and $1.9 million for fiscal year 2014, and $2.1

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

million for fiscal years 2013 and 2012.2015. In fiscal 2014, 2013,2017, 2016 and 2012,2015, the Company’s matching contributions made in the Company’s Class A common stock resulted in the issuance of approximately 245,000, 229,000,81,000, 99,000 and 230,000195,000 shares, respectively.

Other income(expense) consists principally of earnings (losses) from equity method investments and foreign exchange gains and losses.

Income taxes are accounted for under the asset and liability method. Deferred income taxes result primarily from bad debt allowances, inventory and goodwill write-downs, amortization and depreciation. The Company establishes a valuation allowance for deferred tax assets

F- 9

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

when management believes it is more likely than not a deferred tax asset will not be realized. As of fiscal year-end 2014,2017 and 2013,2016, the Company had valuation allowances related to various state and foreign net deferred tax assets of $6.2$6.5 million and $7.0$6.6 million, respectively.

United States

U.S. income taxes have not been provided on undistributed earnings (approximately $2.1$2.0 million at September 27, 2014)30, 2017) of our foreign subsidiary since all such earnings are considered indefinitely reinvested overseas. The potential deferred tax liability associated with these earnings, net of foreign tax credits associated with the earnings, is approximately $0.3 million.

Cash and cash equivalents include cash and all highly liquid instruments with a maturity of three months or less at the date of purchase.

Restricted cash and cash equivalentsinclude cash and highly liquid instruments that are used as collateral for stand–alone letter of credit agreements.

Short term investments include investments with original maturities greater than three months and remaining maturities of one year or less.

Accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest, although a finance charge may be applied to such receivables that are past due.

Allowance for doubtful accounts –Trade accounts receivable are regularly evaluated for collectability based on past credit history with customers, their expected returns and deductions and their current financial condition. See

Note 5 - Allowance for Doubtful Accounts.

Inventories, which primarily consist of garden products and pet supplies finished goods, are stated at the lower of FIFO cost or market. Cost includes certain indirect purchasing, merchandise handling and storage costs incurred to acquire or manufacture inventory, costs to unload, process and put away shipments received in order to prepare them to be picked for orders, and certain other overhead costs. The amount of such costs capitalized to inventory is computed based on an estimate of costs related to the procurement and processing of inventory to prepare it for sale compared to total product purchases. See

Note 6 - Inventories, net.

Land, buildings, improvements and equipment are stated at cost.cost. Depreciation is computed by the straight-line method over thirty30 years for buildings. Improvements are amortized on a straight-line basis over the shorter of the useful life of the asset or the terms of the related leases. Depreciation on equipment and capitalized software is computed by the straight-line and accelerated methods over the estimated useful lives of 3three to 10 years. See

Note 7 - Property and Equipment, Net.

Long-Lived Assets – The Company reviews its long-lived assets, including amortizable and indefinite-lived intangible assets and property, plant and equipment, for potential impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable, and annually

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

for indefinite-lived intangible assets. An impairment loss would be recognized for amortizable intangible assets and property, plant and equipment when estimated undiscounted future cash flows expected to result from the use of the asset are less than its carrying amount. An impairment loss would be recognized for an intangible asset with an indefinite useful life if its carrying value exceeds its fair value. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. DueThere were no impairment losses recorded in fiscal 2017. In fiscal 2016, the Company recognized non-cash asset impairment charges of approximately $1.8 million related to certain indefinite-lived intangible assets due to changes in the Company’s operationsCompany's operational strategy and related plans for future SAP implementations,declining volume of sales. In fiscal 2015, the Company determined thatrecognized a non-cash $7.3 million impairment charge to certain software costs previously capitalized had no future value, and accordingly, wrote off capitalized costsindefinite-lived intangible assets as a result of $5.9 millionincreased competition in the fourth quartermarketplace and declining volume of fiscal 2014.sales. Should market conditions or the assumptions used by the Company in determining the fair value of assets change, or management changes plans regarding the future use of certain assets, additional charges to operations may be required in the period in which such conditions occur. See Note 109 – Other Intangible Assets.

Assets.

Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. Goodwill is not subject to amortization but must be evaluated for impairment annually. The Company tests for goodwill 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. See Note 9 – Goodwill.8– Goodwill.

Investments – The Company owns membership interests approximating 50%ranging from 30%-50% in twosix unconsolidated companies. The Company accounts for its interest in these entities using the equity method. Equity incomemethod losses of $0.6 million in 2014, $0.9 million in fiscal 2013,2017, and $0.7equity method income of $0.4 million in both fiscal 2012 is2016 and fiscal 2015 are included in other income (expense) in the consolidated statements of operations. The Company’s investment in these entities was $0.6$9.2 million at September 27, 2014,30, 2017 and $0.8$0.5 million at September 28, 2013.24, 2016 and is included in Other assets in the Company's consolidated balance sheets. On a combined basis, the assets, liabilities, revenues and expenses of these entities are not significant. During the fourth quarter of fiscal 2016, the Company determined that its equity method investments in two unconsolidated companies were impaired as a result of changes in marketplace conditions, which impacted the expected cash flows and the recoverability of the investment. Accordingly, the Company recorded a non cash charge of approximately $16.6 million in fiscal 2016 to bring the carrying value of these investments to zero. The impairment charge is included in other income (expense) in the Company's consolidated statements of operations. See

Note 3 - Acquisitions.


F- 10

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Accruals For Insurance – The Company maintains insurance for certain risks, including workers’ compensation, general liability and vehicle liability, and is self-insured for employee related health care benefits. The Company’s workers’ compensation, general liability and vehicle liability insurance policies include deductibles of $250,000 to $350,000 per occurrence. The Company maintains excess loss insurance that covers any health care claims in excess of $700,000 per person per year. The Company establishes reserves for losses based on its claims experience and actuarial estimates of the ultimate loss amount inherent in the claims, including claims incurred but not yet reported. Costs are recognized in the period the claim is incurred, and the financial statement accruals include an estimate of claims incurred but not yet reported.

Fair Value of Financial Instruments – At September 27, 201430, 2017 and September 28, 2013,24, 2016, the carrying amount of cash and cash equivalents, short term investments, accounts receivable and payable, short term borrowings and accrued liabilities approximates fair value because of the short term nature of these instruments. The estimated fair value of the Company’s senior subordinated notes is based on quoted market prices for these instruments. See Note 2 - Fair Value Measurements for further information regarding the fair value of the Company’s financial instruments.

Derivative Financial Instruments – The Company reports all derivative financial instruments on the balance sheet at fair value. Changes in fair value are recognized in earnings, or are deferred, depending on the nature of the underlying exposure being hedged and how effective the derivative is at offsetting a change in the underlying exposure.

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

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

As of September 27, 2014 and September 28, 2013, the Company had no outstanding derivative instruments.

Stock-Based Compensation – Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is expensed ratably over the service period of the award. Total compensation costs recognized under all share-based arrangements in fiscal 20142017 was $7.7$11.1 million ($4.97.0 million after tax), fiscal 20132016 was $15.9$8.4 million ($10.05.3 million after tax), and in fiscal 20122015 was $7.5$8.3 million ($4.75.3 million after tax). See Note 1413 - Stock-Based Compensation for further information.

Total Comprehensive Income (Loss) – Total comprehensive income (loss) consists of two components: net income and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that under generally accepted accounting principles are recorded directly as an element of shareholders’ equity, but are excluded from net income. Other comprehensive income (loss) is comprised of currency translation adjustments relating to the Company’s foreign subsidiary whose functional currency is not the U.S. dollar, and unrealized gains and losses on investments classified as available for sale.sale, as well as the reclassification of realized gains and losses on investments classified as available for sale to net income.

Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Balance Sheet Classification of Deferred Taxes

Comprehensive Income.

In February 2013,November 2015, the FASB issued Accounting Standards Update No. 2013-02,Comprehensive Income (Topic 220) – ReportingASU 2015-17 (ASU 2015-17), Balance Sheet Classification of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU 2013-02)Deferred Taxes. This guidance requiresASU eliminates the current requirement for entities to disclose, eitherpresent deferred tax liabilities and assets as current and noncurrent in the notes to the consolidated financial statements or parenthetically on the face of the statement that reports comprehensive income (loss), items reclassified out of accumulated other comprehensive income (loss) and into net earnings in their entirety and the effect of the reclassification on each affecteda classified statement of operations line item. In addition, for accumulated other comprehensivefinancial position and instead requires that deferred income (loss) reclassification items that aretax liabilities and assets be classified as noncurrent in a classified statement of financial position. Although ASU 2015-17 is not reclassified in their entirety into net earnings, a cross reference to other required accounting standard disclosures is required. This guidance became effective for the Company until October 1, 2018, the Company adopted the standard on September 29, 2013. This guidance did not have a material impact30, 2017. As of September 30, 2017, the Company has classified all deferred tax assets and liabilities as noncurrent on the Company’sCompany's consolidated financial statements.balance sheets

Discontinued Operationsand retrospectively adjusted prior periods. Upon adoption, current deferred tax assets of $31.5 million in our September 24, 2016 consolidated balance sheet were reclassified as non-current.

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 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 is effective for the Company prospectively commencing in the first quarter of fiscal 2015. Early adoption is permitted. 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.

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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.

Early adoption is permitted, but not before interim and annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period, with earlier adoption not permitted.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 still in the early stages of assessing the adoption method and analyzing the impact of the adoption of this guidance is not expected to have a significant impactupdate on its consolidated financial statements. As part of its assessment work to-date, the Company has formed an implementation work team and conducted training sessions on the Company’snew ASU’s revenue recognition model and begun the process of scoping of revenue streams under the new ASU. Additionally, the Company is also analyzing the impact of the new standard on its current accounting policies and internal controls. Upon completion of these and other assessments, the Company will evaluate the impact of adopting the new standard on its consolidated financial statements.

Stock Based Compensation


F- 11

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Leases
In June 2014,February 2016, the FASB issued ASU No. 2014-122016-02 (ASU 2014-12)2016-02),Leases (Topic 842). ASU 2016-02 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. ASU 2016-02 is effective for the Company in its first quarter of fiscal 2020 on a modified retrospective basis and earlier adoption is permitted. The Company is currently evaluating the impact of its pending adoption of ASU 2016-02 on its consolidated financial statements, and it currently expects that most of its operating lease commitments will be subject to the new standard and the Company will record material operating lease liabilities and right-of-use assets upon the adoption of ASU 2016-02. Information on our current operating leases can be found in Note 11 - Commitments and Contingencies.
Stock Based Compensation
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 Payments Whenshare-based payment award transactions including: income tax consequences, classification of awards as either equity or liabilities and classification on the Termsstatement of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.cash flows. 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 2014-122016-09 is effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption2016, or the Company's first quarter of fiscal 2018. The Company will adopt the guidance effective October 1, 2017. The ASU is permitted.expected to result in increased volatility to the Company’s income tax expense in future periods dependent upon, among other variables, the price of its common stock and the timing and volume of share-based payment award activity, such as employee exercises of stock options and vesting of restricted stock awards.
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 effect thatimpact of the adoption of this standard but does not anticipate it will have a material impact on its consolidated financial statements.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15) . The ASU provides additional clarification guidance on the classification of certain cash receipts and payments in the statement of cash flows. The new guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2017 with early adoption permitted. The Company is currently evaluating the impact the adoption of ASU 2016-15 will have on its consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force) (ASU 2016-18). This ASU clarifies the presentation of restricted cash on the statement of cash flows. Amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning and ending cash balances on the statement of cash flows. ASU 2016-18 is effective for fiscal years, and interim periods within those fiscal years beginning after December 15, 2017, or the Company's first quarter of fiscal 2019, with early adoption permitted. The Company holds restricted cash balances of $12.6 million and $10.9 million as of September 30, 2017 and September 24, 2016, respectively. The Company is currently evaluating the impact ASU 2016-18 will have on its consolidated financial statements and related disclosures.
Business Combinations

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


F- 12

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

    Goodwill

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, or the Company's first quarter of fiscal 2021. The amendment should be applied on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The fair value of the Company’s reporting units exceeded its carrying value in its fiscal 2017 impairment analysis for goodwill and, therefore, the early adoption was not considered in fiscal 2017.


F- 13

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Fair Value Measurements

Generally accepted accounting principles require 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 and equivalents, short term investments, 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.

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 September 27, 201430, 2017 (in thousands):

       Level 1           Level 2           Level 3           Total     

Assets:

        

Short-term investments (a)

  $9,990    $        0    $0    $9,990  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $9,990    $0    $0    $9,990  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Liability for contingent consideration (b)

  $0    $0    $4,414    $4,414  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $0    $0    $4,414    $4,414  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Level 1     Level 2     Level 3     Total    
Liabilities:
 
 
 
Liability for contingent consideration (a)$
 $
 $9,343
 $9,343
Total liabilities$
 $
 $9,343
 $9,343
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 28, 201324, 2016 (in thousands):

       Level 1           Level 2           Level 3           Total     

Assets:

        

Certificates of deposit (c)

  $        0    $17,820    $0    $17,820  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $0    $17,820    $0    $17,820  
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Liability for contingent consideration (b)

  $0    $0    $4,165    $4,165  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $0    $0    $4,165    $4,165  
  

 

 

   

 

 

   

 

 

   

 

 

 

 Level 1     Level 2     Level 3     Total    
Liabilities:       
Liability for contingent consideration (a)$
 $
 $5,113
 $5,113
Total liabilities$
 $
 $5,113
 $5,113
(a)The fair value of short-term investments are based on quoted prices in active markets for identical assets.
(b)(a)The liability for contingent consideration relates to an earn-out for B2E, acquired in December 2012, – See Note 4.future performance-based contingent payments for Hydro-Organics Wholesale, Inc., acquired in October 2015, and future performance-based contingent payment for Segrest, Inc., acquired in October 2016. The fair value of the estimated contingent consideration arrangement is determined based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. This is presented as part of long-term liabilities in ourthe Company's consolidated balance sheets.
(c)The fair value of the Company’s time deposits is based on the most recent observable inputs for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable. These are presented as short term investments in the Company’s consolidated balance sheets.

The following table provides a summary of changes in fair value of ourthe Company's Level 3 financial instruments for the years ended September 27, 201430, 2017 and September 28, 201324, 2016 (in thousands):

   Amount 

Balance as of September 28, 2013

  $4,165  

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

   249  
  

 

 

 

Balance as of September 27, 2014

  $4,414  
  

 

 

 

 Amount
Balance as of September 24, 2016$5,113
     Estimated contingent performance-based consideration established at the time of acquisition2,700
Changes in the fair value of contingent performance-based payments2,830
     Performance-based payments made(1,300)
Balance as of September 30, 2017$9,343



F- 14

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)


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.

There were no impairment losses recorded in fiscal 2017.

During the fiscal year ended September 28, 2013, the Company recognized a non-cash charge of $7.7 million, as24, 2016, the carrying value of $1.8 million of indefinite-lived intangible assets was written down to its Garden segment goodwill exceeded the impliedestimated fair value, resulting in impairment charges of $1.8 million, which were included in selling, general and administrative expenses for the goodwill. The fair market value of these non-financial assets was determined using an income approach and Level 3 inputs, which required management to make significant estimates about future cash flows.period. See Note 9 – Goodwill.

Other Intangible Assets.

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 valuevalues of the Company’s $450.02023 Notes were $427.9 million 8.25% senior subordinated notes due 2018 as of September 27, 2014 was $459.530, 2017 and $430.3 million compared to a
as of September 24, 2016, and the carrying valuevalues were $395.2 million as of $449.5 million.September 30, 2017 and $394.4 million as of September 24, 2016. The estimated fair value isvalues are based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.



3. Derivative Instruments

OurAcquisitions and Investments in Joint Ventures

Fiscal 2017
K&H Manufacturing, LLC
On April 28, 2017, the Company purchased K&H Manufacturing, LLC ("K&H"), a producer of premium pet supplies and the largest marketer of heated pet products in the country, for a purchase price of approximately $48.0 million. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $41.8 million, which is included in other assets in the Company’s consolidated balance sheet as of September 30, 2017. The Company has not yet finalized the allocation of the purchase price to the fair value of the intangible assets acquired. K&H sells branded pet products under the K&H and K&H Pet brands. The acquisition is expected to complement the Company's existing dog and cat business.

F- 15

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Segrest Inc.
On October 21, 2016, the Company acquired Segrest, Inc., a wholesaler of aquarium fish and small live animals, for a purchase price of approximately $60.0 million, of which $6.0 million is in an escrow account managed by an independent trustee and is payable contingent upon future events. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $44.4 million, of which $27.7 million was allocated to identified intangible assets and $25.9 million million is included in goodwill in the Company’s consolidated balance sheet as of September 30, 2017. Financial results for Segrest have been included in the results of operations within the Pet segment since the date of acquisition. The following table summarizes the purchase price and the recording of fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments (in thousands):
 Amounts Previously Recognized as of Acquisition Date (1) Measurement Period Adjustments Amounts Recognized as of Acquisition Date (as Adjusted)
Purchase Price     
Cash paid, net of cash acquired$54,043
 $
 $54,043
Contingent consideration6,000
 (3,300) 2,700
 $60,043
 $(3,300) $56,743
      
Allocation     
Current assets, net of cash and cash equivalents acquired$7,403
 $(300) $7,103
Fixed assets7,011
 2,242
 9,253
Other assets47,704
 (47,704) 
Goodwill  25,890
 25,890
Other intangible assets  27,650
 27,650
Current liabilities(2,075)   (2,075)
Deferred Tax Liability  (11,078) (11,078)
 $60,043
 $(3,300) $56,743
(1) As previously reported in the Company's Form 10-Q for the periods ended December 24, 2016, March 25, 2017 and June 24, 2017.
Proforma financial information has not been presented as the Segrest and K&H acquisitions were not considered material to the Company's overall consolidated financial statements during the periods presented.
Equity Method Investments
During fiscal 2017, the Company made investments in two ventures. The Company acquired a 45% interest in a mature, seasonal business and a 30% interest in a start-up company. The Company invested a total of $12.5 million in these businesses, which are exposedaccounted for under the equity method of accounting.
Fiscal 2016
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, which are capped at $1.0 million per year. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $10.7 million, of which $5.2 million was allocated to market risks from adverseidentified intangible assets and $5.5 million is included in goodwill in the Company’s consolidated balance sheet as of September 24, 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.

F- 16

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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. During the fourth quarter of fiscal 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 $33.8 million, of which $18.7 million was allocated to identified intangible assets and $15.1 million is included in goodwill in the Company’s consolidated balance sheet as of September 24, 2016. Financial results for DMC have been included in the results of operations within the Pet segment since the date of acquisition. The following table summarizes the preliminary recording of fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments:
In thousandsAmounts 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$41,170

$156

$41,326
Fixed assets521

17

538
Goodwill

15,058

15,058
Other assets33,810

(33,790)
20
Other intangible assets, net

18,700

18,700
Current liabilities(14,586)
(40)
(14,626)
Net assets acquired, less cash and cash equivalents$60,915

$101

$61,016
(1) As previously reported in the Company's Form 10-Q for the periods ended December 26, 2015, March 26, 2016 and June 25, 2016
The acquisitions of IMS Trading Corp, Hydro-Organics Wholesale Inc. and DMC were not considered individually or collectively material to the Company's overall consolidated financial statements during the periods presented. The following unaudited pro forma information presents the combined net sales as if the acquisitions of IMS Trading Corp and DMC had occurred at the beginning of fiscal 2015. The pre-acquisition net sales of DMC and IMS Trading Corp have been added to the Company's historical results. The following pro forma net sales information has been prepared for comparative purposes only and is not necessarily indicative of the net sales of the Company as they would have been had the acquisitions occurred on the assumed dates, nor are they necessarily an indication of future net sales.
   In thousands (unaudited)
   Fiscal Year Ended
   September 24, 2016 September 26, 2015
Pro forma net sales  $1,856,691
 $1,815,997
The impact of DMC and IMS on pro forma earnings for fiscal 2015 was not material. The impact of IMS and DMC on the Company's operating income in fiscal 2016 was $10.6 million. The financial results of Hydro-Organics Wholesale, Inc are not material to the Company's consolidated operating results.

Fiscal 2015
Purishield LLC and Ceregenin LLC
On December 30, 2014, the Company invested $16 million in cash for a 50% interest in two newly formed entities. The two entities own rights to commercialize products which incorporate features covered by certain patents, technology and associated intellectual property rights in the fields of animal health and pesticide applications. The investment is being accounted for under the equity method of accounting.
During the fourth quarter of fiscal 2016, the Company determined that its equity method investments in these two entities were impaired as a result of changes in commodity prices affectingmarketplace conditions, which impacted the cost of raw materials. In the normal course of business, these risks are managed through a variety of strategies, including the use of derivatives. The utilization of these financial transactions is governed by policies covering acceptable counterparty exposure, instrument types and other practices. The Company does not enter into derivative contracts for speculative purposes. The Company performs assessments of its counterparty credit risk regularly, including a review of credit ratings and potential nonperformancetime line of the counterparty,expected cash flows and minimizes counterparty concentrations.

Commodity and commodity index futures, swaps and option contracts are used to economically hedge commodity input prices on grains and proteins. These derivative contracts are entered into for periods consistent with the related underlying exposures and do not constitute positions independentrecoverability of those exposures. Generally,the investment. Accordingly, the Company economically hedgesrecorded a portionnon-cash charge of its anticipated consumption of commodity inputs for periods of up to 12 months. As of September 27, 2014 and September 28, 2013, the Company had no outstanding derivative instruments. As of September 29, 2012, the Company had economically hedged certain portions of its anticipated consumption of commodity inputs using derivative instruments with expiration dates through February 2013.

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets, with the exception of normal purchases and normal sales expected to result in physical delivery. The Company’s derivative financial instruments have not been designated as hedging instruments for accounting purposes. The Company recognizes realized and unrealized gains and losses from derivatives used to economically hedge anticipated commodity consumptionapproximately $16.6 million, included in other income (expense) on the consolidated statement of operations.

The following table presents the effect of derivative instruments recorded in other income (expense) on the consolidated statements of operations, (in thousands):

   Fiscal Year Ended 

Derivatives Not Designated as Hedging Instruments

  September  27,
2014
   September  28,
2013
  September  29,
2012
 

Commodity contracts

  $0    $(958 $111  
  

 

 

   

 

 

  

 

 

 

Total derivative instruments

  $0    $(958 $111  
  

 

 

   

 

 

  

 

 

 

to bring the carrying value of these investments to zero.


F- 17

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

4. Acquisitions

Fiscal 2014

Envincio


IMS Trading Corp
On April 1, 2014,July 31, 2015, the Company purchased certainsubstantially all of the assets of Envincio LLC, including brands, EPA registrations, inventory and trade receivables,IMS Trading Corp. for approximately $20.3$23.2 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 $2.5$1.4 million, which is recordedincluded in goodwill. The operating resultsgoodwill in our consolidated balance sheet as of this acquisition did not have a material impact on the Company’s consolidated financial statements.September 24, 2016. Financial results for EnvincioIMS Trading Corp. have been included in the results of operations within the Pet segment since the date of acquisition. This acquisition is expected to enable
During the second fiscal quarter of 2016, the Company finalized the allocation of the purchase price to be a key supplierthe fair value of the tangible and product innovator in the growing natural insecticides product market, often characterized as EPA-exempt products, and expand its offerings in traditional pesticides.

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
Recognized as  of
Acquisition Date
 

Current assets, net of cash and cash equivalents acquired

  $6,650  

Fixed assets

   20  

Goodwill

   2,477  

Intangible assets

   12,306  

Current liabilities

   (1,170
  

 

 

 

Net assets acquired, less cash and cash equivalents

  $20,283  
  

 

 

 

In thousandsAmounts 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 assets1,670
 
 1,670
Goodwill
 1,365
 1,365
Other assets5,356
 (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
Fiscal 2013(1)

InAs previously reported in the Company's Form 10-K for the period ended September 26, 2015 and the Company's Form 10-Q for the period ended December 2012, the Company acquired the remaining majority interest in FourStar Microbial Products, LLC (Four Star Microbial) for approximately $4.8 million in cash and approximately $4.2 million of contingent future performance-based payments. The purchase price exceeded the estimated fair value of the tangible and intangible assets acquired by $3.2 million, which was recorded as goodwill. The operating results of FourStar Microbial had no material impact on the consolidated financial statements. In the future, the Company expects the acquisition will enhance its capability to service professional providers of mosquito abatement.

Fiscal 201226, 2015

The Company made no acquisitions during fiscal 2012.

5.

4. Concentration of Credit Risk and Significant Customers and Suppliers

Customer Concentration – Approximately 41%44% of the Company’s net sales for fiscal 2014, 43%2017, 42% for fiscal 20132016 and 45%40% for fiscal 20122015 were derived from sales to the Company’s top five customers. The Company’s largest customer accounted for approximately 17%, 16%, 15% and 17%16% of the Company’s net sales in fiscal years 2014, 2013,2017, 2016 and 2012,2015, respectively. The Company’s second largest customer in 20142017 accounted for approximately 8% of the Company’s net sales in both 2014the fiscal years 2017, 2016 and 2013 and 7% in 2012.2015, respectively. The Company’s third largest customer in 2017 accounted for approximately 7%8%, 8%, and 9%7% of the Company’s net sales in fiscal years 2014, 2013,2017, 2016 and 2012,2015, respectively. The loss of, or significant adverse change in, the relationship between the Company and any of these three customers could have a material adverse effect on the Company’s business and financial results. The loss of or reduction in orders from any significant customer, losses arising from customer

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

disputes regarding shipments, fees, merchandise condition or related matters, or the Company’s inability to collect accounts receivable from any major customer could also have a material adverse impact on the Company’s business and financial results. As of September 27, 201430, 2017 and September 28, 2013,24, 2016, accounts receivable from the Company’s top five customers comprised approximately 37%44% and 35%41% of the Company’s total accounts receivable, including 11%10% and 9%11% from the Company’s largest customer.

Supplier Concentration – While the Company purchases products from many different manufacturers and suppliers, approximately 10%9%, 11%,9% and 9%11% of the Company’s cost of goods sold in fiscal years 2014, 2013,2017, 2016 and 2012,2015, respectively, were derived from products purchased from the Company’s five largest suppliers.

6.


F- 18

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Allowance for Doubtful Accounts

The allowance for doubtful accounts includes reserves for collectability determined by past credit history with customers, their expected returns and deductions and their current financial condition.
Changes in the allowance for doubtful accounts are summarized below (in thousands):

Description

  Balances at
Beginning
of Period
   Charged/
(Credited)  to
Costs and
Expenses
   Asset
Write-Offs,
Less
Recoveries
  Balances
at End of
Period
 

Fiscal year ended September 29, 2012

  $15,590    $5,291    $(2,307 $18,574  

Fiscal year ended September 28, 2013

   18,574     4,373     (1,789  21,158  

Fiscal year ended September 27, 2014

   21,158     8,988     (4,934  25,212  

7.

Description
Balances at
Beginning
of Period
 
Charged/
(Credited)  to
Costs and
Expenses
 
Asset
Write-Offs,
Less
Recoveries
 
Balances at
End of
Period
Fiscal Year Ended September 26, 201525,212
 741
 (6,657) 19,296
Fiscal Year Ended September 24, 201619,296
 6,041
 (4,268) 21,069
Fiscal Year Ended September 30, 201721,069
 2,921
 (2,554) 21,436

6. Inventories, net

Inventories, net of allowance for obsolescence, consist of the following (in thousands):

   September 27,
2014
   September 28,
2013
 

Raw materials

  $93,678    $121,695  

Work in progress

   13,397     19,856  

Finished goods

   207,818     236,322  

Supplies

   11,493     14,060  
  

 

 

   

 

 

 

Total inventories, net

  $326,386    $391,934  
  

 

 

   

 

 

 

8.

 September 30,
2017
 September 24,
2016
Raw materials$116,591
 $120,786
Work in progress16,394
 17,378
Finished goods241,420
 217,788
Supplies7,696
 6,052
Total inventories, net$382,101
 $362,004
7. Property and Equipment, Net

Property and equipment consists of the following (in thousands):

   September 27,
2014
  September 28,
2013
 

Land

  $8,678   $9,504  

Buildings and improvements

   109,618    112,882  

Transportation equipment

   5,388    5,646  

Machine and warehouse equipment

   163,783    179,723  

Capitalized software

   107,271    104,034  

Office furniture and equipment

   25,091    25,248  
  

 

 

  

 

 

 
   419,829    437,037  

Accumulated depreciation and amortization

   (252,980  (248,124
  

 

 

  

 

 

 
  $166,849   $188,913  
  

 

 

  

 

 

 

  September 30,
2017
 September 24,
2016
Land $8,942
 $8,825
Buildings and improvements 131,280
 115,965
Transportation equipment 7,141
 5,574
Machine and warehouse equipment 221,329
 193,525
Capitalized software 117,360
 109,641
Office furniture and equipment 27,355
 25,282
  513,407
 458,812
Accumulated depreciation and amortization (332,494) (300,588)
  $180,913
 $158,224
Depreciation and amortization expense, including the amortization of intangible assets, charged to operations was $35.8$42.7 million, $33.0$40.0 million and $30.4$33.7 million for fiscal 2014, 2013,2017, 2016 and 2012,2015, respectively.


F- 19

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)



8. Goodwill
9. Goodwill

Changes in the carrying amount of goodwill for the fiscal years ended September 27, 2014,30, 2017, September 28, 201324, 2016 and September 29, 201226, 2015 (in thousands):

   Garden Products
Segment
  Pet Products
Segment
  Total 

Balance as of September 24, 2011

    

Goodwill

  $213,583   $398,492   $612,075  

Accumulated impairment losses

   (205,874  (195,978  (401,852
  

 

 

  

 

 

  

 

 

 
   7,709    202,514    210,223  
  

 

 

  

 

 

  

 

 

 

Balance as of September 29, 2012

    

Goodwill

   213,583    398,492    612,075  

Accumulated impairment losses

   (205,874  (195,978  (401,852
  

 

 

  

 

 

  

 

 

 
   7,709    202,514    210,223  
  

 

 

  

 

 

  

 

 

 

Additions in fiscal 2013

   0    3,242    3,242  

Impairment losses in fiscal 2013

   (7,709  0    (7,709

Balance as of September 28, 2013

    

Goodwill

   213,583    401,734    615,317  

Accumulated impairment losses

   (213,583  (195,978  (409,561
  

 

 

  

 

 

  

 

 

 
   0    205,756    205,756  
  

 

 

  

 

 

  

 

 

 

Additions in fiscal 2014

   0    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
  

 

 

  

 

 

  

 

 

 
  $0   $208,233   $208,233  
  

 

 

  

 

 

  

 

 

 

 
Garden Products
Segment
 
Pet Products
Segment
 Total
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     
Goodwill213,583
 405,067
 618,650
Accumulated impairment losses(213,583) (195,978) (409,561)
 
 209,089
 209,089
Additions in fiscal 20165,473
 16,823
 22,296
Balance as of September 24, 2016     
Goodwill219,056
 421,890
 640,946
Accumulated impairment losses(213,583) (195,978) (409,561)
 5,473
 225,912
 231,385
Additions in fiscal 2017

 25,890
 25,890
Sale of business

  (1,000) (1,000)
Balance as of September 30, 2017     
Goodwill219,056
 446,780
 665,836
Accumulated impairment losses(213,583) (195,978) (409,561)
 $5,473
 $250,802
 $256,275
Additions or reductions to goodwill include acquisitions, sale of businesses, purchase price adjustments and adjustments of amounts upon finalization of purchase accounting.

The Company tests goodwill for impairment annually (on(as of the first day of the fourth fiscal quarter), or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, by initially comparingfirst 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.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 all fourits 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;

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and (iii) projected revenue and operating profit growth rates


F- 20

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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 2014,2017 and fiscal 2016, the first stepCompany made a qualitative evaluation about the likelihood of such testing indicated thatgoodwill impairment to determine whether it was necessary to calculate the fair valuevalues of its reporting units under the two-step goodwill impairment test. The Company completed its qualitative assessment of potential goodwill impairment in each fiscal year and it was determined that it was more likely than not the fair values of the Company’sCompany's reporting segments exceededunits were greater than their carrying value by more than 10%, and accordingly, no further testing of goodwill was required.

In connection with the Company’s annual goodwill impairment testing performed duringamounts in each fiscal 2013, the first step of such testing indicated that the fair value of the Company’s Pet segment reporting units exceeded their carrying value,year, and accordingly, no further testing of goodwill was required for the Pet segment. However, the carrying value of the Company’s Garden segment reporting units exceeded their fair value, indicating potential impairment. Based on further analysis, it was determined that the entire carrying value of the Company’s Garden segment goodwill was impaired, resulting in a non-cash goodwill impairment charge of $7.7 million.

In connection with the Company’s annual goodwill impairment testing performed during fiscal 2012, the first step of such testing indicated that the fair value of the Company’s reporting segments exceeded their carrying value by more than 10%,2017 and 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.

10.2016.


9. Other Intangible Assets

The following table summarizes the components of gross and net acquired intangible assets:

   Gross   Accumulated
Amortization
  Impairment  Net
Carrying
Value
 
       (in millions)       

September 27, 2014

      

Marketing-related intangible assets – amortizable

  $15.5    $(9.9 $0   $5.6  

Marketing-related intangible assets – nonamortizable

   59.6     0    (16.9  42.7  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

   75.1     (9.9  (16.9  48.3  
  

 

 

   

 

 

  

 

 

  

 

 

 

Customer-related intangible assets – amortizable

   42.8     (20.2  0    22.6  
  

 

 

   

 

 

  

 

 

  

 

 

 

Other acquired intangible assets – amortizable

   19.4     (8.8  0    10.6  

Other acquired intangible assets – nonamortizable

   7.7     0    (1.2  6.5  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

   27.1     (8.8  (1.2  17.1  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total other intangible assets

  $145.0    $(38.9 $(18.1 $88.0  
  

 

 

   

 

 

  

 

 

  

 

 

 

September 28, 2013

      

Marketing-related intangible assets – amortizable

  $12.5    $(8.9 $0   $3.6  

Marketing-related intangible assets – nonamortizable

   59.6     0    (16.9  42.7  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

   72.1     (8.9  (16.9  46.3  
  

 

 

   

 

 

  

 

 

  

 

 

 

Customer-related intangible assets – amortizable

   42.8     (17.9  0    24.9  
  

 

 

   

 

 

  

 

 

  

 

 

 

Other acquired intangible assets – amortizable

   16.6     (7.9  0    8.7  

Other acquired intangible assets – nonamortizable

   1.2     0    (1.2  0  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total

   17.8     (7.9  (1.2  8.7  
  

 

 

   

 

 

  

 

 

  

 

 

 

Total other intangible assets

  $132.7    $(34.7 $(18.1 $79.9  
  

 

 

   

 

 

  

 

 

  

 

 

 

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 Gross 
Accumulated
Amortization
 
Accumulated
Impairment
 
Net
Carrying
Value
   (in millions)    
September 30, 2017       
Marketing-related intangible assets – amortizable$16.9
 $(12.7) $
 $4.2
Marketing-related intangible assets – nonamortizable62.7
 
 (26.0) 36.7
Total79.6
 (12.7) (26.0) 40.9
Customer-related intangible assets – amortizable91.6
 (32.2) 
 59.4
Other acquired intangible assets – amortizable22.1
 (12.9) 
 9.2
Other acquired intangible assets – nonamortizable7.8
 
 (1.2) 6.6
Total29.9
 (12.9) (1.2) 15.8
Total other intangible assets$201.1
 $(57.8) $(27.2) $116.1
September 24, 2016       
Marketing-related intangible assets – amortizable$14.9
 $(11.3) $
 $3.6
Marketing-related intangible assets – nonamortizable63.0
 
 (26.0) 37.0
Total77.9
 (11.3) (26.0) 40.6
Customer-related intangible assets – amortizable65.6
 (26.1) 
 39.5
Other acquired intangible assets – amortizable20.8
 (11.6) 
 9.2
Other acquired intangible assets – nonamortizable7.8
 
 (1.2) 6.6
Total28.6
 (11.6) (1.2) 15.8
Total other intangible assets$172.1
 $(49.0) $(27.2) $95.9
September 26, 2015       
Marketing-related intangible assets – amortizable$14.1
 $(10.4) $
 $3.7
Marketing-related intangible assets – nonamortizable59.6
 
 (24.2) 35.4
Total73.7
 (10.4) (24.2) 39.1
Customer-related intangible assets – amortizable43.3
 (22.3) 
 21.0
Other acquired intangible assets – amortizable19.3
 (10.5) 
 8.8
Other acquired intangible assets – nonamortizable7.8
 
 (1.2) 6.6
Total27.1
 (10.5) (1.2) 15.4
Total other intangible assets$144.1
 $(43.2) $(25.4) $75.5
Other acquired intangible assets acquired include contract-based and technology-based intangible assets.


F- 21

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

As part of its acquisition of Envincio, LLC duringSegrest, Inc. in the thirdfirst quarter of fiscal 2014,2017, the Company acquired approximately $3.0$2.0 million of marketing related intangible assets, $27.3 million of customer related intangible assets and $9.3$1.3 million of other intangible assets. See Note 43Acquisitions.

Acquisitions.

In fiscal 2016, the Company recognized a non-cash $1.8 million impairment charge to certain indefinite-lived intangible assets as a result of declining volume of sales.
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 Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from 1three years to 25 years; over weighted average remaining lives of eightfour years for marketing-related intangibles, 1510 years for customer-related intangibles and 1411 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $4.3$8.8 million, $5.1$5.8 million and $5.6$4.3 million, for fiscal 2014, 2013,2017, 2016 and 2012,2015, respectively, and is classified within operating expenses in the 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 – $5$8 million per year from fiscal 20152018 through fiscal 2019.

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. For fiscal 2014, 2013 and 2012, 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, and accordingly, no impairment testing was performed on these assets.

11.2022.


10. Long-Term Debt

Long-term debt consists of the following:

   September 27,
2014
  September 28
2013
 
   (in thousands) 

Senior subordinated notes, net of unamortized discount of $471 and $583, interest at 8.25%, payable semi-annually, principal due March 2018

  $449,529   $449,417  

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

   0    0  

Revolving credit facility, interest at Alternate Base Rate plus a margin of 0.75% to 1.75%, or LIBOR plus a margin of 1.75% to 2.75%, final maturity June 2016

   0    23,000  

Other notes payable

   710    170  
  

 

 

  

 

 

 

Total

   450,239    472,587  

Less current portion

   (291  (142
  

 

 

  

 

 

 

Long-term portion

  $449,948   $472,445  
  

 

 

  

 

 

 

   September 30,
2017

September 24,
2016
  (in thousands)
Senior notes, interest at 6.125%, payable semi-annually, principal due November 2023  $400,000
 $400,000
Unamortized debt issuance costs  (4,840) (5,635)
Net carrying value  395,160
 394,365
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%, amended in April 2016  
 
Other notes payable  493
 904
Total  395,653
 395,269
Less current portion  (375) (463)
Long-term portion  $395,278
 $394,806
Senior Notes and Redemption of Senior Subordinated Notes

On March 8, 2010,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 (the “2018 Notes”). On February 13, 2012, the Company issued an additional $50 million aggregate principal amount of its( 2018 NotesNotes) at a price of 98.501%, plus accrued interest from September 1, 2011, in a private placement. 102.063% of the principal amount and to pay fees and expenses related to the offering.
The Company usedincurred 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 net proceeds from the offering to pay a portionterm of the outstanding balance under its prior revolving credit facility.

2023 Notes.

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 consolidated statements of operations for the year ended September 24, 2016.
The 20182023 Notes require semiannual interest payments which commenced on September 1, 2010.May 15 and November 15. The 20182023 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

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

unconditionally guaranteed on a senior subordinated basis by each of the Company’s existing and future domestic restricted subsidiaries with certain exceptions.which are borrowers under or guarantors of Central’s senior secured revolving credit facility. The guarantees2023 Notes are general unsecured senior subordinated obligations of the guarantors and are subordinated to all of


F- 22

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

the Company’s existing and future seniorsecured debt, including the Company’s Credit Facility, to the extent of the guarantors.

value of the collateral securing such indebtedness.

The Company may redeem some or all of the 20182023 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 March 1, 2014November 15, 2018 for 104.125%104.594%, on or after March 1, 2015November 15, 2019 for 102.063%103.063%, on or after November 15, 2020 for 101.531% and on or after March 1, 2016November 15, 2021 for 100%, plus accrued and unpaid interest.
The holders of the 20182023 Notes have the right to require the Company to repurchase all or a portion of the 20182023 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 20182023 Notes contain customary high yield covenants, including financial 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 September 27, 2014.

Asset Backed30, 2017.

Asset-Based Loan Facility

Amendment

On December 5, 2013,April 22, 2016, the Company entered into aan amended and restated credit agreement which provides up to a $390$400 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders if the Company exercises the accordion feature set forth therein (collectively, the “Credit“Amended Credit Facility”). The Amended Credit Facility matures on December 5, 2018 and replaced the Company’s prior revolving credit facility.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 September 27, 2014,30, 2017, there were no borrowings outstanding under the Credit Facility. There wereand no letters of credit outstanding under the Credit Facility as of September 27, 2014.Facility. There were other letters of credit of $12.6$1.8 million outstanding as of September 27, 2014.

30, 2017.

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. TheAs of September 30, 2017, the borrowing base and remaining borrowing availability as of September 27, 2014 was $330$368.9 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%1.0%), plus, in either case, an applicable margin based on the Company’s total outstanding borrowings.consolidated senior leverage ratio. Such applicable margin for LIBOR-based borrowings fluctuates between 1.25%-1.75% (and - 1.5% and was 1.25% atas of September 27, 2014)30, 2017, and such applicable margin for Base Rate borrowings fluctuates between 0.25%-0.75% (and-0.5% and was 0.25% atas of September 27, 2014).30, 2017. As of September 27, 2014,30, 2017, the applicable interest rate related to Base Rate borrowings was 3.5%4.5%, and the applicable interest rate related to LIBOR-based borrowings was 1.4%2.5%.

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 :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 fiscal yearperiod ended September 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 will be 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.

30, 2017.



F- 23

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)


The scheduled principal repayments on long-term debt as of September 27, 201430, 2017 are as follows:

   (in thousands) 

Fiscal year:

  

2015

  $291  

2016

   287  

2017

   122  

2018

   450,030  

2019

   3  

Thereafter

   0  
  

 

 

 

Total

  $450,733 (1) 
  

 

 

 

 (in thousands) 
Fiscal year:  
2018$375
  
20195
  
2020113
  
2021
  
2022
  
Thereafter400,000
  
Total$400,493
(1)

(1)Debt repayments include an amount in excess of the carrying value of debt anddo not reflect the unamortized portion of deferred financing costs associated with the original issue discount on the Senior Subordinated2023 Notes of $0.5$4.8 million as of September 27, 2014,30, 2017, which is amortizable until March 2018.November 2023 and is included in the carrying value.

12.

11. Commitments and Contingencies

Commitments
Commitments

Letters of creditThe Company had $12.6$1.8 million of outstanding letters of credit related to normal business transactions at September 27, 2014.30, 2017. These agreements require the Company to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash the Company has available for other uses. The amount of cash collateral in these segregated accounts was $14.3$12.6 million and $ 10.9 million as of September 30, 2017 and September 24, 2016, respectively, and is reflected in “Restricted cash and cash equivalents”cash” on the Consolidated Balance Sheets.

Purchase commitments – Production and purchase agreements (primarily for grass seed and grains) entered into in the ordinary course of business obligate the Company to make future purchases based on estimated yields. The terms of these contracts vary and have fixed prices or quantities. At September 27, 2014,30, 2017, estimated annual purchase commitments were $98.5 million for fiscal 2015, $35.0 million for fiscal 2016, $20.5 million for fiscal 2017, $13.4$104.4 million for fiscal 2018, $7.4$31.3 million for fiscal 2019, $18.9 million for fiscal 2020, $11.4 million for fiscal 2021, $4.3 million for fiscal 2022 and $1.9$0.8 million thereafter.

Leases – The Company has operating lease agreements principally for office and warehouse facilities and equipment. Such leases have remaining terms of 1one to 7 years.12 years . Rental expense was $21.3$31.7 million for fiscal 2014, $22.42017, $25.0 million for fiscal 20132016 and $23.6$23.1 million for fiscal 2012.2015 and is included in cost of goods sold and occupancy or selling, general and administrative expenses in the Company's consolidated statements of operations.

Certain facility leases have renewal options and include escalation clauses. Minimum lease payments include scheduled rent increases pursuant to these escalation provisions.

Aggregate minimum annual payments on non-cancelable operating leases at September 27, 201430, 2017 are as follows:

   (in thousands) 

Fiscal year:

  

2015

  $17,553  

2016

   14,088  

2017

   10,963  

2018

   5,458  

2019

   3,979  

Thereafter

   1,507  
  

 

 

 

Total

  $53,548  
  

 

 

 

 (in thousands)
Fiscal year: 
2018$26,461
201921,393
202016,658
202112,222
20228,812
Thereafter25,885
Total$111,431

F- 24

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)


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 the resolution of which 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 stage and, as such, management is unable to determine the impact, if any, on the Company’s financial position or results of operations.

The Company has experienced, and may in the future experience, issues with products that may lead to product liability, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. The Company has not experienced recent issues with products the resolution of which management believes would have a material effect on the Company’s financial position or results of operations.

13.

12. Income Taxes

The provision for income tax expense (benefit) consists of the following:

   Fiscal Year Ended 
   September 27,
2014
  September 28,
2013
  September 29,
2012
 
   (in thousands) 

Current:

    

Federal.

  $(329 $52   $(1,003

State.

   873    958    603  

Foreign.

   0    0    35  
  

 

 

  

 

 

  

 

 

 

Total

   544    1,010    (365

Deferred:

    

Federal.

   4,171    (2,915  12,671  

State.

   177    (687  198  

Foreign.

   (847  0    312  
  

 

 

  

 

 

  

 

 

 

Total

   3,501    (3,602  13,181  
  

 

 

  

 

 

  

 

 

 

Total

  $4,045   $(2,592 $12,816  
  

 

 

  

 

 

  

 

 

 

 Fiscal Year Ended
 September 30,
2017
 September 24,
2016
 September 26,
2015
 (in thousands)
Current:     
Federal$32,755
 $18,592
 $2,301
State3,034
 2,140
 643
Foreign121
 110
 25
Total35,910
 20,842
 2,969
Deferred:     
Federal11,227
 2,796
 14,843
State(1,038) 463
 625
Foreign600
 (48) 98
Total10,789
 3,211
 15,566
Total$46,699
 $24,053
 $18,535
A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:

   Fiscal Year Ended 
   September 27,
2014
  September 28,
2013
  September 29,
2012
 

Statutory federal income tax rate

   35.0  (35.0)%   35.0

State income taxes, net of federal benefit

   2.1    (5.2  2.3  

Other permanent differences

   0.2    2.4    0.6  

Adjustment of prior year accruals

   (0.2  1.8    0.2  

Uncertain tax positions

   0.4    3.7    0.0  

Credits

   (1.6  (29.3  (1.2

Change in valuation allowances

   (5.4  (9.0  (0.1

Foreign rate differential

   (1.3  (3.6  (0.1
  

 

 

  

 

 

  

 

 

 

Effective income tax rate (benefit)

   29.2  (74.2%)   36.7
  

 

 

  

 

 

  

 

 

 

 Fiscal Year Ended
 September 30,
2017
 September 24,
2016
 September 26,
2015
Statutory federal income tax rate35.0 % 35.0 % 35.0 %
State income taxes, net of federal benefit2.4
 2.1
 2.4
Other permanent differences0.3
 (1.6) (0.5)
Adjustment of prior year accruals(0.3) (0.6) (0.5)
Credits(0.6) (1.0) (0.3)
Change in valuation allowances
 0.5
 
Foreign rate differential0.1
 0.1
 (0.1)
Effective income tax rate (benefit)36.9 % 34.5 % 36.0 %


F- 25

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)


Deferred income taxes reflect the impact of “temporary differences” between asset and liability amounts for financial reporting purposes and such amounts as determined based on existing tax laws. The tax effect of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:

   September 27, 2014   September 28, 2013 
   Deferred
Tax
Assets
  Deferred
Tax
Liabilities
   Deferred
Tax
Assets
  Deferred
Tax
Liabilities
 

Current:

  

Allowance for doubtful accounts .

  $9,262   $0    $7,758   $0  

Inventory write-downs

   12,018    0     14,983    0  

Prepaid expenses.

   820    0     620    0  

Nondeductible reserves

   1,420    0     2,782    0  

State taxes.

   0    165     0    188  

Employee benefits

   7,816    0     6,062    0  

Other.

   3,233    0     3,012    0  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total

   34,569    165     35,218    188  
  

 

 

  

 

 

   

 

 

  

 

 

 

Noncurrent:

      

Depreciation and amortization.

   0    46,458     0    39,100  

Equity income.

   0    127     0    393  

State net operating loss carryforward

   5,167    0     4,816    0  

Stock based compensation

   5,263    0     6,061    0  

State credits

   2,352    0     2,421    0  

Other.

   7,281    0     5,349    0  

Valuation allowance

   (6,215  0     (6,968  0  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total.

   13,848    46,585     11,679    39,493  
  

 

 

  

 

 

   

 

 

  

 

 

 

Total.

  $48,417   $46,750    $46,897   $39,681  
  

 

 

  

 

 

   

 

 

  

 

 

 

 September 30, 2017 September 24, 2016
 
Deferred
Tax
Assets
 
Deferred
Tax
Liabilities
 
Deferred
Tax
Assets
 
Deferred
Tax
Liabilities
 (in thousands)
Allowance for doubtful accounts$7,790
 $
 $7,634
 $
Inventory write-downs10,406
 
 9,869
 
Prepaid expenses
 1,740
 
 1,188
Nondeductible reserves1,485
 
 1,632
 
State taxes276
 
 19
 
Employee benefits10,007
 
 10,544
 
Depreciation and amortization
 84,059
 
 62,778
Equity loss4,243
 
 5,070
 
State net operating loss carryforward5,182
 
 4,939
 
Stock based compensation3,097
 
 2,642
 
State credits2,403
 
 2,317
 
Other5,768
 
 5,303
 
Valuation allowance(6,527) 
 (6,583) 
Total$44,130
 $85,799
 $43,386
 $63,966
The Company has federal tax net operating losses of $6.6 million which begin to expire in 2033, state tax net operating losses of $102.6$109.1 million, which expire at various times between 20142017 and 2034,2037, and foreign losses of $1.5$3.0 million, which do not expire. Pursuant to authoritative guidance, the benefit of stock options will only be recorded to stockholders’ equity when cash taxes payable are reduced. As of September 27, 2014, the portion of net operating loss carryforwards related to stock options is approximately $1.2 million, the benefit of which will be credited to additional paid-in capital when realized.

The Company has federal income tax credits of $1.4 million which expire between 2024 and 2034. The Company also has state income tax credits of $3.6$3.7 million, which expire at various times beginning in 20142017 through 2030.2033. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including past operating results, future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against any deferred tax assets. The Company has determined there will be insufficient future separate state taxable income for the separate parent company to realize its deferred tax assets. Therefore, valuation allowances of $6.2$6.5 million and $7.0$6.6 million (net of federal impact) at September 27, 201430, 2017 and September 28, 2013,24, 2016, respectively, have been provided to reduce state deferred tax assets to amounts considered recoverable.

The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year.year. The Company recognizes interest and/or penalties related to income tax matters as a component of pretax income. As of September 27, 201430, 2017 and September 28, 2013,24, 2016, accrued interest was less than $0.1 million and no penalties were accrued related to uncertain tax positions.


F- 26

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)


The following table, which excludes interest and penalties, summarizes the activity related to the Company’s unrecognized tax benefits for fiscal years ended September 27, 201430, 2017 and September 28, 201324, 2016 (in thousands):

Balance as of September 29, 2012

  $262  

Increases related to prior year tax positions

   247  

Increases related to current year tax positions

   60  

Settlements

   (202

Decreases related to lapse of statute of limitations

   (3
  

 

 

 

Balance as of September 28, 2013

  $364  

Increases related to prior year tax positions

   264  

Increases related to current year tax positions

   14  

Decreases related to prior year tax positions

   (166

Settlements

   (388

Decreases related to lapse of statute of limitations

   (1
  

 

 

 

Balance as of September 27, 2014

  $87  
  

 

 

 

  
Balance as of September 26, 2015$138
Increases related to prior year tax positions51
Increases related to current year tax positions66
Decreases related to prior year tax positions
Settlements(1)
Decreases related to lapse of statute of limitations
Balance as of September 24, 2016$254
Increases related to prior year tax positions4
Increases related to current year tax positions67
Decreases related to prior year tax positions
Settlements
Decreases related to lapse of statute of limitations
Balance as of September 30, 2017$325
As of September 27, 2014,30, 2017, unrecognized income tax benefits totaled approximately $0.1$0.3 million and all of the unrecognized tax benefits would, if recognized, impact the Company’s effective income tax rate.

The Company is principally subject to taxation by the United States and various states within the United States. The Company’s tax filings in major jurisdictions are open to examination by tax authorities by the Internal Revenue Service from fiscal year ended 20112014 forward and in various state taxing authorities generally from fiscal year ended 20102013 forward.

The Company does not believe there will be any significant change in its unrecognized tax benefits within the next twelve months.

14.

13. Stock-Based Compensation

The Company’s 2003 Omnibus Equity Incentive Plan (the “2003 Plan”), as amended, provides for the grant of options and restricted stock to key employees, directors and consultants of the Company up to an aggregate of 5.8 million shares of common stock of the Company. The 2003 Plan is administered by the Compensation Committee of the Board of Directors, which is comprised only of independent directors, and which must approve individual awards to be granted, vesting and exercise of share conditions.

In connection with a dividend payable in the form of two shares of the Class A Common Stock for each outstanding share of Common Stock and Class B Common Stock on February 5, 2007, the 2003 Plan was amended to include 9,734,982 shares of Class A Common Stock authorized for issuance. As a result of recent amendments, there

There is a total of 5,800,0005.8 million shares of Common Stock, 19,734,98219.7 million shares of Class A Common Stock and 500,000 shares of Preferred Stock authorized under the 2003 Plan. If and when the Company issues any shares of Preferred Stock under the 2003 Plan, it will reduce the amount of Class A Common Stock available for future issuance in an amount equal to the number of shares of Class A Common Stock that are issuable upon conversion of such Preferred Stock.

The Company has a Nonemployee Director Stock Option Plan (the “Director Plan”) which provides for the grant of options and restricted stock to nonemployee directors of the Company. The Director Plan, as amended, provides for the granting to each independent director of options to purchase a number of shares equal to $200,000 divided by the fair market value of the Company’s common stock on the date of each annual meeting of stockholders and a number of shares of restricted stock equal to $20,000 divided by such fair market value.

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As of September 27, 2014,30, 2017, there were approximately 2.3 million32.1 thousand shares of Common Stock, 8.63.6 million shares of Class A Common Stock and no shares of Preferred Stock reserved for outstanding equity awards, and there were approximately 2.74.6 million shares of Common Stock, 8.511.7 million shares of Class A Common Stock and 0.5 million shares of Preferred Stock remaining for future awards.

Stock Option Awards

The Company recognized share-based compensation expense of $7.7$11.1 million, $15.9$8.4 million, and $7.5$8.3 million for the years ended September 27, 2014,30, 2017, September 28, 201324, 2016 and September 29, 2012,26, 2015, respectively, as a component of selling, general and administrative expenses. Share-based compensation expense in fiscal 2014, 20132017, 2016 and 2012,2015 consisted of $2.8$2.9 million, $2.7$2.2 million, and $3.8$3.3 million, respectively, for stock options, and $3.0$5.8 million, $11.2$4.5 million and $1.7$3.1 million, respectively, for stock awards. Share-based compensation

F- 27

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

expense in fiscal 2014, 20132017, 2016 and 20122015 also includes $2.4 million, $1.7 million and $1.9 million, $2.0 million and $2.0 millionrespectively, for the Company’s 401(k) matching contributions.

From fiscal 2008 to fiscal 2011, the Company granted stock options under its 2003 Plan that included performance targets and time-based vesting to key employees and executives. In March 2012, the Company eliminated all of the past and future performance goals relating to stock options granted from fiscal 2008 to fiscal 2011, except for the performance goals relating to the overall Company performance. The Company took this action because, as a result of the Company’s reorganization around functional lines during 2011, the extent to which cumulative performance targets for segments or business units have been or may be achieved became difficult or impossible to measure and the changes underway within the Company were not contemplated when the Company granted the options. After the amendment, 20% of the shares covered by each award continue to be performance-based. The time vested component of the options did not change. Approximately 250 employees were affected by the modification, and no additional compensation cost was recorded.

The performance-based component of the options granted in fiscal 2008 was achieved and 60% of the performance-based component of the options granted in fiscal 2009 was achieved and the related expense was recorded over the estimated service period. The Company currently estimates the performance-based component of the options granted in fiscal 2010 and 2011 is not probable of achievement and are not recording related expense. As of September 27, 2014, there were 4 million of unvested options, of which approximately 0.7 million are subject to performance based vesting criteria. To the extent Company goals are or are not achieved, the amount of stock-based compensation recognized in the future will be adjusted.

During fiscal 2014,2017, the Company granted time-based stock options with an exercise price based on the closing fair market value on the date of the grant. The majority of the options granted in fiscal 20142017 vest in four annual installments commencing approximately one year from the date of grant and expire approximately six years after the grant date.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities are estimated based on the Company’s historical volatility. The expected term of options granted is based on analyses of historical employee termination rates, option exercises and the contractual term of the option. The risk-free rates are based on U.S. Treasury yields, for notes with comparable terms as the option grants, in effect at the time of the grant. For purposes of this valuation model, no dividends have been assumed.

The Company’s calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life from the date of grant, 3.53.7 years in fiscal 2014, 3.52017 and fiscal 2016 and 3.6 years in fiscal 2013 and 3.5 years in fiscal 2012;2015; stock price volatility, 34.3%31.5% in fiscal 2014, 34.8%2017, 30.8% in fiscal 20132016, and 37.9%30.3% in fiscal 2012;2015; risk free interest rates, 1.6%2.0% in fiscal 2014, 1.2%2017, 1.3% in fiscal 20132016 and 0.9% in fiscal 2012;2015; and no dividends during the expected term.

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes option activity for the period ended September 27, 2014:

   Number of
Shares
(in thousands)
  Weighted
Average Exercise
Price per Share
   Weighted Average
Remaining
Contractual Life
   Aggregate
Intrinsic Value
(in thousands)
 

Outstanding at September 28, 2013

   12,571   $10.57     3 years    $1,166  

Granted

   248   $7.72      

Exercised

   (705 $6.14      

Cancelled or expired

   (2,901 $12.09      
  

 

 

      

Outstanding at September 27, 2014

   9,213   $10.35     3 years    $1,895  
  

 

 

      

Exercisable at September 29, 2012

   4,601   $11.34     2 years    $6,708  

Exercisable at September 28, 2013

   6,409   $11.21     2 years     770  

Exercisable at September 27, 2014

   5,205   $10.81     2 years     390  

Expected to vest after September 27, 2014

   3,390   $9.77     3 years    $1,272  

30, 2017:

 
Number of
Shares
(in thousands)
 
Weighted
Average Exercise
Price per Share
 
Weighted Average
Remaining
Contractual Life
 
Aggregate
Intrinsic Value
(in thousands)
Outstanding at September 24, 20164,169
 $11.64
 3 years $53,705
Granted639
 $31.02
    
Exercised(2,234) $11.51
    
Canceled or expired(103) $11.33
    
Outstanding at September 30, 20172,471
 $16.79
 4 years $50,420
Exercisable at September 26, 20152,910
 $10.74
 2 years 17,226
Exercisable at September 24, 20161,732
 $11.46
 2 years 22,954
Exercisable at September 30, 2017458
 $10.80
 2 years 12,097
Expected to vest after September 30, 20171,767
 $18.15
 4 years $33,644
The price of options to purchase shares of common stock and Class A common stock outstanding at September 30, 2017, September 24, 2016 and September 26, 2015 was between $6.43 to $33.15 per share, $6.43 to $15.56 per share and $6.43 to $15.00 per share, respectively. The weighted average grant date fair value of options granted during the fiscal years ended September 27, 2014,30, 2017, September 28, 201324, 2016 and September 29, 201226, 2015 was $1.93, $1.72$8.14, $3.04 and $2.72.$2.51, respectively. The total intrinsic value of options exercised during the fiscal years ended September 27, 2014,30, 2017, September 28, 201324, 2016 and September 29, 201226, 2015 was $1.4$44.0 million, $1.1$22.6 million, and $5.1$5.9 million, respectively.

As of September 27, 2014,30, 2017, there was $5.1$7.4 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted average vesting period of 2three years.

Restricted Stock Awards

As of September 27, 201430, 2017 and September 28, 2013,24, 2016, there were approximately 1.61.1 million and 0.91.5 million, shares, respectively, of restricted stock awards outstanding. The awardsAwards granted in fiscal 20142017 and 2016 generally vest inwithin four annual installments commencing approximately one yearor five years from the date of grant. In fiscal 2014, approximately $6.4 million of bonus amounts earned in fiscal 2013 were paid by granting approximately 570,000 restricted shares that vested immediately.

Restricted stock award activity during the three fiscal years in the period ended September 27, 201430, 2017 is summarized as follows:

   Number of
Shares
  Weighted Average
Grant Date

Fair Value per
Share
 
   (in thousands)    

Nonvested at September 24, 2011

   804   $9.79  

Granted

   159   $9.16  

Vested

   (98 $12.12  

Forfeited

   (80 $8.32  
  

 

 

  

Nonvested at September 29, 2012

   785   $9.53  

Granted

   552   $9.26  

Vested

   (354 $9.60  

Forfeited

   (89 $9.37  
  

 

 

  

Nonvested at September 28, 2013

   894   $9.35  

Granted

   1,021   $7.98  

Vested

   (226 $9.92  

Forfeited

   (80 $8.93  
  

 

 

  

Nonvested at September 27, 2014

   1,609   $8.43  
  

 

 

  


F- 28

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

The weighted average grant date fair value of restricted stock awards granted during the fiscal years ended September 27, 2014, September 28, 2013 and September 29, 2012 was $7.98, $9.26 and $9.16, respectively. The aggregate fair value as of the vesting date of restricted shares that vested was $1.7 million, $3.4 million and $0.9 million for fiscal 2014, 2013 and 2012, respectively.


 
Number of
Shares
 
Weighted Average
Grant Date
Fair Value per
Share
 (in thousands)  
Nonvested at September 24, 20161,540
 $10.68
Granted196
 $29.30
Vested(567) $9.94
Forfeited(32) $9.81
Nonvested at September 30, 20171,137
 $14.34
As of September 27, 2014,30, 2017, there was $10.1$11.1 million of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of twothree years.

15.

14. Shareholders’ Equity

At September 27, 2014,30, 2017 and September 24, 2016, there were 80,000,000 shares of common stock ($0.01 par value) authorized, of which 12,437,30712,160,023 and 11,998,472, respectively, were outstanding, and 100,000,000 shares of non-voting Class A common stock ($0.01 par value) authorized, of which 36,887,31138,019,736 and 37,418,572, respectively, were outstanding. The preferences and relative rights of the Class A common stock are identical to common stock in all respects, except that the Class A common stock generally will have no voting rights unless otherwise required by Delaware law.

There are 3,000,000 shares of Class B stock ($0.01 par value) authorized, of which 1,652,262 were outstanding at September 27, 201430, 2017 and September 28, 2013.24, 2016. The voting powers, preferences and relative rights of the Class B stock are identical to common stock in all respects except that (i) the holders of common stock are entitled to one vote per share and the holders of Class B stock are entitled to the lesser of ten votes per share or 49% of the total votes cast, (ii) stock dividends on common stock may be paid only in shares of common stock and stock dividends on Class B stock may be paid only in shares of Class B stock and (iii) shares of Class B stock have certain conversion rights and are subject to certain restrictions on ownership and transfer. Each share of Class B stock is convertible into one share of common stock, at the option of the holder. Additional shares of Class B stock may only be issued with majority approval of the holders of the common stock and Class B stock, voting as separate classes.

There are 1,000,000 shares of preferred stock ($0.01 par value) authorized, of which none were outstanding at September 30, 2017 and September 24, 2016.
During the third fiscal quarter of fiscal 2011, the Company’s Board of Directors authorized a $100 million share repurchase program, in part, to minimize the dilutive impact of the Company’s stock-based equity compensation programs over time. During the fiscal year ended September 27, 2014,30, 2017, the Company made no material stock repurchases.did not repurchase any of its stock. In total, as of September 27, 2014,30, 2017, the Company had repurchased approximately 6.37.9 million shares for an aggregate price of approximately $49.9$65.0 million under the share repurchase program.

16.


F- 29

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

15. Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings (loss) per share (EPS) computations:

  Fiscal Year Ended
September 27, 2014
  Fiscal Year Ended
September 28, 2013
  Fiscal Year Ended
September 29, 2012
 
  Net
Income
(Loss)
  Shares  Per
Share
  Net
Income
  Shares  Per
Share
  Net
Income
  Shares  Per
Share
 
  (in thousands, except per share amounts) 

Basic EPS:

         

Net income (loss) available to common shareholders

 $8,804    48,880   $0.18   $(1,929  48,094   $(0.04 $21,173    47,622   $0.44  

Effect of dilutive securities:

         

Options to purchase common stock

   69    0     0    0     497    0  

Restricted shares

   448    0     0    0     255    0  

Diluted EPS:

         

Net income (loss) available to common shareholders

 $8,804    49,397   $0.18   $(1,929  48,094   $(0.04 $21,173    48,374   $0.44  

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The

 Fiscal Year Ended
September 30, 2017
 Fiscal Year Ended
September 24, 2016
 Fiscal Year Ended
September 26, 2015
 
Net
Income
 Shares 
Per
Share
 
Net
Income
 Shares 
Per
Share
 
Net
Income
(Loss)
 Shares 
Per
Share
 (in thousands, except per share amounts)
Basic EPS:                 
Net income (loss) available to common shareholders$78,828
 50,230
 $1.57
 $44,514
 48,964
 $0.91
 $31,971
 48,562
 $0.66
Effect of dilutive securities:                 
Options to purchase common stock  992
 (0.03)   1,335
 (0.02)   520
 (0.01)
Restricted shares  598
 (0.02)   776
 (0.02)   556
 (0.01)
Diluted EPS:                 
Net income (loss) available to common shareholders$78,828
 51,820
 $1.52
 $44,514
 51,075
 $0.87
 $31,971
 49,638
 $0.64
For fiscal 2017, 31 thousand options were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options to purchase shareswould be anti-dilutive.
For fiscal 2016, all options outstanding were included in the computation of common stock and Class A common stock outstanding at September 27, 2014 range from $6.43 to $16.23diluted earnings per share.
For fiscal 2014, 9.72015, 3.2 million options were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive.

The price of options to purchase shares of common stock and Class A common stock outstanding at September 28, 2013 range from $4.60 to $16.23 per share. For fiscal 2013, 10.4 million options were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive. Regardless of exercise price, all outstanding stock options were excluded in the calculation due to the net loss recorded for the period ended September 28, 2013. In periods where net earnings are reported, these options may become dilutive if the average market price of our common stock exceeds the exercise price of the outstanding options.

The price of options to purchase shares of common stock and Class A common stock outstanding at September 29, 2012 range from $4.60 to $16.23 per share. For fiscal 2012, 6.1 million options were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive.

17.

16. Quarterly Financial Data – Unaudited
 Fiscal 2017  
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
  
 (in thousands, except per share amounts)  
Net sales$419,498
 $569,924
 $574,592
 $490,464
   
Gross profit120,678
 183,529
 183,273
 145,328
   
Net income attributable to Central Garden & Pet Company7,637
(1)34,684
 32,248
 4,259
  
Net income per share:         
Basic$0.15
 $0.69
 $0.64
 $0.08
  
Diluted$0.15
 $0.67
 $0.62
 $0.08
  
Weighted average common shares outstanding:         
Basic49,665
 50,079
 50,507
 50,654
   
Diluted51,810
 51,983
 51,825
 51,935
   
(1) 

  Fiscal 2014 
  1st Quarter  2nd Quarter  3rd Quarter  4th Quarter 
  (in thousands, except per share amounts) 

Net sales

 $290,521   $501,611   $437,987   $374,238  

Gross profit

  79,741    147,596    119,131    107,556  

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

  (12,708  20,895    4,687 (1)   (4,070) (1) 

Net income (loss) per share:

    

Basic

 $(0.26 $0.43   $0.10   $(0.08

Diluted

 $(0.26 $0.43   $0.09   $(0.08

Weighted average common shares outstanding:

    

Basic

  48,368    48,688    49,148    49,324  

Diluted

  48,368    49,116    49,841    49,324  

  Fiscal 2013 
  1st Quarter  2nd Quarter  3rd Quarter  4th Quarter 
  (in thousands, except per share amounts) 

Net sales

 $292,497   $498,169   $494,130   $368,837  

Gross profit

  76,959    153,170    152,466    81,307  

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

  (15,269  22,196    13,725    (22,581) (2) 

Net income (loss) per share:

    

Basic

 $(0.32 $0.46   $0.28   $(0.47

Diluted

 $(0.32 $0.46   $0.28   $(0.47

Weighted average common shares outstanding:

    

Basic

  47,871    48,064    48,173    48,264  

Diluted

  47,871    48,740    48,822    48,264  

The Company recognized a $2.0 million gain in its Garden segment from the sale of a distribution facility during the first quarter of fiscal 2017.

F- 30

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

 Fiscal 2016  
 
1st Quarter
 
2nd Quarter
 
3rd Quarter
 
4th Quarter
  
 (in thousands, except per share amounts)  
Net sales$359,812
 $541,249
 $514,544
 $413,412
   
Gross profit99,786
 169,339
 163,745
 120,180
   
Net income (loss) attributable to Central Garden & Pet Company(8,602)(1)32,697
 26,030
(2)(5,611) (3)
Net income (loss) per share:         
Basic$(0.18) $0.67
 $0.53
 $(0.11)  
Diluted$(0.18) $0.65
 $0.51
 $(0.11)  
Weighted average common shares outstanding:         
Basic48,566
 48,717
 49,120
 49,453
   
Diluted48,566
 50,445
 51,063
 49,453
   

(1)During the first quarter of fiscal 2016, the Company redeemed its 2018 Notes and issued senior notes due November 2023. As a result of the bond redemption, the Company incurred incremental expenses of $14.3 million, comprised of a call premium payment of $8.3 million, a $2.7 million payment of overlapping interest expense for 30 days and a $3.3 million non-cash charge for the write off of unamortized deferred financing costs and discount related to the 2018 Notes.
(2)The Company recognized a $16.9 million charge related to certain products introduced in fiscal 2013 and a $2.0$2.4 million gain onin its Pet segment from the sale of a manufacturing plant assets inresulting from rationalizing its Garden segmentfacilities to reduce excess capacity during the third quarter of fiscal 2014, as well as a $2.9 million gain on the sale of manufacturing plant assets in its Garden segment in the fourth quarter of fiscal 2014.2016.
(2)
(3)The Company recognized a $7.7 million goodwillnon-cash impairment charge and an $11.2of $16.6 million charge related to certain products introducedits investment in fiscal 2013two joint ventures as a result of changes in marketplace conditions, and a non-cash impairment charge in its GardenPet segment of $1.8 million related to the impairment of certain indefinite-lived intangible assets due to declining sales volume during the fourth quarter of fiscal 2013.2016.

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

18.


17. Transactions with Related Parties

During each of the fiscal years 2013 and 2012, subsidiaries of the Company purchased approximately $1.0 million of products from Bio Plus, Inc., a company that produces granular peanut hulls. As of September 28, 2013, the amounts owed to BioPlus, Inc. for such purchases were not material. A director of the Company was a minority shareholder and a director of Bio Plus, Inc until May 2013.

During fiscal 2014, 20132017, 2016 and 2012,2015, Tech Pac, a subsidiary of the Company, made purchases from Contract Packaging, Inc, (“CPI”), Tech Pac’s principal supplier and a minority 20% shareholder in Tech Pac. Tech Pac’s total purchases from CPI were approximately $30.8$37.0 million, $32.5$36.5 million and $39.3$35.2 million for fiscal years 2014, 20132017, 2016 and 2012,2015, respectively. Amounts due to CPI as of September 27, 201430, 2017 and September 28, 201324, 2016 were $0.6 million and $0.5$1.5 million, respectively.

19.

18. Business Segment Data

The Company’s chief operating decision-maker is its Chief Executive Officer. Operating segments are managed separately because each segment represents a strategic business that offers different products or services. The Company’s chief operating decision maker evaluates performance based on profitoperating income or loss from operations.loss. The Company’s Corporate division is included in the following presentation since certain expenses of this division are not allocated separately to the two operating segments. Segment assets exclude cash equivalents, short-term investments, goodwill, and deferred taxes.

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 the Pet segment and the Garden segment. Substantially all of the Company’s assets and operations relate to its business in the United States.

The Pet segment consists of DMC, Four Paws Products, TFH Publications, Kaytee, Aquatics, Interpet, IMS, Pets International, Breeder’s Choice, Life Sciences, Segrest and Life Sciences.K&H Manufacturing. These businesses are engaged in the manufacturing, purchase, sale and delivery of internally and externally produced pet supplies, books , food, live fish and foodsmall animals principally to independent pet distributors, national and regional retail chains, grocery stores, mass merchants and bookstores. The Garden segment consists of Pennington Seed, Matthews Four Seasons, Grant’s,Hydro Organics, AMBRANDS, Lilly Miller, the Pottery Group Gulfstream and GKI/Bethlehem Lighting.Gulfstream. Products manufactured, designed and sourced, or distributed are products found typically in the lawn and garden sections of mass merchandisers, warehouse-type clubs, home improvement centers and

F- 31

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

nurseries and include grass seed, bird feed, clay pottery, outdoor wooden planters and trellises, herbicides and insecticides. These products are sold directly to national and regional retail chains, independent garden distributors, grocery stores, nurseries and garden supply retailers.

The Corporate division includes expenses associated with corporate functions and projects, certain employee benefits, interest income, interest expense and intersegment eliminations.

The following table indicates each class of similar products which represented approximately 10% or more than 10% of the Company’s consolidated net sales in the fiscal years presented (in millions).

Category

  2014   2013   2012 

Pet supplies (excluding wild bird feed)

  $774.2    $807.4    $847.1  

Garden controls and fertilizer products

   262.5     274.9     281.7  

Wild bird feed

   202.1     210.8     205.1  

Other garden supplies

   182.5     183.5     185.7  

Grass seed

   183.1     177.0     180.4  
  

 

 

   

 

 

   

 

 

 

Total

  $1,604.4    $1,653.6    $1,700.0  
  

 

 

   

 

 

   

 

 

 

Category2017 2016 2015 
Other pet products$841.4
 $689.3
 $594.7
 
Other garden supplies464.9
 331.3
 343.5
 
Dog and cat products405.0
 326.0
 233.0
 
Garden controls and fertilizer products343.2
 298.8
 286.3
 
Wild bird feed
(1)183.6
 193.2
 
Total$2,054.5
 $1,829.0
 $1,650.7
 
CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

See Note 5 – Concentrations4 - Concentration of Credit Risk and Significant Customers and Suppliers for the Company’s largest customers by segment.

(1) The product category was less than 10% of the Company's consolidated net sales in the respective period.

F- 32

CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Financial information relating to the Company’s business segments for each of the three most recent fiscal years is presented in the table below (in thousands):

   Fiscal Year Ended 
   September 27,
2014
  September 28,
2013
  September 29,
2012
 

Net sales:

    

Pet segment

  $845,505   $888,228   $930,753  

Garden segment

   758,852    765,405    769,260  
  

 

 

  

 

 

  

 

 

 

Total

  $1,604,357   $1,653,633   $1,700,013  
  

 

 

  

 

 

  

 

 

 

Income (loss) from operations:

    

Pet segment

  $88,077   $95,451   $87,650  

Garden segment

   41,020 (1)   8,286 (2)   40,376  

Corporate

   (72,884  (63,582  (53,605
  

 

 

  

 

 

  

 

 

 

Total

   56,213    40,155    74,421  

Interest expense

   (42,844  (43,112  (40,315

Interest income

   94    142    145  

Other income (expense)

   403    (677  678  
  

 

 

  

 

 

  

 

 

 

Income (loss) before income taxes and noncontrolling interest

   13,866    (3,492  34,929  

Income tax expense (benefit)

   4,045    (2,592  12,816  
  

 

 

  

 

 

  

 

 

 

Net income (loss) including noncontrolling interest

   9,821    (900  22,113  

Net income attributable to noncontrolling interest

   1,017    1,029    940  
  

 

 

  

 

 

  

 

 

 

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

  $8,804   $(1,929 $21,173  
  

 

 

  

 

 

  

 

 

 

Assets:

    

Pet segment

  $414,279   $425,988   $411,059  

Garden segment

   337,461    388,581    341,716  

Corporate and eliminations

   396,987    346,591    396,772  
  

 

 

  

 

 

  

 

 

 

Total

  $1,148,727   $1,161,160   $1,149,547  
  

 

 

  

 

 

  

 

 

 

Depreciation and amortization:

    

Pet segment

  $17,256   $15,753   $14,507  

Garden segment

   6,793    6,410    6,213  

Corporate

   11,732    10,805    9,705  
  

 

 

  

 

 

  

 

 

 

Total

  $35,781   $32,968   $30,425  
  

 

 

  

 

 

  

 

 

 

Expenditures for long-lived assets:

    

Pet segment

  $8,561   $9,694   $15,540  

Garden segment

   5,541    7,496    4,138  

Corporate

   3,071    7,982    19,914  
  

 

 

  

 

 

  

 

 

 

Total

  $17,173   $25,172   $39,592  
  

 

 

  

 

 

  

 

 

 

 Fiscal Year Ended 
 September 30, 2017 September 24, 2016 September 26, 2015 
Net sales:      
Pet segment$1,246,354
  $1,081,853
  $894,549
  
Garden segment808,124
  747,164
  756,188
  
Total$2,054,478
  $1,829,017
  $1,650,737
  
Operating income (loss):      
Pet segment$131,622

$119,930
(1)$98,798
(1)
Garden segment87,298
  70,317

60,145
 
Corporate(62,808) (60,889) (67,508) 
Total156,112
 129,358
 91,435
 
Interest expense(28,209) (42,847) (40,027) 
Interest income147
  140
  129
 
Other income (expense)(1,621) (17,013)(2)13
 
Income (loss) before income taxes and noncontrolling interest126,429
  69,638
  51,550
 
Income tax expense (benefit)46,699
  24,053
  18,535
 
Net income (loss) including noncontrolling interest79,730
  45,585
  33,015
 
Net income attributable to noncontrolling interest902
  1,071
  1,044
 
Net income (loss) attributable to Central Garden & Pet Company$78,828
  $44,514
  $31,971
 
Assets:      
Pet segment$612,337
  $508,879
  $465,171
  
Garden segment311,026
  304,901
  310,981
  
Corporate and eliminations383,543
  366,903
  324,960
  
Total$1,306,906
  $1,180,683
  $1,101,112
  
Depreciation and amortization:      
Pet segment$26,044
  $22,556
  $15,885
  
Garden segment6,267
  6,098
  5,988
  
Corporate10,408
  11,347
  11,830
  
Total$42,719
  $40,001
  $33,703
  
Expenditures for long-lived assets:      
Pet segment$38,970
  $18,939
  $17,060
  
Garden segment4,948
  4,750
  2,432
  
Corporate741
  3,933
  2,538
  
Total$44,659
  $27,622
  $22,030
  
Noncontrolling interest is associated with the Garden segment.

(1)Includes a $16.9$1.8 million impairment charge in fiscal 2016 and a $7.3 million impairment charge in fiscal 2015 to indefinite-lived intangible assets as a result of increased competition and declining sales volume.
(2)Includes a $16.6 million impairment charge related to certain products introduced in fiscal and a $4.9 million gain from the sale of manufacturing plant assets.two equity method investments.
(2)Includes goodwill impairment of $7.7 million and an $11.2 million charge related to certain products introduced in fiscal 2013.




F- 33

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

20.


19. 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 $450 million 8.25% Senior Subordinated Notes (the “Notes”) due March 1, 2018.2023 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.

Hydro-Organics Wholesale, Inc.
IMS Trading, LLC
IMS Southern, LLC
K&H Manufacturing, LLC
Kaytee Products, Inc.

Matson, LLC

New England Pottery, LLC

Pennington Seed, Inc. (including Gro Tec, Inc. and All-Glass Aquarium Co., Inc.)

Pets International, Ltd.

Segrest, Inc. (including Blue Springs Hatchery, Inc., Segrest Farms, Inc., Florida Tropical Distributors International, Inc., Sun
Pet, Ltd and Aquatica Tropicals, Inc.)
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.

  CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 27, 2014
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net sales

 $460,781   $109,453   $1,103,926   $(69,803 $1,604,357  

Cost of goods sold and occupancy

  370,492    87,028    757,217    (64,404  1,150,333  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  90,289    22,425    346,709    (5,399  454,024  

Selling, general and administrative expenses

  117,240    18,230    267,740    (5,399  397,811  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

  (26,951  4,195    78,969    0    56,213  

Other (income) expense

  (186  (583  366    0    (403

Interest expense

  42,742    218    (116  0    42,844  

Interest income

  92    2    0    0    94  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  (69,415  4,562    78,719    0    13,866  

Income tax expense (benefit)

  (26,962  756    30,251    0    4,045  

Equity in earnings of affiliates

  51,257    0    1,506    (52,763  0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) including noncontrolling interest

  8,804    3,806    49,974    (52,763  9,821  

Noncontrolling interest

  0    1,017    0    0    1,017  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income attributable to Central Garden & Pet Company

 $8,804   $2,789   $49,974   $(52,763 $8,804  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 Fiscal Year Ended September 30, 2017
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net sales$685,998
 $79,681
 $1,370,335
 $(81,536) $2,054,478
Cost of goods sold and occupancy534,682
 60,788
 901,959
 (75,759) 1,421,670
Gross profit151,316
 18,893
 468,376
 (5,777) 632,808
Selling, general and administrative expenses154,267
 18,416
 309,790
 (5,777) 476,696
Operating income (loss)(2,951) 477
 158,586
 
 156,112
Interest expense(28,051) (294) 136
 
 (28,209)
Interest income146
 1
 
 
 147
Other income (expense)(2,379) 844
 (86) 
 (1,621)
Income (loss) before taxes and equity in earnings of affiliates(33,235) 1,028
 158,636
 
 126,429
Income tax expense (benefit)(11,981) 1,466
 57,214
 
 46,699
Equity in earnings of affiliates100,082
 
 420
 (100,502) 
Net income (loss) including noncontrolling interest78,828
 (438) 101,842
 (100,502) 79,730
Noncontrolling interest
 902
 
 
 902
Net income (loss) attributable to Central Garden & Pet Company$78,828
 $(1,340) $101,842
 $(100,502) $78,828


F- 34

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

  CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 28, 2013 (As Revised)
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net sales

 $453,001   $88,822   $1,186,328   $(74,518 $1,653,633  

Cost of goods sold and occupancy

  364,120    73,068    821,524    (68,981  1,189,731  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  88,881    15,754    364,804    (5,537  463,902  

Selling, general and administrative expenses

  127,644    19,340    282,300    (5,537  423,747  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

  (38,763  (3,586  82,504    0    40,155  

Other (income) expense

  250    (398  825    0    677  

Interest expense

  42,925    263    (76  0    43,112  

Interest income

  140    2    0    0    142  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  (81,798  (3,449  81,755    0    (3,492

Income tax expense (benefit)

  (46,789  (2,567  46,764    0    (2,592

Equity in earnings of affiliates

  33,080    0    (2,561  (30,519  0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) including noncontrolling interest

  (1,929  (882  32,430    (30,519  (900

Noncontrolling interest

  0    1,029    0    0    1,029  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

 $(1,929 $(1,911 $32,430   $(30,519 $(1,929
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
Fiscal Year Ended September 29, 2012 (As Revised)
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net sales

 $483,337   $97,804   $1,218,521   $(99,649 $1,700,013  

Cost of goods sold and occupancy

  360,236    72,058    847,889    (94,328  1,185,855  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Gross profit

  123,101    25,746    370,632    (5,321  514,158  

Selling, general and administrative expenses

  130,360    22,564    292,134    (5,321  439,737  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

  (7,259  3,182    78,498    0    74,421  

Other (income) expense

  (108  3    (573  0    (678

Interest expense

  40,071    396    (152  0    40,315  

Interest income

  142    2    1    0    145  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

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

  (47,080  2,785    79,224    0    34,929  

Income tax expense (benefit)

  (16,607  1,477    27,946    0    12,816  

Equity in earnings of affiliates

  51,646    0    1,579    (53,225  0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income (loss) including noncontrolling interest

  21,173    1,308    52,857    (53,225  22,113  

Noncontrolling interest

  0    940    0    0    940  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net income attributable to Central Garden & Pet Company

 $21,173   $368   $52,857   $(53,225 $21,173  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 Fiscal Year Ended September 24, 2016
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net sales$587,579
 $82,567
 $1,238,339
 $(79,468) $1,829,017
Cost of goods sold and occupancy466,543
 62,727
 820,573
 (73,876) 1,275,967
Gross profit121,036
 19,840
 417,766
 (5,592) 553,050
Selling, general and administrative expenses138,556
 18,077
 272,651
 (5,592) 423,692
Operating income (loss)(17,520) 1,763
 145,115
 
 129,358
Interest expense(42,700) (266) 119
 
 (42,847)
Interest income136
 4
 
 
 140
Other income (expense)(16,925) (113) 25
 
 (17,013)
Income (loss) before taxes and equity in earnings of affiliates(77,009) 1,388
 145,259
 
 69,638
Income tax expense (benefit)(26,422) 923
 49,552
 
 24,053
Equity in earnings of affiliates95,101
 
 624
 (95,725) 
Net income including noncontrolling interest44,514
 465
 96,331
 (95,725) 45,585
Noncontrolling interest
 1,071
 
 
 1,071
Net income (loss) attributable to Central Garden & Pet Company$44,514
 $(606) $96,331
 $(95,725) $44,514
 CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS
 Fiscal Year Ended September 26, 2015
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net sales$484,310
 $100,127
 $1,146,821
 $(80,521) $1,650,737
Cost of goods sold and occupancy379,235
 76,597
 781,797
 (74,944) 1,162,685
Gross profit105,075
 23,530
 365,024
 (5,577) 488,052
Selling, general and administrative expenses124,613
 18,329
 259,252
 (5,577) 396,617
Operating income (loss)(19,538) 5,201
 105,772
 
 91,435
Interest expense(39,893) (268) 134
 
 (40,027)
Interest income126
 3
 
 
 129
Other income (expense)(372) 407
 (22) 
 13
Income (loss) before taxes and equity in earnings of affiliates(59,677) 5,343
 105,884
 
 51,550
Income tax expense (benefit)(21,500) 2,089
 37,946
 
 18,535
Equity in earnings of affiliates70,148
 
 2,445
 (72,593) 
Net income including noncontrolling interest31,971
 3,254
 70,383
 (72,593) 33,015
Noncontrolling interest
 1,044
 
 
 1,044
Net income attributable to Central Garden & Pet Company$31,971
 $2,210
 $70,383
 $(72,593) $31,971


F- 35

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

  CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)

Fiscal Year Ended September 27, 2014
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net income

 $8,804   $3,806   $49,974   $(52,763 $9,821  

Other comprehensive loss:

     

Foreign currency translation

  0    (200  0    0    (200

Unrealized loss on securities

  (10  0    0    0    (10
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income

  8,794    3,606    49,974    (52,763  9,611  

Comprehensive income attributable to noncontrolling interests

  0    1,017    0    0    1,017  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income attributable to Central Garden &Pet Company

 $8,794   $2,589   $49,974   $(52,763 $8,594  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)

Fiscal Year Ended September 28, 2013 (As Revised)
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net income (loss)

 $(1,929 $(882 $32,430   $(30,519 $(900

Other comprehensive loss:

     

Foreign currency translation

  0    (97  0    0    (97
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss)

  (1,929  (979  32,430    (30,519  (997

Comprehensive income attributable to noncontrolling interests

  0    1,029    0    0    1,029  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive loss attributable to Central Garden &Pet Company

 $(1,929 $(2,008 $32,430   $(30,519 $(2,026
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

  CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME (LOSS)

Fiscal Ended September 29, 2012 (As Revised)
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net income

 $21,173   $1,308   $52,857   $(53,225 $22,113  

Other comprehensive income:

     

Foreign currency translation

  0    520    0    0    520  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total comprehensive income

  21,173    1,828    52,857    (53,225  22,633  

Comprehensive income attributable to noncontrolling interests

  0    940    0    0    940  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Comprehensive income attributable to Central Garden & Pet Company

 $21,173   $888   $52,857   $(53,225 $21,693  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 





 
CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
 Fiscal Year Ended September 30, 2017
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net income (loss)$78,828
 $(438) $101,842
 $(100,502) $79,730
Other comprehensive income (loss):         
Foreign currency translation343
 169
 108
 (277) 343
Total comprehensive income (loss)79,171
 (269) 101,950
 (100,779) 80,073
Comprehensive income attributable to noncontrolling interests
 902
 
 
 902
Comprehensive income (loss) attributable to Central Garden & Pet Company$79,171
 $(1,171) $101,950
 $(100,779) $79,171

 
CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
 Fiscal Year Ended September 24, 2016
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net income$44,514
 $465
 $96,331
 $(95,725) $45,585
Other comprehensive income (loss):
 
 
 
 
Foreign currency translation(1,458) (1,132) 8
 1,124
 (1,458)
Total comprehensive income (loss)43,056
 (667) 96,339
 (94,601) 44,127
Comprehensive income attributable to noncontrolling interests
 1,071
 
 
 1,071
Comprehensive income (loss) attributable to Central Garden & Pet Company$43,056
 $(1,738) $96,339
 $(94,601) $43,056

F- 36

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

  CONSOLIDATING CONDENSED BALANCE SHEET
September 27, 2014
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 
ASSETS     

Cash and cash equivalents

 $63,471   $12,806   $2,399   $0   $78,676  

Restricted cash

  14,283    0    0    0    14,283  

Short term investments

  9,990    0    0    0    9,990  

Accounts receivable, net

  41,235    8,268    144,226    0    193,729  

Inventories

  79,199    15,210    231,977    0    326,386  

Prepaid expenses and other assets

  26,092    816    21,580    0    48,488  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total current assets

  234,270    37,100    400,182    0    671,552  

Land, buildings, improvements and equipment, net

  63,059    3,649    100,141    0    166,849  

Goodwill

  0    0    208,233    0    208,233  

Other long term assets

  25,230    4,244    83,713    (11,094  102,093  

Intercompany receivable

  16,906    0    351,423    (368,329  0  

Investment in subsidiaries

  983,413    0    0    (983,413  0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $1,322,878   $44,993   $1,143,692   $(1,362,836 $1,148,727  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

LIABILITIES AND EQUITY

     

Accounts payable

 $28,937   $3,542   $55,949   $0   $88,428  

Accrued expenses and other liabilities

  34,412    1,868    48,390    0    84,670  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total current liabilities

  63,349    5,410    104,339    0    173,098  

Long-term debt

  449,855    0    93    0    449,948  

Intercompany payable

  323,315    45,014    0    (368,329  0  

Losses in excess of investment in subsidiaries

  0    0    7,594    (7,594  0  

Other long-term obligations

  1,636    0    48,686    (11,094  39,228  

Shareholders’ equity attributable to Central Garden & Pet

  484,723    (7,161  982,980    (975,819  484,723  

Noncontrolling interest

  0    1,730    0    0    1,730  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity

  484,723    (5,431  982,980    (975,819  486,453  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $1,322,878   $44,993   $1,143,692   $(1,362,836 $1,148,727  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


 
CONSOLIDATING CONDENSED STATEMENTS OF
COMPREHENSIVE INCOME
 Fiscal Year Ended September 26, 2015
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net income$31,971
 $3,254
 $70,383
 $(72,593) $33,015
Other comprehensive loss:
 
 
 
 
Unrealized loss on securities(10) 
 

 

 (10)
Reclassification of realized loss on securities included in net income20







20
Foreign currency translation(1,078) (537) (380) 917
 (1,078)
Total comprehensive income30,903
 2,717
 70,003
 (71,676) 31,947
Comprehensive income attributable to noncontrolling interests
 1,044
 
 
 1,044
Comprehensive income attributable to Central Garden & Pet Company$30,903
 $1,673
 $70,003
 $(71,676) $30,903


F- 37

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

  CONSOLIDATING CONDENSED BALANCE SHEET
September 28, 2013 (As Revised)
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

ASSETS

  

Cash and cash equivalents

 $5,438   $7,003   $2,715   $0   $15,156  

Short term investments

  17,820    0    0    0    17,820  

Accounts receivable, net

  35,685    7,672    150,903    0    194,260  

Inventories

  95,025    19,225    277,684    0    391,934  

Prepaid expenses and other assets

  24,032    887    28,565    0    53,484  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total current assets

  178,000    34,787    459,867    0    672,654  

Land, buildings, improvements and equipment, net

  76,385    2,276    110,252    0    188,913  

Goodwill

  0    0    205,756    0    205,756  

Other long term assets

  26,130    3,859    75,348    (11,500  93,837  

Intercompany receivable

  10,180    0    246,497    (256,677  0  

Investment in subsidiaries

  932,156    0    0    (932,156  0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $1,222,851   $40,922   $1,097,720   $(1,200,333 $1,161,160  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

LIABILITIES AND EQUITY

     

Accounts payable

 $33,538   $2,794   $67,237   $0   $103,569  

Accrued expenses and other liabilities

  31,886    1,778    45,096    0    78,760  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total current liabilities

  65,424    4,572    112,333    0    182,329  

Long-term debt

  472,418    0    27    0    472,445  

Intercompany payable

  214,258    42,419    0    (256,677  0  

Losses in excess of investments in subsidiaries

  0    0    6,565    (6,565  0  

Other long-term obligations

  2,073    0    45,789    (11,500  36,362  

Shareholders’ equity attributable to Central Garden & Pet

  468,678    (7,415  933,006    (925,591  468,678  

Noncontrolling interest

  0    1,346    0    0    1,346  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total equity

  468,678    (6,069  933,006    (925,591  470,024  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

 $1,222,851   $40,922   $1,097,720   $(1,200,333 $1,161,160  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


  CONSOLIDATING CONDENSED BALANCE SHEET
  September 30, 2017
  (in thousands)
  Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
ASSETS          
Cash and cash equivalents $19,238
 $11,693
 $1,466
 $
 $32,397
Restricted cash 12,645
 
 
 
 12,645
Accounts receivable, net 78,692
 5,586
 153,590
 
 237,868
Inventories 125,797
 9,493
 246,811
 
 382,101
Prepaid expenses and other assets 6,059
 811
 11,175
 
 18,045
Total current assets 242,431
 27,583
 413,042
 
 683,056
Land, buildings, improvements and equipment, net 38,170
 4,225
 138,518
 
 180,913
Goodwill 15,058
 
 241,217
 
 256,275
Other long term assets 61,715
 2,376
 146,372
 (23,801) 186,662
Intercompany receivable 36,606
 
 662,137
 (698,743) 
Investment in subsidiaries 1,383,633
 
 
 (1,383,633) 
Total $1,777,613
 $34,184
 $1,601,286
 $(2,106,177) $1,306,906
LIABILITIES AND EQUITY          
Accounts payable $36,760
 $3,076
 $63,447
 $
 $103,283
Accrued expenses and other liabilities 54,909
 2,391
 59,249
 
 116,549
Current portion of long term debt 
 
 375
 
 375
Total current liabilities 91,669
 5,467
 123,071
 
 220,207
Long-term debt 395,160
 
 118
 
 395,278
Intercompany payable 647,409
 51,334
 
 (698,743) 
Losses in excess of investment in subsidiaries 
 
 19,782
 (19,782) 
Other long-term obligations 7,689
 
 70,391
 (23,801) 54,279
Shareholders’ equity attributable to Central Garden & Pet 635,686
 (24,073) 1,387,924
 (1,363,851) 635,686
Noncontrolling interest 
 1,456
 
 
 1,456
Total equity 635,686
 (22,617) 1,387,924
 (1,363,851) 637,142
Total $1,777,613
 $34,184
 $1,601,286
 $(2,106,177) $1,306,906


F- 38

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

  CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 27, 2014
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net cash (used) provided by operating activities

 $(4,139 $7,420   $125,720   $(2,534 $126,467  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Additions to property, plant and equipment

  (6,721  (1,027  (9,425  0    (17,173

Businesses acquired, net of cash acquired

  0    0    (20,282  0    (20,282

Proceeds from disposal of plant and equipment

  0    0    8,737    0    8,737  

Change in restricted cash and cash equivalents

  (14,283  0    0    0    (14,283

Maturities of short term investments

  17,820    0    0    0    17,820  

Investment in short term investments

  (10,000  0    0    0    (10,000

Intercompany investing activities

  (6,726  0    (104,926  111,652    0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash (used) provided by investing activities

  (19,910  (1,027  (125,896  111,652    (35,181
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Repayments on revolving line of credit

  (301,000  0    0    0    (301,000

Borrowings on revolving line of credit

  278,000    0    0    0    278,000  

Repayments of long-term debt

  (243  0    (124  0    (367

Proceeds from issuance of common stock

  1,165    0    0    0    1,165  

Excess tax benefits from stock-based awards

  498    0    0    0    498  

Repurchase of common stock

  (2,332  0    0    0    (2,332

Payment of deferred financing costs

  (3,090  0    0    0    (3,090

Distribution to parent

  0    (2,534  0    2,534    0  

Distribution to noncontrolling interest

  0    (633  0    0    (633

Intercompany financing activities

  109,057    2,595    0    (111,652  0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided (used) by financing activities

  82,055    (572  (124  (109,118  (27,759
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rates on cash

  27    (18  (16  0    (7
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

  58,033    5,803    (316  0    63,520  

Cash and cash equivalents at beginning of year

  5,438    7,003    2,715    0    15,156  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

 $63,471   $12,806   $2,399   $0   $78,676  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


 CONSOLIDATING CONDENSED BALANCE SHEET
 September 24, 2016
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
ASSETS
 
Cash and cash equivalents$82,158
 $9,695
 $1,129
 $
 $92,982
Restricted cash10,910
 
 
 
 10,910
Accounts receivable, net59,617
 5,156
 136,378
 
 201,151
Inventories113,317
 11,752
 236,935
 
 362,004
Prepaid expenses and other assets5,700
 800
 9,749
 
 16,249
Total current assets271,702
 27,403
 384,191
 
 683,296
Land, buildings, improvements and equipment, net41,083
 3,897
 113,244
 
 158,224
Goodwill15,058
 
 216,327
 
 231,385
Other long term assets45,832
 2,998
 85,701
 (26,753) 107,778
Intercompany receivable32,778
 
 567,374
 (600,152) 
Investment in subsidiaries1,176,990
 
 
 (1,176,990) 
Total$1,583,443
 $34,298
 $1,366,837
 $(1,803,895) $1,180,683
LIABILITIES AND EQUITY

 

 

 

 

Accounts payable$34,096
 $3,953
 $64,364
 $
 $102,413
Accrued expenses and other liabilities47,861
 1,411
 50,071
 
 99,343
Current portion of long term debt88
 
 375
 
 463
Total current liabilities82,045
 5,364
 114,810
 
 202,219
Long-term debt394,364
 
 442
 
 394,806
Intercompany payable553,964
 46,188
 
 (600,152) 
Losses in excess of investment in subsidiaries
 
 16,126
 (16,126) 
Other long-term obligations56
 
 55,768
 (26,753) 29,071
Shareholders’ equity attributable to Central Garden & Pet553,014
 (18,827) 1,179,691
 (1,160,864) 553,014
Noncontrolling interest
 1,573
 
 
 1,573
Total equity553,014
 (17,254) 1,179,691
 (1,160,864) 554,587
Total$1,583,443
 $34,298
 $1,366,837
 $(1,803,895) $1,180,683


F- 39

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

  CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 28, 2013 (As Revised)
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net cash (used) provided by operating activities

 $(31,250 $(11,632 $17,116   $(2,516 $(28,282
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Additions to property, plant and equipment

  (8,656  (337  (16,179  0    (25,172

Businesses acquired, net of cash acquired

  0    0    (4,835  0    (4,835

Sale of short term investments

  4,885    0    0    0    4,885  

Intercompany investing activities

  8,986    0    2,923    (11,909  0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash (used) provided by investing activities

  5,215    (337  (18,091  (11,909  (25,122
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Repayments on revolving line of credit

  (368,000  0    0    0    (368,000

Borrowings on revolving line of credit

  391,000    0    0    0    391,000  

Repayments of long-term debt

  (206  0    (126  0    (332

Proceeds from issuance of common stock

  613    0    0    0    613  

Excess tax benefits from stock-based awards

  388    0    0    0    388  

Repurchase of common stock

  (2,731  0    0    0    (2,731

Distribution to parent

  0    (2,516  0    2,516    0  

Distribution to noncontrolling interest

  0    (629  0    0    (629

Intercompany financing activities

  (28,896  16,987    0    11,909    0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided (used) by financing activities

  (7,832  13,842    (126  14,425    20,309  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rates on cash

  36    (263  3    0    (224
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

  (33,831  1,610    (1,098  0    (33,319

Cash and cash equivalents at beginning of year

  39,269    5,393    3,813    0    48,475  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

 $5,438   $7,003   $2,715   $0   $15,156  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
 Fiscal Year Ended September 30, 2017
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net cash provided (used) by operating activities$(7,418) $2,846
 $122,957
 $(4,076) $114,309
Additions to property, plant and equipment(9,419) (805) (34,435) 
 (44,659)
Businesses acquired, net of cash acquired, and investments in joint ventures(103,880) 
 
 
 (103,880)
Proceeds from asset sales229
 
 8,318
 
 8,547
Escrow deposit for acquisition-related contingent consideration(6,000)       (6,000)
Change in restricted cash and cash equivalents(1,735) 
 
 
 (1,735)
Investment in equity method investee(12,495)       (12,495)
Other investing activities(4,355) 
 
 
 (4,355)
Intercompany investing activities(3,828) 
 (94,763) 98,591
 
Net cash used by investing activities(141,483) (805) (120,880) 98,591
 (164,577)
Repayments on revolving line of credit(552,000) 
 
 
 (552,000)
Borrowings on revolving line of credit552,000
 
 
 
 552,000
Repayments of long-term debt(89) 
 (374) 
 (463)
Excess tax benefits from stock-based awards19,946
 
 
 
 19,946
Repurchase of common stock(27,556) 
 
 
 (27,556)
Payments of contingent consideration
 
 (1,300) 
 (1,300)
Distribution to parent
 (4,076) 
 4,076
 
Distribution to noncontrolling interest
 (1,019) 
 
 (1,019)
Intercompany financing activities93,445
 5,146
 
 (98,591) 
Net cash provided (used) by financing activities85,746
 51
 (1,674) (94,515) (10,392)
Effect of exchange rates on cash235
 (94) (66) 
 75
Net increase (decrease) in cash and cash equivalents(62,920) 1,998
 337
 
 (60,585)
Cash and cash equivalents at beginning of year82,158
 9,695
 1,129
 
 92,982
Cash and cash equivalents at end of year$19,238
 $11,693
 $1,466
 $
 $32,397


F- 40

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

  CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
Fiscal Year Ended September 29, 2012 (As Revised)
(in thousands)
 
  Parent  Non-Guarantor
Subsidiaries
  Guarantor
Subsidiaries
  Eliminations  Consolidated 

Net cash provided by operating activities

 $7,978   $16,008   $65,183   $0   $89,169  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Additions to property, plant and equipment

  (20,357  (378  (18,857  0    (39,592

Investment in short term investments

  (4,885  0    0    0    (4,885

Intercompany investing activities

  5,153    0    (43,681  38,528    0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash provided (used) by investing activities

  (20,089  (378  (62,538  38,528    (44,477
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Repayments on revolving line of credit

  (339,000  0    0    0    (339,000

Borrowings on revolving line of credit

  304,000    0    0    0    304,000  

Repayments of long-term debt

  (231  0    (122  0    (353

Proceeds from the issuance of long-term debt

  49,312    0    0    0    49,312  

Proceeds from issuance of common stock

  2,129    0    0    0    2,129  

Excess tax benefits from stock-based awards

  1,881    0    0    0    1,881  

Repurchase of common stock

  (24,829  0    0    0    (24,829

Payment of deferred financing costs

  (1,715  0    0    0    (1,715

Intercompany financing activities

  50,750    (12,222  0    (38,528  0  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net cash used in financing activities

  42,297    (12,222  (122  (38,528  (8,575
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Effect of exchange rates on cash

  374    61    (108  0    327  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

  30,560    3,469    2,415    0    36,444  

Cash and cash equivalents at beginning of year

  8,709    1,924    1,398    0    12,031  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

 $39,269   $5,393   $3,813   $0   $48,475  
 

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 


 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
 Fiscal Year Ended September 24, 2016
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net cash (used) provided by operating activities$3,906
 $2,654
 $149,749
 $(4,883) $151,426
Additions to property, plant and equipment(4,513) (717) (22,392) 
 (27,622)
Payments to acquire companies, net of expenses(69,001) 
 
 
 (69,001)
Proceeds from asset sales



3,911



3,911
Change in restricted cash and cash equivalents2,247
 
 
 
 2,247
Other investing activities(730) 
 
 
 (730)
Intercompany investing activities(83) 
 (129,708) 129,791
 
Net cash used by investing activities(72,080) (717) (148,189) 129,791
 (91,195)
Repayments on revolving line of credit(419,000) 
 
 
 (419,000)
Borrowings on revolving line of credit419,000
 
 
 
 419,000
Repayments of long-term debt(400,286) 
 (21) 
 (400,307)
Issuance of long-term debt400,000










400,000
Proceeds from issuance of common stock324
 
 
 
 324
Excess tax benefits from stock-based awards6,869
 
 
 
 6,869
Repurchase of common stock(10,873) 
 
 
 (10,873)
Payments of contingent consideration





(2,026)



(2,026)
Payment of deferred financing costs(7,560) 
 
 
 (7,560)
Distribution to parent
 (4,883) 
 4,883
 
Distribution to noncontrolling interest
 (592) 
 
 (592)
Intercompany financing activities127,044
 2,747
 
 (129,791) 
Net cash provided (used) by financing activities115,518
 (2,728) (2,047) (124,908) (14,165)
Effect of exchange rates on cash(1,466) 464
 334
 
 (668)
Net increase (decrease) in cash and cash equivalents45,878
 (327) (153) 
 45,398
Cash and cash equivalents at beginning of year36,280
 10,022
 1,282
 
 47,584
Cash and cash equivalents at end of year$82,158
 $9,695
 $1,129
 $
 $92,982


F- 41

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—STATEMENTS (Continued)

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 are shown in the following tables:

   CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS 
       As previously reported    
2013
      Adjustments    
2013
      As revised    
2013
 

Parent

  $(41,937 $3,174   $(38,763

Non-guarantor subsidiaries

   0    (3,586  (3,586

Guarantor subsidiaries

   82,092    412    82,504  

Eliminations

   0    0    0  
  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

   40,155    0    40,155  

Parent

   (1,929  0    (1,929

Non-guarantor subsidiaries

   0    (1,911  (1,911

Guarantor subsidiaries

   40,072    (7,642  32,430  

Eliminations

   (40,072  9,553    (30,519
  

 

 

  

 

 

  

 

 

 

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

  $(1,929 $0   $(1,929

   CONSOLIDATING CONDENSED STATEMENT OF OPERATIONS 
       As previously reported    
2012
      Adjustments    
2012
      As revised    
2012
 

Parent

  $(260 $(6,999 $(7,259

Non-guarantor subsidiaries

   0    3,182    3,182  

Guarantor subsidiaries

   74,681    3,817    78,498  

Eliminations

   0    0    0  
  

 

 

  

 

 

  

 

 

 

Income (loss) from operations

   74,421    0    74,421  

Parent

   21,173    0    21,173  

Non-guarantor subsidiaries

   0    368    368  

Guarantor subsidiaries

   50,763    2,094    52,857  

Eliminations

   (50,763  (2,462  (53,225
  

 

 

  

 

 

  

 

 

 

Net income attributable to Central Garden & Pet Company

  $21,173   $0   $21,173  

In the Consolidating Condensed Statement of Operations, we now present the Non-Guarantor subsidiaries separate from the Parent. We 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.

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

   CONSOLIDATING CONDENSED
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
 
   As previously reported
2013
  Adjustments
2013
  As revised
2013
 

Parent

  $(40,972 $39,043   $(1,929

Non-guarantor subsidiaries

   0    (882  (882

Guarantor subsidiaries

   40,072    (7,642  32,430  

Eliminations

   0    (30,519  (30,519
  

 

 

  

 

 

  

 

 

 

Net income (loss)

   (900  0    (900

Parent

   (41,069  39,140    (1,929

Non-guarantor subsidiaries

   0    (979  (979

Guarantor subsidiaries

   40,072    (7,642  32,430  

Eliminations

   0    (30,519  (30,519
  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss)

   (997  0    (997

Parent

   (42,098  40,169    (1,929

Non-guarantor subsidiaries

   0    (2,008  (2,008

Guarantor subsidiaries

   40,072    (7,642  32,430  

Eliminations

   0    (30,519  (30,519
  

 

 

  

 

 

  

 

 

 

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

  $(2,026 $0   $(2,026

   CONSOLIDATING CONDENSED
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
 
   As previously reported
2012
  Adjustments
2012
  As revised
2012
 

Parent

  $(28,650 $49,823   $21,173  

Non-guarantor subsidiaries

   0    1,308    1,308  

Guarantor subsidiaries

   50,763    2,094    52,857  

Eliminations

   0    (53,225  (53,225
  

 

 

  

 

 

  

 

 

 

Net income (loss)

   22,113    0    22,113  

Parent

   (28,130  49,303    21,173  

Non-guarantor subsidiaries

   0    1,828    1,828  

Guarantor subsidiaries

   50,763    2,094    52,857  

Eliminations

   0    (53,225  (53,225
  

 

 

  

 

 

  

 

 

 

Total comprehensive income (loss)

   22,633    0    22,633  

Parent

   (29,070  50,243    21,173  

Non-guarantor subsidiaries

   0    888    888  

Guarantor subsidiaries

   50,763    2,094    52,857  

Eliminations

   0    (53,225  (53,225
  

 

 

  

 

 

  

 

 

 

Comprehensive income attributable to Central Garden & Pet Company

  $21,693   $0   $21,693  

In the Consolidating Condensed Statement of Comprehensive Income, we now present the Non-Guarantor subsidiaries separate from the Parent. We also recorded an adjustment to correct the beginning net income of the Parent to reflect the equity in earnings from affiliates.

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

   CONSOLIDATING CONDENSED BALANCE SHEET 
   As previously  reported
2013
  Adjustments
2013
  As revised
2013
 

Parent

  $213,330   $(35,330 $178,000  

Non-guarantor subsidiaries

   0    34,787    34,787  

Guarantor subsidiaries

   462,458    (2,591  459,867  

Eliminations

   (3,134  3,134    0  
  

 

 

  

 

 

  

 

 

 

Total Current assets

   672,654    0    672,654  

Parent

   1,042,862    179,989    1,222,851  

Non-guarantor subsidiaries

   0    40,922    40,922  

Guarantor subsidiaries

   815,047    282,673    1,097,720  

Eliminations

   (696,749  (503,584  (1,200,333
  

 

 

  

 

 

  

 

 

 

Total assets

  $1,161,160   $0   $1,161,160  

Parent

  $70,533   $(5,109 $65,424  

Non-guarantor subsidiaries

   0    4,572    4,572  

Guarantor subsidiaries

   114,930    (2,597  112,333  

Eliminations

   (3,134  3,134    0  
  

 

 

  

 

 

  

 

 

 

Current liabilities

   182,329    0    182,329  

Parent

   470,024    (1,346  468,678  

Non-guarantor subsidiaries

   0    (6,069  (6,069

Guarantor subsidiaries

   693,615    239,391    933,006  

Eliminations

   (693,615  (231,976  (925,591
  

 

 

  

 

 

  

 

 

 

Total equity

  $470,024   $0   $470,024  

In the Consolidating Condensed Balance Sheet, we now present the Non-Guarantor subsidiaries separate from the Parent. We 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. We also corrected the presentation of certain deferred tax balances to present on a gross basis by legal entity.

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

  CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS 
      As previously reported    
2013
      Adjustments    
2013
      As revised    
2013
 

Parent

 $(9,068 $(22,182 $(31,250

Non-guarantor subsidiaries

  0    (11,632  (11,632

Guarantor subsidiaries

  20,858    (3,742  17,116  

Eliminations

  (40,072  37,556    (2,516
 

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) operating activities

  (28,282  0    (28,282

Parent

  (43,361  48,576    5,215  

Non-guarantor subsidiaries

  0    (337  (337

Guarantor subsidiaries

  (21,833  3,742    (18,091

Eliminations

  40,072    (51,981  (11,909
 

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) investing activities

  (25,122  0    (25,122

Parent

  20,435    (28,267  (7,832

Non-guarantor subsidiaries

  0    13,842    13,842  

Guarantor subsidiaries

  (126  0    (126

Eliminations

  0    14,425    14,425  
 

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

 $20,309   $0   $20,309  

  CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS 
  As previously  reported
2012
  Adjustments
2012
  As revised
2012
 

Parent

 $74,405   $(66,427 $7,978  

Non-guarantor subsidiaries

  0    16,008    16,008  

Guarantor subsidiaries

  65,527    (344  65,183  

Eliminations

  (50,763  50,763    0  
 

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) operating activities

  89,169    0    89,169  

Parent

  (32,357  12,268    (20,089

Non-guarantor subsidiaries

  0    (378  (378

Guarantor subsidiaries

  (62,883  345    (62,538

Eliminations

  50,763    (12,235  38,528  
 

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) investing activities

  (44,477  0    (44,477

Parent

  (8,453  50,750    42,297  

Non-guarantor subsidiaries

  0    (12,222  (12,222

Guarantor subsidiaries

  (122  0    (122

Eliminations

  0    (38,528  (38,528
 

 

 

  

 

 

  

 

 

 

Net cash provided by (used in) financing activities

 $(8,575 $0   $(8,575

In the Consolidating Condensed Statement of Cash Flows, we now present the Non-Guarantor subsidiaries separate from the Parent. We also present changes in receivable balances between affiliates as investing activities

CENTRAL GARDEN & PET COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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. We also corrected the presentation of the Parent’s cash flows from operating activities to reflect equity in earnings of affiliates as a non-cash operating activity. We previously presented changes of intercompany receivables and payables in investing activities.

21. Subsequent Event

In November 2014, the Board of Directors authorized the purchase of up to $50 million principal amount of the Company’s 8.25% senior subordinated notes due March 2018.

EXHIBIT INDEX

Set forth below is a list of exhibits that are being filed or incorporated by reference into this Form 10-K:

      Incorporated by Reference   

Exhibit

Number

  

Exhibit

  Form  File
No.
  Exhibit  Filing
Date
  Filed
Herewith
  3.1  Fourth Amended and Restated Certificate of Incorporation, including the Certificate of Designation – Series A Convertible Preferred Stock and Certificate of Designation – Series B Convertible Preferred Stock.  10-K  001-33268  3.1  12/14/06  
  3.2  Amended and Restated By-laws of Central Garden & Pet Company, effective February 10, 2009.  10-Q  001-33268  3.2  5/7/09  
  4.1  Specimen Common Stock Certificate.  S-1  33-48070  4.1  5/21/92  
  4.2  Specimen Class A Common Stock Certificate.  8-A  001-33268  1  1/24/07  
  4.4  Indenture, dated as of March 8, 2010, by and between the Company and Wells Fargo Bank, National Association, as trustee.  8-K  001-33268  4.2  3/8/10  
  4.5  First Supplemental Indenture, dated as of March 8, 2010, by and among the Company, the guarantors named therein and Wells Fargo Bank, National Association, as trustee, relating to 8.25% Senior Subordinated Notes due 2018.  8-K  001-33268  4.3  3/8/10  
  4.6  Second Supplemental Indenture, dated as of February 13, 2012, by and among the Company, the guarantors named therein and Wells Fargo Bank, National Association, as trustee, relating to 8.25% Senior Subordinated Notes due 2018.  8-K  001-33268  4.1  2/13/12  
10.1*  Form of Indemnification Agreement between the Company and Executive Officers and Directors.  S-1  33-48070  10.18  5/21/92  
10.2  Credit Agreement dated December 5, 2013 among the Company, certain of the Company’s domestic subsidiaries, as borrowers and guarantors, a syndicate of financial institutions party thereto, SunTrust Bank, as administrative agent and swingline lender, and SunTrust Robinson Humphrey, Inc., U.S. Bank National Association and Harris Bank as joint lead arrangers and bookrunners.  10-Q  001-33268  10.1  2/6/14  
10.3*  2003 Omnibus Equity Incentive Plan, as amended and restated effective February 13, 2012.  8-K  001-33268  10.2  2/15/12  
10.4*  Form of Nonstatutory Stock Option Agreement for 2003 Omnibus Equity Incentive Plan.  10-K  000-20242  10.5.1  12/9/04  
10.5*  Form of Restricted Stock Agreement for 2003 Omnibus Equity Incentive Plan.  10-K  000-20242  10.5.2  12/9/04  


Incorporated by Reference

Exhibit

Number

Exhibit

FormFile
No.
ExhibitFiling
Date
Filed
Herewith
10.6*Form of Performance-Based Non-Statutory Stock Option Agreement for 2003 Omnibus Equity Incentive Plan10-K001-3326810.4.311/19/10
10.7*Nonemployee Director Equity Incentive Plan, as amended and restated effective December 10, 2008 (Incorporated by reference from Exhibit 10.5 to the Company’s Form 10-Q for the fiscal quarter ended March 28, 2009).10-Q001-3326810.55/7/09
10.8*Form of Nonstatutory Stock Option Agreement for Nonemployee Director Equity Incentive Plan.10-Q000-2024210.6.12/3/05
10.9*Form of Restricted Stock Agreement for Nonemployee Director Equity Incentive Plan.10-Q000-2024210.6.22/3/05
10.10*Employment Agreement dated as of February 27, 1998 between Pennington Seed, Inc. of Delaware and Brooks Pennington III.10-K/A000-2024210.201/20/99
10.11*Modification and Extension of Employment Agreement dated as of February 27, 1998 between Pennington Seed, Inc. of Delaware and Brooks Pennington III, dated as of May 6, 2003.10-Q000-2024210.7.18/8/03
10.12*Modification and Extension of Employment Agreement and Noncompetition Agreement, dated as of April 10, 2006, between the Company and Brooks M. Pennington III.8-K000-2024210.14/14/06
10.13*Modification and Extension of Employment Agreement and Noncompetition Agreement, dated as of July 1, 2008, between the Company and Brooks M. Pennington III.10-K001-3326810.7.211/26/08
10.14*Amendment of Employment Agreement and Non-Competition Agreement between the Company and Brooks M. Pennington III, dated March 20, 2012.10-Q001-3326810.12/7/2013
10.15*Form of Agreement to Protect Confidential Information, Intellectual Property and Business Relationships.8-K000-2024210.110/14/05
10.16*Form of Post-Termination Consulting Agreement.8-K000-2024210.210/14/05
10.17*Employment Offer Letter between the Company and Lori Varlas dated November 5, 2010.8-K001-3326810.112/1/10
10.19*Consulting Services Agreement between the Company and Gus Halas, dated January 15, 2013.10-Q001-3326810.22/7/2013
10.20*Consulting Services Agreement between the Company and Frank P. Palantoni, dated March 7, 2013.8-K001-3326810.13/8/2013


      Incorporated by Reference   

Exhibit

Number

  

Exhibit

  Form  File
No.
  Exhibit  Filing
Date
  Filed
Herewith
  10.21*  Employment Agreement between the Company and John Ranelli, dated January 9, 2013.  10-Q  001-33268  10.3  2/7/2013  
  10.22*  Election for Additional Compensation and Release Agreement between the Company and Steven LaMonte, effective April 19, 2014.          X
  12  Statement re Computation of Ratios of Earnings to Fixed Charges.          X
  14  Code of Ethics, updated May 2009  10-K  001-33268  14  12/13/2012  
  21  List of Subsidiaries.          X
  23  Consent of Independent Registered Public Accounting Firm.          X
  31.1  Certification of Principal Executive Officer Pursuant to Rule 13a-14(a).          X
  31.2  Certification of Principal Financial Officer Pursuant to Rule 13a-14(a).          X
  32.1  Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350.          X
  32.2  Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350.          X
101.INS  XBRL Instance Document          X
101.SCH  XBRL Taxonomy Extension Schema Document          X
101.CAL  XBRL Taxonomy Extension Calculation Linkbase Document          X
101.DEF  XBRL Taxonomy Extension Definition Linkbase Document          X
101.LAB  XBRL Taxonomy Extension Label Linkbase Document          X
101.PRE  XBRL Taxonomy Extension Presentation Linkbase Document          X

*Management contract or compensatory plan or arrangement.


 CONSOLIDATING CONDENSED STATEMENT OF CASH FLOWS
 Fiscal Year Ended September 26, 2015
 (in thousands)
 Parent 
Non-Guarantor
Subsidiaries
 
Guarantor
Subsidiaries
 Eliminations Consolidated
Net cash (used) provided by operating activities$(16,823) $7,372
 $103,619
 $(6,719) $87,449
Additions to property, plant and equipment(2,721) (405) (18,904) 
 (22,030)
Businesses acquired, net of cash acquired(38,384) 
 
 
 (38,384)
Change in restricted cash and cash equivalents1,126
 
 
 
 1,126
Maturities of short term investments9,997
 
 
 
 9,997
Investment in short term investments(17) 
 
 
 (17)
Other investing activities(546) 
 
 
 (546)
Intercompany investing activities(15,789) 
 (85,963) 101,752
 
Net cash used by investing activities(46,334) (405) (104,867) 101,752
 (49,854)
Repayments on revolving line of credit(312,000) 
 
 
 (312,000)
Borrowings on revolving line of credit312,000
 
 
 
 312,000
Repayments of long-term debt(50,262) 
 (27) 
 (50,289)
Proceeds from issuance of common stock200
 
 
 
 200
Excess tax benefits from stock-based awards2,154
 
 
 
 2,154
Repurchase of common stock(18,497) 
 
 
 (18,497)
Payment of deferred financing costs(258) 
 
 
 (258)
Distribution to parent
 (6,719) 
 6,719
 
Distribution to noncontrolling interest
 (1,680) 
 
 (1,680)
Intercompany financing activities103,326
 (1,574) 
 (101,752) 
Net cash provided (used) by financing activities36,663
 (9,973) (27) (95,033) (68,370)
Effect of exchange rates on cash(697) 222
 158
 
 (317)
Net increase (decrease) in cash and cash equivalents(27,191) (2,784) (1,117) 
 (31,092)
Cash and cash equivalents at beginning of year63,471
 12,806
 2,399
 
 78,676
Cash and cash equivalents at end of year$36,280
 $10,022
 $1,282
 $
 $47,584



F- 42