UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_____________________________________________________________________________________________
FORM 10-Q
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended December 30, 2023
or
| TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-33268
Central Garden & Pet Company
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
(925 ) 948-4000
(Registrant’s telephone number, including area code)
_______________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ý | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Common Stock Outstanding as of January 31, 2024 | |||||||||||
| Class A Common Stock Outstanding as of January 31, 2024 | |||||||||||
| Class B Stock Outstanding as of January 31, 2024 | |||||||||||
| PART I. FINANCIAL INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II. OTHER INFORMATION | ||||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995
This Form 10-Q includes “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, projected cost savings, capital expenditures, financing needs, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries and markets in which we operate and other information that is not historical information. When used in this Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our examination of historical operating trends, are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith, and we believe there is a reasonable basis for them, but we cannot assure you that our expectations, beliefs and projections will be realized.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in this Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Form 10-Q are set forth in the Form 10-K for the fiscal year ended September 30, 2023, including the factors described in the section entitled “Item 1A – Risk Factors.” If any of these risks or uncertainties materializes, or if any of our underlying assumptions are incorrect, our actual results may differ significantly from the results that we express in, or imply by, any of our forward-looking statements. We do not undertake any obligation to revise these forward-looking statements to reflect future events or circumstances, except as required by law. Presently known risk factors include, but are not limited to, the following factors:
•high inflation and interest rates, and other adverse macro-economic conditions;
•fluctuations in market prices for seeds and grains and other raw materials;
•our inability to pass through cost increases in a timely manner;
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•our ability to recruit and retain new members of our management team, including a Chief Executive Officer, to support our businesses and to hire and retain employees;
•fluctuations in energy prices, fuel and related petrochemical costs;
•declines in consumer spending and increased inventory risk during economic downturns;
•reductions in demand for product categories that benefited from the COVID-19 pandemic;
•adverse weather conditions;
•the success of our Central to Home strategy and our Cost and Simplicity program;
•risks associated with our acquisition strategy, including our ability to successfully integrate acquisitions and the impact of purchase accounting on our financial results;
•material weaknesses relating to the internal controls of recently acquired companies;
•seasonality and fluctuations in our operating results and cash flow;
•supply shortages in pet birds, small animals and fish;
•dependence on a small number of customers for a significant portion of our business;
•consolidation trends in the retail industry;
•risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;
•competition in our industries;
•continuing implementation of an enterprise resource planning information technology system;
•potential environmental liabilities;
•risks associated with international sourcing;
•impacts of tariffs or a trade war;
•access to and cost of additional capital;
•potential goodwill or intangible asset impairment;
•our ability to remediate material weaknesses in our internal control over financial reporting;
•our dependence upon our key executives;
•our ability to protect our trademarks and other proprietary rights;
•litigation and product liability claims;
•regulatory issues;
•the impact of product recalls;
•potential costs and risks associated with actual or potential cyberattacks;
•potential dilution from issuance of authorized shares;
•the voting power associated with our Class B stock; and
•the impact of new accounting regulations and the possibility our effective tax rate will increase as a result of future changes in the corporate tax rate or other tax law changes.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts, unaudited)
| December 30, 2023 | December 24, 2022 | September 30, 2023 | |||||||||||||||
| ASSETS | |||||||||||||||||
| Current assets: | |||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | ||||||||||||||
| Restricted cash | |||||||||||||||||
Accounts receivable (less allowances of $ | |||||||||||||||||
| Inventories, net | |||||||||||||||||
| Prepaid expenses and other | |||||||||||||||||
| Total current assets | |||||||||||||||||
| Plant, property and equipment, net | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Other intangible assets, net | |||||||||||||||||
| Operating lease right-of-use assets | |||||||||||||||||
| Other assets | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
| LIABILITIES AND EQUITY | |||||||||||||||||
| Current liabilities: | |||||||||||||||||
| Accounts payable | $ | $ | $ | ||||||||||||||
| Accrued expenses | |||||||||||||||||
| Current lease liabilities | |||||||||||||||||
| Current portion of long-term debt | |||||||||||||||||
| Total current liabilities | |||||||||||||||||
| Long-term debt | |||||||||||||||||
| Long-term lease liabilities | |||||||||||||||||
| Deferred income taxes and other long-term obligations | |||||||||||||||||
| Equity: | |||||||||||||||||
Common stock, $ | |||||||||||||||||
Class A common stock, $ | |||||||||||||||||
Class B stock, $ | |||||||||||||||||
| Additional paid-in capital | |||||||||||||||||
| Retained earnings | |||||||||||||||||
| Accumulated other comprehensive loss | ( | ( | ( | ||||||||||||||
| Total Central Garden & Pet Company shareholders’ equity | |||||||||||||||||
| Noncontrolling interest | |||||||||||||||||
| Total equity | |||||||||||||||||
| Total | $ | $ | $ | ||||||||||||||
See notes to condensed consolidated financial statements.
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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts, unaudited)
| Three Months Ended | |||||||||||
| December 30, 2023 | December 24, 2022 | ||||||||||
| Net sales | $ | $ | |||||||||
| Cost of goods sold | |||||||||||
| Gross profit | |||||||||||
| Selling, general and administrative expenses | |||||||||||
| Operating income | |||||||||||
| Interest expense | ( | ( | |||||||||
| Interest income | |||||||||||
| Other income | |||||||||||
| Loss before income taxes and noncontrolling interest | ( | ( | |||||||||
| Income tax benefit | ( | ( | |||||||||
| Income (loss) including noncontrolling interest | ( | ||||||||||
| Net income (loss) attributable to noncontrolling interest | ( | ||||||||||
| Net income (loss) attributable to Central Garden & Pet Company | $ | $ | ( | ||||||||
| Net income (loss) per share attributable to Central Garden & Pet Company: | |||||||||||
| Basic | $ | $ | ( | ||||||||
| Diluted | $ | $ | ( | ||||||||
| Weighted average shares used in the computation of net income (loss) per share: | |||||||||||
| Basic | |||||||||||
| Diluted | |||||||||||
See notes to condensed consolidated financial statements.
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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands, unaudited)
| Three Months Ended | |||||||||||
| December 30, 2023 | December 24, 2022 | ||||||||||
| Income (loss) including noncontrolling interest | $ | $ | ( | ||||||||
| Other comprehensive income (loss): | |||||||||||
| Foreign currency translation | |||||||||||
| Total comprehensive income (loss) | ( | ||||||||||
| Comprehensive income (loss) attributable to noncontrolling interest | ( | ||||||||||
| Comprehensive income (loss) attributable to Central Garden & Pet Company | $ | $ | ( | ||||||||
See notes to condensed consolidated financial statements.
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CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
| Three Months Ended | |||||||||||
| December 30, 2023 | December 24, 2022 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income (loss) | $ | $ | ( | ||||||||
| Adjustments to reconcile net income (loss) to net cash used by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Non-cash lease expense | |||||||||||
| Stock-based compensation | |||||||||||
| Deferred income taxes | |||||||||||
| Other operating activities | ( | ( | |||||||||
| Change in assets and liabilities (excluding businesses acquired): | |||||||||||
| Accounts receivable | ( | ||||||||||
| Inventories | ( | ( | |||||||||
| Prepaid expenses and other assets | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued expenses | ( | ||||||||||
| Other long-term obligations | ( | ||||||||||
| Operating lease liabilities | ( | ( | |||||||||
| Net cash used by operating activities | ( | ( | |||||||||
| Cash flows from investing activities: | |||||||||||
| Additions to plant, property and equipment | ( | ( | |||||||||
| Payments to acquire companies, net of cash acquired | ( | ||||||||||
| Investments | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Repurchase of common stock, including shares surrendered for tax withholding | ( | ( | |||||||||
| Payment of contingent consideration liability | ( | ( | |||||||||
| Distribution to noncontrolling interest | ( | ||||||||||
| Net cash used by financing activities | ( | ( | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | |||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| New operating lease right of use assets | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
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CENTRAL GARDEN & PET COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended December 30, 2023
(Unaudited)
1. Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of December 30, 2023 and December 24, 2022, the condensed consolidated statements of operations, the condensed consolidated statements of comprehensive income and the condensed consolidated statements of cash flows for the three months ended December 30, 2023 and December 24, 2022 have been prepared by the Company, without audit. In the opinion of management, the interim financial statements include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented.
For the Company’s foreign businesses in the United Kingdom and Canada, the local currency is the functional currency. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Deferred taxes are not provided on translation gains and losses because the Company expects earnings of its foreign subsidiaries to be permanently reinvested. Transaction gains and losses are included in results of operations.
Due to the seasonal nature of the Company’s garden business, the results of operations for the three months ended December 30, 2023 are not necessarily indicative of the operating results that may be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2023, which has previously been filed with the Securities and Exchange Commission. The September 30, 2023 balance sheet presented herein was derived from the audited financial statements.
Noncontrolling Interest
Cash, Cash Equivalents and Restricted Cash
Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents. The Company manages the credit risk associated with cash equivalents by investing with high-quality institutions. The Company maintains cash accounts that exceed federally insured limits. The Company has not experienced any losses from maintaining cash accounts in excess of such limits. Management believes that it is not exposed to any significant risks on its cash and cash equivalent accounts.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the condensed consolidated statements of cash flows as of December 30, 2023, December 24, 2022 and September 30, 2023, respectively.
| December 30, 2023 | December 24, 2022 | September 30, 2023 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Cash and cash equivalents | $ | $ | $ | |||||||||||||||||
| Restricted cash | ||||||||||||||||||||
| Total cash, cash equivalents and restricted cash | $ | $ | $ | |||||||||||||||||
Allowance for Credit Losses and Customer Allowances
The Company’s trade accounts receivable are recorded at net realizable value, which includes an allowance for estimated credit losses, as well as allowances for contractual customer deductions accounted for as variable consideration. The Company maintains an
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Revenue Recognition
Revenue Recognition and Nature of Products and Services
The Company manufactures, markets and distributes a wide variety of pet and garden products to wholesalers, distributors and retailers, primarily in the United States. The majority of the Company’s revenue is generated from the sale of finished pet and garden products. The Company also recognizes a minor amount of non-product revenue (approximately one percent of consolidated net sales) comprising third-party logistics services, merchandising services and royalty income from sales-based licensing arrangements. Product and non-product revenue is recognized when performance obligations under the terms of the contracts with customers are satisfied. The Company recognizes product revenue when control over the finished goods transfers to its customers, which generally occurs upon shipment to, or receipt at, customers’ locations, as determined by the specific terms of the contract, and when control over the finished goods transfers to retail consumers in consignment arrangements. These revenue arrangements generally have single performance obligations. Non-product revenue is recognized as the services are provided to the customer in the case of third-party logistics services and merchandising services, or as third-party licensee sales occur for royalty income. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to our customers, including applicable discounts, returns, allowances, trade promotion, unsaleable product, consumer coupon redemption and rebates. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.
Key sales terms are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, the Company does not capitalize contract inception costs. The Company generally does not have unbilled receivables at the end of a period. Deferred revenues are not material and primarily include advance payments for services that have yet to be rendered. The Company does not receive noncash consideration for the sale of goods. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis; therefore, the Company does not have any significant financing components.
Sales Incentives and Other Promotional Programs
The Company routinely offers sales incentives and discounts through various regional and national programs to its customers and consumers. These programs include product discounts or allowances, product rebates, product returns, one-time or ongoing trade-promotion programs with customers and consumer coupon programs that require the Company to estimate and accrue the expected costs of such programs. The costs associated with these activities are accounted for as reductions to the transaction price of the Company’s products and are, therefore, recorded as reductions to gross sales at the time of sale. The Company bases its estimates of incentive costs on historical trend experience with similar programs, actual incentive terms per customer contractual obligations and expected levels of performance of trade promotions, utilizing customer and sales organization inputs. The Company maintains liabilities at the end of each period for the estimated incentive costs incurred but unpaid for these programs. Differences between estimated and actual incentive costs are generally not material and are recognized in earnings in the period such differences are determined. Reserves for product returns, accrued rebates and promotional accruals are included in the condensed consolidated balance sheets as part of accrued expenses, and the value of inventory associated with reserves for sales returns is included within prepaid expenses and other current assets on the condensed consolidated balance sheets.
Leases
The Company determines whether an arrangement contains a lease at inception by determining if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration and other facts and circumstances. Long-term operating lease right-of-use ("ROU") assets and current and long-term operating lease liabilities are presented separately in the condensed consolidated balance sheets. Finance lease ROU assets are presented in property, plant and equipment, net, and the related finance liabilities are presented with current and long-term debt in the condensed consolidated balance sheets.
Lease ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets are calculated based on the lease liability adjusted for any lease payments paid to the lessor at or before the commencement date and excludes any lease incentives received from the lessor. Lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As the Company's leases typically do not contain a readily determinable implicit rate, the Company determines the present value of the lease liability using its incremental borrowing rate at the lease commencement date based on the lease term on a collateralized basis. Variable lease payments are
9
expensed as incurred and include certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease, as applicable. Non-lease components and the lease components to which they relate are accounted for as a single lease component, as the Company has elected to combine lease and non-lease components for all classes of underlying assets.
Amortization of ROU lease assets is calculated on a straight-line basis over the lease term with the expense recorded in cost of sales or selling, general and administrative expenses, depending on the nature of the leased item. Interest expense is recorded over the lease term and is recorded in interest expense (based on a front-loaded interest expense pattern) for finance leases and is recorded in cost of sales or selling, general and administrative expenses (on a straight-line basis) for operating leases. All operating lease cash payments and interest on finance leases are recorded within cash flows from operating activities and all finance lease principal payments are recorded within cash flows from financing activities in the condensed consolidated statements of cash flows.
Recent Accounting Pronouncements
Recently Issued and Adopted Accounting Updates
There are no recent accounting pronouncements that are anticipated to have a material impact on the Company's condensed consolidated financial statements.
2. Fair Value Measurements
ASC 820 establishes a single authoritative definition of fair value, a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 requires financial assets and liabilities to be categorized based on the inputs used to calculate their fair values as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company’s financial instruments include cash and equivalents, short term investments consisting of bank certificates of deposit, accounts receivable and payable, derivative instruments, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company's financial assets and liabilities measured at fair value on a recurring basis consist of contingent consideration within Level 3 of the fair value hierarchy. Such amounts are not material for all periods presented.
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company measures certain non-financial assets and liabilities, including long-lived assets, goodwill and intangible assets, at fair value on a non-recurring basis. Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived assets, goodwill and other intangible assets. During the periods ended December 30, 2023 and December 24, 2022, the Company was not required to measure any significant non-financial assets and liabilities at fair value.
Fair Value of Other Financial Instruments
In April 2021, the Company issued $400 million aggregate principal amount of 4.125 % senior notes due April 2031 (the "2031 Notes"). The estimated fair value of the Company's 2031 Notes as of December 30, 2023, December 24, 2022 and September 30, 2023 was $354.7 million, $329.6 million and $327.1 million, respectively, compared to a carrying value of $395.6 million, $395.0 million and $395.4 million, respectively.
In October 2020, the Company issued $500 million aggregate principal amount of 4.125 % senior notes due October 2030 (the "2030 Notes"). The estimated fair value of the Company's 2030 Notes as of December 30, 2023, December 24, 2022 and September 30, 2023 was $454.7 million, $420.9 million and $417.0 million, respectively, compared to a carrying value of $494.6 million, $493.8 million and $494.4 million, respectively.
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In December 2017, the Company issued $300 million aggregate principal amount of 5.125 % senior notes due February 2028 (the "2028 Notes"). The estimated fair value of the Company's 2028 Notes as of December 30, 2023, December 24, 2022 and September 30, 2023 was $293.5 million, $281.7 million and $279.5 million, respectively, compared to a carrying value of $298.1 million, $297.6 million and $298.0 million, respectively.
The estimated fair value is based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.
3. Acquisitions
On November 3, 2023, the Company acquired TDBBS, LLC (“TDBBS”), a provider of premium natural dog chews and treats for approximately $60 million. The Company has not yet finalized the allocation of the purchase price to the fair value of the tangible assets, intangible assets and liabilities acquired. Approximately $40 million of the purchase price remains unallocated and is included in other assets on the condensed consolidated balance sheet as of December 30, 2023. The addition of TDBBS expands Central’s portfolio with bully and collagen sticks, bones and jerky, adds scale to its dog and cat business and enhances Central’s eCommerce and direct-to-consumer capabilities.
4. Inventories, net
Inventories, net of allowance for obsolescence, consist of the following:
| December 30, 2023 | December 24, 2022 | September 30, 2023 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Raw materials | $ | $ | $ | |||||||||||||||||
| Work in progress | ||||||||||||||||||||
| Finished goods | ||||||||||||||||||||
| Supplies | ||||||||||||||||||||
| Total inventories, net | $ | $ | $ | |||||||||||||||||
5. Goodwill
The Company tests goodwill for impairment annually (as of the first day of the fourth fiscal quarter), or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, by first assessing qualitative factors to determine whether it is more likely than not the fair value of the reporting unit is less than its carrying amount. The qualitative assessment evaluates factors including macro-economic conditions, industry-specific and company-specific considerations, legal and regulatory environments and historical performance. 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 quantitative 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 quantitative 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 quantitative goodwill impairment test, which compares the estimated fair value of our reporting units to their related carrying values, including goodwill. Impairment is indicated if the estimated fair value of the reporting unit is less than its carrying value, and an impairment charge is recognized for the differential. The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of its two reporting units to the Company’s total market capitalization. No
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6. Other Intangible Assets
The following table summarizes the components of gross and net acquired intangible assets:
| Gross | Accumulated Amortization | Accumulated Impairment | Net Carrying Value | |||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| December 30, 2023 | ||||||||||||||||||||||||||
| Marketing-related intangible assets – amortizable | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Marketing-related intangible assets – nonamortizable | ( | |||||||||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||||||||
| Customer-related intangible assets – amortizable | ( | ( | ||||||||||||||||||||||||
| Other acquired intangible assets – amortizable | ( | ( | ||||||||||||||||||||||||
| Other acquired intangible assets – nonamortizable | ( | |||||||||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||||||||
| Total other intangible assets, net | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Gross | Accumulated Amortization | Accumulated Impairment | Net Carrying Value | |||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| December 24, 2022 | ||||||||||||||||||||||||||
| Marketing-related intangible assets – amortizable | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Marketing-related intangible assets – nonamortizable | ( | |||||||||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||||||||
| Customer-related intangible assets – amortizable | ( | ( | ||||||||||||||||||||||||
| Other acquired intangible assets – amortizable | ( | |||||||||||||||||||||||||
| Other acquired intangible assets – nonamortizable | ( | |||||||||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||||||||
| Total other intangible assets, net | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Gross | Accumulated Amortization | Accumulated Impairment | Net Carrying Value | |||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| September 30, 2023 | ||||||||||||||||||||||||||
| Marketing-related intangible assets – amortizable | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Marketing-related intangible assets – nonamortizable | ( | |||||||||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||||||||
| Customer-related intangible assets – amortizable | ( | ( | ||||||||||||||||||||||||
| Other acquired intangible assets – amortizable | ( | ( | ||||||||||||||||||||||||
| Other acquired intangible assets – nonamortizable | ( | |||||||||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||||||||
| Total other intangible assets, net | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
Other acquired intangible assets include contract-based and technology-based intangible assets.
The Company evaluates long-lived assets, including amortizable and indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates indefinite-lived intangible assets on an annual basis. Factors indicating the carrying value of the Company’s amortizable intangible assets may not be recoverable were not present in the three months ended December 30, 2023, and accordingly, no impairment testing was performed on these assets.
The Company amortizes its acquired intangible assets with definite lives over periods ranging from two years to 25 years; over weighted average remaining lives of one year for marketing-related intangibles, 11 years for customer-related intangibles and five years for
12
other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $8.2 million and $9.0 million for the three months ended December 30, 2023 and December 24, 2022, respectively, and is classified within selling, general and administrative expenses in the condensed consolidated statements of operations. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $29 25
.
7. Long-Term Debt
Long-term debt consists of the following:
| December 30, 2023 | December 24, 2022 | September 30, 2023 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
Senior notes, interest at | $ | $ | $ | |||||||||||||||||
Senior notes, interest at | ||||||||||||||||||||
Senior notes, interest at | ||||||||||||||||||||
| Unamortized debt issuance costs | ( | ( | ( | |||||||||||||||||
| Net carrying value | ||||||||||||||||||||
Asset-based revolving credit facility, interest at SOFR plus a margin of | ||||||||||||||||||||
| Other notes payable | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| Less current portion | ( | ( | ( | |||||||||||||||||
| Long-term portion | $ | $ | $ | |||||||||||||||||
Senior Notes
$400 million 4.125 % Senior Notes due 2031
On April 30, 2021, the Company issued $400 million aggregate principal amount of 4.125 % senior notes due April 2031 (the "2031 Notes"). The Company used a portion of the net proceeds from the offering to repay all outstanding borrowings under its Credit Facility, with the remainder used for general corporate purposes.
The Company incurred approximately $6 million of debt issuance costs in conjunction with this issuance, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2031 Notes.
The 2031 Notes require semi-annual interest payments on April 30 and October 30. The 2031 Notes are unconditionally guaranteed on a senior basis by each of the Company's existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central's Credit Facility. The 2031 Notes were issued in a private placement under Rule 144A and will not be registered under the Securities Act of 1933.
The Company may redeem some or all of the 2031 Notes at any time, at its option, prior to April 30, 2026 at the principal amount plus a "make whole" premium. At any time prior to April 30, 2024, the Company may also redeem, at its option, up to 40 % of the notes with the proceeds of certain equity offerings at a redemption price of 104.125 % of the principal amount of the notes. The Company may redeem some or all of the 2031 Notes at the Company’s option, at any time on or after April 30, 2026 for 102.063 %, on or after April 30, 2027 for 101.375 %, on or after April 30, 2028 for 100.688 % and on or after April 30, 2029 for 100.0 %, plus accrued and unpaid interest.
The holders of the 2031 Notes have the right to require the Company to repurchase all or a portion of the 2031 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 specific kinds of changes of control.
The 2031 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all financial covenants as of December 30, 2023.
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$500 million 4.125 % Senior Notes due 2030
In October 2020, the Company issued $500 million aggregate principal amount of 4.125 % senior notes due October 2030 (the "2030 Notes"). In November 2020, the Company used a portion of the net proceeds to redeem all of its outstanding 6.125 % senior notes due November 2023 (the "2023 Notes") at a redemption price of 101.531 % plus accrued and unpaid interest, and to pay related fees and expenses, with the remainder used for general corporate purposes.
The Company incurred approximately $8.0 million of debt issuance costs associated with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2030 Notes.
The 2030 Notes require semiannual interest payments on October 15 and April 15. The 2030 Notes are unconditionally guaranteed on a senior basis by each of the Company's existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central's Credit Facility.
The Company may redeem some or all of the 2030 Notes at any time, at its option, prior to October 15, 2025 at a price equal to 100 % of the principal amount plus a “make-whole” premium. The Company may redeem some or all of the 2030 Notes, at its option, in whole or in part, at any time on or after October 15, 2025 for 102.063 %, on or after October 15, 2026 for 101.375 %, on or after October 15, 2027 for 100.688 % and on or after October 15, 2028 for 100.0 %, plus accrued and unpaid interest.
The holders of the 2030 Notes have the right to require the Company to repurchase all or a portion of the 2030 Notes at a purchase price equal to 101.0 % of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2030 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all financial covenants as of December 30, 2023.
$300 million 5.125 % Senior Notes due 2028
On December 14, 2017, the Company issued $300 million aggregate principal amount of 5.125 % senior notes due February 2028 (the "2028 Notes"). The Company used the net proceeds from the offering to finance acquisitions and for general corporate purposes.
The Company incurred approximately $4.8 million of debt issuance costs in conjunction with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2028 Notes.
The 2028 Notes require semiannual interest payments on February 1 and August 1. The 2028 Notes are unconditionally guaranteed on a senior basis by the Company's existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central's Credit Facility.
The Company may redeem some or all of the 2028 Notes, at its option, at any time on or after January 1, 2024 for 101.708 %, on or after January 1, 2025 for 100.854 %, and on or after January 1, 2026 for 100.0 %, plus accrued and unpaid interest.
The holders of the 2028 Notes have the right to require the Company to repurchase all or a portion of the 2028 Notes at a purchase price equal to 101.0 % of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2028 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all financial covenants as of December 30, 2023.
Asset-Based Loan Facility Amendment
On December 16, 2021, the Company entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a $750 million principal amount senior secured asset-based revolving credit facility, with up to an additional $400 million principal amount available with the consent of the Lenders, as defined, if the Company exercises the uncommitted accordion feature set forth therein (collectively, the “Credit Facility”). The Credit Facility matures on December 16, 2026. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full.
The Credit Facility is subject to a borrowing base that is calculated using a formula based upon eligible receivables and inventory, and at the Company's election, eligible real property, minus certain reserves. Proceeds of the Credit Facility will be used for general corporate
14
purposes. Net availability under the Credit Facility was approximately $568 million as of December 30, 2023. The Credit Facility includes a $50 million sublimit for the issuance of standby letters of credit and a $75 million sublimit for swing Loan borrowings. As of December 30, 2023, there were no borrowings outstanding and no letters of credit outstanding under the Credit Facility. Outside of the Credit Facility, there were other standby and commercial letters of credit of $1.3 million outstanding as of December 30, 2023.
Borrowings under the Credit Facility bear interest at a rate based on SOFR (which will not be less than 0.00 %) or, at the option of the Company, the Base Rate, plus, in either case, an applicable margin based on the Company's usage under the Credit Facility. Base Rate is defined as the highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50 %, (c) one-month SOFR plus 1.00 % and (d) 0.00 %. The applicable margin for SOFR-based borrowings fluctuates between 1.00 %-1.50 %, and was 1.00 % as of December 30, 2023, and such applicable margin for Base Rate borrowings fluctuates between 0.00 %-0.50 %, and was 0.00 % as of December 30, 2023. An unused line fee shall be payable quarterly in respect of the total amount of the unutilized Lenders’ commitments and short-notice borrowings under the Credit Facility. Standby letter of credit fees at the applicable margin on the average undrawn and unreimbursed amount of standby letters of credit are payable quarterly and a facing fee of 0.125 % is payable quarterly for the stated amount of each letter of credit. The Company is also required to pay certain fees to the administrative agent under the Credit Facility. The Credit Facility was amended on May 15, 2023 to transition from LIBOR to SOFR. As of December 30, 2023, the interest rate applicable to Base Rate borrowings was 8.5 %, and the interest rate applicable to one-month SOFR-based borrowings was 6.3 %.
The Company incurred approximately $2.4 million of debt issuance costs in conjunction with this transaction, which included lender fees and legal expenses. The debt issuance costs are being amortized over the term of the Credit Facility.
The Credit Facility contains customary covenants, including financial covenants which require the Company to maintain a minimum fixed charge coverage ratio of 1 :1 upon triggered quarterly testing (e.g. when availability falls below certain thresholds established in the agreement), reporting requirements and events of default. The Credit Facility is secured by substantially all assets of the borrowing parties, including (i) pledges of 100 % of the stock or other equity interest of each domestic subsidiary that is directly owned by such entity and (ii) 65 % of the stock or other equity interest of each foreign subsidiary that is directly owned by such entity, in each case subject to customary exceptions. The Company was in compliance with all financial covenants under the Credit Facility as of December 30, 2023.
15
8. Supplemental Equity Information
The following table provides a summary of the changes in the carrying amounts of equity attributable to controlling interest and noncontrolling interest through the three months ended December 30, 2023 and December 24, 2022.
| Controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Class A Common Stock | Class B Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | Noncontrolling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance September 30, 2023 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of share-based awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted share activity, including net share settlement | — | ( | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, including net share settlement of stock options | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of stock | — | — | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to Noncontrolling interest | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 30, 2023 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Class A Common Stock | Class B Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | Noncontrolling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance September 24, 2022 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | ( | ( | ( | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of share-based awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted share activity, including net share settlement | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, including net share settlement of stock options | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of stock | — | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 24, 2022 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
9. Stock-Based Compensation
The Company recognized share-based compensation expense of $6.0 million and $6.6 million for the three months ended December 30, 2023 and December 24, 2022, respectively, as a component of selling, general and administrative expenses. The tax benefit associated with share-based compensation expense for the three months ended December 30, 2023 and December 24, 2022 was $1.4 million and $1.6 million, respectively.
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10. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income (loss) from continuing operations.
| Three Months Ended | ||||||||||||||||||||
| December 30, 2023 | ||||||||||||||||||||
| Income | Shares | Per Share | ||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||
| Basic EPS: | ||||||||||||||||||||
| Net income available to common shareholders | $ | $ | ||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||
| Options to purchase common stock | ||||||||||||||||||||
| Restricted shares | ||||||||||||||||||||
| Performance stock units | ||||||||||||||||||||
| Diluted EPS: | ||||||||||||||||||||
| Net income available to common shareholders | $ | $ | ||||||||||||||||||
| Three Months Ended | ||||||||||||||||||||
| December 24, 2022 | ||||||||||||||||||||
| Income | Shares | Per Share | ||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||
| Basic EPS: | ||||||||||||||||||||
| Net loss available to common shareholders | $ | ( | $ | ( | ||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||
| Options to purchase common stock | ||||||||||||||||||||
| Restricted shares | ||||||||||||||||||||
| Diluted EPS: | ||||||||||||||||||||
| Net loss available to common shareholders | $ | ( | $ | ( | ||||||||||||||||
Options to purchase 1.2 million shares of Class A common stock at prices ranging from $25.79 to $51.37 per share were outstanding at December 30, 2023, and options to purchase 2.1 million shares of Class A common stock at prices ranging from $21.37 to $51.37 per share were outstanding at December 24, 2022.
For the three months ended December 30, 2023, approximately 0.5 million options outstanding 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.
For the three months ended December 24, 2022, the potential effects of stock awards were excluded from the diluted earnings per share calculation, because their inclusion in a loss period would be anti-dilutive to the earnings per share calculation.
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11. Segment Information
Management has determined that the Company has two operating segments, which are also reportable segments based on the level at which the Chief Operating Decision Maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are the Pet segment and the Garden segment. Substantially all of the Company's assets and operations relate to its business in the United States. Financial information relating to the Company's business segments is presented in the table below.
| Three Months Ended | ||||||||||||||
| December 30, 2023 | December 24, 2022 | |||||||||||||
| (in thousands) | ||||||||||||||
| Net sales: | ||||||||||||||
| Pet segment | $ | $ | ||||||||||||
| Garden segment | ||||||||||||||
| Total net sales | $ | $ | ||||||||||||
| Operating income (loss) | ||||||||||||||
| Pet segment | ||||||||||||||
| Garden segment | ( | ( | ||||||||||||
| Corporate | ( | ( | ||||||||||||
| Total operating income | ||||||||||||||
| Interest expense - net | ( | ( | ||||||||||||
| Other income | ||||||||||||||
| Income tax benefit | ( | ( | ||||||||||||
| Income (loss) including noncontrolling interest | ( | |||||||||||||
| Net income (loss) attributable to noncontrolling interest | ( | |||||||||||||
| Net income (loss) attributable to Central Garden & Pet Company | $ | $ | ( | |||||||||||
| Depreciation and amortization: | ||||||||||||||
| Pet segment | $ | $ | ||||||||||||
| Garden segment | ||||||||||||||
| Corporate | ||||||||||||||
| Total depreciation and amortization | $ | $ | ||||||||||||
| December 30, 2023 | December 24, 2022 | September 30, 2023 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Pet segment | $ | $ | $ | |||||||||||||||||
| Garden segment | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||||||
| Goodwill (included in corporate assets above): | ||||||||||||||||||||
| Pet segment | $ | $ | $ | |||||||||||||||||
| Garden segment | ||||||||||||||||||||
| Total goodwill | $ | $ | $ | |||||||||||||||||
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The tables below presents the Company's disaggregated revenues by segment:
| Three Months Ended December 30, 2023 | ||||||||||||||||||||
| Pet Segment | Garden Segment | Total | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Other pet products | $ | $ | $ | |||||||||||||||||
| Dog and cat products | ||||||||||||||||||||
| Other manufacturers' products | ||||||||||||||||||||
| Wild bird products | ||||||||||||||||||||
| Other garden supplies | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
| Three Months Ended December 24, 2022 | ||||||||||||||||||||
| Pet Segment | Garden Segment | Total | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Other pet products | $ | $ | $ | |||||||||||||||||
| Dog and cat products | ||||||||||||||||||||
| Other manufacturers' products | ||||||||||||||||||||
| Wild bird products | ||||||||||||||||||||
| Other garden supplies | ||||||||||||||||||||
| Total | $ | $ | $ | |||||||||||||||||
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12. 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 could have a material effect on the Company’s financial position or results of operations with the potential exception of the proceeding below.
In 2012, Nite Glow Industries, Inc and its owner, Marni Markell, (“Nite Glow”) filed suit in the U.S. District Court for New Jersey against the Company alleging that the applicator developed and used by the Company for certain of its branded topical flea and tick products infringes a patent held by Nite Glow and asserted related claims for breach of contract and misappropriation of confidential information based on the terms of a Non-Disclosure Agreement. On June 27, 2018, a jury returned a verdict in favor of Nite Glow on each of the three claims and awarded damages of approximately $12.6 million. The court ruled on post-trial motions in early June 2020, reducing the judgment amount to $12.4 million and denying the plaintiff's request for attorneys' fees. The Company filed its notice of appeal and the plaintiffs cross-appealed. On July 14, 2021, the Federal Circuit Court of Appeals issued its decision on the appeal. The Federal Circuit concluded that the Company did not infringe plaintiff's patent and determined that the breach of contract claim raised no non-duplicative damages and should be dismissed. The court affirmed the jury's liability verdict on the misappropriation of confidential information claim but ordered a new trial on damages on that single claim limited to the "head start" benefit, if any, generated by the confidential information. The district court has scheduled the trial on the head start damage claim to begin in February and conclude in early March of this year. The Company intends to vigorously pursue its defenses in the future proceedings and believes that it will prevail on the merits as to the head start damages issue. While the Company believes that the ultimate resolution of this matter will not have a material impact on the Company's consolidated financial statements, the outcome of litigation is inherently uncertain and the final resolution of this matter may result in expense to the Company in excess of management's expectations.
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. Subsequent Events
In December 2023, the Board of Directors approved a stock dividend to increase liquidity in the Company's Class A shares. The stock dividend is in the form of one share of the Company's Class A Common Stock for every four outstanding shares of its Common Stock, Class A Common Stock and Class B Stock. Dividend shares of Class A Common Stock will be distributed on February 8, 2024, to stockholders of record on January 8, 2024. The Company believes the increased liquidity will benefit stockholders and provide the Company with more flexibility to pursue its growth objectives.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Company
Central Garden & Pet Company (“Central”) is a market leader in the garden and pet industries in the United States. For over 40 years, Central has proudly nurtured happy and healthy homes by bringing innovative and trusted solutions to consumers and its customers. We manage our operations through two reportable segments: Pet and Garden.
Our Pet segment includes dog and cat supplies such as dog treats and chews, toys, pet beds and grooming products, waste management and training pads, pet containment; supplies for aquatics, small animals, reptiles and pet birds including toys, cages and habitats, bedding, food and supplements; products for equine and livestock, animal and household health and insect control products; live fish and small animals as well as outdoor cushions. These products are sold under brands such as Aqueon®, Cadet®, Comfort Zone®, Farnam®, Four Paws®, K&H Pet Products® ("K&H"), Kaytee®, Nylabone® and Zilla®.
Our Garden segment includes lawn and garden consumables such as grass seed, vegetable, flower and herb packet seed; wild bird feed, bird houses and other birding accessories; weed, grass, and other herbicides, insecticide and pesticide products; fertilizers and live plants. These products are sold under brands such as Amdro®, Ferry-Morse®, Pennington® and Sevin®.
In fiscal 2023, our consolidated net sales were $3.3 billion, of which our Pet segment, or Pet, accounted for approximately $1.9 billion and our Garden segment, or Garden, accounted for approximately $1.4 billion. In fiscal 2023, our operating income was $211 million consisting of income from our Pet segment of $198 million, income from our Garden segment of $123 million and corporate expenses of $111 million.
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We were incorporated in Delaware in May 1992 as the successor to a California corporation that was formed in 1955. Our executive offices are located at 1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597, and our telephone number is (925) 948-4000. Our website is www.central.com. The information on our website is not incorporated by reference in this quarterly report.
Recent Developments
Fiscal 2024 First Quarter Financial Performance:
•Net sales increased $6.8 million, or 1.1%, from the prior year quarter to $634.5 million. Pet segment sales declined $6.6 million, and Garden segment sales increased $13.4 million.
•Gross profit increased $7.1 million from the prior year quarter, and gross margin increased 80 basis points to 28.2%.
•Selling, general and administrative expense declined $0.9 million from the prior year quarter to $170.4 million and as a percentage of net sales decreased 40 basis points to 26.9%.
•Operating income increased $8.0 million from the prior year quarter to $8.4 million.
•Net Income in the first quarter of fiscal 2024 was $0.4 million, or $0.01 per diluted share, compared to a net loss of $8.4 million, or $0.16 per diluted share, in the first quarter of fiscal 2023.
Stock Dividend
In December 2023, our Board of Directors approved a stock dividend to increase liquidity in our Class A shares. The stock dividend is in the form of one share of our Class A Common Stock for every four outstanding shares of our Common Stock, Class A Common Stock and Class B Stock. Dividend shares of Class A Common Stock will be distributed on February 8, 2024, to stockholders of record on January 8, 2024. We believe the increased liquidity will benefit stockholders and provide us with more flexibility to pursue our growth objectives.
Acquisition
In November 2023, we acquired TDBBS, LLC (“TDBBS”), a provider of premium natural dog chews and treats for approximately $60 million. The addition of TDBBS expands our portfolio with bully and collagen sticks, bones and jerky, adds scale to our dog and cat business and enhances our eCommerce and direct-to-consumer capabilities.
Results of Operations
Three Months Ended December 30, 2023
Compared with Three Months Ended December 24, 2022
Net Sales
Net sales for the three months ended December 30, 2023 increased $6.8 million, or 1.1%, to $634.5 million from $627.7 million for the three months ended December 24, 2022. Organic net sales, which excludes the impact of our acquisition of TDBBS in November 2023 and the sale of our independent garden channel distribution business in July 2023, increased 0.5%. Our branded product sales increased $9.3 million, and sales of other manufacturers’ products decreased $2.5 million.
Pet net sales decreased $6.6 million, or 1.6%, to $409.2 million for the three months ended December 30, 2023 from $415.8 million for the three months ended December 24, 2022. Pet organic net sales, which excludes the impact of our acquisition of TDBBS in November 2023, declined 4.8%. The decline in net sales was due primarily to lower sales of durable items in our outdoor cushion business and our pet distribution business. Pet branded product sales declined $3.6 million, and sales of other manufacturers' products declined $3.0 million.
Garden net sales increased $13.4 million, or 6.3%, to $225.3 million for the three months ended December 30, 2023 from $211.9 million for the three months ended December 24, 2022. Garden organic net sales, which excludes the impact of the sale of our independent garden channel distribution business in July 2023, increased 11.3%. The increase in Garden net sales was due primarily to increased sales in our control and fertilizer, grass seed and packet seed businesses which benefited from the current quarter ending December 30, as opposed to the prior year fiscal quarter which ended Christmas eve, and early season shipments by select retailers. Garden branded sales increased $12.9 million, and sales of other manufacturers' products increased $0.5 million.
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Gross Profit
Gross profit for the three months ended December 30, 2023 increased $7.1 million, or 4.2%, to $178.8 million from $171.7 million for the three months ended December 24, 2022. Gross margin increased 80 basis points to 28.2% for the three months ended December 30, 2023 from 27.4% for the three months ended December 24, 2022. The increase in gross margin was driven primarily by the Pet segment, although gross margin improved in both segments in the first quarter of fiscal 2024 as compared to the prior year quarter, as both segments benefited from cost management and moderating inflation.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $0.9 million, or 0.5%, to $170.4 million for the three months ended December 30, 2023. As a percentage of net sales, selling, general and administrative expenses decreased to 26.9% for the three months ended December 30, 2023, compared to 27.3% in the comparable prior year quarter. Decreased expense in both the Pet segment and corporate were partially offset by increased expense in the Garden segment.
Selling and delivery expense decreased $5.7 million to $69.3 million for the three months ended December 30, 2023 as compared to $75.0 million in the prior year quarter. The decrease was primarily in the Pet segment due to lower delivery costs resulting from lower sales and the continued implementation of a transportation management system, as well as reduced overhead marketing costs.
Warehouse and administrative expense increased $4.8 million, or 5.0%, to $101.1 million for the three months ended December 30, 2023 from $96.3 million for the three months ended December 24, 2022. The increase in warehouse and administrative expense was due primarily to increased expense from the TDBBS acquisition and higher facility expense in our Pet segment. Corporate expense decreased $2.2 million due primarily to lower payroll related costs, including equity compensation, resulting from lower corporate headcount. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resources, and information technology functions.
Operating Income
Operating income increased $8.0 million to $8.4 million for the three months ended December 30, 2023. Our operating margin increased from 0.1% in the prior year quarter to 1.3% in the current year quarter. The increase in operating income was due to a $6.9 million increase in net sales, an 80 basis point increase in gross margin and a $0.9 million decline in selling, general and administrative expense.
Pet operating income increased $3.8 million, or 9.7%, to $43.4 million for the three months ended December 30, 2023 from $39.6 million for the three months ended December 24, 2022, and Pet operating margin improved 110 basis points to 10.6%. Pet operating income and margin increased due to an improved gross margin partially offset by reduced net sales and relatively flat selling, general and administrative expenses.
Garden operating loss decreased $1.9 million to a loss of $8.9 million for the three months ended December 30, 2023, from a loss of $10.8 million for the three months ended December 24, 2022. The Garden operating loss decreased due to higher sales and gross margin partially offset by higher selling, general and administrative expense.
Corporate operating expense decreased $2.2 million, or 7.9%, to $26.1 million for the three months ended December 30, 2023 from $28.3 million for the three months ended December 24, 2022. Corporate expense decreased due primarily to lower payroll related costs, including equity compensation, due to reduced corporate headcount.
Net Interest Expense
Net interest expense for the three months ended December 30, 2023 decreased $4.1 million, or 29.5%, to $9.7 million from $13.8 million for the three months ended December 24, 2022. The decrease in net interest expense was due to increased interest income resulting from both higher rates of interest earned on our higher cash balance during the current quarter. Debt outstanding on December 30, 2023 was $1,189.6 million compared to $1,186.9 million at December 24, 2022.
Other Income
Other income is comprised of income or losses from investments accounted for under the equity method of accounting and foreign currency exchange gains and losses. Other income decreased $0.7 million to $1.0 million for the quarter ended December 30, 2023 from $1.7 million for the quarter ended December 24, 2022. The decrease in other income was due primarily to lower foreign currency gains in the current year quarter as compared to the prior year quarter.
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Income Taxes
The income tax benefit was $0.9 million for the quarter ended December 30, 2023, and $2.8 million for the quarter ended December 24, 2022. The benefit from income taxes decreased for the quarter ended December 30, 2023, compared to the prior year period, primarily due to a smaller pre-tax loss in the first quarter of fiscal 2024.
The tax benefit in the current quarter was larger than our $0.3 million pre-tax loss due to a benefit from a discrete item, related to stock compensation, in a quarter with a small loss. We expect our effective income tax rate for fiscal 2024 to be in the range of 22% to 24%.
Net Income and Earnings Per Share
Net income in the first quarter of fiscal 2024 was $0.4 million, or $0.01 per diluted share, compared to a net loss of $8.4 million, or $0.16 per diluted share, in the first quarter of fiscal 2023. The increase in net income and earnings per share was due to an $8.0 million increase in operating income, decreased net interest expense and the tax benefit from a discrete item in the current year quarter.
Use of Non-GAAP Financial Measures
We report our financial results in accordance with GAAP. However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including adjusted EBITDA and organic sales. Management uses these non-GAAP financial measures that exclude the impact of specific items (described below) in making financial, operating and planning decisions and in evaluating our performance. Also, Management believes that these non-GAAP financial measures may be useful to investors in their assessment of our ongoing operating performance and provide additional meaningful comparisons between current results and results in prior operating periods. While Management believes that non-GAAP measures 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.
Adjusted EBITDA is defined by us as income before income tax, net other expense, net interest expense and depreciation and amortization and stock-based compensation expense (or operating income plus depreciation and amortization expense and stock-based compensation expense). We present adjusted EBITDA because we believe that adjusted EBITDA is a useful supplemental measure in evaluating the cash flows and performance of our business and provides greater transparency into our results of operations. Adjusted EBITDA is used by our management to perform such evaluations. Adjusted EBITDA should not be considered in isolation or as a substitute for cash flow from operations, income from operations or other income statement measures prepared in accordance with GAAP. We believe that adjusted EBITDA is frequently used by investors, securities analysts and other interested parties in their evaluation of companies, many of which present adjusted EBITDA when reporting their results. Other companies may calculate adjusted EBITDA differently and it may not be comparable.
The reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below.
| Organic Net Sales Reconciliation | GAAP to Non-GAAP Reconciliation | |||||||||||||||||||
| Three Months Ended December 30, 2023 | ||||||||||||||||||||
| Net sales (GAAP) | Effect of acquisitions & divestitures on net sales | Net sales organic | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Q1 FY 24 | $ | 634.5 | $ | 13.2 | $ | 621.3 | ||||||||||||||
| Q1 FY 23 | 627.7 | 9.5 | 618.2 | |||||||||||||||||
| $ increase | $ | 6.8 | $ | 3.1 | ||||||||||||||||
| % increase | 1.1% | 0.5% | ||||||||||||||||||
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| Organic Pet Segment Net Sales Reconciliation | GAAP to Non-GAAP Reconciliation | |||||||||||||||||||
| Three Months Ended December 30, 2023 | ||||||||||||||||||||
| Net sales (GAAP) | Effect of acquisitions & divestitures on net sales | Net sales organic | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Q1 FY 24 | $ | 409.2 | $ | 13.2 | $ | 396.0 | ||||||||||||||
| Q1 FY 23 | 415.8 | — | 415.8 | |||||||||||||||||
| $ decrease | $ | (6.6) | $ | (19.8) | ||||||||||||||||
| % decrease | (1.6) | % | (4.8) | % | ||||||||||||||||
| Organic Garden Segment Net Sales Reconciliation | GAAP to Non-GAAP Reconciliation | |||||||||||||||||||
| Three Months Ended December 30, 2023 | ||||||||||||||||||||
| Net sales (GAAP) | Effect of acquisitions & divestitures on net sales | Net sales organic | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Q1 FY 24 | $ | 225.3 | $ | — | $ | 225.3 | ||||||||||||||
| Q1 FY 23 | 211.9 | 9.5 | 202.4 | |||||||||||||||||
| $ increase | $ | 13.4 | $ | 22.9 | ||||||||||||||||
| % increase | 6.3% | 11.3% | ||||||||||||||||||
| Adjusted EBITDA Reconciliation | GAAP to Non-GAAP Reconciliation | |||||||||||||||||||||||||
| Three Months Ended December 30, 2023 | ||||||||||||||||||||||||||
| Pet | Garden | Corporate | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net income attributable to Central Garden & Pet Company | $ | — | $ | — | $ | — | $ | 430 | ||||||||||||||||||
| Interest expense, net | — | — | — | 9,707 | ||||||||||||||||||||||
| Other income | — | — | — | (993) | ||||||||||||||||||||||
| Income tax benefit | — | — | — | (869) | ||||||||||||||||||||||
| Net income attributable to noncontrolling interest | — | — | — | 137 | ||||||||||||||||||||||
| Sum of items below operating income | — | — | — | 7,982 | ||||||||||||||||||||||
| Income (loss) from operations | 43,388 | (8,886) | (26,090) | 8,412 | ||||||||||||||||||||||
| Depreciation & amortization | 10,798 | 11,006 | 741 | 22,545 | ||||||||||||||||||||||
| Noncash stock-based compensation | — | — | 6,021 | 6,021 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 54,186 | $ | 2,120 | $ | (19,328) | $ | 36,978 | ||||||||||||||||||
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| Adjusted EBITDA Reconciliation | GAAP to Non-GAAP Reconciliation | |||||||||||||||||||||||||
| Three Months Ended December 24, 2022 | ||||||||||||||||||||||||||
| Pet | Garden | Corporate | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net loss attributable to Central Garden & Pet Company | $ | — | $ | — | $ | — | $ | (8,433) | ||||||||||||||||||
| Interest expense, net | — | — | — | 13,776 | ||||||||||||||||||||||
| Other income | — | — | — | (1,699) | ||||||||||||||||||||||
| Income tax benefit | — | — | — | (2,822) | ||||||||||||||||||||||
| Net loss attributable to noncontrolling interest | — | — | — | (416) | ||||||||||||||||||||||
| Sum of items below operating income | — | — | — | 8,839 | ||||||||||||||||||||||
| Income (loss) from operations | 39,555 | (10,820) | (28,329) | 406 | ||||||||||||||||||||||
| Depreciation & amortization | 10,112 | 10,842 | 738 | 21,692 | ||||||||||||||||||||||
| Noncash stock-based compensation | — | — | 6,577 | 6,577 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 49,667 | $ | 22 | $ | (21,014) | $ | 28,675 | ||||||||||||||||||
Inflation
Our revenues and margins are dependent on various economic factors, including rates of inflation, energy costs, consumer behavior, 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 fertilizers. 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 fiscal 2022, we experienced notable inflationary pressure which continued in fiscal 2023, although at a reduced rate in the latter months of fiscal 2023. The rate of inflationary pressure for key commodities, labor and freight, is moderating as we enter calendar 2024.
Weather and Seasonality
Our sales of lawn and garden products are influenced by weather and climate conditions in the different markets we serve. Our Garden segment’s business is highly seasonal. In fiscal 2023, approximately 67% of our Garden segment’s net sales and 58% 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 any operating loss incurred during the first fiscal quarter of the year.
Liquidity and Capital Resources
We have financed our growth through a combination of cash generated from operations, bank borrowings, supplier credit, and sales of equity and debt securities.
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 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. Our lawn and garden businesses are highly seasonal with approximately 67% 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.
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Operating Activities
Net cash used by operating activities increased by $6.5 million, from $63.3 million for the three months ended December 24, 2022, to $69.8 million for the three months ended December 30, 2023. The increase in cash used by operating activities was due primarily to changes in our working capital accounts for the period ended December 30, 2023, as compared to the prior year period, primarily increased accounts receivable partially offset by increased payables and accrued expenses.
Investing Activities
Net cash used in investing activities increased $52.5 million, from $17.9 million for the three months ended December 24, 2022 to $70.5 million during the three months ended December 30, 2023. The increase in cash used in investing activities was due primarily to acquisition activity in the current year partially offset by decreased capital expenditures in the current year.
Financing Activities
Net cash used by financing activities decreased $1.7 million, from $9.4 million for the three months ended December 24, 2022, to $7.8 million for the three months ended December 30, 2023. The decrease in cash used by financing activities during the current year was due primarily to decreased open market purchases of our common stock during the current year as compared to the prior year. During the three months ended December 30, 2023, we repurchased approximately 40,000 shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately $1.4 million, or approximately $35.94 per share. During the three months ended December 24, 2022, we repurchased approximately 0.1 million shares of our voting common stock (CENT) on the open market at an aggregate cost of approximately $2.0 million, or approximately $37.26 per share, and approximately 0.2 million shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately $6.9 million, or approximately $35.29 per share.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $750 million Credit Facility. Based on our anticipated cash needs, availability under our Credit 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 and beyond. 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 Credit Facility, and arrangements with suppliers will be adequate to fund our presently anticipated working capital and capital expenditure 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 be approximately $70 million in fiscal 2024, of which we have invested approximately $10 million through December 30, 2023.
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.
Total Debt
At December 30, 2023, our total debt outstanding was $1,189.6 million, as compared with $1,186.9 million at December 24, 2022.
Senior Notes
$400 million 4.125% Senior Notes due 2031
On April 30, 2021, we issued $400 million aggregate principal amount of 4.125% senior notes due April 2031 (the "2031 Notes"). We used a portion of the net proceeds from the offering to repay all outstanding borrowings under our Credit Facility, with the remainder used for general corporate purposes.
We incurred approximately $6 million of debt issuance costs in conjunction with this issuance, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2031 Notes.
The 2031 Notes require semi-annual interest payments on April 30 and October 30. The 2031 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 Amended Credit Facility. The 2031 Notes were issued in a private placement under Rule 144A and will not be registered under the Securities Act of 1933.
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We may redeem some or all of the 2031 Notes at any time, at our option, prior to April 30, 2026 at the principal amount plus a "make whole" premium. At any time prior to April 30, 2024, we may also redeem, at our option, up to 40% of the notes with the proceeds of certain equity offerings at a redemption price of 104.125% of the principal amount of the notes. We may redeem some or all of the 2031 Notes at our option, at any time on or after April 30, 2026 for 102.063%, on or after April 30, 2027 for 101.375%, on or after April 30, 2028 for 100.688% and on or after April 30, 2029 for 100.0%, plus accrued and unpaid interest.
The holders of the 2031 Notes have the right to require us to repurchase all or a portion of the 2031 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 specific kinds of changes of control.
The 2031 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all financial covenants as of December 30, 2023.
$500 million 4.125% Senior Notes due 2030
In October 2020, we issued $500 million aggregate principal amount of 4.125% senior notes due October 2030 (the "2030 Notes"). In November 2020, we used a portion of the net proceeds to redeem all of our outstanding 6.125% senior notes due November 2023 (the "2023 Notes") at a redemption price of 101.531% plus accrued and unpaid interest, and to pay related fees and expenses, with the remainder used for general corporate purposes.
We incurred approximately $8.0 million of debt issuance costs associated with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2030 Notes.
The 2030 Notes require semiannual interest payments on October 15 and April 15. The 2030 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 Credit Facility.
We may redeem some or all of the 2030 Notes at any time, at our option, prior to October 15, 2025 at a price equal to 100% of the principal amount plus a “make-whole” premium. We may redeem some or all of the 2030 Notes, at our option, in whole or in part, at any time on or after October 15, 2025 for 102.063%, on or after October 15, 2026 for 101.375%, on or after October 15, 2027 for 100.688% and on or after October 15, 2028 for 100.0%, plus accrued and unpaid interest.
The holders of the 2030 Notes have the right to require us to repurchase all or a portion of the 2030 Notes at a purchase price equal to 101.0% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2030 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all financial covenants as of December 30, 2023.
$300 Million 5.125% Senior Notes due 2028
On December 14, 2017, we issued $300 million aggregate principal amount of 5.125% senior notes due February 2028 (the "2028 Notes"). We used the net proceeds from the offering to finance acquisitions and for general corporate purposes.
We incurred approximately $4.8 million of debt issuance costs in conjunction with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2028 Notes.
The 2028 Notes require semiannual interest payments on February 1 and August 1. The 2028 Notes are unconditionally guaranteed on a senior basis by our existing and future domestic restricted subsidiaries who are borrowers under or guarantors of our Credit Facility.
We may redeem some or all of the 2028 Notes at our option, at any time on or after January 1, 2024 for 101.708%, on or after January 1, 2025 for 100.854% and on or after January 1, 2026 for 100.0%, plus accrued and unpaid interest.
The holders of the 2028 Notes have the right to require us to repurchase all or a portion of the 2028 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2028 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all financial covenants as of December 30, 2023.
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Asset-Based Loan Facility Amendment
On December 16, 2021, we entered into a Third Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a $750 million principal amount senior secured asset-based revolving credit facility, with up to an additional $400 million principal amount available with the consent of the Lenders, as defined, if we exercise the uncommitted accordion feature set forth therein (collectively, the “Credit Facility”). The Credit Facility matures on December 16, 2026. We may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full.
The Credit Facility is subject to a borrowing base that is calculated using a formula based upon eligible receivables and inventory, and at our election, eligible real property, minus certain reserves. Proceeds of the Credit Facility will be used for general corporate purposes. Net availability under the Credit Facility was approximately $568 million as of December 30, 2023. The Credit Facility includes a $50 million sublimit for the issuance of standby letters of credit and a $75 million sublimit for swing Loan borrowings. As of December 30, 2023, there were no borrowings outstanding and no letters of credit outstanding under the Credit Facility. Outside of the Credit Facility, there were other standby and commercial letters of credit of $1.3 million outstanding as of December 30, 2023.
Borrowings under the Credit Facility bear interest at a rate based on SOFR (which will not be less than 0.00%) or, at our option, the Base Rate, plus, in either case, an applicable margin based on our usage under the Credit Facility. Base Rate is defined as the highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50%, (c) one-month SOFR plus 1.00% and (d) 0.00%. The applicable margin for SOFR-based borrowings fluctuates between 1.00%-1.50%, and was 1.00% as of December 30, 2023, and such applicable margin for Base Rate borrowings fluctuates between 0.00%-0.50%, and was 0.00% as of December 30, 2023. An unused line fee shall be payable quarterly in respect of the total amount of the unutilized Lenders’ commitments and short-notice borrowings under the Credit Facility. Standby letter of credit fees at the applicable margin on the average undrawn and unreimbursed amount of standby letters of credit are payable quarterly and a facing fee of 0.125% is payable quarterly for the stated amount of each letter of credit. We are also required to pay certain fees to the administrative agent under the Credit Facility. The Credit Facility was amended on May 15, 2023 to transition from LIBOR to SOFR. As of December 30, 2023, the interest rate applicable to Base Rate borrowings was 8.5%, and the interest rate applicable to one-month SOFR-based borrowings was 6.3%.
We incurred approximately $2.4 million of debt issuance costs in conjunction with this transaction, which included lender fees and legal expenses. The debt issuance costs are being amortized over the term of the Credit Facility.
The Credit Facility contains customary covenants, including financial covenants which require us to maintain a minimum fixed charge coverage ratio of 1:1 upon triggered quarterly testing (e.g. when availability falls below certain thresholds established in the agreement), reporting requirements and events of default. The Credit Facility is secured by substantially all assets of the borrowing parties, including (i) pledges of 100% of the stock or other equity interest of each domestic subsidiary that is directly owned by such entity and (ii) 65% of the stock or other equity interest of each foreign subsidiary that is directly owned by such entity, in each case subject to customary exceptions. We were in compliance with all financial covenants under the Credit Facility as of December 30, 2023.
Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities
Central (the "Parent/Issuer") issued $400 million of 2031 Notes in April 2021, $500 million of 2030 Notes in October 2020, and $300 million of 2028 Notes in December 2017. The 2031 Notes, 2030 Notes and 2028 Notes are fully and unconditionally guaranteed on a joint and several senior basis by each of our existing and future domestic restricted subsidiaries (the "Guarantors") which are guarantors of our Credit Facility. The 2031 Notes, 2030 Notes and 2028 Notes are unsecured senior obligations and are subordinated to all of our existing and future secured debt, including our Credit Facility, to the extent of the value of the collateral securing such indebtedness. There are no significant restrictions on the ability of the Guarantors to make distributions to the Parent/Issuer. Certain subsidiaries and operating divisions of the Company do not guarantee the 2031, 2030 or 2028 Notes and are referred to as the Non-Guarantors.
The Guarantors jointly and severally, and fully and unconditionally, guarantee the payment of the principal and premium, if any, and interest on the 2031, 2030 and 2028 Notes when due, whether at stated maturity of the 2031, 2030 and 2028 Notes, by acceleration, call for redemption or otherwise, and all other obligations of the Company to the holders of the 2031, 2030 and 2028 Notes and to the trustee under the indenture governing the 2031, 2030 and 2028 Notes (the "Guarantee"). The Guarantees are senior unsecured obligations of each Guarantor and are of equal rank with all other existing and future senior indebtedness of the Guarantors.
The obligations of each Guarantor under its Guarantee shall be limited to the maximum amount as well, after giving effect to all other contingent and fixed liabilities of such Guarantor and to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such Guarantor under the guarantee not constituting a fraudulent conveyance or fraudulent transfer under Federal or state law.
The Guarantee of a Guarantor will be released:
(1) upon any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation), in accordance with the governing indentures, to any person other than the Company;
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(2) if such Guarantor merges with and into the Company, with the Company surviving such merger;
(3) if the Guarantor is designated as an Unrestricted Subsidiary; or
(4) if the Company exercises its legal defeasance option or covenant defeasance option or the discharge of the Company's obligations under the indentures in accordance with the terms of the indentures.
The following tables present summarized financial information of the Parent/Issuer subsidiaries and the Guarantor subsidiaries. All intercompany balances and transactions between subsidiaries under Parent/Issuer and subsidiaries under the Guarantor have been eliminated. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to the Parent/Issuer's interests in the Guarantor Subsidiaries. The summarized information excludes financial information of the Non-Guarantors, including earnings from and investments in these entities.
| Summarized Statements of Operations | Three Months Ended | Fiscal Year Ended | |||||||||||||||||||||
| December 30, 2023 | September 30, 2023 | ||||||||||||||||||||||
| Parent/Issuer | Guarantors | Parent/Issuer | Guarantors | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net sales | $ | 149,618 | $ | 483,740 | $ | 768,207 | $ | 2,531,503 | |||||||||||||||
| Gross profit | $ | 34,268 | $ | 143,150 | $ | 166,370 | $ | 767,480 | |||||||||||||||
| Income (loss) from operations | $ | (6,651) | $ | 16,937 | $ | (32,001) | $ | 244,164 | |||||||||||||||
| Equity in earnings of Guarantor subsidiaries | $ | 16,950 | $ | — | $ | 191,793 | $ | — | |||||||||||||||
| Net income (loss) | $ | (15,642) | $ | 16,950 | $ | (63,840) | $ | 191,793 | |||||||||||||||
| Summarized Balance Sheet Information | As of | As of | |||||||||||||||||||||
| December 30, 2023 | September 30, 2023 | ||||||||||||||||||||||
| Parent/Issuer | Guarantors | Parent/Issuer | Guarantors | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Current assets | $ | 527,661 | $ | 1,138,824 | $ | 661,660 | $ | 999,218 | |||||||||||||||
| Intercompany receivable from Non-guarantor subsidiaries | 70,957 | — | 69,404 | — | |||||||||||||||||||
| Other assets | 3,584,344 | 2,837,181 | 3,402,000 | 2,762,797 | |||||||||||||||||||
| Total assets | $ | 4,182,962 | $ | 3,976,005 | $ | 4,133,064 | $ | 3,762,015 | |||||||||||||||
| Current liabilities | $ | 148,444 | $ | 332,483 | $ | 155,793 | $ | 294,686 | |||||||||||||||
| Intercompany payable from Non-guarantor subsidiaries | — | 1,078 | — | 766 | |||||||||||||||||||
| Long-term debt | 1,188,241 | 852 | 1,187,771 | 186 | |||||||||||||||||||
| Other liabilities | 1,382,733 | 138,759 | 1,308,736 | 60,611 | |||||||||||||||||||
| Total liabilities | $ | 2,719,418 | $ | 473,172 | $ | 2,652,300 | $ | 356,249 | |||||||||||||||
New Accounting Pronouncements
Refer to Footnote 1 in the notes to the condensed consolidated financial statements for new accounting pronouncements.
Critical Accounting Policies, Estimates and Judgments
There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in our exposure to market risk from that discussed in our Annual Report on Form 10-K for the fiscal year ended September 30, 2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Management, including our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of December 30, 2023. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of December 30, 2023, in light of the material weaknesses identified in our internal control over financial reporting described below, our disclosure controls and procedures were not effective at the reasonable assurance level and are not effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely discussion regarding required disclosure.
Previously Reported Material Weaknesses
As disclosed in Item 9A, “Controls and Procedures” within our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, which was filed with the SEC on November 28, 2023, we identified deficiencies in the design and operating effectiveness of controls in our internal control over financial reporting as of September 30, 2023. Management determined these identified deficiencies represented material weaknesses related to (1) certain information technology general computer controls ("ITGC’s") at our Live Plant and Green Garden businesses and (2) controls related to an outsourced service provider that supports certain of the Company’s revenue processes for our Live Plant business and were found to not be operating effectively. As a result, certain of the Company’s related business controls that are dependent upon the affected ITGC’s and lack of controls around outsourced IT service provider data were also deemed ineffective. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses did not result in any identified misstatements to our consolidated financial statements or changes to previously disclosed financial results.
After giving full consideration to these material weaknesses, and the additional analyses and other procedures we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, our management has concluded that our condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.
Management’s Plan to Remediate the Material Weaknesses
Our management has been engaged in developing and implementing remediation plans to address the material weaknesses described above. These remediation efforts are ongoing and are expected to include the following:
•Enhancing the design and control procedures of the Live Plant and Green Garden ITGCs to ensure that the control activities related to ITGCs are functioning appropriately;
•Improving the control environment in relation to personnel training and accountability of Sarbanes-Oxley Act of 2002 ("SOX") control activities;
•Hiring additional personnel in the IT department with an appropriate level of knowledge and experience to effectively execute our processes and procedures; and
•Expanding controls to address the design and operation of internal controls related to the revenue processes for our Live Plants business.
In fiscal 2024 to date, we have formalized our design and controls for the Live Plant and Green Garden ITGC’s and the Live Plant revenue process to ensure we address the root causes of the material weaknesses. We are in the process of developing and delivering SOX compliance training to control owners. We are also in the process of hiring to supplement our IT staffing. Additionally, we have enhanced
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our communication by holding frequent meetings with key management personnel and periodically updating members of the Audit Committee to discuss the SOX program and remediation efforts.
Changes in Internal Control over Financial Reporting
Other than the changes associated with the material weaknesses and remediation actions noted above, there have been no changes in our internal control over financial reporting during the quarter ended December 30, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 2012, Nite Glow Industries, Inc and its owner, Marni Markell, (“Nite Glow”) filed suit in the U.S. District Court for New Jersey against the Company alleging that the applicator developed and used by the Company for certain of its branded topical flea and tick products infringes a patent held by Nite Glow and asserted related claims for breach of contract and misappropriation of confidential information based on the terms of a Non-Disclosure Agreement. On June 27, 2018, a jury returned a verdict in favor of Nite Glow on each of the three claims and awarded damages of approximately $12.6 million. The court ruled on post-trial motions in early June 2020, reducing the judgment amount to $12.4 million and denying the plaintiff's request for attorneys' fees. The Company filed its notice of appeal and the plaintiffs cross-appealed. On July 14, 2021, the Federal Circuit Court of Appeals issued its decision on the appeal. The Federal Circuit concluded that the Company did not infringe plaintiff's patent and determined that the breach of contract claim raised no non-duplicative damages and should be dismissed. The court affirmed the jury's liability verdict on the misappropriation of confidential information claim but ordered a new trial on damages on that single claim limited to the "head start" benefit, if any, generated by the confidential information. The district court has scheduled the trial on the head start damage claim to begin in February and conclude in early March of this year. The Company intends to vigorously pursue its defenses in the future proceedings and believes that it will prevail on the merits as to the head start damages issue. While the Company believes that the ultimate resolution of this matter will not have a material impact on the Company's consolidated financial statements, the outcome of litigation is inherently uncertain and the final resolution of this matter may result in expense to the Company in excess of management's expectations.
From time to time, we are involved in certain legal proceedings in the ordinary course of business. Except as discussed above, we are not currently a party to any other legal proceedings that management believes would have a material effect on our financial position or results of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the fiscal year ended September 30, 2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the repurchases of any equity securities during the fiscal quarter ended December 30, 2023 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 Units) | 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)(2) | |||||||||||||||||||||||||||||||
| October 1, 2023 - November 4, 2023 | 6,340 | (3) | $ | 39.73 | — | $ | 83,235,000 | (4) | |||||||||||||||||||||||||||
| November 5, 2023 - December 2, 2023 | 39,749 | (1) (2) (3) | $ | 35.94 | 39,576 | $ | 81,951,000 | ||||||||||||||||||||||||||||
| December 3, 2023 - December 30, 2023 | 41,426 | (3) | $ | 40.08 | — | $ | 81,951,000 | ||||||||||||||||||||||||||||
| Total | 87,515 | $ | 38.18 | 39,576 | $ | 81,951,000 | |||||||||||||||||||||||||||||
(1)During the fourth quarter of fiscal 2019, our Board of Directors authorized a $100 million share repurchase program, (the "2019 Repurchase Authorization"). The 2019 Repurchase Authorization has no fixed expiration date and expires when the amount
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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. As of December 30, 2023, we had $82.0 million of authorization remaining under our 2019 Repurchase Authorization.
(2)In February 2019, our Board of Directors authorized us to make supplemental stock purchases to minimize dilution resulting from issuances under our equity compensation plans (the "Equity Dilution Authorization"). In addition to our regular share repurchase program, we are permitted to purchase annually a number of shares equal to the number of shares of restricted stock and stock options granted in the prior fiscal year, to the extent not already repurchased, and the current fiscal year. The Equity Dilution Authorization has no fixed expiration date and expires when the Board withdraws its authorization.
(3)Shares purchased during the period indicated represent withholding of a portion of shares to cover taxes in connection with the vesting of restricted stock and do not reduce the dollar value of shares that may be purchased under our stock repurchase plan.
(4)During the period, we repurchased 39,576 shares under the two plans. We repurchased 3,851 shares under the Equity Dilution Authorization and 35,725 shares under the 2019 Repurchase Authorization.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
During the quarter ended December 30, 2023, none of our directors or officers informed us of the adoption termination
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Item 6. | Exhibits | ||||||||||||||||||||||||||||||||||||||||
| Incorporated by Reference | |||||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit | Form | File No. | Exhibit | Filing Date | Filed Herewith | Furnished, Not Filed | ||||||||||||||||||||||||||||||||||
| 22 | X | ||||||||||||||||||||||||||||||||||||||||
| 31.1 | X | ||||||||||||||||||||||||||||||||||||||||
| 31.2 | X | ||||||||||||||||||||||||||||||||||||||||
| 32.1 | X | ||||||||||||||||||||||||||||||||||||||||
| 32.2 | X | ||||||||||||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended December 30, 2023, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Cash Flows, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Balance Sheets, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | X | |||||||||||||||||||||||||||||||||||||||
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended December 30, 2023, formatted in Inline XBRL (included as Exhibit 101) | ||||||||||||||||||||||||||||||||||||||||
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.
| CENTRAL GARDEN & PET COMPANY | |||||
| Registrant | |||||
| Dated: February 8, 2024 | |||||
| /s/ Mary Beth Springer | |||||
| Mary Beth Springer | |||||
| Interim Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| /s/ NICHOLAS LAHANAS | |||||
| Nicholas Lahanas | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
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