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 March 28, 2020

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

Delaware	68-0275553
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

1340 Treat Blvd., Suite 600, Walnut Creek, California 94597

(Address of principal executive offices)

(925) 948-4000

(Registrant’s telephone number, including area code)

_______________________________________________________________________ 

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically 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.

Large accelerated filer	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

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
Common Stock	CENT	The NASDAQ Stock Market LLC
Class A Common Stock	CENTA	The NASDAQ Stock Market LLC

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 April 30, 2020	11,300,810
Class A Common Stock Outstanding as of April 30, 2020	41,712,472
Class B Stock Outstanding as of April 30, 2020	1,647,922

	PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of March 28, 2020, March 30, 2019 and September 28, 2019	4
	Condensed Consolidated Statements of Operations Three and Six Months Ended March 28, 2020 and March 30, 2019	5
	Condensed Consolidated Statements of Comprehensive Income Three and Six Months Ended March 28, 2020 and March 30, 2019	6
	Condensed Consolidated Statements of Cash Flows Six Months Ended March 28, 2020 and March 30, 2019	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 4.	Controls and Procedures	48
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	48
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 3.	Defaults Upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	51

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This Form 10-Q includes “forward-looking statements.” Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, plans or intentions relating to acquisitions, our competitive strengths and weaknesses, our business strategy and the trends we anticipate in the industries in which we operate and other information that is not historical information. When used in this Form 10-Q, the words “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, our future earnings expectations, 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 28, 2019, 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:

•the impact of the COVID-19 pandemic on our business, including but not limited to, the impact on our workforce, operations, supply chain, demand for our products and services, and our financial results and condition; our ability to successfully manage the challenges associated with the COVID-19 pandemic;

•seasonality and fluctuations in our operating results and cash flow;

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

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

•our dependence upon our key executives;

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

•fluctuations in energy prices, fuel and related petrochemical costs;

•declines in consumer spending during economic downturns;

•inflation, deflation and other adverse macro-economic conditions;

•supply shortages in pet birds, small animals and fish;

•adverse weather conditions;

•risks associated with our acquisition strategy;

•access to and cost of additional capital;

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

•impacts of tariffs or a trade war;

•consolidation trends in the retail industry;

•competition in our industries;

•potential goodwill or intangible asset impairment;

•continuing implementation of an enterprise resource planning information technology system;

•our inability to protect our trademarks and other proprietary rights;

•potential environmental liabilities;

•risk associated with international sourcing;

•litigation and product liability claims;

•regulatory issues;

•the impact of product recalls;

•potential costs and risks associated with actual or potential cyber attacks;

•the impact of new accounting regulations and the U.S. Tax Cuts and Jobs Act on the Company's tax rate;

•our ability to recover asset and business interruption losses caused by the recent fires at our DMC facility in Texas;

•the voting power associated with our Class B stock; and

•potential dilution from issuance of authorized shares.

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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)

	March 28, 2020		March 30, 2019		September 28, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	331,555	$	329,724	$	497,749
Restricted cash	13,021		16,115		12,952
Accounts receivable (less allowance for doubtful accounts of $22,103, $16,818 and $21,128)	460,985		456,129		300,135
Inventories, net	517,207		517,158		466,197
Prepaid expenses and other	36,160		33,161		30,160
Total current assets	1,358,928		1,352,287		1,307,193
Plant, property and equipment, net	241,878		217,538		245,405
Goodwill	289,854		281,177		286,077
Other intangible assets, net	141,686		142,798		146,137
Operating lease right-of-use assets	99,098		—		—
Other assets	35,963		52,340		40,208
Total	$	2,167,407	$	2,046,140	$	2,025,020
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	186,871	$	157,596	$	149,246
Accrued expenses	137,723		136,413		129,166
Current lease liabilities	32,403		—		—
Current portion of long-term debt	103		5,119		113
Total current liabilities	357,100		299,128		278,525
Long-term debt	693,622		692,646		693,037
Long-term lease liabilities	70,760		—		—
Deferred income taxes and other long-term obligations	52,483		55,064		57,281
Equity:
Common stock, $0.01 par value: 11,329,110, 12,145,135 and 11,543,969 shares outstanding at March 28, 2020, March 30, 2019 and September 28, 2019	113		121		115
Class A common stock, $0.01 par value: 41,802,735, 44,386,792 and 42,968,493 shares outstanding at March 28, 2020, March 30, 2019 and September 28, 2019	418		444		430
Class B stock, $0.01 par value: 1,647,922, 1,652,262 and 1,652,262 shares outstanding at March 28, 2020, March 30, 2019 and September 28, 2019	16		16		16
Additional paid-in capital	562,625		592,331		575,380
Retained earnings	431,486		407,117		421,742
Accumulated other comprehensive loss	(1,645)		(1,280)		(1,676)
Total Central Garden & Pet Company shareholders’ equity	993,013		998,749		996,007
Noncontrolling interest	429		553		170
Total equity	993,442		999,302		996,177
Total	$	2,167,407	$	2,046,140	$	2,025,020

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				Six Months Ended
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Net sales	$	703,229	$	673,701	$	1,186,057	$	1,135,691
Cost of goods sold and occupancy	496,112		467,650		847,674		799,458
Gross profit	207,117		206,051		338,383		336,233
Selling, general and administrative expenses	141,012		143,898		270,213		263,899
Operating income	66,105		62,153		68,170		72,334
Interest expense	(10,753)		(10,640)		(21,394)		(21,254)
Interest income	1,417		2,255		3,421		4,792
Other income (expense)	(979)		500		(674)		308
Income before income taxes and noncontrolling interest	55,790		54,268		49,523		56,180
Income tax expense	12,648		11,546		10,920		11,819
Income including noncontrolling interest	43,142		42,722		38,603		44,361
Net income attributable to noncontrolling interest	438		331		316		167
Net income attributable to Central Garden & Pet Company	$	42,704	$	42,391	$	38,287	$	44,194
Net income per share attributable to Central Garden & Pet Company:
Basic	$	0.79	$	0.74	$	0.70	$	0.78
Diluted	$	0.78	$	0.73	$	0.69	$	0.76
Weighted average shares used in the computation of net income per share:
Basic	54,281		57,050		54,517		56,976
Diluted	54,952		58,026		55,220		58,013

See notes to condensed consolidated financial statements.

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CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

	Three Months Ended				Six Months Ended
	March 28, 2020		March 30, 2019		March 28, 2020		March 30, 2019
Income including noncontrolling interest	$	43,142	$	42,722	$	38,603	$	44,361
Other comprehensive income (loss):
Foreign currency translation	(405)		212		32		(62)
Total comprehensive income	42,737		42,934		38,635		44,299
Comprehensive income attributable to noncontrolling interest	438		331		316		167
Comprehensive income attributable to Central Garden & Pet Company	$	42,299	$	42,603	$	38,319	$	44,132

See notes to condensed consolidated financial statements.

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CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

	Six Months Ended
	March 28, 2020		March 30, 2019
Cash flows from operating activities:
Net income	$	38,603	$	44,361
Adjustments to reconcile net income to net cash used by operating activities:
Depreciation and amortization	26,316		24,229
Amortization of deferred financing costs	921		916
Non-cash lease expense	17,194		—
Stock-based compensation	8,423		5,907
Deferred income taxes	4,966		6,044
Gain on sale of property and equipment	(9)		(16)
Other	1,331		(710)
Change in assets and liabilities (excluding businesses acquired):
Accounts receivable	(160,799)		(159,933)
Inventories	(50,471)		(59,630)
Prepaid expenses and other assets	(6,051)		(2,772)
Accounts payable	37,857		41,332
Accrued expenses	6,803		20,818
Other long-term obligations	23		135
Operating lease liabilities	(17,765)		—
Net cash used by operating activities	(92,658)		(79,319)
Cash flows from investing activities:
Additions to plant, property and equipment	(19,487)		(14,302)
Payments to acquire companies, net of cash acquired	—		(11,137)
Investments	(4,439)		(1,749)
Other investing activities	(437)		(368)
Net cash used in investing activities	(24,363)		(27,556)
Cash flows from financing activities:
Repayments of long-term debt	(59)		(36,466)
Repurchase of common stock, including shares surrendered for tax withholding	(48,026)		(3,739)
Payment of contingent consideration liability	(90)		(66)
Distribution to noncontrolling interest	(57)		—
Payment of financing costs	(959)		—
Net cash used by financing activities	(49,191)		(40,271)
Effect of exchange rate changes on cash and cash equivalents	87		(20)
Net decrease in cash, cash equivalents and restricted cash	(166,125)		(147,166)
Cash, cash equivalents and restricted cash at beginning of period	510,701		493,005
Cash, cash equivalents and restricted cash at end of period	$	344,576	$	345,839
Supplemental information:
Cash paid for interest	$	21,464	$	21,298

See notes to condensed consolidated financial statements.

7

CENTRAL GARDEN & PET COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Three and Six Months Ended March 28, 2020

(Unaudited)

1.  Basis of Presentation

The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of March 28, 2020 and March 30, 2019, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income (loss) for the three and six months ended March 28, 2020 and March 30, 2019 and the condensed consolidated statements of cash flows for the six months ended March 28, 2020 and March 30, 2019 have been prepared by the Company, without audit. In the opinion of management, the interim financial statements include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented.

For the Company’s foreign business in the UK, the local currency is the functional currency. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Deferred taxes are not provided on translation gains and losses because the Company expects earnings of its foreign subsidiary to be permanently reinvested. Transaction gains and losses are included in results of operations.

Due to the seasonal nature of the Company’s garden business, the results of operations for the three and six months ended March 28, 2020 are not indicative of the operating results that may be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2019 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 28, 2019 balance sheet presented herein was derived from the audited financial statements.

Noncontrolling Interest

Noncontrolling interest in the Company’s condensed consolidated financial statements represents the 20% interest not owned by Central in a consolidated subsidiary. Since the Company controls this subsidiary, its financial statements are consolidated with those of the Company, and the noncontrolling owner’s 20% share of the subsidiary’s net assets and results of operations is deducted and reported as noncontrolling interest on the consolidated balance sheets and as net income (loss) attributable to noncontrolling interest in the consolidated statements of operations. See Note 9, Supplemental Equity Information, for additional information.

Cash, Cash Equivalents and Restricted Cash

The Company considers cash and all highly liquid investments with an original maturity of three months or less at date of purchase to be cash and cash equivalents. Restricted cash includes cash and highly liquid instruments that are used as collateral for stand-alone letter of credit agreements related to normal business transactions. These agreements require the Company to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash the Company has available for other uses. The 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 March 28, 2020, March 30, 2019 and September 28, 2019, respectively (in thousands).

	March 28, 2020		March 30, 2019		September 28, 2019
Cash and cash equivalents	$	331,555	$	329,724	$	497,749
Restricted cash	13,021		16,115		12,952
Total cash, cash equivalents and restricted cash	$	344,576	$	345,839	$	510,701

Revenue Recognition

Revenue Recognition and Nature of Products and Services

The Company manufactures, markets and distributes a wide variety of branded, private label and third-party 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 (less than 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. 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.

8

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. Product fulfillment costs are capitalized as a part of inventoriable costs in accordance with our inventory policies. 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 our 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

Effective September 29, 2019, the Company adopted Accounting Standards Codification 842, Leases ("ASC 842"). Under this guidance, 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. On September 29, 2019, the Company began to record operating leases on its condensed consolidated balance sheet. As of December 28, 2019, long-term operating lease right-of-use ("ROU") assets and current and long-term operating lease liabilities were presented separately in the condensed consolidated balance sheets. Finance lease ROU assets continue to be presented in property, plant and equipment, net, and the related finance liabilities have been 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 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.

9

Recent Accounting Pronouncements

Accounting Pronouncements Recently Adopted

Leases

In February 2016, the FASB issued ASU 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires companies to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets and disclose key information about leasing information. Topic 842 was subsequently amended by ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; and ASU 2018-11, Targeted Improvements. The new standard establishes a right-of-use model (ROU) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the statement of operations.

The Company adopted the new standard in the first quarter of fiscal year 2020, on a modified retrospective basis using the optional transition method, and accordingly, has not restated comparative periods. Fiscal year 2019 balances and related disclosures supporting those comparative period balances continue to be presented under ASC 840, "Leases." The new standard provides a number of optional practical expedients in transition. The Company elected the 'package of practical expedients,' which permit it to not reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs. The Company elected not to recognize ROU assets and lease liabilities for short-term operating leases with terms of 12 months or less. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements, the latter not being applicable. Upon adoption, the Company recorded operating lease right-of-use assets and lease liabilities of approximately $111 million and $115 million, respectively, in the condensed consolidated balance sheet, which included the reclassifications of amounts presented in comparative periods as deferred rent as a reduction of the ROU assets. The Company did not record an adjustment to beginning retained earnings associated with the adoption of this standard. See Note 7. Leases for more information.

Accounting Standards Not Yet Adopted

Goodwill and Intangible Assets

In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The new guidance is effective for annual periods or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019, or the Company's first quarter of fiscal 2021. The amendment should be applied on a prospective basis. Based on the Company's most recent annual goodwill impairment test performed as of July 1, 2018, there were no reporting units for which the carrying amount of the reporting unit exceeded its fair value; therefore, this ASU would not currently have an impact on the Company's condensed consolidated financial statements and related disclosures. However, if upon adoption the carrying amount of a reporting unit exceeds its fair value, the Company would be impacted by the amount of impairment recognized.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40), Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted, and is effective for the Company in fiscal 2021. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the effect that ASU 2018-15 will have on its condensed consolidated financial statements and related disclosures.

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Fair Value Disclosures

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. ASU 2018-13 is effective for annual periods beginning after December 15, 2019 and interim periods within those annual periods, with early adoption permitted and is effective for the Company in fiscal 2021. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The Company is currently evaluating the effect that ASU 2018-13 will have on its condensed consolidated financial statements and related disclosures.

Accounting for Income Taxes

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for the Company in its first quarter of fiscal 2022 and would require the Company to recognize a cumulative effect adjustment to the opening balance of retained earnings, if applicable. The Company is currently evaluating the impact that ASU 2019-12 may have on its 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 following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of March 28, 2020 (in thousands): 

	Level 1		Level 2		Level 3		Total
Liabilities:
Liability for contingent consideration (a)	$	—	$	—	$	1,310	$	1,310
Total liabilities	$	—	$	—	$	1,310	$	1,310

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of March 30, 2019 (in thousands): 

	Level 1		Level 2		Level 3		Total
Liabilities:
Liability for contingent consideration (a)	$	—	$	—	$	7,729	$	7,729
Total liabilities	$	—	$	—	$	7,729	$	7,729

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The following table presents our financial assets and liabilities at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of September 28, 2019 (in thousands): 

	Level 1		Level 2		Level 3		Total
Liabilities:
Liability for contingent consideration (a)	$	—	$	—	$	7,369	$	7,369
Total liabilities	$	—	$	—	$	7,369	$	7,369

(a)The liability for contingent consideration relates to an earn-out for B2E, acquired in December 2012, future performance-based contingent payments for Hydro-Organics Wholesale, Inc., acquired in October 2015 and future performance-based contingent payments for Segrest, Inc., acquired in October 2016. In December 2019, performance-based criteria associated with the $6 million contingent consideration liability related to Segrest, Inc. were met and accordingly, the entire amount was released out of an independent escrow account to the former owners as of December 28, 2019. The fair value of the estimated contingent consideration arrangement is determined based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. This is presented as part of long-term liabilities in the Company's consolidated balance sheets.

The following table provides a summary of the changes in fair value of the Company's Level 3 financial instruments for the periods ended March 28, 2020 and March 30, 2019 (in thousands):

	Amount
Balance September 28, 2019	$	7,369
Estimated contingent performance-based consideration established at the time of acquisition	—
Changes in the fair value of contingent performance-based payments established at the time of acquisition	31
Performance-based payments	(6,090)
Balance March 28, 2020	$	1,310
	Amount
Balance September 29, 2018	$	8,224
Estimated contingent performance-based consideration established at the time of acquisition	—
Changes in the fair value of contingent performance-based payments established at the time of acquisition	(429)
Performance-based payments	(66)
Balance March 30, 2019	$	7,729

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 March 28, 2020 and March 30, 2019, the Company was not required to measure any significant non-financial assets and liabilities at fair value.

Fair Value of Other Financial Instruments

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 March 28, 2020, March 30, 2019 and September 28, 2019 was $270.2 million, $278.2 million and $307.1 million, respectively, compared to a carrying value of $296.3 million, $295.9 million and $296.1 million, respectively.

In November 2015, the Company issued $400 million aggregate principal amount of 6.125% senior notes due November 2023 (the “2023 Notes”). The estimated fair value of the Company’s 2023 Notes as of March 28, 2020, March 30, 2019 and September 28, 2019 was $385.0 million, $417.7 million and $414.6 million, respectively, compared to a carrying value of $397.2 million, $396.3 million and $396.7 million, respectively.

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3.  Acquisitions

C&S Products

In May 2019, the Company purchased C&S Products, a manufacturer of suet and other wild bird feed products, to complement our existing wild bird feed business for approximately $30.0 million. Subsequent to the acquisition, approximately $4.7 million of cash was used to eliminate the acquired long-term debt. The financial results of C&S Products have been included in the results of operations within the Pet segment since the date of acquisition. The following table summarizes the purchase price and recording of fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments.

In thousands	Amounts Previously Recognized as of Acquisition Date (1)		Measurement Period Adjustments		Amounts Recognized as of Acquisition Date (as Adjusted)
Current assets, net of cash and cash equivalents acquired	$	9,794	$	441	$	10,235
Fixed assets	23,743		(3,786)		19,957
Goodwill	—		3,777		3,777
Other assets	5,081		(3,242)		1,839
Other intangible assets, net	—		2,810		2,810
Current liabilities	(2,137)		—		(2,137)
Long-term obligations	(6,457)		$	—	(6,457)
Net assets acquired, less cash and cash equivalents	$	30,024	$	—	$	30,024

(1) As previously reported in the Company's Form 10-K for the period ended September 28, 2019.

The impact to the consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible assets for C&S Products was immaterial.

4.  Inventories, net

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

	March 28, 2020		March 30, 2019		September 28, 2019
Raw materials	$	148,730	$	136,879	$	145,331
Work in progress	66,866		58,529		51,154
Finished goods	286,448		305,569		255,870
Supplies	15,163		16,181		13,842
Total inventories, net	$	517,207	$	517,158	$	466,197

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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. If it is determined that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, it is unnecessary to perform the two-step goodwill impairment test. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the two-step test is performed to identify potential goodwill impairment. Based on certain circumstances, the Company may elect to bypass the qualitative assessment and proceed directly to performing the first step of the two-step goodwill impairment test, which compares the fair value of the Company’s reporting units to their related carrying values, including goodwill. If the fair value of the reporting unit is less than its carrying value, the Company performs an additional step to determine the implied fair value of goodwill associated with that reporting unit. The implied fair value of goodwill is determined by first allocating the fair value of the reporting unit to all of its assets and liabilities and then computing the excess of the reporting unit’s fair value over the amounts assigned to the assets and liabilities. If the carrying value of goodwill exceeds the implied fair value of goodwill, such excess represents the amount of goodwill impairment, and accordingly, the Company recognizes such impairment. The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of its two reporting units to the Company’s total market capitalization. No impairment of goodwill was recorded for the three and six months ended March 28, 2020 and March 30, 2019. The Company recorded approximately $3.8 million of goodwill in its Pet segment during the three months ended December 28, 2019 as part of its finalization of the purchase price allocation of C&S Products.

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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)
March 28, 2020
Marketing-related intangible assets – amortizable	$	20.6	$	(17.1)	$	—	$	3.5
Marketing-related intangible assets – nonamortizable	70.6		—		(26.0)		44.6
Total	91.2		(17.1)		(26.0)		48.1
Customer-related intangible assets – amortizable	140.3		(58.8)		(2.5)		79.0
Other acquired intangible assets – amortizable	26.0		(17.3)		—		8.7
Other acquired intangible assets – nonamortizable	7.1		—		(1.2)		5.9
Total	33.1		(17.3)		(1.2)		14.6
Total other intangible assets	$	264.6	$	(93.2)	$	(29.7)	$	141.7
	Gross		Accumulated Amortization		Accumulated Impairment		Net Carrying Value
	(in millions)
March 30, 2019
Marketing-related intangible assets – amortizable	$	18.6	$	(15.2)	$	—	$	3.4
Marketing-related intangible assets – nonamortizable	70.6		—		(26.0)		44.6
Total	89.2		(15.2)		(26.0)		48.0
Customer-related intangible assets – amortizable	128.3		(47.5)		(2.5)		78.3
Other acquired intangible assets – amortizable	26.0		(15.5)		—		10.5
Other acquired intangible assets – nonamortizable	7.2		—		(1.2)		6.0
Total	33.2		(15.5)		(1.2)		16.5
Total other intangible assets	$	250.7	$	(78.2)	$	(29.7)	$	142.8
	Gross		Accumulated Amortization		Accumulated Impairment		Net Carrying Value
	(in millions)
September 28, 2019
Marketing-related intangible assets – amortizable	$	19.7	$	(16.3)	$	—	$	3.4
Marketing-related intangible assets – nonamortizable	70.6		—		(26.0)		44.6
Total	90.3		(16.3)		(26.0)		48.0
Customer-related intangible assets – amortizable	138.4