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 27, 2021
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
(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 April 30, 2021 | |||||||||||
| Class A Common Stock Outstanding as of April 30, 2021 | |||||||||||
| Class B Stock Outstanding as of April 30, 2021 | |||||||||||
| 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, 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 26, 2020, 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:
•our ability to successfully manage the impact of COVID-19 on our business, including but not limited to, the impact on our workforce, operations, fill rates, supply chain, demand for our products and services, and our financial results and condition;
•risks associated with our acquisition strategy, including our ability to successfully integrate our recently announced acquisitions and the impact of purchase accounting on our financial results;
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•inflation and other adverse macro-economic conditions and our ability to pass on cost increases;
•the potential for future reductions in demand for product categories, which benefited from the COVID-19 pandemic;
•the success of our new Central to Home strategy;
•seasonality and fluctuations in our operating results and cash flow;
•fluctuations in market prices for seeds and grains and other raw materials;
•our inability to pass through cost increases in a timely manner;
•supply shortages in pet birds, small animals and fish;
•adverse weather conditions;
•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;
•declines in consumer spending during economic downturns;
•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;
•risk associated with international sourcing;
•access to and cost of additional capital;
•potential goodwill or intangible asset impairment;
•our dependence upon our key executives;
•our inability to protect our trademarks and other proprietary rights;
•fluctuations in energy prices, fuel and related petrochemical costs;
•litigation and product liability claims;
•regulatory issues;
•the impact of product recalls;
•potential costs and risks associated with actual or potential cyber attacks;
•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)
| March 27, 2021 | March 28, 2020 | September 26, 2020 | |||||||||||||||
| 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 | Six Months Ended | ||||||||||||||||||||||
| March 27, 2021 | March 28, 2020 | March 27, 2021 | March 28, 2020 | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | |||||||||||||||||||
| Cost of goods sold | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling, general and administrative expenses | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Interest income | |||||||||||||||||||||||
| Other income (expense) | ( | ( | |||||||||||||||||||||
| Income before income taxes and noncontrolling interest | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Income including noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to noncontrolling interest | |||||||||||||||||||||||
| Net income attributable to Central Garden & Pet Company | $ | $ | $ | $ | |||||||||||||||||||
| Net income per share attributable to Central Garden & Pet Company: | |||||||||||||||||||||||
| Basic | $ | $ | $ | $ | |||||||||||||||||||
| Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average shares used in the computation of net income 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
(in thousands, unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| March 27, 2021 | March 28, 2020 | March 27, 2021 | March 28, 2020 | ||||||||||||||||||||
| Income including noncontrolling interest | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive loss: | |||||||||||||||||||||||
| Foreign currency translation | ( | ( | ( | ||||||||||||||||||||
| Total comprehensive income | |||||||||||||||||||||||
| Comprehensive income attributable to noncontrolling interest | |||||||||||||||||||||||
| Comprehensive income 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)
| Six Months Ended | |||||||||||
| March 27, 2021 | March 28, 2020 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash used by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Amortization of deferred financing costs | |||||||||||
| Non-cash lease expense | |||||||||||
| Stock-based compensation | |||||||||||
| Debt extinguishment costs | |||||||||||
| Loss on sale of business | |||||||||||
| Deferred income taxes | |||||||||||
| Gain on sale of property and equipment | ( | ( | |||||||||
| Other | |||||||||||
| 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 | ( | ||||||||||
| Proceeds from the sale of business | |||||||||||
| Investments | ( | ||||||||||
| Other investing activities | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Repayments of long-term debt | ( | ( | |||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Borrowings under revolving line of credit | |||||||||||
| Repayments under revolving line of credit | ( | ||||||||||
| Premium paid on extinguishment of debt | ( | ||||||||||
| Repurchase of common stock, including shares surrendered for tax withholding | ( | ( | |||||||||
| Payment of contingent consideration liability | ( | ( | |||||||||
| Distribution to noncontrolling interest | ( | ( | |||||||||
| Payment of financing costs | ( | ( | |||||||||
| Net cash provided (used) by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | |||||||||||
| 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 | $ | $ | |||||||||
| Cash paid for taxes | $ | $ | |||||||||
| 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 and Six Months Ended March 27, 2021
(Unaudited)
1. Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of March 27, 2021 and March 28, 2020, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income (loss) for the three and six months ended March 27, 2021 and March 28, 2020 and the condensed consolidated statements of cash flows for the six months ended March 27, 2021 and March 28, 2020 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 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 27, 2021 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 2020 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 26, 2020 balance sheet presented herein was derived from the audited financial statements.
Change in Segment Components
During the first quarter of fiscal year 2021, the Company began reporting the results of its outdoor cushion operations in the Pet segment as a result of a change in internal management reporting lines due to potential synergies in sourcing, manufacturing and innovation and to be consistent with the reporting of financial information used to assess performance and allocate resources. These operations were previously reported in the Garden segment and are now managed and reported in the Pet segment. All prior period segment disclosures have been recast to reflect this segment change.
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.
| March 27, 2021 | March 28, 2020 | September 26, 2020 | ||||||||||||||||||
| (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. Under the guidance found in ASC Topic 326, the “expected credit loss” model replaces the previous incurred loss model and requires consideration of a broader range of
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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 1% of consolidated net sales) from 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. 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
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
9
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.
Recent Accounting Pronouncements
Accounting Pronouncements Recently Adopted
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets measured at amortized cost, including trade receivables. The model replaces the probable, incurred loss model for those assets and broadens the information an entity must consider when developing its expected credit loss estimate for assets measured at amortized cost. The Company adopted the standard as of September 27, 2020, and the adoption did not have a material impact on the Company's condensed consolidated financial statements and related disclosures. Additionally, there have been no significant changes to the Company's accounting policies as disclosed in the Company's fiscal 2020 Form 10-K as a result of the adoption of this new accounting guidance.
Goodwill and Intangible Assets
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). The Company adopted this standard as of September 27, 2020 on a prospective basis, and the adoption of this standard did not have a material impact on its condensed consolidated financial statements and related disclosures.
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 Company adopted this guidance as of September 27, 2020 on a prospective basis. Based on the Company's most recent annual goodwill impairment test performed as of July 1, 2020, there were no reporting units for which the carrying amount of the reporting unit exceeded its fair value; therefore, the adoption of this ASU did not have an impact on the Company's condensed consolidated financial statements and related disclosures.
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. 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. The Company adopted this standard as of September 27, 2020, and the adoption did not have a material impact on its condensed consolidated financial statements and related disclosures.
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Accounting Standards Not Yet Adopted
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 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 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 27, 2021:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Liability for contingent consideration (a) | $ | $ | $ | $ | ||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of March 28, 2020:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Liability for contingent consideration (a) | $ | $ | $ | $ | ||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
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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 26, 2020:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Liability for contingent consideration (a) | $ | $ | $ | $ | ||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
(a)The fair values of the Company's contingent consideration liabilities from previous business acquisitions are considered "Level 3" measurements because the Company uses various estimates in the valuation models to project timing and amount of future contingent payments. 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 performance period related to B2E ended on December 31, 2020. The performance period related to Hydro-Organics Wholesale extends through fiscal year 2025. 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 27, 2021 and March 28, 2020:
| Amount | |||||
| (in thousands) | |||||
| Balance September 26, 2020 | $ | ||||
| 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 | ( | ||||
| Performance-based payments | ( | ||||
| Balance March 27, 2021 | $ | ||||
| Amount | |||||
| (in thousands) | |||||
| Balance September 28, 2019 | $ | ||||
| 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 | |||||
| Performance-based payments | ( | ||||
| Balance March 28, 2020 | $ | ||||
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 27, 2021 and March 28, 2020, the Company was not required to measure any significant non-financial assets and liabilities at fair value.
Fair Value of Other Financial Instruments
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 March 27, 2021 was $506.3 million, compared to a carrying value of $492.4 million.
12
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 27, 2021, March 28, 2020 and September 26, 2020 was $317.1 million, $270.2 million and $316.0 million, respectively, compared to a carrying value of $296.8 million, $296.3 million and $296.6 million, respectively.
In November 2020, the Company redeemed $400 million aggregate principal amount of 6.125 % senior notes due November 2023 (the “2023 Notes”) at a price of 101.531 %. The estimated fair value of the Company’s 2023 Notes as of March 28, 2020 and September 26, 2020 was $385.0 million and $409.2 million, respectively, compared to a carrying value of $397.2 million and $397.5 million, respectively.
The estimated fair value is based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.
3. Acquisitions and Divestitures
Acquisitions
DoMyOwn
On December 18, 2020, the Company acquired DoMyOwn, a leading online retailer of professional-grade control products in the United States, for approximately $81 million. The acquisition strengthens the Company's position in the control products category and adds a leading online platform for eCommerce fulfillment and digital capabilities. 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 $80 million of the purchase price remains unallocated, and is included in other assets on the Company's condensed consolidated balance sheet as of March 27, 2021. Deferred taxes associated with the intangible assets acquired will be finalized upon completion of the purchase accounting. The financial results of DoMyOwn have been included in the results of operations within the Garden segment since the date of acquisition.
Hopewell Nursery
On December 31, 2020, the Company purchased substantially all of the assets of Hopewell Nursery, a leading live goods wholesale grower serving retail nurseries, landscape contractors, wholesalers and garden centers across the Northeast, for approximately $81 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 $17 million of the purchase price remains unallocated, and is included in other assets on the Company's condensed consolidated balance sheet as of March 27, 2021. Deferred taxes associated with the intangible assets acquired will be finalized upon completion of the purchase accounting. The addition of Hopewell to the Central portfolio strengthens the Company's position as a leading live goods provider in the garden category. The financial results of Hopewell Nursery have been included in the results of operations within the Garden segment since the date of acquisition.
Green Garden Products
On February 11, 2021, the Company acquired Flora Parent, Inc. and its subsidiaries ("Green Garden Products"), a leading provider of vegetable, herb and flower seed packets, seed starters and plant nutrients in North America, for approximately $571 million. The Company borrowed approximately $180 million under its credit facility to partially finance the acquisition. 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 $490 million of the purchase price remains unallocated, and is included in other assets on the Company's condensed consolidated balance sheet as of March 27, 2021. Deferred taxes associated with the intangible assets acquired will be finalized upon completion of the purchase accounting. The addition of Green Garden Products is intended to expand the Company's portfolio into an adjacent garden category. The financial results of Green Garden have been included in the results of operations within the Garden segment since the date of acquisition. For both the fiscal quarter and year-to-date periods ended March 27, 2021, net sales and net income related to Green Garden Products were approximately $55 5
13
| Three months ended | Six months ended | |||||||||||||||||||
| March 27, 2021 | March 28, 2020 | March 27, 2021 | March 28, 2020 | |||||||||||||||||
| (in thousands except per share amounts, unaudited) | ||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||
| Net income attributable to Central Garden & Pet Company | $ | $ | $ | $ | ||||||||||||||||
| Diluted net income per share attributable to Central Garden & Pet Company | $ | $ | $ | $ | ||||||||||||||||
This pro forma information is based on historical results of operations, adjusted for the preliminary estimated allocation of the purchase price and other acquisition adjustments. This pro forma information is not necessarily indicative of what the results of the Company had been had it operated the businesses since the beginning of the periods presented. The pro forma adjustments reflect the income statement effects of the elimination of intercompany sales and profit, amortization of intangible assets related to the fair value adjustments of the assets acquired, elimination of interest expense on Green Garden Products debt that was paid off at the time of acquisition, incremental interest expense directly resulting from the acquisition and the related tax effects.
Divestiture
Breeder's Choice
4. Inventories, net
Inventories, net of allowance for obsolescence, consist of the following:
| March 27, 2021 | March 28, 2020 | September 26, 2020 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Raw materials | $ | $ | $ | |||||||||||||||||
| Work in progress | ||||||||||||||||||||
| Finished goods | ||||||||||||||||||||
| Supplies | ||||||||||||||||||||
| Total inventories, net | $ | $ | $ | |||||||||||||||||
5. Goodwill
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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 27, 2021 | ||||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||
| March 28, 2020 | ||||||||||||||||||||||||||
| 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 26, 2020 | ||||||||||||||||||||||||||
| 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 or six months ended March 27, 2021, and accordingly, no impairment testing was performed on these assets.
The Company amortizes its acquired intangible assets with definite lives over periods ranging from three years to 25 years; over weighted average remaining lives of three years for marketing-related intangibles, eight years for customer-related intangibles and 10 years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $3.3 million and $3.5 million for
15
.
7. Leases
The Company has operating and finance leases for manufacturing and distribution facilities, vehicles, equipment and office space. The Company's leases have remaining lease terms of to 10 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise. The Company does not include significant restrictions or covenants in its lease agreements, and residual value guarantees are not included within its operating leases. Some of the Company's leasing arrangements require variable payments that are dependent on usage or output or may vary for other reasons, such as product costs, insurance and tax payments. These variable payments are not included in the Company's recorded lease assets and liabilities and are expensed as incurred. Certain leases are tied to a variable index or rate and are included in lease assets and liabilities based on the indices or rates as of lease commencement. See Note 1. Basis of Presentation, Leases, for more information about the Company's lease accounting policies.
Supplemental balance sheet information related to the Company's leases was as follows:
| Balance Sheet Classification | As of March 27, 2021 | As of March 28, 2020 | ||||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Operating leases | ||||||||||||||||||||
| Right-of-use assets | Operating lease right-of-use assets | $ | $ | |||||||||||||||||
| Current lease liabilities | Current lease liabilities | $ | $ | |||||||||||||||||
| Non-current lease liabilities | Long-term lease liabilities | |||||||||||||||||||
| Total operating lease liabilities | $ | $ | ||||||||||||||||||
| Finance leases | ||||||||||||||||||||
| Right-of-use assets | $ | $ | ||||||||||||||||||
| Current lease liabilities | $ | $ | ||||||||||||||||||
| Non-current lease liabilities | ||||||||||||||||||||
| Total finance lease liabilities | $ | $ | ||||||||||||||||||
16
Components of lease cost were as follows:
| Six months ended March 27, 2021 | Six months ended March 28, 2020 | |||||||||||||
| (in millions) | ||||||||||||||
| Operating lease cost | $ | $ | ||||||||||||
| Finance lease cost: | ||||||||||||||
| Amortization of right-of-use assets | $ | $ | ||||||||||||
| Interest on lease liabilities | ||||||||||||||
| Total finance lease cost | $ | $ | ||||||||||||
| Short-term lease cost | $ | $ | ||||||||||||
| Variable lease cost | $ | $ | ||||||||||||
| Total lease cost | $ | $ | ||||||||||||
Supplemental cash flow information and non-cash activity related to the Company's leases was as follows:
| Six months ended March 27, 2021 | Six months ended March 28, 2020 | ||||||||||||||||
| (in millions) | |||||||||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||||||||
| Operating cash flows from operating leases | $ | $ | |||||||||||||||
| Operating cash flows from finance leases | $ | $ | |||||||||||||||
| Financing cash flows from finance leases | $ | $ | |||||||||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||||||||
| Operating leases | $ | $ | |||||||||||||||
| Finance leases | $ | $ | |||||||||||||||
Weighted-average remaining lease term and discount rate for the Company's leases were as follows:
| As of March 27, 2021 | As of March 28, 2020 | |||||||||||||
| Weighted-average remaining lease term (in years): | ||||||||||||||
| Operating leases | ||||||||||||||
| Finance leases | ||||||||||||||
| Weighted-average discount rate: | ||||||||||||||
| Operating leases | % | % | ||||||||||||
| Finance leases | % | % | ||||||||||||
17
Future non-cancelable lease payments are as follows:
| As of March 27, 2021 | ||||||||||||||
| Operating Leases | Finance Leases | |||||||||||||
| Fiscal Year | (in millions) | |||||||||||||
| 2021 (remaining six months) | $ | $ | ||||||||||||
| 2022 | ||||||||||||||
| 2023 | ||||||||||||||
| 2024 | ||||||||||||||
| 2025 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total future undiscounted lease payments | $ | $ | ||||||||||||
| Less imputed interest | ( | |||||||||||||
| Total reported lease liability | $ | $ | ||||||||||||
8. Long-Term Debt
Long-term debt consists of the following:
| March 27, 2021 | March 28, 2020 | September 26, 2020 | ||||||||||||||||||
| (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 LIBOR plus a margin of | ||||||||||||||||||||
| Other notes payable | ||||||||||||||||||||
| Total | ||||||||||||||||||||
| Less current portion | ( | ( | ( | |||||||||||||||||
| Long-term portion | $ | $ | $ | |||||||||||||||||
Senior Notes
Issuance of $500 million 4.125 % Senior Notes due 2030 and Redemption of $400 million 6.125 % Senior Notes due 2023
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 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.
18
As a result of the Company's redemption of the 2023 Notes, the Company incurred a call premium payment of $6.1 million, overlapping interest expense for 30 days of approximately $1.4 million and a $2.5 million non-cash charge for the write-off of unamortized deferred financing costs related to the 2023 Notes. These amounts are included in interest expense in the condensed consolidated statements of operations.
The 2030 Notes require semiannual interest payments on October 15 and April 15, commencing April 15, 2021. 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 senior secured revolving credit facility or guarantee Central's other debt.
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. Prior to October 15, 2023, the Company may redeem up to 40 % of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of