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 26, 2022
or
| TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the transition period from to
Commission File Number: 001-33268
Central Garden & Pet Company
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
(Address of principal executive offices)
(925 ) 948-4000
(Registrant’s telephone number, including area code)
_______________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ý Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ý Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ý | Accelerated filer | ☐ | ||||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||||||||
| Emerging growth company | ||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ý No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Common Stock Outstanding as of April 29, 2022 | |||||||||||
| Class A Common Stock Outstanding as of April 29, 2022 | |||||||||||
| Class B Stock Outstanding as of April 29, 2022 | |||||||||||
| 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 25, 2021, 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 continuing 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;
•the potential for future reductions in demand for product categories that benefited from the COVID-19 pandemic;
2
•the success of our Central to Home strategy;
•risks associated with our acquisition strategy, including our ability to successfully integrate acquisitions and the impact of purchase accounting on our financial results;
•inflation and other adverse macro-economic conditions;
•fluctuations in market prices for seeds and grains and other raw materials;
•fluctuations in energy prices, fuel and related petrochemical costs;
•our inability to pass through cost increases in a timely manner;
•supply chain delays and disruptions resulting in lost sales, reduced fill rates and service levels and delays in expanding capacity and automating processes;
•adverse weather conditions;
•seasonality and fluctuations in our operating results and cash flow;
•supply shortages in pet birds, small animals and fish;
•dependence on a small number of customers for a significant portion of our business;
•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 ability to recruit and retain new members of our management team to support our growing businesses and to hire and retain employees;
•our inability to protect our trademarks and other proprietary rights;
•litigation and product liability claims;
•regulatory issues;
•the impact of product recalls;
•potential costs and risks associated with actual or potential 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.
3
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 26, 2022 | March 27, 2021 | September 25, 2021 | |||||||||||||||
| 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.
4
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts, unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | March 26, 2022 | March 27, 2021 | ||||||||||||||||||||
| 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.
5
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands, unaudited)
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | March 26, 2022 | March 27, 2021 | ||||||||||||||||||||
| Income including noncontrolling interest | $ | $ | $ | $ | |||||||||||||||||||
| Other comprehensive income (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.
6
CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, unaudited)
| Six Months Ended | |||||||||||
| March 26, 2022 | March 27, 2021 | ||||||||||
| 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 (used) provided by financing activities | ( | ||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | ( | ||||||||||
| Net decrease in cash, cash equivalents and restricted cash | ( | ( | |||||||||
| Cash, cash equivalents and restricted cash at beginning of period | |||||||||||
| Cash, cash equivalents and restricted cash at end of period | $ | $ | |||||||||
| Supplemental information: | |||||||||||
| Cash paid for interest | $ | $ | |||||||||
| Cash paid for taxes | $ | $ | |||||||||
| New operating lease right of use assets | $ | $ | |||||||||
See notes to condensed consolidated financial statements.
7
CENTRAL GARDEN & PET COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three and Six Months Ended March 26, 2022
(Unaudited)
1. Basis of Presentation
The condensed consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the “Company” or “Central”) as of March 26, 2022 and March 27, 2021, the condensed consolidated statements of operations and the condensed consolidated statements of comprehensive income for the three and six months ended March 26, 2022 and March 27, 2021 and the condensed consolidated statements of cash flows for the six months ended March 26, 2022 and March 27, 2021 have been prepared by the Company, without audit. In the opinion of management, the interim financial statements include all normal recurring adjustments necessary for a fair statement of the results for the interim periods presented.
For the Company’s foreign businesses in the United Kingdom and Canada, the local currency is the functional currency. Assets and liabilities are translated using the exchange rate in effect at the balance sheet date. Income and expenses are translated at the average exchange rate for the period. Deferred taxes are not provided on translation gains and losses because the Company expects earnings of its foreign subsidiaries to be permanently reinvested. Transaction gains and losses are included in results of operations.
Due to the seasonal nature of the Company’s garden business, the results of operations for the three and six months ended March 26, 2022 are not necessarily indicative of the operating results that may be expected for the entire fiscal year. These interim financial statements should be read in conjunction with the annual audited financial statements, accounting policies and financial notes thereto, included in the Company’s 2021 Annual Report on Form 10-K, which has previously been filed with the Securities and Exchange Commission. The September 25, 2021 balance sheet presented herein was derived from the audited financial statements.
| March 26, 2022 | March 27, 2021 | September 25, 2021 | ||||||||||||||||||
| (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 requires consideration of a broader range of information to estimate expected credit losses over the lives of the Company’s trade accounts receivable.
The Company maintains an allowance for credit losses related to its trade accounts receivable for future expected credit losses for the inability of its customers to make required payments. The Company estimates the allowance based upon historical bad debts, current customer receivable balances and the customer’s financial condition. The allowance is adjusted to reflect changes in current and forecasted
8
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 (approximately one percent of consolidated net sales) comprising third-party logistics services, merchandising services and royalty income from sales-based licensing arrangements. Product and non-product revenue is recognized when performance obligations under the terms of the contracts with customers are satisfied. The Company recognizes product revenue when control over the finished goods transfers to its customers, which generally occurs upon shipment to, or receipt at, customers’ locations, as determined by the specific terms of the contract. These revenue arrangements generally have single performance obligations. Non-product revenue is recognized as the services are provided to the customer in the case of third-party logistics services and merchandising services, or as third-party licensee sales occur for royalty income. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to our customers, including applicable discounts, returns, allowances, trade promotion, unsaleable product, consumer coupon redemption and rebates. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.
Key sales terms are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, the Company does not capitalize contract inception costs. The Company generally does not have unbilled receivables at the end of a period. Deferred revenues are not material and primarily include advance payments for services that have yet to be rendered. The Company does not receive noncash consideration for the sale of goods. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis; therefore, the Company does not have any significant financing components.
Sales Incentives and Other Promotional Programs
The Company routinely offers sales incentives and discounts through various regional and national programs to 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 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.
9
Recent Accounting Pronouncements
Accounting Pronouncements Recently 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 and enacted 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 was effective for the Company as of September 26, 2021, and the adoption of this standard did not have a material impact on the Company's condensed consolidated financial statements.
2. Fair Value Measurements
ASC 820 establishes a single authoritative definition of fair value, a framework for measuring fair value and expands disclosure of fair value measurements. ASC 820 requires financial assets and liabilities to be categorized based on the inputs used to calculate their fair values as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company’s financial instruments include cash and equivalents, short term investments consisting of bank certificates of deposit, accounts receivable and payable, derivative instruments, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The 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 26, 2022:
| 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 27, 2021:
| Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Liability for contingent consideration (a) | $ | $ | $ | $ | ||||||||||||||||||||||
| Total liabilities | $ | $ | $ | $ | ||||||||||||||||||||||
10
The following table presents the Company's 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 25, 2021:
| 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 future performance-based contingent payments for Hydro-Organics Wholesale, Inc., acquired in October 2015. 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.
| Amount | |||||
| (in thousands) | |||||
| Balance September 25, 2021 | $ | ||||
| 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 26, 2022 | $ | ||||
| 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 | $ | ||||
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 26, 2022 and March 27, 2021, the Company was not required to measure any significant non-financial assets and liabilities at fair value.
Fair Value of Other Financial Instruments
In April 2021, the Company issued $400 million aggregate principal amount of 4.125 % senior notes due April 2031 (the "2031 Notes"). The estimated fair value of the Company's 2031 Notes as of March 26, 2022 and September 25, 2021 was $359.2 million and $408.5 million, respectively, compared to a carrying value of $394.5 million and $394.2 million, respectively.
In October 2020, the Company issued $500 million aggregate principal amount of 4.125 % senior notes due October 2030 (the "2030 Notes"). The estimated fair value of the Company's 2030 Notes as of March 26, 2022, March 27, 2021 and September 25, 2021 was $452.5 million, $506.3 million and $517.2 million, respectively, compared to a carrying value of $493.2 million, $492.4 million and $492.8 million, respectively.
11
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 26, 2022, March 27, 2021 and September 25, 2021 was $296.8 million, $317.1 million and $318.6 million, respectively, compared to a carrying value of $297.3 million, $296.8 million and $297.0 million, respectively.
The estimated fair value is based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.
3. Acquisitions and Divestitures
Acquisitions
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 purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $487 million, of which $392.9 million was allocated to identified intangible assets and approximately $142.4 million was included in goodwill in the Company's condensed consolidated balance sheet as of March 26, 2022. The financial results of Green Garden have been included in the results of operations within the Garden 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.
| Amounts Previously Recognized as of Acquisition Date (1) | Measurement Period Adjustments | Amounts Recognized as of Acquisition Date (as Adjusted) | |||||||||||||||
| (in thousands) | |||||||||||||||||
| Current assets, net of cash and cash equivalents acquired | $ | $ | $ | ||||||||||||||
| Fixed assets | |||||||||||||||||
| Goodwill | |||||||||||||||||
| Other intangible assets, net | |||||||||||||||||
| Other assets | ( | ||||||||||||||||
| Operating lease right-of-use assets | |||||||||||||||||
| Current liabilities | ( | ( | |||||||||||||||
| Long-term lease liabilities | ( | ( | |||||||||||||||
| Deferred income taxes and other long-term obligations | ( | ( | ( | ||||||||||||||
| Net assets acquired, less cash and cash equivalents | $ | $ | $ | ||||||||||||||
The impact to the condensed consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible asset amortization for Green Garden Products was immaterial.
D&D Commodities Limited
On June 30, 2021, the Company purchased D&D Commodities, Ltd. ("D&D"), a provider of high-quality, premium bird feed, for approximately $88 million in cash and the assumption of approximately $30 million of long-term debt. 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 $101 million of the purchase price remains unallocated. Deferred taxes associated with the intangible assets acquired will be finalized upon completion of the purchase accounting. The addition of D&D will expand Central's portfolio in the bird feed category and is expected to deepen the Company's relationship with major retailers. The financial results of D&D have been included in the results of operations within the Garden segment since the date of acquisition.
The Company includes the unallocated purchase price for acquisitions in other assets on its condensed consolidated balance sheet.
12
4. Inventories, net
| March 26, 2022 | March 27, 2021 | September 25, 2021 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Raw materials | $ | $ | $ | |||||||||||||||||
| Work in progress | ||||||||||||||||||||
| Finished goods | ||||||||||||||||||||
| Supplies | ||||||||||||||||||||
| Total inventories, net | $ | $ | $ | |||||||||||||||||
5. Goodwill
13
6. Other Intangible Assets
| Gross | Accumulated Amortization | Accumulated Impairment | Net Carrying Value | |||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| March 26, 2022 | ||||||||||||||||||||||||||
| Marketing-related intangible assets – amortizable | $ | $ | ( | $ | $ | |||||||||||||||||||||
| Marketing-related intangible assets – nonamortizable | — | ( | ||||||||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||||||||
| Customer-related intangible assets – amortizable | ( | ( | ||||||||||||||||||||||||
| Other acquired intangible assets – amortizable | ( | |||||||||||||||||||||||||
| Other acquired intangible assets – nonamortizable | — | ( | ||||||||||||||||||||||||
| Total | ( | ( | ||||||||||||||||||||||||
| Total other intangible assets, net | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
| Gross | Accumulated Amortization | Accumulated Impairment | Net Carrying Value | |||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||
| 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) | ||||||||||||||||||||||||||
| September 25, 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 | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||
14
Other acquired intangible assets include contract-based and technology-based intangible assets.
As part of its acquisition of Green Garden Products in the second quarter of fiscal 2021, the Company acquired approximately $147.6 million of marketing related intangible assets, $242.8 million of customer related intangible assets and $2.5 million of other 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 six months ended March 26, 2022, and accordingly, no impairment testing was performed on these assets.
The Company amortizes its acquired intangible assets with definite lives over periods ranging from two years to 25 years; over weighted average remaining lives of two years for marketing-related intangibles, 12 years for customer-related intangibles and six years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately and $7.8 million and $3.3 million for the three months ended March 26, 2022 and March 27, 2021, respectively, and $14.7 million and $6.7 million for the six months ended March 26, 2022 and March 27, 2021, respectively, and is classified within selling, general and administrative expenses in the condensed consolidated statements of operations. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $32 25 20 million per year thereafter.
.
7. Long-Term Debt
| March 26, 2022 | March 27, 2021 | September 25, 2021 | ||||||||||||||||||
| (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 | ||||||||||||||||||||
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 $400 million 4.125 % Senior Notes due 2031
In April 2021, the Company issued $400 million aggregate principal amount of 4.125 % senior notes due April 2031 (the "2031 Notes"). The Company used the net proceeds from the offering to repay all outstanding borrowings under its Amended Credit Facility, with the remainder to be used for general corporate purposes.
The Company incurred approximately $6 million of debt issuance costs in conjunction with this issuance, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2031 Notes.
15
The 2031 Notes require semi-annual interest payments on April 30 and October 30. The 2031 Notes are unconditionally guaranteed on a senior basis by each of the Company's existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central's Amended Credit Facility. The 2031 Notes were issued in a private placement under Rule 144A and will not be registered under the Securities Act of 1933.
The Company may redeem some or all of the 2031 Notes at any time, at its option, prior to April 30, 2026 at the principal amount plus a "make whole" premium. At any time prior to April 30, 2024, the Company may also redeem, at its option, up to 40 % of the notes with the proceeds of certain equity offerings at a redemption price of 104.125 % of the principal amount of the notes. The Company may redeem some or all of the 2031 Notes at the Company’s option, at any time on or after April 30, 2026 for 102.063 %, on or after April 30, 2027 for 101.375 %, on or after April 30, 2028 for 100.688 % and on or after April 30, 2029 for 100.0 %, plus accrued and unpaid interest.
The holders of the 2031 Notes have the right to require the Company to repurchase all or a portion of the 2031 Notes at a purchase price equal to 101 % of the principal amount of the notes repurchased, plus accrued and unpaid interest, upon the occurrence of specific kinds of changes of control.
The 2031 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all covenants as of March 26, 2022.
Issuance of $500 million 4.125 % Senior Notes due 2030
In October 2020, the Company issued $500 million aggregate principal amount of 4.125 % senior notes due October 2030 (the "2030 Notes"). In November 2020, the Company used a portion of the net proceeds to redeem all of its outstanding 6.125 % senior notes due November 2023 (the "2023 Notes") at a redemption price of 101.531 % plus accrued and unpaid interest, and to pay related fees and expenses, with the remainder 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.
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. 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 104.125 % of the principal amount of the notes. The Company may redeem some or all of the 2030 Notes, at its option, in whole or in part, at any time on or after October 15, 2025 for 102.063 %, on or after October 15, 2026 for 101.375 %, on or after October 15, 2027 for 100.688 % and on or after October 15, 2028 for 100.0 %, plus accrued and unpaid interest.
The holders of the 2030 Notes have the right to require the Company to repurchase all or a portion of the 2030 Notes at a purchase price equal to 101.0 % of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2030 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all covenants as of March 26, 2022.
$300 million 5.125 % Senior Notes due 2028
In December 2017, the Company issued $300 million aggregate principal amount of 5.125 % senior notes due February 2028 (the "2028 Notes"). The Company used the net proceeds from the offering to finance acquisitions and for general corporate purposes.
The Company incurred approximately $4.8 million of debt issuance costs in conjunction with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2028 Notes.
16
The 2028 Notes require semiannual interest payments on February 1 and August 1. The 2028 Notes are unconditionally guaranteed on a senior basis by the Company's existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central's senior secured revolving credit facility, or which guarantee Central's other debt.
The Company may redeem some or all of the 2028 Notes at any time, at its option, prior to January 1, 2023 at the principal amount plus a “make whole” premium. The Company may redeem some or all of the 2028 Notes, at its option, at any time on or after January 1, 2023 for 102.563 %, on or after January 1, 2024 for 101.708 %, on or after January 1, 2025 for 100.854 %, and on or after January 1, 2026 for 100.0 %, plus accrued and unpaid interest.
The holders of the 2028 Notes have the right to require the Company to repurchase all or a portion of the 2028 Notes at a purchase price equal to 101.0 % of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2028 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. The Company was in compliance with all covenants as of March 26, 2022.
Asset-Based Loan Facility Amendment
On December 16, 2021, the Company entered into a Third Amended and Restated Credit Agreement (“Amended Credit Agreement”). The Amended Credit Agreement amended and restated the previous credit agreement dated September 27, 2019 (the "Predecessor Credit Agreement"), and provides for a $750 million principal amount senior secured asset-based revolving credit facility, with up to an additional $400 million principal amount available with the consent of the Lenders, as defined, if the Company exercises the uncommitted accordion feature set forth therein (collectively, the “Amended Credit Facility”). The Amended Credit Facility matures on December 16, 2026. The Company may borrow, repay and reborrow amounts under the Amended Credit Facility until its maturity date, at which time all amounts outstanding under the Amended Credit Facility must be repaid in full.
The Amended Credit Facility is subject to a borrowing base that is calculated using a formula based upon eligible receivables and inventory, and at the Company's election, eligible real property, minus certain reserves. The Company did not draw down any commitments under the Amended Credit Facility upon closing. Proceeds of the Amended Credit Facility will be used for general corporate purposes. Net availability under the Amended Credit Facility was approximately $652 million as of March 26, 2022. The Amended Credit Facility includes a $50 million sublimit for the issuance of standby letters of credit and a $75 million sublimit for short-notice borrowings. As of March 26, 2022, there were no borrowings outstanding and no letters of credit outstanding under the Amended Credit Facility. There were other letters of credit of $1.3 million outstanding as of March 26, 2022.
Borrowings under the Amended Credit Facility will bear interest at an index based on LIBOR (which will not be less than 0.00 %) or, at the option of the Company, the Base Rate, plus, in either case, an applicable margin based on the Company's usage under the credit facility. Base Rate is defined as the highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50 %, (c) one-month LIBOR plus 1.00 % and (d) 0.00 %. The applicable margin for LIBOR-based borrowings fluctuates between 1.00 %-1.50 %, and was 1.00 % as of March 26, 2022, and such applicable margin for Base Rate borrowings fluctuates between 0.00 %-0.50 %, and was 0 % as of March 26, 2022. An unused line fee shall be payable quarterly in respect of the total amount of the unutilized Lenders’ commitments and short-notice borrowings under the Amended Credit Facility. Letter of credit fees at the applicable margin on the average undrawn and unreimbursed amount of letters of credit shall be payable quarterly and a facing fee of 0.125 % shall be payable quarterly for the stated amount of each letter of credit. The Company is also required to pay certain fees to the administrative agent under the Amended Credit Facility. The Amended Credit Facility provides for the transition from LIBOR to Secured Overnight Financing Rate ("SOFR") and does not require an amendment in connection with such transition. As of March 26, 2022, the applicable interest rate related to Base Rate borrowings was 3.3 %, and the applicable interest rate related to one-month LIBOR-based borrowings was 1.4 %.
The Company incurred approximately $2.4 million of debt issuance costs in conjunction with this transaction, which included lender fees and legal expenses. The debt issuance costs are being amortized over the term of the Amended Credit Facility.
The Amended Credit Facility continues to contain customary covenants, including financial covenants which require the Company to maintain a minimum fixed charge coverage ratio of 1 :1 upon triggered quarterly testing (e.g. when availability falls below certain thresholds established in the agreement), reporting requirements and events of default. The Amended Credit Facility is secured by substantially all assets of the borrowing parties, including (i) pledges of 100 % of the stock or other equity interest of each domestic subsidiary that is directly owned by such entity and (ii) 65 % of the stock or other equity interest of each foreign subsidiary that is directly owned by such entity, in each case subject to customary exceptions. The Company was in compliance with all financial covenants under the Amended Credit Facility as of March 26, 2022.
17
8. Supplemental Equity Information
| Controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Class A Common Stock | Class B Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | Noncontrolling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance September 25, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of share-based awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted share activity, including net share settlement | — | — | — | ( | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, including net share settlement of stock options | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of stock | — | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to Noncontrolling interest | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 25, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of share-based awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted share activity, including net share settlement | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Repurchase of stock | — | ( | — | ( | ( | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, including net share settlement of stock options | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to Noncontrolling interest | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 26, 2022 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
18
| Controlling Interest | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Class A Common Stock | Class B Stock | Additional Paid In Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total | Noncontrolling Interest | Total | ||||||||||||||||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Balance September 26, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of share-based awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted share activity, including net share settlement | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, including net share settlement of stock options | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to Noncontrolling interest | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance December 26, 2020 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
| Comprehensive income | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Amortization of share-based awards | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Restricted share activity, including net share settlement | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock, including net share settlement of stock options | — | — | ( | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||
| Distribution to Noncontrolling interest | — | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||
| Balance March 27, 2021 | $ | $ | $ | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||||||||
9. Stock-Based Compensation
19
10. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted per share computations for income from continuing operations.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||
| March 26, 2022 | March 26, 2022 | |||||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||
| Basic EPS: | ||||||||||||||||||||||||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||||||||||||||
| Options to purchase common stock | ( | ( | ||||||||||||||||||||||||||||||||||||
| Restricted shares | ( | ( | ||||||||||||||||||||||||||||||||||||
| Diluted EPS: | ||||||||||||||||||||||||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||||||
| March 27, 2021 | March 27, 2021 | |||||||||||||||||||||||||||||||||||||
| Income | Shares | Per Share | Income | Shares | Per Share | |||||||||||||||||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||||||||||||||||||||
| Basic EPS: | ||||||||||||||||||||||||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||||||||||||||
| Options to purchase common stock | ( | ( | ||||||||||||||||||||||||||||||||||||
| Restricted shares | ( | ( | ||||||||||||||||||||||||||||||||||||
| Diluted EPS: | ||||||||||||||||||||||||||||||||||||||
| Net income available to common shareholders | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||
Options to purchase 2.4 million shares of common stock at prices ranging from $13.82 to $51.37 per share were outstanding at March 26, 2022, and options to purchase 2.9 million shares of common stock at prices ranging from $13.82 to $44.02 per share were outstanding at March 27, 2021.
For the three months ended March 26, 2022 and March 27, 2021, approximately 0.4 million and 0.2 million options outstanding, respectively, were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and therefore, the effect of including these options would be antidilutive.
For the six months ended March 26, 2022 and March 27, 2021, 21 thousand and 0.1 million options outstanding were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and therefore, the effect of including these options would be antidilutive.
20
11. Segment Information
Management has determined that the Company has two operating segments, which are also reportable segments based on the level at which the Chief Operating Decision Maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are the Pet segment and the Garden segment and are presented in the table below.
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | March 26, 2022 | March 27, 2021 | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net sales: | ||||||||||||||||||||||||||
| Pet segment | $ | $ | $ | $ | ||||||||||||||||||||||
| Garden segment | $ | |||||||||||||||||||||||||
| Total net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Operating Income | ||||||||||||||||||||||||||
| Pet segment | ||||||||||||||||||||||||||
| Garden segment | ||||||||||||||||||||||||||
| Corporate | ( | ( | ( | ( | ||||||||||||||||||||||
| Total operating income | ||||||||||||||||||||||||||
| Interest expense - net | ( | ( | ( | ( | ||||||||||||||||||||||
| Other income (expense) | ( | ( | ||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||||
| Income including noncontrolling interest | ||||||||||||||||||||||||||
| Net income attributable to noncontrolling interest | ||||||||||||||||||||||||||
| Net income attributable to Central Garden & Pet Company | $ | $ | $ | $ | ||||||||||||||||||||||
| Depreciation and amortization: | ||||||||||||||||||||||||||
| Pet segment | $ | $ | $ | $ | ||||||||||||||||||||||
| Garden segment | ||||||||||||||||||||||||||
| Corporate | ||||||||||||||||||||||||||
| Total depreciation and amortization | $ | $ | $ | $ | ||||||||||||||||||||||
| March 26, 2022 | March 27, 2021 | September 25, 2021 | ||||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Assets: | ||||||||||||||||||||
| Pet segment | $ | $ | $ | |||||||||||||||||
| Garden segment | ||||||||||||||||||||
| Corporate | ||||||||||||||||||||
| Total assets | $ | $ | $ | |||||||||||||||||
| Goodwill (included in corporate assets above): | ||||||||||||||||||||
| Pet segment | $ | $ | $ | |||||||||||||||||
| Garden segment | ||||||||||||||||||||
| Total goodwill | $ | $ | $ | |||||||||||||||||
21
The tables below presents the Company's disaggregated revenues by segment:
| Three Months Ended March 26, 2022 | Six Months Ended March 26, 2022 | |||||||||||||||||||||||||||||||||||||
| Pet Segment | Garden Segment | Total | Pet Segment | Garden Segment | Total | |||||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||
| Other pet products | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Dog and cat products | ||||||||||||||||||||||||||||||||||||||
| Other manufacturers' products | ||||||||||||||||||||||||||||||||||||||
| Wild bird products | ||||||||||||||||||||||||||||||||||||||
| Other garden supplies | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | 954.3 | $ | $ | $ | 1,615.7 | ||||||||||||||||||||||||||||||
| Three Months Ended March 27, 2021 | Six Months Ended March 27, 2021 | |||||||||||||||||||||||||||||||||||||
| Pet Segment | Garden Segment | Total | Pet Segment | Garden Segment | Total | |||||||||||||||||||||||||||||||||
| (in millions) | (in millions) | |||||||||||||||||||||||||||||||||||||
| Other pet products | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
| Dog and cat products | ||||||||||||||||||||||||||||||||||||||
| Other manufacturers' products | ||||||||||||||||||||||||||||||||||||||
| Wild bird products | ||||||||||||||||||||||||||||||||||||||
| Other garden supplies | ||||||||||||||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||
22
12. Contingencies
The Company may from time to time become involved in legal proceedings in the ordinary course of business. Currently, the Company is not a party to any legal proceedings that management believes are likely to have a material effect on the Company’s financial position or results of operations with the potential exception of the proceeding below.
In 2012, Nite Glow Industries, Inc and its owner, Marni Markell, (“Nite Glow”) filed suit in the U.S. District Court for New Jersey against the Company alleging that the applicator developed and used by the Company for certain of its branded topical flea and tick products infringes a patent held by Nite Glow and asserted related claims for breach of contract and misappropriation of confidential information based on the terms of a Non-Disclosure Agreement. On June 27, 2018, a jury returned a verdict in favor of Nite Glow on each of the three claims and awarded damages of approximately $12.6 million. The court ruled on post-trial motions in early June 2020, reducing the judgment amount to $12.4 million and denying the plaintiff's request for attorneys' fees. The Company filed its notice of appeal and the plaintiffs cross-appealed. On July 14, 2021, the Federal Circuit Court of Appeals issued its decision on the appeal. The Federal Circuit concluded that the Company did not infringe plaintiff's patent and determined that the breach of contract claim raised no non-duplicative damages and should be dismissed. The court affirmed the jury's liability verdict on the misappropriation of confidential information claim but ordered a new trial on damages on that single claim limited to the "head start" benefit, if any, generated by the confidential information. The Company intends to vigorously pursue its defenses in the future proceedings and believes that it will prevail on the merits as to the head start damages issue. While the Company believes that the ultimate resolution of this matter will not have a material impact on the Company's consolidated financial statements, the outcome of litigation is inherently uncertain and the final resolution of this matter may result in expense to the Company in excess of management's expectations.
During fiscal 2013, the Company received notices from several states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking unclaimed property subject to escheat laws, the states may seek interest, penalties and other relief. The examinations are continuing; as a result, the ultimate resolution and impact on the Company’s consolidated financial statements is uncertain.
The Company has experienced, and may in the future experience, issues with products that may lead to product liability, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. The Company has not experienced recent issues with products, the resolution of which, management believes would have a material effect on the Company’s financial position or results of operations.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Our Company
Central Garden & Pet Company (“Central”) is a market leader in the garden and pet industries in the United States. For over 40 years, Central has proudly nurtured happy and healthy homes by bringing innovative and trusted solutions to consumers and its customers. We manage our operations through two reportable segments: Pet and Garden.
Our pet segment includes dog and cat supplies such as dog treats and chews, toys, pet beds and grooming products, waste management and training pads, pet containment, supplies for aquatics, small animals, reptiles and pet birds including toys, cages and habitats, bedding, food and supplements, products for equine and livestock, animal and household health and insect control products, live fish and small animals as well as outdoor cushions. These products are sold under brands such as Aqueon®, Cadet®, Comfort Zone®, Farnam®, Four Paws®, K&H Pet Products® ("K&H"), Kaytee®, Nylabone® and Zilla®.
Our garden segment includes lawn and garden consumables such as grass, vegetable, flower and herb seed, wild bird feed, bird houses and other birding accessories, weed, grass, and other herbicides, insecticide and pesticide products, fertilizers and live plants. These products are sold under brands such as Amdro®, Ferry-Morse®, Pennington® and Sevin®.
In fiscal 2021, our consolidated net sales were $3.3 billion, of which our Pet segment, or Pet, accounted for approximately $1.9 billion and our Garden segment, or Garden, accounted for approximately $1.4 billion. In fiscal 2021, our operating income was $254 million consisting of income from our Pet segment of $208 million, income from our Garden segment of $139 million and corporate expenses of $93 million.
We were incorporated in Delaware in May 1992 as the successor to a California corporation that was formed in 1955. Our executive offices are located at 1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597, and our telephone number is (925) 948-4000. Our website is www.central.com. The information on our website is not incorporated by reference in this quarterly report.
23
Recent Developments
Fiscal 2022 Second Quarter Financial Performance:
•Net sales increased $19.1 million, or 2.0%, from the prior year quarter to $954.4 million. Pet segment sales increased $5.7 million, and Garden segment sales increased $13.4 million.
•Organic net sales declined 3.5%, comprised of an 8.7% decrease in our Garden segment partially offset by a 1.2% increase in our Pet segment.
•Gross profit increased $14.4 million from the prior year quarter, and gross margin increased 100 basis points to 30.1%.
•Selling, general and administrative expense increased $12.2 million from the prior year quarter to $179.9 million and as a percentage of net sales increased 100 basis points to 18.9%.
•Operating income increased $2.2 million, or 2.1%, from the prior year quarter, to $106.8 million.
•Net income in the second quarter of fiscal 2022 was $69.7 million, or $1.27 per diluted share, compared to net income of $73.0 million, or $1.32 per diluted share, in the second quarter of fiscal 2021.
COVID-19 Impact
COVID-19 has led to adverse impacts on human health, the global economy and society at large. From the beginning, our priority has been the safety of our employees, customers and consumers.
Central has been impacted by COVID-19 in a number of ways, including increased demand and sales. The increased demand for our products continues to challenge our supply chain and our ability to procure and manufacture enough product to meet the continued high levels of demand. At some of our facilities, we have experienced reduced productivity and increased employee absences, which we expect to continue during the balance of the pandemic. Our manufacturing facilities and distribution centers are currently open and operational. We have incurred and will continue to incur additional costs including personal protective equipment and sanitation costs. We have hosted mobile vaccination clinics at some of our larger manufacturing and distribution sites, in order to make vaccines available to our employees.
The pandemic and related increase in demand have created operational challenges, which have impacted our service and fill rates. While they have improved in fiscal 2022, they have yet to return to our historical rates. Our supply chain has experienced disruptions and delays which have resulted in increased operational and logistics costs. We may also experience additional disruptions in our supply chain as the pandemic continues, although we cannot reasonably estimate the potential impact or timing of those events, and we may not be able to mitigate such impact. We continue to face supply constraints for commodities, materials and freight and the limited availability of labor. Inflationary pressures stemming in part from the COVID-19 operating environment are continuing to result in significant increases in costs for commodities, materials, labor and freight.
We believe we have sufficient liquidity to satisfy our cash needs with our cash and revolving credit facility as we manage through the current economic and health environment.
While vaccination efforts and the easing of government restrictions have signaled an improving health environment, the timing of a full recovery remains uncertain. Forecasting and planning remain challenging in the current environment and will continue to be challenging as the pandemic eases in the future. In the current uncertain environment, our employees, customers and consumers will continue to be our priority as we manage our business to deliver long-term growth.
Results of Operations
Three Months Ended March 26, 2022
Compared with Three Months Ended March 27, 2021
Net Sales
Net sales for the three months ended March 26, 2022 increased $19.1 million, or 2.0%, to $954.4 million from $935.3 million for the three months ended March 27, 2021. Organic net sales, which exclude the impact of acquisitions and divestitures in the last 12 months, decreased $32.7 million, or 3.5%, as compared to the fiscal 2021 quarter. Our branded product sales increased $29.2 million, and sales of other manufacturers’ products decreased $10.1 million.
24
Pet net sales increased $5.7 million, or 1.2%, to $497.7 million for the three months ended March 26, 2022 from $492.0 million for the three months ended March 27, 2021. This organic sales increase was due primarily to pricing actions taken to offset the current inflationary operating environment. Increases in net sales in our dog and cat treats and toy business and our outdoor cushion business were partially offset by lower sales in our dog bed business. The increase in sales in our dog and cat treats and toy business was due to pricing actions taken to offset inflationary pressures; and the increase in our outdoor cushion business was due primarily to a volume shift from our first quarter to our second quarter. The decrease in our dog bed business was due to a purposeful SKU rationalization. Pet branded product sales increased $6.3 million while sales of other manufacturers' products declined $0.6 million.
Garden net sales increased $13.4 million, or 3.0%, to $456.7 million for the three months ended March 26, 2022 from $443.3 million for the three months ended March 27, 2021. The sales increase was due to the addition of our fiscal 2021 acquisitions. Organic sales decreased 8.7% due primarily to unfavorable weather resulting in a delayed start to the garden season which more than offset increases from pricing actions taken to offset rising costs. As such, most of our garden businesses had decreased sales in the quarter with the exception of wild bird feed resulting from price increases taken to offset large commodity inflation. Garden branded sales increased $22.9 million due to our fiscal 2021 acquisitions while sales of other manufacturers' products decreased $9.5 million.
Gross Profit
Gross profit for the three months ended March 26, 2022 increased $14.4 million, or 5.3%, to $286.8 million from $272.4 million for the three months ended March 27, 2021. Gross margin increased 100 basis points to 30.1% for the three months ended March 26, 2022 from 29.1% for the three months ended March 27, 2021. Both operating segments contributed to the increase in gross profit and gross margin. The increases in gross profit and gross margin were driven by pricing actions and the impact of our fiscal 2021 acquisitions partially offset by significant cost inflation in commodities, labor, and freight. Overall, our gross margins continue to be under pressure from the current inflationary environment and we continue to experience cost increases, primarily in commodities, labor and freight. We intend to continue to seek price increases to help offset the rising costs but do not anticipate that we will be able to fully offset the cost pressures in fiscal 2022.
The improvement in the Pet segment was due to price increases and a more favorable product mix which were only partially offset by cost inflation in commodities, labor and freight. The improvement in our Garden segment was due primarily to price increases that helped offset lower sales volumes due to the late start to the garden season and to the impact of our fiscal 2021 acquisitions.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $12.2 million, or 7.2%, to $179.9 million for the three months ended March 26, 2022. As a percentage of net sales, selling, general and administrative expenses increased to 18.9% for the three months ended March 26, 2022, compared to 17.9% in the comparable prior year quarter. Both operating segments and corporate had increased selling, general and administrative expenses. Overall, the increases were due primarily to the incremental expense from recent acquisitions, wage and freight inflation and increased marketing investment for brand development and innovation.
Selling and delivery expense increased $4.3 million to $87.3 million for the three months ended March 26, 2022. The increase was due primarily to our recent acquisitions, wage and freight inflation and increased marketing investment for brand development and innovation.
Warehouse and administrative expense increased $7.9 million, or 9.3%, to $92.6 million for the three months ended March 26, 2022. The increase was due primarily to the warehouse and administrative costs associated with our four fiscal 2021 acquisitions. Additionally, both operating segments experienced increased labor and payroll-related expense. Corporate expenses increased $0.9 million due primarily to increased salary and wages from headcount additions and equity compensation costs. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resources, and information technology functions.
Operating Income
Operating income increased $2.2 million, or 2.1%, to $106.8 million for the three months ended March 26, 2022. The increase in operating income was due to increased sales and gross profit partially offset by higher selling, general and administrative expense. Our operating margin remained flat at 11.2% as compared to the prior year quarter, as a 100 basis point increase in gross margin was offset by a 100 basis point increase in selling, general and administrative expense as a percentage of net sales.
Pet operating income decreased $1.4 million, or 2.3%, to $60.6 million for the three months ended March 26, 2022. Pet operating income decreased due to higher selling, general and administrative expense which more than offset the favorable impact of increased sales and gross profit. Pet operating margin decreased 40 basis points to 12.2% due to higher input costs in the current inflationary environment and increased marketing and brand building spend.
Garden operating income increased $4.5 million to $70.5 million for the three months ended March 26, 2022 from $66.0 million for the three months ended March 27, 2021. Garden operating income increased due to increased sales and gross profit partially offset by higher selling, general and administrative expense. Garden operating margin increased 50 basis points to 15.4% due primarily to increased prices and the favorable impact of our recent acquisitions.
25
Corporate expense increased $0.9 million, or 3.8%, to $24.3 million for the three months ended March 26, 2022 from $23.4 million for the three months ended March 27, 2021. Corporate expense increased due primarily to increased salaries and wages from headcount additions and equity compensation costs.
Net Interest Expense
Net interest expense for the three months ended March 26, 2022 increased $4.6 million, or 44.8%, to $14.7 million due primarily to a higher debt balance outstanding during the quarter. In April 2021, we issued $400 million aggregate principal amount of 4.125% senior notes due April 2031. Debt outstanding on March 26, 2022 was $1,185.8 million compared to $979.0 million at March 27, 2021.
Other Income (Expense)
Other income (expense) is comprised of income or losses from investments accounted for under the equity method of accounting and foreign currency exchange gains and losses. Other income (expense) was $0.4 million of expense for the quarter ended March 26, 2022 compared to income of $0.7 million for the quarter ended March 27, 2021, due primarily to foreign currency losses in the current year quarter as compared to gains in the prior year quarter.
Income Taxes
Our effective income tax rate was 23.4% for the quarter ended March 26, 2022 and 22.7% for the quarter ended March 27, 2021. The increase in our effective income tax rate was due primarily to increased foreign earnings in higher tax rate jurisdictions.
Net Income and Earnings Per Share
Our net income in the second quarter of fiscal 2022 was $69.7 million, or $1.27 per diluted share, compared to a net income of $73.0 million, or $1.32 per diluted share, in the second quarter of fiscal 2021.
Six Months Ended March 26, 2022
Compared with Six Months Ended March 27, 2021
Net Sales
Net sales for the six months ended March 26, 2022 increased $88.3 million, or 5.8%, to $1,615.8 million from $1,527.5 million for the six months ended March 27, 2021. Organic net sales declined $29.6 million, or 1.9%, as compared to the prior year six-month period. Our branded product sales increased $87.2 million, and sales of other manufacturers’ products increased $1.1 million.
Pet net sales increased $5.3 million, or 0.6%, to $933.7 million for the six months ended March 26, 2022 from $928.4 million for the six months ended March 27, 2021. Net sales in the prior year period include sales from the Breeder’s Choice business unit, which we sold in December 2020. Organic net sales increased $9.2 million, or 1.0%, as compared to the prior year six-month period. The organic sales improvement was driven by price and volume based sales increases in our dog and cat treats and toy business, animal health business and outdoor cushion business, partially offset by a volume based sales decrease in our dog bed business due primarily to SKU rationalization. Pet branded sales increased $0.1 million, and sales of other manufacturer's products increased $5.2 million.
Garden net sales increased $83.0 million, or 13.9%, to $682.1 million for the six months ended March 26, 2022 from $599.1 million for the six months ended March 27, 2021. Organic sales decreased $38.8 million, or 6.5%, while sales from recent acquisitions contributed $121.8 million. The organic sales decrease was due primarily to unfavorable weather causing a delayed start to the garden season. As such, most of our garden businesses had decreased sales with the exception of wild bird feed which benefited from price increases taken to offset large commodity inflation. Garden branded sales increased $87.1 million, while sales of other manufacturers’ products decreased $4.1 million.
Gross Profit
Gross profit for the six months ended March 26, 2022 increased $47.2 million, or 10.8%, to $485.0 million from $437.8 million for the six months ended March 27, 2021. Gross margin improved 130 basis points to 30.0% for the six months ended March 26, 2022 from 28.7% for the six months ended March 27, 2021. Both Pet and Garden contributed to the increase in gross profit and gross margin. Both segments are being impacted by the rapidly increasing cost environment. We have implemented and intend to continue to seek price increases to help offset the rising costs but do not anticipate we will be able to fully offset the cost pressures in 2022. Although our gross margin increased in the current six-month period, as compared to the prior year six month period, our operating margin declined during the current six-month period.
26
In the Pet segment, the improved gross profit and margin were due primarily to price increases taken to combat inflation and a favorable product mix partially offset by increased commodity, freight and labor costs.
In the Garden segment, the improved gross profit and margin were due primarily to price increases and the impact of our fiscal 2021 acquisitions, which included the impact of purchase accounting in fiscal 2021 and the impact on our product mix in the current year, partially offset by increased commodity, freight and labor costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $45.7 million, or 14.9%, to $351.9 million for the six months ended March 26, 2022 from $306.2 million for the six months ended March 27, 2021. As a percentage of net sales, selling, general and administrative expenses increased to 21.8% for the six months ended March 26, 2022 from 20.0% for the comparable prior year six-month period.
Selling and delivery expense increased $16.9 million, or 11.3%, to $166.4 million for the six months ended March 26, 2022 from $149.5 million for the six months ended March 27, 2021. The increase was due primarily to the addition of our fiscal 2021 acquisitions, marketing investment for brand development and innovation.
Warehouse and administrative expense increased $28.8 million, or 18.4%, to $185.5 million for the six months ended March 26, 2022 from $156.7 million for the six months ended March 27, 2021. The increased expense was driven by the addition of our four fiscal 2021 acquisitions in the Garden segment. Additionally, both operating segments experienced increased labor, delivery, fuel and rent rates due to the current inflationary environment. Corporate expenses increased $4.9 million due primarily to increased payroll related costs, non-cash equity compensation and medical insurance expense. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resources, and information technology functions.
Operating Income
Operating income increased $1.4 million to $133.1 million for the six months ended March 26, 2022 from $131.7 million for the six months ended March 27, 2021. Our operating margin decreased to 8.2% for the six months ended March 26, 2022 from 8.6% for the six months ended March 27, 2021. Increased sales and a 130 basis point improvement in gross margin was more than offset by a 180 basis point increase in selling, general and administrative expense.
Pet operating income increased $0.3 million, or 0.3%, to $105.9 million for the six months ended March 26, 2022 from $105.6 million for the six months ended March 27, 2021. Pet operating income increased due to increased sales and gross profit partially offset by higher selling, general and administrative expense. Pet operating margin declined 10 basis points as an improved gross margin was more than offset by higher selling, general and administrative expense as a percentage of net sales.
Garden operating income increased $6.0 million to $76.6 million for the six months ended March 26, 2022 from $70.6 million for the six months ended March 27, 2021. Garden operating income increased due to increased sales and gross profit partially offset by higher selling, general and administrative expense. Garden operating margin declined 60 basis points to 11.2% due to higher selling, general and administrative expense as a percentage of net sales which more than offset the favorable impact of increased sales and a higher gross margin.
Corporate operating expense increased $4.9 million to $49.4 million in the current nine-month period from $44.5 million in the comparable fiscal 2021 period due primarily to increased payroll related costs, non-cash equity compensation and medical insurance expense.
Net Interest Expense
Net interest expense for the six months ended March 26, 2022 decreased $1.8 million, or 5.9%, to $29.1 million from $30.9 million for the six months ended March 27, 2021. In the prior year six-month period, we issued $500 million aggregate principal amount of 4.125% senior notes due October 2030 and used the proceeds to redeem all of our outstanding aggregate principal amount 6.125% senior notes due 2023 with the remainder available for general corporate purposes. As a result of our redemption of the 2023 Notes, we recognized incremental interest expense in the prior year six-month period of approximately $10.0 million. Partially offsetting the reduction from the prior year’s incremental interest expense was increased interest expense in the current year quarter related to our issuance in April 2021 of $400 million aggregate principal amount of 4.125% senior notes due April 2031.
Debt outstanding on March 26, 2022 was $1,185.8 million compared to $979.0 million as of March 27, 2021. Our average borrowing rate for the six months ended March 26, 2022 decreased to 4.5% from 4.6% for the six months ended March 27, 2021.
27
Other Income (Expense)
Other income (expense) was an expense of $0.6 million for the six-month period ended March 26, 2022 compared to income of $1.5 million for the six-month period ended March 27, 2021, due primarily to foreign currency losses in the current six-month period as compared to gains in the prior six-month period.
Income Taxes
Our effective income tax rate was 23.1% for the six-month period ended March 26, 2022 compared to 22.5% for the six-month period ended March 27, 2021. The increase in our effective income tax rate was due primarily to increased foreign earnings in higher tax rate jurisdictions.
Net Income and Earnings Per Share
Our net income for the six months ended March 26, 2022 was $78.7 million, or $1.44 per diluted share, compared to $78.6 million, or $1.43 per diluted share, for the six months ended March 27, 2021.
Use of Non-GAAP Financial Measures
We report our financial results in accordance with accounting principles generally accepted in the United States (GAAP). However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including non-GAAP net income and diluted net income per share, adjusted EBITDA and organic sales. Management believes these non-GAAP financial measures that exclude the impact of specific items (described below) may be useful to investors in their assessment of our ongoing operating performance and provide additional meaningful comparisons between current results and results in prior operating periods.
Adjusted EBITDA is defined by us as income before income tax, net other expense, net interest expense, depreciation and amortization and stock-based compensation (or operating income plus depreciation and amortization and stock-based compensation expense). We present adjusted EBITDA because we believe that adjusted EBITDA is a useful supplemental measure in evaluating the cash flows and performance of our business and provides greater transparency into our results of operations. Adjusted EBITDA is used by our management to perform such evaluation. Adjusted EBITDA should not be considered in isolation or as a substitute for cash flow from operations, income from operations or other income statement measures prepared in accordance with GAAP. We believe that adjusted EBITDA is frequently used by investors, securities analysts and other interested parties in their evaluation of companies, many of which present adjusted EBITDA when reporting their results. Other companies may calculate adjusted EBITDA differently and it may not be comparable.
We have also provided organic net sales, a non-GAAP measure that excludes the impact of businesses purchased or exited in the prior 12 months, because we believe it permits investors to better understand the performance of our historical business without the impact of recent acquisitions or dispositions.
The reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below. We believe that the non-GAAP financial measures provide useful information to investors and other users of our financial statements by allowing for greater transparency in the review of our financial and operating performance. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating our performance, and we believe these measures similarly may be useful to investors in evaluating our financial and operating performance and the trends in our business from management's point of view. While our management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our GAAP financial results and should be read in conjunction with those GAAP results.
Non-GAAP financial measures reflect adjustments based on the following items:
•Incremental expenses from note redemption and issuance: we have excluded the impact of the incremental expenses incurred from the note redemption and issuance as they represent an infrequent transaction that occurs in limited circumstances that impacts the comparability between operating periods. We believe the adjustment of these expenses supplements the GAAP information with a measure that may be used to assess the sustainability of our operating performance.
•Loss on sale of business: we have excluded the impact of the loss on the sale of a business as it represents an infrequent transaction that occurs in limited circumstances that impacts the comparability between operating periods. We believe the adjustment of this loss supplements the GAAP information with a measure that may be used to assess the sustainability of our operating performance.
28
From time to time in the future, there may be other items that we may exclude if we believe that doing so is consistent with the goal of providing useful information to investors and management.
The non-GAAP adjustments reflect the following:
(1)During the first quarter of fiscal 2021, we issued $500 million aggregate principal amount of 4.125% senior notes due October 2030. We used a portion of the proceeds to redeem all of our outstanding 6.125% senior notes due 2023. As a result of our redemption of the 2023 Notes, we incurred incremental expenses of approximately $10.0 million, comprised of a call premium payment of $6.1 million, overlapping interest expense of approximately $1.4 million and a $2.5 million non-cash charge for the write-off of unamortized financing costs. These amounts are included in Interest expense in the condensed consolidated statements of operations.
(2)During the first quarter of fiscal 2021, we recognized a loss of $2.6 million, included in selling, general and administrative expense in the consolidated statement of operations, from the sale of our Breeder’s Choice business unit after concluding it was not a strategic business for our Pet segment.
| GAAP to Non-GAAP Reconciliation | ||||||||||||||||||||||||||
| For the Three Months Ended | For the Six Months Ended | |||||||||||||||||||||||||
| Net Income and Diluted Net Income Per Share Reconciliation | March 26, 2022 | March 27, 2021 | March 26, 2022 | March 27, 2021 | ||||||||||||||||||||||
| (in thousands, except per share amounts) | ||||||||||||||||||||||||||
| GAAP net income attributable to Central Garden & Pet Company | $ | 69,713 | $ | 72,954 | $ | 78,722 | $ | 78,567 | ||||||||||||||||||
| Incremental expenses from note redemption and issuance | (1) | — | — | — | 9,952 | |||||||||||||||||||||
| Loss on sale of business | (2) | — | — | — | 2,611 | |||||||||||||||||||||
| Tax effect of incremental expenses, loss on sale and impairment | $ | — | $ | — | — | (2,821) | ||||||||||||||||||||
| Non-GAAP net income attributable to Central Garden & Pet Company | $ | 69,713 | $ | 72,954 | $ | 78,722 | $ | 88,309 | ||||||||||||||||||
| GAAP diluted net income per share | $ | 1.27 | $ | 1.32 | $ | 1.44 | $ | 1.43 | ||||||||||||||||||
| Non-GAAP diluted net income per share | $ | 1.27 | $ | 1.32 | $ | 1.44 | $ | 1.61 | ||||||||||||||||||
| Shares used in GAAP and non-GAAP diluted net earnings per share calculation | 54,722 | 55,156 | 54,818 | 54,930 | ||||||||||||||||||||||
Organic Net Sales Reconciliation
We have provided organic net sales, a non-GAAP measure that excludes the impact of recent acquisitions and dispositions, because we believe it permits investors to better understand the performance of our historical business. We define organic net sales as net sales from our historical business derived by excluding the net sales from businesses acquired or exited in the preceding 12 months. After an acquired business has been part of our consolidated results for 12 months, the change in net sales thereafter is considered part of the increase or decrease in organic net sales.
| Consolidated | GAAP to Non-GAAP Reconciliation | |||||||||||||||||||||||||||||||||||||
| For Three Months Ended March 26, 2022 | For the Six Months Ended March 26, 2022 | |||||||||||||||||||||||||||||||||||||
| Net sales (GAAP) | Effect of acquisition & divestitures on increase in net sales | Net sales organic | Net sales (GAAP) | Effect of acquisition & divestitures on increase in net sales | Net sales organic | |||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Q2 FY 22 | $ | 954.4 | $ | 51.8 | $ | 902.6 | $ | 1,615.8 | $ | 121.8 | $ | 1,494.0 | ||||||||||||||||||||||||||
| Q2 FY 21 | 935.3 | — | 935.3 | 1,527.5 | 3.9 | 1,523.6 | ||||||||||||||||||||||||||||||||
| $ increase (decrease) | $ | 19.1 | $ | (32.7) | $ | 88.3 | $ | (29.6) | ||||||||||||||||||||||||||||||
| % increase (decrease) | 2.0 | % | (3.5) | % | 5.8 | % | (1.9) | % | ||||||||||||||||||||||||||||||
29
| Pet | GAAP to Non-GAAP Reconciliation | |||||||||||||||||||||||||||||||||||||
| For Three Months Ended March 26, 2022 | For the Six Months Ended March 26, 2022 | |||||||||||||||||||||||||||||||||||||
| Net sales (GAAP) | Effect of acquisition & divestitures on increase in net sales | Net sales organic | Net sales (GAAP) | Effect of acquisition & divestitures on increase in net sales | Net sales organic | |||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Q2 FY 22 | $ | 497.7 | $ | — | $ | 497.7 | $ | 933.7 | $ | — | $ | 933.7 | ||||||||||||||||||||||||||
| Q2 FY 21 | 492.0 | — | 492.0 | 928.4 | 3.9 | 924.5 | ||||||||||||||||||||||||||||||||
| $ increase | $ | 5.7 | $ | 5.7 | $ | 5.3 | $ | 9.2 | ||||||||||||||||||||||||||||||
| % increase | 1.2 | % | 1.2 | % | 0.6 | % | 1.0 | % | ||||||||||||||||||||||||||||||
| Garden | GAAP to Non-GAAP Reconciliation | |||||||||||||||||||||||||||||||||||||
| For Three Months Ended March 26, 2022 | For the Six Months Ended March 26, 2022 | |||||||||||||||||||||||||||||||||||||
| Net sales (GAAP) | Effect of acquisition & divestitures on increase in net sales | Net sales organic | Net sales (GAAP) | Effect of acquisition & divestitures on increase in net sales | Net sales organic | |||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Q2 FY 22 | $ | 456.7 | $ | 51.8 | $ | 404.9 | $ | 682.1 | $ | 121.8 | $ | 560.3 | ||||||||||||||||||||||||||
| Q2 FY 21 | 443.3 | — | 443.3 | 599.1 | — | 599.1 | ||||||||||||||||||||||||||||||||
| $ increase (decrease) | $ | 13.4 | $ | (38.4) | $ | 83.0 | $ | (38.8) | ||||||||||||||||||||||||||||||
| % increase (decrease) | 3.0 | % | (8.7) | % | 13.9 | % | (6.5) | % | ||||||||||||||||||||||||||||||
| Adjusted EBITDA Reconciliation | GAAP to Non-GAAP Reconciliation For the Three Months Ended March 26, 2022 | |||||||||||||||||||||||||
| Garden | Pet | Corp | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net income attributable to Central Garden & Pet Company | $ | — | $ | — | $ | — | $ | 69,713 | ||||||||||||||||||
| Interest expense, net | — | — | — | 14,702 | ||||||||||||||||||||||
| Other expense | — | — | — | 369 | ||||||||||||||||||||||
| Income tax expense | — | — | — | 21,488 | ||||||||||||||||||||||
| Net income attributable to noncontrolling interest | — | — | — | 573 | ||||||||||||||||||||||
| Sum of items below operating income | — | — | — | 37,132 | ||||||||||||||||||||||
| Income (loss) from operations | $ | 70,511 | $ | 60,645 | $ | (24,311) | $ | 106,845 | ||||||||||||||||||
| Depreciation & amortization | 7,719 | 9,539 | 989 | 18,247 | ||||||||||||||||||||||
| Noncash stock-based compensation | — | — | 6,292 | 6,292 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 78,230 | $ | 70,184 | $ | (17,030) | $ | 131,384 | ||||||||||||||||||
30
| Adjusted EBITDA Reconciliation | GAAP to Non-GAAP Reconciliation For the Three Months Ended March 27, 2021 | |||||||||||||||||||||||||
| Garden | Pet | Corp | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net income attributable to Central Garden & Pet Company | $ | — | $ | — | $ | — | $ | 72,954 | ||||||||||||||||||
| Interest expense, net | — | — | — | 10,151 | ||||||||||||||||||||||
| Other income | — | — | — | (704) | ||||||||||||||||||||||
| Income tax expense | — | — | — | 21,564 | ||||||||||||||||||||||
| Net income attributable to noncontrolling interest | — | — | — | 645 | ||||||||||||||||||||||
| Sum of items below operating income | — | — | — | 31,656 | ||||||||||||||||||||||
| Income (loss) from operations | $ | 65,962 | $ | 62,058 | $ | (23,410) | $ | 104,610 | ||||||||||||||||||
| Depreciation & amortization | 8,804 | 8,882 | 1,168 | 18,854 | ||||||||||||||||||||||
| Noncash stock-based compensation | — | — | 5,725 | 5,725 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 74,766 | $ | 70,940 | $ | (16,517) | $ | 129,189 | ||||||||||||||||||
| Adjusted EBITDA Reconciliation | GAAP to Non-GAAP Reconciliation For the Six Months Ended March 26, 2022 | |||||||||||||||||||||||||
| Garden | Pet | Corp | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net income attributable to Central Garden & Pet Company | $ | — | $ | — | $ | — | $ | 78,722 | ||||||||||||||||||
| Interest expense, net | — | — | — | 29,110 | ||||||||||||||||||||||
| Other expense | — | — | — | 578 | ||||||||||||||||||||||
| Income tax expense | — | — | — | 23,889 | ||||||||||||||||||||||
| Net income attributable to noncontrolling interest | — | — | — | 760 | ||||||||||||||||||||||
| Sum of items below operating income | — | — | — | 54,337 | ||||||||||||||||||||||
| Income (loss) from operations | $ | 76,568 | $ | 105,896 | $ | (49,405) | $ | 133,059 | ||||||||||||||||||
| Depreciation & amortization | 17,339 | 19,088 | 2,022 | 38,449 | ||||||||||||||||||||||
| Noncash stock-based compensation | — | — | 11,479 | 11,479 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 93,907 | $ | 124,984 | $ | (35,904) | $ | 182,987 | ||||||||||||||||||
| Adjusted EBITDA Reconciliation | GAAP to Non-GAAP Reconciliation For the Six Months Ended March 27, 2021 | |||||||||||||||||||||||||
| Garden | Pet | Corp | Total | |||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||
| Net income attributable to Central Garden & Pet Company | $ | — | $ | — | $ | — | $ | 78,567 | ||||||||||||||||||
| Interest expense, net | — | — | — | 30,920 | ||||||||||||||||||||||
| Other income | — | — | — | (1,456) | ||||||||||||||||||||||
| Income tax expense | — | — | — | 22,945 | ||||||||||||||||||||||
| Net income attributable to noncontrolling interest | — | — | — | 674 | ||||||||||||||||||||||
| Sum of items below operating income | — | — | — | 53,083 | ||||||||||||||||||||||
| Income (loss) from operations | $ | 70,613 | $ | 105,583 | $ | (44,546) | $ | 131,650 | ||||||||||||||||||
| Depreciation & amortization | 11,442 | 17,967 | 2,360 | 31,769 | ||||||||||||||||||||||
| Noncash stock-based compensation | — | — | 10,394 | 10,394 | ||||||||||||||||||||||
| Adjusted EBITDA | $ | 82,055 | $ | 123,550 | $ | (31,792) | $ | 173,813 | ||||||||||||||||||
31
Inflation
Our revenues and margins are dependent on various economic factors, including rates of inflation, energy costs, currency fluctuations, and other macro-economic factors which may impact levels of consumer spending. In certain fiscal periods, we have been adversely impacted by rising input costs related to inflation, particularly relating to grain and seed prices, fuel prices and the ingredients used in our garden controls and fertilizers. Rising costs in those periods have made it difficult for us to increase prices to our retail customers at a pace sufficient to enable us to maintain margins.
In fiscal 2022, we have continued to experience increasing inflationary pressure stemming in part from the COVID-19 operating environment, including notable increases in costs for key commodities, labor and freight.
Weather and Seasonality
Our sales of lawn and garden products are influenced by weather and climate conditions in the different markets we serve. Our Garden segment’s business is highly seasonal. In fiscal 2021, approximately 69% of our Garden segment’s net sales and 60% of our total net sales occurred during our second and third fiscal quarters. Substantially all of the Garden segment’s operating income is typically generated in this period, which has historically more than offset the operating loss incurred during the first fiscal quarter of the year.
Liquidity and Capital Resources
We have financed our growth through a combination of internally generated funds, bank borrowings, supplier credit, and sales of equity and debt securities to the public.
Our business is seasonal and our working capital requirements and capital resources track closely to this seasonal pattern. Generally, during the first fiscal quarter, accounts receivable reach their lowest level while inventory, accounts payable and short-term borrowings begin to increase. During the second fiscal quarter, receivables, accounts payable and short-term borrowings increase, reflecting the build-up of inventory and related payables in anticipation of the peak lawn and garden selling season. During the third fiscal quarter, inventory levels remain relatively constant while accounts receivable peak and short-term borrowings start to decline as cash collections are received during the peak selling season. During the fourth fiscal quarter, inventory levels are at their lowest, and accounts receivable and payables are substantially reduced through conversion of receivables to cash.
We service two broad markets: pet supplies and lawn and garden supplies. Our pet supplies businesses involve products that have a year round selling cycle with a slight degree of seasonality. As a result, it is not necessary to maintain large quantities of inventory to meet peak demands. Our lawn and garden businesses are highly seasonal with approximately 69% of our Garden segment’s net sales occurring during the second and third fiscal quarters. This seasonality requires the shipment of large quantities of product well ahead of the peak consumer buying periods. To encourage retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.
Operating Activities
Net cash used by operating activities increased by $151.9 million, from $120.2 million for the six months ended March 27, 2021, to $272.1 million for the six months ended March 26, 2022. The increase in cash used by operating activities was due primarily to changes in our working capital accounts for the period ended March 26, 2022, as compared to the prior year period, predominantly an increase in inventory resulting from an intentional build-up in inventory due to the increased demand for our products amid the continuing global supply chain issues, as well as increased input costs.
Investing Activities
Net cash used in investing activities decreased $688.2 million, from $765.4 million for the six months ended March 27, 2021 to $77.2 million during the six months ended March 26, 2022. The decrease in cash used in investing activities was due primarily to the three acquisitions in the prior six-month period, partially offset by an increase in capital expenditures of $41.8 million in the current year compared to the prior year. During the first quarter of fiscal 2021, we acquired DoMyOwn for approximately $81 million. During the second quarter of fiscal 2021, we acquired Hopewell Nursery on December 31, 2020 for approximately $81 million and Green Garden Products on February 11, 2021 for approximately $571 million.
32
Financing Activities
Net cash used by financing activities increased $293.5 million, from $270.5 million of cash provided for the six months ended March 27, 2021, to $23.0 million of cash used for the six months ended March 26, 2022. The increase in cash used by financing activities during the current year was due primarily to the issuance of $500 million of our 2030 Notes in October 2020 and net borrowings under our senior secured credit facility of $190 million in the prior year period, partially offset by the repayment of our 2023 Notes and the corresponding premium paid on extinguishment in November 2020, as well as debt issuance costs incurred on the issuance of the 2030 Notes. We also recommenced open market purchases of our common stock during the current year period. During the six months ended March 26, 2022, we repurchased approximately 0.4 million shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately $16.1 million, or approximately $42.30 per share. During the six months ended March 27, 2021, we did not make any open market purchases of our common stock.
We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $750 million Amended Credit Facility. Based on our anticipated cash needs, availability under our asset backed revolving credit facility and the scheduled maturity of our debt, we believe that our sources of liquidity should be adequate to meet our working capital, capital spending and other cash needs for at least the next 12 months. However, we cannot assure you that these sources will continue to provide us with sufficient liquidity and, should we require it, that we will be able to obtain financing on terms satisfactory to us, or at all.
We believe that cash flows from operating activities, funds available under our asset backed loan facility, and arrangements with suppliers will be adequate to fund our presently anticipated working capital and capital expenditure requirements for the foreseeable future. We anticipate that our capital expenditures, which are related primarily to replacements and expansion of and upgrades to plant and equipment and also investment in our continued implementation of a scalable enterprise-wide information technology platform, will be approximately $115 million to $125 million in fiscal 2022, of which we have invested approximately $75 million through March 26, 2022.
As part of our growth strategy, we have acquired a number of companies in the past, and we anticipate that we will continue to evaluate potential acquisition candidates in the future. If one or more potential acquisition opportunities, including those that would be material, become available in the near future, we may require additional external capital. In addition, such acquisitions would subject us to the general risks associated with acquiring companies, particularly if the acquisitions are relatively large.
Total Debt
At March 26, 2022, our total debt outstanding was $1,185.8 million, as compared with $979.0 million at March 27, 2021.
Senior Notes
Issuance of $400 million 4.125% Senior Notes due 2031
In April 2021, we issued $400 million aggregate principal amount of 4.125% senior notes due April 2031 (the "2031 Notes"). We used the net proceeds from the offering to repay all outstanding borrowings under our Amended Credit Facility, with the remainder to be used for general corporate purposes.
We incurred approximately $6 million of debt issuance costs in conjunction with this issuance, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2031 Notes.
The 2031 Notes require semi-annual interest payments on April 30 and October 30, which commenced October 30, 2021. The 2031 Notes are unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries which are borrowers under or guarantors of our Amended Credit Facility. The 2031 Notes were issued in a private placement under Rule 144A and will not be registered under the Securities Act of 1933.
We may redeem some or all of the 2031 Notes at any time, at our option, prior to April 30, 2026 at the principal amount plus a "make whole" premium. At any time prior to April 30, 2024, we may also redeem, at our option, up to 40% of the notes with the proceeds of certain equity offerings at a redemption price of 104.125% of the principal amount of the notes. We may redeem some or all of the 2031 Notes at our option, at any time on or after April 30, 2026 for 102.063%, on or after April 30, 2027 for 101.375%, on or after April 30, 2028 for 100.688% and on or after April 30, 2029 for 100.0%, plus accrued and unpaid interest.
The holders of the 2031 Notes have the right to require us to repurchase all or a portion of the 2031 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest, upon the occurrence of specific kinds of changes of control.
The 2031 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all covenants as of March 26, 2022.
33
Issuance of $500 million 4.125% Senior Notes due 2030
In October 2020, we issued $500 million aggregate principal amount of 4.125% senior notes due October 2030 (the "2030 Notes"). In November 2020, we used a portion of the net proceeds to redeem all of our outstanding 6.125% senior notes due November 2023 (the "2023 Notes") at a redemption price of 101.531% plus accrued and unpaid interest, and to pay related fees and expenses, with the remainder for general corporate purposes.
We incurred approximately $8.0 million of debt issuance costs associated with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2030 Notes.
As a result of our redemption of the 2023 Notes, we 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. The 2030 Notes are unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries which are borrowers under or guarantors of our senior secured revolving credit facility or guarantee our other debt.
We may redeem some or all of the 2030 Notes at any time, at our option, prior to October 15, 2025 at a price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2023, we 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 104.125% of the principal amount of the notes. We may redeem some or all of the 2030 Notes, at our option, in whole or in part, at any time on or after October 15, 2025 for 102.063%, on or after October 15, 2026 for 101.375%, on or after October 15, 2027 for 100.688% and on or after October 15, 2028 for 100.0%, plus accrued and unpaid interest.
The holders of the 2030 Notes have the right to require us to repurchase all or a portion of the 2030 Notes at a purchase price equal to 101.0% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2030 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all covenants as of March 26, 2022.
$300 Million 5.125% Senior Notes due 2028
In December 2017, we issued $300 million aggregate principal amount of 5.125% senior notes due February 2028 (the "2028 Notes"). We used the net proceeds from the offering to finance acquisitions and for general corporate purposes.
We incurred approximately $4.8 million of debt issuance costs in conjunction with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2028 Notes.
The 2028 Notes require semiannual interest payments on February 1 and August 1. The 2028 Notes are unconditionally guaranteed on a senior basis by our existing and future domestic restricted subsidiaries who are borrowers under or guarantors of our senior secured revolving credit facility or who guarantee the 2030 Notes.
We may redeem some or all of the 2028 Notes at any time, at our option, prior to January 1, 2023 at the principal amount plus a “make whole” premium. We may redeem some or all of the 2028 Notes, at our option, at any time on or after January 1, 2023 for 102.563%, on or after January 1, 2024 for 101.708%, on or after January 1, 2025 for 100.854% and on or after January 1, 2026 for 100.0%, plus accrued and unpaid interest.
The holders of the 2028 Notes have the right to require us to repurchase all or a portion of the 2028 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.
The 2028 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all covenants as of March 26, 2022.
34
Asset-Based Loan Facility Amendment
On December 16, 2021, we entered into a Third Amended and Restated Credit Agreement (“Amended Credit Agreement”). The Amended Credit Agreement amended and restated the previous credit agreement dated September 27, 2019 (the "Predecessor Credit Agreement"), and has been increased to provide for a $750 million principal amount senior secured asset-based revolving credit facility, with up to an additional $400 million principal amount available with the consent of the Lenders, as defined, if we exercise the uncommitted accordion feature set forth therein (collectively, the “Amended Credit Facility”). The Amended Credit Facility matures on December 16, 2026. We may borrow, repay and reborrow amounts under the Amended Credit Facility until its maturity date, at which time all amounts outstanding under the Amended Credit Facility must be repaid in full.
The Amended Credit Facility is subject to a borrowing base that is calculated using a formula based upon eligible receivables and inventory, and at our election, eligible real property, minus certain reserves. We did not draw down any commitments under the Amended Credit Facility upon closing. Proceeds of the Amended Credit Facility will be used for general corporate purposes. Net availability under the Amended Credit Facility was approximately $652 million as of March 26, 2022. The Amended Credit Facility includes a $50 million sublimit for the issuance of standby letters of credit and a $75 million sublimit for short-notice borrowings. As of March 26, 2022, there were no borrowings outstanding and no letters of credit outstanding under the Amended Credit Facility. There were other letters of credit of $1.3 million outstanding as of March 26, 2022.
Borrowings under the Amended Credit Facility will bear interest at an index based on LIBOR (which will not be less than 0.00%) or, at our option, the Base Rate, plus, in either case, an applicable margin based on our usage under the credit facility. Base Rate is defined as the highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50%, (c) one-month LIBOR plus 1.00% and (d) 0.00%. The applicable margin for LIBOR-based borrowings fluctuates between 1.00%-1.50%, and was 1.00% as of March 26, 2022, and such applicable margin for Base Rate borrowings fluctuates between 0.00%-0.50%, and was 0% as of March 26, 2022. An unused line fee shall be payable quarterly in respect of the total amount of the unutilized Lenders’ commitments and short-notice borrowings under the Amended Credit Facility. Letter of credit fees at the applicable margin on the average undrawn and unreimbursed amount of letters of credit shall be payable quarterly and a facing fee of 0.125% shall be payable quarterly for the stated amount of each letter of credit. We are also required to pay certain fees to the administrative agent under the Amended Credit Facility. The Amended Credit Facility provides for the transition from LIBOR to SOFR and does not require an amendment in connection with such transition. As of March 26, 2022, the applicable interest rate related to Base Rate borrowings was 3.3%, and the applicable interest rate related to one-month LIBOR-based borrowings was 1.4%.
We incurred approximately $2.4 million of debt issuance costs in conjunction with this transaction, which included lender fees and legal expenses. The debt issuance costs are being amortized over the term of the Amended Credit Facility.
The Amended Credit Facility continues to contain customary covenants, including financial covenants which require us to maintain a minimum fixed charge coverage ratio of 1:1 upon triggered quarterly testing (e.g. when availability falls below certain thresholds established in the agreement), reporting requirements and events of default. The Amended Credit Facility is secured by substantially all assets of the borrowing parties, including (i) pledges of 100% of the stock or other equity interest of each domestic subsidiary that is directly owned by such entity and (ii) 65% of the stock or other equity interest of each foreign subsidiary that is directly owned by such entity, in each case subject to customary exceptions. We were in compliance with all financial covenants under the Amended Credit Facility during the period ended March 26, 2022.
Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities
Central (the "Parent/Issuer") issued $400 million of 2031 Notes in April 2021, $500 million of 2030 Notes in October 2020, and $300 million of 2028 Notes in December 2017. The 2031 Notes, 2030 Notes and 2028 Notes are fully and unconditionally guaranteed on a joint and several senior basis by each of our existing and future domestic restricted subsidiaries (the "Guarantors") which are guarantors of our senior secured revolving credit facility ("Credit Facility"). The 2031 Notes, 2030 Notes and 2028 Notes are unsecured senior obligations and are subordinated to all of our existing and future secured debt, including our Amended Credit Facility, to the extent of the value of the collateral securing such indebtedness. There are no significant restrictions on the ability of the Guarantors to make distributions to the Parent/Issuer. Certain subsidiaries and operating divisions of the Company do not guarantee the 2031, 2030 or 2028 Notes and are referred to as the Non-Guarantors.
The Guarantors jointly and severally, and fully and unconditionally, guarantee the payment of the principal and premium, if any, and interest on the 2031, 2030 and 2028 Notes when due, whether at stated maturity of the 2031, 2030 and 2028 Notes, by acceleration, call for redemption or otherwise, and all other obligations of the Company to the holders of the 2031, 2030 and 2028 Notes and to the trustee under the indenture governing the 2031, 2030 and 2028 Notes (the "Guarantee"). The Guarantees are senior unsecured obligations of each Guarantor and are of equal rank with all other existing and future senior indebtedness of the Guarantors.
The obligations of each Guarantor under its Guarantee shall be limited to the maximum amount as well, after giving effect to all other contingent and fixed liabilities of such Guarantor and to any collections from or payments made by or on behalf of any other Guarantor in
35
respect of the obligations of such Guarantor under the guarantee not constituting a fraudulent conveyance or fraudulent transfer under Federal or state law.
The Guarantee of a Guarantor will be released:
(1) upon any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation), in accordance with the governing indentures, to any person other than the Company;
(2) if such Guarantor merges with and into the Company, with the Company surviving such merger;
(3) if the Guarantor is designated as an Unrestricted Subsidiary; or
(4) if the Company exercises its legal defeasance option or covenant defeasance option or the discharge of the Company's obligations under the indentures in accordance with the terms of the indentures.
The following tables present summarized financial information of the Parent/Issuer subsidiaries and the Guarantor subsidiaries. All intercompany balances and transactions between subsidiaries under Parent/Issuer and subsidiaries under the Guarantor have been eliminated. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to the Parent/Issuer's interests in the Guarantor Subsidiaries. The summarized information excludes financial information of the Non-Guarantors, including earnings from and investments in these entities.
| Summarized Statements of Operations | |||||||||||||||||||||||
| Six Months Ended | Fiscal Year Ended | ||||||||||||||||||||||
| March 26, 2022 | September 25, 2021 | ||||||||||||||||||||||
| Parent/Issuer | Guarantors | Parent/Issuer | Guarantors | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Net sales | $ | 420,651 | $ | 1,102,518 | $ | 908,599 | $ | 2,142,925 | |||||||||||||||
| Gross profit | $ | 97,911 | $ | 360,871 | $ | 205,837 | $ | 686,332 | |||||||||||||||
| Income (loss) from operations | $ | 1,069 | $ | 135,416 | $ | 4,382 | $ | 229,961 | |||||||||||||||
| Equity in earnings of Guarantor subsidiaries | $ | 104,201 | $ | — | $ | 183,122 | $ | — | |||||||||||||||
| Net income (loss) | $ | (21,444) | $ | 104,201 | $ | (45,596) | $ | 183,122 | |||||||||||||||
| Summarized Balance Sheet Information | |||||||||||||||||||||||
| As of | As of | ||||||||||||||||||||||
| March 26, 2022 | September 25, 2021 | ||||||||||||||||||||||
| Parent/Issuer | Guarantors | Parent/Issuer | Guarantors | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Current assets | $ | 384,477 | $ | 1,039,326 | $ | 670,030 | $ | 733,132 | |||||||||||||||
| Intercompany receivable from Non-guarantor subsidiaries | 313,617 | 61,022 | 229,795 | 61,633 | |||||||||||||||||||
| Other assets | 3,033,967 | 2,300,322 | 2,896,162 | 2,399,165 | |||||||||||||||||||
| Total assets | $ | 3,732,061 | $ | 3,400,670 | $ | 3,795,987 | $ | 3,193,930 | |||||||||||||||
| Current liabilities | $ | 186,059 | $ | 326,475 | $ | 185,996 | $ | 298,039 | |||||||||||||||
| Long-term debt | 1,184,959 | — | 1,184,024 | — | |||||||||||||||||||
| Other liabilities | 1,294,010 | 221,451 | 1,272,798 | 151,011 | |||||||||||||||||||
| Total liabilities | $ | 2,665,028 | $ | 547,926 | $ | 2,642,818 | $ | 449,050 | |||||||||||||||
36
Contractual Obligations
There have been no material changes outside the ordinary course of business in our contractual obligations set forth in the Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources in our Annual Report on Form 10-K for the fiscal year ended September 25, 2021.
New Accounting Pronouncements
Refer to Footnote 1 in the notes to the condensed consolidated financial statements for new accounting pronouncements.
Critical Accounting Policies, Estimates and Judgments
There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended September 25, 2021.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There has been no material change in our exposure to market risk from that discussed in our Annual Report on Form 10-K for the fiscal year ended September 25, 2021.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. Our Chief Executive Officer and principal financial officer have reviewed, as of the end of the period covered by this report, the “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) that ensure that information relating to the Company required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported in a timely and proper manner and that such information is accumulated and communicated to our management, including our Chief Executive Officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. Based upon this review, such officers concluded that our disclosure controls and procedures were effective as of March 26, 2022.
(b) Changes in Internal Control Over Financial Reporting. Our management, with the participation of our Chief Executive Officer and our principal financial officer, have evaluated whether any change in our internal control over financial reporting occurred during the second quarter of fiscal 2022. There were no changes in our internal control over financial reporting during the second quarter of fiscal 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
In 2012, Nite Glow Industries, Inc and its owner, Marni Markell, (“Nite Glow”) filed suit in the U.S. District Court for New Jersey against the Company alleging that the applicator developed and used by the Company for certain of its branded topical flea and tick products infringes a patent held by Nite Glow and asserted related claims for breach of contract and misappropriation of confidential information based on the terms of a Non-Disclosure Agreement. On June 27, 2018, a jury returned a verdict in favor of Nite Glow on each of the three claims and awarded damages of approximately $12.6 million. The court ruled on post-trial motions in early June 2020, reducing the judgment amount to $12.4 million and denying the plaintiff's request for attorneys' fees. The Company filed its notice of appeal and the plaintiffs cross-appealed. On July 14, 2021, the Federal Circuit Court of Appeals issued its decision on the appeal. The Federal Circuit concluded that the Company did not infringe plaintiff's patent and determined that the breach of contract claim raised no non-duplicative damages and should be dismissed. The court affirmed the jury's liability verdict on the misappropriation of confidential information claim but ordered a new trial on damages on that single claim limited to the "head start" benefit, if any, generated by the confidential information. The Company intends to vigorously pursue its defenses in the future proceedings and believes that it will prevail on the merits as to the head start damages issue. While the Company believes that the ultimate resolution of this matter will not have a material impact on the Company's consolidated financial statements, the outcome of litigation is inherently uncertain and the final resolution of this matter may result in expense to the Company in excess of management's expectations.
37
From time to time, we are involved in certain legal proceedings in the ordinary course of business. Except as discussed above, we are not currently a party to any other legal proceedings that management believes would have a material effect on our financial position or results of operations.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the fiscal year ended September 25, 2021.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth the repurchases of any equity securities during the fiscal quarter ended March 26, 2022 and the dollar amount of authorized share repurchases remaining under our stock repurchase program.
| Period | Total Number of Shares (or Units) Purchased | Average Price Paid per Share (or Units) | Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs | Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1)(2) | |||||||||||||||||||||||||||||||
| December 26, 2021 - January 29 2022 | 52,558 | (2) (3) | $ | 41.94 | 47,340 | $ | 100,000,000 | ||||||||||||||||||||||||||||
| January 30, 2022 - February 26, 2022 | 107,916 | (3) | $ | 41.75 | 92,521 | $ | 100,000,000 | ||||||||||||||||||||||||||||
| February 27, 2022 - March 26, 2022 | 88,525 | (2) (3) | $ | 41.21 | 87,401 | $ | 100,000,000 | ||||||||||||||||||||||||||||
| Total | 248,999 | $ | 41.60 | 227,262 | $ | 100,000,000 | (4) | ||||||||||||||||||||||||||||
(1)During the fourth quarter of fiscal 2019, our Board of Directors authorized a $100 million share repurchase program, (the "2019 Repurchase Authorization"). The 2019 Repurchase Authorization has no fixed expiration date and expires when the amount authorized has been used or the Board withdraws its authorization. The repurchase of shares may be limited by certain financial covenants in our credit facility that restrict our ability to repurchase our stock. As of March 26, 2022, we had $100 million of authorization remaining under our 2019 Repurchase Authorization.
(2)In February 2019, our Board of Directors authorized us to make supplemental stock purchases to minimize dilution resulting from issuances under our equity compensation plans (the "Equity Dilution Authorization"). In addition to our regular share repurchase program, we are permitted to purchase annually a number of shares equal to the number of shares of restricted stock and stock options granted in the prior fiscal year, to the extent not already repurchased, and the current fiscal year. The Equity Dilution Authorization has no fixed expiration date and expires when the Board withdraws its authorization.
(3)Shares purchased during the period indicated represent withholding of a portion of shares to cover taxes in connection with the vesting of restricted stock and do not reduce the dollar value of shares that may be purchased under our stock repurchase plan.
(4)Excludes 1.1 million shares remaining under our Equity Dilution Authorization as of March 26, 2022.
Item 3. Defaults Upon Senior Securities
Not applicable
Item 4. Mine Safety Disclosures
Not applicable
Item 5. Other Information
Not applicable
38
Item 6. | Exhibits | ||||||||||||||||||||||||||||||||||||||||
| Incorporated by Reference | |||||||||||||||||||||||||||||||||||||||||
| Exhibit Number | Exhibit | Form | File No. | Exhibit | Filing Date | Filed Herewith | Filed, Not Furnished | ||||||||||||||||||||||||||||||||||
| 3.1 | 8-K | 001-33268 | 3.1 | 04/01/2022 | |||||||||||||||||||||||||||||||||||||
| 10.1* | 8-K | 001-33268 | 10.1 | 02/09/2022 | |||||||||||||||||||||||||||||||||||||
| 10.2* | X | ||||||||||||||||||||||||||||||||||||||||
| 22 | X | ||||||||||||||||||||||||||||||||||||||||
| 31.1 | X | ||||||||||||||||||||||||||||||||||||||||
| 31.2 | X | ||||||||||||||||||||||||||||||||||||||||
| 32.1 | X | ||||||||||||||||||||||||||||||||||||||||
| 32.2 | X | ||||||||||||||||||||||||||||||||||||||||
| 101 | The following financial statements from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 26, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Statements of Cash Flows, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Balance Sheets, and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text and including detailed tags. | X | |||||||||||||||||||||||||||||||||||||||
| 104 | The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended March 26, 2022, formatted in Inline XBRL (included as Exhibit 101) | ||||||||||||||||||||||||||||||||||||||||
| * | Management contract or compensatory plan or arrangement | ||||||||||||||||||||||||||||||||||||||||
39
SIGNATURES
Pursuant to the requirements of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunder duly authorized.
| CENTRAL GARDEN & PET COMPANY | |||||
| Registrant | |||||
| Dated: May 5, 2022 | |||||
| /s/ TIMOTHY P. COFER | |||||
| Timothy P. Cofer | |||||
| Chief Executive Officer | |||||
| (Principal Executive Officer) | |||||
| /s/ NICHOLAS LAHANAS | |||||
| Nicholas Lahanas | |||||
| Chief Financial Officer | |||||
| (Principal Financial Officer) | |||||
40
