Central Garden & Pet Company (NASDAQ:CENT) Q1 2020 Earnings Conference Call February 5, 2020 4:30 PM ET Company Participants Howard Machek - Senior Vice President, Finance & Chief Accounting Officer Tim Cofer - Chief Executive Officer Niko Lahanas - Chief Financial Officer J.D. Walker - President, Garden Branded Business John Hanson - President, Pet Consumer Products Conference Call Participants Chris Carey - Bank of America Bill Chappell - SunTrust Robinson Humphrey Brad Thomas - KeyBanc Hale Holden - Barc ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ________________________________________________________________________________________ FORM 10-K ☒ ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 28, 2019 OR ☐ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 1-33268 (Exact name of registrant as spe ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________________________________________________________________________________ FORM 10-Q (Mark One) Title of each class Trading Symbol(s) Name of each exchange on which registered ☑ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 29, 2019 or ☐ TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transiti ...

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _____________________________________________________________________________________________ FORM 10-Q (Mark One) Title of each class Trading Symbol(s) Name of each exchange on which registered Common Stock CENT The NASDAQ Stock Market LLC ý QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 30, 2019 or ¨ TRANSITION REPORT PURSUANT OF SECTION 13 or 15(d) OF THE S ...

PART I. FINANCIAL INFORMATION [Item 1. Financial Statements (Unaudited)](index=4&type=section&id=Item%201.%20Financial%20Statements%20(Unaudited)) The company's unaudited financial statements show a significant decrease in net income and EPS for the quarter, driven by lower margins and higher expenses [Condensed Consolidated Balance Sheets](index=4&type=section&id=Condensed%20Consolidated%20Balance%20Sheets) **Condensed Consolidated Balance Sheets (in thousands)** | Item | Dec 29, 2018 | Dec 30, 2017 | Sep 29, 2018 | | :--- | :--- | :--- | :--- | | Total Current Assets | $1,272,024 | $993,900 | $1,217,298 | | Total Assets | $1,950,846 | $1,617,352 | $1,907,209 | | Total Current Liabilities | $249,548 | $224,959 | $212,964 | | Long-term Debt | $692,332 | $690,964 | $692,031 | | Total Equity | $956,484 | $661,951 | $952,834 | [Condensed Consolidated Statements of Operations](index=5&type=section&id=Condensed%20Consolidated%20Statements%20of%20Operations) **Condensed Consolidated Statements of Operations (in thousands, except per share amounts)** | Item | Three Months Ended Dec 29, 2018 | Three Months Ended Dec 30, 2017 | | :--- | :--- | :--- | | Net Sales | $461,990 | $442,011 | | Gross Profit | $130,182 | $131,837 | | Operating Income | $10,181 | $22,521 | | Income Before Income Taxes | $1,912 | $12,214 | | Net Income Attributable to Central Garden & Pet Company | $1,803 | $26,247 | | Basic EPS | $0.03 | $0.52 | | Diluted EPS | $0.03 | $0.50 | [Condensed Consolidated Statements of Comprehensive Income](index=6&type=section&id=Condensed%20Consolidated%20Statements%20of%20Comprehensive%20Income) **Condensed Consolidated Statements of Comprehensive Income (in thousands)** | Item | Three Months Ended Dec 29, 2018 | Three Months Ended Dec 30, 2017 | | :--- | :--- | :--- | | Income Including Noncontrolling Interest | $1,639 | $26,450 | | Foreign Currency Translation | $(274) | $44 | | Total Comprehensive Income | $1,365 | $26,494 | | Comprehensive Income Attributable to Central Garden & Pet Company | $1,529 | $26,291 | [Condensed Consolidated Statements of Cash Flows](index=7&type=section&id=Condensed%20Consolidated%20Statements%20of%20Cash%20Flows) **Condensed Consolidated Statements of Cash Flows (in thousands)** | Cash Flow Activity | Three Months Ended Dec 29, 2018 | Three Months Ended Dec 30, 2017 | | :--- | :--- | :--- | | Net Cash Provided (Used) by Operating Activities | $6,800 | $(24,213) | | Net Cash Used in Investing Activities | $(9,387) | $(15,941) | | Net Cash (Used) Provided by Financing Activities | $(635) | $290,977 | | Net Increase (Decrease) in Cash, Cash Equivalents and Restricted Cash | $(3,347) | $250,843 | | Cash, Cash Equivalents and Restricted Cash at End of Period | $489,658 | $295,885 | Notes to Condensed Consolidated Financial Statements [1. Basis of Presentation](index=8&type=section&id=1.%20Basis%20of%20Presentation) The company adopted several new accounting standards in fiscal 2019, with the new lease standard expected to materially impact the balance sheet - The Company adopted **ASC Topic 606** for revenue recognition on September 30, 2018, using the modified retrospective method, with no adjustment required to opening retained earnings[45](index=45&type=chunk)[46](index=46&type=chunk) - The adoption of ASU 2016-18 on restricted cash resulted in an increase in beginning and end of period cash, cash equivalents, and restricted cash by **$12.6 million** and **$12.4 million**, respectively, for the three months ended December 30, 2017[50](index=50&type=chunk) - The Company will adopt ASU 2016-02 (Leases) on September 29, 2019, and expects to record **material long-term operating lease liabilities** and right-of-use assets[56](index=56&type=chunk) [2. Fair Value Measurements](index=13&type=section&id=2.%20Fair%20Value%20Measurements) The company's recurring fair value measurements primarily involve Level 3 contingent consideration liabilities, with senior notes' fair values below carrying values **Liability for Contingent Consideration (Level 3, in thousands)** | Date | Amount | | :--- | :--- | | Dec 29, 2018 | $7,616 | | Dec 30, 2017 | $9,058 | | Sep 29, 2018 | $8,224 | **Fair Value vs. Carrying Value of Senior Notes (in millions)** | Notes | Date | Estimated Fair Value | Carrying Value | | :--- | :--- | :--- | :--- | | 5.125% Senior Notes due 2028 | Dec 29, 2018 | $273.6 | $295.7 | | | Dec 30, 2017 | $300.8 | $295.5 | | | Sep 29, 2018 | $285.5 | $295.6 | | 6.125% Senior Notes due 2023 | Dec 29, 2018 | $402.0 | $396.2 | | | Dec 30, 2017 | $424.2 | $395.4 | | | Sep 29, 2018 | $414.4 | $396.0 | [3. Inventories, net](index=16&type=section&id=3.%20Inventories,%20net) Total net inventories increased to $493.7 million at December 29, 2018, driven by growth in all categories, particularly finished goods and raw materials **Inventories, net (in thousands)** | Category | Dec 29, 2018 | Dec 30, 2017 | Sep 29, 2018 | | :--- | :--- | :--- | :--- | | Raw materials | $134,955 | $120,710 | $117,539 | | Work in progress | $34,553 | $13,778 | $35,691 | | Finished goods | $306,181 | $291,812 | $263,845 | | Supplies | $18,056 | $14,121 | $10,748 | | Total inventories, net | $493,745 | $440,421 | $427,823 | [4. Goodwill](index=16&type=section&id=4.%20Goodwill) The company performed its annual goodwill impairment test and recorded no impairment charges for the recent quarter or the prior year period - **No goodwill impairment** was recorded for the three months ended December 29, 2018, and December 30, 2017[72](index=72&type=chunk) [5. Other Intangible Assets](index=17&type=section&id=5.%20Other%20Intangible%20Assets) The net carrying value of other intangible assets increased to $148.8 million, with annual amortization expense estimated at $10 million through fiscal 2023 **Other Intangible Assets (Net Carrying Value, in millions)** | Category | Dec 29, 2018 | Dec 30, 2017 | Sep 29, 2018 | | :--- | :--- | :--- | :--- | | Marketing-related intangible assets – amortizable | $4.0 | $3.8 | $4.4 | | Marketing-related intangible assets – nonamortizable | $44.6 | $36.7 | $44.6 | | Customer-related intangible assets – amortizable | $83.2 | $57.7 | $85.8 | | Other acquired intangible assets – amortizable | $10.4 | $8.9 | $10.9 | | Other acquired intangible assets – nonamortizable | $6.6 | $6.6 | $6.6 | | Total other intangible assets | $148.8 | $113.7 | $152.3 | - Amortization expense for intangibles was approximately **$3.5 million** for the three months ended December 29, 2018, compared to $2.3 million in the prior year, classified within selling, general and administrative expenses[77](index=77&type=chunk) - Estimated annual amortization expense related to acquired intangible assets is approximately **$10 million per year** from fiscal 2019 through fiscal 2023[77](index=77&type=chunk) [6. Long-Term Debt](index=18&type=section&id=6.%20Long-Term%20Debt) The company's long-term debt remained stable at $692.3 million, with no outstanding borrowings under its $400 million revolving credit facility **Long-Term Debt (in thousands)** | Item | Dec 29, 2018 | Dec 30, 2017 | Sep 29, 2018 | | :--- | :--- | :--- | :--- | | Senior notes, 6.125%, due Nov 2023 | $400,000 | $400,000 | $400,000 | | Senior notes, 5.125%, due Feb 2028 | $300,000 | $300,000 | $300,000 | | Unamortized debt issuance costs | $(8,108) | $(9,161) | $(8,425) | | Net carrying value | $691,892 | $690,839 | $691,575 | | Other notes payable | $557 | $497 | $578 | | Total | $692,449 | $691,336 | $692,153 | | Less current portion | $(117) | $(372) | $(122) | | Long-term portion | $692,332 | $690,964 | $692,031 | - The Company has a **$400 million** senior secured asset-based revolving credit facility, maturing April 22, 2021[88](index=88&type=chunk) As of December 29, 2018, there were no borrowings outstanding and the borrowing base and remaining availability was **$356.6 million**[89](index=89&type=chunk) - The Company was **in compliance with all financial covenants** for its senior notes and credit facility as of December 29, 2018[80](index=80&type=chunk)[87](index=87&type=chunk)[91](index=91&type=chunk) [7. Supplemental Equity Information](index=20&type=section&id=7.%20Supplemental%20Equity%20Information) Total equity attributable to the company increased slightly during the quarter, primarily due to comprehensive income and share-based award amortization **Changes in Equity Attributable to Central Garden & Pet Company (in thousands)** | Item | Sep 29, 2018 | Dec 29, 2018 | | :--- | :--- | :--- | | Balance | $952,449 | $956,263 | | Comprehensive income | $1,529 | $1,529 | | Amortization of share-based awards | $2,261 | $2,261 | | Restricted share activity, including net share settlement | $(385) | $(385) | | Issuance of common stock, including net share settlement of stock options | $409 | $409 | [8. Stock-Based Compensation](index=20&type=section&id=8.%20Stock-Based%20Compensation) Share-based compensation expense and the associated tax benefit remained relatively consistent with the prior year period - Share-based compensation expense was **$2.8 million** for the three months ended December 29, 2018, compared to $2.7 million for the prior year period[95](index=95&type=chunk) - The tax benefit associated with share-based compensation expense was **$0.7 million** for both the three months ended December 29, 2018, and December 30, 2017[95](index=95&type=chunk) [9. Earnings Per Share](index=21&type=section&id=9.%20Earnings%20Per%20Share) Basic and diluted earnings per share plummeted to $0.03 from approximately $0.50 in the prior year, reflecting a sharp decline in net income **Earnings Per Share (in thousands, except per share amounts)** | Item | Three Months Ended Dec 29, 2018 | Three Months Ended Dec 30, 2017 | | :--- | :--- | :--- | | Net income available to common shareholders | $1,803 | $26,247 | | Basic EPS | $0.03 | $0.52 | | Diluted EPS | $0.03 | $0.50 | | Weighted average shares used in diluted EPS | 58,001 | 52,695 | - For the three months ended December 29, 2018, **1.1 million options were excluded** from diluted EPS computation as their exercise prices exceeded the average market price, making them antidilutive[100](index=100&type=chunk) [10. Segment Information](index=22&type=section&id=10.%20Segment%20Information) Both Pet and Garden segments saw increased net sales, but operating income declined significantly, with the Garden segment reporting an operating loss **Segment Net Sales (in thousands)** | Segment | Three Months Ended Dec 29, 2018 | Three Months Ended Dec 30, 2017 | | :--- | :--- | :--- | | Pet segment | $340,416 | $325,084 | | Garden segment | $121,574 | $116,927 | | Total net sales | $461,990 | $442,011 | **Segment Operating Income (Loss) (in thousands)** | Segment | Three Months Ended Dec 29, 2018 | Three Months Ended Dec 30, 2017 | | :--- | :--- | :--- | | Pet segment | $29,755 | $36,176 | | Garden segment | $(4,637) | $2,300 | | Corporate | $(14,937) | $(15,955) | | Total operating income | $10,181 | $22,521 | **Segment Assets (in thousands)** | Segment | Dec 29, 2018 | Dec 30, 2017 | Sep 29, 2018 | | :--- | :--- | :--- | :--- | | Pet segment | $677,647 | $620,681 | $683,938 | | Garden segment | $453,331 | $356,821 | $407,483 | | Corporate | $819,868 | $639,850 | $815,788 | | Total assets | $1,950,846 | $1,617,352 | $1,907,209 | [11. Consolidating Condensed Financial Information of Guarantor Subsidiaries](index=23&type=section&id=11.%20Consolidating%20Condensed%20Financial%20Information%20of%20Guarantor%20Subsidiaries) This section provides consolidating financial statements for the entities that guarantee the company's senior notes - Certain **100% wholly-owned subsidiaries** (Guarantor Subsidiaries) fully and unconditionally guarantee the Company's 2023 Notes and 2028 Notes[106](index=106&type=chunk) - The consolidating condensed financial statements are provided in lieu of separate audited financial statements for Guarantor Subsidiaries, in accordance with **SEC Regulation S-X Rule 3-10**[106](index=106&type=chunk) [12. Contingencies](index=31&type=section&id=12.%20Contingencies) The company faces a $12.6 million jury award for patent infringement but intends to appeal and believes the outcome will not be materially adverse - A jury awarded Nite Glow Industries, Inc. approximately **$12.6 million in damages** against the Company for patent infringement, breach of contract, and misappropriation of confidential information on June 27, 2018[125](index=125&type=chunk) - The Company intends to **vigorously pursue its rights on appeal** and believes it will prevail on the merits, expecting the ultimate resolution not to have a material impact on its consolidated financial statements[125](index=125&type=chunk) - The Company is subject to state unclaimed property law examinations and potential product liability, recalls, or regulatory actions, but currently does not anticipate a material effect on its financial position or results of operations from recent issues[127](index=127&type=chunk)[128](index=128&type=chunk) [13. Subsequent Events](index=32&type=section&id=13.%20Subsequent%20Events) The company acquired the remaining 55% of Arden Companies for $13.4 million post-quarter end to leverage synergies with its dog bed business - In February 2019, the Company purchased the remaining **55% interest in Arden Companies** for approximately **$13.4 million**[129](index=129&type=chunk) - Approximately **$40 million** was used to eliminate most of Arden Companies' acquired debt subsequent to the acquisition[129](index=129&type=chunk) - The Company anticipates leveraging synergies between Arden Companies' outdoor cushion and pillow business and its existing dog bed business[129](index=129&type=chunk) [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=33&type=section&id=Item%202.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses a 4.5% sales increase from acquisitions offset by a 1.7% organic decline, leading to significantly lower gross profit and operating income [Our Company](index=33&type=section&id=Our%20Company) Central Garden & Pet is a leading producer and distributor in the U.S. lawn & garden and pet supplies markets with $2.2 billion in fiscal 2018 sales - Central Garden & Pet Company is a leading innovator, producer, and distributor of branded and private label products for the **U.S. lawn & garden and pet supplies markets**[131](index=131&type=chunk) **Fiscal 2018 Consolidated Net Sales and Operating Income (in millions)** | Segment | Net Sales | Operating Income | | :--- | :--- | :--- | | Pet segment | $1,341 | $140 | | Garden segment | $874 | $96 | | Corporate expenses | - | $(69) | | Consolidated Total | $2,215 | $167 | [Recent Developments](index=33&type=section&id=Recent%20Developments) First-quarter net sales rose 4.5% due to acquisitions, but organic sales, gross profit, operating income, and net income all declined significantly **Fiscal 2019 First Quarter Financial Performance Highlights** | Metric | Q1 FY2019 | Q1 FY2018 | Change | | :--- | :--- | :--- | :--- | | Net sales | $462.0 million | $442.0 million | +4.5% (+$20.0 million) | | Organic net sales | - | - | -1.7% | | Gross profit | $130.2 million | $131.8 million | -$1.6 million | | Gross margin | 28.2% | 29.8% | -160 bps | | Selling, general & administrative expense | $120.0 million | $109.3 million | +$10.7 million | | Operating income | $10.2 million | $22.5 million | -$12.3 million | | Net income attributable to Central Garden & Pet Company | $1.8 million | $26.2 million | -$24.4 million | | Diluted EPS | $0.03 | $0.50 | -$0.47 | | Adjusted diluted EPS (non-GAAP) | $0.03 | $0.19 | -$0.16 | - In February 2019, the Company acquired the remaining **55% interest in Arden Companies** for approximately **$13.4 million**, and used **$40 million** to eliminate most of the acquired debt[138](index=138&type=chunk) [Results of Operations](index=34&type=section&id=Results%20of%20Operations) Acquisition-driven sales growth was offset by an organic decline, lower margins, and higher costs, leading to a 54.7% drop in operating income [Net Sales](index=34&type=section&id=Net%20Sales) Net sales increased 4.5% to $462.0 million due to acquisitions, but organic sales fell 1.7% from declines in both Pet and Garden segments **Net Sales Performance (in millions)** | Segment | Q1 FY2019 Net Sales | Q1 FY2018 Net Sales | YoY Change | Organic Net Sales Change | | :--- | :--- | :--- | :--- | :--- | | Consolidated | $462.0 | $442.0 | +4.5% (+$20.0) | -1.7% (-$7.3) | | Pet segment | $340.4 | $325.1 | +4.7% (+$15.3) | -0.6% (-$1.9) | | Garden segment | $121.6 | $116.9 | +4.0% (+$4.7) | -4.6% (-$5.4) | - Pet segment organic sales declined due to **lower sales in animal health**, partially offset by increased wild bird feed sales[142](index=142&type=chunk) - Garden segment organic sales declined primarily due to **lower sales in controls and fertilizer products**, attributed to timing of orders from a large customer[143](index=143&type=chunk) [Gross Profit](index=34&type=section&id=Gross%20Profit) Gross profit decreased by 1.3%, with gross margin contracting 160 basis points due to acquisitions, unfavorable mix, and higher input costs **Gross Profit and Margin** | Metric | Q1 FY2019 | Q1 FY2018 | Change | | :--- | :--- | :--- | :--- | | Gross Profit | $130.2 million | $131.8 million | -$1.6 million (-1.3%) | | Gross Margin | 28.2% | 29.8% | -160 bps | | Impacting Factors | Acquisitions, unfavorable sales mix, higher raw material, labor, and transportation costs | | | - The Pet segment's gross margin was impacted by the acquisition of a **lower-margin distribution business**, while the Garden segment was impacted by a **live plant business** which typically incurs losses in Q1[144](index=144&type=chunk) - **Pricing actions** to offset increased costs are being implemented during the second fiscal quarter, with expected year-over-year improvement in gross and operating margins by the third quarter[140](index=140&type=chunk)[144](index=144&type=chunk) [Selling, General and Administrative Expenses](index=35&type=section&id=Selling,%20General%20and%20Administrative%20Expenses) SG&A expenses rose 9.8% to $120.0 million, driven by recent acquisitions and higher transportation costs **Selling, General and Administrative Expenses (in millions)** | Metric | Q1 FY2019 | Q1 FY2018 | Change | | :--- | :--- | :--- | :--- | | SG&A Expenses | $120.0 | $109.3 | +$10.7 (+9.8%) | | SG&A as % of Net Sales | 26.0% | 24.7% | +130 bps | | Selling and delivery expense | $60.7 | $53.9 | +$6.8 (+12.6%) | | Warehouse and administrative expense | $59.3 | $55.4 | +$3.9 (+7.0%) | - The increase in SG&A was primarily driven by **businesses acquired in the last 12 months** and higher transportation costs[146](index=146&type=chunk)[147](index=147&type=chunk) - Corporate expenses decreased due to **lower variable performance-based compensation** expense[148](index=148&type=chunk)[152](index=152&type=chunk) [Operating Income](index=35&type=section&id=Operating%20Income) Operating income fell by $12.3 million to $10.2 million, as profitability declined in both the Pet and Garden segments **Operating Income and Margin (in millions)** | Metric | Q1 FY2019 | Q1 FY2018 | Change | | :--- | :--- | :--- | :--- | | Operating Income | $10.2 | $22.5 | -$12.3 | | Operating Margin | 2.2% | 5.1% | -290 bps | | Pet operating income | $29.8 | $36.2 | -$6.4 (-17.7%) | | Garden operating income (loss) | $(4.6) | $2.3 | -$6.9 | - Pet operating margin decreased to **8.7% from 11.1%** due to the General Pet Supply acquisition (lower margins), less favorable organic sales mix, and higher costs[150](index=150&type=chunk) - Garden operating income shifted to a loss primarily due to the highly seasonal **Bell Nursery acquisition**, which typically incurs losses in Q1[151](index=151&type=chunk) [Net Interest Expense](index=35&type=section&id=Net%20Interest%20Expense) Net interest expense increased 11.9% to $8.1 million due to higher average debt outstanding from a prior year senior notes issuance **Net Interest Expense (in millions)** | Metric | Q1 FY2019 | Q1 FY2018 | Change | | :--- | :--- | :--- | :--- | | Net Interest Expense | $8.1 | $7.2 | +$0.9 (+11.9%) | | Debt outstanding | $692.4 (Dec 29, 2018) | $691.3 (Dec 30, 2017) | +$1.1 | - The increase in interest expense was due to **higher average debt outstanding** from the December 2017 issuance of $300 million 5.125% senior notes[153](index=153&type=chunk) [Other Expense](index=36&type=section&id=Other%20Expense) Other expense decreased to $0.2 million from $3.1 million, primarily due to lower losses from a start-up business investment **Other Expense (in millions)** | Metric | Q1 FY2019 | Q1 FY2018 | Change | | :--- | :--- | :--- | :--- | | Other Expense | $0.2 | $3.1 | -$2.9 | | Primary Driver | Lower losses from start-up business investments | | | [Income Taxes](index=36&type=section&id=Income%20Taxes) The effective tax rate was 14.3%, compared to a tax benefit in the prior year which included a $16.3 million benefit from the Tax Reform Act **Income Tax Rates** | Metric | Q1 FY2019 | Q1 FY2018 | | :--- | :--- | :--- | | Effective Income Tax Rate | 14.3% | Tax Benefit (due to $16.3M provisional benefit) | | Adjusted Effective Income Tax Rate (excluding provisional benefit) | 14.3% | 17.3% | | Expected Full FY2019 Effective Tax Rate | ~24.5% (statutory rate) | | [Net Income and Earnings Per Share](index=36&type=section&id=Net%20Income%20and%20Earnings%20Per%20Share) Net income was $1.8 million, or $0.03 per diluted share, a sharp decline from the prior year's GAAP and adjusted results **Net Income and Diluted EPS (in millions, except per share amounts)** | Metric | Q1 FY2019 | Q1 FY2018 (GAAP) | Q1 FY2018 (Adjusted) | | :--- | :--- | :--- | :--- | | Net Income | $1.8 | $26.2 | $9.9 | | Diluted EPS | $0.03 | $0.50 | $0.19 | [Use of Non-GAAP Financial Measures](index=36&type=section&id=Use%20of%20Non-GAAP%20Financial%20Measures) The company utilizes non-GAAP measures like organic net sales and EBITDA to provide better insight into ongoing operational performance - **Non-GAAP financial measures** are used to supplement GAAP results, providing additional meaningful comparisons between current and prior operating periods[159](index=159&type=chunk) - **EBITDA** is defined as income before income tax, net other expense, net interest expense, and depreciation and amortization, used to evaluate cash flows and business performance[159](index=159&type=chunk) - **Organic net sales**, a non-GAAP measure, excludes the impact of businesses purchased or exited in the prior 12 months to better understand historical business performance[159](index=159&type=chunk)[163](index=163&type=chunk) [Inflation](index=38&type=section&id=Inflation) Rising costs for raw materials, freight, and labor negatively impacted fiscal 2018 margins, prompting price increases effective January 2019 - Revenues and margins are dependent on economic factors including **inflation, energy costs, and consumer spending**[167](index=167&type=chunk) - During fiscal 2018, **rising input costs** (raw materials, freight, labor) adversely impacted margins[168](index=168&type=chunk) - **Price increases** were implemented, generally taking effect in January 2019, to offset inflationary pressures[168](index=168&type=chunk) [Weather and Seasonality](index=38&type=section&id=Weather%20and%20Seasonality) The company's business, particularly the Garden segment, is highly seasonal, with most sales and all operating income typically generated in Q2 and Q3 - Sales of lawn and garden products are influenced by **weather and climate conditions**[169](index=169&type=chunk) - The Garden segment's business is highly seasonal, with approximately **68% of its net sales** and 57% of total net sales occurring during the second and third fiscal quarters in fiscal 2018[169](index=169&type=chunk) - Substantially all of the Garden segment's operating income is typically generated in **Q2 and Q3**, offsetting operating losses incurred during Q1[169](index=169&type=chunk) [Liquidity and Capital Resources](index=38&type=section&id=Liquidity%20and%20Capital%20Resources) The company relies on operating cash flow and its $400 million credit facility to manage seasonal working capital needs and fund growth - The Company's business is seasonal, with working capital requirements tracking this pattern; inventory, accounts payable, and short-term borrowings increase in **Q1 and Q2**[172](index=172&type=chunk)[173](index=173&type=chunk) - Principal sources of funds are cash generated from operations and borrowings under the **$400 million asset-backed revolving credit facility**[177](index=177&type=chunk) - Anticipated capital expenditures for fiscal 2019 are approximately **$45 million**, primarily for plant and equipment replacements/upgrades and information technology platform implementation[178](index=178&type=chunk) [Operating Activities](index=39&type=section&id=Operating%20Activities) Net cash from operating activities improved by $31.0 million year-over-year, shifting from a $24.2 million use to a $6.8 million provision of cash **Net Cash Provided (Used) by Operating Activities (in millions)** | Period | Amount | | :--- | :--- | | Three Months Ended Dec 29, 2018 | $6.8 (provided) | | Three Months Ended Dec 30, 2017 | $(24.2) (used) | | Change | +$31.0 | [Investing Activities](index=39&type=section&id=Investing%20Activities) Net cash used in investing activities decreased by $6.5 million to $9.4 million, reflecting lower investment and capital expenditure levels **Net Cash Used in Investing Activities (in millions)** | Period | Amount | | :--- | :--- | | Three Months Ended Dec 29, 2018 | $(9.4) | | Three Months Ended Dec 30, 2017 | $(15.9) | | Change | -$6.5 | [Financing Activities](index=39&type=section&id=Financing%20Activities) Financing activities shifted from a $291.0 million cash source to a $0.6 million use, due to a $300 million notes issuance in the prior year **Net Cash Provided (Used) by Financing Activities (in millions)** | Period | Amount | | :--- | :--- | | Three Months Ended Dec 29, 2018 | $(0.6) (used) | | Three Months Ended Dec 30, 2017 | $291.0 (provided) | | Change | -$291.6 | - The decrease in cash provided by financing activities was primarily due to the December 2017 issuance of **$300 million senior notes** in the prior year, partially offset by $4.8 million in deferred financing costs[176](index=176&type=chunk) [Senior Notes](index=40&type=section&id=Senior%20Notes) The company has $700 million in outstanding senior notes due 2023 and 2028, guaranteed by domestic subsidiaries and subject to customary covenants - The Company issued **$300 million** aggregate principal amount of **5.125% senior notes due February 2028** in December 2017, incurring approximately $4.8 million in debt issuance costs[182](index=182&type=chunk)[183](index=183&type=chunk) - The Company issued **$400 million** aggregate principal amount of **6.125% senior notes due November 2023** in November 2015, incurring approximately $6.3 million in debt issuance costs[184](index=184&type=chunk) - Both series of senior notes are **unconditionally guaranteed** by existing and future domestic restricted subsidiaries and contain customary high yield covenants, with the Company in compliance as of December 29, 2018[183](index=183&type=chunk)[184](index=184&type=chunk) [Asset-Based Loan Facility Amendment](index=40&type=section&id=Asset-Based%20Loan%20Facility%20Amendment) The company maintains a $400 million asset-based revolving credit facility with $356.6 million available and no outstanding borrowings as of quarter-end - The Company has a **$400 million** senior secured asset-based revolving credit facility, maturing April 22, 2021, with an accordion feature for an additional **$200 million**[185](index=185&type=chunk) - As of December 29, 2018, there were **no borrowings outstanding** under the Credit Facility, and the borrowing base and remaining availability was **$356.6 million**[185](index=185&type=chunk)[186](index=186&type=chunk) - The Credit Facility is secured by substantially all of the Company's assets and includes financial covenants, with which the Company was **in compliance** during the period ended December 29, 2018[189](index=189&type=chunk) [Off-Balance Sheet Arrangements](index=42&type=section&id=Off-Balance%20Sheet%20Arrangements) There have been no material changes to the company's off-balance sheet arrangements since its last annual report - **No material changes** to off-balance sheet arrangements since the fiscal year ended September 29, 2018[190](index=190&type=chunk) [Contractual Obligations](index=42&type=section&id=Contractual%20Obligations) There have been no material changes to the company's contractual obligations since its last annual report - **No material changes** to contractual obligations outside the ordinary course of business since the fiscal year ended September 29, 2018[191](index=191&type=chunk) [New Accounting Pronouncements](index=42&type=section&id=New%20Accounting%20Pronouncements) Information regarding new accounting pronouncements is available in Footnote 1 of the financial statements - Information on new accounting pronouncements is detailed in **Footnote 1** of the condensed consolidated financial statements[192](index=192&type=chunk) [Critical Accounting Policies, Estimates and Judgments](index=42&type=section&id=Critical%20Accounting%20Policies,%20Estimates%20and%20Judgments) There have been no material changes to the company's critical accounting policies since its last annual report - **No material changes** to critical accounting policies, estimates, and judgments since the fiscal year ended September 29, 2018[193](index=193&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=42&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company's exposure to market risk has not materially changed since its last annual report - **No material change** in exposure to market risk since the Annual Report on Form 10-K for the fiscal year ended September 29, 2018[194](index=194&type=chunk) [Item 4. Controls and Procedures](index=42&type=section&id=Item%204.%20Controls%20and%20Procedures) Management concluded that disclosure controls and internal control over financial reporting were effective as of the quarter-end - The Chief Executive Officer and principal financial officer concluded that **disclosure controls and procedures were effective** as of December 29, 2018[195](index=195&type=chunk) - Management concluded that there has been **no material change in internal control** over financial reporting during the first quarter of fiscal 2019[196](index=196&type=chunk) PART II. OTHER INFORMATION [Item 1. Legal Proceedings](index=43&type=section&id=Item%201.%20Legal%20Proceedings) The company is appealing a $12.6 million jury verdict against it and does not expect the final outcome to have a material financial impact - A jury returned a verdict in favor of Nite Glow Industries, Inc., awarding approximately **$12.6 million in damages** against the Company on June 27, 2018[199](index=199&type=chunk) - The Company intends to **vigorously pursue its rights on appeal** and believes it will prevail on the merits, expecting the ultimate resolution not to have a material impact on its consolidated financial statements[199](index=199&type=chunk) [Item 1A. Risk Factors](index=43&type=section&id=Item%201A.%20Risk%20Factors) There have been no material changes to the company's risk factors since its last annual report - **No material changes** to risk factors previously disclosed in the Form 10-K for the fiscal year ended September 29, 2018[200](index=200&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=43&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) The company repurchased 12,669 shares during the quarter, primarily to cover taxes related to vested restricted stock **Equity Securities Repurchased (Fiscal Quarter Ended Dec 29, 2018)** | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Sep 30, 2018 - Nov 3, 2018 | — | — | | Nov 4, 2018 - Dec 1, 2018 | 10,081 | $30.67 | | Dec 2, 2018 - Dec 29, 2018 | 2,588 | $29.42 | | Total | 12,669 | $30.41 | - Shares purchased represent **withholding of a portion of shares to cover taxes** in connection with the vesting of restricted stock[202](index=202&type=chunk) - As of December 29, 2018, approximately **34,968,000 shares** (or approximate dollar value) may yet be purchased under the $100 million share repurchase program, which has no expiration date[202](index=202&type=chunk) [Item 3. Defaults Upon Senior Securities](index=43&type=section&id=Item%203.%20Defaults%20Upon%20Senior%20Securities) This item is not applicable for the reporting period - Not applicable[203](index=203&type=chunk) [Item 4. Mine Safety Disclosures](index=43&type=section&id=Item%204.%20Mine%20Safety%20Disclosures) This item is not applicable for the reporting period - Not applicable[203](index=203&type=chunk) [Item 5. Other Information](index=44&type=section&id=Item%205.%20Other%20Information) This item is not applicable for the reporting period - Not applicable[204](index=204&type=chunk) [Item 6. Exhibits](index=44&type=section&id=Item%206.%20Exhibits) This section lists exhibits filed with the report, including officer certifications and XBRL data files - Includes **Certifications of Principal Executive Officer and Principal Financial Officer** pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Exhibits 31.1, 31.2)[204](index=204&type=chunk) - Includes **Certifications of Principal Executive Officer and Principal Financial Officer** pursuant to 18 U.S.C. Section 1350 (Exhibits 32.1, 32.2)[204](index=204&type=chunk) - Includes various **XBRL Taxonomy Extension Documents** (Instance, Schema, Calculation, Definition, Label, Presentation)[204](index=204&type=chunk)

Central Garden & Pet Company (NASDAQ:CENTA) Q1 2019 Earnings Conference Call February 6, 2019 4:30 PM ET Company Participants Steve Zenker - IR George Roeth - President & CEO Niko Lahanas - CFO JD Walker - President, Garden Branded Business Rodolfo Spielmann - President, Pet Consumer Products Conference Call Participants Bill Chappell - SunTrust Robinson Humphrey Christopher Carey - Bank of America Merrill Lynch Bradley Thomas - KeyBanc Capital Markets William Reuter - Bank of America Merrill Lynch Christin ...