Central Garden & Pet(CENT) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The unaudited condensed consolidated financial statements for the three and six months ended March 25, 2023, reflect a decline in financial performance, with decreased sales and net income, stable assets, and reduced cash Condensed Consolidated Balance Sheets As of March 25, 2023, total assets remained stable at $3.35 billion, while cash decreased significantly to $60.6 million, and total equity increased to $1.37 billion Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 25, 2023 | March 26, 2022 | September 24, 2022 | | :--- | :--- | :--- | :--- | | Total current assets | $1,653,875 | $1,623,887 | $1,553,854 | | Total assets | $3,350,798 | $3,349,258 | $3,282,002 | | Total current liabilities | $475,949 | $570,749 | $465,892 | | Long-term debt | $1,212,053 | $1,185,456 | $1,186,245 | | Total equity | $1,372,247 | $1,294,333 | $1,334,712 | Condensed Consolidated Statements of Operations For the second quarter and six months ended March 25, 2023, net sales, net income, and diluted EPS all decreased year-over-year, reflecting a decline in operational profitability Statement of Operations Summary (in thousands, except per share amounts) | Metric | Three Months Ended Mar 25, 2023 | Three Months Ended Mar 26, 2022 | Six Months Ended Mar 25, 2023 | Six Months Ended Mar 26, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $909,004 | $954,370 | $1,536,667 | $1,615,768 | | Gross profit | $259,638 | $286,792 | $431,337 | $484,988 | | Operating income | $78,041 | $106,845 | $78,447 | $133,059 | | Net income | $48,115 | $69,713 | $39,682 | $78,722 | | Diluted EPS | $0.90 | $1.27 | $0.74 | $1.44 | Condensed Consolidated Statements of Cash Flows For the six months ended March 25, 2023, net cash used in operating activities significantly improved to $97.1 million, while investing activities decreased cash usage, and financing activities provided cash Cash Flow Summary - Six Months Ended (in thousands) | Cash Flow Activity | March 25, 2023 | March 26, 2022 | | :--- | :--- | :--- | | Net cash used by operating activities | $(97,072) | $(272,081) | | Net cash used in investing activities | $(30,828) | $(77,237) | | Net cash provided (used) by financing activities | $8,641 | $(23,014) | | Net decrease in cash | $(118,102) | $(372,764) | Notes to Condensed Consolidated Financial Statements The notes provide details on accounting policies, long-term debt composition, segment performance, an ongoing legal contingency, and a subsequent event regarding a facility closure - Total inventories increased to $966.9 million as of March 25, 2023, up from $888.1 million in the prior year, driven by a significant increase in work in progress[41] Long-Term Debt Composition (in thousands) | Debt Instrument | March 25, 2023 | | :--- | :--- | | 5.125% Senior notes due 2028 | $300,000 | | 4.125% Senior notes due 2030 | $500,000 | | 4.125% Senior notes due 2031 | $400,000 | | Asset-based revolving credit facility | $25,000 | | Total | $1,212,323 | Segment Net Sales (in thousands) | Segment | Three Months Ended Mar 25, 2023 | Three Months Ended Mar 26, 2022 | | :--- | :--- | :--- | | Pet segment | $475,203 | $497,640 | | Garden segment | $433,801 | $456,730 | | Total net sales | $909,004 | $954,370 | - In April 2023, the company announced the closure of a manufacturing and distribution facility in Athens, Texas, expected to result in a one-time charge of approximately $15 million in the third fiscal quarter[59][82] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management attributes the 4.8% decline in second-quarter net sales to lower volumes in both Pet and Garden segments, leading to gross margin contraction and a significant decrease in operating income Q2 Fiscal 2023 vs Q2 Fiscal 2022 Performance | Metric | Q2 2023 | Q2 2022 | Change | Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $909.0M | $954.4M | $(45.4)M | (4.8)% | | Gross Profit | $259.6M | $286.8M | $(27.2)M | (9.5)% | | Gross Margin | 28.6% | 30.1% | (150) bps | N/A | | Operating Income | $78.0M | $106.8M | $(28.8)M | (27.0)% | | Net Income | $48.1M | $69.7M | $(21.6)M | (31.0)% | - The decline in Pet segment sales was primarily due to lower demand for durable products and the exit from some private label pet bed lines[60] - The Garden segment's sales decline was attributed to adverse weather, unfavorable pre-season retailer ordering, and lighter retail foot traffic[86] - The company continues to face inflationary pressure on key commodities, labor, and freight, which began in fiscal 2022 and is continuing in fiscal 2023[98] Quantitative and Qualitative Disclosures About Market Risk The company reported no material changes in its exposure to market risk since the information provided in its Annual Report on Form 10-K for the fiscal year ended September 24, 2022 - There has been no material change in the company's exposure to market risk since the last annual report filing[123] Controls and Procedures The CEO and principal financial officer concluded that disclosure controls and procedures were effective as of March 25, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and principal financial officer concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[108] - No material changes to the company's internal control over financial reporting occurred during the second quarter of fiscal 2023[286] PART II. OTHER INFORMATION Legal Proceedings The company is involved in ongoing litigation with Nite Glow Industries, Inc. concerning a misappropriation claim, with a new trial on damages pending, which management believes will not materially impact financial statements - The company is engaged in a legal proceeding with Nite Glow Industries, Inc., where a Federal Circuit Court of Appeals decision ordered a new trial on damages for a single claim of misappropriation of confidential information[57][287] - Management intends to vigorously defend its position and believes the ultimate resolution of the Nite Glow matter will not have a material impact on the company's consolidated financial statements[57][287] Risk Factors There have been no material changes to the company's risk factors since those disclosed in its Form 10-K for the fiscal year ended September 24, 2022 - No material changes to risk factors have occurred since the last annual report filing[125] Unregistered Sales of Equity Securities and Use of Proceeds During the fiscal quarter ended March 25, 2023, the company repurchased 154,430 shares at an average price of $37.63, with $94.6 million remaining for future repurchases under the 2019 authorization Share Repurchases for Quarter Ended March 25, 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Dec 25, 2022 - Jan 28, 2023 | 76,042 | $35.83 | | Jan 29, 2023 - Feb 25, 2023 | 38,883 | $40.64 | | Feb 26, 2023 - Mar 25, 2023 | 39,505 | $38.12 | | Total | 154,430 | $37.63 | - As of March 25, 2023, the company had $94.6 million of authorization remaining under its 2019 Repurchase Authorization program[131] Exhibits This section lists exhibits filed with the Quarterly Report on Form 10-Q, including supplemental indentures for senior notes, guarantor subsidiaries, and certifications by the Principal Executive and Financial Officers - Filed exhibits include supplemental indentures for the 5.125% Senior Notes due 2028, 4.125% Senior Notes due 2030, and 4.125% Senior Notes due 2031[238][274] - Certifications by the CEO and CFO pursuant to Section 302 and Section 1350 of the Sarbanes-Oxley Act were filed as exhibits[275][292][293]