Central Garden & Pet(CENTA) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) The company presents its unaudited condensed consolidated financial statements and accompanying notes Condensed Consolidated Balance Sheets Total assets increased to $3.42 billion, driven by higher cash balances and a rise in total equity Condensed Consolidated Balance Sheets | Metric | June 24, 2023 (in thousands) | June 25, 2022 (in thousands) | Sept 24, 2022 (in thousands) | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | | Total Assets | $3,419,947 | $3,345,926 | $3,282,002 | | Cash and Cash Equivalents | $333,139 | $195,791 | $177,442 | | Inventories, net | $865,496 | $882,522 | $938,000 | | Total Current Liabilities | $496,387 | $516,187 | $465,892 | | Long-term debt | $1,187,498 | $1,185,842 | $1,186,245 | | Total Equity | $1,447,106 | $1,352,405 | $1,334,712 | Condensed Consolidated Statements of Operations Quarterly net sales and net income increased, while nine-month results showed a decline Condensed Consolidated Statements of Operations | Metric | 3 Months Ended June 24, 2023 (in thousands) | 3 Months Ended June 25, 2022 (in thousands) | 9 Months Ended June 24, 2023 (in thousands) | 9 Months Ended June 25, 2022 (in thousands) | | :----- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Net sales | $1,023,269 | $1,015,378 | $2,559,936 | $2,631,146 | | Cost of goods sold | $705,217 | $707,752 | $1,810,547 | $1,838,532 | | Gross profit | $318,052 | $307,626 | $749,389 | $792,614 | | Operating income | $122,830 | $114,079 | $201,277 | $247,138 | | Net income attributable to Central Garden & Pet Company | $83,126 | $75,420 | $122,808 | $154,142 | | Diluted EPS | $1.56 | $1.39 | $2.30 | $2.82 | Condensed Consolidated Statements of Comprehensive Income Quarterly comprehensive income rose due to higher net income, while the nine-month figure declined Condensed Consolidated Statements of Comprehensive Income | Metric | 3 Months Ended June 24, 2023 (in thousands) | 3 Months Ended June 25, 2022 (in thousands) | 9 Months Ended June 24, 2023 (in thousands) | 9 Months Ended June 25, 2022 (in thousands) | | :----- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Income including noncontrolling interest | $83,549 | $75,555 | $123,378 | $155,037 | | Foreign currency translation | $1,644 | $(1,221) | $2,189 | $(1,093) | | Total comprehensive income | $85,195 | $74,334 | $125,569 | $153,944 | Condensed Consolidated Statements of Cash Flows Operating cash flow improved significantly due to inventory reduction and lower capital expenditures Condensed Consolidated Statements of Cash Flows | Metric | 9 Months Ended June 24, 2023 (in thousands) | 9 Months Ended June 25, 2022 (in thousands) | | :----- | :---------------------------------------- | :---------------------------------------- | | Net cash provided (used) by operating activities | $227,566 | $(82,397) | | Net cash used in investing activities | $(41,450) | $(100,831) | | Net cash used by financing activities | $(33,665) | $(46,238) | | Net increase (decrease) in cash, cash equivalents and restricted cash | $154,497 | $(231,055) | | Cash, cash equivalents and restricted cash at end of period | $346,681 | $208,467 | Notes to Condensed Consolidated Financial Statements This section provides detailed disclosures for the condensed consolidated financial statements 1. Basis of Presentation Interim statements are unaudited and results are not indicative of the full year due to seasonality - Interim financial statements are unaudited and prepared by management, including all normal recurring adjustments[25] - Foreign businesses (UK, Canada) use local currency as functional currency; translation gains/losses are not deferred as earnings are permanently reinvested[26] - Results are not necessarily indicative of the full fiscal year due to the seasonal nature of the Garden business[27] 2. Fair Value Measurements Financial instruments are categorized into a three-level hierarchy for fair value measurement - Financial instruments are categorized into Level 1 (quoted prices), Level 2 (observable inputs), and Level 3 (unobservable inputs) for fair value measurement[46][47] - Recurring fair value measurements for derivative financial instruments (Level 1) and contingent consideration (Level 3) are not material[49][50] - Non-recurring fair value measurements are primarily used for impairment analyses of long-lived assets, goodwill, and other intangible assets[51] 3. Inventories, net Net inventories decreased to $865.5 million, driven by a reduction in finished goods and supplies Inventories, net | Inventory Component | June 24, 2023 (in thousands) | June 25, 2022 (in thousands) | Sept 24, 2022 (in thousands) | | :------------------ | :--------------------------- | :--------------------------- | :--------------------------- | | Raw materials | $286,869 | $252,075 | $266,695 | | Work in progress | $158,406 | $82,282 | $99,842 | | Finished goods | $399,555 | $514,585 | $528,481 | | Supplies | $20,666 | $33,580 | $42,982 | | Total inventories, net | $865,496 | $882,522 | $938,000 | 4. Goodwill Goodwill is tested for impairment annually, and no impairment was recorded in the current period - Goodwill is tested for impairment annually (first day of Q4) or when events indicate carrying value may exceed fair value[58] - No goodwill impairment was recorded for the nine months ended June 24, 2023, or June 25, 2022[58] 5. Other Intangible Assets Net intangible assets stood at $512.2 million, with a $4.7 million impairment charge recognized Other Intangible Assets, Net | Intangible Asset Type | Net Carrying Value (June 24, 2023, in millions) | Net Carrying Value (June 25, 2022, in millions) | Net Carrying Value (Sept 24, 2022, in millions) | | :-------------------- | :---------------------------------------------- | :---------------------------------------------- | :---------------------------------------------- | | Marketing-related intangible assets – amortizable | $0.8 | $1.9 | $1.5 | | Marketing-related intangible assets – nonamortizable | $226.5 | $192.2 | $226.5 | | Customer-related intangible assets – amortizable | $268.8 | $276.8 | $296.1 | | Other acquired intangible assets – amortizable | $10.2 | $14.2 | $13.2 | | Other acquired intangible assets – nonamortizable | $5.9 | $5.9 | $5.9 | | Total other intangible assets, net | $512.2 | $491.0 | $543.2 | - A non-cash $4.7 million impairment charge was recognized on an amortizable customer-related intangible asset in the Pet Segment during the three months ended June 24, 2023, due to market changes and declining sales[61] - Amortization expense for intangibles was $8.4 million (Q3 2023) and $26.3 million (YTD 2023), classified within selling, general and administrative expenses[63] 6. Long-Term Debt Total long-term debt remained stable at approximately $1.19 billion, and the company was in compliance with all covenants Long-Term Debt | Debt Type | June 24, 2023 (in thousands) | June 25, 2022 (in thousands) | Sept 24, 2022 (in thousands) | | :-------- | :--------------------------- | :--------------------------- | :--------------------------- | | Senior notes, 5.125% due Feb 2028 | $300,000 | $300,000 | $300,000 | | Senior notes, 4.125% due Oct 2030 | $500,000 | $500,000 | $500,000 | | Senior notes, 4.125% due Apr 2031 | $400,000 | $400,000 | $400,000 | | Unamortized debt issuance costs | $(12,702) | $(14,588) | $(14,116) | | Other notes payable | $455 | $782 | $678 | | Total Long-term debt | $1,187,498 | $1,185,842 | $1,186,245 | - The Company was in compliance with all financial covenants for its senior notes and the Amended Credit Facility as of June 24, 2023[70][77][83][88] 7. Supplemental Equity Information Total equity increased to $1.45 billion, driven by comprehensive income and offset by stock repurchases Total Equity | Metric | Sept 24, 2022 (in thousands) | June 24, 2023 (in thousands) | | :----- | :--------------------------- | :--------------------------- | | Total Central Garden & Pet Company shareholders' equity | $1,333,706 | $1,445,530 | | Noncontrolling interest | $1,006 | $1,576 | | Total equity | $1,334,712 | $1,447,106 | - Equity increased due to comprehensive income, partially offset by stock repurchases and restricted share activity[90] 8. Stock-Based Compensation Stock-based compensation expense increased to $20.6 million for the nine-month period Stock-Based Compensation | Metric | 9 Months Ended June 24, 2023 (in millions) | 9 Months Ended June 25, 2022 (in millions) | | :----- | :--------------------------------------- | :--------------------------------------- | | Share-based compensation expense | $20.6 | $18.9 | | Tax benefit associated with share-based compensation | $4.9 | $4.5 | 9. Earnings Per Share Quarterly diluted EPS increased to $1.56, while nine-month diluted EPS decreased to $2.30 Earnings Per Share | Metric | 3 Months Ended June 24, 2023 | 3 Months Ended June 25, 2022 | 9 Months Ended June 24, 2023 | 9 Months Ended June 25, 2022 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | :--------------------------- | | Basic EPS | $1.58 | $1.42 | $2.34 | $2.89 | | Diluted EPS | $1.56 | $1.39 | $2.30 | $2.82 | | Weighted average shares used in diluted EPS (in thousands) | 53,380 | 54,329 | 53,466 | 54,658 | - Options to purchase 0.8 million (Q3 2023) and 0.3 million (Q3 2022) shares were excluded from diluted EPS computation as they were antidilutive[95] 10. Segment Information Quarterly Garden segment sales grew 1.8%, while Pet segment sales declined slightly by 0.3% Segment Net Sales and Operating Income | Metric | 3 Months Ended June 24, 2023 (in thousands) | 3 Months Ended June 25, 2022 (in thousands) | 9 Months Ended June 24, 2023 (in thousands) | 9 Months Ended June 25, 2022 (in thousands) | | :----- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | :---------------------------------------- | | Pet segment net sales | $503,329 | $504,781 | $1,394,352 | $1,438,423 | | Garden segment net sales | $519,940 | $510,597 | $1,165,584 | $1,192,723 | | Total net sales | $1,023,269 | $1,015,378 | $2,559,936 | $2,631,146 | | Pet segment operating income | $59,969 | $62,616 | $154,779 | $168,512 | | Garden segment operating income | $88,088 | $75,564 | $126,887 | $152,132 | Net Sales by Product Category | Product Category (3 Months Ended June 24, 2023) | Pet Segment (in millions) | Garden Segment (in millions) | Total (in millions) | | :---------------------------------------------- | :------------------------ | :--------------------------- | :------------------ | | Other pet products | $208.9 | — | $208.9 | | Dog and cat products | $136.0 | — | $136.0 | | Other manufacturers' products | $100.3 | $107.9 | $208.2 | | Wild bird products | $58.1 | $81.5 | $139.6 | | Other garden supplies | — | $330.5 | $330.5 | 11. Contingencies The company is involved in a legal proceeding whose resolution is not expected to be material - Ongoing legal proceeding with Nite Glow Industries, Inc. concerning patent infringement and misappropriation of confidential information[101] - Appeals court dismissed patent and breach of contract claims, ordering a new trial on damages for misappropriation limited to "head start" benefit[101] - Management believes the ultimate resolution will not have a material impact on the Company's consolidated financial statements, despite inherent litigation uncertainty[101] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management provides its perspective on financial performance, liquidity, and critical accounting policies Our Company Central Garden & Pet is a market leader in the US pet and garden industries with two operating segments - Central Garden & Pet Company is a market leader in the US pet and garden industries[105] - Operates through two reportable segments: Pet (dog/cat supplies, aquatics, small animals, reptiles, pet birds, equine/livestock, health/insect control) and Garden (lawn/garden consumables, wild bird feed, fertilizers, live plants)[106] Fiscal Year 2022 Performance | Fiscal Year 2022 | Net Sales (in billions) | Operating Income (in millions) | | :--------------- | :---------------------- | :----------------------------- | | Consolidated | $3.3 | $260 | | Pet segment | $1.9 | $209 | | Garden segment | $1.4 | $154 | | Corporate expenses | N/A | $(103) | Recent Developments The company closed a pet bedding facility and sold its independent garden center distribution business - Closed a leased pet bedding manufacturing and distribution facility in Athens, Texas, as part of the Cost and Simplicity program[109] - Incurred approximately $13.9 million in one-time costs related to the facility closure, including $8.0 million in cost of goods sold and $5.9 million in SG&A[109] - Sold the independent garden center distribution business in July 2023 to simplify the garden business and optimize customer footprint, representing less than 5% of Garden net sales[110][112] Results of Operations This section details financial performance for the three and nine-month periods ended June 24, 2023 Three Months Ended June 24, 2023 Compared with Three Months Ended June 25, 2022 Quarterly net sales, gross profit, and operating income improved despite facility closure costs Net Sales (Q3) Net sales rose 0.8% to $1.02 billion, driven by a 1.8% increase in the Garden segment Net Sales by Segment (Q3) | Metric | Q3 FY23 (in millions) | Q3 FY22 (in millions) | Change ($M) | Change (%) | | :----- | :-------------------- | :-------------------- | :---------- | :--------- | | Total Net Sales | $1,023.3 | $1,015.4 | $7.9 | +0.8% | | Pet Net Sales | $503.3 | $504.8 | $(1.5) | -0.3% | | Garden Net Sales | $520.0 | $510.6 | $9.4 | +1.8% | - Pet sales decline was primarily due to lower demand for durable pet products (outdoor cushion, aquatics), partially offset by dog/cat treats and toys, and wild bird feed[115] - Garden sales increase was driven by live plant and packet seed businesses, aided by price increases and new store distribution[116] Gross Profit (Q3) Gross profit increased 3.4% to $318 million, with gross margin improving 80 basis points to 31.1% Gross Profit (Q3) | Metric | Q3 FY23 (in millions) | Q3 FY22 (in millions) | Change ($M) | Change (bps) | | :----- | :-------------------- | :-------------------- | :---------- | :----------- | | Gross Profit | $318.0 | $307.6 | $10.4 | +3.4% | | Gross Margin | 31.1% | 30.3% | N/A | +80 bps | - Gross margin increase was primarily driven by the Garden segment due to price increases, productivity initiative gains, and a favorable product mix[117] - Non-GAAP gross margin, excluding $8 million in facility closure costs, increased 160 basis points to 31.9%[117] Selling, General and Administrative Expenses (Q3) SG&A expenses increased 0.9% to $195.2 million, driven by facility closure costs SG&A Expenses (Q3) | Metric | Q3 FY23 (in millions) | Q3 FY22 (in millions) | Change ($M) | Change (%) | | :----- | :-------------------- | :-------------------- | :---------- | :--------- | | SG&A Expenses | $195.2 | $193.5 | $1.7 | +0.9% | | SG&A as % of Net Sales | 19.1% | 19.1% | N/A | 0 bps | | Selling and delivery expense | $92.3 | $97.8 | $(5.5) | -5.6% | | Warehouse and administrative expense | $102.9 | $95.7 | $7.2 | +7.5% | - Increase in SG&A was due to $5.9 million from the pet bedding facility closure and higher corporate expenses, partially offset by reduced commercial spend in selling and delivery[118][119][120] Operating Income (Q3) Operating income increased 7.7% to $122.8 million, with operating margin improving to 12.0% Operating Income by Segment (Q3) | Metric | Q3 FY23 (in millions) | Q3 FY22 (in millions) | Change ($M) | Change (%) | | :----- | :-------------------- | :-------------------- | :---------- | :--------- | | Total Operating Income | $122.8 | $114.1 | $8.8 | +7.7% | | Operating Margin | 12.0% | 11.2% | N/A | +80 bps | | Pet Operating Income | $60.0 | $62.6 | $(2.6) | -4.2% | | Garden Operating Income | $88.1 | $75.6 | $12.5 | +16.5% | - Non-GAAP operating income, excluding $13.9 million facility closure expense, was $136.7 million, an increase of $22.7 million[121] - Pet segment non-GAAP operating income increased $11.3 million, excluding facility closure costs[123] Net Interest Expense (Q3) Net interest expense decreased to $13.1 million due to higher interest income on cash balances Net Interest Expense (Q3) | Metric | Q3 FY23 (in millions) | Q3 FY22 (in millions) | Change ($M) | | :----- | :-------------------- | :-------------------- | :---------- | | Net Interest Expense | $13.1 | $14.3 | $(1.2) | - Decrease in net interest expense was due to increased interest income from higher rates on higher cash balances[126] Other Income (Expense) (Q3) Other income was $0.9 million, a positive shift driven by foreign currency gains Other Income (Expense) (Q3) | Metric | Q3 FY23 (in millions) | Q3 FY22 (in millions) | Change ($M) | | :----- | :-------------------- | :-------------------- | :---------- | | Other Income (Expense) | $0.9 | $(0.8) | $1.7 | - The increase in other income was primarily due to foreign currency gains in the current quarter, reversing prior year losses[127] Income Taxes (Q3) The effective income tax rate increased to 24.4% from 23.7% in the prior year quarter Effective Income Tax Rate (Q3) | Metric | Q3 FY23 | Q3 FY22 | Change (bps) | | :----- | :------- | :------- | :----------- | | Effective Income Tax Rate | 24.4% | 23.7% | +70 bps | - Increase in tax rate due to reduced tax benefit from stock compensation and increased impact of nondeductible executive compensation[128] Net Income and Earnings Per Share (Q3) Net income increased 10.2% to $83.1 million, with diluted EPS rising 12.2% to $1.56 Net Income and EPS (Q3) | Metric | Q3 FY23 (in millions) | Q3 FY22 (in millions) | Change ($M) | Change (%) | | :----- | :-------------------- | :-------------------- | :---------- | :--------- | | Net Income | $83.1 | $75.4 | $7.7 | +10.2% | | Diluted EPS | $1.56 | $1.39 | $0.17 | +12.2% | - Non-GAAP net income was $93.7 million and diluted EPS was $1.75 for Q3 FY23[129] Nine Months Ended June 24, 2023 Compared with Nine Months Ended June 25, 2022 Nine-month net sales, gross profit, operating income, and net income all declined year-over-year Net Sales (YTD) Net sales decreased 2.7% to $2.56 billion, with declines in both Pet and Garden segments Net Sales by Segment (YTD) | Metric | YTD FY23 (in millions) | YTD FY22 (in millions) | Change ($M) | Change (%) | | :----- | :--------------------- | :--------------------- | :---------- | :--------- | | Total Net Sales | $2,560 | $2,631 | $(71) | -2.7% | | Pet Net Sales | $1,394.4 | $1,438.4 | $(44.1) | -3.1% | | Garden Net Sales | $1,165.6 | $1,192.7 | $(27.1) | -2.3% | - Pet sales decline was volume-related, primarily due to lower demand for durable pet products (outdoor cushion, aquatics) and exit of profit-challenged private label pet bed lines[132] - Garden sales decrease was due to lower sales in private-label controls/fertilizer and grass seed, impacted by adverse weather and unfavorable retailer inventory management[133] Gross Profit (YTD) Gross profit decreased 5.5% to $749.4 million, with gross margin declining 80 basis points Gross Profit (YTD) | Metric | YTD FY23 (in millions) | YTD FY22 (in millions) | Change ($M) | Change (bps) | | :----- | :--------------------- | :--------------------- | :---------- | :----------- | | Gross Profit | $749.4 | $792.6 | $(43.2) | -5.5% | | Gross Margin | 29.3% | 30.1% | N/A | -80 bps | - Decline in Garden gross margin due to lower sales/production volumes, reduced overhead absorption, initial start-up costs for a live goods facility, and cost inflation[135] - Consolidated non-GAAP gross margin, excluding $8 million facility closure expense, would have been 29.6%[135] Selling, General and Administrative Expenses (YTD) SG&A expenses increased 0.5% to $548.1 million, rising to 21.4% of net sales SG&A Expenses (YTD) | Metric | YTD FY23 (in millions) | YTD FY22 (in millions) | Change ($M) | Change (%) | | :----- | :--------------------- | :--------------------- | :---------- | :--------- | | SG&A Expenses | $548.1 | $545.5 | $2.6 | +0.5% | | SG&A as % of Net Sales | 21.4% | 20.7% | N/A | +70 bps | | Selling and delivery expense | $250.8 | $264.2 | $(13.4) | -5.1% | | Warehouse and administrative expense | $297.3 | $281.3 | $16.0 | +5.7% | - Non-GAAP SG&A, excluding $13.9 million facility closure expense, decreased $3.3 million to $542.2 million[136] - Corporate expense increased $6.9 million due to higher insurance and payroll, and Pet segment included $5.9 million from facility closure[138][142] Operating Income (YTD) Operating income decreased 18.5% to $201.3 million, with operating margin declining to 7.9% Operating Income by Segment (YTD) | Metric | YTD FY23 (in millions) | YTD FY22 (in millions) | Change ($M) | Change (%) | | :----- | :--------------------- | :--------------------- | :---------- | :--------- | | Total Operating Income | $201.3 | $247.1 | $(45.8) | -18.5% | | Operating Margin | 7.9% | 9.4% | N/A | -150 bps | | Pet Operating Income | $154.8 | $168.5 | $(13.7) | -8.1% | | Garden Operating Income | $126.9 | $152.1 | $(25.2) | -16.6% | - Non-GAAP operating income, excluding $13.9 million facility closure expense, was $215.2 million, a decrease of $31.9 million[139] - Pet operating income increased $0.2 million on a non-GAAP basis, excluding facility closure costs, with operating margin improving to 12.1%[140] Net Interest Expense (YTD) Net interest expense decreased 4.2% to $41.6 million due to higher interest income Net Interest Expense (YTD) | Metric | YTD FY23 (in millions) | YTD FY22 (in millions) | Change ($M) | | :----- | :--------------------- | :--------------------- | :---------- | | Net Interest Expense | $41.6 | $43.4 | $(1.8) | - Decrease in net interest expense was due to increased interest income from higher rates on higher cash balances[143] - Average borrowing rate remained stable at 4.5% for both periods[144] Other Income (Expense) (YTD) Other income was $3.1 million, a positive shift driven by foreign currency gains Other Income (Expense) (YTD) | Metric | YTD FY23 (in millions) | YTD FY22 (in millions) | Change ($M) | | :----- | :--------------------- | :--------------------- | :---------- | | Other Income (Expense) | $3.1 | $(1.3) | $4.4 | - The increase in other income was primarily due to foreign currency gains in the current fiscal nine-month period, reversing prior year losses[145] Income Taxes (YTD) The effective income tax rate increased to 24.2% from 23.4% in the prior year period Effective Income Tax Rate (YTD) | Metric | YTD FY23 | YTD FY22 | Change (bps) | | :----- | :------- | :------- | :----------- | | Effective Income Tax Rate | 24.2% | 23.4% | +80 bps | - Increase in tax rate due to reduced tax benefit from stock compensation and increased impact of nondeductible executive compensation[146] Net Income and Earnings Per Share (YTD) Net income decreased 20.3% to $122.8 million, with diluted EPS falling to $2.30 Net Income and EPS (YTD) | Metric | YTD FY23 (in millions) | YTD FY22 (in millions) | Change ($M) | Change (%) | | :----- | :--------------------- | :--------------------- | :---------- | :--------- | | Net Income | $122.8 | $154.1 | $(31.3) | -20.3% | | Diluted EPS | $2.30 | $2.82 | $(0.52) | -18.4% | - Non-GAAP net income was $133.4 million, or $2.49 per diluted share, for YTD FY23, adjusting for facility closure costs[147] Use of Non-GAAP Financial Measures The company uses non-GAAP measures to supplement GAAP results and provide additional insight - Non-GAAP financial measures (net income, diluted EPS, operating income, Adjusted EBITDA) are used to supplement GAAP results for evaluating ongoing operating performance[148][150] - Adjusted EBITDA is defined as income before income tax, net other expense, net interest expense, depreciation, amortization, and stock-based compensation, further excluding one-time facility closure charges[149] Reconciliation of GAAP to Non-GAAP Measures | Metric | Q3 FY23 GAAP (in thousands) | Q3 FY23 Non-GAAP (in thousands) | YTD FY23 GAAP (in thousands) | YTD FY23 Non-GAAP (in thousands) | | :----- | :-------------------------- | :---------------------------- | :--------------------------- | :----------------------------- | | Net income attributable to Central Garden & Pet Company | $83,126 | $93,674 | $122,808 | $133,356 | | Diluted net income per share | $1.56 | $1.75 | $2.30 | $2.49 | | Income from operations | $122,830 | $136,751 | $201,277 | $215,198 | Adjusted EBITDA | Metric | Q3 FY23 Adjusted EBITDA (in thousands) | Q3 FY22 Adjusted EBITDA (in thousands) | YTD FY23 Adjusted EBITDA (in thousands) | YTD FY22 Adjusted EBITDA (in thousands) | | :----- | :------------------------------------- | :------------------------------------- | :-------------------------------------- | :-------------------------------------- | | Total Adjusted EBITDA | $165,757 | $141,363 | $301,334 | $324,350 | | Pet Segment Adjusted EBITDA | $98,911 | $72,407 | $199,347 | $197,391 | | Garden Segment Adjusted EBITDA | $83,950 | $84,682 | $159,370 | $178,589 | Inflation Inflationary pressures continued in fiscal 2023, though at a reduced rate compared to fiscal 2022 - Revenues and margins are dependent on economic factors including inflation, energy costs, consumer behavior, and currency fluctuations[157] - Experienced adverse impact from rising input costs (grain, seed, fuel, garden controls/fertilizers) in recent fiscal periods[157] - Inflationary pressure continued in fiscal 2023, but at a reduced rate in recent months compared to fiscal 2022[158] Weather and Seasonality The Garden segment is highly seasonal, with most sales and all operating income in Q2 and Q3 - Garden segment business is highly seasonal, with approximately 82% of net sales occurring during the second and third fiscal quarters[162] - Substantially all of the Garden segment's operating income is typically generated in Q2 and Q3, offsetting Q1 operating losses[159] - Pet supplies businesses have a year-round selling cycle with slight seasonality, not requiring large inventory quantities for peak demands[162] Liquidity and Capital Resources The company's liquidity improved significantly, with strong operating cash flow and reduced spending - Growth is financed through internally generated funds, bank borrowings, supplier credit, and sales of equity and debt securities[160] - Business seasonality impacts working capital, with Garden segment sales concentrated in Q2 and Q3[161][162] - Expects cash flows from operations, Amended Credit Facility, and supplier arrangements to be adequate for working capital and capital expenditures for the foreseeable future[166][167] Operating Activities Net cash from operating activities improved by $310.0 million, driven by inventory reduction Cash Flow from Operating Activities | Metric | 9 Months Ended June 24, 2023 (in millions) | 9 Months Ended June 25, 2022 (in millions) | Change ($M) | | :----- | :--------------------------------------- | :--------------------------------------- | :---------- | | Net cash provided (used) by operating activities | $227.6 | $(82.4) | $310.0 | - Increase in cash provided by operating activities was primarily due to changes in working capital, driven by a reduction in inventory levels[163] Investing Activities Net cash used in investing activities decreased by $59.4 million due to lower capital expenditures Cash Flow from Investing Activities | Metric | 9 Months Ended June 24, 2023 (in millions) | 9 Months Ended June 25, 2022 (in millions) | Change ($M) | | :----- | :--------------------------------------- | :--------------------------------------- | :---------- | | Net cash used in investing activities | $(41.5) | $(100.8) | $(59.4) | - Decrease in cash used in investing activities was primarily due to lower capital expenditures[164] - Anticipated capital expenditures for fiscal 2023 are $60 million to $70 million, with approximately $41 million invested through June 24, 2023[167] Financing Activities Net cash used by financing activities decreased by $12.6 million due to reduced stock repurchases Cash Flow from Financing Activities | Metric | 9 Months Ended June 24, 2023 (in millions) | 9 Months Ended June 25, 2022 (in millions) | Change ($M) | | :----- | :--------------------------------------- | :--------------------------------------- | :---------- | | Net cash used by financing activities | $(33.7) | $(46.2) | $(12.6) | - Decrease in cash used by financing activities was primarily due to decreased open market purchases of common stock[165] Stock Repurchases | Stock Repurchases (9 Months Ended) | Shares (millions) | Cost (millions) | Average Price per Share | | :--------------------------------- | :---------------- | :-------------- | :---------------------- | | Common Stock (CENT) FY23 | 0.2 | $7.7 | $37.23 | | Class A Common Stock (CENTA) FY23 | 0.6 | $20.6 | $35.28 | | Common Stock (CENT) FY22 | 0.013 | $0.6 | $41.30 | | Class A Common Stock (CENTA) FY22 | 0.9 | $37.7 | $41.44 | Total Debt Total debt outstanding remained stable at approximately $1.19 billion Total Debt Outstanding | Metric | June 24, 2023 (in millions) | June 25, 2022 (in millions) | Change ($M) | | :----- | :-------------------------- | :-------------------------- | :---------- | | Total Debt Outstanding | $1,187.8 | $1,186.2 | $1.6 | Senior Notes The company has three series of senior notes outstanding and was in compliance with all covenants - The Company has $400 million of 4.125% senior notes due April 2031, $500 million of 4.125% senior notes due October 2030, and $300 million of 5.125% senior notes due February 2028[170][176][181] - All senior notes are unconditionally guaranteed by domestic restricted subsidiaries and contain customary high yield covenants[172][178][182] - The Company was in compliance with all financial covenants as of June 24, 2023[175][180][184] Asset-Based Loan Facility Amendment The $750 million credit facility was amended to transition from LIBOR to SOFR - A $750 million senior secured asset-based revolving credit facility, maturing December 16, 2026, was established via Amended Credit Agreement in December 2021[185] - Borrowing base supported approximately $559 million access as of June 24, 2023, with no outstanding borrowings[186] - Amended on May 15, 2023, to transition from LIBOR to SOFR for interest rate calculations[187] Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities This section provides summarized financial data for the Parent/Issuer and Guarantor subsidiaries - Summarized financial information is presented for the Parent/Issuer and Guarantor subsidiaries, with intercompany balances eliminated[194] - Bell Nursery Holdings, LLC, Bell Nursery USA, LLC, and D&D Commodities Limited were added as guarantors in Q2 FY23, and prior fiscal year results were adjusted accordingly[195] Summarized Statement of Operations | Metric (Nine Months Ended June 24, 2023) | Parent/Issuer (in thousands) | Guarantors (in thousands) | | :--------------------------------------- | :--------------------------- | :------------------------ | | Net sales | $587,167 | $1,966,523 | | Gross profit | $128,224 | $610,493 | | Income (loss) from operations | $(21,767) | $223,505 | | Net income (loss) | $(47,547) | $168,822 | Summarized Balance Sheet | Metric (As of June 24, 2023) | Parent/Issuer (in thousands) | Guarantors (in thousands) | | :--------------------------- | :--------------------------- | :------------------------ | | Total assets | $4,101,335 | $3,883,964 | | Total liabilities | $2,630,914 | $500,357 | New Accounting Pronouncements No recent accounting pronouncements are expected to have a material impact on financial statements - No material impact from recent accounting pronouncements is anticipated[45][198] Critical Accounting Policies, Estimates and Judgments There have been no material changes to the company's critical accounting policies and estimates - No material changes to critical accounting policies, estimates, and judgments since the fiscal year ended September 24, 2022, Annual Report on Form 10-K[199] Item 3. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes in the company's exposure to market risk - No material changes in market risk exposure since the Annual Report on Form 10-K for the fiscal year ended September 24, 2022[200] Item 4. Controls and Procedures Disclosure controls and procedures were deemed effective, with no material changes in internal control - CEO and principal financial officer concluded that disclosure controls and procedures were effective as of June 24, 2023[201] - No material changes in internal control over financial reporting occurred during the third quarter of fiscal 2023[202] PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is involved in a legal proceeding whose resolution is not expected to be material - Ongoing legal proceeding with Nite Glow Industries, Inc. concerning patent infringement and misappropriation of confidential information[204] - Appeals court dismissed patent and breach of contract claims, ordering a new trial on damages for misappropriation limited to "head start" benefit[204] - Management believes the ultimate resolution will not have a material impact on the Company's consolidated financial statements[204] Item 1A. Risk Factors There have been no material changes from previously disclosed risk factors - No material changes from risk factors disclosed in the Form 10-K for the fiscal year ended September 24, 2022[206] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 490,409 shares during the quarter, with $84.5 million remaining authorized Issuer Purchases of Equity Securities | Period | Total Number of Shares Purchased | Average Price Paid per Share | Maximum Dollar Value Remaining Under Plans | | :----- | :------------------------------- | :--------------------------- | :----------------------------------------- | | March 26, 2023 - April 29, 2023 | 94,445 | $36.01 | $94,591,000 | | April 30, 2023 - May 27, 2023 | 139,394 | $35.89 | $93,491,000 | | May 28, 2023 - June 24, 2023 | 256,570 | $35.76 | $84,501,000 | | Total | 490,409 | $35.85 | $84,501,000 | - As of June 24, 2023, $84.5 million of authorization remained under the 2019 Repurchase Authorization, which has no fixed expiration date[208] - Supplemental stock purchases are authorized to minimize dilution from equity compensation plans[208] Item 3. Defaults Upon Senior Securities This item is not applicable to the company - This item is not applicable to the Company[211] Item 4. Mine Safety Disclosures This item is not applicable to the company - This item is not applicable to the Company[211] Item 5. Other Information This item is not applicable to the company - This item is not applicable to the Company[211] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including agreements and certifications - Exhibits include the First Amendment to Third Amended and Restated Credit Agreement, List of Guarantor Subsidiaries, Certifications of Principal Executive and Financial Officers (Sarbanes-Oxley Act Sections 302 and 1350), and financial statements in Inline XBRL format[212]