Central Garden & Pet(CENTA) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Central Garden & Pet Company for the three and six months ended March 30, 2024, and March 25, 2023, encompassing the Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Cash Flows, and the accompanying Notes to the financial statements | Financial Statement | Period Ended | Total Assets ($ thousands) | Total Liabilities ($ thousands) | Total Equity ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Balance Sheet | Mar 30, 2024 | 3,540,018 | 2,027,851 | 1,512,167 | | | Sep 30, 2023 | 3,378,648 | 1,925,835 | 1,452,813 | | Income Statement | Three Months Ended Mar 30, 2024 ($ thousands) | Three Months Ended Mar 25, 2023 ($ thousands) | Six Months Ended Mar 30, 2024 ($ thousands) | Six Months Ended Mar 25, 2023 ($ thousands) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | 900,090 | 909,004 | 1,534,623 | 1,536,667 | | Operating Income | 93,447 | 78,041 | 101,859 | 78,447 | | Net Income | 61,987 | 48,115 | 62,417 | 39,682 | Notes to Condensed Consolidated Financial Statements The notes provide detailed information supporting the financial statements, covering the basis of presentation, a recent stock dividend, revenue recognition policies, acquisitions, fair value measurements, goodwill and intangible assets, debt structure, segment information, and legal contingencies, with key events including the acquisition of TDBBS, LLC and a one-for-four stock dividend distributed in February 2024 - On November 3, 2023, the Company acquired TDBBS, LLC, a provider of premium natural dog chews and treats, for approximately $60 million to expand its portfolio and enhance e-commerce capabilities[167] - In December 2023, the Board approved a stock dividend of one Class A Common Stock share for every four outstanding shares, distributed on February 8, 2024; all share and per-share amounts have been retroactively adjusted[126][151] | Debt Instrument | Principal Amount ($ millions) | Interest Rate | Maturity Date | | :--- | :--- | :--- | :--- | | Senior Notes | 400 | 4.125% | April 2031 | | Senior Notes | 500 | 4.125% | October 2030 | | Senior Notes | 300 | 5.125% | February 2028 | | Credit Facility | 750 (Capacity) | SOFR + 1.00%-1.50% | December 2026 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the second quarter and first half of fiscal 2024, highlighting a slight decrease in net sales driven by declines in durable pet products, offset by growth in Garden organic sales, while gross margin and operating income improved significantly due to the 'Cost and Simplicity' program, moderating input costs, and strategic exits from certain business lines, also covering liquidity, capital resources, debt structure, and the use of non-GAAP financial measures Results of Operations For the second quarter of fiscal 2024, net sales decreased 1.0% to $900.1 million while organic sales decreased 0.7%, with gross margin improving by 240 basis points to 31.0% and operating income rising 19.7% to $93.4 million; for the six-month period, net sales were flat, but operating income increased 29.8% to $101.9 million, driven by cost-saving initiatives and favorable segment performance, particularly in Garden organic sales, despite softness in the Pet segment | Metric | Q2 FY2024 | Q2 FY2023 | Change | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $900.1M | $909.0M | ($8.9M) | (1.0)% | | Gross Profit | $278.9M | $259.6M | $19.3M | 7.4% | | Operating Income | $93.4M | $78.0M | $15.4M | 19.7% | | Net Income | $62.0M | $48.1M | $13.9M | 28.9% | | Diluted EPS | $0.93 | $0.72 | $0.21 | 29.2% | - Q2 organic sales performance varied by segment: Pet organic sales decreased 3.0% due to lower demand for durable products, while Garden organic sales increased 1.9%, aided by favorable weather and strong performance in live plants and grass seed[245] - Gross margin for Q2 increased by 240 basis points, benefiting from the 'Cost and Simplicity' program, the exit from the private-label pet bed business, and moderating input costs[246] | Metric | H1 FY2024 | H1 FY2023 | Change | YoY Change (%) | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $1,535M | $1,537M | ($2M) | (0.1)% | | Gross Profit | $457.7M | $431.3M | $26.4M | 6.1% | | Operating Income | $101.9M | $78.5M | $23.4M | 29.8% | | Net Income | $62.4M | $39.7M | $22.7M | 57.2% | Use of Non-GAAP Financial Measures The company utilizes non-GAAP financial measures, including non-GAAP net income, non-GAAP operating income, adjusted EBITDA, and organic net sales, to supplement its GAAP results by excluding specific items like facility closure costs, thereby providing investors with a clearer view of ongoing operating performance, with reconciliations to comparable GAAP measures provided - Non-GAAP measures for Q2 FY2024 exclude $5.3 million in costs related to the closure of a manufacturing facility in Chico, California, and the consolidation of the Southeast distribution network[283][221] | Metric | Q2 FY2024 | Q2 FY2023 | H1 FY2024 | H1 FY2023 | | :--- | :--- | :--- | :--- | :--- | | GAAP Net Income | $62.0M | $48.1M | $62.4M | $39.7M | | Non-GAAP Net Income | $66.0M | $48.1M | $66.5M | $39.7M | | Adjusted EBITDA Reconciliation ($ thousands) | Q2 FY2024 | Q2 FY2023 | H1 FY2024 | H1 FY2023 | | :--- | :--- | :--- | :--- | :--- | | Income from operations (GAAP) | 93,447 | 78,041 | 101,859 | 78,447 | | Depreciation & amortization | 22,812 | 22,109 | 45,357 | 43,801 | | Noncash stock-based compensation | 2,907 | 6,750 | 8,927 | 13,327 | | Facility closures | 5,270 | - | 5,270 | - | | Adjusted EBITDA (Non-GAAP) | 124,436 | 106,900 | 161,413 | 135,575 | Liquidity and Capital Resources The company's primary sources of liquidity are cash from operations and its $750 million credit facility, with total debt at $1.2 billion as of March 30, 2024, and approximately $685 million available under the credit facility; net cash used by operating activities was $94.3 million for the six-month period, a slight improvement from the prior year, and the company believes its liquidity is adequate to meet its needs for at least the next 12 months, including planned capital expenditures of approximately $70 million for fiscal 2024 | Cash Flow Activity ($ millions) | Six Months Ended Mar 30, 2024 | Six Months Ended Mar 25, 2023 | | :--- | :--- | :--- | | Net cash used by operating activities | (94.3) | (97.1) | | Net cash used in investing activities | (80.3) | (30.8) | | Net cash (used) provided by financing activities | (13.2) | 8.6 | - Total debt outstanding was $1,189.3 million as of March 30, 2024; the company has a $750 million asset-based revolving credit facility with net availability of approximately $685 million and no outstanding borrowings as of the quarter's end[268][43] - The company anticipates capital expenditures of approximately $70 million in fiscal 2024, primarily for plant and equipment upgrades and IT platform investments[267] Quantitative and Qualitative Disclosures About Market Risk The company reports that there has been no material change in its exposure to market risk from the information provided in its Annual Report on Form 10-K for the fiscal year ended September 30, 2023 - There has been no material change in the company's exposure to market risk since its last annual report[89] Controls and Procedures Management concluded that as of March 30, 2024, the company's disclosure controls and procedures were not effective due to previously identified material weaknesses in internal control over financial reporting related to IT general controls and controls at an outsourced service provider, with the company actively engaged in a remediation plan to address these weaknesses - Management, including the Principal Executive Officer and Principal Financial Officer, concluded that disclosure controls and procedures were not effective as of March 30, 2024[90] - The ineffectiveness is due to material weaknesses identified as of September 30, 2023, related to IT general controls at the Live Plant and Green Garden businesses and controls over an outsourced revenue process service provider[91] - An ongoing remediation plan includes enhancing control procedures, improving personnel training, hiring additional experienced staff, and expanding controls related to revenue processes for the Live Plants business[75] PART II. OTHER INFORMATION Legal Proceedings The company is involved in a lawsuit with Nite Glow Industries, Inc., where a prior verdict was partially overturned on appeal, leaving a single claim for misappropriation of confidential information, and a retrial on damages concluded in March 2024 with a decision pending, though the company does not believe the final resolution will have a material impact on its financial statements - The ongoing legal proceeding involves a claim by Nite Glow Industries for misappropriation of confidential information; a retrial to determine damages concluded in March 2024, with a court decision pending[77][217] - Management intends to vigorously defend its position and believes the ultimate outcome will not materially affect the company's consolidated financial statements, though litigation outcomes are inherently uncertain[77][78][79] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended September 30, 2023 - No material changes from the risk factors disclosed in the Form 10-K for the fiscal year ended September 30, 2023, have been identified[80] Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's repurchase of its equity securities during the fiscal quarter ended March 30, 2024, with a total of 117,964 shares repurchased at an average price of $36.82 per share, primarily related to tax withholding for vested restricted stock, and as of the quarter's end, $82.0 million remained available under the 2019 share repurchase authorization | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Dec 31, 2023 - Feb 3, 2024 | 7,508 | $33.16 | | Feb 4, 2024 - Mar 2, 2024 | 99,225 | $37.14 | | Mar 3, 2024 - Mar 30, 2024 | 11,231 | $36.43 | | Total | 117,964 | $36.82 | - As of March 30, 2024, the company had $82.0 million of authorization remaining under its 2019 Repurchase Authorization program[97] Exhibits This section lists the exhibits filed with the Form 10-Q, which include certifications from the Principal Executive Officer and Principal Financial Officer as required by the Sarbanes-Oxley Act, a list of guarantor subsidiaries, and financial statements formatted in Inline XBRL - Exhibits filed include CEO and CFO certifications pursuant to Section 302 of the Sarbanes-Oxley Act[83][101] - The filing also includes financial data formatted in Inline XBRL as required by the SEC[102]