# CENTRAL GARDEN & PET CO (CENT) FY 2023 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CENTRAL GARDEN & PET CO's 10-K for fiscal year 2023.

SEC filing source: https://www.sec.gov/Archives/edgar/data/887733/000088773323000017/cent-20230930.htm
Accession: 0000887733-23-000017
Filing date: 2023-11-28
Report date: 2023-09-30
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/CENT/
All MD&A years: /company/CENT/mda/
Previous year: /company/CENT/mda/fy2022/ (FY 2022)
Next year: /company/CENT/mda/fy2024/ (FY 2024)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is management’s discussion of the financial results, liquidity and other key items related to our performance. This discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-K. This Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See “Forward-Looking Statements” and “Item 1A – Risk Factors.”

Business Overview

Central Garden & Pet Company is a leading innovator, producer and distributor of branded and private label products for the lawn & garden and pet supplies markets in the United States.

In fiscal 2023, 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 2023, our operating income was $211 million, consisting of income from our Pet segment of $198 million, income from our Garden segment of $123 million and corporate expenses of $111 million.

Fiscal 2023 Financial Highlights

Financial summary:

•Net sales for fiscal 2023 decreased $28.5 million, or 0.9%, to $3,310 million. The decline in sales was primarily in our Garden segment, the sales of which decreased $27.6 million, or 1.9%.

•Gross profit for fiscal 2023 decreased $45.5 million, or 4.6%, to $946.8 million. Gross margin declined 110 basis points in fiscal 2023 to 28.6%, from 29.7% in fiscal 2022. On a non-GAAP basis, gross margin declined 80 basis points in fiscal 2023.

•Our operating income decreased $49.4 million, or 19.0%, to $210.6 million in fiscal 2023. On a non-GAAP basis, operating income declined $32.8 million in fiscal 2023.

•Net income for fiscal 2023 was $125.6 million, or $2.35 per share on a diluted basis compared to $152.2 million, or $2.80 per share on a diluted basis in fiscal 2022. On a non-GAAP basis, net income was $138.5 million, or $2.59 per share on a diluted basis compared to $152.2 million, or $2.80 per share on a diluted basis in fiscal 2022.

Recent Developments:

Pet Segment Facility Closures

As part of our Cost and Simplicity program, we closed several facilities in fiscal 2023. In the third quarter of fiscal 2023, we closed a leased manufacturing and distribution facility in Athens, Texas. In the fourth quarter of fiscal 2023, we closed a leased manufacturing and distribution facility in Amarillo, Texas. The closures reflect our purposeful exit of low-margin private-label pet bed product lines and our efforts to leverage the supply chain synergies of our cushion facilities, and to achieve a simpler, more efficient manufacturing and distribution network in our outdoor cushion facilities. As a result, in fiscal 2023 we incurred approximately $15.7 million of one-time costs, including $9.8 million in cost of goods sold and $5.9 million in selling, general and administrative expenses, composed of charges for facilities closure, severance, inventory liquidation and related intangibles, the majority of which was non-cash.

Sale of Garden Segment Independent Distribution Business

In the fourth quarter of fiscal 2023, we sold our independent garden center distribution business for approximately $20 million for inventory and the related customer data. Associated with the sale, we are closing one facility and part of another facility due to excess space previously dedicated to serving the independent garden channel. As a result of these planned closures, we recorded a gain of $5.8 million

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which is net of the inventory sold, inventory transport costs and the associated facility closure costs, including severance. The gain was recorded as part of selling, general and administrative expenses.

We exited the independent garden center distribution business to simplify our garden business and optimize our customer footprint. While we exited the distribution of products to the independent garden center channel, we retained our third-party distribution business with our largest three retail partners and other select national accounts. The business sold represented less than 5% of our Garden net sales.

Subsequent Event

On November 3, 2023, we acquired TDBBS, LLC (“TDBBS”), a provider of premium natural dog chews and treats for approximately $60 million. The addition of TDBBS will expand our portfolio with bully and collagen sticks, bones and jerky, add scale to our dog and cat business and enhance our eCommerce and digital capabilities.

Results of Operations (GAAP)

The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items bear to net sales:

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[[/GREPCENT_TABLE]]

Fiscal 2023 Compared to Fiscal 2022

Net Sales

Net sales for fiscal 2023 decreased $28.5 million, or 0.9%, to $3,310.1 million from $3,338.6 million in fiscal 2022, even with the benefit of an additional week in fiscal 2023 compared to fiscal 2022. Our branded product sales, which include products we produce under Central brand names and products we produce under third-party brands, decreased $33.2 million, and sales of other manufacturers’ products increased $4.7 million. The decline in branded sales was due primarily to lower sales of private label products we produce under third-party brands in both the Garden and Pet segments. Sales of branded products represented 78% of our net sales in both fiscal 2023 and fiscal 2022. Sales of other manufacturers' products represented 22% of our net sales.

The following table indicates each class of similar products which represented approximately 10% or more of our consolidated net sales in the fiscal years presented:

[[GREPCENT_TABLE]]
[["Category","","2023","","2022","","2021"],["","","(in millions)"],["Other garden products","","$","832.2","","","$","865.3","","","$","876.6"],["Other pet products","","699.4","","","765.9","","","767.0"],["Other manufacturers' products","","734.9","","","730.2","","","749.1"],["Dog & cat products","","568.6","","","542.9","","","570.9"],["Wild bird","","475.0","","","434.3","","","340.1"],["Total","","$","3,310.1","","","$","3,338.6","","","$","3,303.7"]]
[[/GREPCENT_TABLE]]

Pet net sales decreased $0.9 million, to $1,877.2 million in fiscal 2023 from $1,878.1 million in fiscal 2022. The decline in Pet net sales was volume-related and due primarily to lower demand for durable pet products, particularly in our outdoor cushion business and aquatics business, and our exit of profit-challenged product lines in our private label pet bed business. These declines were partially offset by

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increased sales in our dog and cat treats and toys business and our wild bird feed business. Pet branded sales decreased $14.1 million, and sales of other manufacturers' products increased $13.2 million.

Garden net sales decreased $27.6 million, or 1.9%, to $1,432.9 million in fiscal 2023 from $1,460.5 million in fiscal 2022. The decrease in Garden net sales was due primarily to lower sales in our private-label controls and fertilizer business and our grass seed business, partially offset by increased sales in our wild bird feed business. The volume related sales decline was due primarily to adverse weather during our second quarter of fiscal 2023, unfavorable retailer inventory management and lighter retailer foot traffic. Garden branded sales decreased $19.1 million and sales of other manufacturers' products decreased $8.5 million.

Gross Profit

Gross profit in fiscal 2023 decreased $45.5 million, or 4.6%, to $946.8 million from $992.3 million in fiscal 2022. Gross margin declined 110 basis points to 28.6% in fiscal 2023 from 29.7% in fiscal 2022. The decrease in gross profit resulted from declines in both net sales and gross margin, primarily in Garden, impacted by unfavorable overhead absorption and inflation.

On a non-GAAP basis, excluding $9.8 million related to the facility closures in Pet, gross profit decreased $35.7 million and gross margin declined 80 basis points. Garden decreases in both gross profit and gross margin were partially offset by minor increases in Pet, compared to the prior year. The decline in Garden gross margin was due primarily to unfavorable overhead absorption, impacted by lower sales and production volumes, initial start-up costs associated with a live goods facility acquired in the prior year, and cost inflation, partially offset by pricing actions.

Selling, General and Administrative

Selling, general and administrative expenses increased $3.9 million, or 0.5%, from $732.3 million in fiscal 2022 to $736.2 million in fiscal 2023. As a percentage of net sales, selling, general and administrative expenses increased from 21.9% in fiscal 2022 to 22.2% in fiscal 2023. The increase was due to $6.8 million related to the closure of facilities in the Pet segment and intangible asset impairments, partially offset by the gain from the sale of the independent garden center distribution business. Excluding these items, non-GAAP selling, general and administrative expense declined $2.9 million and as a percentage of net sales was 22.0%.

Selling and delivery expense decreased $20.6 million, or 5.8%, to $337.5 million in fiscal 2023 and decreased as a percentage of net sales from 10.7% in fiscal 2022 to 10.2% in fiscal 2023. The decrease in selling and delivery expense, in both the Garden and Pet segments, was due primarily to reduced commercial spend in an effort to align with the lower retailer foot traffic and lower product volume.

Warehouse and administrative expense increased $24.5 million, or 6.6%, to $398.7 million in fiscal 2023 and increased as a percentage of net sales to 12.0% in fiscal 2023 from 11.2% in fiscal 2022. The increase in warehouse and administrative expense was primarily in the Pet segment and secondarily in Corporate. Pet included $8.7 million of expense related to facility closures and the impairment of an intangible asset. Garden had a relatively small increase in warehouse and administrative expense, due to income of $1.8 million resulting from a $5.8 million gain from the sale of the independent garden center distribution business, which is net of related facility closure costs, and intangible asset impairment. Corporate expenses increased $8.0 million due primarily to an increase in payroll related costs, medical insurance and legal expense partially offset by discretionary spend reductions (e.g., travel and entertainment expense). Corporate expenses included within administrative expense relate to the costs of unallocated executive, administrative, finance, legal, human resources, and information technology functions.

Operating Income

Operating income decreased $49.4 million, or 19.0%, to $210.6 million in fiscal 2023 from $260.0 million in fiscal 2022. Our operating margin was 6.4% in fiscal 2023, decreasing from 7.8% in fiscal 2022. Decreased sales of $28.5 million, a 110 basis point decline in gross margin and increased selling, general and administrative expenses all contributed to a lower operating income. Contributing to the lower gross margin and increased selling, general administrative expenses were facility closures and intangible asset impairments. Excluding the impact of these costs, on a non-GAAP basis, operating margin was 6.9%.

Pet operating income decreased $10.9 million, or 5.2%, to $198.0 million in fiscal 2023 from $208.9 million in fiscal 2022. Pet operating income decreased due to slightly lower sales, a decrease in gross margin and increased selling, general and administrative expenses. Pet operating margin decreased from 11.1% in fiscal 2022 to 10.5% in fiscal 2023. On a non-GAAP basis, Pet operating income increased $7.5 million and operating margin increased to 11.5% in fiscal 2023.

Garden operating income decreased $30.5 million, or 19.8%, to $123.5 million in fiscal 2023 from $154.0 million in fiscal 2022. Garden was the largest contributor to the Company’s lower operating income and operating margin. Garden operating income decreased due to lower sales and a lower gross margin, partially offset by lower selling, general and administrative expenses. Garden operating income and operating margin were negatively impacted by lower sales volumes due primarily to adverse weather, unfavorable retailer inventory management and lighter retailer foot traffic.

Corporate expenses increased $8.0 million due primarily to an increase in payroll related costs, medical insurance and legal expense partially offset by discretionary spend reductions (e.g., travel and entertainment expense).

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Net Interest Expense

Net interest expense decreased $7.9 million, or 13.7%, from $57.5 million in fiscal 2022 to $49.7 million in fiscal 2023. The decrease in net interest expense was due to increased interest income resulting from both higher interest rates and higher cash balances during fiscal 2023.

Debt outstanding on September 30, 2023 was $1,188.2 million compared to $1,186.6 million as of September 24, 2022. Our average borrowing rate was 4.5% in both fiscal 2023 and fiscal 2022.

Other Income (Expense)

Other income (expense) is comprised of income or loss from investments accounted for under the equity method of accounting and foreign currency exchange gains and losses. Other income (expense) was $1.5 million of income in fiscal 2023 compared to an expense of $3.6 million for fiscal 2022, due primarily to foreign currency gains in fiscal 2023 as compared to foreign currency losses in fiscal 2022.

Income Tax

Our effective income tax rate was 22.4% for fiscal 2023 compared to 23.2% for fiscal 2022. The decrease in our effective income tax rate was primarily due to a decrease in the blended state income tax rate from a mix change in the states where income was earned in the current year as compared to the prior year.

Net Income and Earnings Per Share

Our net income for fiscal 2023 was $125.6 million, or $2.35 per diluted share, compared to $152.2 million, or $2.80 per diluted share, for fiscal 2022. On a non-GAAP basis, net income in fiscal 2023 was $138.5 million, or $2.59 per diluted share.

Fiscal 2022 Compared to Fiscal 2021

For a discussion of our results of operations in fiscal 2022 compared to fiscal 2021, please see Item 7 of our Annual Report on Form 10-K for the fiscal year ended September 24, 2022 filed with the SEC.

Use of Non-GAAP Financial Measures

We report our financial results in accordance with GAAP. However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including adjusted EBITDA, non-GAAP operating income, and non-GAAP net income and diluted net income per share. 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 and depreciation and amortization and stock-based compensation expense (or operating income plus depreciation and amortization expense and stock-based compensation expense). Adjusted EBITDA further excludes one-time charges related to facility closures, the gain from the sale of our independent garden center distribution business and intangible asset impairment charges. 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 evaluations. 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.

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:

•Facility closures: we exclude the impact of the closure of facilities as they represent infrequent transactions that occur in limited circumstances that impact the comparability between operating periods. We believe the adjustment of closure costs supplements the GAAP information with a measure that may be used to assess the performance of our ongoing operations.

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•Gain on sale of a business or service line: we exclude the impact of the gain 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 gain supplements the GAAP information with a measure that may be used to assess the performance of our ongoing operations.

•Asset impairment charges: we exclude the impact of asset impairments on intangible assets as such non-cash amounts are inconsistent in amount and frequency. We believe that the adjustment of these charges supplements the GAAP information with a measure that can be used to assess the performance of our ongoing operations.

•Tax impact: adjustment represents the impact of the tax effect of the pre-tax non-GAAP adjustments excluded from non-GAAP net income. The tax impact of the non-GAAP adjustments is calculated based on the consolidated effective tax rate on a GAAP basis, applied to the non-GAAP adjustments, unless the underlying item has a materially different tax treatment.

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 made reflect the following:

(1)During the third quarter of fiscal 2023, we recognized incremental expense of $13.9 million in our Pet segment in the consolidated statement of operations, from the closure of a leased manufacturing and distribution facility in Athens, Texas. During the fourth quarter of fiscal 2023, we recognized incremental expense of $1.8 million in our Pet segment in the consolidated statement of operations, from the closure of a leased manufacturing and distribution facility in Amarillo, Texas.

(2)During the fourth quarter of fiscal 2023, we recognized a gain of $5.8 million from the sale of our independent garden center distribution business, which includes the impact of associated facility closure costs. The gain is included in selling, general and administrative expense in the consolidated statements of operations.

(3)During the fourth quarter of fiscal 2023, we recognized a non-cash impairment charge in our Pet segment of $2.8 million related to the impairment of intangible assets caused by the loss of a significant customer in our live fish business. Also, during the fourth quarter of fiscal 2023, we recognized a non-cash impairment charge in our Garden segment of $3.9 million related to the impairment of intangible assets due to reduced demand for products we sold under an acquired trade name. The impairments were recorded as part of selling, general and administrative costs.

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[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

30

[[GREPCENT_TABLE]]
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[[/GREPCENT_TABLE]]

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[[/GREPCENT_TABLE]]

Inflation

Our revenues and margins are dependent on various economic factors, including rates of inflation, energy costs, interest rates, consumer attitudes toward discretionary spending, currency fluctuations, and other macro-economic factors which may impact levels of consumer spending. In fiscal years 2021 through 2023, we were adversely impacted by high input costs due to inflation, particularly relating to prices for grain and seed, fuel and the ingredients used in our garden controls and fertilizer business as well as heightened import costs such as shipping container costs and tariffs. In fiscal 2022, our gross and operating margins increased as we were able to increase prices to offset higher input costs. Costs continued rise in fiscal 2023, however, and we were unable to continue to increase prices to our customers at a pace sufficient for us to maintain our margins.

In fiscal 2023, we continued to experience inflationary pressures, although at a reduced rate in the latter months of the fiscal year. In fiscal 2022, we continued to experience increasing inflationary pressure, including notable increases in costs for key commodities, materials, labor and freight. During fiscal 2021, inflation was broad-based and we saw significant increases across commodity and material costs, freight and labor.

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 2023, approximately 67% of our Garden segment’s net sales and 58% 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.

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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 67% 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 provided by operating activities increased $415.6 million, from $34.0 million of cash used in operating activities in fiscal 2022 to $381.6 million of cash provided by operating activities in fiscal 2023. The increase in cash provided was due primarily to changes in our working capital accounts, primarily a decrease in inventory, due to our focus on converting inventory to cash, and in accounts receivable.

Net cash used in operating activities increased $284.8 million, from $250.8 million of cash provided by operating activities in fiscal 2021 to $34.0 million of cash used in operating activities in fiscal 2022. The increase in cash used was due primarily to changes in our working capital accounts, primarily an increase in inventory, driven in part by higher costs of inventory in this inflationary environment as well as management's decision to increase inventory levels to help improve fill rates and customer service adversely impacted by a challenged supply chain.

Investing Activities

Net cash used in investing activities decreased $108.4 million from $143.0 million in fiscal 2022 to $34.6 million in fiscal 2023. The decrease in cash used in investing activities was due primarily to reduced capital expenditures, decreased investments in fiscal 2023 compared to fiscal 2022, and proceeds received from the sale of our independent garden center distribution business.

Net cash used in investing activities decreased $756.4 million from $899.4 million in fiscal 2021 to $143.0 million in fiscal 2022. The decrease in cash used in investing activities was due primarily to acquisition activity in the prior year. The decrease was partially offset by an increase in capital expenditures of approximately $35 million in the current year compared to the prior year and increased investments in the current year compared to the prior year. During fiscal 2021, we acquired DoMyOwn for approximately $81 million, Hopewell Nursery for approximately $81 million, Green Garden Products for approximately $571 million and D&D Commodities for approximately $88 million.

Financing Activities

Net cash used by financing activities decreased $29.2 million from $66.8 million of cash used in fiscal 2022 to $37.6 million of cash used in fiscal 2023. The decrease in cash used by financing activities during the current year was due primarily to lower stock repurchase activity in fiscal 2023 compared to fiscal 2022.

Net cash used in financing activities increased $487.3 million from $420.5 million of cash provided in fiscal 2021 to $66.8 million of cash used in fiscal 2022. The increase in cash used in financing activities during the fiscal 2022 was due primarily to our prior year issuance of $500 million of our 2030 Notes in October 2020 and $400 million of our 2031 Notes in April 2021, partially offset by the prior year repayment of our 2023 Notes and the corresponding premium paid on extinguishment as well as debt issuance costs incurred on the issuances of the 2030 Notes and 2031 Notes. We also increased open market purchases of our common stock during fiscal 2022 as compared to fiscal 2021.

We expect that our principal sources of funds will be cash generated from our operations, proceeds from our debt and equity offerings, and, if necessary, borrowings under our $750 million asset backed loan facility. Based on our anticipated cash needs, availability under our asset backed loan 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.

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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 $70 million over the next 12 months.

As part of our growth strategy, we have acquired a large number of businesses 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.

Stock Repurchases

During fiscal 2023, we repurchased approximately 0.6 million shares of our non-voting common stock (CENTA) on the open market at an aggregate cost of approximately $22.2 million, or $35.31 per share, and approximately 0.2 million of our voting common stock (CENT) on the open market at an aggregate cost of approximately $8.5 million, or $37.31 per share. During fiscal 2022, we repurchased approximately 1.4 million shares of our non-voting common stock (CENTA) on the open market at an aggregate cost of approximately $56.2 million, or $40.79 per share, and approximately 39,000 shares of our voting common stock (CENT) on the open market at an aggregate cost of approximately $1.6 million, or $39.72 per share, in addition to $5.4 million used for minimum statutory tax withholdings related to the net share settlement of our stock.

In August 2019, our Board of Directors authorized a share repurchase program to purchase up to $100 million of our common stock (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. As of September 30, 2023, we had $83.2 million remaining under our 2019 Repurchase Authorization.

In February 2019, the Board of Directors authorized us to make supplemental 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 or 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. As of September 30, 2023, we did not have any shares remaining to repurchase under our Equity Dilution Authorization.

Total Debt

At September 30, 2023, our total debt outstanding was $1,188.2 million versus $1,186.6 million at September 24, 2022.

Senior Notes

Issuance of $400 million 4.125% Senior Notes due 2031

On April 30, 2021, we issued $400 million aggregate principal amount of 4.125% senior notes due April 2031 (the "2031 Notes"). We used a portion of the net proceeds from the offering to repay all outstanding borrowings under our Amended Credit Facility, with the remainder 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. 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 anytime, 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 financial covenants as of September 30, 2023.

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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 used 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.

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 Amended Credit Facility.

We may redeem some or all of the 2030 Notes at anytime, at our option, prior to October 15, 2025, at a price equal to 100% of the principal amount plus a “make-whole” premium. 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 financial covenants as of September 30, 2023.

$300 Million, 5.125% Senior Notes due 2028

On December 14, 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 Amended Credit Facility.

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%, 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 September 30, 2023.

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 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 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. Proceeds of the Amended Credit Facility will be used for general corporate purposes. Net availability under the Amended Credit Facility was approximately $493 million as of September 30, 2023. The Amended Credit Facility includes a $50 million sublimit for the issuance of standby letters of credit and a $75 million sublimit for Swing Loan borrowings. As of September 30, 2023, there were no borrowings outstanding and no letters of credit outstanding under the Amended Credit Facility. Outside of the Amended Credit Facility, there were other standby and commercial letters of credit of $1.3 million outstanding as of September 30, 2023.

Borrowings under the Amended Credit Facility will bear interest at an index based on SOFR (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

34

highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50%, (c) one-month SOFR plus 1.00% and (d) 0.00%. The applicable margin for SOFR-based borrowings fluctuates between1.00%-1.50%, and was 1.0% as of September 30, 2023, and the applicable margin for Base Rate borrowings fluctuates between 0.00%-0.50%, and was 0.00% as of September 30, 2023. An unused line fee shall be payable quarterly in respect of the total amount of the unutilized Lenders’ commitments under the Amended Credit Facility. Standby letter of credit fees accruing at the applicable margin on the average undrawn and unreimbursed amounts of standby letters of credit are payable quarterly, and a facing fee of 0.125% is 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 was amended on May 15, 2023 to transition from LIBOR to SOFR. As of September 30, 2023, the applicable interest rate related to Base Rate borrowings was 8.5%, and the applicable interest rate related to one-month SOFR-based borrowings was 6.3%.

We incurred approximately $2.4 million of debt issuance costs in conjunction with the Amended Credit Agreement, 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 as of September 30, 2023.

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, 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 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 such 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.

35

[[GREPCENT_TABLE]]
[["Summarized Statements of Operations"],["(in thousands)","Fiscal Year Ended","","Fiscal Year Ended"],["","September 30, 2023","","September 24, 2022"],["","(in thousands)"],["","Parent/Issuer","","Guarantors","","Parent/Issuer","","Guarantors"],["Net sales","$","768,207","","","$","2,531,503","","","$","819,213","","","$","2,198,460"],["Gross profit","$","166,370","","","$","767,480","","","$","183,090","","","$","709,635"],["Income (loss) from operations","$","(32,001)","","","$","244,164","","","$","(12,305)","","","$","243,293"],["Equity in earnings of Guarantor subsidiaries","$","191,793","","","$","\u2014","","","$","189,228","","","$","\u2014"],["Net income (loss)","$","(63,840)","","","$","191,793","","","$","(53,968)","","","$","189,228"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Summarized Balance Sheet Information"],["(in thousands)","As of","","As of"],["","September 30, 2023","","September 24, 2022"],["","(in thousands)"],["","Parent/Issuer","","Guarantors","","Parent/Issuer","","Guarantors"],["Current assets","$","661,660","","","$","999,218","","","$","455,381","","","$","904,090"],["Intercompany receivable from Non-guarantor subsidiaries","69,404","","","\u2014","","","309,238","","","61,794"],["Other assets","3,402,000","","","2,762,797","","","3,124,526","","","2,458,823"],["Total assets","$","4,133,064","","","$","3,762,015","","","$","3,889,145","","","$","3,424,707"],["Current liabilities","$","155,793","","","$","294,686","","","$","162,793","","","$","267,872"],["Intercompany payable from Non-guarantor subsidiaries","\u2014","","","766"],["Long-term debt","1,187,771","","","186","","","1,185,891","","","\u2014"],["Other liabilities","1,308,736","","","60,611","","","1,450,702","","","220,990"],["Total liabilities","$","2,652,300","","","$","356,249","","","$","2,799,386","","","$","488,862"]]
[[/GREPCENT_TABLE]]

Contractual Obligations

The table below presents our significant contractual cash obligations by fiscal year:

[[GREPCENT_TABLE]]
[["Contractual Obligations","","Fiscal 2024","","Fiscal 2025","","Fiscal 2026","","Fiscal 2027","","Fiscal 2028","","Thereafter","","Total"],["","","(in millions)"],["Long-term debt, including current maturities (1)","","$","0.2","","","$","0.2","","","$","0.1","","","$","\u2014","","","$","\u2014","","","$","1,200.0","","","$","1,200.5"],["Interest payment obligations (2)","","52.5","","","52.5","","","52.5","","","52.5","","","52.5","","","92.8","","","355.3"],["Operating leases","","54.9","","","47.1","","","33.0","","","22.8","","","14.7","","","34.8","","","207.3"],["Purchase commitments (3)","","138.9","","","36.4","","","21.4","","","13.0","","","5.9","","","2.4","","","218.0"],["Performance-based payments (4)","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","","$","246.5","","","$","136.2","","","$","107.0","","","$","88.3","","","$","73.1","","","$","1,330.0","","","$","1,981.1"]]
[[/GREPCENT_TABLE]]

(1)Excludes $1.3 million of outstanding letters of credit related to normal business transactions. Debt repayments do not reflect the unamortized portion of deferred financing costs associated with the 2028 Notes, 2030 Notes and 2031 Notes of approximately $12.2 million as of September 30, 2023, of which $2.0 million is amortizable until February 2028, $5.6 million is amortizable until October 2030 and $4.6 million is amortizable until April 2031, and is included in the carrying value of the long-term debt. See Note 11 - Long-Term Debt to the consolidated financial statements for further discussion of long-term debt.

(2)Estimated interest payments to be made on our 2028 Notes, our 2030 Notes and our 2031 Notes. See Note 11 - Long-Term Debt to the consolidated financial statements for description of interest rate terms.

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(3)Contracts for purchases of grains, grass seed and pet food ingredients, used primarily to mitigate risk associated with increases in market prices and commodity availability, may obligate us to make future purchases based on estimated yields. The terms of these contracts vary; some having fixed prices or quantities, others having variable pricing and quantities. For certain agreements, management estimates are used to develop the quantities and pricing for anticipated purchases, and future purchases could vary significantly from such estimates.

(4)Possible performance-based payments associated with prior acquisitions of businesses are not included in the above table, because they are based on future performance of the businesses acquired, which is not yet known. Performance-based payments of approximately $0.1 million were made in fiscal 2023 related to Hydro-Organics Wholesale, Inc. Potential performance-based periods extend through fiscal 2025 for Hydro-Organics Wholesale, Inc. and the payments are capped at $1.0 million per year.

Recent Accounting Pronouncements

Refer to the discussion under Part II, Item 8, Notes to Consolidated Financial Statements, Note 1 – Organization and Significant Accounting Policies for a summary of recent accounting pronouncements.

Critical Accounting Policies, Estimates and Judgments

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts and related disclosures in the consolidated financial statements. Estimates and assumptions are required for, but are not limited to, accounts receivable and inventory realizable values, fixed asset lives, long-lived asset valuation and impairments, intangible asset lives, stock-based compensation, deferred and current income taxes, self-insurance accruals and the impact of contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions.

Although not all inclusive, we believe that the following represent the more critical accounting policies, which are subject to estimates and assumptions used in the preparation of our consolidated financial statements.

Goodwill

Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. Goodwill and identifiable intangible assets with indefinite lives are not subject to amortization but must be evaluated for impairment.

We test goodwill for impairment annually (as of the first day of the fourth fiscal quarter), or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, by first assessing qualitative factors to determine whether it is more likely than not the fair value of the reporting unit is less than its carrying amount. The qualitative assessment evaluates factors including macro-economic conditions, industry-specific and company-specific considerations, legal and regulatory environments and historical performance. If it is determined that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, it is unnecessary to perform the quantitative goodwill impairment test. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the quantitative test is performed to identify potential goodwill impairment. Based on certain circumstances, we may elect to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test, which compares the estimated fair value of our reporting units to their related carrying values, including goodwill. Impairment is indicated if the estimated fair value of the reporting unit is less than its carrying value, and an impairment charge is recognized for the differential. Our goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of our two reporting units to the Company’s total market capitalization.

Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimate of fair value of each of our reporting units is based on our projection of revenues, gross margin, operating costs and cash flows considering historical and estimated future results, general economic and market conditions as well as the impact of planned business and operational strategies. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Assumptions critical to our fair value estimates were: (i) discount rates used in determining the fair value of the reporting units; (ii) estimated future cash flows; and (iii) projected revenue and operating profit growth rates used in the reporting unit models. Actual results may differ from those estimates. The valuations employ present value techniques to measure fair value and consider market factors.

Our goodwill is associated with our Pet segment and our Garden segment. In connection with our annual goodwill impairment testing performed during fiscal 2023, we elected to bypass the qualitative assessment and proceeded directly to performing the quantitative goodwill

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impairment test. We completed our quantitative assessment of potential goodwill and determined that it was more likely than not the fair values of our reporting units were greater than their carrying amounts.

In connection with our annual goodwill impairment testing performed during fiscal 2022, we made a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the estimated fair values of our reporting units under the quantitative goodwill impairment test. We completed our qualitative assessment of potential goodwill impairment and it was determined that it was more likely than not the fair values of our reporting units were greater than their carrying amounts, and accordingly, no quantitative testing of goodwill was required.

Changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including expected future cash flows and discount rates, could result in a significantly different estimate of the fair value of the reporting units in the future and could result in additional impairment of goodwill.

Intangible assets

Indefinite-lived intangible assets consist primarily of acquired trade names and trademarks. Indefinite-lived intangible assets are tested annually for impairment or whenever events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized for an intangible asset with an indefinite useful life if its carrying value exceeds its fair value.

Indefinite-lived intangible assets are primarily tested for impairment by comparing the fair value of the asset to the carrying value. Fair value is determined based on discounted cash flow analyses that include significant management assumptions such as revenue growth rates, discount rates, weighted average cost of capital, and assumed royalty rates. Future net sales and short-term growth rates are estimated for trade names based on management’s forecasted financial results which consider key business drivers such as specific revenue growth initiatives, market share changes and general economic factors such as consumer spending.

During fiscal 2023, 2022 and 2021, we performed evaluations of the fair value of our indefinite-lived trade names and trademarks. Our expected revenues were based on our future operating plan and market growth or decline estimates for future years. We recognized impairment losses on certain intangible assets of $11.5 million in fiscal year 2023, and there were no impairment losses recorded in fiscal years 2021 and 2022.

Acquisitions

In connection with businesses we acquire, management must determine the fair values of assets acquired and liabilities assumed. Considerable judgment and estimates are required to determine such amounts, particularly as they relate to identifiable intangible assets, and the applicable useful lives related thereto. Under different assumptions, the resulting valuations could be materially different, which could materially impact the operating results we report.

Our contractual commitments are presented under the caption Liquidity and Capital Resources.