NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended September 25, 2021,
September 26, 2020, and September 28, 2019
1. Organization and Significant Accounting Policies
Organization – Central Garden & Pet Company (“Central”), a Delaware corporation, and subsidiaries (the “Company”), is a leading marketer and producer of quality branded products and distributor of third-party products in the pet and lawn and garden supplies markets.
Basis of Consolidation and Presentation – The consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America (GAAP) and include the accounts of Central and all majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. The fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019 each included 52 weeks.
Noncontrolling Interest – Noncontrolling interest in the Company’s consolidated financial statements represents the 20% interest not owned by the Company in a consolidated subsidiary. Since the Company controls this subsidiary, its financial statements are consolidated with those of the Company, and the noncontrolling owner’s 20% share of the subsidiary’s net assets and results of operations is deducted and reported as noncontrolling interest on the consolidated balance sheets and as net income attributable to noncontrolling interest in the consolidated statements of operations.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period including realization of accounts receivable and inventory and valuation of goodwill and intangibles. Actual results could differ from those estimates.
Change in Segment Components - During the first quarter of fiscal year 2021, the Company began reporting the results of its outdoor cushion operations in the Pet segment as a result of a change in internal management reporting lines due to potential synergies in sourcing, manufacturing and innovation and to be consistent with the reporting of financial information used to assess performance and allocate resources. These operations were previously reported in the Garden segment and are now managed and reported in the Pet segment. All prior period segment disclosures have been recast to reflect this change.
Revenue Recognition and Nature of Products and Services
The Company manufactures, markets and distributes a wide variety of branded, private label and third-party pet and garden products to wholesalers, distributors and retailers, primarily in the United States. The majority of the Company’s revenue is generated from the sale of finished pet and garden products. The Company also recognizes a minor amount of non-product revenue (approximately one percent of consolidated net sales) comprising third-party logistics services, merchandising services and royalty income from sales-based licensing arrangements. Product and non-product revenue is recognized when performance obligations under the terms of the contracts with customers are satisfied. The Company recognizes product revenue when control over the finished goods transfers to its customers, which generally occurs upon shipment to, or receipt at, customers’ locations, as determined by the specific terms of the contract. These revenue arrangements generally have single performance obligations. Non-product revenue is recognized as the services are provided to the customer in the case of third-party logistics services and merchandising services, or as third-party licensee sales occur for royalty income. Revenue, which includes shipping and handling charges billed to the customer, is reported net of variable consideration and consideration payable to our customers, including applicable discounts, returns, allowances, trade promotion, unsaleable product, consumer coupon redemption and rebates. The amount billed to customers for shipping and handling costs included in net sales for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019 was $13.1 million, $12.5 million and $13.8 million, respectively. Shipping and handling costs that occur before the customer obtains control of the goods are deemed to be fulfillment activities and are accounted for as fulfillment costs.
Key sales terms are established on a frequent basis such that most customer arrangements and related incentives have a one year or shorter duration. As such, the Company does not capitalize contract inception costs. The Company generally does not have unbilled receivables at the end of a period. Deferred revenues are not material and primarily include advance payments for services that have yet to be rendered. The Company does not receive noncash consideration for the sale of goods. Amounts billed and due from our customers are classified as receivables and require payment on a short-term basis; therefore, the Company does not have any significant financing components.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sales Incentives and Other Promotional Programs
The Company routinely offers sales incentives and discounts through various regional and national programs to its customers and consumers. These programs include product discounts or allowances, product rebates, product returns, one-time or ongoing trade-promotion programs with customers and consumer coupon programs that require the Company to estimate and accrue the expected costs of such programs. The costs associated with these activities are accounted for as reductions to the transaction price of the Company’s products and are, therefore, recorded as reductions to gross sales at the time of sale. The Company bases its estimates of incentive costs on historical trend experience with similar programs, actual incentive terms per customer contractual obligations and expected levels of performance of trade promotions, utilizing customer and sales organization inputs. The Company maintains liabilities at the end of each period for the estimated incentive costs incurred but unpaid for these programs. Differences between estimated and actual incentive costs are generally not material and are recognized in earnings in the period such differences are determined. Reserves for product returns, accrued rebates and promotional accruals are included in the consolidated balance sheets as part of accrued expenses, and the value of inventory associated with reserves for sales returns is included within prepaid and other current assets on the consolidated balance sheets.
Cost of goods sold consists of cost of product, inbound freight charges, purchasing and receiving costs, certain indirect purchasing, merchandise handling and storage costs, internal transfer costs as well as allocations of overhead costs, including depreciation, related to the Company’s facilities. Cost of goods sold excludes substantially all shipping and handling and out-bound freight costs to customers, which are included in selling, general and administrative expenses as delivery expenses. The cost of shipping and handling, including internal costs and payments to third parties, included in delivery expenses within selling, general and administrative expenses for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019 was $108 million, $88.5 million and $80.4 million, respectively.
Advertising Costs – The Company expenses the costs of advertising as incurred. Advertising expenses were $54.6 million, $37.0 million and $27.5 million in fiscal 2021, 2020 and 2019, respectively.
401(k) Plans – The Company sponsors several 401(k) plans which cover substantially all employees. The Company’s matching contributions expensed under these plans were $6.8 million for fiscal 2021, $6.4 million for fiscal 2020 and $4.2 million for fiscal 2019. In fiscal 2021, 2020 and 2019, the Company’s matching contributions made in the Company’s Class A common stock resulted in the issuance of approximately 159,000, 218,000 and 161,000 shares, respectively.
Other income (expense) consists principally of earnings (losses) from equity method investments and foreign exchange gains and losses.
Income taxes are accounted for under the asset and liability method. Deferred income taxes reflect the impact of “temporary differences” between asset and liability amounts for financial reporting purposes and such amounts as determined based on existing tax laws. Deferred income taxes result primarily from bad debt allowances, inventory and goodwill write-downs, amortization and depreciation. The Company establishes a valuation allowance for deferred tax assets when management believes it is more likely than not a deferred tax asset will not be realized. As of fiscal year-end 2021 and 2020, the Company had valuation allowances related to various state and foreign net deferred tax assets of $7.0 million and $7.1 million, respectively.
Cash, cash equivalents and restricted cash – The Company considers cash and all highly liquid investments with an original maturity of three months or less at date of purchase to be cash and cash equivalents. Restricted cash includes cash and highly liquid instruments that are used as collateral for stand-alone letter of credit agreements related to normal business transactions. These agreements require the Company to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash the Company has available for other uses. The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the consolidated balance sheets to the consolidated statements of cash flows as of September 25, 2021, September 26, 2020 and September 28, 2019, respectively (in thousands).
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2021
|
|
September 26, 2020
|
|
September 28, 2019
|
|
(in thousands)
|
Cash and cash equivalents
|
$
|
426,422
|
|
|
$
|
652,712
|
|
|
$
|
497,749
|
|
Restricted cash
|
13,100
|
|
|
13,685
|
|
|
12,952
|
|
Total cash, cash equivalents and restricted cash
|
$
|
439,522
|
|
|
$
|
666,397
|
|
|
$
|
510,701
|
|
|
|
|
|
|
|
Accounts receivable are carried at their estimated collectible amounts. Trade credit is generally extended on a short-term basis; thus trade receivables do not bear interest, although a finance charge may be applied to such receivables that are past due.
Allowance for Credit Losses and Customer Allowances – The Company’s trade accounts receivable are recorded at net realizable value, which includes an allowance for estimated credit losses, as well as allowances for contractual customer deductions accounted for as
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
variable consideration. Under the guidance found in Accounting Standards Codification ("ASC") Topic 326, the “expected credit loss” model replaces the previous incurred loss model and requires consideration of a broader range of information to estimate expected credit losses over the lives of the Company’s trade accounts receivable. The Company’s prior methodology for estimating credit losses on its trade accounts receivable did not differ significantly from the new requirements of Topic 326.
The Company maintains an allowance for credit losses related to its trade accounts receivable for future expected credit losses for the inability of its customers to make required payments. The Company estimates the allowance based upon historical bad debts, current customer receivable balances and the customer’s financial condition. The allowance is adjusted to reflect changes in current and forecasted macroeconomic conditions. The Company’s estimate of credit losses includes expected current and future economic and market conditions surrounding the COVID-19 pandemic, which did not significantly impact its allowance. See Note 5 – Allowance for Credit Losses and Customer Allowances.
Inventories, which primarily consist of garden products and pet supplies finished goods, are stated at the lower of FIFO cost or market. Cost includes certain indirect purchasing, merchandise handling and storage costs incurred to acquire or manufacture inventory, costs to unload, process and put away shipments received in order to prepare them to be picked for orders, and certain other overhead costs. The amount of such costs capitalized to inventory is computed based on an estimate of costs related to the procurement and processing of inventory to prepare it for sale compared to total product purchases. See Note 6 – Inventories, net.
Land, buildings, improvements and equipment are stated at cost. Depreciation is computed by the straight-line method over 30 years for buildings. Improvements are amortized on a straight-line basis over the shorter of the useful life of the asset or the terms of the related leases. Depreciation on equipment and capitalized software is computed by the straight-line method over the estimated useful lives of three to 10 years. See Note 7 – Property and Equipment, Net.
Long-Lived Assets – The Company reviews its long-lived assets, including amortizable and indefinite-lived intangible assets and property, plant and equipment, for potential impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable, and annually for indefinite-lived intangible assets. An impairment loss would be recognized for amortizable intangible assets and property, plant and equipment when the estimated fair value of the asset is less than its carrying amount. An impairment loss would be recognized for an intangible asset with an indefinite useful life if its carrying value exceeds its fair value. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. As a result of one of our retail customers exiting the live fish business, factors indicating the carrying value of certain amortizable intangible assets may not be recoverable were present during the quarter ended March 30, 2019. The Company performed impairment testing on these assets, found the carrying value was not recoverable, and accordingly, recorded an impairment charge in its Pet segment of approximately $2.5 million as part of selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended September 28, 2019. There were no impairment losses recorded in fiscal years 2020 or 2021. Should market conditions or the assumptions used by the Company in determining the fair value of assets change, or management changes plans regarding the future use of certain assets, additional charges to operations may be required in the period in which such conditions occur. See Note 9 – Other Intangible Assets.
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 is not subject to amortization but must be evaluated for impairment annually. The Company tests for goodwill impairment annually 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. See Note 8 – Goodwill.
Investments – The Company owns membership interests ranging from 3% to 50% in twelve unconsolidated companies. The Company accounts for its interest in these entities using the equity method and in accordance with ASC 321 – Investments – Equity Securities. Equity method losses of $1.4 million in fiscal 2021, and $3.9 million in fiscal 2020 and equity method income of $1.2 million in fiscal 2019 are included in other income (expense) in the consolidated statements of operations. The Company’s investment in these entities was $12.2 million at September 25, 2021 and $13.1 million at September 26, 2020 and is included in Other assets in the Company's consolidated balance sheets. On an individual and combined basis, the assets, liabilities, revenues and expenses of these entities are not significant. See Note 3 – Acquisitions.
Leases -The Company determines whether an arrangement contains a lease at inception by determining if the contract conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration and other facts and circumstances. Long-term operating lease right-of-use ("ROU") assets and current and long-term operating lease liabilities are presented separately in the consolidated balance sheets. Finance lease ROU assets are presented in property, plant and equipment, net, and the related finance liabilities are presented with current and long-term debt in the consolidated balance sheets.
Lease ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets are calculated based on the lease liability adjusted for any
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
lease payments paid to the lessor at or before the commencement date and excludes any lease incentives received from the lessor. Lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term. The lease term may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. As the Company's leases typically do not contain a readily determinable implicit rate, the Company determines the present value of the lease liability using its incremental borrowing rate at the lease commencement date based on the lease term on a collateralized basis. Variable lease payments are expensed as incurred and include certain non-lease components, such as maintenance and other services provided by the lessor, and other charges included in the lease, as applicable. Non-lease components and the lease components to which they relate are accounted for as a single lease component, as the Company has elected to combine lease and non-lease components for all classes of underlying assets.
Amortization of ROU lease assets is calculated on a straight-line basis over the lease term with the expense recorded in cost of sales or selling, general and administrative expenses, depending on the nature of the leased item. Interest expense is recorded over the lease term and is recorded in interest expense (based on a front-loaded interest expense pattern) for finance leases and is recorded in cost of sales or selling, general and administrative expenses (on a straight-line basis) for operating leases. All operating lease cash payments and interest on finance leases are recorded within cash flows from operating activities and all finance lease principal payments are recorded within cash flows from financing activities in the consolidated statements of cash flows. See Note 10 - Leases.
Insurance – The Company maintains insurance for certain risks, including workers’ compensation, general liability and automobile liability, and is self-insured for employee related health care benefits. The Company’s workers’ compensation, general liability and automobile liability insurance policies include deductibles of $250,000 to $350,000 per occurrence. The Company maintains excess loss insurance that covers any health care claims in excess of $750,000 per person per year. The Company establishes reserves for losses based on its claims experience and actuarial estimates of the ultimate loss amount inherent in the claims, including claims incurred but not yet reported. Costs are recognized in the period the claim is incurred, and the financial statement accruals include an estimate of claims incurred but not yet reported.
Fair Value of Financial Instruments – At September 25, 2021 and September 26, 2020, the carrying amount of cash and cash equivalents, short term investments, accounts receivable and payable, short term borrowings and accrued liabilities approximates fair value because of the short term nature of these instruments. The estimated fair value of the Company’s senior subordinated notes is based on quoted market prices for these instruments. See Note 2 – Fair Value Measurements for further information regarding the fair value of the Company’s financial instruments.
Stock-Based Compensation – Stock-based compensation cost is estimated at the grant date based on the fair value of the award and is expensed ratably over the service period of the award. Total compensation costs recognized under all share-based arrangements in fiscal 2021 was $23.1 million ($17.6 million after tax), fiscal 2020 was $19.0 million ($15.0 million after tax), and fiscal 2019 was $14.7 million ($11.1 million after tax). See Note 14 – Stock-Based Compensation for further information.
Total Comprehensive Income (Loss) – Total comprehensive income (loss) consists of two components: net income and other comprehensive income (loss). Other comprehensive income (loss) refers to gains and losses that under generally accepted accounting principles are recorded directly as an element of shareholders’ equity, but are excluded from net income, and is comprised of currency translation adjustments relating to the Company’s foreign subsidiaries in the U.K and Canada whose functional currency is not the U.S. dollar.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
Credit Losses
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments - Credit Losses (Topic 326), which changes the impairment model for most financial assets to require measurement and recognition of expected credit losses for financial assets measured at amortized cost, including trade receivables. The model replaces the probable, incurred loss model for those assets and broadens the information an entity must consider when developing its expected credit loss estimate for assets measured at amortized cost. The Company adopted the standard as of September 27, 2020, and the adoption did not have a material impact on the Company's consolidated financial statements and related disclosures.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Goodwill and Intangible Assets
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other: Simplifying the Test for Goodwill Impairment. The new guidance simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test. The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The Company adopted this guidance as of September 27, 2020 on a prospective basis. Based on the Company's annual goodwill impairment test performed as of July 1, 2020, there were no reporting units for which the carrying amount of the reporting unit exceeded its fair value; therefore, the adoption of this ASU did not have an impact on the Company's consolidated financial statements and related disclosures.
Fair Value Disclosures
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement. This ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. The Company adopted this standard as of September 27, 2020, and the adoption did not have a material impact on its consolidated financial statements and related disclosures.
Accounting Standards Not Yet Adopted
Accounting for Income Taxes
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. This guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 became effective for the Company in its first quarter of fiscal 2022 beginning September 26, 2021 and requires the Company to recognize a cumulative effect adjustment to the opening balance of retained earnings, if applicable. The Company is currently evaluating the impact that ASU 2019-12 may have on its consolidated financial statements but does not expect the impact to be material.
2. Fair Value Measurements
Generally accepted accounting principles require financial assets and liabilities to be categorized based on the inputs used to calculate their fair values as follows:
Level 1 – Quoted prices in active markets for identical assets or liabilities.
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 – Unobservable inputs for the asset or liability, which reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company’s financial instruments include cash and equivalents, restricted cash and equivalents, short term investments, accounts receivable and payable, derivative instruments, short-term borrowings, and accrued liabilities. The carrying amount of these instruments approximates fair value because of their short-term nature.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of September 25, 2021:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Liabilities:
|
|
|
|
|
|
|
|
Liability for contingent consideration (a)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,606
|
|
|
$
|
1,606
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,606
|
|
|
$
|
1,606
|
|
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents our financial assets and liabilities at fair value on a recurring basis based upon the level within the fair value hierarchy in which the fair value measurements fall, as of September 26, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
(in thousands)
|
Liabilities:
|
|
|
|
|
|
|
|
Liability for contingent consideration (a)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,369
|
|
|
$
|
1,369
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,369
|
|
|
$
|
1,369
|
|
(a)The fair values of the Company's contingent consideration liabilities from previous business acquisitions are considered "Level 3" measurements because the Company uses various estimates in the valuation models to project timing and amount of future contingent payments. The liability for contingent consideration relates to an earn-out for B2E, acquired in December 2012, future performance-based contingent payments for Hydro-Organics Wholesale, Inc., acquired in October 2015 and future performance-based contingent payments for Segrest, Inc., acquired in October 2016. In December 2019, performance-based criteria associated with the $6 million contingent consideration liability related to Segrest, Inc. were met and accordingly, the entire amount was released out of an independent escrow account to the former owners as of December 28, 2019. The performance period related to B2E ended on December 31, 2020. The performance period related to Hydro-Organics Wholesale extends through fiscal year 2025. The fair value of the estimated contingent consideration arrangement is determined based on the Company’s evaluation as to the probability and amount of any earn-out that will be achieved based on expected future performance by the acquired entity. This is presented as part of long-term liabilities in the Company's consolidated balance sheets.
The following table provides a summary of changes in fair value of the Company's Level 3 financial instruments for the years ended September 25, 2021 and September 26, 2020:
|
|
|
|
|
|
|
Amount
|
|
(in thousands)
|
Balance as of September 26, 2020
|
$
|
1,369
|
|
Estimated contingent performance-based consideration established at the time of acquisition
|
—
|
|
Changes in the fair value of contingent performance-based payments
|
610
|
|
Performance-based payments made
|
(373)
|
|
Balance as of September 25, 2021
|
$
|
1,606
|
|
Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis
The Company measures certain non-financial assets and liabilities, including long-lived assets, goodwill and intangible assets, at fair value on a non-recurring basis. Fair value measurements of non-financial assets and non-financial liabilities are used primarily in the impairment analyses of long-lived assets, goodwill and other intangible assets. As a result of one of our retail customers exiting the live fish business, factors indicating the carrying value of certain amortizable intangible assets may not be recoverable were present during the quarter ended March 30, 2019. The Company performed impairment testing on these assets, found the carrying value was not recoverable, and accordingly, recorded an impairment charge in its Pet segment of approximately $2.5 million as part of selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended September 28, 2019. There were no impairment losses recorded in fiscal 2020 or fiscal 2021.
In February 2019, the Company purchased the remaining 55% interest in Arden Companies, a manufacturer of outdoor cushions and pillows, for $13.4 million. Accordingly, the Company remeasured its previously held investment at its acquisition-date fair value and recorded a gain of approximately $3.2 million as part of selling, general and administrative expenses in the Company's consolidated statements of operations.
Fair Value of Other Financial Instruments
In April 2021, the Company issued $400 million aggregate principal amount of 4.125% senior notes due April 2031 (the "2031 Notes"). The estimated fair value of the Company's 2031 Notes as of September 25, 2021 was $408.5 million compared to a carrying value of $394.2 million.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 2020, the Company issued $500 million aggregate principal amount of 4.125% senior notes due October 2030 (the "2030 Notes"). The estimated fair value of the Company's 2030 Notes as of September 25, 2021 was $517.2 million, compared to a carrying value of $492.8 million.
In December 2017, the Company issued $300 million aggregate principal amount of 5.125% senior notes due February 2028 (the "2028 Notes"). The estimated fair value of the Company's 2028 Notes as of September 25, 2021 and September 26, 2020 was $318.6 million and $316.0 million, respectively, compared to a carrying value of $297.0 million and $296.6 million, respectively.
In November 2020, the Company redeemed $400 million aggregate principal amount of 6.125% senior notes due November 2023 (the “2023 Notes”) at a price of 101.531%.
The estimated fair value is based on quoted market prices for these notes, which are Level 1 inputs within the fair value hierarchy.
3. Acquisitions and Investments in Joint Ventures
Fiscal 2021
DoMyOwn
On December 18, 2020, the Company acquired DoMyOwn, a leading online retailer of professional-grade control products, for approximately $81 million. The acquisition strengthens the Company's position in the control products category and adds a leading online platform for eCommerce fulfillment and digital capabilities. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $80.4 million, of which $11.9 million was allocated to identified intangible assets and approximately $68.5 million was included in goodwill in the Company’s consolidated balance sheet as of September 25,2021. Financial results of DoMyOwn have been included in the results of operations within the Garden segment since the date of acquisition. The following table summarizes the purchase price and recording of fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Previously Recognized as of Acquisition Date (1)
|
|
Measurement Period Adjustments
|
|
Amounts Recognized as of Acquisition Date (as Adjusted)
|
|
(in thousands)
|
Current assets, net of cash and cash equivalents acquired
|
$
|
3,922
|
|
|
$
|
—
|
|
|
$
|
3,922
|
|
Fixed assets
|
3,047
|
|
|
—
|
|
|
3,047
|
|
Goodwill
|
—
|
|
|
68,512
|
|
|
68,512
|
|
Other assets
|
80,412
|
|
|
(80,412)
|
|
|
—
|
|
Other intangible assets, net
|
—
|
|
|
11,900
|
|
|
11,900
|
|
Current liabilities
|
(6,446)
|
|
|
—
|
|
|
(6,446)
|
|
Net assets acquired, less cash and cash equivalents
|
$
|
80,935
|
|
|
$
|
—
|
|
|
$
|
80,935
|
|
(1) As previously reported in the Company's Form 10-Q for the period ended June 26, 2021.
The impact to the consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible assets for DoMyOwn was immaterial.
Hopewell Nursery
On December 31, 2020, the Company purchased substantially all of the assets of Hopewell Nursery, a leading live goods wholesale grower serving retail nurseries, landscape contractors, wholesalers and garden centers across the Northeast, for approximately $81 million. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $15 million, of which $4.1 million was allocated to identified intangible assets and $10.9 million was included in goodwill in the Company's consolidated balance sheet as of September 25, 2021. The addition of Hopewell Nursery to the Central portfolio strengthens the Company's position as a leading live goods provider in the garden category. Financial results of Hopewell Nursery have been included in the results of operations within the Garden segment since the date of acquisition. The following table summarizes the purchase price and recording of fair values of the assets acquired
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and liabilities assumed as of the acquisition date and subsequent adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Previously Recognized as of Acquisition Date (1)
|
|
Measurement Period Adjustments
|
|
Amounts Recognized as of Acquisition Date (as Adjusted)
|
|
(in thousands)
|
Current assets, net of cash and cash equivalents acquired
|
$
|
39,046
|
|
|
$
|
3,742
|
|
|
$
|
42,788
|
|
Fixed assets
|
31,940
|
|
|
(326)
|
|
|
31,614
|
|
Goodwill
|
—
|
|
|
10,924
|
|
|
10,924
|
|
Other assets
|
18,470
|
|
|
(18,470)
|
|
|
—
|
|
Other intangible assets, net
|
—
|
|
|
4,130
|
|
|
4,130
|
|
Current liabilities
|
(6,767)
|
|
|
—
|
|
|
(6,767)
|
|
Other long-term liabilities
|
(1,301)
|
|
|
—
|
|
|
(1,301)
|
|
Net assets acquired, less cash and cash equivalents
|
$
|
81,388
|
|
|
$
|
—
|
|
|
$
|
81,388
|
|
(1) As previously reported in the Company's Form 10-Q for the period ended June 26, 2021.
The impact to the consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible assets for Hopewell Nursery was immaterial.
Proforma financial information has not been presented as the DoMyOwn and Hopewell Nursery acquisitions were not considered material to the Company's overall consolidated financial statements during the periods presented.
The Company expects all the goodwill from both of the acquisitions above to be deductible for tax purposes.
Green Garden Products
On February 11, 2021, the Company acquired Flora Parent, Inc. and its subsidiaries ("Green Garden Products"), a leading provider of vegetable, herb and flower seed packets, seed starters and plant nutrients in North America, for approximately $571 million. The Company borrowed approximately $180 million under its credit facility to partially finance the acquisition. The Company has not yet finalized the allocation of the purchase price to the fair value of the tangible assets, intangible assets and liabilities acquired. Approximately $487 million of the purchase price remains unallocated. Deferred taxes associated with the intangible assets acquired will be finalized upon completion of the purchase accounting. The addition of Green Garden Products expands the Company's portfolio into an adjacent garden category. The financial results of Green Garden have been included in the results of operations within the Garden segment since the date of acquisition. For the fiscal year ended September 25, 2021, net sales and net income related to Green Garden Products were approximately $122.4 million and $1.6 million, respectively.
The following unaudited pro forma financial information summarizes the combined results of operations for Central and Green Garden Products as if the companies were combined as of the beginning of fiscal year 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
|
|
September 25, 2021
|
September 26, 2020
|
|
|
in thousands except per share amounts
|
Net sales
|
|
|
$
|
3,357,977
|
|
$
|
2,850,678
|
|
Net income attributable to Central Garden & Pet Company
|
|
|
$
|
175,508
|
|
$
|
146,277
|
|
Diluted net income per share attributable to Central Garden & Pet Company
|
|
|
$
|
3.18
|
|
$
|
2.67
|
|
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
This pro forma information is based on historical results of operations, adjusted for the preliminary estimated allocation of the purchase price and other acquisition adjustments. This pro forma information is not necessarily indicative of what the results of the Company would have been had it operated the business since the beginning of the periods presented. The pro forma adjustments reflect the income statement effects of the elimination of intercompany sales and profit, amortization of intangible assets related to the fair value adjustments of the assets acquired, elimination of interest expense on Green Garden Products debt that was paid off at the time of acquisition, incremental interest expense directly resulting from the acquisition and the related tax effects.
D&D Commodities Limited
On June 30, 2021, the Company purchased D&D Commodities, Ltd. ("D&D"), a provider of high-quality, premium bird feed, for approximately $88 million in cash and the assumption of approximately $30 million of long-term debt. Subsequent to the acquisition, $30 million of cash was used to eliminate the acquired long-term debt. The Company has not yet finalized the allocation of the purchase price to the fair value of the tangible assets, intangible assets and liabilities acquired. Approximately $101 million of the purchase price remains unallocated. Deferred taxes associated with the intangible assets acquired will be finalized upon completion of the purchase accounting. The addition of D&D will expand Central's portfolio in the bird feed category and is expected to deepen the Company's relationship with major retailers. The financial results of D&D have been included in the results of operations within the Garden segment since the date of acquisition.
The Company includes the unallocated purchase price for acquisitions in other assets on its consolidated balance sheet.
Divestiture
Breeder's Choice
In December 2020, the Company completed the sale of certain assets of its Breeder's Choice business unit. Prior to the sale of Breeder's Choice assets, the Company recognized the financial results of the business unit in its Pet segment. The Company received cash proceeds of $2.4 million and sold approximately $4.7 million of current and long-term net assets. The Company recognized a loss on the sale of the Breeder's Choice business unit of approximately $2.6 million during the three months ended December 26, 2020 as part of selling, general and administrative expenses in the Company's condensed consolidated statement of operations.
Fiscal 2020
The Company did not make any acquisitions in fiscal 2020. The Company finalized the allocation of the purchase price to the fair value of the tangible assets, intangible assets and liabilities acquired in conjunction with its purchase of C&S Products in its first fiscal quarter of 2020. See below for the purchase price allocation.
Fiscal 2019
C&S Products
In May 2019, the Company purchased C&S Products, a manufacturer of suet and other wild bird feed products, to complement our existing wild bird feed business for approximately $30.0 million. Subsequent to the acquisition, approximately $4.7 million of cash was used to eliminate the acquired long-term debt. The financial results of C&S Products have been included in the results of operations within the Pet segment since the date of acquisition. The following table summarizes the purchase price and recording of fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Previously Recognized as of Acquisition Date (1)
|
|
Measurement Period Adjustments
|
|
Amounts Recognized as of Acquisition Date (as Adjusted)
|
|
(in thousands)
|
Current assets, net of cash and cash equivalents acquired
|
$
|
9,794
|
|
|
$
|
441
|
|
|
$
|
10,235
|
|
Fixed assets
|
23,743
|
|
|
(3,786)
|
|
|
19,957
|
|
Goodwill
|
—
|
|
|
3,878
|
|
|
3,878
|
|
Other assets
|
5,081
|
|
|
(3,242)
|
|
|
1,839
|
|
Other intangible assets, net
|
—
|
|
|
2,810
|
|
|
2,810
|
|
Current liabilities
|
(2,137)
|
|
|
—
|
|
|
(2,137)
|
|
Long-term obligations
|
(6,457)
|
|
|
(101)
|
|
|
(6,558)
|
|
Net assets acquired, less cash and cash equivalents
|
$
|
30,024
|
|
|
$
|
—
|
|
|
$
|
30,024
|
|
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) As previously reported in the Company's Form 10-Q for the period ended December 28, 2019.
The impact to the consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible assets for C&S Products during the quarter ended December 28, 2019 was immaterial.
Arden Companies
In February 2019, the Company purchased the remaining 55% interest in Arden Companies, a manufacturer of outdoor cushions and pillows, for $13.4 million. Accordingly, the Company remeasured its previously held investment at its acquisition-date fair value and recorded a gain of approximately $3.2 million as part of selling, general and administrative expenses in the Company's consolidated statements of operations. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $15.8 million, of which $10.9 million was allocated to identified intangible assets and approximately $4.9 million was included in goodwill in the Company's consolidated balance sheet as of September 28, 2019. Subsequent to the acquisition, approximately $36 million of cash was used to eliminate most of the acquired long-term debt. Financial results of Arden have been included in the results of operations within the Garden segment since the date of acquisition of the remaining 55% interest. The following table summarizes the purchase price and recording of fair values of the assets acquired and liabilities assumed as of the acquisition date and subsequent adjustments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts Previously Recognized as of Acquisition Date (1)
|
|
Measurement Period Adjustments
|
|
Amounts Recognized as of Acquisition Date (as Adjusted)
|
|
(in thousands)
|
Current assets, net of cash and cash equivalents acquired
|
$
|
51,211
|
|
|
$
|
1,540
|
|
|
$
|
52,751
|
|
Fixed assets
|
6,311
|
|
|
5,376
|
|
|
11,687
|
|
Other Assets
|
14,868
|
|
|
(14,868)
|
|
|
—
|
|
Goodwill
|
—
|
|
|
4,900
|
|
|
4,900
|
|
Intangible assets
|
—
|
|
|
10,930
|
|
|
10,930
|
|
Current liabilities
|
(19,853)
|
|
|
—
|
|
|
(19,853)
|
|
Short-term debt
|
(22,000)
|
|
|
—
|
|
|
(22,000)
|
|
Long-term debt
|
(19,400)
|
|
|
—
|
|
|
(19,400)
|
|
Fair value of the Company's initial investment
|
—
|
|
|
(7,878)
|
|
|
(7,878)
|
|
Net assets acquired, less cash and cash equivalents
|
$
|
11,137
|
|
|
$
|
—
|
|
|
$
|
11,137
|
|
(1) As previously reported in the Company's Form 10-Q for the periods ended March 30, 2019 and June 29, 2019.
The Company expects all the goodwill from the acquisition above to be deductible for tax purposes.
The impact to the consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible assets for Arden Companies was immaterial.
Proforma financial information has not been presented as the C&S Products and Arden Companies acquisitions were not considered material to the Company's overall consolidated financial statements during the periods presented.
Investments
During fiscal 2021, the Company made an investment of $0.5 million for a 3% ownership interest in one venture, which is accounted for in accordance with ASC 321. During fiscal 2020, the Company made investments ranging from an additional 3% to 30%, totaling $4.4 million, in two ventures, which are accounted for in accordance with ASC 321. During fiscal 2019, the Company made investments up to 7%, totaling $2.0 million, in two ventures, which are accounted for in accordance with ASC 321.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Concentration of Credit Risk and Significant Customers and Suppliers
Customer Concentration – Approximately 51% of the Company’s net sales for fiscal 2021, 52% for fiscal 2020 and 49% for fiscal 2019 were derived from sales to the Company’s top five customers. The Company’s largest customer accounted for approximately 16% of the Company’s net sales in fiscal 2021 and approximately 17% in 2020 and 16% in 2019. The Company’s second largest customer in 2021 accounted for approximately 15% of the Company’s net sales in fiscal 2021, 13% of the Company's net sales in fiscal 2020 and 12% in fiscal 2019. The Company’s third largest customer in 2021 accounted for approximately 9% of the Company’s net sales in fiscal 2021, approximately 10% in fiscal 2020 and approximately 9% in fiscal 2019, respectively. The loss of, or significant adverse change in, the relationship between the Company and any of these three customers could have a material adverse effect on the Company’s business and financial results. The loss of or reduction in orders from any significant customer, losses arising from customer disputes regarding shipments, fees, merchandise condition or related matters, or the Company’s inability to collect accounts receivable from any major customer could also have a material adverse impact on the Company’s business and financial results. As of September 25, 2021 and September 26, 2020, accounts receivable from the Company’s top five customers comprised approximately 50% and 53%, respectively, of the Company’s total accounts receivable, including 17% and 13% from the Company’s largest customer.
Supplier Concentration – While the Company purchases products from many different manufacturers and suppliers, approximately 8%, 7% and 6% of the Company’s cost of goods sold in fiscal years 2021, 2020 and 2019, respectively, were derived from products purchased from the Company’s five largest suppliers.
5. Allowance for Credit Losses and Customer Allowances
The Company’s trade accounts receivable are recorded at net realizable value, which includes an allowance for estimated credit losses, as well as allowances for contractual customer deductions accounted for as variable consideration as described in Note 1 - Organization and Significant Accounting Policies. Under the guidance found in ASC Topic 326, the “expected credit loss” model replaces the previous incurred loss model and requires consideration of a broader range of information to estimate expected credit losses over the lives of the Company’s trade accounts receivable. The Company’s prior methodology for estimating credit losses on its trade accounts receivable did not differ significantly from the new requirements of Topic 326.
The Company maintains an allowance for credit losses related to its trade accounts receivable for future expected credit losses resulting from the inability of its customers to make required payments. The Company estimates the allowance based upon historical bad debts, current customer receivable balances and the customer’s financial condition. The allowance is adjusted to reflect differences in current conditions as well as changes in forecasted macroeconomic conditions. The Company’s estimate of credit losses includes expected current and future economic and market conditions surrounding the COVID-19 pandemic, which did not significantly impact its allowance.
The following provides a reconciliation of the activity in the Allowance for Credit Losses and Customer Allowances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
Balances at
Beginning
of Period
|
|
Charged/
(Credited) to
Costs and
Expenses
|
|
Asset
Write-Offs,
Less
Recoveries
|
|
Reclassification of Product Return Reserve
|
|
Balances at
End of
Period
|
|
(in thousands)
|
Fiscal Year Ended September 28, 2019
|
24,125
|
|
|
6,906
|
|
|
(3,438)
|
|
|
(6,465)
|
|
|
21,128
|
|
Fiscal Year Ended September 26, 2020
|
21,128
|
|
|
6,771
|
|
|
(238)
|
|
|
—
|
|
|
27,661
|
|
Fiscal Year Ended September 25, 2021
|
27,661
|
|
|
6,604
|
|
|
(5,046)
|
|
|
—
|
|
|
29,219
|
|
The allowance for doubtful accounts includes reserves for expected returns of $6.5 million as of September 29, 2018. The Company began recording reserves for expected returns as part of accrued expenses on the consolidated balance sheet upon its adoption of ASC Topic 606. Accordingly, $6.5 million was reclassified out of the allowance for doubtful accounts at the beginning of the Company's first fiscal quarter of 2019.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Inventories, net
Inventories, net of allowance for obsolescence, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2021
|
|
September 26, 2020
|
|
(in thousands)
|
Raw materials
|
$
|
211,581
|
|
|
$
|
152,692
|
|
Work in progress
|
86,187
|
|
|
49,312
|
|
Finished goods
|
349,338
|
|
|
218,847
|
|
Supplies
|
38,131
|
|
|
18,764
|
|
Total inventories, net
|
$
|
685,237
|
|
|
$
|
439,615
|
|
7. Property and Equipment, Net
Property and equipment consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2021
|
|
September 26, 2020
|
|
|
(in thousands)
|
Land
|
|
$
|
27,528
|
|
|
$
|
17,370
|
|
Buildings and improvements
|
|
209,290
|
|
|
180,260
|
|
Transportation equipment
|
|
12,043
|
|
|
10,522
|
|
Machine and warehouse equipment
|
|
301,062
|
|
|
270,857
|
|
Capitalized software
|
|
119,311
|
|
|
117,073
|
|
Office furniture and equipment
|
|
31,723
|
|
|
30,520
|
|
Assets under construction
|
|
53,041
|
|
|
22,421
|
|
|
|
753,998
|
|
|
649,023
|
|
Accumulated depreciation and amortization
|
|
(425,427)
|
|
|
(404,356)
|
|
|
|
$
|
328,571
|
|
|
$
|
244,667
|
|
Depreciation and amortization expense, including the amortization of intangible assets, charged to operations was $74.7 million, $55.4 million and $50.8 million for fiscal 2021, 2020 and 2019, respectively.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Goodwill
Changes in the carrying amount of goodwill for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Garden Products
Segment
|
|
Pet Products
Segment
|
|
Total
|
|
(in thousands)
|
Balance as of September 29, 2018
|
|
|
|
|
|
Goodwill
|
$
|
226,471
|
|
|
$
|
464,267
|
|
|
$
|
690,738
|
|
Accumulated impairment losses
|
(213,583)
|
|
|
(195,978)
|
|
|
(409,561)
|
|
|
12,888
|
|
|
268,289
|
|
|
281,177
|
|
Additions in fiscal 2019
|
—
|
|
|
4,900
|
|
|
4,900
|
|
Balance as of September 28, 2019
|
|
|
|
|
|
Goodwill
|
226,471
|
|
|
469,167
|
|
|
695,638
|
|
Accumulated impairment losses
|
(213,583)
|
|
|
(195,978)
|
|
|
(409,561)
|
|
|
12,888
|
|
|
273,189
|
|
|
286,077
|
|
Additions in fiscal 2020
|
—
|
|
|
3,878
|
|
|
3,878
|
|
Balance as of September 26, 2020
|
|
|
|
|
|
Goodwill
|
226,471
|
|
|
473,045
|
|
|
699,516
|
|
Accumulated impairment losses
|
(213,583)
|
|
|
(195,978)
|
|
|
(409,561)
|
|
|
12,888
|
|
|
277,067
|
|
|
289,955
|
|
Additions in fiscal 2021
|
79,436
|
|
|
—
|
|
|
79,436
|
|
Balance as of September 25, 2021
|
|
|
|
|
|
Goodwill
|
305,907
|
|
|
473,045
|
|
|
778,952
|
|
Accumulated impairment losses
|
(213,583)
|
|
|
(195,978)
|
|
|
(409,561)
|
|
|
$
|
92,324
|
|
|
$
|
277,067
|
|
|
$
|
369,391
|
|
Additions or reductions to goodwill include acquisitions, sale of businesses, purchase price adjustments and adjustments of amounts upon finalization of purchase accounting.
The Company tests 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, the Company 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. The Company’s goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of its 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 the Company’s reporting units is based on the Company’s 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. The Company bases its fair value estimates on assumptions the Company believes to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Assumptions critical to the Company’s 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.
In connection with the Company’s annual goodwill impairment testing performed during fiscal 2021 and 2020, the Company made a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the fair values of its reporting units under the goodwill impairment test. The Company completed its qualitative assessment of potential goodwill impairment in
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
each fiscal year, and it was determined that it was more likely than not the fair values of the Company's reporting units were greater than their carrying amounts in each fiscal year, and accordingly, no further testing of goodwill was required in fiscal 2021 and 2020.
9. Other Intangible Assets
The following table summarizes the components of gross and net acquired intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
Accumulated
Amortization
|
|
Accumulated
Impairment
|
|
Net
Carrying
Value
|
|
(in millions)
|
September 25, 2021
|
|
|
|
|
|
|
|
Marketing-related intangible assets – amortizable
|
$
|
22.1
|
|
|
$
|
(19.0)
|
|
|
$
|
—
|
|
|
$
|
3.1
|
|
Marketing-related intangible assets – nonamortizable
|
70.6
|
|
|
—
|
|
|
(26.0)
|
|
|
44.6
|
|
Total
|
92.7
|
|
|
(19.0)
|
|
|
(26.0)
|
|
|
47.7
|
|
Customer-related intangible assets – amortizable
|
143.6
|
|
|
(75.4)
|
|
|
(2.5)
|
|
|
65.7
|
|
Other acquired intangible assets – amortizable
|
37.2
|
|
|
(22.0)
|
|
|
—
|
|
|
15.2
|
|
Other acquired intangible assets – nonamortizable
|
7.1
|
|
|
—
|
|
|
(1.2)
|
|
|
5.9
|
|
Total
|
44.3
|
|
|
(22.0)
|
|
|
(1.2)
|
|
|
21.1
|
|
Total other intangible assets
|
$
|
280.6
|
|
|
$
|
(116.4)
|
|
|
$
|
(29.8)
|
|
|
$
|
134.4
|
|
September 26, 2020
|
|
|
|
|
|
|
|
Marketing-related intangible assets – amortizable
|
$
|
20.6
|
|
|
$
|
(17.6)
|
|
|
$
|
—
|
|
|
$
|
3.0
|
|
Marketing-related intangible assets – nonamortizable
|
70.6
|
|
|
—
|
|
|
(26.0)
|
|
|
44.6
|
|
Total
|
91.2
|
|
|
(17.6)
|
|
|
(26.0)
|
|
|
47.6
|
|
Customer-related intangible assets – amortizable
|
140.3
|
|
|
(64.1)
|
|
|
(2.5)
|
|
|
73.7
|
|
Other acquired intangible assets – amortizable
|
26.0
|
|
|
(18.2)
|
|
|
—
|
|
|
7.8
|
|
Other acquired intangible assets – nonamortizable
|
7.1
|
|
|
—
|
|
|
(1.2)
|
|
|
5.9
|
|
Total
|
33.1
|
|
|
(18.2)
|
|
|
(1.2)
|
|
|
13.6
|
|
Total other intangible assets
|
$
|
264.6
|
|
|
$
|
(99.9)
|
|
|
$
|
(29.8)
|
|
|
$
|
134.9
|
|
September 28, 2019
|
|
|
|
|
|
|
|
Marketing-related intangible assets – amortizable
|
$
|
19.7
|
|
|
$
|
(16.3)
|
|
|
$
|
—
|
|
|
$
|
3.4
|
|
Marketing-related intangible assets – nonamortizable
|
70.6
|
|
|
—
|
|
|
(26.0)
|
|
|
44.6
|
|
Total
|
90.3
|
|
|
(16.3)
|
|
|
(26.0)
|
|
|
48.0
|
|
Customer-related intangible assets – amortizable
|
138.4
|
|
|
(53.3)
|
|
|
(2.5)
|
|
|
82.6
|
|
Other acquired intangible assets – amortizable
|
26.0
|
|
|
(16.4)
|
|
|
—
|
|
|
9.6
|
|
Other acquired intangible assets – nonamortizable
|
7.1
|
|
|
—
|
|
|
(1.2)
|
|
|
5.9
|
|
Total
|
33.1
|
|
|
(16.4)
|
|
|
(1.2)
|
|
|
15.5
|
|
Total other intangible assets
|
$
|
261.8
|
|
|
$
|
(86.0)
|
|
|
$
|
(29.7)
|
|
|
$
|
146.1
|
|
Other acquired intangible assets include contract-based and technology-based intangible assets.
As part of its acquisition of DoMyOwn in the first quarter of fiscal 2021 and Hopewell Nursery in the second quarter of fiscal 2021, the Company acquired approximately $1.5 million of marketing related intangible assets, $3.3 million of customer related intangible assets and $11.2 million of other intangible assets. See Note 3 – Acquisitions.
As part of its acquisition of the remaining 55% interest in Arden Companies in the second quarter of fiscal 2019 and C&S Products in the third quarter of fiscal 2019, the Company acquired approximately $1.9 million of marketing related intangible assets and $11.8 million of customer related intangible assets. See Note 3 – Acquisitions.
The Company evaluates long-lived assets, including amortizable and indefinite-lived intangible assets, for impairment whenever events or changes in circumstances indicate the carrying value may not be recoverable. The Company evaluates indefinite-lived intangible assets on an annual basis. As a result of one of our retail customers exiting the live fish business, factors indicating the carrying value of
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
certain amortizable intangible assets may not be recoverable were present during the quarter ended March 30, 2019. The Company performed impairment testing on these assets, found the carrying value was not recoverable, and accordingly, recorded an impairment charge in its Pet segment of approximately $2.5 million as part of selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended September 28, 2019. Factors indicating the carrying value of the Company's amortizable intangible assets may not be recoverable were not present in fiscal 2020 or 2021, and accordingly, no impairment testing was performed on these assets.
The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from two years to 25 years; over weighted-average remaining lives of two years for marketing-related intangibles, seven years for customer-related intangibles and six years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $16.5 million, $14.0 million and $14.5 million, for fiscal 2021, 2020 and 2019, respectively, and is classified within operating expenses in the consolidated statements of operations. Estimated annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $14 million per year from fiscal 2022 through fiscal 2026.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Leases
The Company has operating and finance leases for manufacturing and distribution facilities, vehicles, equipment and office space. The Company's leases have remaining lease terms of one to 13 years, inclusive of renewal or termination options that the Company is reasonably certain to exercise. The Company does not include significant restrictions or covenants in its lease agreements, and residual value guarantees are not included within its operating leases. Some of the Company's leasing arrangements require variable payments that are dependent on usage or output or may vary for other reasons, such as product costs, insurance and tax payments. These variable payments are not included in the Company's recorded lease assets and liabilities and are expensed as incurred. Certain leases are tied to a variable index or rate and are included in lease assets and liabilities based on the indices or rates as of lease commencement. See Note 1 – Organization and Significant Accounting Policies, for more information about the Company's lease accounting policies.
Supplemental balance sheet information related to the Company's leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Classification
|
|
As of
September 25, 2021
|
As of September 26, 2020
|
|
|
|
|
(in millions)
|
Operating leases
|
|
|
|
|
|
Right-of-use assets
|
|
Operating lease right-of-use assets
|
|
$
|
165.6
|
|
$
|
115.9
|
|
Current lease liabilities
|
|
Current operating lease liabilities
|
|
$
|
40.7
|
|
$
|
33.5
|
|
Non-current lease liabilities
|
|
Long-term operating lease liabilities
|
|
130.1
|
|
86.5
|
|
Total operating lease liabilities
|
|
|
|
$
|
170.8
|
|
$
|
120.0
|
|
Finance leases
|
|
|
|
|
|
Right-of-use assets
|
|
Property, plant and equipment, net
|
|
$
|
0.2
|
|
$
|
0.3
|
|
Current lease liabilities
|
|
Current portion of long-term debt
|
|
$
|
0.1
|
|
$
|
0.1
|
|
Non-current lease liabilities
|
|
Long-term debt
|
|
—
|
|
0.1
|
|
Total finance lease liabilities
|
|
|
|
$
|
0.1
|
|
$
|
0.2
|
|
Components of lease cost were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 25, 2021
|
Fiscal Year Ended
September 26, 2020
|
|
|
|
|
|
(in millions)
|
|
|
Operating lease cost
|
|
|
$
|
45.1
|
|
$
|
39.1
|
|
|
|
Finance lease cost:
|
|
|
|
|
|
|
Amortization of right-of-use assets
|
|
|
0.1
|
0.1
|
|
|
Interest on lease liabilities
|
|
|
—
|
|
—
|
|
|
|
Total finance lease cost
|
|
|
$
|
0.1
|
|
$
|
0.1
|
|
|
|
|
|
|
|
0
|
|
|
Short-term lease cost
|
|
|
4.2
|
3.7
|
|
|
Variable lease cost
|
|
|
11.0
|
7.7
|
|
|
|
|
|
|
|
|
|
Total lease cost
|
|
|
$
|
60.4
|
|
$
|
50.6
|
|
|
|
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Supplemental cash flow information and non-cash activity related to the Company's leases was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
September 25, 2021
|
|
Fiscal Year Ended
September 26, 2020
|
|
|
|
|
|
|
(in millions)
|
|
|
Cash paid for amounts included in the measurement of lease liabilities:
|
|
|
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
|
$
|
40.3
|
|
|
$
|
36.1
|
|
|
|
Operating cash flows from finance leases
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Financing cash flows from finance leases
|
|
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations:
|
|
|
|
|
|
|
|
|
Operating leases
|
|
|
|
$
|
90.8
|
|
|
$
|
39.6
|
|
|
|
Finance leases
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
Weighted-average remaining lease term and discount rate for the Company's leases were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 25, 2021
|
|
As of September 26, 2020
|
|
|
|
|
|
|
|
Weighted-average remaining lease term (in years):
|
|
|
|
|
|
|
Operating leases
|
|
6.4
|
|
4.8
|
|
|
Finance leases
|
|
1.1
|
|
2.0
|
|
|
|
|
|
|
|
|
|
Weighted-average discount rate:
|
|
|
|
|
|
|
Operating leases
|
|
2.75
|
%
|
|
3.43
|
%
|
|
|
Finance leases
|
|
4.86
|
%
|
|
4.80
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease liability maturities as of September 25, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 25, 2021
|
|
|
|
|
|
Operating Leases
|
|
Finance Leases
|
Fiscal Year
|
|
(in millions)
|
2022
|
|
$
|
44.7
|
|
|
$
|
0.1
|
|
2023
|
|
34.7
|
|
|
—
|
|
2024
|
|
28.0
|
|
|
—
|
|
2025
|
|
22.8
|
|
|
—
|
|
2026
|
|
13.9
|
|
|
—
|
|
|
|
|
|
|
Thereafter
|
|
45.4
|
|
|
—
|
|
Total future undiscounted lease payments
|
|
$
|
189.5
|
|
|
$
|
0.1
|
|
Less imputed interest
|
|
(18.7)
|
|
|
—
|
|
Total reported lease liability
|
|
$
|
170.8
|
|
|
$
|
0.1
|
|
Rental expense associated with the Company's leases was $41.7 million for fiscal 2019 and is included in cost of goods sold and occupancy or selling, general and administrative expenses in the Company's consolidated statements of operations.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Long-Term Debt
Long-term debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2021
|
|
September 26, 2020
|
|
|
(in thousands)
|
Senior notes, interest at 6.125%, payable semi-annually, principal due November 2023
|
|
|
$
|
—
|
|
|
$
|
400,000
|
|
Senior notes, interest at 5.125%, payable semi-annually, principal due February 2028
|
|
|
300,000
|
|
|
300,000
|
|
Senior notes, interest at 4.125%, payable semi-annually, principal due October 2030
|
|
|
500,000
|
|
|
—
|
|
Senior notes, interest at 4.125%, payable semi-annually, principal due April 2031
|
|
|
400,000
|
|
|
—
|
|
Unamortized debt issuance costs
|
|
|
(15,994)
|
|
|
(6,142)
|
|
Net carrying value
|
|
|
1,184,006
|
|
|
693,858
|
|
Asset-based revolving credit facility, interest at LIBOR plus a margin of 1.00% to 1.50% or Base Rate plus a margin of 0.0% to 0.50%, final maturity September 2024
|
|
|
—
|
|
|
—
|
|
Other notes payable
|
|
|
1,758
|
|
|
195
|
|
Total
|
|
|
1,185,764
|
|
|
694,053
|
|
Less current portion
|
|
|
(1,081)
|
|
|
(97)
|
|
Long-term portion
|
|
|
$
|
1,184,683
|
|
|
$
|
693,956
|
|
Senior Notes
Issuance of $400 million 4.125% Senior Notes due 2031
On April 30, 2021, the Company issued $400 million aggregate principal amount of 4.125% senior notes due April 2031 (the "2031 Notes"). The Company used a portion of the net proceeds from the offering to repay all outstanding borrowings under its Amended Credit Facility, with the remainder to be used for general corporate purposes.
The Company 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, commencing October 30, 2021. The 2031 Notes are unconditionally guaranteed on a senior basis by each of the Company's existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central's 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.
The Company may redeem some or all of the 2031 Notes at any time, at its option, prior to April 30, 2026 at the principal amount plus a "make whole" premium. At any time prior to April 30, 2024, the Company may also redeem, at its 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. The Company may redeem some or all of the 2031 Notes at the Company’s 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 the Company 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. The Company was in compliance with all financial covenants as of September 25, 2021.
Issuance of $500 million 4.125% Senior Notes due 2030
On October 16, 2020, the Company issued $500 million aggregate principal amount of 4.125% senior notes due October 2030 (the "2030 Notes"). In November 2020, the Company used a portion of the net proceeds to redeem all of its 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 for general corporate purposes.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company 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.
As a result of the Company's redemption of the 2023 Notes, the Company incurred a call premium payment of $6.1 million, overlapping interest expense for 30 days of approximately $1.4 million and a $2.5 million non-cash charge for the write-off of unamortized deferred financing costs related to the 2023 Notes. These amounts are included in interest expense in the consolidated statements of operations.
The 2030 Notes require semiannual interest payments on October 15 and April 15, commencing April 15, 2021. The 2030 Notes are unconditionally guaranteed on a senior basis by each of the Company's existing and future domestic restricted subsidiaries which are borrowers under or guarantors of Central's senior secured revolving credit facility or guarantee Central's other debt.
The Company may redeem some or all of the 2030 Notes at any time, at its option, prior to October 15, 2025 at a price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2023, the Company may redeem up to 40% of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of 104.125% of the principal amount of the notes. The Company may redeem some or all of the 2030 Notes, at its 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 the Company 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. The Company was in compliance with all financial covenants as of September 25, 2021.
$300 million 5.125% Senior Notes due 2028
On December 14, 2017, the Company issued $300 million aggregate principal amount of 5.125% senior notes due February 2028 (the "2028 Notes"). The Company used the net proceeds from the offering to finance future acquisitions and for general corporate purposes.
The Company 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, which commenced on August 1, 2018. The 2028 Notes are unconditionally guaranteed on a senior basis by the Company's existing and future domestic restricted subsidiaries who are borrowers under or guarantors of Central's senior secured revolving credit facility or who guarantee the 2023 Notes.
The Company may redeem some or all of the 2028 Notes at any time, at its option, prior to January 1, 2023 at the principal amount plus a “make whole” premium. The Company may redeem some or all of the 2028 Notes, at its 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 100.0%, 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 101.0% 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. The Company was in compliance with all financial covenants as of September 25, 2021.
Asset-Based Loan Facility Amendment
On September 27, 2019, the Company entered into a Second Amended and Restated Credit Agreement (“Amended Credit Facility”). The Amended Credit Facility amends and restates the previous credit agreement dated April 22, 2016 and continues to provide up to a $400 million principal amount senior secured asset-based revolving credit facility, with up to an additional $200 million principal amount available with the consent of the Lenders, as defined, if the Company exercises the accordion feature set forth therein (collectively, the “Amended Credit Facility”). The Amended Credit Facility matures on September 27, 2024. The Company 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 initially based upon eligible receivables and inventory minus certain reserves and adjustments. The Amended Credit Facility also allows the Company to add real property to the
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
borrowing base so long as the real property is subject to a first priority lien in favor of the Administrative Agent for the benefit of the Lenders. Net availability under the Amended Credit Facility was $400 million as of September 25, 2021. The Amended Credit Facility includes a $50 million sublimit for the issuance of standby letters of credit and an increased $40 million sublimit for short-notice borrowings. As of September 25, 2021, there were no borrowings outstanding and no letters of credit outstanding under the Credit Facility. There were other letters of credit of $1.5 million outstanding as of September 25, 2021.
Borrowings under the Amended Credit Facility will bear interest at an index based on LIBOR or, at the option of the Company, the Base Rate (defined as the highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50%, (c) one-month LIBOR plus 1.00%), plus, in either case, an applicable margin based on the Company’s consolidated senior leverage ratio and (d) 0.00%. Such applicable margin for LIBOR-based borrowings fluctuates between 1.00% and 1.50%, and was 1.00% as of September 25, 2021, and such applicable margin for Base Rate borrowings fluctuates between 0.00% and 0.50%, and was 0.00% as of September 25, 2021. An unused line fee shall be payable monthly in respect of the total amount of the unutilized Lenders’ commitments and short-notice borrowings under the Amended Credit Facility. Letter of credit fees at the applicable margin on the average undrawn and unreimbursed amount of letters of credit shall be payable monthly and a facing fee of 0.125% shall be paid on demand for the stated amount of each letter of credit. The Company is also required to pay certain fees to the administrative agent under the Amended Credit Facility. As of September 25, 2021, the applicable interest rate related to Base Rate borrowings was 3.3%, and the applicable interest rate related to one-month LIBOR-based borrowings was 1.1%.
Banks currently reporting information used to set LIBOR will stop doing so after 2021. Various parties, including government agencies, are seeking to identify an alternative rate to replace LIBOR. The Company is monitoring their efforts, and it will likely amend contracts to accommodate any replacement rate where it is not already provided. The Company's Amended Credit Facility already anticipates the potential loss of LIBOR and defines procedures for establishing a replacement rate.
The Company incurred approximately $1.6 million of debt issuance costs in conjunction with this transaction, which included underwriter 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 the Company to maintain a minimum fixed charge coverage ratio of 1.00:1.00 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. The Company was in compliance with all financial covenants under the Amended Credit Facility during the period ended September 25, 2021.
The scheduled principal repayments on long-term debt as of September 25, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
|
Fiscal year:
|
|
|
2022
|
$
|
1,081
|
|
|
2023
|
323
|
|
|
2024
|
228
|
|
|
2025
|
126
|
|
|
2026
|
—
|
|
|
Thereafter
|
1,200,000
|
|
|
Total
|
$
|
1,201,758
|
|
(1)
|
(1)Debt repayments do not reflect the unamortized portion of deferred financing costs associated with the 2028 Notes, 2030 Notes and 2031 Notes of approximately $16.0 million as of September 25, 2021, of which, $2.9 million is amortizable until February 2028, $7.3 million is amortizable until October 2030 and $5.8 million is amortizable until April 2031, and is included in the carrying value.
12. Commitments and Contingencies
Commitments
Letters of credit – The Company had $1.5 million of outstanding letters of credit related to normal business transactions at September 25, 2021. These agreements require the Company to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash the Company has available for other uses. The amount of cash collateral in these segregated accounts was $13.1 million and $13.7 million as of September 25, 2021 and September 26, 2020, respectively, and is reflected in “Restricted cash” on the Company's consolidated balance sheets.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Purchase commitments – Production and purchase agreements (primarily for grass seed and grains) entered into in the ordinary course of business may obligate the Company to make future purchases based on estimated yields. The terms of these contracts vary; some have fixed prices or quantities while others have 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.
Contingencies
The Company may from time to time become involved in legal proceedings in the ordinary course of business. Currently, the Company is not a party to any legal proceedings the resolution of which management believes could have a material effect on the Company’s financial position or results of operations with the exception of the proceeding below.
In 2012, Nite Glow Industries, Inc and its owner, Marni Markell, (“Nite Glow”) filed suit in the U.S. District Court for New Jersey against the Company alleging that the applicator developed and used by the Company for certain of its branded topical flea and tick products infringes a patent held by Nite Glow and asserted related claims for breach of contract and misappropriation of confidential information based on the terms of a Non-Disclosure Agreement. On June 27, 2018, a jury returned a verdict in favor of Nite Glow on each of the three claims and awarded damages of approximately $12.6 million. The court ruled on post-trial motions in early June 2020, reducing the judgment amount to $12.4 million and denying the plaintiff's request for attorneys' fees. The Company filed its notice of appeal and the plaintiffs cross-appealed. On July 14, 2021, the Federal Circuit Court of Appeals issued its decision on the appeal. The Federal Circuit concluded that the Company did not infringe plaintiff's patent and determined that the breach of contract claim raised no non-duplicative damages and should be dismissed. The court affirmed the jury's liability verdict on the misappropriation of confidential information claim but ordered a new trial on damages on that single claim limited to the "head start" benefit, if any, generated by the confidential information. The Company intends to vigorously pursue its defenses in the future proceedings and believes that it will prevail on the merits as to the head start damages issue. While the Company believes that the ultimate resolution of this matter will not have a material impact on the Company's consolidated financial statements, the outcome of litigation is inherently uncertain and the final resolution of this matter may result in expense to the Company in excess of management's expectations.
During fiscal 2013, the Company received notices from several states stating that they have appointed an agent to conduct an examination of the books and records of the Company to determine whether it has complied with state unclaimed property laws. In addition to seeking unclaimed property subject to escheat laws, the states may seek interest, penalties and other relief. The examinations are continuing, and the ultimate resolution and impact on the Company's consolidated financial statements is uncertain.
In November 2019, the DMC business unit in the Company's Pet Segment experienced a fire in one of its leased properties located in Athens, Texas, which resulted in inventory, property-related and business interruption losses of approximately $35 million. In April 2020, DMC experienced an additional fire in the same leased property in Athens, Texas, which resulted in inventory and property-related losses estimated to be approximately $10 million.
The Company's insurance coverage was sufficient to cover the asset-related losses associated with this event.
The Company has experienced, and may in the future experience, issues with products that may lead to product liability, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. The Company has not experienced recent issues with products, the resolution of which management believes would have a material effect on the Company’s financial position or results of operations.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Income Taxes
The provision for income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 25, 2021
|
|
September 26, 2020
|
|
September 28, 2019
|
|
(in thousands)
|
Current:
|
|
|
|
|
|
Federal
|
$
|
49,941
|
|
|
$
|
33,775
|
|
|
$
|
17,048
|
|
State
|
6,193
|
|
|
5,063
|
|
|
2,728
|
|
Foreign
|
645
|
|
|
(5)
|
|
|
169
|
|
Total
|
56,779
|
|
|
38,833
|
|
|
19,945
|
|
Deferred:
|
|
|
|
|
|
Federal
|
(14,740)
|
|
|
(6,019)
|
|
|
4,278
|
|
State
|
(690)
|
|
|
(582)
|
|
|
2,380
|
|
Foreign
|
686
|
|
|
(14)
|
|
|
1
|
|
Total
|
(14,744)
|
|
|
(6,615)
|
|
|
6,659
|
|
Total
|
$
|
42,035
|
|
|
$
|
32,218
|
|
|
$
|
26,604
|
|
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended
|
|
September 25, 2021
|
|
September 26, 2020
|
|
September 28, 2019
|
|
|
Statutory federal income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
State income taxes, net of federal benefit
|
2.2
|
|
|
2.3
|
|
|
4.3
|
|
Other permanent differences
|
0.1
|
|
|
—
|
|
|
0.7
|
|
Adjustment of prior year accruals
|
(0.1)
|
|
|
(0.2)
|
|
|
(0.6)
|
|
Credits
|
(0.4)
|
|
|
(0.6)
|
|
|
(0.9)
|
|
|
|
|
|
|
|
Stock based compensation
|
(1.4)
|
|
|
(1.4)
|
|
|
(1.6)
|
|
Other
|
0.2
|
|
|
(0.1)
|
|
|
(0.6)
|
|
Effective income tax rate
|
21.6
|
%
|
|
21.0
|
%
|
|
22.3
|
%
|
The tax effect of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 25, 2021
|
|
September 26, 2020
|
|
Deferred
Tax
Assets
|
|
Deferred
Tax
Liabilities
|
|
Deferred
Tax
Assets
|
|
Deferred
Tax
Liabilities
|
|
(in thousands)
|
Allowance for doubtful accounts
|
$
|
6,991
|
|
|
$
|
—
|
|
|
$
|
6,618
|
|
|
$
|
—
|
|
Inventory write-downs
|
10,377
|
|
|
—
|
|
|
8,624
|
|
|
—
|
|
Prepaid expenses
|
—
|
|
|
1,928
|
|
|
—
|
|
|
1,603
|
|
Nondeductible reserves
|
9,532
|
|
|
—
|
|
|
9,484
|
|
|
—
|
|
State taxes
|
105
|
|
|
—
|
|
|
505
|
|
|
—
|
|
Employee benefits
|
15,831
|
|
|
—
|
|
|
12,913
|
|
|
—
|
|
Depreciation and amortization
|
—
|
|
|
104,829
|
|
|
—
|
|
|
85,302
|
|
Equity loss
|
179
|
|
|
—
|
|
|
2,047
|
|
|
—
|
|
State net operating loss carryforward
|
7,155
|
|
|
—
|
|
|
5,652
|
|
|
—
|
|
Stock based compensation
|
7,003
|
|
|
—
|
|
|
4,743
|
|
|
—
|
|
State credits
|
2,764
|
|
|
—
|
|
|
2,732
|
|
|
—
|
|
Other
|
1,034
|
|
|
—
|
|
|
1,774
|
|
|
—
|
|
Valuation allowance
|
(7,031)
|
|
|
—
|
|
|
(7,124)
|
|
|
—
|
|
Total
|
$
|
53,940
|
|
|
$
|
106,757
|
|
|
$
|
47,968
|
|
|
$
|
86,905
|
|
The Company has a federal net operating loss of $22.1 million from its acquisition of Green Garden, all of which will be carried back for a refund. The Company also has state tax net operating losses of $104 million, which expire at various times between 2021 and 2041, and foreign losses of $4.1 million, which do not expire.
The Company has state income tax credits of $3.4 million, which expire at various times beginning in 2021 through 2041. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including past operating results, future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against any deferred tax assets. The Company has determined there will be insufficient future separate state and foreign taxable income for the separate parent company and foreign subsidiaries to realize the deferred tax assets. Therefore, valuation allowances of $7.0 million and $7.1 million (net of federal impact) at September 25, 2021 and September 26, 2020, respectively, have been provided to reduce state deferred tax assets to amounts considered recoverable.
The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year. The Company recognizes interest and/or penalties related to income tax matters as a component of pretax income. As of September 25, 2021 and September 26, 2020, accrued interest was less than $0.1 million and no penalties were accrued related to uncertain tax positions.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the activity related to the Company’s unrecognized tax benefits for fiscal years ended September 25, 2021 and September 26, 2020:
|
|
|
|
|
|
|
(in thousands)
|
Balance as of September 28, 2019
|
$
|
483
|
|
Increases related to prior year tax positions
|
—
|
|
Increases related to current year tax positions
|
80
|
|
Decreases related to prior year tax positions
|
—
|
|
Settlements
|
—
|
|
Decreases related to lapse of statute of limitations
|
(236)
|
|
Balance as of September 26, 2020
|
$
|
327
|
|
Increases related to prior year tax positions
|
47
|
|
Increases related to current year tax positions
|
85
|
|
Decreases related to prior year tax positions
|
—
|
|
Settlements
|
(43)
|
|
Decreases related to lapse of statute of limitations
|
(74)
|
|
Balance as of September 25, 2021
|
$
|
342
|
|
As of September 25, 2021, unrecognized income tax benefits totaled approximately $0.3 million and all of the unrecognized tax benefits would, if recognized, impact the Company’s effective income tax rate.
The Company is principally subject to taxation by the United States and various states within the United States. The Company’s tax filings in major jurisdictions are open to examination by tax authorities by the Internal Revenue Service from fiscal year ended 2017 forward and in various state taxing authorities generally from fiscal year ended 2016 forward.
The Company believes there is a reasonable chance that its unrecognized tax benefits will decrease by less than $0.1 million within the next twelve months.
14. Stock-Based Compensation
The Company’s 2003 Omnibus Equity Incentive Plan (the “2003 Plan”), as amended, allows for the grant of options, restricted stock and certain other specified types of awards to key employees, directors and consultants of the Company. The 2003 Plan is administered by the Compensation Committee of the Board of Directors, which is comprised only of independent directors, and which must approve individual awards to be granted, vesting and exercise of share conditions.
There are a total of 5.8 million shares of Common Stock, 19.7 million shares of Class A Common Stock and 500,000 shares of Preferred Stock authorized under the 2003 Plan. If and when the Company issues any shares of Preferred Stock under the 2003 Plan, it will reduce the amount of Class A Common Stock available for future issuance in an amount equal to the number of shares of Class A Common Stock that are issuable upon conversion of such Preferred Stock.
The Company has a Nonemployee Director Equity Incentive Plan (the “Director Plan”) which provides for the grant of options and restricted stock to nonemployee directors of the Company. The Director Plan, as amended, provides for the granting to each independent director of options to purchase a number of shares equal to $200,000 divided by the fair market value of the Company’s common stock on the date of each annual meeting of stockholders and a number of shares of restricted stock equal to $20,000 divided by such fair market value. In October 2020, the Director Plan was amended such that the number of shares of restricted stock granted to each independent director would be equal to $70,000 divided by the fair market value of the Company's common stock on the date of each annual meeting of shareholders.
As of September 25, 2021, there were approximately 4.3 million shares of Class A Common Stock and no shares of Common Stock and Preferred Stock reserved for outstanding equity awards, and there were approximately 4.6 million shares of Common Stock, 9.4 million shares of Class A Common Stock and 0.5 million shares of Preferred Stock remaining for future awards.
Stock Option Awards
The Company recognized stock-based compensation expense of $23.1 million, $19.0 million, and $14.7 million for the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019, respectively, as a component of selling, general and
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
administrative expenses. Share-based compensation expense in fiscal 2021, 2020 and 2019 consisted of $5.6 million, $5.1 million, and $4.5 million, respectively, for stock options, and $10.7 million, $7.5 million and $6.0 million, respectively, for stock awards. Share-based compensation expense in fiscal 2021, 2020 and 2019 also includes $6.8 million, $6.4 million and $4.2 million, respectively, for the Company’s 401(k) matching contributions.
During fiscal 2021, the Company granted time-based stock options with an exercise price based on the closing fair market value on the date of the grant. The majority of the options granted in fiscal 2021 vest in four annual installments commencing approximately one year from the date of grant and expire approximately six years after the grant date.
The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities are estimated based on the historical volatility of the Company’s stock price. The expected term of options granted is based on analyses of historical employee termination rates, option exercises and the contractual term of the option. The risk-free rates are based on U.S. Treasury yields, for notes with comparable terms as the option grants, in effect at the time of the grant. For purposes of this valuation model, no dividends have been assumed.
The Company’s calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life from the date of grant 3.7 years in fiscal 2021, 2020 and 2019; stock price volatility, 32.4% in fiscal 2021, 32.6% in fiscal 2020, and 30.4% in fiscal 2019; risk free interest rates, 0.5% in fiscal 2021, 1.4% in fiscal 2020 and 2.5% in fiscal 2019; and no dividends during the expected term.
The following table summarizes option activity for the period ended September 25, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(in thousands)
|
|
Weighted
Average Exercise
Price per Share
|
|
Weighted Average
Remaining
Contractual Life
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding at September 26, 2020
|
3,021
|
|
|
$
|
28.46
|
|
|
4 years
|
|
$
|
19,039
|
|
Granted
|
432
|
|
|
$
|
43.64
|
|
|
|
|
|
Exercised
|
(766)
|
|
|
$
|
26.73
|
|
|
|
|
|
Canceled or expired
|
(92)
|
|
|
$
|
23.48
|
|
|
|
|
|
Outstanding at September 25, 2021
|
2,595
|
|
|
$
|
31.64
|
|
|
4 years
|
|
$
|
28,075
|
|
Exercisable at September 28, 2019
|
957
|
|
|
$
|
21.08
|
|
|
3 years
|
|
8,589
|
|
Exercisable at September 26, 2020
|
1,016
|
|
|
$
|
26.41
|
|
|
3 years
|
|
8,533
|
|
Exercisable at September 25, 2021
|
929
|
|
|
29.64
|
|
|
3 years
|
|
11,645
|
|
Expected to vest after September 25, 2021
|
1,666
|
|
|
32.75
|
|
|
4 years
|
|
16,430
|
|
The prices of options to purchase shares of common stock and Class A common stock outstanding at September 25, 2021, September 26, 2020 and September 28, 2019 were between $13.82 to $51.37 per share, $10.63 to $38.10 per share and $8.56 to $38.10 per share, respectively. The weighted average grant date fair value of options granted during the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019 was $10.50, $7.60 and $7.28, respectively. The total intrinsic value of options exercised during the fiscal years ended September 25, 2021, September 26, 2020 and September 28, 2019 was $15.1 million, $9.9 million, and $6.7 million, respectively.
As of September 25, 2021, there was $11.0 million of total unrecognized compensation cost related to nonvested stock options, which is expected to be recognized over a remaining weighted-average vesting period of three years.
Restricted Stock Awards
As of September 25, 2021 and September 26, 2020, there were approximately 1.7 million and 1.1 million, respectively, of restricted stock awards outstanding. Awards granted in fiscal 2021 and 2020 generally vest within four or five years from the date of grant.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted stock award activity during the period ended September 25, 2021 is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value per
Share
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested at September 26, 2020
|
1,123
|
|
|
$
|
28.45
|
|
Granted
|
755
|
|
|
$
|
39.68
|
|
Vested
|
(178)
|
|
|
$
|
27.11
|
|
Forfeited
|
(36)
|
|
|
$
|
34.44
|
|
Nonvested at September 25, 2021
|
1,664
|
|
|
$
|
33.47
|
|
As of September 25, 2021, there was $40.9 million of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of four years.
15. Shareholders’ Equity
At September 25, 2021 and September 26, 2020, there were 80,000,000 shares of common stock ($0.01 par value) authorized, of which 11,335,658 and 11,336,358, respectively, were outstanding, and 100,000,000 shares of non-voting Class A common stock ($0.01 par value) authorized, of which 42,282,922 and 41,856,626, respectively, were outstanding. The preferences and relative rights of the Class A common stock are identical to common stock in all respects, except that the Class A common stock generally has no voting rights unless otherwise required by Delaware law.
There are 3,000,000 shares of Class B stock ($0.01 par value) authorized, of which 1,612,374 were outstanding at September 25, 2021 and September 26, 2020. The voting powers, preferences and relative rights of the Class B stock are identical to common stock in all respects except that (i) the holders of common stock are entitled to one vote per share and the holders of Class B stock are entitled to the lesser of ten votes per share or 49% of the total votes cast, (ii) stock dividends on common stock may be paid only in shares of common stock and stock dividends on Class B stock may be paid only in shares of Class B stock and (iii) shares of Class B stock have certain conversion rights and are subject to certain restrictions on ownership and transfer. Each share of Class B stock is convertible into one share of common stock, at the option of the holder. Additional shares of Class B stock may only be issued with majority approval of the holders of the common stock and Class B stock, voting as separate classes.
There are 1,000,000 shares of preferred stock ($0.01 par value) authorized, of which none were outstanding at September 25, 2021 and September 26, 2020.
In August 2019, the Company's Board of Directors authorized a new share repurchase program to purchase up to $100 million of its 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 25, 2021, the Company had $100 million remaining under its 2019 Repurchase Authorization. During fiscal 2021, the Company repurchased approximately 0.5 million shares of its non-voting common stock (CENTA) on the open market at an aggregate cost of approximately $21.8 million, or $41.91 per share.
In February 2019, the Board of Directors authorized the Company to make supplemental purchases to minimize dilution resulting from issuances under its equity compensation plans (the "Equity Dilution Authorization"). In addition to the Company's regular share repurchase program, it is 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 26, 2021, the Company had authorization remaining from the fiscal 2021 equity plan activity to repurchase up to 1.2 million shares under its Equity Dilution Authorization.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. Earnings Per Share
The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations:
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|
Fiscal Year Ended September 25, 2021
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Fiscal Year Ended September 26, 2020
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|
Fiscal Year Ended September 28, 2019
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Net
Income
|
|
Shares
|
|
Per
Share
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
Net
Income
|
|
Shares
|
|
Per
Share
|
|
(in thousands, except per share amounts)
|
Basic EPS:
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|
|
|
|
|
|
|
|
|
|
|
|
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|
Net income available to common shareholders
|
$
|
151,746
|
|
|
53,914
|
|
|
$
|
2.81
|
|
|
$
|
120,676
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|
|
54,008
|
|
|
$
|
2.23
|
|
|
$
|
92,786
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|
|
56,770
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|
|
$
|
1.63
|
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Effect of dilutive securities:
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Options to purchase common stock
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645
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(0.03)
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316
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(0.01)
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509
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|
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(0.01)
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Restricted shares
|
|
|
689
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(0.03)
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|
|
|
|
414
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(0.02)
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332
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|
|
(0.01)
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Diluted EPS:
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Net income available to common shareholders
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$
|
151,746
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|
|
55,248
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$
|
2.75
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$
|
120,676
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|
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54,738
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$
|
2.20
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$
|
92,786
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|
|
57,611
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|
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$
|
1.61
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For fiscal 2021, options to purchase 0.2 million shares were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive.
For fiscal 2020, options to purchase 1.0 million shares were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive.
For fiscal 2019, options to purchase 1.1 million shares were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive.
17. Transactions with Related Parties
During fiscal 2021, 2020 and 2019, Tech Pac, a subsidiary of the Company, made purchases from Contract Packaging, Inc, (“CPI”), Tech Pac’s principal supplier and a minority 20% shareholder in Tech Pac. Tech Pac’s total purchases from CPI were approximately $42.6 million, $31.3 million and $32.5 million for fiscal years 2021, 2020 and 2019, respectively. Amounts due to and from CPI as of September 25, 2021 and September 26, 2020 were $1.1 million and $0.9 million, respectively.
18. Business Segment Data
The Company’s chief operating decision-maker is its Chief Executive Officer. Operating segments are managed separately because each segment represents a strategic business that offers different products or services. The Company’s chief operating decision maker evaluates performance based on operating income or loss. The Company’s Corporate division is included in the following presentation since certain expenses of this division are not allocated separately to the two operating segments. Segment assets exclude cash equivalents, short-term investments, goodwill, and deferred taxes.
Management has determined that the Company has two operating segments which are also reportable segments based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are the Pet segment and the Garden segment. Substantially all of the Company’s assets and operations relate to its business in the United States.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During the first quarter of fiscal year 2021, the Company began reporting the results of its outdoor cushion operations in the Pet segment as a result of a change in internal management reporting lines due to potential synergies in sourcing, manufacturing and innovation and to be consistent with the reporting of financial information used to assess performance and allocate resources. These operations were previously reported in the Garden segment and are now managed and reported in the Pet segment. All prior period segment disclosures have been recast to reflect this segment change.
The Pet segment consists of TFH Publications, IMS Trading, Four Paws Products, Central Specialty Pet (Avian and Small Animal, C&S Products and Aquatics), Segrest, K&H Pet Products, Arden, DMC, Life Sciences, Interpet, General Pet and Pet Distribution. These businesses are engaged in the manufacture, purchase, sale and delivery of internally and externally produced pet supplies, animal health and insect controls, aquariums, books, dog treats and food, as well as live fish and small animals principally to independent pet distributors, big-box retailers, regional retailer chains, e-commerce retailers, grocery stores and mass merchants. The Garden segment consists of Grass Seed, Bird Feed, Chemicals and Fertilizers, Excel Marketing, Gulfstream, Hydro-Organics, Pottery (terra-cotta), Cedarworks, Bell Nursery, Hopewell Nursery, DMO, Green Garden, D&D Commodities and Garden Distribution. Products manufactured, designed and sourced, or distributed include products found typically in the lawn and garden sections of mass merchandisers, warehouse-type clubs, home improvement centers and nurseries and include live plants; grass, vegetable, flower and herb seed; wild bird feed, bird houses and other birding accessories; terra-cotta pottery; herbicides, pesticides and insecticides. These products are sold directly to national and regional retail chains, independent garden distributors, online retailers, grocery stores, nurseries and garden supply retailers.
The Corporate division includes expenses associated with corporate functions and projects, certain employee benefits, interest income, interest expense and inter-segment eliminations.
The following table indicates each class of similar products which represented approximately 10% or more of the Company’s consolidated net sales in the fiscal years presented (in millions).
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Category
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2021
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2020
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2019
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(in millions)
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Other pet products
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$
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767.0
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$
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821.1
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$
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688.3
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Other garden products
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876.6
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491.7
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485.9
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Other manufacturers' products
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749.1
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600.7
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504.5
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Dog & cat products
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570.9
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502.1
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452.1
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Wild bird
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|
340.1
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|
—
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(1)
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—
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(1)
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Controls & fertilizer products
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—
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(1)
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279.9
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252.2
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Total
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$
|
3,303.7
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$
|
2,695.5
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$
|
2,383.0
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(1) The product category was less than 10% of our consolidated net sales in the period.
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Financial information relating to the Company’s business segments for each of the three most recent fiscal years is presented in the table below:
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|
|
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|
Fiscal Year Ended
|
|
|
September 25, 2021
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|
September 26, 2020
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September 28, 2019
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(in thousands)
|
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Net sales:
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|
|
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|
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Pet segment
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$
|
1,894,929
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$
|
1,678,027
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$
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1,459,581
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Garden segment
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1,408,755
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1,017,482
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923,429
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Total
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$
|
3,303,684
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|
$
|
2,695,509
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$
|
2,383,010
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Operating income (loss):
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|
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|
|
Pet segment
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$
|
208,201
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|
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$
|
171,369
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|
|
$
|
132,496
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|
(1)
|
Garden segment
|
138,755
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|
|
115,413
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|
|
92,401
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Corporate
|
(92,460)
|
|
|
(88,805)
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|
|
(72,829)
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Total
|
254,496
|
|
|
197,977
|
|
|
152,068
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|
|
Interest expense
|
(58,597)
|
|
|
(44,016)
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|
|
(42,614)
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|
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Interest income
|
415
|
|
|
4,027
|
|
|
9,554
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|
|
Other income (expense), net
|
(1,506)
|
|
|
(4,250)
|
|
|
243
|
|
|
Income before income taxes and noncontrolling interest
|
194,808
|
|
|
153,738
|
|
|
119,251
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|
|
Income tax expense
|
42,035
|
|
|
32,218
|
|
|
26,604
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|
|
Net income including noncontrolling interest
|
152,773
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|
|
121,520
|
|
|
92,647
|
|
|
Net income (loss) attributable to noncontrolling interest
|
1,027
|
|
|
844
|
|
|
(139)
|
|
|
Net income attributable to Central Garden & Pet Company
|
$
|
151,746
|
|
|
$
|
120,676
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|
|
$
|
92,786
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|
|
Assets:
|
|
|
|
|
|
|
Pet segment
|
$
|
966,437
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|
|
$
|
877,901
|
|
|
$
|
782,696
|
|
|
Garden segment
|
1,313,899
|
|
|
481,401
|
|
|
415,573
|
|
|
Corporate and eliminations
|
836,344
|
|
|
980,062
|
|
|
826,751
|
|
|
Total
|
$
|
3,116,680
|
|
|
$
|
2,339,364
|
|
|
$
|
2,025,020
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Pet segment
|
$
|
36,952
|
|
|
$
|
38,116
|
|
|
$
|
34,838
|
|
|
Garden segment
|
33,050
|
|
|
10,590
|
|
|
9,924
|
|
|
Corporate
|
4,725
|
|
|
6,653
|
|
|
6,066
|
|
|
Total
|
$
|
74,727
|
|
|
$
|
55,359
|
|
|
$
|
50,828
|
|
|
Expenditures for long-lived assets:
|
|
|
|
|
|
|
Pet segment
|
$
|
44,919
|
|
|
$
|
31,106
|
|
|
$
|
21,203
|
|
|
Garden segment
|
34,043
|
|
|
8,177
|
|
|
8,658
|
|
|
Corporate
|
1,371
|
|
|
3,772
|
|
|
1,716
|
|
|
Total
|
$
|
80,333
|
|
|
$
|
43,055
|
|
|
$
|
31,577
|
|
|
Noncontrolling interest is associated with the Garden segment.
(1) Includes a $2.5 million impairment charge in fiscal 2019.