Item 9A. Controls and Procedures
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our Principal Executive Officer and Principal Financial Officer have reviewed, as of the end of the period covered by this report, the “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) that ensure that information relating to the Company required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported in a timely and proper manner and that such information is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based upon this review, such officers concluded that our disclosure controls and procedures were effective as of September 28, 2024.
Remediation of Previously Disclosed Material Weaknesses
We previously identified and disclosed in our Form 10-K for the fiscal year ended September 30, 2023, as well as in our Quarterly Report on Form 10-Q filed for the quarters ended December 30, 2023, March 30, 2024, and June 29, 2024, material weaknesses in our internal controls over financial reporting. The material weaknesses identified related to (1) certain information technology general computer controls ("ITGC’s") at our Live Plant and Green Garden businesses and (2) controls related to an outsourced service provider that supports certain of the Company’s revenue processes for our Live Plant business. As a result, certain of the Company’s related business controls that are dependent upon the affected ITGC’s and lack of controls around outsourced IT service provider data were also deemed ineffective. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis.
As of September 28, 2024, we have completed our remediation activities including testing of the design and concluding on the operating effectiveness of the related controls. The remediation activities included, but are not limited to:
• Instituted a ITGC material weakness remediation team;
• Implemented defined standards & control processes;
• Enhanced the training of personnel on the design and operation of our internal controls over financial reporting;
• Developed monitoring controls and protocols allowing us to timely assess the design and operating effectiveness of the new and redesigned controls;
• Hired an additional resource with an appropriate level of knowledge and experience; and
• Expanded and formalized controls related to recording revenue from an outsourced service provider that supports certain of the Company's revenue processes for our Live Plant business.
Based upon the above, we believe the steps taken have improved the effectiveness of our internal control over financial reporting and we have determined that these new or redesigned controls are operating effectively.
Changes in Internal Control Over Financial Reporting
Our management, with the participation of our Principal Executive Officer and Principal Financial Officer, has evaluated whether any change in our internal control over financial reporting occurred during the fourth quarter of fiscal 2024. Based on that evaluation, management concluded that other than the improvements to our internal control over financial reporting to remediate the material weaknesses discussed above, there have been no other changes in our internal control over financial reporting that occurred during the fourth quarter of fiscal 2024 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
34
Management’s Report on Internal Control Over Financial Reporting
A copy of our management’s report and the report of Deloitte & Touche LLP, our independent registered public accounting firm, are included in our Financial Statements and Supplementary Data beginning on page F-1.
Item 9B. Other Information
During the quarter ended September 28, 2024, none of our directors or officers informed us of the adoption , modification or termination of a "Rule 10b5-1 trading arrangement" or "non-Rule 10b5-1 trading arrangement," as those terms are defined in Regulation S-K, Item 408, except as described in the table below:
Name & Title Date Adopted Character of Trading Arrangement 1
Aggregate Number of Shares of Common Stock to be Purchased or Sold Pursuant to Trading Arrangement Duration 2
Other Material Terms Date Terminated
Brooks M. Pennington III , Director
8/29/2024 Rule 10b5-1
Trading
Arrangement Up to 27,789
shares of CENTA
to be sold 3
2/10/2025 through 5/14/2027
N/A N/A
1 Except as indicated by footnote, each trading arrangement marked as a "Rule 10b5-1 Trading Arrangement" is intended to satisfy the affirmative defense of Rule 10b5-1(c), as amended (the "Rule").
2 The Rule 10b5-1 Trading Arrangements permit transactions through and including the earlier to occur of (a) the completion of all purchases or sales or (b) the date listed in the table. The Rule 10b5-1 Trading Arrangements only permit transactions upon expiration of the applicable mandatory cooling-off period under the Rule. The Rule 10b5-1 Trading Arrangements also provide for automatic expiration in the event of certain events, including written notice of death or legal incapacity, filing of a bankruptcy petition, upon transfer of the securities account to another broker-dealer; the closing of a merger, recapitalization, consolidation or similar transaction, or the termination of the Rule 10b5-1 Trading Arrangement by the executive.
3 Includes options to purchase 20,446 shares of CENTA of which only the amount of net shares issued after withholding shares to cover the exercise price and tax withholding will be sold.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
We have adopted a code of ethics that applies to all of our executive officers and directors, a copy of which is available on our website at www.central.com/about-us/what-we-stand-for.
The remaining information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2025 Annual Meeting of Shareholders under the captions “Election of Directors,” “Further Information Concerning the Board of Directors – Committees of the Board”, “Delinquent Section 16(a) Reports,” “Code of Ethics,” and "Restrictions on Transactions in Company Stock by Directors and Officers." See also Item 1 – Business above.
Item 11. Executive Compensation
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2025 Annual Meeting of Shareholders under the captions “Executive Compensation” and “Further Information Concerning the Board of Directors – Compensation Committee Interlocks and Insider Participation.”
35
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2025 Annual Meeting of Shareholders under the captions “Stock Ownership of Management and Principal Shareholders” and "Executive Compensation – Equity Compensation Plan Information.”
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2025 Annual Meeting of Shareholders under the captions “Further Information Concerning the Board of Directors – Board Independence” and “Transactions with the Company.”
Item 14. Principal Accountant Fees and Services
The information required by this item is incorporated by reference from Central’s Definitive Proxy Statement for its 2025 Annual Meeting of Shareholders under the caption “Ratification of Selection of Independent Registered Public Accounting Firm.”
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this report:
(i) Consolidated Financial Statements of Central Garden & Pet Company are attached to this Form 10-K beginning on page F-1:
Management’s Report on Internal Control Over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
All other schedules are omitted because of the absence of conditions under which they are required or because the required information is included in the consolidated financial statements or notes thereto.
(2) Exhibits:
Set forth below is a list of exhibits that are being filed or incorporated by reference into this Form 10-K:
Incorporated by Reference
Exhibit
Number Exhibit Form File
No. Exhibit Filing
Date Filed
Herewith Furnished, Not Filed
3.1
Fourth Amended and Restated Certificate of Incorporation
10-K 001-33268 3.1 12/14/2006
3.2
Amended and Restated By-laws of Central Garden & Pet Company, dated as of March 31, 2022
8-K 001-33268 3.1 4/1/2022
4.1
Specimen Common Stock Certificate
10-K 001-33268 4.1 11/29/2017
4.2
Specimen Class A Common Stock Certificate
10-K 001-33268 4.2 11/29/2017
4.3
Indenture, dated as of March 8, 2010, by and between the Company and Wells Fargo Bank, National Association, as trustee
8-K 001-33268 4.2 3/8/2010
4.4
Seventh Supplemental Indenture, dated as of December 24, 2017, by and among the Company, certain guarantors named therein and Wells Fargo Bank National Association, as t0rustee, relating to the 5.125% Senior Notes due 2028
8-K 001-33268 4.1 12/14/2017
4.5.
Ninth Supplemental Indenture, dated as of March 30, 2019, by and among the Company, certain guarantors named therein and Wells Fargo Bank National Association, as trustee, relating to the 6.125% Senior Notes due 2023 and the 5.125% Senior Note due 2028
10-Q 001-33268 4.1 5/7/2019
4.6
Tenth Supplemental Indenture, dated as of June 29, 2019, by and among the Company, certain guarantors named therein and Wells Fargo Bank National Association, as trustee, relating to the 6.125% Senior Notes due 2023 and the 5.125% Senior Notes due 2028
10-Q 001-33268 4.1 8/2/2019
4.7
Eleventh Supplemental Indenture, dated as of October 16, 2020, by and among the Company, certain guarantors named therein and Wells Fargo Bank National Association, as trustee, relating to the 4.125% Senior Notes due 2030
8-K 001-33268 4.1 10/16/2020
4.8
Twelfth Supplemental Indenture, dated as of March 10, 2021 by P&M Solutions, LLC, the Company, the other Guarantors and Wells Fargo Bank, National Association as trustee.
10-Q 001-33268 4.1 5/6/20213
4.9
Thirteenth Supplemental Indenture, dated effective as of April 9, 2021 by (i) Flora Parent, Inc., (ii) Seed Holdings, Inc., (iii) Plantation Products, LLC, (iv) Ferry-Morse Seed Company, (v) Livingston Seed Company, (vi) MARTEAL LTD, (vii) A.E. MCKENZIE CO. ULC, the Company, the other Guarantors and Wells Fargo Bank, National Association, as trustee.
10-Q 001-33268 4.2 5/6/20213
4.10
Fourteenth Supplemental Indenture, dated as of March 3, 2023, by and among the Company, certain guarantors named therein and Computershare Trust Company, N.A., as successor to Wells Fargo Bank National Association, as trustee, relating to the 5.125% Senior Notes due 2028 and the 4.125% Senior Notes due 2030.
10-Q 001-33268 4.1 5/4/2023
4.11
Fifteenth Supplemental Indenture (this “Supplemental Indenture”), dated effective as of February 7, 2024, by (i) BRP Hold Nightingale, LLC, a Delaware limited liability company, (ii) BRP Hold Ox, LLC, a Delaware limited liability company, and (iii) TDBBS, LLC, a Delaware limited liability company (each of (i)-(iii), a “Subsidiary Guarantor” and, collectively, the “Subsidiary Guarantors”), each Subsidiary Guarantor a direct subsidiary of Central Garden & Pet Company, a Delaware corporation (the “Company”), the Company, the other Guarantors (as defined in the Indenture referred to herein), and Computershare Trust Company, N.A., as successor to Wells Fargo Bank, National Association, as trustee under the indenture referred to below (the “Trustee”)
10-Q 001-33268 4.2 8/8/2024
4.12
Indenture, dated as of April 30, 2021, by and among the Company, certain guarantors named therein and Wells Fargo Bank, National Association, as trustee, relating to the 4.125% Senior Notes due 2031.
8-K 001-33268 4.1 4/30/2021
4.13
First Supplemental Indenture, dated as of March 3, 2023 among the Company, certain guarantors named therein and Computershare Trust Company, N.A., as successor to Wells Fargo Bank, National Association, as trustee, paying agent and registrar under such indenture, relating to the 4.125% Senior Notes due 2031.
10-Q 001-33268 4.2 5/4/2023
4.14
Second Supplemental Indenture and Guarantee, dated as of February 7, 2024 among (i) BRP Hold Nightingale, LLC, (ii) BRP Hold Ox, LLC, (iii) TDBBS, LLC, (each of (i)-(iii), each, a “New Guarantor” and, collectively, the “New Guarantors) and Central Garden & Pet Company (together with its successors and assigns, the “Company”) and Computershare Trust Company, N.A., as successor to Wells Fargo Bank, National Association, as Trustee, paying agent and registrar under such Indenture
10-Q 001-33268 4.1 8/8/2024
4.15
Description of the Registrants Securities Registered Pursuant to Section 12 of the Securities Exchange Act of 1934
10-K 001-33268 4.12 11/27/2019
10.1
Form of Indemnification Agreement between the Company and Executive Officers and Directors
10-K 001-33268 10.1 11/29/2017
10.2
Third Amended and Restated Credit Agreement dated December 16, 2021 among the Company, certain of the Company's subsidiaries as guarantors, a syndicate of financial institutions party thereto, Truist Bank, as issuing bank and administrative agent, Bank of America, N.A., Keybank National Association, U.S. Bank National Association and Wells Fargo Bank, National Association as Co-Syndication Agents. Bank of the West, Capital One National Association, J.P. Morgan Chase Bank, N.A. and MUFG Bank LTD., as Co-Documentation Agents, Truist Securities, Inc., Bank of America N.A., Keybanc Capital Markets, Inc., U.S. Bank National Association and Wells Fargo Bank, National Association as Joint Lead Arrangers and Joint Bookrunners.
8-K 001-33268 10.1 12/21/2021
10.3
First Amendment to Third Amended and Restated Credit Agreement dated May 15, 2023, among the Company, each of the other Borrowers and Guarantors party hereto, the Lenders party hereto, and Truist Bank, as the Administrative Agent and Annex A to First Amendment to Third Amended and Restated Credit Agreement dated December 16, 2021, among the Company, certain of the Company's subsidiaries as guarantors, a syndicate of financial institutions party thereto, Truist Bank, as Issuing Bank and Administrative Agent, Bank of America, N.A., Keybank National Association, U.S. Bank National Association and Wells Fargo Bank, National Association as Co-Syndication Agents, Bank of the West, Capital One, National Association, JPMorgan Chase Bank, N.A., and MUFG Bank, LTD., as Co-Documentation Agents, Truist Securities, Inc., Bank of America, N.A., Keybanc Capital Markets, Inc., U.S. Bank National Association and Wells Fargo Bank, National Association as Joint Lead Arrangers and Joint Bookrunners.
10-Q 001-33268 10.1 8/3/2023
10.4*
2003 Omnibus Equity Incentive Plan, as amended and restated effective February 13, 2012.
8-K 001-33268 10.2 2/15/2012
10.5*
Form of Nonstatutory Stock Option Agreement for 2003 Omnibus Equity Incentive Plan
10-K 000-20242 10.5.1 12/9/2004
10.6*
Form of Restricted Stock Agreement for 2003 Omnibus Equity Incentive Plan
10-K 000-20242 10.5.2 12/9/2004
10.7*
Form of Performance-Based Non-Statutory Stock Option Agreement for 2003 Omnibus Equity Incentive Plan
10-K 001-33268 10.4.3 11/19/2010
10.8*
Form of Central Garden & Pet Company 2003 Omnibus Equity Incentive Plan Performance Unit Agreement
8-K 001-33268 10.1 2/9/2022
10.9*
Nonemployee Director Equity Incentive Plan, as amended and restated effective October 7, 2020
10-K 001-33268 10.7 11/24/2020
10.10*
Form of Nonstatutory Stock Option Agreement for Nonemployee Director Equity Incentive Plan
10-Q 000-20242 10.6.1 2/3/2005
10.11*
Form of Restricted Stock Agreement for Nonemployee Director Equity Incentive Plan
10-Q 000-20242 10.6.2 2/3/2005
10.21*
Form of Agreement to Protect Confidential Information, Intellectual Property and Business Relationships
8-K 000-20242 10.1 10/14/2005
10.22*
Form of Post-Termination Consulting Agreement
8-K 000-20242 10.2 10/14/2005
10.23
Promotion Letter of Niko Lahanas dated September 26, 2024
X
10.24
Promotion Letter of Bradley Smith dated September 25, 2024
X
19
Insider Trading Policy
X
21
List of Subsidiaries
X
22
List of Guarantor Subsidiaries
X
23
Consent of Independent Registered Public Accounting Firm
X
31.1
Certification of Principal Executive Officer Pursuant to Rule 13a-14(a)
X
31.2
Certification of Principal Financial Officer Pursuant to Rule 13a-14(a)
X
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350
X
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350
X
97
Compensation Recovery Policy
X
101 The following financial statements from the Company's Annual Report on Form 10-K for the year ended September 28, 2024, formatted in Inline XBRL: (i) Consolidated Balance Sheet, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to Consolidated Financial Statements, tagged as block text and including detailed tags. X
104 Cover Page Interactive Data File - the cover page iXBRL tags are embedded within the Inline XBRL document.
* Management contract or compensatory plan or arrangement
36
Item 16. Form 10-K Summary
Not applicable.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: November 27, 2024
CENTRAL GARDEN & PET COMPANY
By /s/ Nicholas Lahanas
Nicholas Lahanas
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.
Signature Capacity Date
/s/ Nicholas Lahanas Chief Executive Officer (Principal Executive Officer) November 27, 2024
Nicholas Lahanas
/s/ Bradley G. Smith Chief Financial Officer
(Principal Financial Officer) November 27, 2024
Bradley G. Smith
/s/ Howard A. Machek Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer) November 27, 2024
Howard A. Machek
/s/ William E. Brown Chairman November 27, 2024
William E. Brown
/s/ Mary Beth Springer Director November 27, 2024
Mary Beth Springer
/s/ Courtnee Chun Director November 27, 2024
Courtnee Chun
/s/ Lisa Coleman Director November 27, 2024
Lisa Coleman
/s/ Brendan P. Dougher Director November 27, 2024
Brendan P. Dougher
/s/ Michael J. Griffith Director November 27, 2024
Michael J. Griffith
/s/ Christopher Metz Director November 27, 2024
Christopher Metz
/s/ Brooks M. Pennington III Director November 27, 2024
Brooks M. Pennington III
/s/ John R. Ranelli Director November 27, 2024
John R. Ranelli
37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Central Garden & Pet Company
Management’s Report on Internal Control Over Financial Reporting
2
Reports of Independent Registered Public Accounting Firm (PCAOB ID No. 34 )
3
Consolidated Balance Sheets, September 28, 2024 and September 30, 2023
6
Consolidated Statements of Operations for Fiscal Years Ended September 28, 2024, September 30, 2023 and September 24, 2022
7
Consolidated Statements of Comprehensive Income for Fiscal Years Ended September 28, 2024, September 30, 2023 and September 24, 2022
8
Consolidated Statements of Equity for Fiscal Years Ended September 28, 2024, September 30, 2023 and September 24, 2022
9
Consolidated Statements of Cash Flows for Fiscal Years Ended September 28, 2024, September 30, 2023 and September 24, 2022
10
Notes to Consolidated Financial Statements for Fiscal Years Ended September 28, 2024, September 30, 2023 and September 24, 2022
11
F-1
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Central Garden & Pet Company’s management, under the supervision of Central’s Principal Executive Officer and Principal Financial Officer, is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15(f) or 15d-15(f) under the Exchange Act). Management evaluated the effectiveness of Central’s internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (“COSO”) of the Treadway Commission. The scope of management's assessment of the effectiveness of our internal control over financial reporting included all of our consolidated operations except for the operations of TDBBS, LLC, which we acquired in November 2023 and whose financial statements constitute 1% and 2% of the consolidated total assets and net sales, respectively, as of and for the fiscal year ended September 28, 2024. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from our scope in the year of acquisition. Based upon this assessment, such officers concluded the Company maintained effective internal control over financial reporting as of September 28, 2024.
Our independent registered public accounting firm, Deloitte & Touche LLP, has issued a report on our internal control over financial reporting, which appears on page F-5 of this Form 10-K.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become ineffective because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Central Garden & Pet Company
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Central Garden & Pet Company and subsidiaries (the "Company") as of September 28, 2024 and September 30, 2023, the related consolidated statements of operations, comprehensive income, equity, and cash flows, for each of the fiscal years ended September 28, 2024, September 30, 2023, and September 24, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of September 28, 2024 and September 30, 2023, and the results of its operations and its cash flows for each of the fiscal years ended September 28, 2024, September 30, 2023, and September 24, 2022, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of September 28, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 27, 2024, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Net Sales - Revenue Recognition for Consignment Arrangements — Refer to Note 1 to the financial statements
Critical Audit Matter Description
Under consignment arrangements, a component of the Garden segment net sales, the customer receives the product at its retail locations, but the Company retains the title to the product until it is purchased by the retail consumer. When products are sold under consignment arrangements, the Company recognizes revenue when control over such products has transferred to the retail consumer. The initiation, processing, and recording of certain transactions under a specific consignment arrangement with a retailer customer relies upon the accuracy and completeness of revenues reported by its customer and revenue transaction processing services provided by a third party.
We identified revenue recognition for this consignment arrangement included in net sales for the fiscal year ended September 28, 2024, to be a critical audit matter because of the nature of the information used by the Company to recognize revenue. This required a high degree of audit judgment and an increased extent of effort to evaluate the accuracy and completeness of information reported by the Company’s customer and third-party transaction processing services provider.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to revenue recognized for this consignment arrangement included the following, among others:
• We tested the effectiveness of controls over recognizing consignment revenue.
F-3
• With the assistance of data specialists, we created data visualizations to analyze journal entries to (i) identify significant transaction types in the revenue population and (ii) evaluate trends in the transactional revenue data, significant transaction types, and related accounts affecting revenue.
• For a sample of transactions, we performed a test of details on those related accounts determined to have a significant relationship with revenue, including accounts receivable and cash collections.
• We traced the recording of point-of-sale revenue transactions into the Company’s records to test how revenue transactions are captured, processed, and aggregated.
• We performed a proof of cash reconciliation that reconciled cash deposits to revenue recognized throughout the year. For a selection of deposits received during the period, we performed detailed transaction testing, including agreeing the amount of the deposit received and the amount recognized as revenue during the period to underlying source documents, including cash receipts.
• We selected a sample of credits issued after the end of the fiscal year and performed detailed transaction testing by agreeing the credit amount to documents supporting the authorization of the issuance of the credit and to evaluate if the credit was recognized in the correct period.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
November 27, 2024
We have served as the Company's auditor since at least 1987; however, an earlier year could not be reliably determined.
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Central Garden & Pet Company
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Central Garden & Pet Company and subsidiaries (the “Company”) as of September 28, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 28, 2024, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the fiscal year ended September 28, 2024, of the Company and our report dated November 27, 2024, expressed an unqualified opinion on those financial statements.
As described in Management’s Report on Internal Control over Financial Reporting, management excluded from its assessment the internal control over financial reporting of the acquired operations of TDBBS, LLC, which was acquired on November 3, 2023, and whose financial statements constitute 1% and 2% of the consolidated total assets and net sales, respectively, as of and for the fiscal year ended September 28, 2024. Accordingly, our audit did not include the internal control over financial reporting at TDBBS, LLC.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
San Francisco, California
November 27, 2024
F-5
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED BALANCE SHEETS
September 28, 2024 September 30, 2023
(in thousands, except share and per share amount)
ASSETS
Current assets:
Cash and cash equivalents $ 753,550 $ 488,730
Restricted cash 14,853 14,143
Accounts receivable, net 326,220 332,890
Inventories, net 757,943 838,188
Prepaid expenses and other 34,240 33,172
Total current assets 1,886,806 1,707,123
Plant, property and equipment, net 379,166 391,768
Goodwill 551,361 546,436
Other intangible assets, net 473,280 497,228
Operating lease right-of-use assets 205,137 173,540
Other assets 57,689 62,553
Total $ 3,553,439 $ 3,378,648
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 212,606 $ 190,902
Accrued expenses 245,226 216,241
Current lease liabilities 57,313 50,597
Current portion of long-term debt 239 247
Total current liabilities 515,384 457,987
Long-term debt 1,189,809 1,187,956
Long-term lease liabilities 173,086 135,621
Deferred income taxes and other long-term obligations 117,615 144,271
Commitments and contingencies (Note 12)
Equity:
Common stock ($ 0.01 par value; 80 million shares authorized; 11,074,620 and 11,077,612 issued at September 28, 2024 and September 30, 2023, respectively)
111 111
Class A common stock ($ 0.01 par value; 100 million shares authorized; 54,446,194 and 54,472,902 issued at September 28, 2024 and September 30, 2023, respectively)
544 544
Class B stock ($ 0.01 par value; 3 million shares authorized; 1,602,374 and 1,602,374 issued at September 28, 2024 and September 30, 2023, respectively)
16 16
Additional paid-in capital 598,098 594,282
Retained earnings 959,511 859,370
Accumulated other comprehensive loss ( 2,626 ) ( 2,970 )
Total Central Garden & Pet shareholders’ equity 1,555,654 1,451,353
Noncontrolling interest 1,891 1,460
Total equity 1,557,545 1,452,813
Total $ 3,553,439 $ 3,378,648
See notes to consolidated financial statements.
F-6
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
Fiscal Year Ended
September 28, 2024 September 30, 2023 September 24, 2022
(in thousands, except per share amounts)
Net sales $ 3,200,460 $ 3,310,083 $ 3,338,588
Cost of goods sold 2,256,725 2,363,241 2,346,283
Gross profit 943,735 946,842 992,305
Selling, general and administrative expenses 758,348 736,196 732,269
Operating income 185,387 210,646 260,036
Interest expense ( 57,527 ) ( 57,025 ) ( 58,253 )
Interest income 19,655 7,362 719
Other income (expense), net ( 5,090 ) 1,462 ( 3,596 )
Income before income taxes and noncontrolling interest 142,425 162,445 198,906
Income tax expense 33,112 36,348 46,234
Net income including noncontrolling interest 109,313 126,097 152,672
Net income attributable to noncontrolling interest 1,330 454 520
Net income attributable to Central Garden & Pet Company $ 107,983 $ 125,643 $ 152,152
Net income per share attributable to Central Garden & Pet Company:
Basic $ 1.64 $ 1.92 $ 2.29
Diluted $ 1.62 $ 1.88 $ 2.24
Weighted average shares used in the computation of net income per share:
Basic 65,711 65,493 66,525
Diluted 66,860 66,783 68,031
See notes to consolidated financial statements.
F-7
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Fiscal Year Ended
September 28, 2024 September 30, 2023 September 24, 2022
(in thousands)
Net income $ 109,313 $ 126,097 $ 152,672
Other comprehensive income (loss):
Foreign currency adjustment, net of tax 344 1,175 ( 3,314 )
Total comprehensive income 109,657 127,272 149,358
Comprehensive income attributable to noncontrolling interest 1,330 454 520
Comprehensive income attributable to Central Garden & Pet Company $ 108,327 $ 126,818 $ 148,838
See notes to consolidated financial statements.
F-8
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF EQUITY
Central Garden & Pet Company
(in thousands, except per share amounts)
Common Stock Class A Common
Stock Class B Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Income (Loss) Total Non-controlling
Interest Total Equity
Shares Amount Shares Amount Shares Amount
Balance, September 25, 2021 11,335,658 $ 113 56,090,659 $ 561 1,612,374 $ 16 $ 576,308 $ 646,082 $ ( 831 ) $ 1,222,249 $ 1,292 $ 1,223,541
Amortization of share-based awards — — — — — — 18,610 — — 18,610 — 18,610
Restricted share activity — — 213,323 2 — — ( 3,036 ) — — ( 3,034 ) — ( 3,034 )
Issuance of common stock — — 326,716 3 — — 4,835 — — 4,838 — 4,838
Distribution to noncontrolling interest — — — — — — — — — — ( 806 ) ( 806 )
Repurchase of stock ( 39,307 ) — ( 1,733,240 ) ( 17 ) — — ( 14,797 ) ( 42,981 ) — ( 57,795 ) — ( 57,795 )
Other comprehensive loss — — — — — — — — ( 3,314 ) ( 3,314 ) — ( 3,314 )
Net income — — — — — — — 152,152 — 152,152 520 152,672
Balance, September 24, 2022 11,296,351 113 54,897,458 549 1,612,374 16 581,920 755,253 ( 4,145 ) 1,333,706 1,006 1,334,712
Amortization of share-based awards — — — — — — 20,117 — — 20,117 — 20,117
Restricted share activity — — 75,471 1 — — ( 4,767 ) — — ( 4,766 ) — ( 4,766 )
Issuance of common stock — — 343,085 2 — — 6,212 — — 6,214 — 6,214
Distribution to noncontrolling interest — — — — — — — — — — — —
Repurchase of stock ( 228,739 ) ( 2 ) ( 843,112 ) ( 8 ) — — ( 9,200 ) ( 21,526 ) — ( 30,736 ) — ( 30,736 )
Other comprehensive income — — — — — — — — 1,175 1,175 — 1,175
Net income — — — — — — — 125,643 — 125,643 454 126,097
Balance, September 30, 2023 11,077,612 111 54,472,902 544 1,602,374 16 594,282 859,370 ( 2,970 ) 1,451,353 1,460 1,452,813
Amortization of share-based awards — — — — — — 13,785 — — 13,785 — 13,785
Restricted share activity — — ( 84,508 ) ( 1 ) — — ( 8,495 ) — — ( 8,496 ) — ( 8,496 )
Issuance of common stock — — 393,987 4 — — 1,527 — — 1,531 — 1,531
Distribution to noncontrolling interest — — — — — — — — — — ( 899 ) ( 899 )
Repurchase of stock ( 2,992 ) — ( 336,187 ) ( 3 ) — — ( 3,001 ) ( 7,842 ) — ( 10,846 ) — ( 10,846 )
Other comprehensive income — — — — — — — — 344 344 — 344
Net income — — — — — — — 107,983 — 107,983 1,330 109,313
Balance, September 28, 2024 11,074,620 $ 111 54,446,194 $ 544 1,602,374 $ 16 $ 598,098 $ 959,511 $ ( 2,626 ) $ 1,555,654 $ 1,891 $ 1,557,545
See notes to consolidated financial statements
F-9
CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
September 28, 2024 September 30, 2023 September 24, 2022
(in thousands)
Cash flows from operating activities:
Net income $ 109,313 $ 126,097 $ 152,672
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 90,807 87,700 80,948
Amortization of deferred financing costs 2,687 2,698 2,657
Non-cash lease expense 56,180 51,868 48,656
Stock-based compensation 20,583 27,990 25,817
Debt extinguishment costs — — 169
Gain on sale of business — ( 5,845 ) —
Deferred income taxes ( 14,482 ) ( 12,253 ) 28,128
Facility closures and business exit costs 27,842 15,674 —
Impairment of intangibles 12,790 — —
Other asset impairments 7,462 750 —
Other 906 ( 525 ) ( 648 )
Changes in assets and liabilities (excluding businesses acquired):
Receivables 11,857 43,980 7,004
Inventories 84,306 86,980 ( 256,443 )
Prepaid expenses and other assets 11,944 8,813 ( 6,031 )
Accounts payable 18,373 ( 19,962 ) ( 31,209 )
Accrued expenses 17,152 6,766 ( 33,495 )
Other long-term obligations ( 12,631 ) 9,595 ( 7,728 )
Operating lease liabilities ( 50,197 ) ( 48,692 ) ( 44,527 )
Net cash provided by (used in) operating activities 394,892 381,634 ( 34,030 )
Cash flows from investing activities:
Additions to property, plant and equipment ( 43,135 ) ( 53,966 ) ( 115,205 )
Business acquired, net of cash acquired ( 60,226 ) — —
Proceeds from sale of business — 20,000 —
Payments for investments ( 1,650 ) ( 500 ) ( 27,818 )
Other investing activities ( 175 ) ( 115 ) 40
Net cash used in investing activities ( 105,186 ) ( 34,581 ) ( 142,983 )
Cash flows from financing activities:
Repayments on revolving line of credit — ( 48,000 ) —
Borrowings on revolving line of credit — 48,000 —
Repayments of long-term debt ( 370 ) ( 338 ) ( 1,096 )
Repurchase of common stock, including shares surrendered for tax withholding ( 24,075 ) ( 37,161 ) ( 62,287 )
Payments of contingent consideration ( 95 ) ( 54 ) ( 216 )
Distribution to noncontrolling interest ( 899 ) — ( 806 )
Payment of financing costs — — ( 2,410 )
Net cash used in financing activities ( 25,438 ) ( 37,553 ) ( 66,815 )
Effect of exchange rate changes on cash and equivalents 1,261 1,189 ( 3,510 )
Net increase (decrease) in cash, cash equivalents and restricted cash 265,530 310,689 ( 247,338 )
Cash, cash equivalents and restricted cash at beginning of year 502,873 192,184 439,522
Cash, cash equivalents and restricted cash at end of year $ 768,403 $ 502,873 $ 192,184
Supplemental information:
Cash paid for interest $ 57,531 $ 57,143 $ 57,928
Cash paid for income taxes – net of refunds 53,582 17,910 34,964
Non-cash investing and financing activities:
Capital expenditures incurred but not paid 1,936 2,243 8,016
Liability for contingent performance based payments ( 20 ) ( 374 ) ( 847 )
Shares of common stock repurchased but not settled 536 — 911
Lease liabilities arising from obtaining right-of-use assets 95,391 42,777 70,794
See notes to consolidated financial statements.
F-10
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal Years Ended September 28, 2024,
September 30, 2023, and September 24, 2022
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 year ended September 28, 2024 included 52 weeks, the fiscal year ended September 30, 2023 included 53 weeks and the fiscal year ended September 24, 2022 included 52 weeks.
Stock Dividend - In December 2023, the Board of Directors approved a stock dividend in the form of one share of the Company's Class A Common Stock for every four outstanding shares of its Common Stock, Class A Common Stock and Class B Stock. Dividend shares of Class A Common Stock were distributed on February 8, 2024, to stockholders of record as of January 8, 2024.
The stock dividend did not affect the number of the Company's authorized shares and the par value of each share of stock remained unchanged. Proportionate adjustments were made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options, restricted stock and performance share units outstanding at January 8, 2024, which resulted in a proportional increase in the number of vesting stock options, restricted stock and performance share units, and, in the case of stock options, a proportional decrease in the exercise price of all such stock options.
Unless noted, all Class A Common Stock share and per share amounts contained in the condensed consolidated financial statements and management's discussion and analysis have been retroactively adjusted to reflect the one-for-four stock dividend. The legal form of the stock dividend was accounted for as a stock split as the Company concluded that shareholders were not receiving a distribution of earnings.
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.
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, and when control over the finished goods transfers to retail consumers in consignment arrangements. 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 28, 2024, September 30, 2023 and September 24, 2022 was $ 12.8 million, $ 13.6 million and $ 15.8 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.
F-11
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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 28, 2024, September 30, 2023 and September 24, 2022 was $ 87.1 million, $ 97.1 million and $ 100.8 million, respectively.
Advertising Costs – The Company expenses the costs of advertising as incurred. Advertising expenses were $ 56.2 million, $ 43.6 million and $ 54.7 million in fiscal 2024, 2023 and 2022, 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 2024, $ 7.9 million for fiscal 2023 and $ 7.2 million for fiscal 2022. In fiscal 2024, 2023 and 2022, the Company’s matching contributions made in the Company’s Class A common stock resulted in the issuance of approximately 198,697 , 216,000 and 170,000 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 2024 and 2023, the Company had valuation allowances related to various state and foreign net deferred tax assets of $ 9.9 million and $ 7.7 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
F-12
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
September 28, 2024, September 30, 2023 and September 24, 2022, respectively (in thousands).
September 28, 2024 September 30, 2023 September 24, 2022
(in thousands)
Cash and cash equivalents $ 753,550 $ 488,730 $ 177,442
Restricted cash 14,853 14,143 14,742
Total cash, cash equivalents and restricted cash $ 768,403 $ 502,873 $ 192,184
Accounts receivable are carried at their estimated net realizable value. 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 variable consideration.
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. 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 net realizable value. 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, property, plant and equipment and right-of-use assets, for potential impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable, and at least annually for indefinite-lived intangible assets. The Company’s fixed assets and intangible assets subject to amortization are required to be tested for recoverability whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. If an evaluation of recoverability is required, the estimated undiscounted future cash flows associated with the asset group would be compared to the asset group carrying amount to determine if a write-down is required. If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded. Impairment, if any, is measured as the amount by which the carrying amount of a long-lived asset exceeds its fair value. The Company recognized impairment losses on certain intangible assets of $ 12.8 million and $ 11.5 million in fiscal years 2024 and 2023, respectively, and there were no impairment losses recorded in fiscal 2022. 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 1 % to 50 % in fourteen 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 $ 6.7 million (which includes an investment impairment of $ 7.5 million) in fiscal year 2024, equity method losses of $ 0.2 million in fiscal year 2023, and equity method income of $ 0.8 million in fiscal 2022, are included in other income (expense) in the consolidated statements of operations. The Company’s investment in these entities was $ 31.5 million at September 28, 2024 and $ 38.7 million at September 30, 2023 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 .
F-13
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 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. Operating lease cost is recorded on a straight-line basis over the lease term with expense recorded in cost of sales or selling, general and administrative expenses, depending on the nature of the leased item. All operating lease cash payments and lease costs 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 28, 2024 and September 30, 2023, 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 2024 was $ 20.6 million ($ 15.7 million after tax), fiscal 2023 was $ 28.0 million ($ 21.3 million after tax), and fiscal 2022 was $ 25.8 million ($ 19.7 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 .
F-14
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recent Accounting Pronouncements
Recently Adopted Accounting Updates
There are no recently adopted accounting pronouncements that had a material impact on the Company's condensed consolidated financial statements.
Accounting Standards Not Yet Adopted
Segment Reporting
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. This ASU requires enhanced disclosures about significant segment expenses regularly provided to the chief operating decision maker that are included within each reported measure of segment profit or loss, and also requires all annual disclosures currently required by Topic 280 to be included in interim periods. ASU No. 2023-07 is to be applied retrospectively for all periods presented in the financial statements and is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024, with early adoption permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on the Company’s disclosures.
Income Taxes
In December 2023, the FASB issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. This ASU primarily requires enhanced disclosures and disaggregation of income tax information by jurisdiction in the annual income tax reconciliation and quantitative and qualitative disclosures regarding income taxes paid. ASU No. 2023-09 is to be applied prospectively, with the option to apply the standard retrospectively, effective for fiscal years beginning after December 15, 2024. The Company is currently evaluating the impact that the adoption of this guidance will have on the Company’s disclosures.
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 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 future performance-based contingent payments for Hydro-Organics Wholesale, Inc., acquired in October 2015. The performance period related to Hydro-Organics Wholesale extends through fiscal 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. The balance, if there is an amount, is presented as part of long-term liabilities in the Company's consolidated balance sheets.
F-15
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides a summary of changes in fair value of the Company's Level 3 financial instruments for the years ended September 28, 2024 and September 30, 2023:
Amount
(in thousands)
Balance September 24, 2022 $ 543
Changes in the fair value of contingent performance-based payments ( 374 )
Performance-based payments made ( 54 )
Balance as of September 30, 2023 115
Changes in the fair value of contingent performance-based payments ( 20 )
Performance-based payments made ( 95 )
Balance as of September 28, 2024 $ —
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, intangible assets and right-of-use 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 market changes and declining sales, factors indicating the carrying value of certain amortizable and indefinite-lived intangible assets may not be recoverable were present in fiscal 2024. The Company performed impairment testing on these assets, found the carrying value was not recoverable, and accordingly, recorded impairment charges of approximately $ 12.8 million in its Pet segment, as part of selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended September 28, 2024. In fiscal year ended September 30, 2023, impairment charges of approximately $ 7.5 million and $ 3.9 million in the Company's Pet and Garden segments, respectively, were recorded as part of selling, general and administrative expenses in the consolidated statements of operations. There were no impairment losses recorded in fiscal 2022.
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 28, 2024 and September 30, 2023 was $ 367.2 million and $ 327.1 million compared to a carrying value of $ 396.0 million and $ 395.4 million, respectively.
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 28, 2024 and September 30, 2023 was $ 465.2 million and $ 417.0 million compared to a carrying value of $ 495.2 million and $ 494.4 million, respectively.
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 28, 2024 and September 30, 2023 was $ 299.2 million and $ 279.5 million, respectively, compared to a carrying value of $ 298.4 million and $ 298.0 million, respectively.
The estimated fair value is based on quoted market prices for these notes, which are Level 2 inputs within the fair value hierarchy.
3. Acquisitions and Investments in Joint Ventures
Fiscal 2024
On November 3, 2023, the Company acquired TDBBS, LLC (“TDBBS”), a provider of premium natural dog chews and treats for approximately $ 60 million. The addition of TDBBS expands Central’s portfolio with bully and collagen sticks, bones and jerky, adds scale to its dog and cat business and enhances Central’s eCommerce and direct-to-consumer capabilities. The purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $ 45 million, of which $ 23 million was allocated to identified intangible assets and approximately $ 5 million was included in goodwill in the Company's consolidated balance sheet as of September 28, 2024. Financial results of TDBBS 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.
F-16
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 $ 21,831 $ 1,137 $ 22,968
Fixed assets 2,369 — 2,369
Goodwill — 4,925 4,925
Other assets 44,891 ( 44,891 ) —
Operating lease right-of-use assets 3,956 — 3,956
Deferred tax assets — 15,859 15,859
Other intangible assets, net — 22,970 22,970
Current liabilities ( 9,094 ) — ( 9,094 )
Long-term lease liabilities ( 3,727 ) — ( 3,727 )
Net assets acquired, less cash and cash equivalents $ 60,226 $ — $ 60,226
F-17
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 June 29, 2024.
The impact to the consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible assets for TDBBS was immaterial.
Proforma financial information has not been presented as the TDBBS acquisition was not considered material to the Company's overall consolidated financial statements during the periods presented.
Fiscal 2023
The Company did not make any acquisitions in fiscal 2023.
Divestiture
Sale of Garden Segment Independent Distribution Business
In the fourth quarter of fiscal 2023, the Company sold their independent garden center distribution business for approximately $ 20 million for inventory and the related customer data. Associated with the sale, the Company is closing one facility and part of another facility due to excess space previously dedicated to serving the independent garden channel. As a result of these closures, the Company recorded a gain of $ 5.8 million which is net of the inventory sold, inventory transport costs and the associated facility closure costs, including severance. The gain was recorded as part of selling, general and administrative expenses.
Fiscal 2022
The Company did not make any acquisitions in fiscal 2022.
During the second quarter and fourth quarter of fiscal 2022, the Company finalized the allocation of the purchase price to the fair values of the tangible assets, intangible assets and liabilities acquired for its acquisitions of Green Garden Products and D&D Commodities Limited, respectively.
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 purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $ 487 million, of which $ 393 million was allocated to identified intangible assets and approximately $ 143 million was included in goodwill in the Company's consolidated balance sheet as of September 24, 2022. The financial results of Green Garden Products 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 $ 118,421 $ 31,826 $ 150,247
Fixed assets 2,340 — 2,340
Goodwill — 142,582 142,582
Other intangible assets, net — 392,929 392,929
Other assets 487,420 ( 487,259 ) 161
Operating lease right-of-use assets 14,577 — 14,577
Current liabilities ( 26,507 ) — ( 26,507 )
Long-term lease liabilities ( 10,912 ) — ( 10,912 )
Deferred income taxes and other long-term obligations ( 14,829 ) ( 80,078 ) ( 94,907 )
Net assets acquired, less cash and cash equivalents $ 570,510 $ — $ 570,510
F-18
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) As previously reported in the Company's Form 10-K for the fiscal year ended September 25, 2021.
The impact to the consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible asset amortization for Green Garden Products was immaterial.
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 purchase price exceeded the estimated fair value of the net tangible assets acquired by approximately $ 99 million, of which $ 64 million was allocated to identified intangible assets and approximately $ 34 million was included in goodwill in the Company's consolidated balance sheet as of September 24, 2022. The financial results of D&D have been included in the results of operations within the Garden segment since the date of acquisition.
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 $ 17,183 $ 465 $ 17,648
Fixed assets 6,907 1,823 8,730
Goodwill — 34,463 34,463
Other assets 101,218 ( 101,051 ) 167
Other intangible assets, net — 64,300 64,300
Current liabilities ( 7,183 ) — ( 7,183 )
Long-term debt ( 30,000 ) — ( 30,000 )
Net assets acquired, less cash and cash equivalents $ 88,125 $ — $ 88,125
(1) As previously reported in the Company's Form 10-K for the fiscal year ended September 25, 2021.
The impact to the consolidated statement of operations associated with the finalization of purchase accounting and true-up of intangible asset amortization for D&D was immaterial.
The Company expects all the goodwill from its acquisition of D&D Commodities Limited to be deductible for tax purposes.
Investments
During fiscal year 2024, the Company recorded an investment impairment totaling $ 7.5 million for two related private company investments. During fiscal 2023, the Company converted a SAFE note totaling $ 0.9 million into shares, acquiring a 6 % interest, which is accounted for in accordance with ASC 321. During fiscal 2022, the Company made investments totaling $ 26.1 million, maintaining its 7 % interest in a venture and acquiring a 10 % interest in another venture, both of which are accounted for in accordance with ASC 321.
F-19
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Concentration of Credit Risk and Significant Customers and Suppliers
Customer Concentration – Approximately 54 % of the Company’s net sales for fiscal 2024, 52 % for fiscal 2023 and 51 % for fiscal 2022 were derived from sales to the Company’s top five customers. The Company’s largest customer accounted for approximately 17 % of the Company’s net sales in fiscal 2024, 16 % in 2023 and 17 % in 2022 (in both Pet and Garden). The Company’s second largest customer in 2024 accounted for approximately 16 % of the Company’s net sales in fiscal years 2024, 2023 and 2022 (in both Pet and Garden). The Company’s third largest customer in 2024 accounted for approximately 8 % of the Company’s net sales in fiscal years 2024, 2023 and 2022 (in Pet). 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 28, 2024 and September 30, 2023, accounts receivable from the Company’s top five customers comprised approximately 53 % and 51 %, respectively, of the Company’s total accounts receivable, including 14 % and 11 %, respectively, from the Company’s largest customer.
Supplier Concentration – While the Company purchases products from many different manufacturers and suppliers, approximately 7 %, 5 % and 7 % of the Company’s cost of goods sold in fiscal years 2024, 2023 and 2022, 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 .
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.
The following provides a reconciliation of the activity in the Allowance for Credit Losses and Customer Allowances:
Balances at
Beginning
of Period Charged/
(Credited) to
Costs and
Expenses Asset
Write-Offs,
Less
Recoveries Balances at
End of
Period
(in thousands)
Fiscal Year Ended September 24, 2022 $ 29,219 $ 1,264 $ ( 4,237 ) $ 26,246
Fiscal Year Ended September 30, 2023 26,246 1,258 ( 1,707 ) 25,797
Fiscal Year Ended September 28, 2024 25,797 1,055 ( 5,817 ) 21,035
6. Inventories, net
Inventories, net of allowance for obsolescence, consist of the following:
September 28, 2024 September 30, 2023
(in thousands)
Raw materials $ 256,419 $ 270,672
Work in progress 146,041 166,394
Finished goods 338,762 384,903
Supplies 16,721 16,219
Total inventories, net $ 757,943 $ 838,188
F-20
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Property and Equipment, Net
Property and equipment, net consists of the following:
September 28, 2024 September 30, 2023
(in thousands)
Land $ 29,672 $ 29,434
Buildings and improvements 290,599 277,618
Transportation equipment 15,833 14,258
Machine and warehouse equipment 409,049 388,854
Capitalized software 117,666 117,007
Office furniture and equipment 31,432 30,534
Assets under construction 19,295 25,701
913,546 883,406
Accumulated depreciation and amortization ( 534,380 ) ( 491,638 )
Total property and equipment, net $ 379,166 $ 391,768
Depreciation and amortization expense, including the amortization of intangible assets, charged to operations was $ 90.8 million, $ 87.7 million and $ 80.9 million for fiscal 2024, 2023 and 2022, respectively.
8. Goodwill
Changes in the carrying amount of goodwill for the fiscal years ended September 28, 2024, September 30, 2023 and September 24, 2022:
Garden Products
Segment
Pet Products
Segment Total
(in thousands)
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 in fiscal 2022 177,045 — 177,045
Balance as of September 24, 2022
Goodwill 482,952 473,045 955,997
Accumulated impairment losses ( 213,583 ) ( 195,978 ) ( 409,561 )
269,369 277,067 546,436
Additions in fiscal 2023 — — —
Balance as of September 30, 2023
Goodwill 482,952 473,045 955,997
Accumulated impairment losses ( 213,583 ) ( 195,978 ) ( 409,561 )
269,369 277,067 546,436
Additions in fiscal 2024 — 4,925 4,925
Balance as of September 28, 2024
Goodwill 482,952 477,970 960,922
Accumulated impairment losses ( 213,583 ) ( 195,978 ) ( 409,561 )
$ 269,369 $ 281,992 $ 551,361
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
F-21
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 2024, 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 and determined that it was more likely than not the fair values of the Company's reporting units were greater than their carrying amount in fiscal year 2024, and accordingly, no further testing of goodwill was required in fiscal 2024.
In connection with the Company’s annual goodwill impairment testing performed during fiscal 2023, the Company elected to bypass the qualitative assessment and proceeded directly to performing the quantitative goodwill impairment test. The Company completed its quantitative assessment of potential goodwill and determined that it was more likely than not the fair values of the Company's reporting units were greater than their carrying amounts.
In connection with the the Company’s annual goodwill impairment testing performed during fiscal year 2022, 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 segments under the goodwill impairment test. The Company completed our qualitative assessment of potential goodwill impairment and determined that it was more likely than not the fair values of the Company’s reporting segments were greater than their carrying amount in fiscal year 2022, and accordingly, no further testing of goodwill was required in fiscal year 2022.
F-22
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 28, 2024
Marketing-related intangible assets – amortizable $ 26.0 $ ( 22.8 ) $ — $ 3.1
Marketing-related intangible assets – nonamortizable 266.3 — ( 35.0 ) 231.4
Total 292.3 ( 22.8 ) ( 35.0 ) 234.5
Customer-related intangible assets – amortizable 421.7 ( 176.4 ) ( 17.5 ) 227.8
Other acquired intangible assets – amortizable 39.7 ( 34.3 ) ( 0.3 ) 5.1
Other acquired intangible assets – nonamortizable 7.1 — ( 1.2 ) 5.9
Total 46.8 ( 34.3 ) ( 1.5 ) 11.0
Total other intangible assets $ 760.8 $ ( 233.5 ) $ ( 54.0 ) $ 473.3
September 30, 2023
Marketing-related intangible assets – amortizable $ 22.1 $ ( 21.5 ) $ — $ 0.6
Marketing-related intangible assets – nonamortizable 252.5 — ( 29.4 ) 223.1
Total 274.6 ( 21.5 ) ( 29.4 ) 223.7
Customer-related intangible assets – amortizable 416.4 ( 147.4 ) ( 10.3 ) 258.8
Other acquired intangible assets – amortizable 39.7 ( 30.5 ) ( 0.3 ) 8.9
Other acquired intangible assets – nonamortizable 7.1 — ( 1.2 ) 5.9
Total 46.8 ( 30.5 ) ( 1.5 ) 14.8
Total other intangible assets $ 737.8 $ ( 199.4 ) $ ( 41.2 ) $ 497.2
September 24, 2022
Marketing-related intangible assets – amortizable $ 22.1 $ ( 20.5 ) $ — $ 1.5
Marketing-related intangible assets – nonamortizable 252.5 — ( 26.0 ) 226.5
Total 274.6 ( 20.5 ) ( 26.0 ) 228.0
Customer-related intangible assets – amortizable 416.4 ( 117.8 ) ( 2.5 ) 296.1
Other acquired intangible assets – amortizable 39.7 ( 26.6 ) — 13.2
Other acquired intangible assets – nonamortizable 7.1 — ( 1.2 ) 5.9
Total 46.8 ( 26.6 ) ( 1.2 ) 19.1
Total other intangible assets $ 737.8 $ ( 164.9 ) $ ( 29.8 ) $ 543.2
Other acquired intangible assets include contract-based and technology-based intangible assets.
As part of its acquisition of TDBBS, the Company acquired approximately $ 17.7 million of marketing related intangible assets and $ 5.3 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 market changes and declining sales, factors indicating the carrying value of certain amortizable and indefinite-lived intangible assets may not be recoverable were present in fiscal 2024 and 2023. The Company performed impairment testing on these assets, found the carrying value was not recoverable, and accordingly, recorded impairment charges of approximately $ 12.8 million in its Pet segment as part of selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended September 28, 2024 and $ 7.5 million and $ 3.9 million in its Pet and Garden segments, respectively, as part of selling, general and administrative expenses in the consolidated statements of operations for the fiscal year ended September 30, 2023. Factors indicating the carrying value of the Company's amortizable and indefinite-lived intangible assets may not be recoverable were not present in fiscal 2022, and accordingly, no impairment testing was performed on these assets.
F-23
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company is currently amortizing its acquired intangible assets with definite lives over periods ranging from four years to 25 years; over weighted-average remaining lives of nine years for marketing-related intangibles, ten years for customer-related intangibles and seven years for other acquired intangibles. Amortization expense for intangibles subject to amortization was approximately $ 34.1 million, $ 34.5 million and $ 35.1 million, for fiscal 2024, 2023 and 2022, respectively, and is classified within selling, general and administrative expenses in the consolidated statements of operations. Annual amortization expense related to acquired intangible assets in each of the succeeding five years is estimated to be approximately $ 25 million per year from fiscal 2025 through fiscal 2027, and $ 23 million per year from fiscal 2028 through fiscal 2029.
F-24
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 10 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 September 28, 2024 September 30, 2023
(in millions)
Operating leases
Right-of-use assets Operating lease right-of-use assets $ 205.1 $ 173.5
Current lease liabilities Current operating lease liabilities $ 57.3 $ 50.6
Non-current lease liabilities Long-term operating lease liabilities 173.1 135.6
Total operating lease liabilities $ 230.4 $ 186.2
Finance leases
Right-of-use assets Property, plant and equipment, net $ 0.3 $ 0.1
Current lease liabilities Current portion of long-term debt $ 0.1 $ —
Non-current lease liabilities Long-term debt 0.2 —
Total finance lease liabilities $ 0.3 $ —
Components of lease cost were as follows:
Fiscal Year Ended
September 28, 2024 September 30, 2023
(in millions)
Operating lease cost $ 62.8 $ 58.0
Finance lease cost:
Amortization of right-of-use assets 0.2 0.1
Interest on lease liabilities — —
Total finance lease cost $ 0.2 $ 0.1
Short-term lease cost 13.6 12.6
Variable lease cost 10.6 10.6
Total lease cost $ 87.2 $ 81.3
F-25
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 28, 2024 September 30, 2023
(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases $ 50.7 $ 50.1
Operating cash flows from finance leases — —
Financing cash flows from finance leases 0.1 —
Right-of-use assets obtained in exchange for lease obligations:
Operating leases $ 95.4 $ 42.8
Finance leases — —
Weighted-average remaining lease term and discount rate for the Company's leases were as follows:
September 28, 2024 September 30, 2023
Weighted-average remaining lease term (in years):
Operating leases 5.3 5.3
Finance leases 2.9 4.4
Weighted-average discount rate:
Operating leases 5.64 % 3.85 %
Finance leases 6.80 % 6.89 %
Lease liability maturities as of September 28, 2024 are as follows:
September 28, 2024
Operating Leases Finance Leases
Fiscal Year (in millions)
2025 $ 65.0 $ 0.1
2026 53.7 0.1
2027 42.6 0.1
2028 30.8 —
2029 24.7 —
Thereafter 55.6 —
Total future undiscounted lease payments $ 272.4 $ 0.3
Less imputed interest ( 42.0 ) —
Total reported lease liability $ 230.4 $ 0.3
F-26
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Long-Term Debt
Long-term debt consists of the following:
September 28, 2024 September 30, 2023
(in thousands)
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
500,000 500,000
Senior notes, interest at 4.125 %, payable semi-annually, principal due April 2031
400,000 400,000
Unamortized debt issuance costs ( 10,345 ) ( 12,231 )
Net carrying value 1,189,655 1,187,769
Asset-based revolving credit facility, interest at SOFR plus a margin of 1.00 % to 1.50 % or Base Rate plus a margin of 0.0 % to 0.50 %, final maturity December 2026
— —
Other notes payable 393 434
Total 1,190,048 1,188,203
Less current portion ( 239 ) ( 247 )
Long-term portion $ 1,189,809 $ 1,187,956
Senior Notes
$ 400 million 4.125 % Senior Notes due 2031
In April 2021, the Company issued $ 400 million aggregate principal amount of 4.125 % senior notes due April 2031 (the "2031 Not es"). The Company used a portion of the net proceeds from the offering to repay all outstanding borrowings under its Credit Facility, with the remainder 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. 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 the Company's 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. The Company may redeem some or all of the 2031 Notes at its 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 28, 2024.
$ 500 million 4.125 % Senior Notes due 2030
In October 2020, the Company issued $ 500 million aggregate principal amount of 4.125 % senior notes due October 2030 (the "2030 Notes"). 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 used for general corporate purposes.
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.
The 2030 Notes require semiannual interest payments on October 15 and April 15. The 2030 Notes are unconditionally guaranteed on a senior basis by each of the Company's existing and future domestic restricted subsidiaries which are borrowers under or guarantors of the Company's Credit Facility.
F-27
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. The Company may redeem some or all of the 2030 Notes, at its option, 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 28, 2024.
$ 300 million 5.125 % Senior Notes due 2028
In December 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 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. 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 the Company's Credit Facility.
The Company may redeem some or all of the 2028 Notes, at its option, at any time during 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 the Company 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 28, 2024.
Asset-Based Loan Facility Amendment
On December 16, 2021, the Company entered into a Third Amended and Restated Credit Agreement (“Credit Agreement”). The Credit Agreement provides for a $ 750 million principal amount senior secured asset-based revolving credit facility, with up to an additional $ 400 million principal amount available with the consent of the Lenders, as defined, if the Company exercises the uncommitted accordion feature set forth therein (collectively, the “Credit Facility”). The Credit Facility matures on December 16, 2026. The Company may borrow, repay and reborrow amounts under the Credit Facility until its maturity date, at which time all amounts outstanding under the Credit Facility must be repaid in full.
The Credit Facility is subject to a borrowing base that is calculated using a formula based upon eligible receivables and inventory, and at the Company's election, eligible real property, minus certain reserves. Proceeds of the Credit Facility will be used for general corporate purposes. Net availability under the Credit Facility was approximately $ 481 million as of September 28, 2024. The Credit Facility includes a $ 50 million sublimit for the issuance of commercial and standby letters of credit and a $ 75 million sublimit for Swing Loan borrowings. As of September 28, 2024, there were no borrowings outstanding and no letters of credit outstanding under the Credit Facility. Outside of the Credit Facility, there were other letters of credit of $ 3.0 million outstanding as of September 28, 2024.
Borrowings under the Credit Facility will bear interest at an index based on SOFR (which will not be less than 0.00 %) or, at the option of the Company, the Base Rate, plus, in either case, an applicable margin based on the Company's usage under the Credit Facility. Base Rate is defined as the highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50 %, (c) one-month SOFR plus 1.00 % and (d) 0.00 %. The applicable margin for SOFR-based borrowings fluctuates between 1.00 %- 1.50 %, and was 1.0 % as of September 28, 2024, and the applicable margin for Base Rate borrowings fluctuates between 0.00 %- 0.50 %, and was 0.00 % as of September 28, 2024. An unused line fee shall be payable quarterly in respect of the total amount of the unutilized Lenders’ commitments under the Credit Facility. Standby letter of credit fees accruing at the applicable margin on the average undrawn and unreimbursed amount of standby letters of credit are payable quarterly, and a facing fee of 0.125 % is payable quarterly for the stated amount of each letter of credit. The Company is also required to pay certain fees to the administrative agent under the Credit Facility. The Credit Facility was amended on May 15, 2023 to transition from LIBOR to SOFR. As of September 28, 2024, the applicable interest rate related to Base Rate borrowings was 8.0 %, and the applicable interest rate related to one-month SOFR-based borrowings was 5.8 %.
F-28
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company incurred approximately $ 2.4 million of debt issuance costs in conjunction with this transaction, which included lender fees and legal expenses. The debt issuance costs are being amortized over the term of the Credit Facility.
The Credit Facility continues to contain customary covenants, including financial covenants which require the Company to maintain a minimum fixed charge coverage ratio of 1 :1 upon triggered quarterly testing (e.g. when availability falls below certain thresholds established in the agreement), reporting requirements and events of default. The Credit Facility is secured by substantially all assets of the borrowing parties, including (i) pledges of 100 % of the stock or other equity interest of each domestic subsidiary that is directly owned by such entity and (ii) 65 % of the stock or other equity interest of each foreign subsidiary that is directly owned by such entity, in each case subject to customary exceptions. The Company was in compliance with all financial covenants under the Credit Facility as of September 28, 2024.
The scheduled principal repayments on long-term debt as of September 28, 2024 are as follows:
(in thousands)
Fiscal year:
2025 $ 239
2026 62
2027 57
2028 35
2029 —
Thereafter 1,200,000
Total $ 1,200,393 (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 $ 10.3 million as of September 28, 2024, of which, $ 1.6 million is amortizable until February 2028, $ 4.8 million is amortizable until October 2030 and $ 4.0 million is amortizable until April 2031, and are included in the carrying value.
12. Commitments and Contingencies
Commitments
Letters of credit – The Company had $ 3.0 million of outstanding letters of credit related to normal business transactions at September 28, 2024. 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 $ 14.9 million and $ 14.1 million as of September 28, 2024 and September 30, 2023, respectively, and is reflected in “Restricted cash” on the Company's consolidated balance sheets.
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 retrial on the "head start" damages issue concluded in early March 2024, but no decision has been issued by the court. The Company intends to vigorously pursue its defenses in any 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
F-29
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.
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.
F-30
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 28, 2024 September 30, 2023 September 24, 2022
(in thousands)
Current:
Federal $ 42,400 $ 41,375 $ 11,391
State 4,107 6,229 4,418
Foreign 1,087 997 2,297
Total 47,594 48,601 18,106
Deferred:
Federal ( 14,495 ) ( 10,339 ) 27,276
State 757 ( 2,547 ) 1,710
Foreign ( 744 ) 633 ( 858 )
Total ( 14,482 ) ( 12,253 ) 28,128
Total $ 33,112 $ 36,348 $ 46,234
F-31
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 28, 2024 September 30, 2023 September 24, 2022
Statutory federal income tax rate 21.0 % 21.0 % 21.0 %
State income taxes, net of federal benefit 2.8 1.5 2.5
Other permanent differences ( 0.1 ) ( 0.2 ) ( 0.1 )
Non-Deductible Officers Compensation 1.4 0.7 0.5
Adjustment of prior year accruals ( 0.3 ) ( 0.2 ) 0.2
Credits ( 0.7 ) ( 0.7 ) ( 0.5 )
Stock based compensation ( 1.5 ) ( 0.3 ) ( 0.5 )
Other 0.6 0.6 0.1
Effective income tax rate 23.2 % 22.4 % 23.2 %
The tax effect of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:
September 28, 2024 September 30, 2023
Deferred
Tax
Assets Deferred
Tax
Liabilities Deferred
Tax
Assets Deferred
Tax
Liabilities
(in thousands)
Allowance for doubtful accounts $ 5,005 $ — $ 5,338 $ —
Inventory write-downs 23,570 — 18,230 —
Prepaid expenses 1,928 1,602
Nondeductible reserves 10,958 — 10,045 —
State taxes — 220 181 —
Employee benefits 12,232 — 10,743 —
Depreciation and amortization 185,560 192,235
Equity earnings 1,067 653
State net operating loss carryforward 16,505 — 6,158 —
Stock based compensation 6,939 — 8,155 —
State credits 3,007 — 3,055 —
Other 15,342 — 5,389 —
Valuation allowance ( 9,900 ) — ( 7,659 ) —
Total $ 83,658 $ 188,775 $ 59,635 $ 194,490
The Company also has state tax net operating losses of $ 93.4 million, which expire at various times between 2024 and 2043, and foreign losses of $ 11.8 million, which do not expire.
The Company has state income tax credits of $ 3.5 million, which expire at various times beginning in 2025 through 2043. 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 $ 9.9 million and $ 7.7 million (net of federal impact) at September 28, 2024 and September 30, 2023, 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 28, 2024 and September 30, 2023, accrued interest was less than $ 0.1 million and no penalties were accrued related to uncertain tax positions.
F-32
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 28, 2024 and September 30, 2023:
(in thousands)
Balance as of September 24, 2022 $ 382
Increases related to prior year tax positions 222
Increases related to current year tax positions 100
Decreases related to prior year tax positions ( 10 )
Settlements ( 222 )
Decreases related to lapse of statute of limitations ( 81 )
Balance as of September 30, 2023 $ 391
Increases related to prior year tax positions 1
Increases related to current year tax positions —
Decreases related to prior year tax positions ( 12 )
Settlements ( 1 )
Decreases related to lapse of statute of limitations ( 84 )
Balance as of September 28, 2024 $ 295
As of September 28, 2024, 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 2021 forward and in various state taxing authorities generally from fiscal year ended 2020 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 a number of shares of restricted stock equal to $ 120,000 divided by such fair market value.
As of September 28, 2024, there were approximately 2.5 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, 11.2 million shares of Class A Common Stock and 0.5 million shares of Preferred Stock remaining for future awards. In fiscal 2024, no shares were granted from the Director Plan and each independent director was granted restricted shares from the 2003 Plan.
The Company recognized stock-based compensation expense of $ 20.6 million, $ 28.0 million, and $ 25.8 million for the fiscal years ended September 28, 2024, September 30, 2023 and September 24, 2022, respectively, as a component of selling, general and administrative expenses. Share-based compensation expense in fiscal 2024, 2023 and 2022 consisted of $ 0.7 million, $ 3.8 million, and $ 4.9 million, respectively, for stock options, and $ 13.1 million, $ 16.3 million and $ 13.7 million, respectively, for stock awards. Share-based compensation expense in fiscal 2024, 2023 and 2022 also includes $ 6.8 million, $ 7.9 million and $ 7.2 million, respectively, for the Company’s 401(k) matching contributions.
F-33
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Option Awards
During fiscal 2024, the Company did not grant any stock options.
During fiscal 2023, the Company granted time-based stock options with an exercise price 15 % above the market price on the date of the grant. But generally, the Company has granted options at the market price on the date of the grant.
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 exercise behavior, 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.
In fiscal years 2023 and 2022, 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, 8 years in fiscal 2023 and 3.7 years in 2022; stock price volatility, 30.6 % in fiscal 2023 and 31.1 % in fiscal 2022; risk free interest rates, 3.6 % in fiscal 2023 and 1.7 % in fiscal 2022; and no dividends during the expected term.
The following table summarizes option activity for the period ended September 28, 2024:
Number of
Shares
(in thousands) Weighted
Average Exercise
Price per Share Weighted Average
Remaining
Contractual Life Aggregate
Intrinsic Value
(in thousands)
Outstanding at September 30, 2023 2,228 $ 26.53 3 years $ 30,229
Granted — $ —
Exercised ( 1,136 ) $ 23.96
Canceled or expired ( 264 ) $ 30.37
Outstanding at September 28, 2024 828 $ 28.83 2 years $ 3,520
Exercisable at September 24, 2022 1,489 $ 25.50 3 years $ 5,826
Exercisable at September 30, 2023 1,613 $ 24.99 2 years $ 11,361
Exercisable at September 28, 2024 758 $ 28.25 2 years $ 3,518
Expected to vest after September 28, 2024 70 $ 35.16 1 year $ 2
The prices of options to purchase shares of Class A common stock outstanding at September 28, 2024, September 30, 2023 and September 24, 2022 were $ 20.63 to $ 41.10 per share, $ 20.63 to $ 41.10 per share and $ 17.10 to $ 41.10 per share, respectively. There were no options granted in fiscal year ended September 28, 2024. The weighted average grant date fair value of options granted during the fiscal years ended September 30, 2023 and September 24, 2022 was $ 12.29 and $ 8.77 , respectively. The total intrinsic value of options exercised during the fiscal years ended September 28, 2024, September 30, 2023 and September 24, 2022 was $ 12.0 million, $ 3.9 million, and $ 6.1 million, respectively.
As of September 28, 2024, there was $ 0.3 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a remaining weighted-average vesting period of one year .
Restricted Stock Awards
As of September 28, 2024 and September 30, 2023, there were approximately 1.4 million and 1.8 million shares, respectively, of restricted stock awards outstanding. Awards granted in fiscal 2024 and 2023 generally vest within four or five years from the date of grant.
F-34
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Restricted stock award activity during the period ended September 28, 2024 is summarized as follows:
Number of
Shares Weighted Average
Grant Date
Fair Value per
Share
(in thousands)
Nonvested at September 30, 2023 1,848 $ 29.13
Granted 332 $ 33.27
Vested ( 603 ) $ 26.87
Forfeited ( 179 ) $ 32.32
Nonvested at September 28, 2024 1,398 $ 30.68
As of September 28, 2024, there was $ 24.4 million of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period of three years .
In fiscal years 2024, 2023 and 2022, the Company granted a combination of performance stock units (PSU’s) and restricted stock awards under its long-term incentive program, which replaced the option or restricted stock awards historically granted annually under the Company’s long-term incentive plan. The impact of granting PSU’s during fiscal year 2024 was not material to the Company’s Consolidated Financial Statements.
PSU’s provide the right to receive shares of the Company’s common stock based on the Company’s achievement of certain performance criteria at the end of a four-year measurement period (fiscal 2024-fiscal 2027) and continued employment through the vesting period. The number of shares issued at the end of the performance period may range from 50 % to 225 % of the original target award amount ( 100 %).
15. Shareholders’ Equity
At September 28, 2024 and September 30, 2023, there were 80,000,000 shares of common stock ($ 0.01 par value) authorized, of which 11,074,620 and 11,077,612 , respectively, were outstanding, and 100,000,000 shares of non-voting Class A common stock ($ 0.01 par value) authorized, of which 54,446,194 and 54,472,902 , 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 1,602,374 was outstanding at September 28, 2024 and September 30, 2023. 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 28, 2024 and September 30, 2023.
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 28, 2024, the Company had $ 82.0 million remaining under its 2019 Repurchase Authorization. During fiscal 2024, the Company repurchased approximately 0.3 million shares of its non-voting common stock (CENTA) on the open market at an aggregate cost of approximately $ 10.7 million and approximately 3 thousand shares of its voting common stock (CENT) on the open market at an aggregate cost of approximately $ 109 thousand.
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 28, 2024, the Company had authorization remaining to repurchase up to 38 thousand shares under its Equity Dilution Authorization.
F-35
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:
Fiscal Year Ended September 28, 2024 Fiscal Year Ended September 30, 2023 Fiscal Year Ended September 24, 2022
Net
Income Shares Per
Share Net
Income Shares Per
Share Net
Income Shares Per
Share
(in thousands, except per share amounts)
Basic EPS:
Net income available to common shareholders $ 107,983 65,711 $ 1.64 $ 125,643 65,493 $ 1.92 $ 152,152 66,525 $ 2.29
Effect of dilutive securities:
Options to purchase common stock 228 — 369 ( 0.01 ) 596 ( 0.02 )
Restricted shares 741 ( 0.02 ) 797 ( 0.03 ) 910 ( 0.03 )
Performance stock units 180 — 124 — — —
Diluted EPS:
Net income available to common shareholders $ 107,983 66,860 $ 1.62 $ 125,643 66,783 $ 1.88 $ 152,152 68,031 $ 2.24
For fiscal 2024, options to purchase 0.3 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 2023, options to purchase 0.6 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 2022, options to purchase 0.4 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 2024, 2023 and 2022, 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 $ 37.0 million, $ 31.0 million and $ 41.0 million for fiscal years 2024, 2023 and 2022, respectively. Amounts due to CPI as of September 28, 2024 and September 30, 2023 were $ 1.4 million and $ 1.6 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.
F-36
CENTRAL GARDEN & PET COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Pet segment consists of Nylabone Products, 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, eCommerce retailers, grocery stores and mass merchants. The Garden segment consists of Grass Seed, Bird Feed, Chemicals and Fertilizers, Excel Marketing, Gulfstream, 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).
Category 2024 2023 2022
(in millions)
Other garden products $ 802.6 $ 832.2 $ 865.3
Other pet products 701.4 699.4 765.9
Other manufacturers' products 735.9 734.9 730.2
Dog & cat products 534.2 568.6 542.9
Wild bird 426.4 475.0 434.3
Total $ 3,200.5 $ 3,310.1 $ 3,338.6
See Note 4 – Concentration of Credit Risk and Significant Customers and Suppliers for the Company’s largest customers by segment.
F-37
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:
Fiscal Year Ended
September 28, 2024 September 30, 2023 September 24, 2022
(in thousands)
Net sales:
Pet segment $ 1,832,744 $ 1,877,177 $ 1,878,110
Garden segment 1,367,716 1,432,906 1,460,478
Total $ 3,200,460 $ 3,310,083 $ 3,338,588
Operating income (loss):
Pet segment $ 203,425 $ 198,004 $ 208,924
Garden segment 81,893 123,455 153,956
Corporate ( 99,931 ) ( 110,813 ) ( 102,844 )
Total 185,387 210,646 260,036
Interest expense ( 57,527 ) ( 57,025 ) ( 58,253 )
Interest income 19,655 7,362 719
Other income (expense), net ( 5,090 ) 1,462 ( 3,596 )
Income before income taxes and noncontrolling interest 142,425 162,445 198,906
Income tax expense 33,112 36,348 46,234
Net income including noncontrolling interest 109,313 126,097 152,672
Net income attributable to noncontrolling interest 1,330 454 520
Net income attributable to Central Garden & Pet Company $ 107,983 $ 125,643 $ 152,152
Assets:
Pet segment $ 955,000 $ 944,359 $ 1,069,167
Garden segment 1,272,033 1,349,426 1,405,802
Corporate and eliminations 1,326,406 1,084,863 807,033
Total $ 3,553,439 $ 3,378,648 $ 3,282,002
Depreciation and amortization:
Pet segment $ 43,642 $ 41,126 $ 38,960
Garden segment 44,403 43,375 36,583
Corporate 2,762 3,199 5,405
Total $ 90,807 $ 87,700 $ 80,948
Expenditures for long-lived assets:
Pet segment $ 27,757 $ 33,515 $ 46,917
Garden segment 17,307 19,109 65,126
Corporate 1,600 1,342 3,162
Total $ 46,664 $ 53,966 $ 115,205
Noncontrolling interest is associated with the Garden segment.
F-38