Central Garden & Pet Co: Form 10-Q for the period ended Mar 25, 2023

Our Company

Central Garden & Pet Company (“Central”) is a market leader in the garden and pet industries in the United States. For over 40 years, Central has proudly nurtured happy and healthy homes by bringing innovative and trusted solutions to consumers and its customers. We manage our operations through two reportable segments: Pet and Garden.

Our Pet segment includes dog and cat supplies such as dog treats and chews, toys, pet beds and grooming products, waste management and training pads, pet containment; supplies for aquatics, small animals, reptiles and pet birds including toys, cages and habitats, bedding, food and supplements; products for equine and livestock, animal and household health and insect control products; live fish and small animals as well as outdoor cushions. These products are sold under brands such as Aqueon®, Cadet®, Comfort Zone®, Farnam®, Four Paws®, K&H Pet Products® ("K&H"), Kaytee®, Nylabone® and Zilla®.

Our Garden segment includes lawn and garden consumables such as grass seed, vegetable, flower and herb packet seed; wild bird feed, bird houses and other birding accessories; weed, grass, and other herbicides, insecticide and pesticide products; fertilizers and live plants. These products are sold under brands such as Amdro®, Ferry-Morse®, Pennington® and Sevin®.

In fiscal 2022, our consolidated net sales were $3.3 billion, of which our Pet segment, or Pet, accounted for approximately $1.9 billion and our Garden segment, or Garden, accounted for approximately $1.4 billion. In fiscal 2022, our operating income was $260 million consisting of income from our Pet segment of $209 million, income from our Garden segment of $154 million and corporate expenses of $103 million.

We were incorporated in Delaware in May 1992 as the successor to a California corporation that was formed in 1955. Our executive offices are located at 1340 Treat Boulevard, Suite 600, Walnut Creek, California 94597, and our telephone number is (925) 948-4000. Our website is www.central.com (http://www.central.com). The information on our website is not incorporated by reference in this quarterly report.

Recent Developments

Fiscal 2023 Second Quarter Financial Performance:

• Net sales declined $45.4 million, or 4.8%, from the prior year quarter to $909.0 million. Pet segment sales decreased $22.5 million, and Garden segment sales decreased $22.9 million.
• Gross profit declined $27.2 million from the prior year quarter, and gross margin decreased 150 basis points to 28.6%.
• Selling, general and administrative expense increased $1.7 million from the prior year quarter to $181.6 million and as a percentage of net sales increased 110 basis points to 20.0%.
• Operating income decreased $28.8 million from the prior year quarter, to $78.0 million.
• Net income in the second quarter of fiscal 2023 was $48.1 million, or $0.90 per diluted share, compared to net income of $69.7 million, or $1.27 per diluted share, in the second quarter of fiscal 2022.

Facility Closure

In April 2023, we announced the closure of a leased manufacturing and distribution facility in Athens, Texas. This decision reflects our purposeful exit of low-margin private-label pet bed product lines and our efforts to achieve a simpler, more efficient manufacturing and distribution network leveraging the supply chain synergies of our cushion facilities.

This facility closure is expected to result in a one-time charge to earnings of approximately $15 million in our fiscal third quarter, composed of charges for facilities closure, severance, inventory liquidation and related intangibles, the majority of which will be non-cash.

Results of Operations

Three Months Ended March 25, 2023

Compared with Three Months Ended March 26, 2022

Net Sales

Net sales for the three months ended March 25, 2023 decreased $45.4 million, or 4.8%, to $909.0 million from $954.4 million for the three months ended March 26, 2022. Our branded product sales decreased $50.1 million, and sales of other manufacturers’ products increased $4.7 million. Both segments had volume related decreases in net sales that more than offset price increases taken to respond to rising input costs.

Pet net sales decreased $22.5 million, or 4.5%, to $475.2 million for the three months ended March 25, 2023 from $497.7 million for the three months ended March 26, 2022. The decline in net sales was due primarily to lower demand for durable pet products, particularly in our outdoor cushion business and aquatics business, and our exit of some profit-challenged product lines in our private label pet bed business. These declines were partially offset by increased sales in our dog and cat treats and toys business and our wild bird feed business. Pet branded product sales declined $26.9 million, and sales of other manufacturers' products increased $4.4 million.

Garden net sales decreased $22.9 million, or 5.0%, to $433.8 million for the three months ended March 25, 2023 from $456.7 million for the three months ended March 26, 2022. The decrease in garden net sales was due primarily to lower sales in controls and fertilizer and grass seed partially offset by increased sales of wild bird feed. The volume related sales decline was due primarily to adverse weather, unfavorable pre-season retailer ordering patterns and lighter retailer foot traffic. While the unfavorable weather pattern negatively impacted most of our garden segment, it positively impacted the sales of our wild bird feed business. Garden branded sales decreased $23.2 million, and sales of other manufacturers' products increased $0.3 million.

Gross Profit

Gross profit for the three months ended March 25, 2023 decreased $27.2 million, or 9.5%, to $259.6 million from $286.8 million for the three months ended March 26, 2022. Gross margin decreased 150 basis points to 28.6% for the three months ended March 25, 2023 from 30.1% for the three months ended March 26, 2022. The decrease in gross profit resulted from the declines in both net sales and gross margin. The decline in our consolidated gross margin was in the Garden segment, while the Pet segment gross margin was relatively flat as compared to the prior year. The decline in Garden gross margin was due primarily to lower sales and production volumes resulting in reduced overhead absorption, initial start-up costs associated with a live goods facility acquired in the prior year, and cost inflation; all of which were only partially offset by pricing actions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.7 million, or 0.9%, to $181.6 million for the three months ended March 25, 2023. As a percentage of net sales, selling, general and administrative expenses increased to 20.0% for the three months ended March 25, 2023, compared to 18.9% in the comparable prior year quarter. An increase in corporate expense and a smaller increase in Garden, were partially offset by a decrease in Pet.

Selling and delivery expense decreased $3.8 million to $83.5 million for the three months ended March 25, 2023 as compared to $87.3 million in the prior year quarter. The decreases, in both the Garden and Pet segments, were due primarily to lower product volume delivered and reduced discretionary spend (e.g. travel and entertainment expense).

Warehouse and administrative expense increased $5.5 million, or 5.9%, to $98.1 million for the three months ended March 25, 2023 from $92.6 million for the three months ended March 26, 2022. The increase in warehouse and administrative expense was due primarily to increased corporate expense. Corporate expenses increased $2.5 million due primarily to an increase in insurance expense and an increase in payroll expense due to headcount additions over the preceding twelve month period. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resources, and information technology functions.

Operating Income

Operating income decreased $28.8 million to $78.0 million for the three months ended March 25, 2023. Our operating margin decreased from 11.2% in the prior year quarter to 8.6% in the current year quarter. The decrease in operating income was due to a $45.4 million decrease in net sales, a 150 basis point decrease in gross margin, and a $1.7 million increase in selling, general and administrative expense.

Pet operating income decreased $5.4 million, or 8.9%, to $55.3 million for the three months ended March 25, 2023 from $60.6 million for the three months ended March 26, 2022, and Pet operating margin declined 60 basis points to 11.6%. Pet operating income decreased due primarily to lower sales. Although Pet segment selling, general and administrative expense declined, it was higher as a percent of net sales and was the primary reason for the decline in the Pet operating margin.

Garden operating income decreased $20.9 million to $49.6 million for the three months ended March 25, 2023, from $70.5 million for the three months ended March 26, 2022. Garden operating income decreased due primarily to lower sales and a lower gross margin.

Corporate expense increased $2.5 million, or 10.4%, to $26.8 million for the three months ended March 25, 2023 from $24.3 million for the three months ended March 26, 2022. Corporate expense increased due primarily to increased insurance expense and an increase in payroll expense due headcount additions over the preceding twelve-month period.

Net Interest Expense

Net interest expense was $14.7 million for the three months ended March 25, 2023 and the three months ended March 26, 2022. Debt outstanding on March 25, 2023 was $1,212.3 million compared to $1,185.8 million at March 26, 2022.

Other Income (Expense)

Other income (expense) is comprised of income or losses from investments accounted for under the equity method of accounting and foreign currency exchange gains and losses. Other income (expense) was income of $0.6 million for the quarter ended March 25, 2023 compared to an expense of $0.4 million for the quarter ended March 26, 2022. The increase in other income was due primarily to foreign currency gains in the current year quarter, as compared to losses in the prior year quarter, and proceeds from a small investment interest that was sold.

Income Taxes

Our effective income tax rate was 23.9% for the quarter ended March 25, 2023 and 23.4% for the quarter ended March 26, 2022. The increase in our effective income tax rate was due primarily to a reduced tax benefit from stock compensation and an increased impact of nondeductible executive compensation compared to the prior year quarter.

Net Income and Earnings Per Share

Our net income in the second quarter of fiscal 2023 was $48.1 million, or $0.90 per diluted share, compared to net income of $69.7 million, or $1.27 per diluted share, in the second quarter of fiscal 2022.

Six Months Ended March 25, 2023

Compared with Six Months Ended March 26, 2022

Net Sales

Net sales for the six months ended March 25, 2023 decreased $79 million, or 4.9%, to $1,537 million from $1,616 million for the six months ended March 26, 2022. Our branded product sales, which include products we produce under Central brand names and products we produce under third-party brands, decreased $79 million. The largest decline was in products we produce under third-party brands in both the Garden and Pet segments. Sales of other manufacturers’ products remained relatively flat.

Pet net sales decreased $42.7 million, or 4.6%, to $891.0 million for the six months ended March 25, 2023. The decline in net sales was volume-related and due primarily to lower demand for durable pet products, particularly in our outdoor cushion business and aquatics business, and our exit of profit-challenged product lines in our private label pet bed business. These declines were partially offset by increased sales in our dog and cat treats and toys business and our wild bird feed business. Pet branded sales decreased $45.9 million, and sales of other manufacturer's products increased $3.2 million.

Garden net sales decreased $36.4 million, or 5.3%, to $645.7 million for the six months ended March 25, 2023 from $682.1 million for the six months ended March 26, 2022. The decrease in garden net sales was due primarily to lower sales in our controls and fertilizer business and grass seed business partially offset by increased sales in our wild bird feed business. The volume related sales decline was due primarily to adverse weather, unfavorable pre-season retailer ordering patterns and lighter retailer foot traffic. While the unfavorable weather pattern negatively impacted most of our garden segment, it positively impacted the sales of our wild bird feed business. Garden branded sales decreased $33.4 million, and sales of other manufacturers’ products decreased $3.0 million.

Gross Profit

Gross profit for the six months ended March 25, 2023 decreased $53.7 million, or 11.1%, to $431.3 million from $485.0 million for the six months ended March 26, 2022. Gross margin decreased 190 basis points to 28.1% for the six months ended March 25, 2023 from 30.0% for the six months ended March 26, 2022. The decrease in gross profit resulted from the declines in both net sales and gross margin. The decline in our consolidated gross margin was in the Garden segment, while the Pet segment gross margin was relatively flat as compared to the prior year. The decline in Garden gross margin was due primarily to lower sales and production volumes resulting in reduced overhead absorption, initial start-up costs associated with a live goods facility acquired in the prior year, and cost inflation; all of which were only partially offset by pricing actions.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.0 million, or 0.3%, to $353 million for the six months ended March 25, 2023 from $352 million for the six months ended March 26, 2022. As a percentage of net sales, selling, general and administrative expenses increased to 23.0% for the six months ended March 25, 2023 from 21.8% for the comparable prior year six-month period. Increased selling, general and administrative expense at corporate was partially offset by decreased expense in the Pet and Garden segments.

Selling and delivery expense decreased $7.9 million, or 4.7%, to $158.5 million for the six months ended March 25, 2023 from $166.4 million for the six months ended March 26, 2022. The decreases in the Garden and Pet segments were due primarily to lower product delivered due to the lower sales volume, and a customer change from store delivery to warehouse pick-up.

Warehouse and administrative expense increased $8.9 million, or 4.8%, to $194.4 million for the six months ended March 25, 2023 from $185.5 million for the six months ended March 26, 2022. Corporate expense increased $5.8 million and both segments contributed to the increase to a lesser extent. The increased expense was due primarily to increased insurance expense and increased payroll expense. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resources, and information technology functions.

Operating Income

Operating income decreased $54.7 million to $78.4 million for the six months ended March 25, 2023 from $133.1 million for the six months ended March 26, 2022. Our operating margin decreased to 5.1% for the six months ended March 25, 2023 from 8.2% for the six months ended March 26, 2022. Both operating income and operating margin were negatively impacted by a sales decrease of $79.1 million, a 190 basis point decline in gross margin and an increase in selling, general and administrative expense as a percentage of net sales.

Pet operating income decreased $11.1 million, or 10.5%, to $94.8 million for the six months ended March 25, 2023 from $105.9 million for the six months ended March 26, 2022. Pet operating income decreased due to a net sales decrease of $42.7 million partially offset by lower selling, general and administrative expense. Pet operating margin declined 70 basis points to 10.6% for the six months ended March 25, 2023, as compared to the prior year six-month period due primarily to an increase in selling, general and administrative expense as a percentage of net sales.

Garden operating income decreased $37.8 million to $38.8 million for the six months ended March 25, 2023, from $76.6 million for the six months ended March 26, 2022. Garden operating income and operating margin were negatively impacted by a $36.4 million decrease in net sales, a decrease in gross margin and to a smaller extent, an increase in selling, general and administrative expense as a percentage of net sales.

Corporate operating expense increased $5.8 million to $55.2 million in the current six-month period from $49.4 million in the comparable fiscal 2022 period due primarily to increased medical and general insurance and payroll expense.

Net Interest Expense

Net interest expense for the six months ended March 25, 2023 decreased $0.6 million, or 2.2%, to $28.5 million from $29.1 million for the six months ended March 26, 2022. The decrease in net interest expense was due to increased interest income resulting from higher rates of interest earned on our cash balance during the current six-month period.

Debt outstanding on March 25, 2023 was $1,212.3 million compared to $1,185.8 million as of March 26, 2022. Our average borrowing rate was 4.5% for the six month periods ended March 25, 2023 and March 26, 2022.

Other Income

Other income (expense) was income of $2.3 million for the six-month period ended March 25, 2023 compared to an expense of $0.6 million for the six-month period ended March 26, 2022. The increase in other income was due primarily to foreign currency gains in the current fiscal six-month period as compared to losses in the prior year period.

Income Taxes

Our effective income tax rate was 23.8% for the six-month period ended March 25, 2023 compared to 23.1% for the six-month period ended March 26, 2022. The increase in our effective income tax rate was due primarily to a reduced tax benefit from stock compensation and an increased impact of nondeductible executive compensation.

Net Income and Earnings Per Share

Our net income for the six months ended March 25, 2023 was $39.7 million, or $0.74 per diluted share, compared to $78.7 million, or $1.44 per diluted share, for the six months ended March 26, 2022.

Use of Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States (GAAP). However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including adjusted EBITDA. Management believes non-GAAP financial measures may be useful to investors in their assessment of our ongoing operating performance and provide additional meaningful comparisons between current results and results in prior operating periods.

Adjusted EBITDA is defined by us as income before income tax, net other expense, net interest expense, depreciation and amortization and stock-based compensation (or operating income plus depreciation and amortization and stock-based compensation expense). We present adjusted EBITDA because we believe that adjusted EBITDA is a useful supplemental measure in evaluating the cash flows and performance of our business and provides greater transparency into our results of operations. Adjusted EBITDA is used by our management to perform such evaluation. Adjusted EBITDA should not be considered in isolation or as a substitute for cash flow from operations, income from operations or other income statement measures prepared in accordance with GAAP. We believe that adjusted EBITDA is frequently used by investors, securities analysts and other interested parties in their evaluation of companies, many of which present adjusted EBITDA when reporting their results. Other companies may calculate adjusted EBITDA differently and it may not be comparable.

The reconciliations of adjusted EBITDA to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below. We believe that the non-GAAP financial measures provide useful information to investors and other users of our financial statements by allowing for greater transparency in the review of our financial and operating performance. Management also uses adjusted EBITDA in making financial, operating and planning decisions and in evaluating our performance, and we believe it may be useful to investors in evaluating our financial and operating performance and the trends in our business from management's point of view. While our management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace our GAAP financial results and should be read in conjunction with those GAAP results.

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Inflation

Our revenues and margins are dependent on various economic factors, including rates of inflation, energy costs, consumer behavior, currency fluctuations, and other macro-economic factors which may impact levels of consumer spending. In recent fiscal periods, we have been adversely impacted by rising input costs related to domestic inflation, particularly relating to grain and seed prices, fuel prices and the ingredients used in our garden controls and fertilizers. Rising costs in those periods have made it difficult for us to increase prices to our retail customers at a pace sufficient to enable us to maintain margins.

The inflationary pressure, including notable increases in costs for key commodities, labor and freight, that we experienced in fiscal 2022 is continuing in fiscal 2023.

Weather and Seasonality

Our sales of lawn and garden products are influenced by weather and climate conditions in the different markets we serve. Our Garden segment’s business is highly seasonal. In fiscal 2022, approximately 66% of our Garden segment’s net sales and 59% of our total net sales occurred during our second and third fiscal quarters. Substantially all of the Garden segment’s operating income is typically generated in this period, which has historically offset the operating loss incurred during the first fiscal quarter of the year.

Liquidity and Capital Resources

We have financed our growth through a combination of internally generated funds, bank borrowings, supplier credit, and sales of equity and debt securities to the public.

Our business is seasonal and our working capital requirements and capital resources track closely to this seasonal pattern. Generally, during the first fiscal quarter, accounts receivable reach their lowest level while inventory, accounts payable and short-term borrowings begin to increase. During the second fiscal quarter, receivables, accounts payable and short-term borrowings increase, reflecting the build-up of inventory and related payables in anticipation of the peak lawn and garden selling season. During the third fiscal quarter, inventory levels remain relatively constant while accounts receivable peak and short-term borrowings start to decline as cash collections are received during the peak selling season. During the fourth fiscal quarter, inventory levels are at their lowest, and accounts receivable and payables are substantially reduced through conversion of receivables to cash.

We service two broad markets: pet supplies and lawn and garden supplies. Our pet supplies businesses involve products that have a year round selling cycle with a slight degree of seasonality. As a result, it is not necessary to maintain large quantities of inventory to meet peak demands. Our lawn and garden businesses are highly seasonal with approximately 66% of our Garden segment’s net sales occurring during the second and third fiscal quarters. This seasonality requires the shipment of large quantities of product well ahead of the peak consumer buying periods. To encourage retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.

Operating Activities

Net cash used by operating activities decreased by $175.0 million, from $272.1 million for the six months ended March 26, 2022, to $97.1 million for the six months ended March 25, 2023. The decrease in cash used by operating activities was due primarily to changes in our working capital accounts for the period ended March 25, 2023, as compared to the prior year period, predominantly related to inventory.

Investing Activities

Net cash used in investing activities decreased $46.4 million, from $77.2 million for the six months ended March 26, 2022 to $30.8 million during the six months ended March 25, 2023. The decrease in cash used in investing activities was due primarily to lower capital expenditures in the current year compared to the prior year.

Financing Activities

Net cash provided by financing activities increased $31.7 million, from $23.0 million of cash used for the six months ended March 26, 2022, to $8.6 million of cash provided for the six months ended March 25, 2023. The increase in cash provided by financing activities during the current year was due primarily to net borrowings of $25 million under our Amended Credit Facility during the current year period, partially offset by decreased open market purchases of our common stock during the current year as compared to the prior year. During the six months ended March 25, 2023, we repurchased approximately 0.1 million shares of our voting common stock (CENT) on the open market at an aggregate cost of approximately $2.6 million, or approximately $37.30 per share, and approximately 0.2 million shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately $9.1 million, or approximately $35.33 per share. During the six months ended March 26, 2022, we repurchased approximately 0.4 million shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately $16.1 million, or approximately $42.30 per share.

We expect that our principal sources of funds will be cash generated from our operations and, if necessary, borrowings under our $750 million Amended Credit Facility. Based on our anticipated cash needs, availability under our Amended Credit Facility and the scheduled maturity of our debt, we believe that our sources of liquidity should be adequate to meet our working capital, capital spending and other cash needs for at least the next 12 months. However, we cannot assure you that these sources will continue to provide us with sufficient liquidity and, should we require it, that we will be able to obtain financing on terms satisfactory to us, or at all.

We believe that cash flows from operating activities, funds available under our Amended Credit Facility, and arrangements with suppliers will be adequate to fund our presently anticipated working capital and capital expenditure requirements for the foreseeable future. We anticipate that our capital expenditures, which are related primarily to replacements and expansion of and upgrades to plant and equipment and also investment in our continued implementation of a scalable enterprise-wide information technology platform, will be approximately $70 million to $80 million in fiscal 2023, of which we have invested approximately $30 million through March 25, 2023.

As part of our growth strategy, we have acquired a number of companies in the past, and we anticipate that we will continue to evaluate potential acquisition candidates in the future. If one or more potential acquisition opportunities, including those that would be material, become available in the near future, we may require additional external capital. In addition, such acquisitions would subject us to the general risks associated with acquiring companies, particularly if the acquisitions are relatively large.

Total Debt

At March 25, 2023, our total debt outstanding was $1,212.3 million, as compared with $1,185.8 million at March 26, 2022.

Senior Notes

Issuance of $400 million 4.125% Senior Notes due 2031

In April 2021, we issued $400 million aggregate principal amount of 4.125% senior notes due April 2031 (the "2031 Notes"). We used a portion of the net proceeds from the offering to repay all outstanding borrowings under our Amended Credit Facility, with the remainder used for general corporate purposes.

We incurred approximately $6 million of debt issuance costs in conjunction with this issuance, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2031 Notes.

The 2031 Notes require semi-annual interest payments on April 30 and October 30. The 2031 Notes are unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries which are borrowers under or guarantors of our Amended Credit Facility. The 2031 Notes were issued in a private placement under Rule 144A and will not be registered under the Securities Act of 1933.

We may redeem some or all of the 2031 Notes at any time, at our option, prior to April 30, 2026 at the principal amount plus a "make whole" premium. At any time prior to April 30, 2024, we may also redeem, at our option, up to 40% of the notes with the proceeds of certain equity offerings at a redemption price of 104.125% of the principal amount of the notes. We may redeem some or all of the 2031 Notes at our option, at any time on or after April 30, 2026 for 102.063%, on or after April 30, 2027 for 101.375%, on or after April 30, 2028 for 100.688% and on or after April 30, 2029 for 100.0%, plus accrued and unpaid interest.

The holders of the 2031 Notes have the right to require us to repurchase all or a portion of the 2031 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest, upon the occurrence of specific kinds of changes of control.

The 2031 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all financial covenants as of March 25, 2023.

Issuance of $500 million 4.125% Senior Notes due 2030

In October 2020, we issued $500 million aggregate principal amount of 4.125% senior notes due October 2030 (the "2030 Notes"). In November 2020, we used a portion of the net proceeds to redeem all of our outstanding 6.125% senior notes due November 2023 (the "2023 Notes") at a redemption price of 101.531% plus accrued and unpaid interest, and to pay related fees and expenses, with the remainder used for general corporate purposes.

We incurred approximately $8.0 million of debt issuance costs associated with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2030 Notes.

The 2030 Notes require semiannual interest payments on October 15 and April 15. The 2030 Notes are unconditionally guaranteed on a senior basis by each of our existing and future domestic restricted subsidiaries which are borrowers under or guarantors of our senior secured revolving credit facility or guarantee our other debt.

We may redeem some or all of the 2030 Notes at any time, at our option, prior to October 15, 2025 at a price equal to 100% of the principal amount plus a “make-whole” premium. Prior to October 15, 2023, we may redeem up to 40% of the original aggregate principal amount of the notes with the proceeds of certain equity offerings at a redemption price of 104.125% of the principal amount of the notes. We may redeem some or all of the 2030 Notes, at our option, in whole or in part, at any time on or after October 15, 2025 for 102.063%, on or after October 15, 2026 for 101.375%, on or after October 15, 2027 for 100.688% and on or after October 15, 2028 for 100.0%, plus accrued and unpaid interest.

The holders of the 2030 Notes have the right to require us to repurchase all or a portion of the 2030 Notes at a purchase price equal to 101.0% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.

The 2030 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all financial covenants as of March 25, 2023.

$300 Million 5.125% Senior Notes due 2028

In December 2017, we issued $300 million aggregate principal amount of 5.125% senior notes due February 2028 (the "2028 Notes"). We used the net proceeds from the offering to finance acquisitions and for general corporate purposes.

We incurred approximately $4.8 million of debt issuance costs in conjunction with this transaction, which included underwriter fees and legal, accounting and rating agency expenses. The debt issuance costs are being amortized over the term of the 2028 Notes.

The 2028 Notes require semiannual interest payments on February 1 and August 1. The 2028 Notes are unconditionally guaranteed on a senior basis by our existing and future domestic restricted subsidiaries who are borrowers under or guarantors of our senior secured revolving credit facility or who guarantee our other debt.

We may redeem some or all of the 2028 Notes, at our option, at any time on or after January 1, 2024 for 101.708%, on or after January 1, 2025 for 100.854% and on or after January 1, 2026 for 100.0%, plus accrued and unpaid interest.

The holders of the 2028 Notes have the right to require us to repurchase all or a portion of the 2028 Notes at a purchase price equal to 101% of the principal amount of the notes repurchased, plus accrued and unpaid interest upon the occurrence of a change of control.

The 2028 Notes contain customary high yield covenants, including covenants limiting debt incurrence and restricted payments, subject to certain baskets and exceptions. We were in compliance with all financial covenants as of March 25, 2023.

Asset-Based Loan Facility Amendment

On December 16, 2021, we entered into a Third Amended and Restated Credit Agreement (“Amended Credit Agreement”). The Amended Credit Agreement amended and restated the previous credit agreement dated September 27, 2019 (the "Predecessor Credit Agreement"), and provides for a $750 million principal amount senior secured asset-based revolving credit facility, with up to an additional $400 million principal amount available with the consent of the Lenders, as defined, if we exercise the uncommitted accordion feature set forth therein (collectively, the “Amended Credit Facility”). The Amended Credit Facility matures on December 16, 2026. We may borrow, repay and reborrow amounts under the Amended Credit Facility until its maturity date, at which time all amounts outstanding under the Amended Credit Facility must be repaid in full.

The Amended Credit Facility is subject to a borrowing base that is calculated using a formula based upon eligible receivables and inventory, and at our election, eligible real property, minus certain reserves. Proceeds of the Amended Credit Facility will be used for general corporate purposes. At March 25, 2023, the Company's applicable borrowing base calculation supported access to approximately $635 million under the Amended Credit Facility. The Amended Credit Facility includes a $50 million sublimit for the issuance of standby letters of credit and a $75 million sublimit for short-notice borrowings. As of March 25, 2023, there were borrowings of $25 million outstanding and no letters of credit outstanding under the Amended Credit Facility. Outside of the Amended Credit Facility, there were other letters of credit of $1.3 million outstanding as of March 25, 2023.

Borrowings under the Amended Credit Facility will bear interest at an index based on LIBOR (which will not be less than 0.00%) or, at our option, the Base Rate, plus, in either case, an applicable margin based on our usage under the credit facility. Base Rate is defined as the highest of (a) the Truist prime rate, (b) the Federal Funds Rate plus 0.50%, (c) one-month LIBOR plus 1.00% and (d) 0.00%. The applicable margin for LIBOR-based borrowings fluctuates between 1.00%-1.50%, and was 1.00% as of March 25, 2023, and the applicable margin for Base Rate borrowings fluctuates between 0.00%-0.50%, and was 0% as of March 25, 2023. An unused line fee is payable quarterly in respect of the total amount of the unutilized Lenders’ commitments and short-notice borrowings under the Amended Credit Facility. Letter of credit fees at the applicable margin on the average undrawn and unreimbursed amount of letters of credit are payable quarterly and a facing fee of 0.125% is payable quarterly for the stated amount of each letter of credit. We are also required to pay certain fees to the administrative agent under the Amended Credit Facility. The Amended Credit Facility provides for the transition from LIBOR to SOFR. As of March 25, 2023, the applicable interest rate related to Base Rate borrowings was 8.0%, and the applicable interest rate related to one-month LIBOR-based borrowings was 5.8%.

We 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 Amended Credit Facility.

The Amended Credit Facility contains customary covenants, including financial covenants which require us to maintain a minimum fixed charge coverage ratio of 1:1 upon triggered quarterly testing (e.g. when availability falls below certain thresholds established in the agreement), reporting requirements and events of default. The Amended Credit Facility is secured by substantially all assets of the borrowing parties, including (i) pledges of 100% of the stock or other equity interest of each domestic subsidiary that is directly owned by such entity and (ii) 65% of the stock or other equity interest of each foreign subsidiary that is directly owned by such entity, in each case subject to customary exceptions. We were in compliance with all financial covenants under the Amended Credit Facility as of March 25, 2023.

Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities

Central (the "Parent/Issuer") issued $400 million of 2031 Notes in April 2021, $500 million of 2030 Notes in October 2020, and $300 million of 2028 Notes in December 2017. The 2031 Notes, 2030 Notes and 2028 Notes are fully and unconditionally guaranteed on a joint and several senior basis by each of our existing and future domestic restricted subsidiaries (the "Guarantors") which are guarantors of our senior secured revolving credit facility ("Credit Facility"). The 2031 Notes, 2030 Notes and 2028 Notes are unsecured senior obligations and are subordinated to all of our existing and future secured debt, including our Amended Credit Facility, to the extent of the value of the collateral securing such indebtedness. There are no significant restrictions on the ability of the Guarantors to make distributions to the Parent/Issuer. Certain subsidiaries and operating divisions of the Company do not guarantee the 2031, 2030 or 2028 Notes and are referred to as the Non-Guarantors.

The Guarantors jointly and severally, and fully and unconditionally, guarantee the payment of the principal and premium, if any, and interest on the 2031, 2030 and 2028 Notes when due, whether at stated maturity of the 2031, 2030 and 2028 Notes, by acceleration, call for redemption or otherwise, and all other obligations of the Company to the holders of the 2031, 2030 and 2028 Notes and to the trustee under the indenture governing the 2031, 2030 and 2028 Notes (the "Guarantee"). The Guarantees are senior unsecured obligations of each Guarantor and are of equal rank with all other existing and future senior indebtedness of the Guarantors.

The obligations of each Guarantor under its Guarantee shall be limited to the maximum amount as well, after giving effect to all other contingent and fixed liabilities of such Guarantor and to any collections from or payments made by or on behalf of any other Guarantor in respect of the obligations of such Guarantor under the guarantee not constituting a fraudulent conveyance or fraudulent transfer under Federal or state law.

The Guarantee of a Guarantor will be released:

(1) upon any sale or other disposition of all or substantially all of the assets of that Guarantor (including by way of merger or consolidation), in accordance with the governing indentures, to any person other than the Company;

(2) if such Guarantor merges with and into the Company, with the Company surviving such merger;

(3) if the Guarantor is designated as an Unrestricted Subsidiary; or

(4) if the Company exercises its legal defeasance option or covenant defeasance option or the discharge of the Company's obligations under the indentures in accordance with the terms of the indentures.

The following tables present summarized financial information of the Parent/Issuer subsidiaries and the Guarantor subsidiaries. All intercompany balances and transactions between subsidiaries under Parent/Issuer and subsidiaries under the Guarantor have been eliminated. The information presented below excludes eliminations necessary to arrive at the information on a consolidated basis. In presenting the summarized financial statements, the equity method of accounting has been applied to the Parent/Issuer's interests in the Guarantor Subsidiaries. The summarized information excludes financial information of the Non-Guarantors, including earnings from and investments in these entities.

During the second quarter of fiscal 2023, the Company added Bell Nursery Holdings, LLC, Bell Nursery USA, LLC and D&D Commodities Limited as guarantors of the 2031, 2030 and 2028 Notes. Fiscal year ended September 24, 2022 financial results previously reflected Bell Nursery Holdings, LLC, Bell Nursery USA, LLC and D&D Commodities Limited as Non-Guarantor subsidiaries. In accordance with Rule 3-10 of the Securities and Exchange Commissions Regulation S-X, summarized financial information presented herein for the fiscal year ended September 24, 2022 has been adjusted to reflect the current Guarantor status.

(in thousands)

31

Summarized Balance Sheet Information

(in thousands)

New Accounting Pronouncements

Refer to Footnote 1 in the notes to the condensed consolidated financial statements for new accounting pronouncements.

Critical Accounting Policies, Estimates and Judgments

There have been no material changes to our critical accounting policies, estimates and assumptions or the judgments affecting the application of those accounting policies since our Annual Report on Form 10-K for the fiscal year ended September 24, 2022.

There has been no material change in our exposure to market risk from that discussed in our Annual Report on Form 10-K for the fiscal year ended September 24, 2022.

(a) Evaluation of Disclosure Controls and Procedures. Our Chief 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 Chief 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 March 25, 2023.

(b) Changes in Internal Control Over Financial Reporting. Our management, with the participation of our Chief Executive Officer and our principal financial officer, have evaluated whether any change in our internal control over financial reporting occurred during the second quarter of fiscal 2023. There were no changes in our internal control over financial reporting during the second quarter of fiscal 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes from the risk factors previously disclosed in Item 1A to Part I of our Form 10-K for the fiscal year ended September 24, 2022.