Central Garden & Pet Co: Form 10-Q for the period ended Jun 24, 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 Third Quarter Financial Performance:

• Net sales increased $7.9 million, or 0.8%, from the prior year quarter to $1,023.3 million. Pet segment sales decreased $1.5 million, and Garden segment sales increased $9.4 million.
• Gross profit increased $10.4 million from the prior year quarter, and gross margin improved 80 basis points to 31.1%.
• On a non-GAAP basis, gross margin improved 160 basis points to 31.9% for the third quarter of fiscal 2023.
• Selling, general and administrative expense increased $1.7 million from the prior year quarter to $195.2 million and as a percentage of net sales was 19.1% in both the current quarter and prior year quarter.
• Operating income increased $8.8 million from the prior year quarter, to $122.8 million. On a non-GAAP basis, operating income increased $22.7 million.
• Net income in the third quarter of fiscal 2023 was $83.1 million, or $1.56 per diluted share, compared to net income of $75.4 million, or $1.39 per diluted share, in the third quarter of fiscal 2022.
• On a non-GAAP basis, net income was $93.7 million and earnings per share was $1.75 for the third quarter of fiscal 2023.

Facility Closure

During the third quarter of fiscal year 2023, as part of our Cost and Simplicity program we closed a leased manufacturing and distribution facility in Athens, Texas. The closure 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. As a result, we incurred approximately $13.9 million of one-time costs, including $8.0 million in cost of goods sold and $5.9 million in selling, general and administrative costs, composed of charges for facilities closure, severance, inventory liquidation and related intangibles, the majority of which was non-cash.

Sale of Independent Distribution Business

In July 2023, we sold our independent garden center distribution business in order to simplify our garden business and optimize our customer footprint. While we are exiting the distribution of products to the independent garden center channel, we will retain our third-party distribution business with our largest three retail partners and select other national accounts. The business sold represents less than 5% of our Garden net sales.

Results of Operations

Three Months Ended June 24, 2023

Compared with Three Months Ended June 25, 2022

Net Sales

Net sales for the three months ended June 24, 2023 increased $7.9 million, or 0.8%, to $1,023.3 million from $1,015.4 million for the three months ended June 25, 2022. Our branded product sales increased $14.8 million, and sales of other manufacturers’ products decreased $6.9 million.

Pet net sales decreased $1.5 million, or 0.3%, to $503.3 million for the three months ended June 24, 2023 from $504.8 million for the three months ended June 25, 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. 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 increased $0.7 million, and sales of other manufacturers' products decreased $2.2 million.

Garden net sales increased $9.4 million, or 1.8%, to $520 million for the three months ended June 24, 2023 from $510.6 million for the three months ended June 25, 2022. The increase in Garden net sales was due primarily to increased sales in our live plant and packet seed businesses, aided by price increases and new store distribution. These increases were partially offset by a decline in sales of other manufacturers’ products. Garden branded sales increased $14.1 million, and sales of other manufacturers' products decreased $4.7 million.

Gross Profit

Gross profit for the three months ended June 24, 2023 increased $10.4 million, or 3.4%, to $318 million from $307.6 million for the three months ended June 25, 2022. Gross margin increased 80 basis points to 31.1% for the three months ended June 24, 2023 from 30.3% for the three months ended June 25, 2022. The increase in gross profit was due to slightly increased sales and an improved gross margin. The Garden segment primarily drove the increase in gross margin. The increase in gross margin was due primarily to price increases and productivity initiative gains while also being aided by a favorable product mix. Adjusting for the additional $8 million in facility closure costs in the Pet segment in the third quarter of fiscal 2023, non-GAAP gross profit increased $18.4 million from the prior year quarter and non-GAAP gross margin increased to 31.9%, a 160 basis point increase from the prior year quarter.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $1.7 million, or 0.9%, to $195.2 million for the three months ended June 24, 2023. As a percentage of net sales, selling, general and administrative expenses remained flat at 19.1% for the three months ended June 24, 2023, and in the comparable prior year quarter. The increase was due to $5.9 million related to the pet bedding facility closure in Pet as well as an increase in corporate expenses. These increases were partially offset by a decrease in Garden.

Selling and delivery expense decreased $5.5 million to $92.3 million for the three months ended June 24, 2023 as compared to $97.8 million in the prior year quarter. The decreases, in both the Garden and Pet segments, were due primarily to reduced commercial spend, in an effort to align with the lower retailer foot traffic.

Warehouse and administrative expense increased $7.2 million, or 7.4%, to $102.9 million for the three months ended June 24, 2023. The increase in warehouse and administrative expense was due primarily to increased expense in the Pet segment as a result of the charges related to the pet bedding facility closure. Corporate expenses increased $1.1 million due primarily to an increase in variable compensation expense partially offset by discretionary spend reductions (e.g., travel and entertainment 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 increased $8.8 million to $122.8 million for the three months ended June 24, 2023. Our operating margin increased to 12.0% in the current year quarter from 11.2% in the prior year quarter. The increase in operating income was due to a $7.9 million increase in net sales and an 80 basis point improvement in gross margin only partially offset by an increase of $1.7 million in selling, general and administrative expense. On a non-GAAP basis, which excludes the $13.9 million expense related to the pet bedding facility closure, operating income was 136.7 million, an increase of $22.7 million compared to the prior year quarter.

Pet operating income decreased $2.6 million, or 4.2%, to $60.0 million for the three months ended June 24, 2023 from $62.6 million for the three months ended June 25, 2022. Pet operating income decreased due to a $1.5 million decrease in net sales and $13.9 million of expense related to the pet bedding facility closure. Excluding the $13.9 million facility closure costs, Pet segment non-GAAP operating income increased $11.3 million.

Garden operating income increased $12.5 million to $88.1 million for the three months ended June 24, 2023, from $75.6 million for the three months ended June 25, 2022. Garden operating income increased due to a $9.4 million increase in net sales, an improved gross margin and lower selling, general and administrative expense. Garden operating margin improved to 16.9% from 14.8% in the prior year quarter.

Corporate expense increased $1.1 million, or 4.7%, to $25.2 million for the three months ended June 24, 2023 from $24.1 million for the three months ended June 25, 2022. Corporate expense increased due primarily to increased variable compensation expense offset by discretionary spend reductions (e.g., travel and entertainment expense).

Net Interest Expense

Net interest expense declined $1.2 million to $13.1 million for the three months ended June 24, 2023 from $14.3 million for the three months ended June 25, 2022. The decrease in net interest expense was due to increased interest income resulting from higher rates of interest earned on higher cash balances during the current quarter. Debt outstanding on June 24, 2023 was $1,187.8 million compared to $1,186.2 million at June 25, 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 $0.9 million for the quarter ended June 24, 2023 compared to an expense of $0.8 million for the quarter ended June 25, 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.

Income Taxes

Our effective income tax rate was 24.4% for the quarter ended June 24, 2023 and 23.7% for the quarter ended June 25, 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 third quarter of fiscal 2023 was $83.1 million, or $1.56 per diluted share, compared to net income of $75.4 million, or $1.39 per diluted share, in the third quarter of fiscal 2022. On a non-GAAP basis, net income was $93.7 million and earnings per share was $1.75 for the third quarter of fiscal 2023.

Nine Months Ended June 24, 2023

Compared with Nine Months Ended June 25, 2022

Net Sales

Net sales for the nine months ended June 24, 2023 decreased $71 million, or 2.7%, to $2,560 million from $2,631 million for the nine months ended June 25, 2022. Our branded product sales, which include products we produce under Central brand names and products we produce under third-party brands, decreased $65 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 declined $6 million.

Pet net sales decreased $44.1 million, or 3.1%, to $1,394.4 million for the nine months ended June 24, 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 $45.2 million, and sales of other manufacturer's products increased $1.1 million.

Garden net sales decreased $27.1 million, or 2.3%, to $1,165.6 million for the nine months ended June 24, 2023 from $1,192.7 million for the nine months ended June 25, 2022. The decrease in garden net sales was due primarily to lower sales in our private-label controls and fertilizer business and our grass seed business partially offset by increased sales in our wild bird feed business. The volume related sales decline was due primarily to adverse weather during our second quarter of fiscal 2023, unfavorable retailer inventory management and lighter retailer foot traffic. Garden branded sales decreased $19.4 million, and sales of other manufacturers’ products decreased $7.7 million.

Gross Profit

Gross profit for the nine months ended June 24, 2023 decreased $43.2 million, or 5.5%, to $749.4 million from $792.6 million for the nine months ended June 25, 2022. Gross margin decreased 80 basis points to 29.3% for the nine months ended June 24, 2023 from 30.1% for the nine months ended June 25, 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 and improved performance in the most recent three month period. Excluding the $8 million related to the facility closure expense in the pet segment, consolidated non-GAAP gross margin would have been 29.6% versus the 30.1% in the prior year.

Selling, General and Administrative Expenses

Selling, general and administrative expenses increased $2.6 million, or 0.5%, to $548.1 million for the nine months ended June 24, 2023 from $545.5 million for the nine months ended June 25, 2022. As a percentage of net sales, selling, general and administrative expenses increased to 21.4% for the nine months ended June 24, 2023 from 20.7% for the comparable prior year nine-month period. Increased selling, general and administrative expense at corporate was partially offset by decreased expense in the Pet and Garden segments. On a non-GAAP basis, which excludes the $13.9 million expense related to the pet bedding facility closure in the quarter ended June 24, 2023, selling, general and administrative expense decreased $3.3 million to $542.2 million for the nine months ended June 24, 2023.

Selling and delivery expense decreased $13.4 million, or 5.1%, to $250.8 million for the nine months ended June 24, 2023 from $264.2 million for the nine months ended June 25, 2022. The decreases in the Garden and Pet segments were due primarily to lower sales volumes, a customer change from store delivery to warehouse pick-up, and reduced marketing spend.

Warehouse and administrative expense increased $16.0 million, or 5.7%, to $297.3 million for the nine months ended June 24, 2023 from $281.3 million for the nine months ended June 25, 2022. Corporate expense increased $6.9 million due primarily to increased insurance expense and increased payroll expense. Both operating segments contributed to the increase, including $5.9 million in the Pet segment related to the pet bedding facility closure. 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 $45.8 million to $201.3 million for the nine months ended June 24, 2023 from $247.1 million for the nine months ended June 25, 2022. Our operating margin decreased to 7.9% for the nine months ended June 24, 2023 from 9.4% for the nine months ended June 25, 2022. The decline in operating income was due to a $71 million decrease in net sales, an 80 basis point decrease in gross margin and a $2.6 million increase in selling, general and administrative expense. On a non-GAAP basis, which excludes the $13.9 million expense related to the pet bedding facility closure, operating income was $215.2 million, a decrease of $31.9 million compared to the prior year nine month period.

Pet operating income decreased $13.7 million, or 8.1%, to $154.8 million for the nine months ended June 24, 2023 from $168.5 million for the nine months ended June 25, 2022. On a non-GAAP basis, which excludes the $13.9 million expense related to the pet bedding facility closure in the quarter ended June 24, 2023, Pet operating income increased $0.2 million and the operating margin was 12.1% compared to 11.7% in the prior year nine month period. Pet operating income increased due to an improved gross margin and lower selling, general and administrative expense partially offset by lower net sales as compared to the prior year nine month period.

Garden operating income decreased $25.2 million to $126.9 million for the nine months ended June 24, 2023, from $152.1 million for the nine months ended June 25, 2022. Garden operating income and operating margin were negatively impacted by a $27.1 million decrease in net sales relating to a late garden season and a lower gross margin partially offset by a decrease in selling, general and administrative expense.

Corporate operating expense increased $6.9 million to $80.4 million in the current nine-month period from $73.5 million in the comparable fiscal 2022 period due primarily to increased insurance expense and payroll expense.

Net Interest Expense

Net interest expense for the nine months ended June 24, 2023 decreased $1.8 million, or 4.2%, to $41.6 million from $43.4 million for the nine months ended June 25, 2022. The decrease in net interest expense was due to increased interest income resulting from both higher rates of interest earned and higher cash balances during the current nine-month period.

Debt outstanding on June 24, 2023 was $1,187.8 million compared to $1,186.2 million as of June 25, 2022. Our average borrowing rate was 4.5% for the nine month periods ended June 24, 2023 and June 25, 2022.

Other Income (Expense)

Other income (expense) was income of $3.1 million for the nine-month period ended June 24, 2023 compared to an expense of $1.3 million for the nine-month period ended June 25, 2022. The increase in other income was due primarily to foreign currency gains in the current fiscal nine-month period as compared to losses in the prior year period.

Income Taxes

Our effective income tax rate was 24.2% for the nine-month period ended June 24, 2023 compared to 23.4% for the nine-month period ended June 25, 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 nine months ended June 24, 2023 was $122.8 million, or $2.30 per diluted share, compared to $154.1 million, or $2.82 per diluted share, for the nine months ended June 25, 2022. On a non-GAAP basis, which adjusts for the impact of the facility closure costs incurred in the third quarter of fiscal 2023, net income was $133.4 million, or $2.49 per diluted share, for the nine months ended June 24, 2023.

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 non-GAAP net income and diluted net income per share, non-GAAP operating income and 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). Adjusted EBITDA further excludes one-time charges related to facility closures. 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 these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below. We believe that the non-GAAP financial measures provide useful information to investors and other users of our financial statements by allowing for greater transparency in the review of our financial and operating performance. Management also uses these non-GAAP measures 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.

Non-GAAP financial measures reflect adjustments based on the following items:

• Facility closure: we have excluded the impact of the closure of our Athens, Texas pet bedding facility as it represents an infrequent transaction that occurs in limited circumstances that impacts the comparability between operating periods. We believe the adjustment of closure costs supplements the GAAP information with a measure that may be used to assess the sustainability of our operating performance.

From time to time in the future, there may be other items that we may exclude if we believe that doing so is consistent with the goal of providing useful information to investors and management.

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

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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 has continued in fiscal 2023, although at a reduced rate in recent months.

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 82% of our Garden segment’s net sales occurring during the second and third fiscal quarters. This seasonality requires the shipment of large quantities of product well ahead of the peak consumer buying periods. To encourage retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.

Operating Activities

Net cash provided by operating activities increased by $310.0 million, from cash used by operating activities of $82.4 million for the nine months ended June 25, 2022, to $227.6 million of cash provided by operating activities for the nine months ended June 24, 2023. The increase in cash provided by operating activities was due primarily to changes in our working capital accounts for the period ended June 24, 2023, as compared to the prior year period, driven primarily by a reduction in inventory levels as the company converted inventory into cash.

Investing Activities

Net cash used in investing activities decreased $59.4 million, from $100.8 million for the nine months ended June 25, 2022 to $41.5 million during the nine months ended June 24, 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 used by financing activities decreased $12.6 million, from $46.2 million for the nine months ended June 25, 2022, to $33.7 million for the nine months ended June 24, 2023. The decrease in cash used by financing activities during the current year was due primarily to decreased open market purchases of our common stock during the current year as compared to the prior year. During the nine months ended June 24, 2023, we repurchased approximately 0.2 million shares of our voting common stock (CENT) on the open market at an aggregate cost of approximately $7.7 million, or approximately $37.23 per share, and approximately 0.6 million shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately $20.6 million, or approximately $35.28 per share. During the nine months ended June 25, 2022, we repurchased approximately 13 thousand shares of our voting common stock (CENT) on the open market at an aggregate cost of approximately $0.6 million, or approximately $41.30 per share, and 0.9 million shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately $37.7 million, or approximately $41.44 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 $60 million to $70 million in fiscal 2023, of which we have invested approximately $41 million through June 24, 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 June 24, 2023, our total debt outstanding was $1,187.8 million, as compared with $1,186.2 million at June 25, 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 June 24, 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 Amended Credit Facility.

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 June 24, 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 Amended Credit Facility.

We may redeem some or all of the 2028 Notes, at our option, at any time on or after January 1, 2023 for 102.563%, on or after January 1, 2024 for 101.708%, on or after January 1, 2025 for 100.854% and on or after January 1, 2026 for 100.0%, 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 June 24, 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 June 24, 2023, the Company's applicable borrowing base calculation supported access to approximately $559 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 June 24, 2023, there were no borrowings outstanding and no letters of credit outstanding under the Amended Credit Facility. Outside of the Amended Credit Facility, there were other letters of credit of $3.3 million outstanding as of June 24, 2023.

Borrowings under the Amended Credit Facility will bear interest at an index based on SOFR (which will not be less than 0.00%) or, at our option, the Base Rate, plus, in either case, an applicable margin based on our usage under the credit facility. Base Rate is defined as the 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 1.00% as of June 24, 2023, and the applicable margin for Base Rate borrowings fluctuates between 0.00%-0.50%, and was 0% as of June 24, 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. Standby letter of credit fees 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. We are also required to pay certain fees to the administrative agent under the Amended Credit Facility. The Amended Credit Facility was amended on May 15, 2023 to transition from LIBOR to SOFR. As of June 24, 2023, the applicable interest rate related to Base Rate borrowings was 8.3%, and the applicable interest rate related to one-month SOFR-based borrowings was 6.1%.

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 June 24, 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)

32

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 June 24, 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 third quarter of fiscal 2023. There were no changes in our internal control over financial reporting during the third 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.