Central Garden & Pet Co: Form 10-Q for the period ended Dec 30, 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 2023, our consolidated net sales were $3.3 billion, of which our Pet segment, or Pet, accounted for approximately $1.9 billion and our Garden segment, or Garden, accounted for approximately $1.4 billion. In fiscal 2023, our operating income was $211 million consisting of income from our Pet segment of $198 million, income from our Garden segment of $123 million and corporate expenses of $111 million.

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 2024 First Quarter Financial Performance:

• Net sales increased $6.8 million, or 1.1%, from the prior year quarter to $634.5 million. Pet segment sales declined $6.6 million, and Garden segment sales increased $13.4 million.
• Gross profit increased $7.1 million from the prior year quarter, and gross margin increased 80 basis points to 28.2%.
• Selling, general and administrative expense declined $0.9 million from the prior year quarter to $170.4 million and as a percentage of net sales decreased 40 basis points to 26.9%.
• Operating income increased $8.0 million from the prior year quarter to $8.4 million.
• Net Income in the first quarter of fiscal 2024 was $0.4 million, or $0.01 per diluted share, compared to a net loss of $8.4 million, or $0.16 per diluted share, in the first quarter of fiscal 2023.

Stock Dividend

In December 2023, our Board of Directors approved a stock dividend to increase liquidity in our Class A shares. The stock dividend is in the form of one share of our Class A Common Stock for every four outstanding shares of our Common Stock, Class A Common Stock and Class B Stock. Dividend shares of Class A Common Stock will be distributed on February 8, 2024, to stockholders of record on January 8, 2024. We believe the increased liquidity will benefit stockholders and provide us with more flexibility to pursue our growth objectives.

Acquisition

In November 2023, we acquired TDBBS, LLC (“TDBBS”), a provider of premium natural dog chews and treats for approximately $60 million. The addition of TDBBS expands our portfolio with bully and collagen sticks, bones and jerky, adds scale to our dog and cat business and enhances our eCommerce and direct-to-consumer capabilities.

Results of Operations

Three Months Ended December 30, 2023

Compared with Three Months Ended December 24, 2022

Net Sales

Net sales for the three months ended December 30, 2023 increased $6.8 million, or 1.1%, to $634.5 million from $627.7 million for the three months ended December 24, 2022. Organic net sales, which excludes the impact of our acquisition of TDBBS in November 2023 and the sale of our independent garden channel distribution business in July 2023, increased 0.5%. Our branded product sales increased $9.3 million, and sales of other manufacturers’ products decreased $2.5 million.

Pet net sales decreased $6.6 million, or 1.6%, to $409.2 million for the three months ended December 30, 2023 from $415.8 million for the three months ended December 24, 2022. Pet organic net sales, which excludes the impact of our acquisition of TDBBS in November 2023, declined 4.8%. The decline in net sales was due primarily to lower sales of durable items in our outdoor cushion business and our pet distribution business. Pet branded product sales declined $3.6 million, and sales of other manufacturers' products declined $3.0 million.

Garden net sales increased $13.4 million, or 6.3%, to $225.3 million for the three months ended December 30, 2023 from $211.9 million for the three months ended December 24, 2022. Garden organic net sales, which excludes the impact of the sale of our independent garden channel distribution business in July 2023, increased 11.3%. The increase in Garden net sales was due primarily to increased sales in our control and fertilizer, grass seed and packet seed businesses which benefited from the current quarter ending December 30, as opposed to the prior year fiscal quarter which ended Christmas eve, and early season shipments by select retailers. Garden branded sales increased $12.9 million, and sales of other manufacturers' products increased $0.5 million.

Gross Profit

Gross profit for the three months ended December 30, 2023 increased $7.1 million, or 4.2%, to $178.8 million from $171.7 million for the three months ended December 24, 2022. Gross margin increased 80 basis points to 28.2% for the three months ended December 30, 2023 from 27.4% for the three months ended December 24, 2022. The increase in gross margin was driven primarily by the Pet segment, although gross margin improved in both segments in the first quarter of fiscal 2024 as compared to the prior year quarter, as both segments benefited from cost management and moderating inflation.

Selling, General and Administrative Expenses

Selling, general and administrative expenses decreased $0.9 million, or 0.5%, to $170.4 million for the three months ended December 30, 2023. As a percentage of net sales, selling, general and administrative expenses decreased to 26.9% for the three months ended December 30, 2023, compared to 27.3% in the comparable prior year quarter. Decreased expense in both the Pet segment and corporate were partially offset by increased expense in the Garden segment.

Selling and delivery expense decreased $5.7 million to $69.3 million for the three months ended December 30, 2023 as compared to $75.0 million in the prior year quarter. The decrease was primarily in the Pet segment due to lower delivery costs resulting from lower sales and the continued implementation of a transportation management system, as well as reduced overhead marketing costs.

Warehouse and administrative expense increased $4.8 million, or 5.0%, to $101.1 million for the three months ended December 30, 2023 from $96.3 million for the three months ended December 24, 2022. The increase in warehouse and administrative expense was due primarily to increased expense from the TDBBS acquisition and higher facility expense in our Pet segment. Corporate expense decreased $2.2 million due primarily to lower payroll related costs, including equity compensation, resulting from lower corporate headcount. 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 $8.0 million to $8.4 million for the three months ended December 30, 2023. Our operating margin increased from 0.1% in the prior year quarter to 1.3% in the current year quarter. The increase in operating income was due to a $6.9 million increase in net sales, an 80 basis point increase in gross margin and a $0.9 million decline in selling, general and administrative expense.

Pet operating income increased $3.8 million, or 9.7%, to $43.4 million for the three months ended December 30, 2023 from $39.6 million for the three months ended December 24, 2022, and Pet operating margin improved 110 basis points to 10.6%. Pet operating income and margin increased due to an improved gross margin partially offset by reduced net sales and relatively flat selling, general and administrative expenses.

Garden operating loss decreased $1.9 million to a loss of $8.9 million for the three months ended December 30, 2023, from a loss of $10.8 million for the three months ended December 24, 2022. The Garden operating loss decreased due to higher sales and gross margin partially offset by higher selling, general and administrative expense.

Corporate operating expense decreased $2.2 million, or 7.9%, to $26.1 million for the three months ended December 30, 2023 from $28.3 million for the three months ended December 24, 2022. Corporate expense decreased due primarily to lower payroll related costs, including equity compensation, due to reduced corporate headcount.

Net Interest Expense

Net interest expense for the three months ended December 30, 2023 decreased $4.1 million, or 29.5%, to $9.7 million from $13.8 million for the three months ended December 24, 2022. The decrease in net interest expense was due to increased interest income resulting from both higher rates of interest earned on our higher cash balance during the current quarter. Debt outstanding on December 30, 2023 was $1,189.6 million compared to $1,186.9 million at December 24, 2022.

Other Income

Other income 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 decreased $0.7 million to $1.0 million for the quarter ended December 30, 2023 from $1.7 million for the quarter ended December 24, 2022. The decrease in other income was due primarily to lower foreign currency gains in the current year quarter as compared to the prior year quarter.

Income Taxes

The income tax benefit was $0.9 million for the quarter ended December 30, 2023, and $2.8 million for the quarter ended December 24, 2022. The benefit from income taxes decreased for the quarter ended December 30, 2023, compared to the prior year period, primarily due to a smaller pre-tax loss in the first quarter of fiscal 2024.

The tax benefit in the current quarter was larger than our $0.3 million pre-tax loss due to a benefit from a discrete item, related to stock compensation, in a quarter with a small loss. We expect our effective income tax rate for fiscal 2024 to be in the range of 22% to 24%.

Net Income and Earnings Per Share

Net income in the first quarter of fiscal 2024 was $0.4 million, or $0.01 per diluted share, compared to a net loss of $8.4 million, or $0.16 per diluted share, in the first quarter of fiscal 2023. The increase in net income and earnings per share was due to an $8.0 million increase in operating income, decreased net interest expense and the tax benefit from a discrete item in the current year quarter.

Use of Non-GAAP Financial Measures

We report our financial results in accordance with GAAP. However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including adjusted EBITDA and organic sales. Management uses these non-GAAP financial measures that exclude the impact of specific items (described below) in making financial, operating and planning decisions and in evaluating our performance. Also, Management believes that these 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. While Management believes that non-GAAP measures 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.

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

The reconciliations of these non-GAAP measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the tables below.

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23

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24

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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 certain 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.

In fiscal 2022, we experienced notable inflationary pressure which continued in fiscal 2023, although at a reduced rate in the latter months of fiscal 2023. The rate of inflationary pressure for key commodities, labor and freight, is moderating as we enter calendar 2024.

Weather and Seasonality

Our sales of lawn and garden products are influenced by weather and climate conditions in the different markets we serve. Our Garden segment’s business is highly seasonal. In fiscal 2023, approximately 67% of our Garden segment’s net sales and 58% of our total net sales occurred during our second and third fiscal quarters. Substantially all of the Garden segment’s operating income is typically generated in this period, which has historically offset any operating loss incurred during the first fiscal quarter of the year.

Liquidity and Capital Resources

We have financed our growth through a combination of cash generated from operations, bank borrowings, supplier credit, and sales of equity and debt securities.

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 have a year round selling cycle with a slight degree of seasonality. As a result, it is not necessary to maintain large quantities of inventory to meet peak demands. Our lawn and garden businesses are highly seasonal with approximately 67% of our Garden segment’s net sales occurring during the second and third fiscal quarters. This seasonality requires the shipment of large quantities of product well ahead of the peak consumer buying periods. To encourage retailers and distributors to stock large quantities of inventory, industry practice has been for manufacturers to give extended credit terms and/or promotional discounts.

Operating Activities

Net cash used by operating activities increased by $6.5 million, from $63.3 million for the three months ended December 24, 2022, to $69.8 million for the three months ended December 30, 2023. The increase in cash used by operating activities was due primarily to changes in our working capital accounts for the period ended December 30, 2023, as compared to the prior year period, primarily increased accounts receivable partially offset by increased payables and accrued expenses.

Investing Activities

Net cash used in investing activities increased $52.5 million, from $17.9 million for the three months ended December 24, 2022 to $70.5 million during the three months ended December 30, 2023. The increase in cash used in investing activities was due primarily to acquisition activity in the current year partially offset by decreased capital expenditures in the current year.

Financing Activities

Net cash used by financing activities decreased $1.7 million, from $9.4 million for the three months ended December 24, 2022, to $7.8 million for the three months ended December 30, 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 three months ended December 30, 2023, we repurchased approximately 40,000 shares of our non-voting Class A common stock (CENTA) on the open market at an aggregate cost of approximately $1.4 million, or approximately $35.94 per share. During the three months ended December 24, 2022, we repurchased approximately 0.1 million shares of our voting common stock (CENT) on the open market at an aggregate cost of approximately $2.0 million, or approximately $37.26 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 $6.9 million, or approximately $35.29 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 Credit Facility. Based on our anticipated cash needs, availability under our 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 and beyond. 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 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 in fiscal 2024, of which we have invested approximately $10 million through December 30, 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 December 30, 2023, our total debt outstanding was $1,189.6 million, as compared with $1,186.9 million at December 24, 2022.

Senior Notes

$400 million 4.125% Senior Notes due 2031

On April 30, 2021, we issued $400 million aggregate principal amount of 4.125% senior notes due April 2031 (the "2031 Notes"). We used a portion of the net proceeds from the offering to repay all outstanding borrowings under our 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 December 30, 2023.

$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 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. 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 December 30, 2023.

$300 Million 5.125% Senior Notes due 2028

On December 14, 2017, we issued $300 million aggregate principal amount of 5.125% senior notes due February 2028 (the "2028 Notes"). We used the net proceeds from the offering to finance acquisitions and for general corporate purposes.

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

The 2028 Notes require semiannual interest payments on February 1 and August 1. The 2028 Notes are unconditionally guaranteed on a senior basis by our existing and future domestic restricted subsidiaries who are borrowers under or guarantors of our Credit Facility.

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 December 30, 2023.

Asset-Based Loan Facility Amendment

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

The Credit Facility is subject to a borrowing base that is calculated using a formula based upon eligible receivables and inventory, and at our election, eligible real property, minus certain reserves. Proceeds of the Credit Facility will be used for general corporate purposes. Net availability under the Credit Facility was approximately $568 million as of December 30, 2023. The Credit Facility includes a $50 million sublimit for the issuance of standby letters of credit and a $75 million sublimit for swing Loan borrowings. As of December 30, 2023, there were no borrowings outstanding and no letters of credit outstanding under the Credit Facility. Outside of the Credit Facility, there were other standby and commercial letters of credit of $1.3 million outstanding as of December 30, 2023.

Borrowings under the Credit Facility bear interest at a rate 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 December 30, 2023, and such applicable margin for Base Rate borrowings fluctuates between 0.00%-0.50%, and was 0.00% as of December 30, 2023. An unused line fee shall be payable quarterly in respect of the total amount of the unutilized Lenders’ commitments and short-notice borrowings under the 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 Credit Facility. The Credit Facility was amended on May 15, 2023 to transition from LIBOR to SOFR. As of December 30, 2023, the interest rate applicable to Base Rate borrowings was 8.5%, and the interest rate applicable to one-month SOFR-based borrowings was 6.3%.

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 Credit Facility.

The 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 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 Credit Facility as of December 30, 2023.

Summarized Financial Information for Guarantors and the Issuer of Guaranteed Securities

Central (the "Parent/Issuer") issued $400 million of 2031 Notes in April 2021, $500 million of 2030 Notes in October 2020, and $300 million of 2028 Notes in December 2017. The 2031 Notes, 2030 Notes and 2028 Notes are fully and unconditionally guaranteed on a joint and several senior basis by each of our existing and future domestic restricted subsidiaries (the "Guarantors") which are guarantors of our 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 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.

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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 30, 2023.

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 30, 2023.

Evaluation of Disclosure Controls and Procedures

Management, including our Principal Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Exchange Act, as of December 30, 2023. Based on such evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of December 30, 2023, in light of the material weaknesses identified in our internal control over financial reporting described below, our disclosure controls and procedures were not effective at the reasonable assurance level and are not effective to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act, is (i) recorded, processed, summarized and reported as and when required and (ii) accumulated and communicated to our management, including the Principal Executive Officer and Principal Financial Officer, as appropriate to allow timely discussion regarding required disclosure.

Previously Reported Material Weaknesses

As disclosed in Item 9A, “Controls and Procedures” within our Annual Report on Form 10-K for the fiscal year ended September 30, 2023, which was filed with the SEC on November 28, 2023, we identified deficiencies in the design and operating effectiveness of controls in our internal control over financial reporting as of September 30, 2023. Management determined these identified deficiencies represented material weaknesses related to (1) certain information technology general computer controls ("ITGC’s") at our Live Plant and Green Garden businesses and (2) controls related to an outsourced service provider that supports certain of the Company’s revenue processes for our Live Plant business and were found to not be operating effectively. As a result, certain of the Company’s related business controls that are dependent upon the affected ITGC’s and lack of controls around outsourced IT service provider data were also deemed ineffective. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement in annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses did not result in any identified misstatements to our consolidated financial statements or changes to previously disclosed financial results.

After giving full consideration to these material weaknesses, and the additional analyses and other procedures we performed to ensure that our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q were prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, our management has concluded that our condensed consolidated financial statements present fairly, in all material respects, our financial position, results of operations and cash flows for the periods disclosed in conformity with U.S. GAAP.

Management’s Plan to Remediate the Material Weaknesses

Our management has been engaged in developing and implementing remediation plans to address the material weaknesses described above. These remediation efforts are ongoing and are expected to include the following:

• Enhancing the design and control procedures of the Live Plant and Green Garden ITGCs to ensure that the control activities related to ITGCs are functioning appropriately;
• Improving the control environment in relation to personnel training and accountability of Sarbanes-Oxley Act of 2002 ("SOX") control activities;
• Hiring additional personnel in the IT department with an appropriate level of knowledge and experience to effectively execute our processes and procedures; and
• Expanding controls to address the design and operation of internal controls related to the revenue processes for our Live Plants business.

In fiscal 2024 to date, we have formalized our design and controls for the Live Plant and Green Garden ITGC’s and the Live Plant revenue process to ensure we address the root causes of the material weaknesses. We are in the process of developing and delivering SOX compliance training to control owners. We are also in the process of hiring to supplement our IT staffing. Additionally, we have enhanced our communication by holding frequent meetings with key management personnel and periodically updating members of the Audit Committee to discuss the SOX program and remediation efforts.

Changes in Internal Control over Financial Reporting

Other than the changes associated with the material weaknesses and remediation actions noted above, there have been no changes in our internal control over financial reporting during the quarter ended December 30, 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 30, 2023.