CENTRAL GARDEN & PET COMPANY The following is management's discussion of the financial results, liquidity and other key items related to our performance. This discussion should be read in conjunction with our consolidated financial statements and the related notes and other financial information appearing elsewhere in this Form 10-K. This Form 10-K contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those indicated in forward-looking statements. See "Forward-Looking Statements" and "Item 1A - Risk Factors." Business OverviewCentral Garden & Pet Company is a leading innovator, producer and distributor of branded and private label products for the lawn & garden and pet supplies markets inthe United States . In fiscal 2021, 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 2021, our operating income was$254 million consisting of income from our Pet segment of$208 million , income from our Garden segment of$139 million and corporate expenses of$93 million . 26 --------------------------------------------------------------------------------
Fiscal 2021 Financial Highlights
Financial summary: •Net sales for fiscal 2021 increased$608.2 million , or 22.6%, to$3,303.7 million , with organic net sales increasing$335.3 million and sales from our four recent acquisitions of$272.9 million . Our Pet segment sales increased 12.9%, and our Garden segment sales increased 38.5%. •Gross profit for fiscal 2021 increased$174.3 million , or 21.9%, to$970.9 million . Gross margin declined 20 basis points in fiscal 2021 to 29.4%, from 29.6% in fiscal 2020. •Our operating income increased$56.5 million , or 28.5%, to$254.5 million in fiscal 2021, and as a percentage of net sales improved to 7.7% from 7.3% in fiscal 2020. •Net income for fiscal 2021 was$151.7 million , or$2.75 per share on a diluted basis, compared to net income in fiscal 2020 of$120.7 million , or$2.20 per share on a diluted basis. Recent Developments Fiscal Year 2021 AcquisitionsD&D Commodities OnJune 30, 2021 , the Company purchasedD&D Commodities, Ltd. ("D&D"), a provider of high-quality, premium bird feed, for approximately$88 million in cash and the assumption of approximately$30 million of long-term debt. The addition of D&D expands Central's portfolio in the bird feed category and is expected to deepen the Company's relationship with major retailers. Green Garden Products OnFebruary 11, 2021 , the Company acquiredFlora Parent, Inc. and its subsidiaries ("Green Garden Products"), a leading provider of vegetable, herb and flower seed packets, seed starters and plant nutrients inNorth America , for approximately$571 million . The addition of Green Garden Products expands the Company's portfolio into an adjacent garden category.Hopewell Nursery OnDecember 31, 2020 , the Company purchased substantially all of the assets ofHopewell Nursery , a leading live goods wholesale grower serving retail nurseries, landscape contractors, wholesalers and garden centers across the Northeast, for approximately$81 million . The addition ofHopewell Nursery to the Central portfolio strengthens the Company's position as a leading live goods provider in the garden category. DoMyOwn OnDecember 18, 2020 , the Company acquired DoMyOwn, a leading online retailer of professional-grade control products, for approximately$81 million . The acquisition strengthens the Company's position in the control products category and adds a leading online platform for eCommerce fulfillment and digital capabilities. Change in Segment Components During the first quarter of fiscal year 2021, we began reporting the results of our outdoor cushion operations in the Pet segment as a result of a change in internal management reporting lines due to potential synergies in sourcing, manufacturing and innovation and to be consistent with the reporting of financial information used to assess performance and allocate resources. These operations were previously reported in the Garden segment and are now managed and reported in the Pet segment. All prior period segment disclosures have been recast to reflect this segment change. COVID-19 Impact The outbreak of COVID-19 has led to adverse impacts on human health, the global economy and society at large. From the beginning, our priority has been the safety of our employees, customers and consumers. 27 -------------------------------------------------------------------------------- Central has been impacted by COVID-19 in a number of ways, including increased demand evidenced by our organic net sales increase of 13% in fiscal year 2021. The increased demand for our products continues to challenge our supply chain and our ability to procure and manufacture enough product to meet the continued high levels of demand. At some of our facilities, we have experienced reduced productivity and increased employee absences, which we expect to continue during the balance of the pandemic. Our manufacturing facilities and distribution centers are currently open and fully operational. We have incurred and will continue to incur additional costs including personal protective equipment and sanitation costs. We have hosted mobile vaccination clinics at some of our larger manufacturing and distribution sites, in order to make vaccines available to our employees. The pandemic and related increase in demand have created operational challenges, which have impacted our service and fill rates. In our supply chain, we may continue to experience increased operational and logistics costs. We may also experience additional disruptions in our supply chain as the pandemic continues, although we cannot reasonably estimate the potential impact or timing of those events, and we may not be able to mitigate such impact. We continue to face supply constraints of commodities, material and freight and the limited availability of labor and inflationary pressures stemming from the COVID-19 operating environment, including notable increases in costs for key commodities, material, labor and freight. We believe we have sufficient liquidity to satisfy our cash needs with our cash and revolving credit facility as we manage through the current economic and health environment. The volatility in demand, changing consumer consumption patterns, uncertainty regarding vaccination uptake and new variants of the virus make it difficult to predict when more normal order patterns may return. Forecasting and planning remain challenging in the current environment and will continue to be challenging as the pandemic eases in the future. In the current uncertain environment, our employees, customers and consumers will continue to be our priority as we manage our business to deliver long-term growth. Results of Operations (GAAP) The following table sets forth, for the periods indicated, the relative percentages that certain income and expense items bear to net sales: Fiscal Year Ended September 25, 2021 September 26, 2020 September 28, 2019 Net sales 100.0 % 100.0 % 100.0 % Cost of goods sold and occupancy 70.6 70.4 70.5 Gross profit 29.4 29.6 29.5 Selling, general and administrative 21.7 22.2 23.2 Operating income 7.7 7.4 6.4 Interest expense, net (1.8) (1.5) (1.4) Other expense, net - (0.2) - Income taxes 1.3 1.2 1.1 Net income 4.6 % 4.5 % 3.9 % Fiscal 2021 Compared to Fiscal 2020 Net Sales Net sales for fiscal 2021 increased$608.2 million , or 22.6%, to$3,303.7 million from$2,695.5 million in fiscal 2020. Organic net sales, which excludes the impact of acquisitions and divestitures in the last 12 months, increased$335.3 million , or 12.5% in fiscal 2021. Branded product sales increased$459.8 million , and sales of other manufacturers' products increased$148.4 million . Branded product sales include products we produce under Central brand names and products we produce under third-party brands. Sales of branded products represented 77% of our total sales in fiscal 2021 compared with 78% in fiscal 2020. Private label sales represent approximately 10% to 15% of our consolidated net sales. 28 -------------------------------------------------------------------------------- The following table indicates each class of similar products which represented approximately 10% or more of our consolidated net sales in the fiscal years presented: Category 2021 2020 2019 (in millions) Other pet products$ 767.0 $ 821.1 $ 688.3 Other garden products 876.6 491.7 485.9 Other manufacturers' products 749.1 600.7 504.5 Dog & cat products 570.9 502.1 452.1 Wild bird 340.1 - (1) - (1) Controls & fertilizer products - (1) 279.9 252.2 Total$ 3,303.7 $ 2,695.5 $ 2,383.0 (1) The product category was less than 10% of our consolidated net sales in the period. Pet net sales increased$216.9 million , or 12.9%, to$1,894.9 million in fiscal 2021 from$1,678.0 million in fiscal 2020. Net sales in the prior year include sales from the Breeder's Choice business unit which we sold inDecember 2020 . Organic net sales increased$235.8 million , or 14.2%, as compared to the prior year. The sales increase was broad-based across our entire Pet portfolio and we continue to see increased demand due, among other things, to increased pet ownership of dogs, cats, small animals and reptiles during the pandemic. Organic sales gains were most significant in our dog and cat, sales of other manufacturers' products, and outdoor cushion businesses. The organic sales increase was primarily volume driven but price increases did have a more limited positive impact. Pet branded sales increased$176.3 million and sales of other manufacturers' products increased$40.6 million . Garden net sales increased$391.3 million , or 38.5%, to$1,408.8 million in fiscal 2021 from$1,017.5 million in fiscal 2020. Organic sales increased$99.5 million , or 9.8%, and sales from our recent acquisitions of DoMyOwn,Hopewell Nursery , Green Garden Products andD&D Commodities contributed$291.8 million . The increased organic sales were broad-based across our entire Garden portfolio, including sales increases in sales of other manufacturers' products, wild bird feed, live plants and controls and fertilizers. We believe the sales increase across our Garden portfolio was driven in significant part by increased consumer home gardening related to the pandemic and retailer listing gains. The organic sales increase was primarily volume driven but was also aided by price increases necessitated by the current inflationary cost environment, especially in our wild bird feed business. Garden branded sales increased$283.5 million and sales of other manufacturers' products increased$107.8 million . Gross Profit Gross profit for fiscal 2021 increased$174.3 million , or 21.9%, to$970.9 million from$796.6 million in fiscal 2020. Both Garden and Pet contributed to the increase in gross profit. The decline in gross margin was due to significant cost inflation and the impact of inventory-related purchase accounting which was largely offset by price increases and productivity gains. Both segments are being impacted by the rapidly increasing cost environment where we are seeing widespread inflation across commodities (e.g., sunflower, milo, millet and foam), freight and labor. We intend to seek price increases to offset continued inflationary pressures but do not anticipate we will be able to fully offset the cost pressures in fiscal 2022. In the Pet segment, gross profit increased due to increased sales, favorable product mix and productivity gains, partially offset by significant inflationary headwinds. In the Garden segment, gross profit increased due to increased sales, including the inorganic contribution of the four recent acquisitions and gross productivity efforts, partially offset by heightened costs across commodities, freight and labor. Selling, General and Administrative Selling, general and administrative expenses increased$117.8 million , or 19.7%, from$598.6 million in fiscal 2020 to$716.4 million in fiscal 2021. As a percentage of net sales, selling, general and administrative expenses decreased from 22.2% in fiscal 2020 to 21.7% in fiscal 2021; both the Pet segment and corporate contributed to the improvement. Selling, general and administrative expense as a percentage of net sales increased in the Garden segment due to the four fiscal 2021 acquisitions which include the amortization of the intangible assets resulting from purchase accounting. Corporate expenses are included within administrative expense and relate to the costs of unallocated executive, administrative, finance, legal, human resource, and information technology functions. Selling and delivery expense increased$61.5 million , or 20.4%, to$363.7 million in fiscal 2021 but decreased as a percentage of net sales from 11.2% in fiscal 2020 to 11.0% in fiscal 2021. The increase in selling and delivery expense was due primarily to the addition of our four fiscal 2021 acquisitions, increased delivery expense resulting from increased sales volumes and higher shipping costs, and increased headcount and marketing investments for market research, brand development and innovation. The decline in selling and delivery expense as a percentage of net sales was due primarily to improved overhead absorption. 29 -------------------------------------------------------------------------------- Warehouse and administrative expense increased$56.3 million , or 19.0%, to$352.7 million in fiscal 2021 and decreased as a percentage of net sales to 10.7% in fiscal 2021 from 11.0% in fiscal 2020. The increased expense was driven by the addition of the four recent acquisitions in the Garden segment and a$2.6 million loss in our Pet segment resulting from the sale of the Breeder's Choice business in our fiscal 2021 first quarter. Additionally, both operating segments experienced increased labor and payroll-related expense from wage inflation. Corporate expenses increased$3.6 million due primarily to increased variable compensation, payroll expense and increased non-cash equity compensation expense. Operating Income Operating income increased$56.5 million , or 28.5%, to$254.5 million in fiscal 2021 from$198.0 million in fiscal 2020. Our operating margin was 7.7% in fiscal 2021, increasing from 7.3% in fiscal 2020. Increased sales of$608.2 million and a 50 basis point decrease in selling, general and administrative expense as a percentage of net sales were partially offset by a 20 basis point decline in gross margin. Both operating income and margin were favorably impacted by significant pandemic-related increases in demand for our products. Pet operating income increased$36.8 million , or 21.5%, to$208.2 million in fiscal 2021 from$171.4 million for fiscal 2020. Pet operating income increased due to higher sales and gross profit partially offset by higher selling, general and administrative expense. Pet operating margin improved 80 basis points due to increased sales, an improved gross margin and lower selling, general and administrative expense as a percentage of net sales. Garden operating income increased$23.3 million , or 20.2%, to$138.8 million for fiscal 2021. The increase was due to increased sales and higher gross profit partially offset by higher selling, general and administrative expenses. Garden operating margin declined 150 basis points to 9.8% due primarily to higher selling, general and administrative expense as a percentage of net sales and the initial inventory-related impact of purchase accounting from our four recent acquisitions. Corporate expenses increased$3.6 million due primarily to increased variable compensation, payroll expense and increased non-cash equity compensation expense. Net Interest Expense Net interest expense increased$18.2 million , or 45.5%, from$40.0 million in fiscal 2020 to$58.2 million in fiscal 2021. InOctober 2020 , we issued$500 million aggregate principal amount of 4.125% senior notes dueOctober 2030 and used the proceeds to redeem all of our outstanding aggregate principal amount 6.125% senior notes due 2023 with the remainder available for general corporate purposes. As a result of our redemption of the 2023 Notes, we recognized incremental interest expense of approximately$10.0 million in the first quarter of fiscal 2021. Also contributing to the increase in net interest expense was a higher debt balance during fiscal 2021. InApril 2021 , we issued$400 million aggregate principal amount of 4.125% senior notes dueApril 2031 . We used a portion of the net proceeds to repay outstanding amounts under our senior secured revolving credit facility, with the remainder available for general corporate purposes. Debt outstanding onSeptember 25, 2021 was$1,185.8 million compared to$694.1 million as ofSeptember 26, 2020 . Our average borrowing rate for fiscal 2021 was 4.4% and for fiscal 2020 was 5.6%. Other Income (Expense) Other income (expense) is comprised of income or loss from investments accounted for under the equity method of accounting, including any associated impairments of investments and foreign currency exchange gains and losses. Other expense was$1.5 million for the fiscal year endedSeptember 25, 2021 compared to$4.3 million for the fiscal year endedSeptember 26, 2020 , due primarily to a$3.6 million impairment in fiscal 2020 of two investments in private companies impacted by the COVID-19 pandemic. Income Taxes Our effective income tax rate was 21.6% for fiscal 2021 compared to 21.0% for fiscal 2020. The increased effective income tax rate in fiscal 2021 was due primarily to a decrease in benefit from income tax credits and an increase in taxable foreign earnings. Net Income and Earnings Per Share Our net income for fiscal 2021 was$151.7 million , or$2.75 per diluted share, compared to$120.7 million , or$2.20 per diluted share, for fiscal 2020. The fiscal 2021 25.0% improvement in earnings per diluted share was due to strong revenue growth and operating margin improvement. Fiscal 2020 Compared to Fiscal 2019 For a discussion of our results of operations in fiscal 2020 compared to fiscal 2019, please see Item 7 of our Annual Report on Form 10-K for the fiscal year endedSeptember 26, 2020 filed with theSEC . 30 -------------------------------------------------------------------------------- Use of Non-GAAP Financial Measures We report our financial results in accordance with accounting principles generally accepted inthe United States (GAAP). However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including adjusted EBITDA, organic sales; and non-GAAP net income and diluted net income per share. Management believes these non-GAAP financial measures that exclude the impact of specific items (described below) 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 and depreciation and amortization (or operating income plus depreciation and amortization 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. We have also provided organic net sales, a non-GAAP measure that excludes the impact of businesses purchased or exited in the prior 12 months, because we believe it permits investors to better understand the performance of our historical business without the impact of recent acquisitions or dispositions. 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 financial measures in making financial, operating and planning decisions and in evaluating our performance, and we believe these measures similarly 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: •Incremental expenses from note redemption and issuance: we have excluded the impact of the incremental expenses incurred from the note redemption and issuance as they represent an infrequent transaction that occurs in limited circumstances that impacts the comparability between operating periods. We believe the adjustment of these expenses supplements the GAAP information with a measure that may be used to assess the sustainability of our operating performance. •Loss on sale of business: we have excluded the impact of the loss on the sale of a business as it represents an infrequent transaction that occurs in limited circumstances that impacts the comparability between operating periods. We believe the adjustment of this loss 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. The non-GAAP adjustments made reflect the following: (1)During the first quarter of fiscal 2021, we issued$500 aggregate principal amount of 4.125% senior notes dueOctober 2030 . We used a portion of the proceeds to redeem all of our outstanding 6.125% senior notes due 2023. As a result of our redemption of the 2023 Notes, we incurred incremental expenses of approximately$10.0 million , comprised of a call premium payment of$6.1 million , overlapping interest expense of approximately$1.4 million and a$2.5 million non-cash charge for the write-off of unamortized financing costs in interest expense. These amounts are included in interest expense in the condensed consolidated statements of operations. (2)During the first quarter of fiscal 2021, we recognized a loss of$2.6 million , included in selling, general and administrative expense in the consolidated statement of operations, from the sale of our Breeder's Choice business unit after concluding it was not a strategic business for our Pet segment. (3)During the third quarter of fiscal 2020, we recorded a non-cash impairment charge for two private company investments. The impairment was recorded as part of other (expense) income. 31 --------------------------------------------------------------------------------
GAAP to Non-GAAP Reconciliation
For the Fiscal Year Ended
September 26 ,September 25, 2021 2020 (in
thousands, except per share amounts)
Net Income and Diluted Net Income Per Share Reconciliation
GAAP net income attributable to
151,746 $ 120,676
Incremental expenses from note redemption and issuance (1) 9,952 -
Loss on sale of business (2) 2,611 -
Investment Impairments (3) - 3,566
Tax effect of incremental expenses, loss on sale and impairment
(2,711) (747)
Non-GAAP net income attributable to
$ 161,598 $ 123,495 GAAP diluted net income per share $ 2.75$ 2.20 Non-GAAP diluted net income per share $ 2.92$ 2.26 Shares used in GAAP and non-GAAP diluted net earnings per share calculation 55,248 54,738 Organic Net Sales Reconciliation We have provided organic net sales, a non-GAAP measure that excludes the impact of recent acquisitions and dispositions, because we believe it permits investors to better understand the performance of our historical business. We define organic net sales as net sales from our historical business derived by excluding the net sales from businesses acquired or exited in the preceding 12 months. After an acquired business has been part of our consolidated results for 12 months, the change in net sales thereafter is considered part of the increase or decrease in organic net sales. GAAP to Non-GAAP Reconciliation CONSOLIDATED For
the Fiscal Year Ended
Effect of
acquisitions &
divestiture on
increase in net
Net sales (GAAP) sales Net sales organic
(in millions)
Reported net sales FY 2021 $ 3,303.7 $ 291.8 $ 3,011.9
Reported net sales FY 2020 2,695.5 18.9 2,676.6
$ increase $ 608.2 $ 272.9 $ 335.3
% increase 22.6 % 12.5 %
GAAP to Non-GAAP Reconciliation
PET For the Fiscal Year Ended September 25, 2021
Effect of
acquisitions &
divestitures on
increase in net
Net sales (GAAP) sales Net sales organic
(in millions)
Reported net sales FY 2021 $ 1,894.9 $ - $ 1,894.9
Reported net sales FY 2020 1,678.0 18.9 1,659.1
$ increase $ 216.9 $ (18.9) $ 235.8
% increase 12.9 % 14.2 %
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GAAP to Non-GAAP Reconciliation
GARDEN For the Fiscal Year Ended September 25, 2021
Effect of
acquisitions &
divestitures on
increase in net
Net sales (GAAP) sales Net sales organic
(in millions)
Reported net sales FY 2021 $ 1,408.8 $ 291.8 $ 1,117.0
Reported net sales FY 2020 1,017.5 - 1,017.5
$ increase $ 391.3 $ 291.8 $ 99.5
% increase 38.5 % 9.8 %
GAAP to non-GAAP Reconciliation
Fiscal Year Ended
(in thousands)
Adjusted EBITDA Reconciliation Total Garden Pet Corp
Net income attributable to Central Garden & Pet $ 151,746 - - -
Interest expense, net 58,182 - - -
Other expense 1,506 - - -
Income tax expense 42,035 - - -
Net income attributable to noncontrolling
interest 1,027 - - -
Sum of items below operating income 102,750
- - -
Income (loss) from operations 254,496 138,755 208,201 (92,460)
Depreciation & amortization 74,727 33,050 36,952 4,725
Adjusted EBITDA $ 329,223 $ 171,805 $ 245,153 $ (87,735) GAAP to non-GAAP Reconciliation
Fiscal Year Ended
(in thousands)
Adjusted EBITDA Reconciliation Total Garden Pet Corp
Net income attributable to Central Garden & Pet $ 120,676 - - -
Interest expense, net 39,989 - - -
Other income 4,250 - - -
Income tax expense 32,218 - - -
Net loss attributable to noncontrolling
interest 844 - - -
Sum of items below operating income 77,301
- - -
Income (loss) from operations 197,977 115,413 171,369 (88,805)
Depreciation & amortization 55,359 10,590 38,116 6,653
Adjusted EBITDA $ 253,336 $ 126,003 $ 209,485 $ (82,152)
Inflation
Our revenues and margins are dependent on various economic factors, including
rates of inflation, energy costs, consumer attitudes toward discretionary
spending, 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 fertilizer business as well as heightened import
costs such as shipping container costs and tariffs. 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.
During fiscal 2021, inflation was broad-based and we saw significant increases
across commodity and material costs, freight and labor. During fiscal 2020, we
saw more moderate increases to commodity, labor and freight costs. During fiscal
2019, commodity costs increased
33
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while freight costs moderated. In fiscal 2020 and 2019, tariffs implemented
during the year had a negative impact in instances where we were unable to pass
through the incremental costs.
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 2021, approximately 69% of our Garden segment's net
sales and 60% 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 69% 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 decreased $13.5 million , from $264.3
million in fiscal 2020 to $250.8 million in fiscal 2021. The decrease in cash
provided was due primarily to changes in our working capital accounts, primarily
an increase in inventory from an intentional build-up due to the overall
increased demand for our products, as compared to the prior year.
Net cash provided by operating activities increased $59.3 million , from $205.0
million in fiscal 2019 to $264.3 million in fiscal 2020. The increase in cash
provided was due primarily to changes in our working capital accounts,
predominately an increase in accounts receivable, due to the increase in sales
during the latter half of the fourth quarter compared to the prior year, better
working capital management and stronger operating performance during the current
fiscal year.
Investing Activities
Net cash used in investing activities increased $851.3 million from $48.1
million in fiscal 2020 to $899.4 million in fiscal 2021. The increase in cash
used in investing activities was due primarily to acquisition activity and an
increase in capital expenditures of approximately $37 million in the current
year compared to the prior year, partially offset by proceeds received from the
sale of our Breeder's Choice business during the first quarter of fiscal 2021
and decreased investments in the current year compared to the prior year. During
the first quarter of fiscal 2021, we acquired DoMyOwn for approximately $81
million . During the second quarter of fiscal 2021, we acquired Hopewell Nursery
on December 31, 2020 for approximately $81 million and Green Garden Products on
February 11, 2021 for approximately $571 million and in the fourth quarter of
fiscal 2021, we acquired D&D Commodities for approximately $88 million .
Net cash used in investing activities decreased $28.2 million from $76.3 million
in fiscal 2019 to $48.1 million in fiscal 2020. The decrease in cash used in
investing activities was due primarily to acquisition activity in the prior
year, partially offset by an $11.5 million increase in capital expenditures in
the current year compared to the prior year. During the second quarter of fiscal
2019, we acquired the remaining 55% interest in Arden Companies for
approximately $11 million , and during the third quarter of fiscal 2019 we
acquired C&S Products for approximately $30 million .
34
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Financing Activities
Net cash provided by financing activities increased $481.0 million from $60.6
million of cash used in fiscal 2020 to $420.5 million of cash provided in fiscal
2021. The increase in cash provided by financing activities during the current
year was due primarily to the issuance of $500 million of our 2030 Notes in
October 2020 and $400 million of our 2031 Notes in April 2021 , partially offset
by the repayment of our 2023 Notes and the corresponding premium paid on
extinguishment as well as debt issuance costs incurred on the issuances of the
2030 Notes and 2031 Notes. We also decreased open market purchases of our common
stock during the current year period as compared to the prior year. During
fiscal 2021, the Company repurchased approximately 0.5 million shares of its
non-voting common stock (CENTA) on the open market at an aggregate cost of
approximately $21.8 million , or $41.91 per share, in addition to $8.2 million
used for minimum statutory tax withholdings related to the net share settlement
of our stock.
Net cash used in financing activities decreased $50.2 million from $110.8
million of cash provided in fiscal 2019 to $60.6 million cash used in fiscal
2020. The decrease in cash used in financing activities during the current year
was due primarily to our repayment of approximately $46 million of acquired
long-term debt subsequent to our acquisitions of Arden and C&S Products during
fiscal 2019, as well as decreased open market purchases of our common stock
during the current year. During fiscal 2020, we repurchased approximately 0.2
million shares of our voting common stock (CENT) at an aggregate cost of
approximately $6.6 million , or approximately $26.63 per share, and 1.8 million
shares of our non-voting Class A common stock (CENTA) at an aggregate cost of
approximately $45.7 million , or approximately $25.90 per share, in addition to
$6.9 million used for minimum statutory tax withholdings related to the net
share settlement of our stock.
We expect that our principal sources of funds will be cash generated from our
operations, proceeds from our debt and equity offerings, and, if necessary,
borrowings under our $400 million asset backed loan facility. Based on our
anticipated cash needs, availability under our asset backed loan 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
asset backed loan facility, and arrangements with suppliers will be adequate to
fund our presently anticipated working capital 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 $80 million - $90 million
over the next 12 months.
As part of our growth strategy, we have acquired a large number of businesses 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.
Stock Repurchases
During fiscal 2021, the Company repurchased approximately 0.5 million shares of
its non-voting common stock (CENTA) on the open market at an aggregate cost of
approximately $21.8 million , or $41.91 per share. In August 2019 , our Board of
Directors authorized a new share repurchase program to purchase up to $100
million of our common stock (the "2019 Repurchase Authorization"). The 2019
Repurchase Authorization has no fixed expiration date and expires when the
amount authorized has been used or the Board withdraws its authorization. As of
September 25, 2021 , no repurchases had been made under the $100 million 2019
Repurchase Authorization.
In February 2019 , the Board of Directors authorized us to make supplemental
purchases to minimize dilution resulting from issuances under our equity
compensation plans (the "Equity Dilution Authorization"). In addition to our
regular share repurchase program, we are permitted to purchase annually a number
of shares equal to the number of shares of restricted stock or stock options
granted in the prior fiscal year, to the extent not already repurchased, and the
current fiscal year. The Equity Dilution Authorization has no fixed expiration
date and expires when the Board withdraws its authorization. As of September 26,
2021 , we had authorization remaining from the fiscal 2021 equity plan activity
to repurchase up to 1.2 million shares under our Equity Dilution Authorization.
Total Debt
At September 25, 2021 , our total debt outstanding was $1,185.8 million versus
$694.1 million at September 26, 2020 .
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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 the net proceeds from
the offering to repay all outstanding borrowings under our Amended Credit
Facility, with the remainder to be 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 ,
which commenced October 30, 2021 . 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 September
25, 2021 .
Issuance of $500 million 4.125% Senior Notes due 2030 and Redemption of $400
million 6.125% Senior Notes due 2023
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 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.
As a result of our redemption of the 2023 Notes, we incurred a call premium
payment of $6.1 million , overlapping interest expense for 30 days of
approximately $1.4 million and a $2.5 million non-cash charge for the write-off
of unamortized deferred financing costs related to the 2023 Notes. These amounts
are included in interest expense in the condensed consolidated statements of
operations.
The 2030 Notes require semiannual interest payments on October 15 and April 15 ,
which commenced April 15, 2021 . 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 September
25, 2021 .
36
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$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 will use the net
proceeds from the offering to finance future acquisitions and for general
corporate purposes.
We incurred approximately $4.6 million of debt issuance costs in conjunction
with this transaction, which included underwriter fees and legal, accounting and
rating agency expenses. The debt issuance costs are being amortized over the
term of the 2028 notes.
The 2028 Notes require semiannual interest payments on February 1 and August 1 ,
which commenced on August 1, 2018 . The 2028 Notes are unconditionally guaranteed
on a senior basis by our existing and future domestic restricted subsidiaries
who are borrowers under or guarantors of our senior secured revolving credit
facility or who guarantee the 2023 Notes.
We may redeem some or all of the 2028 Notes at any time, at our option, prior to
January 1, 2023 at the principal amount plus a "make whole" premium. 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% 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 covenants as of September 25, 2021 .
Asset-Based Loan Facility Amendment
On September 27, 2019 , we entered into a Second Amended and Restated Credit
Agreement ("Amended Credit Facility"). The Amended Credit Facility amends and
restates the previous credit agreement dated April 22, 2016 and continues to
provide up to a $400.0 million principal amount senior secured asset-based
revolving credit facility, with up to an additional $200.0 million principal
amount available with the consent of the Lenders, as defined, if we exercise the
accordion feature set forth therein. The Amended Credit Facility now matures on
September 27, 2024 . 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 minus certain
reserves and adjustments. The Amended Credit Facility also allows the Company to
add real property to the borrowing base so long as the real property is subject
to a first priority lien in favor of the Administrative Agent for the benefit of
the Lenders. Net availability under the Amended Credit Facility was $400 million
as of September 25, 2021 . The Amended Credit Facility includes a $50 million
sublimit for the issuance of standby letters of credit and an increased $40
million sublimit for short-notice borrowings. We incurred approximately $1.6
million of debt issuance costs in conjunction with this transaction, which
included underwriter fees and legal expenses. The debt issuance costs are being
amortized over the term of the Amended Credit Facility. As of September 25,
2021 , there were no borrowings outstanding and no letters of credit outstanding
under the Credit Facility. There were other letters of credit of $1.5 million
outstanding as of September 25, 2021 .
Borrowings under the Amended Credit Facility will bear interest at an index
based on LIBOR or, at our option, the Base Rate (defined as the highest of (a)
the Truist prime rate, (b) the Federal Funds Rate plus 0.50%, (c) one-month
LIBOR plus 1.00%), plus, in either case, an applicable margin based on our
consolidated senior leverage ratio and (d) 0.00%. Such applicable margin for
LIBOR-based borrowings fluctuates between 1.00% and 1.50% and was 1.00% as of
September 25, 2021 , and such applicable margin for Base Rate borrowings
fluctuates between 0.00% and 0.50% , and was 0.00% as of September 25, 2021 . An
unused line fee shall be payable monthly in respect of the total amount of the
unutilized Lenders' commitments and short-notice borrowings under the Amended
Credit Facility. Letter of credit fees at the applicable margin on the average
undrawn and unreimbursed amount of letters of credit shall be payable monthly
and a facing fee of 0.125% shall be paid on demand for the stated amount of each
letter of credit. We are also required to pay certain fees to the administrative
agent under the Amended Credit Facility. As of September 25, 2021 , the
applicable interest rate related to Base Rate borrowings was 3.3%, and the
applicable interest rate related to one-month LIBOR-based borrowings was 1.1%.
Banks currently reporting information used to set LIBOR will stop doing so after
2021. Various parties, including government agencies, are seeking to identify an
alternative rate to replace LIBOR. We are monitoring their efforts, and we will
likely amend contracts to accommodate any replacement rate where it is not
already provided. Our Amended Credit Facility already anticipates the potential
loss of LIBOR and defines procedures for establishing a replacement rate.
The Amended Credit Facility continues to contain customary covenants, including
financial covenants which require us to maintain a minimum fixed charge coverage
ratio of 1.00:1.00 upon triggered quarterly testing (e.g. when availability
falls below certain thresholds established in the agreement), reporting
requirements and events of default. The Amended Credit Facility is secured by
substantially all assets of the borrowing parties. We were in compliance with
all financial covenants under the Amended Credit Facility during the period
ended September 25, 2021 .
37
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Summarized Financial Information for Guarantors and the Issuer of Guaranteed
Securities
In April 2021 , Central (the "Parent/Issuer") issued $400 million of 2031 Notes.
In October 2020 , Central issued $500 million of 2030 Notes. In December 2017 ,
Central issued $300 million of 2028 Notes. 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 borrowers under or 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 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.
Summarized Statements of
Operations
(in thousands) Fiscal Year Ended Fiscal Year Ended
September 25, 2021 September 26, 2020
(in thousands)
Parent/Issuer Guarantors Parent/Issuer Guarantors
Net sales $ 908,599 $ 2,142,925 $ 839,425 $ 1,720,279
Gross profit $ 205,837 $ 686,332 $ 195,893 $ 555,616
Income (loss) from operations $ 4,382 $ 229,961 $ 2,724 $ 187,114
Equity in earnings of Guarantor $ 183,122 $ - $ 148,349 $ -
subsidiaries
Net income (loss) $ (45,596) $ 183,122 $ (33,326) $ 148,349
38
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Summarized Balance Sheet Information
(in thousands) As of As of
September 25, 2021 September 26, 2020
(in thousands)
Parent/Issuer Guarantors Parent/Issuer Guarantors
Current assets $ 670,030 $
733,132
61,633
subsidiaries 36,329 61,595
Other assets 2,896,162 2,399,165 2,042,206 1,631,167
Total assets $ 3,795,987 $ 3,193,930 $ 2,978,951 $ 2,253,681
Current liabilities $ 185,996 $ 298,039 $ 170,378 $ 247,810
Long-term debt 1,184,024 - 693,956 -
Other liabilities 1,272,798 151,011 1,095,288 101,912
Total liabilities $ 2,642,818 $ 449,050 $ 1,959,622 $ 349,722
Contractual Obligations
The table below presents our significant contractual cash obligations by fiscal
year:
Fiscal Fiscal Fiscal Fiscal Fiscal
Contractual Obligations 2022 2023 2024 2025 2026 Thereafter Total
(in millions)
Long-term debt, including
current maturities (1) $ 1.1 $ 0.3 $ 0.2 $ 0.1 $ - $ 1,200.0 $ 1,201.7
Interest payment obligations
(2) 52.5 52.5 52.5 52.5 52.5 190.1 452.6
Operating leases 44.7 34.7 28.0 22.8 13.9 45.4 189.5
Purchase commitments (3) 149.1 34.3 21.1 13.2 5.6 1.6 224.9
Performance-based payments
(4) - - - - - - -
Total $ 247.4 $ 121.8 $ 101.8 $ 88.6 $ 72.0 $ 1,437.1 $ 2,068.7
(1)Excludes $1.5 million of outstanding letters of credit related to normal
business transactions. Debt repayments do not reflect the unamortized portion of
deferred financing costs associated with the 2028 Notes, 2030 Notes and 2031
Notes of approximately $16.0 million as of September 25, 2021 , of which, $2.9
million is amortizable until February 2028 , $7.3 million is amortizable until
October 2030 and $5.8 million is amortizable until April 2031 , and is included
in the carrying value of the long-term debt. See Note 11 - Long-Term Debt to
the consolidated financial statements for further discussion of long-term debt. (2)Estimated interest payments to be made on our 2028 Notes, our 2030 Notes and our 2031 Notes. See Note 11 - Long-Term Debt to the consolidated financial statements for description of interest rate terms. (3)Contracts for purchases of grains, grass seed and pet food ingredients, used primarily to mitigate risk associated with increases in market prices and commodity availability, may obligate us to make future purchases based on estimated yields. The terms of these contracts vary; some having fixed prices or quantities, others having variable pricing and quantities. For certain agreements, management estimates are used to develop the quantities and pricing for anticipated purchases, and future purchases could vary significantly from such estimates. (4)Possible performance-based payments associated with prior acquisitions of businesses are not included in the above table, because they are based on future performance of the businesses acquired, which is not yet known. Performance-based payments of approximately$0.4 million were made in fiscal 2021 related toHydro-Organics Wholesale, Inc. Potential performance-based periods extend through fiscal 2025 forHydro-Organics Wholesale, Inc. Payments are capped at$1.0 million per year related toHydro-Organics Wholesale, Inc. 39 -------------------------------------------------------------------------------- As ofSeptember 25, 2021 , we had unrecognized tax benefits of$0.3 million . These amounts have been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. Off-Balance Sheet Arrangements We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit risk support to us. Recent Accounting Pronouncements Refer to the discussion under Part II, Item 8, Notes to Consolidated Financial Statements, Note 1 - Organization and Significant Accounting Policies for a summary of recent accounting pronouncements. Critical Accounting Policies, Estimates and Judgments Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted inthe United States of America . The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts and related disclosures in the consolidated financial statements. Estimates and assumptions are required for, but are not limited to, accounts receivable and inventory realizable values, fixed asset lives, long-lived asset valuation and impairments, intangible asset lives, stock-based compensation, deferred and current income taxes, self-insurance accruals and the impact of contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the result of which forms the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from those estimates under different assumptions or conditions. Although not all inclusive, we believe that the following represent the more critical accounting policies, which are subject to estimates and assumptions used in the preparation of our consolidated financial statements.Goodwill Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition.Goodwill and identifiable intangible assets with indefinite lives are not subject to amortization but must be evaluated for impairment. We test goodwill for impairment annually (as of the first day of the fourth fiscal quarter), or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount, by first assessing qualitative factors to determine whether it is more likely than not the fair value of the reporting unit is less than its carrying amount. The qualitative assessment evaluates factors including macro-economic conditions, industry-specific and company-specific considerations, legal and regulatory environments and historical performance. If it is determined that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, it is unnecessary to perform the quantitative goodwill impairment test. If it is determined that it is more likely than not that the fair value of the reporting unit is less than its carrying amount, the quantitative test is performed to identify potential goodwill impairment. Based on certain circumstances, we may elect to bypass the qualitative assessment and proceed directly to performing the quantitative goodwill impairment test, which compares the estimated fair value of our reporting units to their related carrying values, including goodwill. Impairment is indicated if the estimated fair value of the reporting unit is less than its carrying value, and an impairment charge is recognized for the differential. Our goodwill impairment analysis also includes a comparison of the aggregate estimated fair value of our two reporting units to the Company's total market capitalization. Determining the fair value of a reporting unit involves the use of significant estimates and assumptions. The estimate of fair value of each of our reporting units is based on our projection of revenues, gross margin, operating costs and cash flows considering historical and estimated future results, general economic and market conditions as well as the impact of planned business and operational strategies. We base our fair value estimates on assumptions we believe to be reasonable at the time, but such assumptions are subject to inherent uncertainty. Assumptions critical to our fair value estimates were: (i) discount rates used in determining the fair value of the reporting units; (ii) estimated future cash flows; and (iii) projected revenue and operating profit growth rates used in the reporting unit models. Actual results may differ from those estimates. The valuations employ present value techniques to measure fair value and consider market factors. Most of our goodwill is associated with our Pet segment. In connection with our annual goodwill impairment testing performed during fiscal 2021, 2020 and 2019, we made a qualitative evaluation about the likelihood of goodwill impairment to determine whether it was necessary to calculate the estimated fair values of our reporting units under the quantitative goodwill impairment test. We completed our 40
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qualitative assessment of potential goodwill impairment and it was determined that it was more likely than not the fair values of our reporting units were greater than their carrying amounts, and accordingly, no further testing of goodwill was required. Changes in the judgments and estimates underlying our analysis of goodwill for possible impairment, including expected future cash flows and discount rates, could result in a significantly different estimate of the fair value of the reporting units in the future and could result in additional impairment of goodwill. Intangible assets Indefinite-lived intangible assets consist primarily of acquired trade names and trademarks. Indefinite-lived intangible assets are tested annually for impairment or whenever events or changes in circumstances occur indicating that the carrying amount of the asset may not be recoverable. An impairment loss would be recognized for an intangible asset with an indefinite useful life if its carrying value exceeds its fair value. Indefinite-lived intangible assets are primarily tested for impairment by comparing the fair value of the asset to the carrying value. Fair value is determined based on discounted cash flow analyses that include significant management assumptions such as revenue growth rates, discount rates, weighted average cost of capital, and assumed royalty rates. Future net sales and short-term growth rates are estimated for trade names based on management's forecasted financial results which consider key business drivers such as specific revenue growth initiatives, market share changes and general economic factors such as consumer spending. During fiscal 2021, 2020 and 2019, we performed evaluations of the fair value of our indefinite-lived trade names and trademarks. Our expected revenues were based on our future operating plan and market growth or decline estimates for future years. No impairment was indicated during our fiscal 2021, 2020 and 2019 analyses of our indefinite-lived trade names and trademarks. Acquisitions In connection with businesses we acquire, management must determine the fair values of assets acquired and liabilities assumed. Considerable judgment and estimates are required to determine such amounts, particularly as they relate to identifiable intangible assets, and the applicable useful lives related thereto. Under different assumptions, the resulting valuations could be materially different, which could materially impact the operating results we report. Our contractual commitments are presented under the caption Liquidity and Capital Resources.
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