CENTRAL GARDEN & PET CO annual report, FY2022

Central Garden & Pet Company — Fiscal 2022 Form 10-K Summary

Business context and reporting period

Central Garden & Pet Company is a U.S.-focused manufacturer, marketer and distributor of branded, private-label and third-party pet and lawn-and-garden products. Reportable segments are Pet and Garden. The filing covers the 52-week fiscal year ended September 24, 2022; the request metadata identifies this as 2022 Q4, but the source is an annual Form 10-K rather than a standalone quarterly filing.

The company’s strategy, “Central to Home,” emphasizes brand building, e-commerce, customer and portfolio development, acquisitions, supply-chain efficiency, margin improvement and business-unit-led growth.

Financial performance and key metrics

Metric	Fiscal 2022	Fiscal 2021	Change
Net sales	$3,338.6 million	$3,303.7 million	Up 1.1%
Gross profit	$992.3 million	$970.9 million	Up 2.2%
Gross margin	29.7%	29.4%	Up 30 basis points
Operating income	$260.0 million	$254.5 million	Up 2.2%
Operating margin	7.8%	7.7%	Up 10 basis points
Net income attributable to Central	$152.2 million	$151.7 million	Up 0.3%
Diluted EPS	$2.80	$2.75	Up 1.8%
Cash flow from operations	$(34.0) million	$250.8 million	Declined $284.8 million
Capital expenditures	$115.2 million	$80.3 million	Up $34.9 million
Total debt	$1,186.6 million	$1,185.8 million	Essentially flat

Pet sales were $1,878.1 million, down 0.9%, and Pet operating income was $208.9 million, up 0.3%.
Garden sales were $1,460.5 million, up 3.7%, and Garden operating income was $154.0 million, up 11.0%. Garden results benefited from a full year of prior-year acquisitions but were affected by unfavorable weather.
Organic net sales declined 3.3%, comprising a 0.7% decline in Pet and a 6.8% decline in Garden. Reported growth was primarily acquisition-driven.
Adjusted EBITDA, as defined by the company, was $366.8 million versus $352.4 million in fiscal 2021.
Effective tax rate increased to 23.2% from 21.6%, primarily because of a lower tax benefit from stock compensation.

Liquidity, balance sheet and financing

Cash and cash equivalents were $177.4 million at fiscal year-end, compared with $426.4 million a year earlier. Including restricted cash, total cash was $192.2 million.
Working capital was $1,088.0 million, compared with $1,021.3 million in fiscal 2021. Inventory increased to $938.0 million from $685.2 million, reflecting inflation, supply-chain protection and efforts to improve fill rates.
The company had $1.2 billion of senior notes, consisting of $300 million due 2028, $500 million due 2030 and $400 million due 2031, net of issuance costs. Scheduled principal maturities are minimal before 2028.
The $750 million asset-based revolving credit facility matures in December 2026. Net availability was approximately $517 million, with no borrowings or letters of credit outstanding under the facility at year-end. Other letters of credit totaled $1.3 million.
Management stated that available cash and borrowing capacity should be adequate for working capital, capital spending and other needs for at least the next 12 months. Planned capital expenditures for the next 12 months were approximately $70 million to $80 million.
Fiscal 2022 financing cash flow was an outflow of $66.8 million, including approximately $57.8 million of common-stock repurchases and $5.4 million of statutory tax withholding payments.

Material changes versus the prior comparable period

Reported sales increased modestly, but organic sales declined because volume reductions were only partly offset by pricing actions.
Inflation in commodities, materials, labor, freight and energy continued to pressure costs. Pricing actions improved reported gross margin, although management does not expect to fully offset anticipated cost pressures in fiscal 2023.
Operating cash flow turned negative as inventory increased by approximately $256.4 million. This was the most significant year-over-year liquidity change.
Garden benefited from the full-year contribution of DoMyOwn, Hopewell Nursery, Green Garden Products and D&D Commodities, acquired during fiscal 2021. No acquisitions were completed in fiscal 2022.
Corporate expenses increased by $10.3 million, driven by higher headcount, third-party spending, strategy implementation costs and non-cash equity compensation.
Capital expenditures increased substantially, including spending on facilities, equipment and enterprise resource planning systems.
The company repurchased approximately 1.4 million Class A shares for $56.2 million and approximately 39,000 common shares for $1.6 million during fiscal 2022. The separate $100 million 2019 authorization remained unused.

Guidance, outlook, management commentary, risks and unusual items

Management expected inflation, elevated energy and commodity costs, labor constraints, freight costs, economic uncertainty and possible recessionary pressures to continue into fiscal 2023.
Management stated that further price increases would be pursued but may not fully offset cost inflation and could adversely affect volumes, consumer trade-down and demand.
The company expects to continue incurring substantial costs to implement the Central to Home strategy, including investments in brands, e-commerce, supply-chain initiatives, cost reduction and organizational capabilities.
Garden operations are highly seasonal: approximately 66% of Garden sales and 59% of total company sales occurred in the second and third fiscal quarters. Unfavorable weather during the peak season adversely affected fiscal 2022 results.
Retailer concentration is significant. Walmart represented approximately 17% of consolidated sales, Home Depot approximately 16%, and the top five customers approximately 51%. Garden sales were particularly concentrated in Home Depot, Walmart and Lowe’s.
Commodity purchase commitments totaled approximately $285.2 million. Management estimated that a 10% commodity-price change could produce an approximately $28.5 million pretax gain or loss as related inventory is sold.
The company reported no goodwill or indefinite-lived intangible-asset impairment in fiscal 2022. However, goodwill and intangible assets are significant and remain sensitive to changes in projected cash flows, growth rates, discount rates and market conditions.
The company remains involved in Nite Glow litigation. The Federal Circuit rejected patent infringement and dismissed the breach-of-contract damages claim, but affirmed liability for misappropriation of confidential information and ordered a new damages trial. Management believes the matter will not materially affect the financial statements, while acknowledging uncertainty.
Other risks include supply-chain disruption, China sourcing and tariffs, product liability and recalls, environmental liabilities, cyberattacks, ERP implementation, acquisition integration, customer concentration, variable-rate debt exposure and controlling voting power held by the founder through Class B stock.

Most important facts for investors to verify

Whether organic sales and volumes stabilize after the fiscal 2022 decline and whether reported growth can continue without acquisitions.
Whether pricing actions offset inflation without causing material volume declines, retailer destocking or consumer trade-down.
Inventory levels, working-capital conversion and the pace of recovery in operating cash flow.
Debt service capacity, refinancing requirements beginning with the 2028 notes, interest-rate exposure and compliance with credit-facility covenants.
Garden segment performance under normal weather conditions and the sustainability of acquisition-related benefits.
Execution costs and measurable returns from the Central to Home strategy, e-commerce investments, supply-chain programs and ERP implementation.
Exposure to major customers, particularly Walmart, Home Depot and Lowe’s, and the effect of retailer purchasing or inventory changes.
Developments in the Nite Glow litigation, unclaimed-property examinations and any product, environmental or regulatory contingencies.