CENTRAL GARDEN & PET CO

12. Commitments and Contingencies

Commitments

Letters of credit – The Company had $3.0 million of outstanding letters of credit related to normal business transactions at September 28, 2024. These agreements require the Company to maintain specified amounts of cash as collateral in segregated accounts to support the letters of credit issued thereunder, which will affect the amount of cash the Company has available for other uses. The amount of cash collateral in these segregated accounts was $14.9 million and $14.1 million as of September 28, 2024 and September 30, 2023, respectively, and is reflected in “Restricted cash” on the Company's consolidated balance sheets.

Purchase commitments – Production and purchase agreements (primarily for grass seed and grains) entered into in the ordinary course of business may obligate the Company to make future purchases based on estimated yields. The terms of these contracts vary; some have fixed prices or quantities while others have 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.

Contingencies

The Company may from time to time become involved in legal proceedings in the ordinary course of business. Currently, the Company is not a party to any legal proceedings the resolution of which management believes could have a material effect on the Company’s financial position or results of operations with the exception of the proceeding below.

In 2012, Nite Glow Industries, Inc and its owner, Marni Markell, (“Nite Glow”) filed suit in the U.S. District Court for New Jersey against the Company alleging that the applicator developed and used by the Company for certain of its branded topical flea and tick products infringes a patent held by Nite Glow and asserted related claims for breach of contract and misappropriation of confidential information based on the terms of a Non-Disclosure Agreement. On June 27, 2018, a jury returned a verdict in favor of Nite Glow on each of thethree claims and awarded damages of approximately $12.6 million. The court ruled on post-trial motions in early June 2020, reducing the judgment amount to $12.4 million and denying the plaintiff's request for attorneys' fees. The Company filed its notice of appeal and the plaintiffs cross-appealed. On July 14, 2021, the Federal Circuit Court of Appeals issued its decision on the appeal. The Federal Circuit concluded that the Company did not infringe plaintiff's patent and determined that the breach of contract claim raised no non-duplicative damages and should be dismissed. The court affirmed the jury's liability verdict on the misappropriation of confidential information claim but ordered a new trial on damages on that single claim limited to the "head start" benefit, if any, generated by the confidential information. The retrial on the "head start" damages issue concluded in early March 2024, but no decision has been issued by the court. The Company intends to vigorously pursue its defenses in any future proceedings and believes that it will prevail on the merits as to the head start damages issue. While the Company believes that the ultimate resolution of this matter will not have a material impact on the Company's consolidated financial statements, the outcome of litigation is inherently uncertain and the final resolution of this matter may result in expense to the Company in excess of management's expectations.

The Company has experienced, and may in the future experience, issues with products that may lead to product liability, recalls, withdrawals, replacements of products, or regulatory actions by governmental authorities. The Company has not experienced recent issues with products, the resolution of which management believes would have a material effect on the Company’s financial position or results of operations.

13. Income Taxes

The provision for income tax expense (benefit) consists of the following:

A reconciliation of the statutory federal income tax rate to the Company’s effective income tax rate is as follows:

The tax effect of temporary differences and carryforwards which give rise to deferred tax assets and liabilities are as follows:

The Company also has state tax net operating losses of $93.4 million, which expire at various times between 2024 and 2043, and foreign losses of $11.8 million, which do not expire.

The Company has state income tax credits of $3.5 million, which expire at various times beginning in 2025 through 2043. In evaluating the Company’s ability to recover its deferred tax assets, the Company considers all available positive and negative evidence including past operating results, future taxable income, and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance against any deferred tax assets. The Company has determined there will be insufficient future separate state and foreign taxable income for the separate parent company and foreign subsidiaries to realize the deferred tax assets. Therefore, valuation allowances of $9.9 million and $7.7 million (net of federal impact) at September 28, 2024 and September 30, 2023, respectively, have been provided to reduce state deferred tax assets to amounts considered recoverable.

The Company classifies uncertain tax positions as non-current income tax liabilities unless expected to be paid within one year. The Company recognizes interest and/or penalties related to income tax matters as a component of pretax income. As of September 28, 2024 and September 30, 2023, accrued interest was less than $0.1 million andno penalties were accrued related to uncertain tax positions.

The following table summarizes the activity related to the Company’s unrecognized tax benefits for fiscal years ended September 28, 2024 and September 30, 2023:

As of September 28, 2024, unrecognized income tax benefits totaled approximately $0.3 million and all of the unrecognized tax benefits would, if recognized, impact the Company’s effective income tax rate.

The Company is principally subject to taxation by the United States and various states within the United States. The Company’s tax filings in major jurisdictions are open to examination by tax authorities by the Internal Revenue Service from fiscal year ended 2021 forward and in various state taxing authorities generally from fiscal year ended 2020 forward.

The Company believes there is a reasonable chance that its unrecognized tax benefits will decrease by less than $0.1 million within the next twelve months.

14. Stock-Based Compensation

The Company’s 2003 Omnibus Equity Incentive Plan (the “2003 Plan”), as amended, allows for the grant of options, restricted stock and certain other specified types of awards to key employees, directors and consultants of the Company. The 2003 Plan is administered by the Compensation Committee of the Board of Directors, which is comprised only of independent directors, and which must approve individual awards to be granted, vesting and exercise of share conditions.

There are a total of 5.8 million shares of Common Stock,19.7 million shares of Class A Common Stock and 500,000 shares of Preferred Stock authorized under the 2003 Plan. If and when the Company issues any shares of Preferred Stock under the 2003 Plan, it will reduce the amount of Class A Common Stock available for future issuance in an amount equal to the number of shares of Class A Common Stock that are issuable upon conversion of such Preferred Stock.

The Company has a Nonemployee Director Equity Incentive Plan (the “Director Plan”) which provides for the grant of options and restricted stock to nonemployee directors of the Company. The Director Plan, as amended, provides for the granting to each independent director a number of shares of restricted stock equal to $120,000 divided by such fair market value.

As of September 28, 2024, there were approximately 2.5 million shares of Class A Common Stock andno shares of Common Stock and Preferred Stock reserved for outstanding equity awards, and there were approximately 4.6 million shares of Common Stock,11.2 million shares of Class A Common Stock and 0.5 million shares of Preferred Stock remaining for future awards. In fiscal 2024, no shares were granted from the Director Plan and each independent director was granted restricted shares from the 2003 Plan.

The Company recognized stock-based compensation expense of $20.6 million, $28.0 million, and $25.8 million for the fiscal years ended September 28, 2024, September 30, 2023 and September 24, 2022, respectively, as a component of selling, general and administrative expenses. Share-based compensation expense in fiscal 2024, 2023 and 2022 consisted of $0.7 million, $3.8 million, and $4.9 million, respectively, for stock options, and $13.1 million, $16.3 million and $13.7 million, respectively, for stock awards. Share-based compensation expense in fiscal 2024, 2023 and 2022 also includes $6.8 million, $7.9 million and $7.2 million, respectively, for the Company’s 401(k) matching contributions.

Stock Option Awards

During fiscal 2024, the Company did not grant any stock options.

During fiscal 2023, the Company granted time-based stock options with an exercise price 15% above the market price on the date of the grant. But generally, the Company has granted options at the market price on the date of the grant.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option valuation model. Expected stock price volatilities are estimated based on the historical volatility of the Company’s stock price. The expected term of options granted is based on exercise behavior, option exercises and the contractual term of the option. The risk-free rates are based on U.S. Treasury yields, for notes with comparable terms as the option grants, in effect at the time of the grant. For purposes of this valuation model, no dividends have been assumed.

In fiscal years 2023 and 2022, the Company’s calculations were made using the Black-Scholes option pricing model with the following weighted average assumptions: expected life from the date of grant,8 years in fiscal 2023 and 3.7 years in 2022; stock price volatility,30.6% in fiscal 2023 and 31.1% in fiscal 2022; risk free interest rates,3.6% in fiscal 2023 and 1.7% in fiscal 2022; andno dividends during the expected term.

The following table summarizes option activity for the period ended September 28, 2024:

The prices of options to purchase shares of Class A common stock outstanding at September 28, 2024, September 30, 2023 and September 24, 2022 were $20.63 to $41.10 per share, $20.63 to $41.10 per share and $17.10 to $41.10 per share, respectively. There wereno options granted in fiscal year ended September 28, 2024. The weighted average grant date fair value of options granted during the fiscal years ended September 30, 2023 and September 24, 2022 was $12.29 and $8.77, respectively. The total intrinsic value of options exercised during the fiscal years ended September 28, 2024, September 30, 2023 and September 24, 2022 was $12.0 million, $3.9 million, and $6.1 million, respectively.

As of September 28, 2024, there was $0.3 million of total unrecognized compensation cost related to non-vested stock options, which is expected to be recognized over a remaining weighted-average vesting period ofone year.

Restricted Stock Awards

As of September 28, 2024 and September 30, 2023, there were approximately 1.4 million and 1.8 million shares, respectively, of restricted stock awards outstanding. Awards granted in fiscal 2024 and 2023 generally vest within four orfive years from the date of grant.

Restricted stock award activity during the period ended September 28, 2024 is summarized as follows:

As of September 28, 2024, there was $24.4 million of unrecognized compensation cost related to nonvested restricted stock awards, which is expected to be recognized over a weighted average period ofthree years.

In fiscal years 2024, 2023 and 2022, the Company granted a combination of performance stock units (PSU’s) and restricted stock awards under its long-term incentive program, which replaced the option or restricted stock awards historically granted annually under the Company’s long-term incentive plan. The impact of granting PSU’s during fiscal year 2024 was not material to the Company’s Consolidated Financial Statements.

PSU’s provide the right to receive shares of the Company’s common stock based on the Company’s achievement of certain performance criteria at the end of afour-year measurement period (fiscal 2024-fiscal 2027) and continued employment through the vesting period. The number of shares issued at the end of the performance period may range from 50% to 225% of the original target award amount (100%).

15. Shareholders’ Equity

At September 28, 2024 and September 30, 2023, there were 80,000,000 shares of common stock ($0.01 par value) authorized, of which 11,074,620 and 11,077,612, respectively, were outstanding, and 100,000,000 shares of non-voting Class A common stock ($0.01 par value) authorized, of which 54,446,194 and 54,472,902, respectively, were outstanding. The preferences and relative rights of the Class A common stock are identical to common stock in all respects, except that the Class A common stock generally has no voting rights unless otherwise required by Delaware law.

There are 3,000,000 shares of Class B stock ($0.01 par value) authorized, of which 1,602,374 was outstanding at September 28, 2024 and September 30, 2023. The voting powers, preferences and relative rights of the Class B stock are identical to common stock in all respects except that (i) the holders of common stock are entitled toone vote per share and the holders of Class B stock are entitled to the lesser often votes per share or 49% of the total votes cast, (ii) stock dividends on common stock may be paid only in shares of common stock and stock dividends on Class B stock may be paid only in shares of Class B stock and (iii) shares of Class B stock have certain conversion rights and are subject to certain restrictions on ownership and transfer. Each share of Class B stock is convertible intoone share of common stock, at the option of the holder. Additional shares of Class B stock may only be issued with majority approval of the holders of the common stock and Class B stock, voting as separate classes.

There are 1,000,000 shares of preferred stock ($0.01 par value) authorized, of which none were outstanding at September 28, 2024 and September 30, 2023.

In August 2019, the Company's Board of Directors authorized a new share repurchase program to purchase up to $100 million of its 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 28, 2024, the Company had $82.0 million remaining under its 2019 Repurchase Authorization. During fiscal 2024, the Company repurchased approximately 0.3 million shares of its non-voting common stock (CENTA) on the open market at an aggregate cost of approximately $10.7 million and approximately 3 thousand shares of its voting common stock (CENT) on the open market at an aggregate cost of approximately $109 thousand.

In February 2019, the Board of Directors authorized the Company to make supplemental purchases to minimize dilution resulting from issuances under its equity compensation plans (the "Equity Dilution Authorization"). In addition to the Company's regular share repurchase program, it is 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 28, 2024, the Company had authorization remaining to repurchase up to 38 thousand shares under its Equity Dilution Authorization.

16. Earnings Per Share

The following is a reconciliation of the numerators and denominators of the basic and diluted earnings per share (EPS) computations:

For fiscal 2024, options to purchase 0.3 million shares were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive.

For fiscal 2023, options to purchase 0.6 million shares were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive.

For fiscal 2022, options to purchase 0.4 million shares were not included in the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares and, therefore, the effect of including these options would be anti-dilutive.

17. Transactions with Related Parties

During fiscal 2024, 2023 and 2022, Tech Pac, a subsidiary of the Company, made purchases from Contract Packaging, Inc, (“CPI”), Tech Pac’s principal supplier and a minority 20% shareholder in Tech Pac. Tech Pac’s total purchases from CPI were approximately $37.0 million, $31.0 million and $41.0 million for fiscal years 2024, 2023 and 2022, respectively. Amounts due to CPI as of September 28, 2024 and September 30, 2023 were $1.4 million and $1.6 million, respectively.

18. Business Segment Data

The Company’s chief operating decision-maker is its Chief Executive Officer. Operating segments are managed separately because each segment represents a strategic business that offers different products or services. The Company’s chief operating decision maker evaluates performance based on operating income or loss. The Company’s Corporate division is included in the following presentation since certain expenses of this division are not allocated separately to thetwo operating segments. Segment assets exclude cash equivalents, short-term investments, goodwill, and deferred taxes.

Management has determined that the Company hastwo operating segments which are also reportable segments based on the level at which the chief operating decision maker reviews the results of operations to make decisions regarding performance assessment and resource allocation. These operating segments are the Pet segment and the Garden segment. Substantially all of the Company’s assets and operations relate to its business in the United States.

The Pet segment consists of Nylabone Products, IMS Trading, Four Paws Products, Central Specialty Pet (Avian and Small Animal, C&S Products and Aquatics), Segrest, K&H Pet Products, Arden, DMC, Life Sciences, Interpet, General Pet and Pet Distribution. These businesses are engaged in the manufacture, purchase, sale and delivery of internally and externally produced pet supplies, animal health and insect controls, aquariums, books, dog treats and food, as well as live fish and small animals principally to independent pet distributors, big-box retailers, regional retailer chains, eCommerce retailers, grocery stores and mass merchants. The Garden segment consists of Grass Seed, Bird Feed, Chemicals and Fertilizers, Excel Marketing, Gulfstream, Cedarworks, Bell Nursery, Hopewell Nursery, DMO, Green Garden, D&D Commodities and Garden Distribution. Products manufactured, designed and sourced, or distributed include products found typically in the lawn and garden sections of mass merchandisers, warehouse-type clubs, home improvement centers and nurseries and include live plants; grass, vegetable, flower and herb seed; wild bird feed, bird houses and other birding accessories; terra-cotta pottery; herbicides, pesticides and insecticides. These products are sold directly to national and regional retail chains, independent garden distributors, online retailers, grocery stores, nurseries and garden supply retailers.

The Corporate division includes expenses associated with corporate functions and projects, certain employee benefits, interest income, interest expense and inter-segment eliminations.

The following table indicates each class of similar products which represented approximately 10% or more of the Company’s consolidated net sales in the fiscal years presented (in millions).

See Note 4 – Concentration of Credit Risk and Significant Customers and Suppliers for the Company’s largest customers by segment.

Financial information relating to the Company’s business segments for each of the three most recent fiscal years is presented in the table below:

Noncontrolling interest is associated with the Garden segment.