Central Garden & Pet Company Announces Fiscal Third Quarter Results

Fiscal 3Q 2016 sales increased 12.0% to $514.5 million;

Fiscal 3Q 2016 Diluted EPS increased 34.2% to $0.51 from $0.38;

Adjusted Fiscal 3Q 2016 Diluted EPS increased 26.3% to $0.48;

Raised Adjusted EPS guidance to $1.18 or higher for FY 2016

WALNUT CREEK, Calif.–(BUSINESS WIRE)–Central Garden & Pet Company (NASDAQ: CENT) (NASDAQ: CENTA), a leading
innovator, marketer and producer of quality branded products for the
lawn and garden and pet supplies markets, today announced financial
results for its fiscal third quarter ended June 25, 2016.

Fiscal 2016 Third Quarter Financial Results

  • Sales increased 12.0% to $514.5 million compared to $459.4 million in
    the third quarter a year ago. Organic sales growth, excluding three
    businesses acquired in the prior 12 months and one business exited
    earlier in the year, rose 5.0%. The Pet and Garden segments both
    experienced organic growth;
  • Gross margin improved 90 basis points compared to the third quarter a
    year ago to 31.8%, driven by a favorable mix of product sales, reduced
    raw material input costs and manufacturing efficiency improvements;
  • Operating income of $48.2 million increased 23.6% compared to the
    third quarter a year ago. Operating income included a $2.4 million
    gain on the sale of a manufacturing plant. Operating margin of 9.4%
    increased 90 basis points compared to the third quarter a year ago;
  • Net income on a GAAP basis of $26.0 million increased 38.5% compared
    to the third quarter a year ago, and earnings per diluted share
    increased 34.2% to $0.51. On an adjusted basis, excluding the plant
    sale, net income was $24.5 million, and earnings per diluted share was
    $0.48.

“Central’s strong showing this quarter continues its trend of revenue
and profit growth,” said George Roeth, President & CEO of Central Garden
& Pet. “The areas where we have been focused are the main drivers of our
success. Organic sales growth was driven by our customer first
orientation, our gross margin expansion was enabled by executing on key
cost savings initiatives, and our bottom line was enhanced by the
effective on-going integration of our recent acquisitions and exiting an
unprofitable business.”

Pet Segment Fiscal 2016 Third Quarter Results

Third quarter net sales for the Pet segment increased 20.6% to $287.2
million, from the same period a year ago. Pet organic sales grew 4.3%,
driven by higher sales of other manufacturers’ products as well as
strength in the professional and wild bird feed categories. The Pet
segment’s branded product sales were $227.8 million, up 24.3% compared
to the third quarter a year ago and sales of other manufacturers’
products were $59.4 million, an increase of 8.4%.

The Pet segment’s operating income rose 17.7% compared to the third
quarter a year ago to $38.7 million and included a gain of $2.4 million
from the sale of a manufacturing plant during the quarter. Pet operating
margin decreased slightly to 13.5%, a decline of 30 basis points
compared to the third quarter a year ago.

Garden Segment Fiscal 2016 Third Quarter Results

Net sales for the Garden segment rose 2.7% compared to the third quarter
a year ago to $227.3 million, despite a decrease of $7.7 million from
the seasonal decor business that the Company exited earlier in the year.
Higher sales of other manufacturers’ products, as well as gains in wild
bird feed and controls revenues, drove the sales increase. The Garden
segment’s branded product sales were $175.9 million in the quarter, down
2.5% compared to the third quarter a year ago, reflecting the exit from
the seasonal decor business. Sales of other manufacturers’ products were
up 25.7% to $51.4 million.

The Garden segment’s operating income in the quarter rose 12.8% compared
to the third quarter a year ago to $26.5 million. Garden operating
margin improved 100 basis points to 11.6%. The increase in operating
margin was driven by the absence of the seasonal decor business, which
the Company exited earlier in the year, as well as a favorable mix of
product sales, lower raw material costs, and manufacturing efficiency
improvements, somewhat offset by increased marketing expenditures.

Year-to-Date Results & Fiscal Year Guidance

  • Net sales increased 12.0% to $1.42 billion from the prior year period;
  • Branded product sales of $1.11 billion increased 10.7% and sales of
    other manufacturers’ products of $302.7 million rose 17.0%;
  • Operating income of $116.4 million was up 29.1% over the prior year
    period and included $2.4 million of gains from a manufacturing plant
    sale. Operating margin increased 110 basis points to 8.2%;
  • Net income on a GAAP basis was $50.1 million, a 37.9% increase
    compared to the prior year period;
  • Earnings per share increased 35.6% to $0.99 per fully diluted share;
    and
  • Adjusted net income, excluding $14.3 million of charges in the first
    quarter related to the Company’s refinancing of its fixed rate note
    and $2.4 million of income related to the sale of a manufacturing
    plant in the third quarter, was $57.8 million, a 59.1% gain compared
    to the nine-month period a year ago. Adjusted earnings per fully
    diluted share increased 56.2% to $1.14.

Roeth said, “Going forward, we will be even more aggressive in executing
on the initiatives we believe are important to the Company’s long-term
success. These include continuing to focus on our customers’ needs,
increasing our innovation output and success rate, and lowering our
costs to invest in growth. While there is a near-term cost to some of
these actions, we believe we will have the financial flexibility to fund
incremental investment while continuing to drive meaningful sales and
profit growth.” Roeth concluded, “We will have more to say on our
longer-term strategy and goals later this calendar year. In the
meantime, we will stay focused on executing on our current plan.”

The Company currently expects adjusted earnings per fully-diluted share
of $1.18 or higher for fiscal 2016, an increase of over 59% from the
prior year.

Additional Information

Total debt at June 25, 2016 was $395.1 million compared to $396.7
million at June 27, 2015. Net interest expense was $6.9 million for the
third quarter compared to $9.0 million in the prior-year period. The
decline in interest expense was due to the Company’s debt refinancing in
its fiscal first quarter.

The Company’s effective tax rate for the third quarter of 2016 was
35.9%, compared with 37.5% for the third quarter of 2015. The decline in
the tax rate was due primarily to projected additional tax credits in
the current year quarter. During the quarter, the Company did not
repurchase any shares of its common stock. Approximately $35.0 million
remains available under the Board approved share repurchase program.

Conference Call

The Company will host a conference call today at 4:30 p.m. Eastern Time
/ 1:30 p.m. Pacific Time to discuss its third quarter results. The
conference call will be accessible via the internet through Central’s
website, http://ir.central.com.

Alternatively, to listen to the call by telephone, dial (201) 689-8345
(domestic and international) using confirmation #13639789. A replay of
the call will be available for ten days by dialing (201) 612-7415 and
entering confirmation #13639789.

About Central Garden & Pet

Central Garden & Pet Company is a leading innovator, marketer and
producer of quality branded products for the lawn & garden and pet
supplies markets. Committed to new product innovation, our products are
sold to specialty independent and mass retailers. Participating
categories in Lawn & Garden include: Grass seed and the brands
PENNINGTON®, and THE REBELS®; wild bird feed and the brand PENNINGTON®;
weed and insect control and the brands AMDRO®, SEVIN®, IRONITE® and
OVER-N-OUT®; and decorative outdoor patio products under the PENNINGTON
® brand. We also provide a host of other regional and
application-specific garden brands and supplies. Participating
categories in Pet include: Animal health and the brands ADAMS™ and
ZODIAC®; aquatics and reptile and the brands AQUEON®, CORALIFE® and
ZILLA®; bird & small animal and the brands KAYTEE®, Forti-Diet® and
CRITTER TRAIL®; dog & cat and the brands TFH™, NYLABONE®, FOUR PAWS®,
IMS™, CADET®, PINNACLE® and AVODERM®; and equine and the brands FARNAM®,
HORSE HEALTH™ and VITAFLEX®. We also provide a host of other
application-specific pet brands and supplies. Central Garden & Pet
Company is based in Walnut Creek, California, and has approximately
3,700 employees, primarily in North America. For additional information
on Central Garden & Pet Company, including access to the Company’s SEC
filings, please visit the Company’s website at www.central.com.

“Safe Harbor” Statement under the Private Securities Litigation Reform
Act of 1995: The statements contained in this release which are not
historical facts, including expectations for future favorable results
and cost reductions and earnings guidance for fiscal 2016 are
forward-looking statements that are subject to risks and uncertainties
that could cause actual results to differ materially from those set
forth in or implied by forward-looking statements. All forward-looking
statements are based upon the Company’s current expectations and various
assumptions. There are a number of risks and uncertainties that could
cause our actual results to differ materially from the forward-looking
statements contained in this release including, but not limited to, the
following factors:

  • seasonality and fluctuations in the Company’s operating results and
    cash flow;
  • fluctuations in market prices for seeds and grains and other raw
    materials and the Company’s ability to pass through cost increases in
    a timely manner;
  • adverse weather conditions;
  • the recent transition to a new CEO and our dependence upon our key
    executives;
  • dependence on a small number of customers for a significant portion of
    our business;
  • uncertainty about new product innovations and marketing programs; and
  • competition in our industries.

These risks and others are described in the Company’s Securities and
Exchange Commission filings. The Company undertakes no obligation to
publicly update these forward-looking statements to reflect new
information, subsequent events or otherwise.

                       
 

CENTRAL GARDEN & PET COMPANY
CONDENSED
CONSOLIDATED BALANCE SHEETS

(in thousands, except
share and per share amounts)

Unaudited

 
ASSETS

June 25, 2016

June 27, 2015

September 26, 2015

Current assets:
Cash and cash equivalents $ 40,000 $ 43,841 $ 47,584
Restricted cash 12,029 12,590 13,157
Accounts receivable (less allowance for doubtful accounts of
$25,429, $18,573 and $19,296)
241,954 223,149 207,402
Inventories 361,813 340,233 335,946
Prepaid expenses and other 45,075   54,558   49,731
Total current assets 700,871 674,371 653,820
 
Land, buildings, improvements and equipment—net 159,430 162,969 162,809
Goodwill 233,011 209,089 209,089
Other intangible assets—net 95,070 83,841 75,460
Other assets 28,525   25,467   30,419
Total $ 1,216,907   $ 1,155,737   $ 1,131,597
 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 96,906 $ 90,423 $ 88,889
Accrued expenses 102,953 110,070 87,724
Current portion of long-term debt 530   290   291
Total current liabilities 200,389 200,783 176,904
 
Long-term debt 394,603 396,395 396,691
Other long-term obligations 63,975 47,147 51,622
 
Equity:
Common stock, $0.01 par value: 11,998,472, 11,908,317, and
11,908,317 shares outstanding at June 25, 2016, June 27, 2015 and
September 26, 2015
120 119 119
Class A common stock, $0.01 par value: 37,197,569, 35,970,174 and
36,462,299 shares outstanding at June 25, 2016, June 27, 2015 and
September 26, 2015
371 360 364
Class B stock, $0.01 par value: 1,652,262 shares outstanding 16 16 16
Additional paid-in capital 390,270 388,762 388,636
Accumulated earnings 166,112 120,356 115,987
Accumulated other comprehensive income (loss) (805 ) 679   164
Total Central Garden & Pet Company shareholders’ equity 556,084 510,292 505,286
Noncontrolling interest 1,856   1,120   1,094
Total equity 557,940   511,412   506,380
Total $ 1,216,907   $ 1,155,737   $ 1,131,597
                       
 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except per share amounts)

(unaudited)

 
Three Months Ended Nine Months Ended

June 25, 2016

     

June 27, 2015

June 25, 2016

     

June 27, 2015

Net sales $ 514,544 $ 459,446 $ 1,415,605 $ 1,264,368
Cost of goods sold and occupancy 350,799   317,409   982,735   884,288  
Gross profit 163,745 142,037 432,870 380,080
Selling, general and administrative expenses 115,560   103,044   316,509   289,978  
Income from operations 48,185 38,993 116,361 90,102
Interest expense (6,964 ) (8,978 ) (36,205 ) (31,357 )
Interest income 43 7 74 96
Other income (expense) 318   585   (243 ) 96  
Income before income taxes and noncontrolling interest 41,582 30,607 79,987 58,937
Income taxes 14,916   11,484   28,509   21,527  
Income including noncontrolling interest 26,666 19,123 51,478 37,410
Net income attributable to noncontrolling interest 636   323   1,353   1,070  
Net income attributable to Central Garden & Pet Company $ 26,030   $ 18,800   $ 50,125   $ 36,340  
 
Net income per share attributable to Central Garden & Pet Company:
Basic $ 0.53   $ 0.39   $ 1.03   $ 0.75  
Diluted $ 0.51   $ 0.38   $ 0.99   $ 0.73  
 
Weighted average shares used in the computation of net income per
share:
Basic 49,120 48,167 48,801 48,642
Diluted 51,063 49,290 50,743 49,496
 

Use of Non-GAAP Financial Measures

We report our financial results in accordance with U.S. generally
accepted accounting principles (GAAP). However, management believes that
certain non-GAAP financial measures that exclude the $14.3 million
impact of the redemption of our 2018 Notes and the issuance of our 2023
Notes recognized during the quarter ended December 26, 2015 and the $2.4
million gain from the sale of a manufacturing plant during the quarter
ended June 25, 2016 may be useful in certain instances to provide
additional meaningful comparisons between current results and results in
prior operating periods that should be considered when assessing our
ongoing performance and providing consistency with our prior year
disclosure. The $14.3 million impact of the redemption of our 2018 Notes
and issuance of our 2023 Notes is included in interest expense in the
condensed consolidated statements of operations. The $2.4 million gain
from the sale of a manufacturing plant is included in selling, general
and administrative expenses in the condensed consolidated statements of
operations. We believe that the non-GAAP financial measures provide
useful information to investors and other users of our financial
statements, such as lenders. Management also uses these non-GAAP
financial measures in making financial, operating and planning decisions
and in evaluating our performance. 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.

 
 
GAAP to Non-GAAP Reconciliation
(unaudited, in
thousands, except per share amounts)

For the Three
months ended June 25, 2016
          June 25, 2016               June 25, 2016       June 27, 2015
GAAP Adjustment (A) As Adjusted GAAP
Gross profit 163,745 163,745 142,037
Selling, general and administrative expenses 115,560   2,363   117,923   103,044
Income from operations 48,185   (2,363 ) 45,822   38,993
Income tax expense 14,916   (848 ) 14,068   11,484
Net income $ 26,030   $ (1,515 ) $ 24,515   $ 18,800
Earnings per share – diluted $ 0.51 $ 0.48 $ 0.38
Weighted shares outstanding 51,063 51,063 49,290
             
 
GAAP to Non-GAAP Reconciliation
(unaudited, in
thousands, except per share amounts)

For the Nine
months ended June 25, 2016
June 25, 2016       Adjustments           June 25, 2016       June 27, 2015
GAAP (A)(B) As Adjusted GAAP
Gross profit $ 432,870 $ 432,870 $ 380,080
Selling, general and administrative expenses 316,509   2,363   318,872   289,978
Income from operations 116,361 (2,363 ) 113,998 90,102
Interest expense 36,205   14,339   21,866   31,357
Income tax expense 28,509   4,268   32,777   21,527
Net income $ 50,125   $ 7,708   $ 57,833   $ 36,340
Earnings per share – diluted $ 0.99 $ 1.14 $ 0.73
Weighted shares outstanding 50,743 50,743 49,496
 

(A) During the third quarter of fiscal 2016, we recorded a $2.4 million
gain in our Pet Segment from the sale of a manufacturing plant resulting
from rationalizing our facilities to reduce excess capacity.

(B) The Non-GAAP financial information excludes the impact of the
redemption of our 2018 Notes and issuance of our 2023 Notes. As a result
of the bond redemption, we incurred incremental expenses of $14.3
million, comprised of a call premium payment of $8.3 million, a $2.7
million payment of overlapping interest expense for 30 days and a $3.3
million non-cash charge for the write off of unamortized deferred
financing costs and discount related to the 2018 Notes. These amounts
are included in interest expense in the condensed consolidated
statements of operations.

Organic net sales is a non-GAAP measure that excludes the impact of
acquisitions and dispositions in the comparable periods. We have
provided this measure because we believe it permits investors to better
understand the performance of our historical business without the
impacts from acquisitions and dispositions. The following tables provide
a reconciliation for our reported net sales under GAAP to our organic
net sales for our consolidated operations and Pet segment.

 
 

GAAP to Non-GAAP Reconciliation
(unaudited, in
thousands)

For the Three months ended June 25, 2016

              June 25, 2016         June 27, 2015        

Percentage
change

Consolidated
Reported Net Sales – GAAP $ 514.5 $ 459.4

12.0%

 

Effect of acquisitions (40.1 )
Effect of divestitures (0.3 ) (8.0 )
   
Organic net sales $ 474.1   $ 451.4  

5.0%

 

             
 
GAAP to Non-GAAP Reconciliation
(unaudited, in
thousands)

For the Three months ended June 25, 2016
June 25, 2016         June 27, 2015        

Percentage
change

Pet Segment
Reported Net Sales – GAAP $ 287.2 $ 238.1

20.6%

 

Effect of acquisitions (38.8 )
Effect of divestitures
   
Organic net sales $ 248.4   $ 238.1  

4.3%

 

 

Adjusted earnings per-fully diluted share

The company currently expects adjusted earnings per fully-diluted share
(a non-GAAP measure) of $1.18 or higher for fiscal 2016. We have not
provided GAAP estimates of expected earnings per fully diluted share or
a reconciliation to expected adjusted earnings per fully-diluted share
as the adjusted earnings per share guidance excludes the impact of any
potential acquisitions, non-operational charges or impairments that may
occur prior to fiscal year end, and are not known or contemplated at
this time. Any such adjustments could have a significant impact on our
fiscal 2016 GAAP results.

Contacts

Central Garden & Pet Company
Steve Zenker, 925-948-3657
VP
of Investor Relations & Communications