Central Garden & Pet Company Announces Fiscal First Quarter Results

Fiscal 1Q 2017 sales increased 16.6% to $419.5 million;
Fiscal
1Q 2017 diluted EPS increased to $0.15 from $(0.18);

Fiscal
1Q 2017 non-GAAP diluted EPS increased to $0.12 from $0.01

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 first quarter ended December 24, 2016.

The first quarter puts Central well on track to deliver our
fiscal year earnings guidance, which will remain unchanged at this
time,” said George Roeth, President & CEO of Central Garden & Pet.
“While over half of the year-over-year earnings increase in the first
quarter was related to acquisitions and timing, we continue to be
encouraged by our strong organic sales growth and market share gains. We
remain focused on executing with excellence against our strategy and
plan.”

Fiscal 2017 First Quarter Financial Results

Net sales increased 16.6% to $419.5 million compared to $359.8 million
in the first quarter a year ago, in large part due to the Company’s
recent two acquisitions, a favorable close to the Fall garden season,
and share growth in the Company’s Pet segment. Branded product sales of
$332.9 million increased 20.4% and sales of other manufacturers’
products of $86.7 million rose 4.1%. Organic sales growth was 7.0%.
Gross margin rose 110 basis points compared to the first quarter a year
ago to 28.8%, with both Garden and Pet showing improvement.

Fiscal 2017 GAAP First Quarter Operating Income,
Net Earnings and EPS

  • Operating income increased to $19.9 million from $8.8 million in the
    first quarter a year ago;
  • Operating margin of 4.8% increased 240 basis points compared to 2.4%
    in the first quarter a year ago;
  • Net income was $7.6 million compared to a loss of $8.6 million in the
    first quarter a year ago; and
  • Earnings per diluted share increased to $0.15 from a loss of $(0.18)
    in the prior year period.

Fiscal 2017 Non-GAAP First Quarter Operating
Income, Net Earnings and EPS

Non-GAAP results for the first quarter of 2017 exclude a $2.0 million
gain on the sale of a distribution facility. Non-GAAP results for the
first quarter of 2016 exclude the impact of $14.3 million of incremental
costs from the redemption of the Company’s 2018 Notes and issuance of
its 2023 Notes, that are included in the period’s interest expense;

  • Non-GAAP operating income increased to $17.9 million from $8.8 million
    in the first quarter a year ago;
  • Non-GAAP operating margin of 4.3% increased 190 basis points compared
    to 2.4% in the first quarter a year ago;
  • Non-GAAP net income was $6.3 million compared to $0.3 million in the
    first quarter a year ago; and
  • Non-GAAP earnings per diluted share increased $0.11 to $0.12 from
    $0.01 in the prior year period.

Pet Segment Fiscal 2017 First Quarter Results

First quarter net sales for the Pet segment increased 22.2% to $304.0
million, from the same period a year ago, driven by acquisitions and
organic growth. Pet organic sales grew 6.1%, driven by share gains in
many of the Pet businesses, as well as accelerated timing of customer
orders. The Pet segment’s branded product sales were $246.4 million, up
30.6% compared to the first quarter a year ago and sales of other
manufacturers’ products were $57.7 million, a decrease of 4.0%.

The Pet segment’s operating income rose 27.5% compared to the first
quarter a year ago to $33.4 million. Pet operating margin increased to
11.0%, a gain of 50 basis points compared to the first quarter a year
ago. Operating margin benefited from a favorable mix of product sales
during the quarter versus the prior year, as well as higher
profitability from the Company’s DMC business, which had depressed
margins a year ago due to the impact of purchase price accounting
adjustments. The impact from these gains more than offset the
unfavorable margin impact from the Company’s recent acquisition of
Segrest and increased spending on facilities as the Company transitioned
several of its dog & cat businesses to a new location. Those activities
are expected to continue for the remainder of the year.

Garden Segment Fiscal 2017 First Quarter Results

Net sales for the Garden segment rose 4.0% compared to the first quarter
a year ago to $115.5 million, despite a decrease of $5.2 million from
the holiday decor business that the Company exited in January 2016.
Higher sales of other manufacturers’ products, as well as gains in grass
seed and wild bird feed, drove the sales increase. The Garden segment’s
branded product sales were $86.5 million in the quarter, down 1.7%
compared to the first quarter a year ago, due to the exit from the
holiday decor business. Sales of other manufacturers’ products were up
25.0% to $29.0 million.

The Garden segment’s operating income in the quarter rose to $2.7
million compared to a loss of $3.3 million in the first quarter a year
ago. Included in this quarter’s results is a $2.0 million gain from the
sale of a distribution facility. Garden operating margin improved 520
basis points to 2.3%. Operating margin benefited from the facility sale,
additional volume leveraging fixed operational costs and lower input
costs.

2017 Guidance

The Company currently expects non-GAAP earnings per fully-diluted share
of $1.34 or higher for fiscal 2017, an increase of 6% or more from the
prior year. The estimate excludes the gain from the distribution
facility sale in the current quarter. Fiscal 2017 will have 53 weeks
compared to 52 weeks in fiscal 2016; however, the extra week is expected
to only account for just $0.01 per share of 2017 earnings.

Mr. Roeth said, “It is important to note that our first quarter is a
very small part of the company’s annual earnings, and as such, we are
holding our guidance at this time. Our business plans are delivering
against expectations, and we continue to stay focused on executing our
strategies of accelerating our portfolio growth momentum, increasing our
innovation output and success rates, and driving cost savings and
productivity improvements. We fully expect that these actions and
associated investments will drive sustainable profit growth in the years
ahead; however quarterly results versus a year ago may be somewhat lumpy
due to our size, weather and timing of activity.”

Additional Information

Total debt at December 24, 2016 was $395.4 million compared to $436.2
million at December 26, 2015. Net interest expense was $6.8 million for
the first quarter compared to $22.1 million in the prior-year period.
The decline in interest expense was due to the Company’s debt
refinancing in the prior year’s first quarter.

The Company’s effective tax rate for the first quarter of 2017 was
35.8%, compared with 37.6% for the first quarter of 2016. 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 #13653386. A replay of
the call will be available for ten days by dialing (201) 612-7415 and
entering confirmation #13653386.

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®, DMC™, SEGREST, 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
4,100 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 2017 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

December 24,
2016

December 26,
2015

September 24,
2016

Current assets:
Cash and cash equivalents $ 6,581 $ 9,006 $ 92,982
Restricted cash 10,981 11,939 10,910
Accounts receivable (less allowance for doubtful accounts of
$22,157, $21,213 and $21,069)
192,224 195,357 201,151
Inventories 430,171 416,458 362,004
Prepaid expenses and other 53,346   59,873   47,759  
Total current assets 693,303 692,633 714,806
 
Land, buildings, improvements and equipment—net 169,836 163,948 158,224
Goodwill 230,385 209,089 231,385
Other intangible assets—net 92,851 74,552 95,865
Other assets 61,326   70,987   11,913  
Total $ 1,247,701   $ 1,211,209   $ 1,212,193  
 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 135,237 $ 129,091 $ 102,413
Accrued expenses 94,494 89,047 99,343
Current portion of long-term debt 397   292   463  
Total current liabilities 230,128 218,430 202,219
 
Long-term debt 395,011 435,893 394,806
Other long-term obligations 62,606 58,005 60,581
 
Equity:
Common stock, 11,998,472, 11,908,317, and 11,998,472 shares
outstanding at December 24, 2016, December 26, 2015 and September
24, 2016
120 119 120
Class A common stock, $0.01 par value: 37,558,042, 36,591,487 and
37,418,572 shares outstanding at December 24, 2016, December 26,
2015 and September 24, 2016
375 366 374
Class B stock, $0.01 par value: 1,652,262 shares outstanding 16 16 16
Additional paid-in capital 392,402 390,583 393,297
Accumulated earnings 168,138 107,385 160,501
Accumulated other comprehensive income (loss) (1,802 ) (69 ) (1,294 )
Total Central Garden & Pet Company shareholders’ equity 559,249 498,400 553,014
Noncontrolling interest 707   481   1,573  
Total equity 559,956   498,881   554,587  
Total $ 1,247,701   $ 1,211,209   $ 1,212,193  
 
   

CENTRAL GARDEN & PET COMPANY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands,
except per share amounts)

(Unaudited)

 
Three Months Ended
December 24, 2016   December 26, 2015
Net sales $ 419,498 $ 359,812
Cost of goods sold and occupancy 298,820   260,026  
Gross profit 120,678 99,786
Selling, general and administrative expenses 100,740   91,013  
Operating income 19,938 8,773
Interest expense (6,873 ) (22,145 )
Interest income 38 22
Other expense (967 ) (473 )
Income (loss) before income taxes and noncontrolling interest 12,136 (13,823 )
Income tax expense (benefit) 4,347   (5,200 )
Income (loss) including noncontrolling interest 7,789 (8,623 )
Net income (loss) attributable to noncontrolling interest 152   (21 )
Net income (loss) attributable to Central Garden & Pet Company $ 7,637   $ (8,602 )
 
Net income (loss) per share attributable to Central Garden & Pet
Company:
Basic $ 0.15   $ (0.18 )
Diluted $ 0.15   $ (0.18 )
 
Weighted average shares used in the computation of net income per
share:
Basic 49,665 48,566
Diluted 51,810 48,566
 

Use of Non-GAAP Financial Measures

We report our financial results in accordance with U.S. generally
accepted accounting principles (GAAP). However, to supplement the
financial results prepared in accordance with GAAP, we use non-GAAP
financial measures including non-GAAP operating income on a consolidated
and segment basis 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.

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. We have not
provided a reconciliation of non-GAAP guidance measures to the
corresponding GAAP measures on a forward-looking basis, because such
reconciliation cannot be done without unreasonable efforts due to the
potential significant variability and limited visibility of the excluded
items discussed below.

Non-GAAP financial measures reflect adjustments based on the following
items:

  • Gains or losses on disposals of significant plant assets: we have
    excluded the impact of gains or losses on the disposal of facilities
    as these represent infrequent transactions that impact comparability
    between operating periods. We believe the adjustment of these gains or
    losses supplements the GAAP information with a measure that may be
    used to help assess the sustainability of our continuing operating
    performance.
  • Loss on early extinguishment of debt: we have excluded the charges
    associated with the refinancing of our 2018 Notes as the amount and
    frequency of such charges are not consistent and are significantly
    impacted by the timing and size of debt financing transactions.
  • Tax impact: adjustment represents the impact of the tax effect of the
    pre-tax non-GAAP adjustments excluded from non-GAAP net income. The
    tax impact of the non-GAAP adjustments is calculated based on the
    consolidated effective tax rate on a GAAP basis, applied to the
    non-GAAP adjustments, unless the underlying item has a materially
    different tax treatment.
  • 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.

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 reflect the following:

(1) During the first quarter of fiscal 2017, we recorded a $2.0 million
gain in our Garden segment from the sale of a distribution facility
resulting from rationalizing our facilities to reduce excess capacity.
This adjustment was recorded as part of selling, general and
administrative costs in the condensed consolidated statements of
operations.

(2) During the first quarter of fiscal 2016, we redeemed our 2018 Notes
and issued senior notes due November 2023. As a result of the
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.

   
Operating Income Reconciliation

GAAP to Non-GAAP Reconciliation
(in thousands)
For
the Three Months Ended

December 24, 2016   December 26, 2015
GAAP operating income $ 19,938 $ 8,773

Sale of distribution facility

(1) (2,050 )  
Non-GAAP operating income $ 17,888   $ 8,773  
GAAP operating margin 4.8 % 2.4 %
Non-GAAP operating margin 4.3 % 2.4 %
 
   

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

For the Three Months Ended

Net Income and Diluted Net Income Per Share Reconciliation

December 24, 2016

 

December 26, 2015

GAAP net income (loss) attributable to Central Garden & Pet $ 7,637 $ (8,602 )
Sale of distribution facility

(1)

(2,050 )
2018 notes redemption

(2)

14,339
Tax effects of non-GAAP adjustments 734 (5,394 )
Total net income (loss) impact from non-GAAP adjustments $ (1,316 ) $ 8,945  
Non-GAAP net income attributable to Central Garden & Pet $ 6,321 $ 343
GAAP diluted net income per share $ 0.15 $ (0.18 )
Non-GAAP diluted net income per share $ 0.12 $ 0.01
Shares used in GAAP diluted net earnings per share calculation 51,810 48,566
Shares used in non-GAAP diluted net earnings per share calculation 51,810 50,684
 

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
(in thousands)
For
the Three Months Ended

Consolidated

December 24,
2016

 

December 26,
2015

 

Percentage
change

 
Reported Net Sales – GAAP $ 419.5 $ 359.8 16.6 %
Effect of acquisitions and divestitures 41.8 6.7
   
Organic net sales $ 377.7   $ 353.1   7.0 %
 
 

GAAP to Non-GAAP Reconciliation
(in thousands)
For
the Three Months Ended

Pet Segment

December 24,
2016

 

December 26,
2015

 

Percentage
change

 
Reported Net Sales – GAAP $ 304.0 $ 248.7 22.2 %
Effect of acquisitions and divestitures 41.8 1.6
   
Organic net sales 262.2   247.1   6.1 %
 

Contacts

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