Market Overview

Central Garden & Pet Company Announces Fiscal Third Quarter Revenues and Profits

Share:

Fiscal 3Q 2018 sales increased 14.5% to $657.9 million

Fiscal 3Q 2018 diluted EPS increased to $0.79 vs. $0.62 in Fiscal
3Q 2017

Central Garden & Pet Company (NASDAQ:CENT) (NASDAQ:CENTA), a leading
innovator, producer and distributor of branded and private label
products for the lawn & garden and pet supplies markets, today announced
financial results for its fiscal 2018 third quarter ended June 30, 2018.

Fiscal 2018 Third Quarter Financial Results

Total net sales increased 14.5% to $657.9 million compared to $574.6
million in the third quarter a year ago, driven by two recent
acquisitions as well as strong organic growth in the Company's Pet
segment. Total Company organic growth, facing a difficult comparison
with last year's third quarter organic growth of 7.6%, was essentially
flat, down 0.1%. Reduced demand in the organic Garden business, impacted
by unfavorable weather early in the quarter and a significant
year-over-year shift in selling weeks during the third quarter,
adversely impacted results, more than offsetting the strong organic
growth in the Pet segment. Branded product sales of $516.8 million
increased 11.8%, and sales of other manufacturers' products of $141.1
million rose 25.5%, impacted by the acquisition of General Pet, the
Company's new distribution business. Gross margin of 30.7% declined 120
basis points compared to the third quarter a year ago, due primarily to
the lower organic volumes in the Company's Garden segment, as well as an
unfavorable shift in the mix of sales, and higher raw material, freight,
and labor costs across the Company.

Third quarter operating income increased to $60.8 million from $57.9
million in the third quarter a year ago and operating margin decreased
90 basis points to 9.2% compared to 10.1%. Operating income benefited
from the Company's recent Bell Nursery acquisition while operating
margin was negatively impacted by the decrease in gross margin,
partially offset by a decrease in SG&A as a percent of sales of 30 basis
points.

Net income of $41.5 million increased 28.8% compared to $32.2 million in
the third quarter a year ago, due to the revenue increase and a lower
effective tax rate. The tax rate benefited from a reduction in Federal
tax rates and recent changes in accounting standards around non-cash
equity compensation expense. The impact of these changes more than
offset an increase in interest expense of $3.3 million. Earnings per
diluted share increased 27.4% to $0.79 from $0.62 in the third quarter a
year ago.

"Central continued its strong growth trajectory during the quarter,
despite unfavorable weather and the calendar shift, which significantly
impacted our Garden segment," said George Roeth, President & CEO of
Central Garden & Pet. "It is really a testament to our strategy and the
strength and diversity of our portfolio of businesses to be able to show
meaningful growth in such a challenging environment." Roeth continued,
"Year-to-date, we are financially where we expected to be, with market
share gains in both business segments, and are continuing to position
our Company for future sustainable organic growth and expansion through
acquisitions."

Pet Segment Fiscal 2018 Third Quarter Results

Third quarter net sales for the Pet segment increased 13.2% to $354.7
million, from the same period a year ago, driven almost equally by
higher organic Pet sales, which increased 6.6%, and the acquisition of
General Pet, which closed in early April. Continued strength in the
e-commerce and mass channels were primary drivers of the organic
increase, with particular strength in the Company's dog & cat and pet
distribution businesses. The Pet segment's third quarter branded product
sales were $267.9 million, up 5.3% compared to a year ago, and sales of
other manufacturers' products were $86.9 million, an increase of 47.3%,
largely driven by the acquisition of General Pet.

The Pet segment's operating income increased 8.7% compared to the third
quarter a year ago to $39.2 million. Pet operating margin decreased to
11.1%, a decline of 40 basis points compared to the third quarter a year
ago, due to the negative impact of the inclusion of General Pet.

Garden Segment Fiscal 2018 Third Quarter Results

Net sales for the Garden segment rose 16.1% to $303.2 million, due to
the Company's recent acquisition of Bell Nursery. The third quarter is
typically the largest and only profitable quarter of the year for Bell
Nursery. Organic growth decreased 8.2%, significantly impacted by
unfavorable weather in the key month of April and a significant shift in
selling weeks in the Company's third fiscal quarter vs. a year ago. By
contrast, the Garden segment had a strong second fiscal quarter, when
organic sales grew 5.8%. The Garden segment's branded product sales,
including Bell, were $248.9 million in the quarter, up 19.9% compared to
the third quarter a year ago. Sales of other manufacturers' products
were up 1.5% to $54.3 million.

The Garden segment's operating income in the quarter increased 6.7% to
$40.9 million due to the inclusion of Bell Nursery. Operating margin
decreased 120 basis points to 13.5% due largely to lower organic volume.
Increased commodity costs and unfavorable freight costs were also
contributing factors. Importantly, year-to-date, Garden operating margin
was relatively flat vs. the same period a year ago.

Year-to-date 2018 Operating Income, Net
Earnings and EPS

For the nine months ended June 30, 2018, the Company reported:

  • Year-to-date sales of $1,713.0 million increased 9.5% compared with
    $1,564.0 million a year ago with organic sales up 2.5%. Garden sales
    over the period increased 9.8% and organic sales declined 0.6% while
    Pet sales increased 9.3% for the period with organic sales up 4.7%.
  • Gross margin decreased 40 basis points to 30.8% compared to 31.2% in
    the first nine months of fiscal 2017.
  • Operating income of $149.1 million increased 5.2% or $7.4 million from
    $141.7 million in the first nine months of 2017. Non-GAAP operating
    income, excluding the sale of a distribution facility in the prior
    year, increased 6.7% to $149.1 million from $139.7 million.
  • Operating margin of 8.7% decreased 40 basis points from 9.1% in the
    first nine months of fiscal 2017. Non-GAAP operating margin of 8.7%
    decreased 20 basis points from 8.9%.
  • Net income rose 51.6% to $113.0 million from $74.6 million a year ago.
    Non-GAAP net income, which excludes the impact of the revaluation of
    deferred tax amounts in fiscal 2018 and the gain from the sale of a
    distribution facility in 2017, was $96.7 million or an increase of
    31.9% compared to $73.3 million in the first nine months of 2017; and
  • Diluted earnings per share of $2.15 rose 49.3% from $1.44 per share a
    year ago. Non-GAAP earnings per diluted share increased 29.6% to $1.84
    from $1.42 in the first nine months of 2017.

Additional Information

The Company's cash balance at the end of the quarter increased to $204.4
million compared to $14.5 million in the third quarter a year ago. Total
debt at June 30, 2018 was $691.9 million compared to $435.4 million at
June 24, 2017. Net interest expense was $10.0 million for the third
quarter compared to $7.2 million in the prior-year period. The increases
are primarily due to the Company's issuance of $300 million of senior
notes in December 2017. The Company's leverage ratio at the end of the
third quarter, as defined in the Company's credit agreement, was 3.2x
compared to 2.1x at the end of the prior year quarter.

The Company's effective tax rate for the third quarter of 2018 was
21.5%, compared with 37.2% for the third quarter of 2017. The decrease
reflects the reduction in the Federal tax rate and the impact from the
changes in recent accounting standards around non-cash equity
compensation expense.

2018 Guidance

The Company is maintaining its fiscal 2018 guidance expecting non-GAAP
earnings per fully-diluted share of $1.90 or higher for the year. Due to
the Bell Nursery acquisition occurring in the middle and most profitable
part of the fiscal year, fiscal 2018 earnings benefit from the exclusion
of two quarters where Bell Nursery typically is not profitable. If the
full year of Bell Nursery were included in the Company's 2018 fiscal
year results, it is estimated that while Bell would still be accretive,
the Company's EPS would be $0.10 lower than the expected $1.90 or higher
guidance. Consequently, it is expected that next year's earnings will
have less accretion from Bell Nursery due to the inclusion of a full
year of Bell Nursery's results.

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 #13681162. A replay of
the call will be available for three days by dialing (201) 612-7415 and
entering confirmation #13681162.

About Central Garden & Pet

Central Garden & Pet Company is a leading innovator, producer and
distributor of branded and private label 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®, and OVER-N-OUT®;
fertilizer and the brands PENNINGTON® and IRONITE®;
live plants from BELL NURSERY; 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, COMFORT ZONE®, FARNAM®, HORSE
HEALTH and VITAFLEX®; aquatics and reptile and
the brands AQUEON®, CORALIFE®, SEGREST
and ZILLA®; bird & small animal and the brands KAYTEE®,
Forti-Diet® and CRITTER TRAIL®; and dog & cat and
the brands TFH, NYLABONE®, FOUR PAWS®,
IMS®, CADET®, DMC™, K&H Pet Products,
PINNACLE® and AVODERM®. 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
5,000 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, expectations for future financial results, earnings
guidance for fiscal 2018 and expected impact of Bell Nursery on fiscal
2019 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 inability to pass through cost increases
    in a timely manner;
  • adverse weather conditions;
  • our dependence upon our key executives;
  • the impact of new accounting regulations and the U.S. Tax Cuts and
    Jobs Act on the Company's tax rate;
  • dependence on a small number of customers for a significant portion of
    our business;
  • potential impacts of tariffs or trade war;
  • risk associated with litigation arising from 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 30, 2018 June 24, 2017 September 30, 2017
Current assets:
Cash and cash equivalents $ 204,388 $ 14,473 $ 32,397
Restricted cash 13,978 10,999 12,645
Accounts receivable (less allowance for doubtful accounts of
$22,021, $21,277 and $21,436)
348,781 279,504 237,868
Inventories 428,007 383,449 382,101
Prepaid expenses and other 26,735   21,558   18,045  
Total current assets 1,021,889 709,983 683,056
 
Land, buildings, improvements and equipment—net

211,817

177,784 180,913
Goodwill 268,243 230,385 256,275
Other intangible assets—net 138,610 90,004 116,067

 

Other assets 67,846   113,185   70,595  
Total $ 1,708,405   $ 1,321,341   $ 1,306,906  
 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 108,129 $ 106,408 $ 103,283
Accrued expenses 122,897 112,091 116,549
Current portion of long-term debt 119   375   375  
Total current liabilities 231,145 218,874 220,207
 
Long-term debt 691,741 435,074 395,278
Deferred taxes and other long-term obligations 40,798 38,386 54,279
 
Equity:
Common stock, $0.01 par value: 12,145,135, 12,160,023, and
12,160,023 shares outstanding at June 30, 2018, June 24, 2017 and
September 30, 2017
121 122 122
Class A common stock, $0.01 par value: 38,373,324, 37,933,970 and
38,019,736 shares outstanding at June 30, 2018, June 24, 2017 and
September 30, 2017
384 379 380
Class B stock, $0.01 par value: 1,652,262 shares outstanding 16 16 16
Additional paid-in capital 392,412 392,995 396,790
Accumulated earnings 352,355 235,070 239,329
Accumulated other comprehensive loss (1,153 ) (1,487 ) (951 )
 
Total Central Garden & Pet Company shareholders' equity 744,135 627,095 635,686
Noncontrolling interest 586   1,912   1,456  
Total equity 744,721   629,007   637,142  
Total $ 1,708,405   $ 1,321,341   $ 1,306,906  
 

CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(Unaudited)

   
Three Months Ended Nine Months Ended
June 30, 2018   June 24, 2017 June 30, 2018   June 24, 2017
Net sales $ 657,943 $ 574,592 $ 1,713,048 $ 1,564,014
Cost of goods sold and occupancy 455,879   391,319   1,184,690   1,076,534  
Gross profit 202,064 183,273 528,358 487,480

Selling, general and administrative expenses

141,245   125,340   379,232   345,749  
 
Operating income 60,819 57,933 149,126 141,731
Interest expense (10,597 ) (7,273 ) (28,577 ) (20,976 )
Interest income 584 53 1,464 99
Other income (expense) 2,126   1,626   542   (306 )
Income before income taxes and noncontrolling interest 52,932 52,339 122,555 120,548
Income tax expense 11,395   19,450   8,802   44,621  
 
Income including noncontrolling interest 41,537 32,889 113,753 75,927
Net income (loss) attributable to noncontrolling interest (8 ) 641   727   1,358  
 
Net income attributable to Central Garden & Pet Company $ 41,545   $ 32,248   $ 113,026   $ 74,569  
 
Net income per share attributable to Central Garden & Pet Company:
Basic $ 0.81   $ 0.64   $ 2.22   $ 1.49  
Diluted $ 0.79   $ 0.62   $ 2.15   $ 1.44  
 
Weighted average shares used in the computation of net income per
share:
Basic 51,134 50,507 50,938 50,084
Diluted 52,575 51,825 52,670 51,769
 

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.

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

  • The U.S. government enacted comprehensive tax legislation commonly
    referred to as the Tax Cuts and Job Act (the "Tax Reform Act") in
    December 2017. We have excluded the transitional impact of the Tax
    Reform Act as the remeasurement of our deferred tax assets and
    liabilities does not reflect the ongoing impact of the lower U.S.
    statutory rate on our current year earnings.
  • 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.
  • Tax impact: the 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)   Transitional impact of U.S. Tax Reform: As a result of the Tax
Reform Act, during the first quarter of fiscal 2018, the Company
recorded a provisional tax benefit of $16.3 million due to the
remeasurement of its deferred tax assets and liabilities. We have
excluded only this transitional impact and have not included in the
adjustment the ongoing impact of the lower U.S. statutory rate on
our current year earnings.
(2) 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.
 

Operating Income Reconciliation    

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

Consolidated   Garden

June 30,
2018

 

June 24,
2017

June 30,
2018

 

June 24,
2017

GAAP operating income $ 149,126 $ 141,731 $ 93,975 $ 87,050
Gain on sale of distribution facility

(2)

  (2,050 )   (2,050 )
Non-GAAP operating income $ 149,126   $ 139,681   $ 93,975   $ 85,000  
GAAP operating margin 8.7 % 9.1 % 13.2 % 13.4 %
Non-GAAP operating margin 8.7 % 8.9 % 13.2 % 13.1 %
 
   

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

For the Nine Months Ended

Net Income and Diluted Net Income Per Share Reconciliation June 30, 2018   June 24, 2017
GAAP net income attributable to Central Garden & Pet $ 113,026 $ 74,569
Gain on sale of distribution facility (2) (2,050 )
Tax effect of sale of distribution facility adjustment 759
Tax effect of revaluation of deferred tax amounts (1) 16,343    
Total impact on net income from non-GAAP adjustments $ 16,343   $ (1,291 )
Non-GAAP net income attributable to Central Garden & Pet $ 96,683 $ 73,278
GAAP diluted net income per share $ 2.15 $ 1.44
Non-GAAP diluted net income per share $ 1.84 $ 1.42
Shares used in GAAP and non-GAAP diluted net earnings per share
calculation
52,670 51,769
 

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 millions)
For
the Three Months Ended June 30, 2018

Consolidated   Pet Segment   Garden Segment
   

Percent
change

   

Percent
change

   

Percent
change

Reported net sales - Q3 FY18 (GAAP) $ 657.9 $ 354.7   $ 303.2
Reported net sales - Q3 FY17 (GAAP) 574.6   313.4   261.2  
Increase in net sales 83.3 14.5

 %

41.3 13.2 % 42.0 16.1

 %

Effect of acquisition and divestitures on increase in net sales 84.0     20.6     63.4    
Increase (decrease) in organic net sales - Q3 2018 $ (0.7 ) (0.1 )% $ 20.7   6.6 % $ (21.4 ) (8.2 )%
 

 

GAAP to Non-GAAP Reconciliation
(in millions)
For
the Nine Months Ended June 30, 2018

Consolidated   Pet Segment   Garden Segment
   

Percent
change

   

Percent
change

   

Percent
change

Reported net sales - Q3 FY18 (GAAP) $ 1,713.0   $ 1,001.5   $ 711.5
Reported net sales - Q3 FY17 (GAAP) 1,564.0   915.9   648.1  
Increase in net sales 149 9.5 % 85.6 9.3 % 63.4 9.8

 %

Effect of acquisition and divestitures on increase in net sales 110.2     42.6     67.6    
Increase (decrease) in organic net sales - Q3 2018 $ 38.8   2.5 % $ 43.0   4.7 % $ (4.2 ) (0.6 )%
 

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