Central Garden & Pet Company Announces Fiscal 2016 & Fourth Quarter Results

Fiscal 2016 diluted EPS of $0.87 vs. diluted EPS of $0.64 for
fiscal 2015

Fiscal 2016 non-GAAP diluted EPS of $1.26 vs. non-GAAP diluted EPS
of $0.74 for fiscal 2015

WALNUT CREEK, Calif.–(BUSINESS WIRE)–$CENT–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 year and fourth quarter ended September 24, 2016.

Fiscal 2016 Summary

Net sales increased 10.8% to $1.83 billion compared to $1.65 billion a
year ago. Branded product sales of $1.44 billion increased 9.7% and
sales of other manufacturers’ products of $386.2 million rose 15.0%.
Organic sales growth, adjusting for businesses purchased or exited that
impacted the year, rose 4.2%. The Pet and Garden segments both
experienced organic growth. Gross margin improved 60 basis points to
30.2% compared to 29.6% in the prior year despite the dilutive effects
of the Company’s recent acquisitions, which negatively impacted fiscal
2016 gross margin by 100 basis points. The Company’s gross margin
benefited from a favorable mix of product sales, reduced raw material
input costs, as well as its exit from the holiday decor business.

Fiscal 2016 GAAP Operating Income, Net Earnings
and EPS

  • Operating income of $129.4 million was up 41.5% over fiscal 2015 from
    $91.4 million;
  • Operating margin of 7.1% increased 160 basis points compared to fiscal
    2015;
  • Net income was $44.5 million, a 39.2% increase compared to $32.0
    million in fiscal 2015; and
  • Earnings per share increased 35.9% to $0.87 per fully diluted share.

Fiscal 2016 Non-GAAP Operating Income, Net
Earnings and EPS

  • Non-GAAP results for fiscal 2016 exclude $14.3 million of charges in
    the first quarter related to the Company’s refinancing of its fixed
    rate notes, $2.4 million of income related to the sale of a
    manufacturing plant in the third quarter, and non-cash impairment
    charges of $18.4 million in the fourth quarter primarily related to
    the Company’s investment in two joint ventures. Only $1.8 million of
    the impairment charge impacted operating income;
  • Non-GAAP results for fiscal 2015 exclude a Pet non-cash intangible
    impairment charge of $7.3 million, all of which impacted operating
    income;
  • Non-GAAP operating income for the year, excluding the items above, was
    $128.8 million and an operating margin of 7.0% compared to $98.7
    million and 6.0% in the prior year;
  • Non-GAAP net income was $64.4 million, a 75.8% gain compared to $36.6
    million in the period a year ago;
  • Non-GAAP earnings per fully diluted share increased 70.3% to $1.26 per
    fully diluted share.

Fiscal 2016 Fourth Quarter Financial Results

Net sales increased 7.0% to $413.4 million compared to $386.4 million in
the fourth quarter a year ago. Branded product sales of $330.0 million
increased 6.7% and sales of other manufacturers’ products of $83.5
million rose 8.3%. Organic sales growth, adjusting for businesses
purchased or exited that impacted the year, rose 2.6%. The Pet and
Garden segments both experienced organic growth; Gross margin improved
120 basis points compared to the fourth quarter a year ago to 29.1%,
benefiting primarily from the Company’s exit from the holiday decor
business.

Fourth Quarter GAAP Operating Income, Net Earnings
and EPS

  • Operating income of $13.0 million was up $11.7 million compared to
    $1.3 million in the fourth quarter a year ago. Operating margin of
    3.1% increased 280 basis points compared to the fourth quarter a year
    ago;
  • Net loss of $5.6 million increased 28.4% compared to the fourth
    quarter a year ago due to additional net impairment charges of $11.1
    million versus the prior year; and
  • Loss per fully-diluted share increased 22.2% to $0.11.

Fourth Quarter Non-GAAP Operating Income, Net
Earnings and EPS

  • Non-GAAP results exclude non-cash impairment charges of $18.4 million
    in the fourth quarter of fiscal 2016 including $1.8 million that
    impacted operating income;
  • Comparably, in the fourth quarter of fiscal 2015, non-GAAP results
    exclude a Pet non-cash intangible impairment charge of $7.3 million,
    all of which impacted operating income;
  • Non-GAAP operating income, excluding the above items, was $14.8
    million and non-GAAP operating margin was 3.6% compared to $8.6
    million and 2.2% in the fourth quarter of fiscal 2015;
  • Non-GAAP net income of $6.6 million increased $6.3 million compared to
    the fourth quarter a year ago; and
  • Non-GAAP earnings per diluted share of $0.13 increased $0.12.

“Central’s results this quarter and year reflect continued disciplined
execution of our initiatives to grow revenues and profits,” said George
Roeth, President & CEO of Central Garden & Pet. “Our efforts to grow
organically have led to successful new products, expanded distribution
and vendor relationships, and ultimately, market share gains. In
addition, our recent acquisitions are performing at or above
expectations.”

Pet Segment Fiscal 2016 Fourth Quarter Results

Fourth quarter net sales for the Pet segment increased 14.9% to $270.7
million, from the same period a year ago, driven in large part by
acquisitions. The Pet segment’s branded product sales were $214.6
million, up 18.7% compared to the fourth quarter a year ago, and sales
of other manufacturers’ products were $56.0 million, an increase of
2.3%. Pet organic sales grew 2.6%, on strength in most of the segment’s
categories.

The Pet segment’s operating income rose 23.8% compared to the fourth
quarter a year ago to $22.6 million and included a $1.8 million non-cash
impairment charge. In the prior year, there was a non-cash charge of
$7.3 million for intangible impairments. Pet operating margin, aided by
the lower impairment charges compared to the prior year, rose to 8.3%,
an increase of 60 basis points compared to the fourth quarter a year
ago. Excluding the intangible charges in both years, non-GAAP operating
margin declined from the fourth quarter of 2015, primarily due to the
Company’s investments for future growth. The Company expects more
favorable operating margin comparisons in the year ahead.

Garden Segment Fiscal 2016 Fourth Quarter
Results

Net sales for the Garden segment declined 5.3% compared to the fourth
quarter a year ago to $142.8 million, due primarily to a decrease of
$13.6 million from the holiday decor business that the Company exited
earlier in the year. The Garden segment’s branded product sales were
$115.3 million in the quarter, down 10.2% compared to the fourth quarter
a year ago. Sales of other manufacturers’ products were up 23.0% to
$27.4 million. Garden organic sales, excluding the holiday decor
business, rose 2.7%, driven by higher sales of grass seed and other
manufacturers’ products.

The Garden segment’s operating income in the quarter rose to $2.7
million compared to $0.9 million in the fourth quarter a year ago.
Garden operating margin improved 130 basis points to 1.9%, aided by the
absence of the holiday decor business in the current quarter.

2017 Guidance

The Company currently expects earnings per fully-diluted share of $1.34
or higher for fiscal 2017, an increase of 6% or more from the prior
year. Fiscal 2017 will have 53 weeks compared to 52 weeks in fiscal
2016. The extra week is expected to account for approximately $0.01 per
share of 2017 earnings. Capital expenditures are expected to be
approximately $40 million to $45 million on an increase in investment to
drive future growth.

Mr. Roeth said, “Delivering sustainable, profitable growth is a key
strategic goal for our team. To that end, we are increasing our
investment and developing a three-year line of sight to our ability to
deliver improved innovation output and success rates, as well as cost
savings and productivity improvements. At the same time, we are
continuing to take steps to create greater portfolio momentum, by making
strategic acquisitions and divestitures and managing each of our
businesses differentially based on their profit characteristics and
growth potential.” Roeth continued, “The costs of these initiatives will
slow down 2017 earnings growth but are expected to generate meaningful
top and bottom-line growth going forward.” Roeth concluded, “We enter
the new year as financially sound as we have ever been, and I am
energized by the passion of our employees and the opportunities in front
of us as we move forward.”

Additional Information

At September 24, 2016, the Company’s cash and short-term investments
balance was $93.0 million, compared to $47.6 million a year ago. Cash
flow from operations for the fourth quarter of fiscal 2016 was $61.8
million, compared to $30.8 million in the fourth quarter of fiscal 2015.

Total debt at September 24, 2016 was $395.3 million compared to $397.0
million at September 26, 2015. Net interest expense was $6.6 million for
the fourth quarter compared to $8.6 million in the prior-year period.
The decline in interest expense was due to the Company’s debt
refinancing in its fiscal first quarter. During the quarter, the Company
did not repurchase any shares of its common stock. Approximately $35
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 fourth quarter and fiscal 2016
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 #13650358. A replay of
the call will be available for ten days by dialing (201) 612-7415 and
entering confirmation #13650358.

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
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, operating margin expansion, 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)

Unaudited

   
ASSETS September 24, 2016 September 26, 2015
Current assets:
Cash and cash equivalents $ 92,982 $ 47,584
Restricted cash 10,910 13,157
Accounts receivable, net 201,151 207,402
Inventories 362,004 335,946
Prepaid expenses, deferred income taxes and other 47,759   49,731
Total current assets 714,806 653,820
 
Plant, property and equipment, net 158,224 162,809
Goodwill 231,385 209,089
Other intangible assets, net 95,865 75,460
Other assets 11,913   30,419
Total $ 1,212,193   $ 1,131,597
 
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 102,413 $ 88,889
Accrued expenses 99,343 87,724
Current portion of long-term debt 463   291
Total current liabilities 202,219 176,904
 
Long-term debt 394,806 396,691
Deferred income taxes and other long-term obligations 60,581 51,622
 
Equity:
Common stock 120 119
Class A common stock 374 364
Class B stock 16 16
Additional paid-in capital 393,297 388,636
Retained earnings 160,501 115,987
Accumulated other comprehensive income (loss) (1,294 ) 164
Total Central Garden & Pet shareholders’ equity 553,014 505,286
Noncontrolling interest 1,573   1,094
Total equity 554,587   506,380
Total $ 1,212,193   $ 1,131,597
 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)

   
Three Months Ended Fiscal Year Ended

September 24,
2016

 

September 26,
2015

September 24,
2016

 

September 26,
2015

Net sales $ 413,412 $ 386,369 $ 1,829,017 $ 1,650,737
Cost of goods sold and occupancy 293,232   278,397   1,275,967   1,162,685  
Gross profit 120,180 107,972 553,050 488,052
Selling, general and administrative expenses 105,355 99,367 421,864 389,345
Intangible asset impairment 1,828   7,272   1,828   7,272  
Operating income 12,997 1,333 129,358 91,435
Interest expense (6,642 ) (8,670 ) (42,847 ) (40,027 )
Interest income 66 33 140 129
Other income (expense) (16,770 ) (83 ) (17,013 ) 13  
Income (loss) before income taxes and noncontrolling interest (10,349 ) (7,387 ) 69,638 51,550
Income tax expense (benefit) (4,456 ) (2,992 ) 24,053   18,535  
Net income (loss) including noncontrolling interest (5,893 ) (4,395 ) 45,585 33,015
Net income (loss) attributable to noncontrolling interest (282 ) (26 ) 1,071   1,044  
Net income (loss) attributable to Central Garden & Pet Company $ (5,611 ) $ (4,369 ) $ 44,514   $ 31,971  
 
Net income (loss) per share attributable to Central Garden & Pet
Company:
Basic $ (0.11 ) $ (0.09 ) $ 0.91   $ 0.66  
Diluted $ (0.11 ) $ (0.09 ) $ 0.87   $ 0.64  
 
Weighted average shares used in the computation of net income per
share:
Basic 49,453 48,322 48,964 48,562
Diluted 49,453 48,322 51,075 49,638
 

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 net sales on a consolidated and
segment basis, non-GAAP selling, general and administrative (SG&A)
expense, non-GAAP operating income on a consolidated and segment basis,
non-GAAP interest expense, non-GAAP other income (expense) 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:

  • Asset impairment charges: we have excluded the impact of asset
    impairments on intangible assets and equity method investments as such
    non-cash amounts are inconsistent in amount and frequency and are
    impacted by the timing and/or size of acquisitions. We believe that
    the adjustment of these charges supplements the GAAP information with
    a measure that can be used to assess the sustainability of our
    operating performance.
  • Gains or losses on disposals of significant plant assets: we have
    excluded the impact of gains or losses on the disposal of significant
    plant assets as these represent infrequent transactions that impact
    the 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 assess the sustainability of our 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 is not consistent and is 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 made reflect the following:

  (1)   During the fourth quarter of fiscal 2016 and fiscal 2015, we
recognized non-cash impairment charges in our Pet segment of $1.8
million and $7.3 million, respectively, related to the impairment of
intangible assets caused by increased competition and declining
volume of sales. These impairments are included within Intangible
asset impairment.
 
(2) During 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. This
adjustment was recorded as part of Selling, general and
administrative costs.
 
(3) During the first quarter of fiscal 2016, we redeemed our 2018 Notes
and issued senior notes due November 2023. 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 consolidated
statements of operations.
 
(4) During the fourth quarter of 2016, we recognized a non-cash
impairment charge of $16.6 million related to our investment in two
joint ventures as a result of changes in marketplace conditions,
which impacted the expected cash flows and recoverability of the
investment. The impairment is included within Other income (expense).
 
 

GAAP to Non-GAAP Reconciliation
(in thousands)
For
the Year Ended September

Non-GAAP Adjustments 2016   2015
Impairments of intangible assets (1) $ 1,828 $ 7,272
(Gain)/loss on disposal of plant assets (2) (2,363 )
Incremental expenses from note redemption and issuance (3) 14,339
Impairment of equity method investments (4) 16,572    
Total non-GAAP adjustments 30,376 7,272
Tax effects of non-GAAP adjustments (10,492 ) (2,618 )
Total net income impact from non-GAAP adjustments $ 19,884   $ 4,654  
 
SG&A Expense Reconciliation
GAAP SG&A expense $ 423,692 $ 396,617
SG&A expense impact from non-GAAP adjustments (1) (2) 535   (7,272 )
Non-GAAP SG&A expense $ 424,227   $ 389,345  
GAAP SG&A expense as a percentage of net sales 23.1 % 24.0 %
Non-GAAP SG&A expense as a percentage of net sales 23.2 % 23.6 %
 
Operating Income Reconciliation
GAAP operating income $ 129,358 $ 91,435
Total operating income impact from non-GAAP adjustments (1)(2) (535 ) 7,272  
Non-GAAP operating income $ 128,823   $ 98,707  
GAAP operating margin 7.1 % 5.5 %
Non-GAAP operating margin 7.0 % 6.0 %
 
Pet Segment Operating Income Reconciliation
GAAP Pet segment operating income $ 119,930 $ 98,798
Total operating income impact from non-GAAP adjustments (1)(2) (535 ) 7,272  
Non-GAAP Pet segment operating income $ 119,395   $ 106,070  
GAAP Pet segment operating margin 11.1 % 11.0 %
Non-GAAP Pet operating margin 11.0 % 11.9 %
 
Interest Expense Reconciliation
GAAP interest expense $ (42,847 ) N/A
Impact from non-GAAP adjustment (3) 14,339    
Non-GAAP interest expense $ (28,508 )  
 

GAAP to Non-GAAP Reconciliation
(in thousands)
For
the Year Ended September

Net Income and Diluted Net Income Per Share Reconciliation 2016 2015
GAAP net income attributable to Central Garden & Pet $ 44,514

$

31,971
Total non-GAAP adjustments (1)(2) (3)(4) 30,376 7,272
Tax effects of non-GAAP adjustments (10,492 )   (2,618 )
Non-GAAP net income attributable to Central Garden & Pet $ 64,398  

$

36,625  
GAAP diluted net income per share $ 0.87

$

0.64
Non-GAAP diluted net income per share $ 1.26

$

0.74
Shares used in GAAP and non-GAAP diluted net earnings per share
calculation
51,075 49,638
 
 

GAAP to Non-GAAP Reconciliation
(in thousands)
For
the Quarter Ended September 24, 2016

Net income and diluted net income per share September 24, 2016   September 26, 2015
GAAP net income (loss) $ (5,611 ) $ (4,369 )
Total non-GAAP Adjustments (1)(2) (3)(4) 18,400 7,272
Tax effect

(6,224

) (2,618 )
Net income impact

12,176

4,654
Non-GAAP net income $

6,565

$ 285
GAAP diluted loss per share $ (0.11 ) $ (0.09 )
Non-GAAP diluted income per share $ 0.13 $ 0.01
Basic 49,453 48,322
Diluted 51,645 49,922
 
  GAAP to Non-GAAP Reconciliation
(in thousands)
For
the Quarter Ended September 24, 2016
Operating income reconciliation   September 24, 2016   September 26, 2015
GAAP operating income

$

12,997

$

1,333
Total operating income impact from non-GAAP (1)   1,828     7,272  
Non-GAAP operating income 14,825 8,605
GAAP operating margin 3.1 % 0.3 %
Non-GAAP operating margin 3.6 % 2.2 %
Net sales

$

413,412

$

386,369
 

Contacts

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

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