Central Garden & Pet Company Announces Fiscal 2015 Third Quarter Results

Sales increase 5 percent; 3 percent on adjusted basis to $459 million;
Diluted EPS increases to $0.38 compared to adjusted diluted EPS of $0.28

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 27, 2015.

Fiscal 2015 Third Quarter Financial Highlights

• Third quarter sales increased to $459.4 million compared to $438.0 million for the third quarter of 2014. Adjusted sales for the third quarter of 2014 were $445.0 million;
• Gross margin for the third quarter improved to 30.9% compared to 27.2% for the third quarter of 2014. Adjusted gross margin for the third quarter of 2014 was 30.6%;
• Operating income for the third quarter increased to $39.0 million compared to $18.4 million for the third quarter of 2014. Adjusted operating income for the third quarter of 2014 was $33.3 million;
• SG&A expenses as a percentage of sales improved to 22.4% compared to 23.0% for the third quarter of 2014. Adjusted SG&A as a percentage of sales for the third quarter of 2014 was 23.1%;
• Operating margin for the third quarter improved to 8.5% compared to 4.2% for the third quarter of 2014. Adjusted operating margin for the third quarter of 2014 was 7.5%;
• Net income for the third quarter increased to $18.8 million compared to $4.7 million for the third quarter of 2014. Adjusted net income for the third quarter of 2014 was $14.1 million; and
• Earnings per fully-diluted share for the third quarter increased to $0.38 compared to $0.09 for the third quarter of 2014. Adjusted earnings per fully-diluted share for the third quarter of 2014 was $0.28

On an adjusted basis, net sales improved 3 percent, gross margin improved by 30 basis points, and SG&A as a percentage of sales improved by 70 basis points. The combination of these improvements generated an operating margin of 8.5%, a 100 basis point improvement over the prior year.

“The positive impact of the actions we have taken over the past two years to increase revenue, lower SG&A expenses and improve operating margins are clearly reflected in our third quarter financial results, which came in significantly above last year’s reported and adjusted results, as well as above our earlier expectations,” said John Ranelli, President & CEO of Central Garden & Pet. “The trend in Pet revenues continues to be on the upswing, and both our Garden and Pet segments showed solid gains in operating income. We are focused on continuing to drive earnings growth in the years ahead through our initiatives to increase revenues and lower costs.”

While it is still early in the quarter, and there are a number of variables that could impact the Company’s fourth quarter results, an improvement in earnings is expected. The Company currently expects fiscal 2015 earnings per share of $0.63 or higher, well ahead of adjusted earnings per share of $0.33 in the prior year.

Garden Segment Third Quarter Details

Sales for the Garden segment were $221.3 million, an increase of $10.4 million or 4.9 percent compared to reported GAAP numbers from the third quarter of 2014 and up 1.6 percent over adjusted third quarter 2014 results. The increase in sales was primarily due to higher control product revenues and increased sales of other manufacturers’ products, partially offset by declines in wild bird feed sales. The Garden segment’s branded product sales were $180.4 million in the third quarter of 2015, and sales of other manufacturers’ products were $40.9 million.

The Garden segment’s operating income in the quarter improved by $19.5 million, to $23.5 million, compared to reported GAAP operating income of $4.0 million. Adjusted operating income for the third quarter of 2014 was $18.9 million. The Garden segment’s operating margin improved 870 basis points compared to reported GAAP operating margin and 190 basis points compared to adjusted operating margin in the prior year period. Higher profitability in the grass seed and private label controls and fertilizers businesses drove the increase, more than offsetting lower profitability in the décor and wild bird feed businesses.

Pet Segment Third Quarter Details

Third quarter sales for the Pet segment increased $11.0 million, or 4.8 percent, from the same period a year ago to $238.1 million, due in large part to higher professional revenues and higher sales of other manufacturers’ products. Professional sales benefitted from increased sales of the Company’s active ingredient products, including higher sales from its Envincio division, which was acquired last year. Sales of other manufacturers’ products also increased, primarily due to higher sales in the e-commerce channel. Partially offsetting the revenue gains were lower revenues in the flea and tick and wild bird feed categories. The Pet segment’s branded product sales were $183.3 million in the third quarter of 2015, and sales of other manufacturers’ products were $54.8 million.

The Pet segment’s operating income was $32.9 million compared to $28.4 million in the third quarter of 2014. The increase in operating income was largely due to the increase in sales. The Pet segment’s operating margin increased 130 basis points, benefitting from increased efficiencies due to higher volume in the Company’s professional business, a favorable mix shift inclusive of more professional sales, lower marketing expenditures in its flea & tick business, and a higher gross margin in its dog & cat business. The aquatics and equine businesses experienced lower operating margins during the quarter, partially offsetting the gains.

Year-to-Date Fiscal 2015 Financial Highlights

• Sales increased to $1.26 billion compared to $1.23 billion for the same period a year ago. Adjusted sales for the year-ago period were $1.24 billion;
• Branded product sales increased 1% to $1.01 billion. Sales of other manufacturers’ products increased 13% to $258.7 million;
• Operating income increased to $90.1 million compared to $54.8 million for the same period a year ago. Adjusted operating income for the year-ago period was $69.8 million;
• Reported operating margin improved to 7.1% compared to 4.5% for the same period a year ago. Adjusted operating margin for the year-ago period was 5.6%; and
• Reported earnings per fully-diluted share increased to $0.73 compared to $0.26 for the same period a year ago. Adjusted earnings per fully-diluted share for the period was $0.45

Additional Information

At June 27, 2015, the Company’s cash and short-term investments balance was $43.8 million, compared to $46.1 million a year ago. Cash flow from operations for the third quarter of 2015 was $155.1 million, compared to $128.9 million in the third quarter of 2014. The Company reduced its inventory balance by $24.8 million during the quarter compared to the same period a year ago, in addition to a $48.1 million inventory reduction in the third quarter of 2014 compared to the prior year.

The Company’s long term debt was $400.2 million compared to $450.3 million at June 28, 2014. Net interest expense was $9.0 million for the period compared to $10.4 million in the prior-year period. The lower debt and interest expense is reflective of lower average borrowings including the redemption of $50 million of the Company’s 8.25% senior subordinated notes due March 2018 earlier this year.

Depreciation and amortization expense was $8.3 million, compared with $9.2 million in the prior-year period. The Company’s effective tax rate for the third quarter of 2015 was 37.5 percent, compared with 37.0 percent for the third quarter of 2014.

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 [phone] (domestic and international) using confirmation # 13615304. A replay of the call will be available for ten days by dialing [phone] and entering confirmation #13615304.

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®, SMART SEED® 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 OCEANIC®, AQUEON® and ZILLA®; bird & small animal and the brands KAYTEE®, SUPER PET® and CRITTER TRAIL®; dog & cat and the brands TFH™, NYLABONE®, FOUR PAWS®, PINNACLE® and AVODERM®; and equine and the brands FARNAM®, BRONCO® and SUPER MASK®. 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 3,300 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 earnings guidance for the fourth quarter and fiscal 2015 and expectations for future favorable results 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;
• dependence on a small number of customers for a significant portion of our business;
• uncertainty about new product innovations and marketing programs;
• dependence on management and the ability to execute on our succession plan; 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)
	June 27,		June 28,		September 27,
ASSETS		2015		2014		2014
Current assets:
Cash and cash equivalents	$	43,841	$	31,846	$	78,676
Restricted cash		12,590		0		14,283
Short term investments		0		14,220		9,990
Accounts receivable (less allowance for doubtful accounts of $18,573, $29,221 and $25,212)		223,149		214,120		193,729
Inventories		340,233		365,035		326,386
Prepaid expenses and other		54,558		53,689		48,488
Total current assets		674,371		678,910		671,552
Land, buildings, improvements and equipment—net		162,969		177,660		166,849
Goodwill		209,089		205,756		208,233
Other intangible assets—net		83,841		76,923		87,997
Deferred income taxes and other assets		28,951		26,689		14,096
Total	$	1,159,221	$	1,165,938	$	1,148,727
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable	$	90,423	$	89,959	$	88,428
Accrued expenses		110,070		89,521		84,379
Current portion of long-term debt		290		296		291
Total current liabilities		200,783		179,776		173,098
Long-term debt		399,879		449,994		449,948
Other long-term obligations		47,147		43,236		39,228
Equity:
Common stock, $.01 par value: 11,908,317, 12,308,802, and 12,437,307 shares outstanding at June 27, 2015, June 28, 2014 and September 27, 2014		119		123		124
Class A common stock, $.01 par value: 35,970,174, 36,479,590 and 36,887,311 shares outstanding at June 27, 2015, June 28, 2014 and September 27, 2014		360		365		369
Class B stock, $.01 par value: 1,652,262 shares outstanding		16		16		16
Additional paid-in capital		388,762		398,244		396,586
Accumulated earnings		120,356		90,466		86,396
Accumulated other comprehensive income		679		1,868		1,232
Total Central Garden & Pet Company shareholders’ equity		510,292		491,082		484,723
Noncontrolling interest		1,120		1,850		1,730
Total equity		511,412		492,932		486,453
Total	$	1,159,221	$	1,165,938	$	1,148,727

CENTRAL GARDEN & PET COMPANY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share amounts) (Unaudited)
	Three Months Ended						Nine Months Ended
	June 27, 2015			June 28, 2014			June 27, 2015			June 28, 2014
Net sales	$	459,446		$	437,987		$	1,264,368		$	1,230,119
Cost of goods sold and occupancy		317,409			318,856			884,288			883,651
Gross profit		142,037			119,131			380,080			346,468
Selling, general and administrative expenses		103,044			100,705			289,978			291,628
Income from operations		38,993			18,426			90,102			54,840
Interest expense		(8,978	)		(10,429	)		(31,357	)		(33,051	)
Interest income		7			14			96			43
Other income		585			456			96			396
Income before income taxes and noncontrolling interest		30,607			8,467			58,937			22,228
Income taxes		11,484			3,133			21,527			8,217
Income including noncontrolling interest		19,123			5,334			37,410			14,011
Net income attributable to noncontrolling interest		323			647			1,070			1,137
Net income attributable to Central Garden & Pet Company	$	18,800		$	4,687		$	36,340		$	12,874
Net income per share attributable to Central Garden & Pet Company:
Basic	$	0.39		$	0.10		$	0.75		$	0.26
Diluted	$	0.38		$	0.09		$	0.73		$	0.26
Weighted average shares used in the computation of net income per share:
Basic		48,167			49,148			48,642			48,732
Diluted		49,290			49,841			49,496			49,201

Use of Non-GAAP Financial Measures

The Company reports its financial results in accordance with U.S. generally accepted accounting principles (GAAP). However, management believes that certain non-GAAP financial measures that exclude the impact of the garden charge and a gain recognized during the quarter ended June 28, 2014 in the garden segment related to the sale of plant assets 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 Company believes that these non-GAAP financial measures provide useful information to investors and other users of its financial statements, such as lenders. Management also uses these non-GAAP financial measures in making financial, operating and planning decisions and in evaluating the Company's performance. While the Company's management believes that non-GAAP measurements are useful supplemental information, such adjusted results are not intended to replace the Company's 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 28, 2014 GAAP			Garden Charge (A)			Gain on Sale Of Fixed Assets (B)			June 28, 2014 As Adjusted			June 27, 2015 GAAP
Net sales	$	437,987		$	7,035		$	-		$	445,022		$	459,446
Cost of goods sold and occupancy		318,856			(9,873	)		-			308,983			317,409
Gross profit		119,131			16,908			-			136,039			142,037
Selling, general and administrative expenses		100,705			-			1,996			102,701			103,044
Income from operations		18,426			16,908			(1,996	)		33,338			38,993
Net Income	$	4,687		$	10,652		$	(1,258	)	$	14,081		$	18,800
Earnings per share - Diluted	$	0.09		$	0.21		$	(0.02	)	$	0.28		$	0.38
Weighted Shares Outstanding		49,841			49,841			49,841			49,841			49,290
Gross margin		27.2	%								30.6	%		30.9	%
Selling, general and administrative expenses as a percentage of sales		23.0	%								23.1	%		22.4	%
Operating margin		4.2	%								7.5	%		8.5	%

	For the Nine Months Ended
	June 28, 2014 GAAP			Garden Charge (A)			Gain on Sale Of Fixed Assets (B)			June 28, 2014 As Adjusted			June 27, 2015 GAAP
Net sales	$	1,230,119		$	7,035		$	-		$	1,237,154		$	1,264,368
Cost of goods sold and occupancy		883,651			(9,873	)		-			873,778			884,288
Gross profit		346,468			16,908			-			363,376			380,080
Selling, general and administrative expenses		291,628			-			1,996			293,624			289,978
Income from operations		54,840			16,908			(1,996	)		69,752			90,102
Net Income	$	12,874		$	10,652		$	(1,258	)	$	22,268		$	36,340
Earnings per share - Diluted	$	0.26		$	0.22		$	(0.03	)	$	0.45		$	0.73
Weighted Shares Outstanding		49,201			49,201			49,201			49,201			49,496
Gross margin		28.2	%								29.4	%		30.1	%
Selling, general and administrative expenses as a percentage of sales		23.7	%								23.7	%		22.9	%
Operating margin		4.5	%								5.6	%		7.1	%

	For the Three Months Ended		For the Nine Months Ended
Garden Segment:
	Net Sales		Net Sales
June 28, 2014 as reported (GAAP)	$	210,905	$	601,688
Garden charge (A)		7,035		7,035
June 28, 2014 as adjusted	$	217,940	$	608,723
June 27, 2015 as reported (GAAP)	$	221,320	$	605,437

	Income from Operations			Operating Margin		Income from Operations			Operating Margin
June 28, 2014 as reported (GAAP)	$	4,011		1.9	%	$	34,579		5.7	%
Garden charge (A)		16,908					16,908
Gain on sale of fixed assets (B)		(1,996	)				(1,996	)
June 28, 2014 as adjusted	$	18,923		8.7	%	$	49,491		8.1	%
June 27, 2015 as reported (GAAP)	$	23,458		10.6	%	$	59,248		9.8	%

(A) The Non-GAAP financial information excludes the impact of a garden segment charge to write off inventory, account for product returns and promotional allowances and other costs related to the discontinuance of certain products introduced in 2013.

(B) The gain on sale of fixed assets correlates to the sale of plant assets during the quarter ended June 28, 2014 related to a product the garden segment will now purchase rather than produce.