Business Wire | Feb 3, 2021 04:01PM EST

Central Garden & Pet Announces Strong Q1 2021 Results

Feb. 03, 2021

WALNUT CREEK, Calif.--(BUSINESS WIRE)--Feb. 03, 2021--Central Garden & Pet Company (NASDAQ: CENT, CENTA) ("Central"), a market leader in the Garden and Pet industries, today announced financial results for its fiscal 2021 first quarter ended December 26, 2020.

"We delivered another quarter of strong financial results reflecting solid execution, robust consumer demand in Pet and Garden and the unwavering dedication of our employees," said Tim Cofer, CEO of Central Garden & Pet. "I'm pleased with the continued progress against our Central to Home strategy and remain excited about the road ahead. Recent examples of our strategy in action include three acquisitions, which will build scale in our Garden segment, expand into attractive adjacencies and advance our omnichannel and digital capabilities."

Fiscal 2021 First Quarter Financial Results

Total net sales increased 22.7% to $592.2 million compared to $482.8 million in the first quarter a year ago, driven by organic strength in both segments.

First quarter gross margin increased 70 basis points to 27.9%, driven by favorable mix of product sales and volume-related efficiencies partially offset by continued supply-chain constraints and inflationary pressures.

Operating income increased to $27.0 million from $2.1 million in the first quarter a year ago. Operating margin increased 420 basis points to 4.6% compared to 0.4% in the prior year quarter, driven by improved gross margin as well as operating efficiencies. EBITDA increased 162.8% to $40.0 million from $15.2 million in the first quarter a year ago.

Net interest expense increased to $20.8 million from $8.6 million in the first quarter a year ago, mainly due to incremental interest expense related to recognizing the impacts of the call premium, unamortized debt issuance cost and double interest on the debt retired during the quarter.

The Company's net income increased $10.0 million to $5.6 million from a net loss of $4.4 million in the first quarter a year ago. Diluted earnings per share for the quarter grew $0.18 to $0.10 from $(0.08) in the prior year quarter. This translates to non-GAAP diluted earnings per share of $0.29, up $0.37 from $(0.08) in the quarter a year ago, excluding the incremental interest expense related to debt refinancing and the loss on the sale of the Breeder's Choice business.

Garden Segment Fiscal 2021 First Quarter Results

First quarter net sales for the Garden segment increased 34.1% to $155.8 million, driven by strength across the portfolio, with particularly strong growth in distribution, wild bird feed, grass seed, controls and fertilizers and live plants.

Garden segment operating income increased $11.5 million to $4.7 million from an operating loss of $6.9 million in the prior year quarter, and operating margin rose 890 basis points to 3.0%. Garden segment EBITDA of $7.3 million was up from $(4.2) million in the prior year quarter, primarily driven by volume strength and gross margin improvement coupled with operating leverage.

Pet Segment Fiscal 2021 First Quarter Results

First quarter net sales for the Pet segment increased 19.0% to $436.4 million from $366.6 million in the first quarter a year ago, driven by strong growth across the segment, with notable contributions from dog and cat, distribution and small animal supplies.

Pet segment operating income increased to $43.5 million, up 51.5% compared to the first quarter a year ago, and operating margin rose 220 basis points to 10.0%. Pet segment EBITDA increased to $52.6 million from $37.8 million in the first quarter a year ago, primarily driven by stronger sales volume and favorable product mix as well as overhead efficiencies.

Additional Information

The Company's cash balance at the end of the quarter increased 36.4% to $608.3 million compared to $445.8 million in the first quarter a year ago. The Company used approximately $83 million of its cash to pay for the acquisition of DoMyOwn. Cash used by operations during the quarter was $36.1 million compared to $18.0 million in the first quarter a year ago. The increase was driven primarily by an increase in inventory due to the seasonal build in preparation for the lawn and garden season and the overall demand for the Company's products.

Total debt as of December 26, 2020 was $789.0 million compared to $693.4 million at December 28, 2019. The Company successfully refinanced its 2023 senior notes, raising an additional $100 million of debt. The Company's leverage ratio at the end of the first quarter, as defined in the Company's credit agreement, was 2.3x compared to 3.0x at the end of the prior year quarter.

The Company's effective tax rate was 19.7% compared with 27.6% for the first quarter in the prior year.

Acquisitions

On December 18, 2020, the Company closed the acquisition of DoMyOwn, a leading and fast-growing online retailer of professional-grade control products, strengthening the Company's position in the control product category. Further, on January 8, the Company closed the acquisition of Hopewell Nursery, a leading provider of live plants. The acquisition of Green Garden Products, a leading provider of vegetable, herb and flower seed packages and seed starters, is expected to close in the second quarter of fiscal 2021. These acquisitions are very recent and subject to purchase accounting. The Company will provide information as to management's expectations regarding the impact of the acquisitions on the Company's fiscal 2021 results during the Company's second quarter earnings call.

2021 Guidance

The Company continues to project fiscal 2021 EPS to be at or above $1.90, as compared to prior year EPS of $2.20. This guidance does not include the impact of its recent acquisitions or additional acquisitions that may close during fiscal 2021. As previously stated, the projected decline compared to fiscal 2020 reflects additional investments in capacity expansion, brand building and eCommerce as the Company continues to invest in sustainable growth, increasing labor and freight and key commodity costs in addition to resuming more normal levels of promotional activity and travel. The Company also anticipates second-half headwinds associated with lapping almost ideal weather for the gardening season and the COVID-19 tailwinds in fiscal 2020. In addition, the Company incurred non-GAAP expenses in the first quarter of fiscal 2021 related to its recent debt refinancing as well as the loss on the sale of the Breeder's Choice business, which impacts EPS by $(0.15) and $(0.04), respectively.

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 first quarter fiscal 2021 results. The conference call will be accessible on the investor relations section of the Company's website http://ir.central.com.

Alternatively, to listen to the call by telephone, dial (201) 689-8345 (domestic and international) using confirmation #13714995. A replay of the call will be available for three days by dialing (201) 612-7415 and entering confirmation #13714995.

The Company has also made available an Investor Presentation on the investor relations section of the Company's website http://ir.central.com.

About Central Garden & Pet

Central Garden & Pet (NASDAQ: CENT, CENTA) understands that home is central to life and has proudly nurtured happy and healthy homes for over 40 years. With 2020 net sales of $2.7 billion, Central is on a mission to lead the future of the pet and garden industries. The Company's innovative and trusted products are dedicated to help lawns grow greener, gardens bloom bigger, pets live healthier and communities grow stronger. Central is home to a leading portfolio of more than 65 high-quality brands including Pennington, Nylabone, Kaytee, Amdro and Aqueon, strong manufacturing and distribution capabilities and a passionate, entrepreneurial growth culture. Central Garden & Pet is based in Walnut Creek, California and has over 6,300 employees across North America and Europe. For additional information about Central, please visit the Company's website at www.central.com.

Safe Harbor Statement

"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 increased levels of investment to drive capacity expansion, brand building and eCommerce, increases in labor and freight cost as well as key commodities, in addition to resuming more normal levels of travel and promotional activity and their impact on future growth, and earnings guidance for fiscal 2021, 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:

* the impact of the COVID-19 pandemic on our business, including but not limited to, (i) the impact on our workforce, operations, fill rates, supply chain, demand for our products and services, and our financial results and condition, (ii) our ability to successfully manage the challenges associated with the COVID-19 pandemic, and (iii) the potential for future reductions in demand for product categories, which benefited from the COVID-19 pandemic; * the success of our new Central to Home strategy * 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; * our dependence upon our key executives; * risks associated with our acquisition strategy, including our ability to successfully integrate our recently announced acquisitions; * the impact of new accounting regulations on the Company's tax rate; * dependence on a small number of customers for a significant portion of our business; * the impact of tariffs or further expansion of the 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. The Company has not filed its Form 10-Q for the fiscal quarter ended December 26, 2020, so all financial results are preliminary and subject to change.

CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts, unaudited)

ASSETS December 26, December 28, September 26, 2020 2019 2020

Current assets:

Cash and cash equivalents $ 608,285 $ 445,813 $ 652,712

Restricted cash 13,670 12,990 13,685

Accounts receivable (lessallowances of $30,951, $21,257 322,806 268,229 391,773 and $27,661)

Inventories, net 574,878 556,479 439,615

Prepaid expenses and other 28,074 37,569 27,498

Total current assets 1,547,713 1,321,080 1,525,283



Plant, property and equipment, 252,157 241,795 244,667 net

Goodwill 289,955 289,854 289,955

Other intangible assets, net 131,557 145,153 134,924

Operating lease right-of-use 115,833 105,277 115,882 assets

Other assets 108,884 31,998 28,653

Total $ 2,446,099 $ 2,135,157 $ 2,339,364



LIABILITIES AND EQUITY

Current liabilities:

Accounts payable $ 216,991 $ 184,659 $ 205,234

Accrued expenses 189,290 124,774 201,436

Current lease liabilities 34,834 34,320 33,495

Current portion of long-term debt 97 107 97

Total current liabilities 441,212 343,860 440,262



Long-term debt 788,921 693,329 693,956

Long-term lease liabilities 85,729 75,283 86,516

Deferred income taxes and other 43,224 49,513 40,956 long-term obligations



Equity:

Common stock, $0.01 par value:11,336,358, 11,484,297 and11,336,358 shares outstanding at 113 115 113 December 26, 2020, December 28,2019 and September 26, 2020

Class A common stock, $0.01 parvalue: 42,171,329, 42,289,882 and41,856,626 shares outstanding at 422 423 419 December 26, 2020, December 28,2019 and September 26, 2020

Class B stock, $0.01 par value:1,612,374 shares outstanding atDecember 26, 2020, 1,647,922 at 16 16 16 December 28, 2019 and 1,612,374at September 26, 2020

Additional paid-in capital 570,678 570,117 566,883

Retained earnings 516,394 403,693 510,781

Accumulated other comprehensive (1,032 ) (1,240 ) (1,409 )loss

Total Central Garden & Pet 1,086,591 973,124 1,076,803 Company shareholders' equity

Noncontrolling interest 422 48 871

Total equity 1,087,013 973,172 1,077,674

Total $ 2,446,099 $ 2,135,157 $ 2,339,364

CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts, unaudited)

Three Months Ended

December 26, December 28, 2020 2019

Net sales $ 592,230 $ 482,828

Cost of goods sold and occupancy 426,811 351,562

Gross profit 165,419 131,266

Selling, general and administrative expenses 138,379 129,201

Operating income 27,040 2,065

Interest expense (20,975 ) (10,641 )

Interest income 206 2,004

Other income 752 305

Income (loss) before income taxes and 7,023 (6,267 )noncontrolling interest

Income tax expense (benefit) 1,381 (1,728 )

Income (loss) including noncontrolling interest 5,642 (4,539 )

Net income (loss) attributable to noncontrolling 29 (122 )interest

Net income (loss) attributable to Central Garden & $ 5,613 $ (4,417 )Pet Company

Net income (loss) per share attributable to Central Garden & Pet Company:

Basic $ 0.10 $ (0.08 )

Diluted $ 0.10 $ (0.08 )

Weighted average shares used in the computation of net income (loss) per share:

Basic 53,734 54,755

Diluted 54,686 54,755

CENTRAL GARDEN & PET COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands, unaudited)

Three Months Ended

December December 26, 2020 28, 2019

Cash flows from operating activities:

Net income (loss) $ 5,642 $ (4,539 )

Adjustments to reconcile net income (loss) to net cash used by operating activities:

Depreciation and amortization 12,915 13,140

Amortization of deferred financing costs 475 446

Non-cash lease expense 9,087 8,513

Stock-based compensation 4,669 4,152

Debt extinguishment costs 8,577 -

Loss on sale of business 2,611 -

Deferred income taxes 973 1,890

Gain on sale of property and equipment (664 ) (8 )

Other 210 474

Change in assets and liabilities (excluding businesses acquired):

Accounts receivable 68,929 32,173

Inventories (137,635 ) (89,327 )

Prepaid expenses and other assets (1,362 ) (8,065 )

Accounts payable 10,134 35,700

Accrued expenses (13,393 ) (4,422 )

Other long-term obligations 1,437 115

Operating lease liabilities (8,720 ) (8,264 )

Net cash used by operating activities (36,115 ) (18,022 )

Cash flows from investing activities:

Additions to plant, property and equipment (14,661 ) (9,877 )

Payments to acquire companies, net of cash acquired (80,887 ) -

Proceeds from the sale of business 2,400 -

Investments - (424 )

Other investing activities (223 ) (75 )

Net cash used in investing activities (93,371 ) (10,376 )

Cash flows from financing activities:

Repayments of long-term debt (400,024 ) (31 )

Proceeds from issuance of long-term debt 500,000 -

Premium paid on extinguishment of debt (6,124 ) -

Repurchase of common stock, including shares (871 ) (23,054 )surrendered for tax withholding

Payment of contingent consideration liability (110 ) (77 )

Distribution to noncontrolling interest (478 ) -

Payment of financing costs (8,031 ) (869 )

Net cash provided (used) by financing activities 84,362 (24,031 )

Effect of exchange rate changes on cash and cash 682 531 equivalents

Net decrease in cash, cash equivalents and restricted (44,442 ) (51,898 )cash

Cash, cash equivalents and restricted cash at 666,397 510,701 beginning of period

Cash, cash equivalents and restricted cash at end of $ 621,955 $ 458,803 period

Supplemental information:

Cash paid for interest $ 13,180 $ 12,944

Use of Non-GAAP Financial Measures

We report our financial results in accordance with accounting principles generally accepted in the United States (GAAP). However, to supplement the financial results prepared in accordance with GAAP, we use non-GAAP financial measures including non-GAAP net income and diluted net income per share, EBITDA and organic sales. 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.

EBITDA is defined by us as income before income tax, net other expense, net interest expense and depreciation and amortization (or operating income plus depreciation and amortization expense). We present EBITDA because we believe that EBITDA is a useful supplemental measure in evaluating the cash flows and performance of our business and provides greater transparency into our results of operations. EBITDA is used by our management to perform such evaluation. EBITDA should not be considered in isolation or as a substitute for cash flow from operations, income from operations or other income statement measures prepared in accordance with GAAP. We believe that EBITDA is frequently used by investors, securities analysts and other interested parties in their evaluation of companies, many of which present EBITDA when reporting their results. Other companies may calculate EBITDA differently and it may not be comparable.

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.

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 have not provided a reconciliation of non-GAAP guidance measures to the corresponding GAAP measures on a forward-looking basis due to the potential significant variability and limited visibility of the excluded items. 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:

* Incremental expenses from note redemption and issuance: we have excluded the impact of the incremental expenses incurred from the note redemption and issuance as they represent an infrequent transaction that occurs in limited circumstances that impacts the comparability between operating periods. We believe the adjustment of these expenses supplements the GAAP information with a measure that may be used to assess the sustainability of our operating performance. * Loss on sale of business: we have excluded the impact of the loss on the sale of a business as it represents an infrequent transaction that occurs in limited circumstances that impacts the comparability between operating periods. We believe the adjustment of this loss supplements the GAAP information with a measure that may be used to assess the sustainability of our operating performance.

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:

During the first quarter of fiscal 2021, we issued $500 million aggregate principal amount of 4.125% senior notes due October 2030. We used the proceeds to redeem all of our outstanding 6.125% senior notes due 2023. As a result of our redemption of the 2023 Notes, we incurred incremental(1) expenses of approximately $10.0 million, comprised of a call premium payment of $6.1 million, overlapping interest expense of approximately $1.4 million and a $2.5 million non-cash charge for the write-off of unamortized financing costs in interest expense. These amounts are included in Interest expense in the consolidated statements of operations.

During the first quarter of fiscal 2021, we recognized a loss of $2.6 million, included in selling, general and administrative expense in the(2) consolidated statement of operations, from the sale of our Breeder's Choice business unit after concluding it was not a strategic business for our Pet segment.

GAAP to Non-GAAP Reconciliation For the Three Months Ended

Net Income and Diluted Net Income Per Share December 26, December 28,Reconciliation 2020 2019

(in thousands, except per share amounts)

GAAP net income (loss) attributable to Central $ 5,613 $ (4,417 )Garden & Pet Company

Incremental expenses from note redemption and (1 ) 9,952 - issuance

Loss on sale of business (2 ) 2,611 -

Tax effect of incremental expenses and loss on $ (2,470 ) $ - sale

Non-GAAP net income (loss) attributable to $ 15,706 $ (4,417 )Central Garden & Pet Company

GAAP diluted net income (loss) per share $ 0.10 $ (0.08 )

Non-GAAP diluted net income (loss) per share $ 0.29 $ (0.08 )

Shares used in GAAP and non-GAAP diluted net 54,686 54,755 earnings per share calculation

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 For the Three Months Ended December 26 2020

Consolidated Pet Segment Garden Segment

Percent Percent Percent change change change

(in millions)

Reported netsales - Q1 FY21 $ 592.2 $ 436.4 $ 155.8 (GAAP)

Reported netsales - Q1 FY20 482.8 366.6 116.2 (GAAP)

Increase in net 109.4 22.7 % 69.8 19.0 % 39.6 34.1 %sales

Effect ofacquisition anddivestitures on 1.6 1.9 (0.3 ) increase in netsales

Increase inorganic net sales $ 111.0 23.0 % $ 71.7 19.6 % $ 39.3 33.8 %- Q1 FY21

EBITDA Reconciliation GAAP to Non-GAAP Reconciliation For the Three Months Ended December 26, 2020

Garden Pet Corp Total

(in thousands)

Net income attributable to - - - $ 5,613 Central Garden & Pet Company

Interest expense, net - - - 20,769

Other income - - - (752 )

Income tax expense - - - 1,381

Net income attributable to - - - 29 noncontrolling interest

Sum of items below operating - - - 21,427 income

Income (loss) from operations $ 4,651 $ 43,525 $ (21,136 ) $ 27,040

Depreciation & amortization 2,638 9,085 1,192 12,915

EBITDA $ 7,289 $ 52,610 $ (19,944 ) $ 39,955

EBITDA Reconciliation

GAAP to Non-GAAP Reconciliation For the Three Months Ended December 28, 2019

Garden

Pet

Corp

Total

(in thousands)

Net loss attributable to Central Garden & Pet Company

-

-

-

$

(4,417

)

Interest expense, net

-

-

-

8,637

Other income

-

-

-

(305

)

Income tax benefit

-

-

-

(1,728

)

Net loss attributable to noncontrolling interest

-

-

-

(122

)

Sum of items below operating income

-

-

-

6,482

Income (loss) from operations

$

(6,883

)

$

28,737

$

(19,789

)

$

2,065

Depreciation & amortization

2,713

9,072

1,355

13,140

EBITDA

$

(4,170

)

$

37,809

$

(18,434

)

$

15,205

View source version on businesswire.com: https://www.businesswire.com/news/home/20210203005822/en/

CONTACT: Investor Relations Contact Friederike Edelmann 925 412-6726 fedelmann@central.com