Third quarter sales decreased 11% to $438
million
Diluted EPS of $0.09 per share
Adjusted diluted EPS of $0.28 per share
compared to $0.28 per share in prior year quarter
Company takes charge of $16.9 million for
discontinued garden products
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
reported financial results for the third quarter ended June 28,
2014.
Net sales were $438.0 million, an 11 percent decrease from the
comparable fiscal 2013 period. Revenues declined in both the
Company’s Pet and Garden segments. Results were negatively impacted
by a $16.9 million charge related to the discontinuance of two
Garden products introduced in the spring of 2013 but benefitted
from a $2.0 million gain on the sale of certain fixed assets. Gross
margin declined 370 basis points due to lower margins in the
Company’s Garden segment, principally as a result of the Garden
charge recorded during the quarter. Third quarter operating income
was $18.4 million, compared to operating income of $32.9 million in
the third quarter of 2013. Adjusted operating income excluding the
Garden charge and the gain on the sale of fixed assets was $33.3
million. Net income for the quarter was $4.7 million, or $0.09 per
fully diluted share, compared with net income of $13.7 million or
$0.28 per fully diluted share in the third quarter of 2013.
Excluding the Garden charge and the gain on the sale of fixed
assets, adjusted net income was $14.1 million and earnings per
fully diluted share were $0.28 for the quarter.
Despite a concerted effort to improve the takeaway of the two
Garden products introduced in 2013 through product, packaging, and
placement changes, as well as aggressive promotions, the Company
continued to experience weak consumer sales for these products in
their second season. Late in the third quarter, major retailers
indicated that they would not be supporting the products going
forward. Consequently, the Company has made the decision to
discontinue these products at the end of the Garden season. In
conjunction with this decision, the Company recorded a $16.9
million charge to write off its inventory, and account for product
returns, promotional allowances, and other costs related to the
discontinuance of the products. The Company estimates that it may
incur up to an additional $2.5 million in related disposal costs
which would be reflected in the fourth quarter of 2014 and future
quarters.
Said Central President & CEO John Ranelli, “The right
decision was to cut our losses, discontinue the products and move
forward. We are continuing our aggressive efforts to improve
customer service, address issues that have impacted financial
performance and position the Company to create value for
shareholders.”
Garden Segment Details
Third quarter net sales for the Garden segment were $210.9
million, a decline of 18 percent from the third quarter of 2013,
impacted by the acceleration of retailer demand from the Company’s
third fiscal quarter into its second fiscal quarter. As previously
communicated, this acceleration occurred due to retailers
anticipating a favorable weather pattern and an early beginning to
the Garden season. Accordingly, it was expected that third quarter
sales would be lower than a year ago. While third quarter sales
were down substantially due to timing, year-to-date sales for the
Garden segment declined only two percent. The Garden segment’s
branded product sales for the quarter decreased $42.8 million, or
20 percent, to $172.7 million while sales of other manufacturers’
products declined $2.6 million or six percent to $38.2 million,
compared with the third quarter of 2013.
The Garden segment’s gross and operating margins declined during
the quarter, reflecting the Garden product discontinuance charge,
as well as lower gross margins in the grass seed, fertilizer, and
controls businesses, which were negatively impacted by higher costs
and unfavorable mix changes. For the third quarter, the Garden
segment’s operating income was $4.0 million, a decrease from $13.7
million in the third quarter of 2013. Garden’s operating margin
declined 340 basis points to 1.9%, including the Garden charge and
a $2.0 million gain on the sale of fixed assets. Excluding the
Garden charge and the gain on the sale of fixed assets, the
segment’s adjusted operating income increased $5.2 million to $18.9
million, reflecting reduced marketing costs. The Garden segment’s
adjusted operating margin was 8.7%.
Pet Segment Third Quarter
Details
Net sales for the Pet segment for the quarter were $227.1
million, a decline of five percent from the third quarter of 2013.
The decline encompassed most Pet categories and was primarily due
to industry weakness and less shelf space in certain categories, as
well as increased competition in the flea & tick category. The
Pet segment’s branded product sales for the quarter decreased $17.4
million, or nine percent, to $177.1 million. Sales of other
manufacturers’ products increased $6.7 million to $50.0 million, an
increase of 15 percent compared with the third quarter of 2013, due
primarily to increased sales in the independent channel.
The Pet segment’s operating income was $28.4 million, versus
$33.1 million in the comparable prior year period. Pet segment
gross margin improved, benefitting from higher gross margins in the
small animal and dog & cat businesses. Despite the gross margin
improvement, the Pet segment’s operating margin declined 140 basis
points to 12.5%, due in part to higher marketing costs compared to
the third quarter of last year. The majority of the marketing cost
increase was attributable to the Company’s flea & tick
business.
Year-to-Date Results
For the nine months ending June 28, 2014, the Company reported
consolidated net sales of $1.23 billion, a decrease from $1.28
billion in the comparable 2013 period. Branded products sales were
$1.00 billion, a seven percent decrease from the comparable 2013
period, and sales of other manufacturers' products increased eight
percent to $229.9 million, benefitting from expanded distribution.
Operating income for the period was $54.8 million compared to $66.5
million in the prior year. Excluding the third quarter Garden
product discontinuance charge and the gain on the sale of fixed
assets, adjusted operating income was $69.8 million. Net income for
the nine months ended June 28, 2014 was $12.9 million compared to
$20.7 million in the comparable 2013 period. Earnings per fully
diluted share were $0.26 compared to $0.42 per fully diluted share
in the year ago period. Excluding the third quarter Garden charge
and the gain on the sale of fixed assets, adjusted net income was
$22.3 million and adjusted earnings per fully diluted share were
$0.45 for the period ended June 28, 2014.
Cash flow from operations for the quarter totaled $128.9 million
compared to $96.7 million in the prior year period, an improvement
of $32.2 million. At June 28, 2014, the Company’s cash and short
term investments were $46.1 million. Total debt at June 28, 2014
was $450.3 million compared to $509.6 million at June 29, 2013, a
decrease of $59.3 million. As of June 28, 2014, there were no
borrowings outstanding on the Company’s senior-secured asset-based
revolving credit facility and $390.0 million remained available.
Net interest expense was $10.4 million for the quarter and $11.3
million in the prior year period. Depreciation and amortization
expense was $9.2 million, an increase from $7.8 million in the
third quarter of 2013. The Company’s effective tax rate for the
third quarter was 37.0 percent compared to 34.3 percent in the
third quarter of 2013 due to the absence of tax credits that
benefitted the prior year period.
The Company will not be hosting a conference call.
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 and the brands NORCAL POTTERY®,
NEW ENGLAND POTTERY® and MATTHEWS FOUR SEASONS™. 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 SYSTEMS®, 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®, VITA FLEX® and HORSE
HEALTHTM PRODUCTS. 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 expectations for future
favorable results and lower borrowing costs, 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:
- disruptions in the Company’s business;
and increased costs and expenses associated with the Company’s
change initiatives;
- 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;
- uncertainty about new products and
marketing programs;
- adverse weather conditions;
- dependence on a small number of
customers for a significant portion of our business;
- implementation of a new enterprise
resource planning information technology system;
- the impact on financial results of
costs incurred to consider and respond to the unsolicited Harbinger
proposal; and
- the impact of the Harbinger proposal on
our business.
These risks and others are described in Central’s Securities and
Exchange Commission filings, including our Annual Report on Form
10-K filed December 12, 2013 and our Quarterly Report on Form 10-Q
to be filed on August 7, 2014. Central 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 28, June 29,
September 28, ASSETS 2014 2013
2013 Current assets: Cash and cash equivalents $ 31,846 $
20,482 $ 15,156 Short term investments 14,220 17,820 17,820
Accounts receivable (less allowance for doubtful accounts of
$29,221, $23,355 and $21,158) 214,120 243,650 194,260 Inventories
365,035 413,070 391,934 Prepaid expenses and other 53,689
53,751 53,484 Total current assets 678,910 748,773
672,654 Land, buildings, improvements and equipment—net
177,660 190,921 188,913 Goodwill 205,756 210,223 205,756 Other
intangible assets—net 76,923 75,670 79,868 Deferred income taxes
and other assets 26,689 19,049 13,969 Total $
1,165,938 $ 1,244,636 $ 1,161,160
LIABILITIES AND
EQUITY Current liabilities: Accounts payable $ 89,959 $ 112,313
$ 103,569 Accrued expenses 89,521 93,213 78,618 Current portion of
long-term debt 296 205 142 Total current
liabilities 179,776 205,731 182,329 Long-term debt 449,994
509,430 472,445 Other long-term obligations 43,236 37,845 36,362
Equity: Common stock, $.01 par value: 12,308,802,
12,246,751, and 12,246,751 shares outstanding at June 28, 2014,
June 29, 2013 and September 28, 2013 123 122 122 Class A common
stock, $.01 par value: 36,479,590, 35,240,576 and 35,291,001 shares
outstanding at June 28, 2014, June 29, 2013 and September 28, 2013
365 352 353 Class B stock, $.01 par value: 1,652,262 shares
outstanding 16 16 16 Additional paid-in capital 398,244 388,443
389,153 Accumulated earnings 90,466 100,173 77,592 Accumulated
other comprehensive income 1,868 840 1,442
Total Central Garden & Pet Company shareholders’ equity 491,082
489,946 468,678 Noncontrolling interest 1,850 1,684
1,346 Total equity 492,932 491,630
470,024 Total $ 1,165,938 $ 1,244,636 $ 1,161,160
CENTRAL GARDEN & PET
COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
(in thousands, except per share
amounts)
(unaudited)
Three Months Ended Nine Months Ended
June 28,2014
June 29,2013
June 28,2014
June 29,2013
Net sales $ 437,987 $ 494,130 $ 1,230,119 $ 1,284,796 Cost of goods
sold and occupancy 318,856 341,664
883,651 902,201 Gross profit 119,131
152,466 346,468 382,595 Selling, general and administrative
expenses 100,705 119,574 291,628
316,051 Income from operations 18,426 32,892
54,840 66,544 Interest expense (10,429 ) (11,347 ) (33,051 )
(32,599 ) Interest income 14 28 43 120 Other income (expense)
456 353 396 (676 )
Income before income taxes and noncontrolling interest 8,467 21,926
22,228 33,389 Income taxes 3,133 7,520
8,217 11,370 Income including
noncontrolling interest 5,334 14,406 14,011 22,019 Net income
attributable to noncontrolling interest 647
681 1,137 1,367 Net income
attributable to Central Garden & Pet Company $ 4,687 $
13,725 $ 12,874 $ 20,652 Net income per
share attributable to Central Garden & Pet Company: Basic $
0.10 $ 0.28 $ 0.26 $ 0.43 Diluted $
0.09 $ 0.28 $ 0.26 $ 0.42
Weighted average shares used in the computation of net income per
share: Basic 49,148 48,173 48,732 48,037 Diluted 49,841 48,822
49,201 48,766
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. Additionally,
we have provided a comparison of our net debt amounts which can be
used as a measure of our net debt balances. 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 28,2014GAAP
Garden Charge (A) Gain on Sale
Of
Fixed Assets (B)
June 28,2014As
Adjusted
June 29,2013GAAP
Net sales $ 437,987 $ 7,035 $ - $ 445,022 $
494,130 Cost of goods sold and occupancy 318,856
(9,873 ) - 308,983
341,664 Gross profit $ 119,131 $ 16,908 $ - $
136,039 $ 152,466 Selling, general and administrative expenses
100,705 - 1,996
102,701 119,574 Income
from operations 18,426 16,908 (1,996 ) 33,338 32,892 Net Income $
4,687 $ 10,652 $ (1,258 ) $ 14,081 $ 13,725 Earnings per share -
Diluted $ 0.09 $ 0.21 $ (0.02 ) $ 0.28 $ 0.28 Weighted Shares
Outstanding 49,841 49,841 49,841 49,841 48,822 Gross margin
27.2 % 30.6 % 30.9 % Selling, general and administrative expenses
as a percentage of sales 23.0 % 23.1 % 24.2 % Operating margin 4.2
% 7.5 % 6.7 %
For the Nine Months Ended
June 28,2014GAAP
Garden Charge (A) Gain on Sale
Of
Fixed Assets (B)
June 28,2014As
Adjusted
June 29,2013GAAP
Net sales $ 1,230,119 $ 7,035 $ - $ 1,237,154 $ 1,284,796 Cost of
goods sold and occupancy 883,651 (9,873
) - 873,778
902,201 Gross profit $ 346,468 $ 16,908 $ - $ 363,376 $
382,595 Selling, general and administrative expenses 291,628
- 1,996
293,624 316,051 Income from operations
54,840 16,908 (1,996 ) 69,752 66,544 Net Income $ 12,874 $ 10,652 $
(1,258 ) $ 22,268 $ 20,652 Earnings per share - Diluted $ 0.26 $
0.22 $ (0.03 ) $ 0.45 $ 0.42 Weighted Shares Outstanding 49,201
49,201 49,201 49,201 48,766 Gross margin 28.2 % 29.4 % 29.8
% Selling, general and administrative expenses as a percentage of
sales 23.7 % 23.7 % 24.6 % Operating margin 4.5 % 5.6 % 5.2 %
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
Income fromOperations
OperatingMargin
Income fromOperations
OperatingMargin
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 29, 2013 as
reported (GAAP) $ 13,668 5.3 % $ 39,090 6.3 %
(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.
Net Debt Calculation
(unaudited, in thousands)
Net Debt:
June 28,2014
June 29,2013
Current portion of long term debt $ 296 $ 205 Long term debt
449,994 509,430 Total long term debt 450,290 509,635 Less:
Cash and cash equivalents 31,846 20,482 Short term investments
14,220 17,820 Net debt $ 404,224 $ 471,333
Central Garden & Pet CompanySteve Zenker,
925-948-3657Investor Relations
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