Central Garden & Pet Company Announces Record Fiscal Year 2021 Operating Results

Fiscal 2021 net sales increased 23% to $3.3 billion
Fiscal 2021 diluted EPS of $2.75 vs. $2.20 for fiscal 2020
Initial outlook for fiscal 2022 EPS of $3.10 or better

WALNUT CREEK, Calif., November 22, 2021--(BUSINESS WIRE)--Central Garden & Pet Company (NASDAQ: CENT) (NASDAQ: CENTA) ("Central"), a market leader in the Garden and Pet industries, today announced results for its fourth quarter and fiscal year 2021 ended September 25, 2021.

"Central delivered another year of record results, thanks to the continued strength of the Garden and Pet industries and our teams' relentless execution as they adapt to the ever-changing dynamics of the pandemic. We made meaningful progress against our Central to Home strategy, investing in capabilities such as consumer insights, digital marketing and innovation, to drive our organic growth. Moreover, we added four acquisitions to the Central portfolio," said Tim Cofer, CEO of Central Garden & Pet. "As we look to fiscal 2022, we expect to face continued inflationary pressures and supply chain disruption. However, I am confident in the dedication of our people and their ability to perform in this challenging environment."

Fiscal 2021 Results

Net sales of $3.3 billion increased 23% from $2.7 billion in the prior year, driven by the Company's four recent acquisitions, Hopewell Nursery, Green Garden, DoMyOwn and D&D, as well as organic growth in both the Garden and Pet segments. Organic net sales increased 13%, with the most significant contributions coming from dog treats and chews, distribution, wild bird feed, small animal supplies and outdoor cushions.

Net sales for the Pet segment for fiscal 2021 increased 13% to $1.9 billion compared to $1.7 billion a year ago, and net sales for the Garden segment increased 38% to $1.4 billion compared to $1.0 billion in the prior year.

Despite significant inflationary headwinds and the impact of inventory-related purchase accounting, gross margin was largely in line with the prior year, decreasing 20 basis points to 29.4%. The Company was able to mostly offset these headwinds through a combination of pricing actions and gross productivity efforts as well as favorable product mix.

Operating income of $254 million increased 29% from $198 million in fiscal 2020. Operating margin increased 40 basis points to 7.7% compared to 7.3% a year ago, due to improved overhead leverage, despite rising logistics costs and heightened investment spending.

Other expense was $1.5 million compared to $4.3 million in the prior year. The difference was due primarily to impairment in fiscal 2020 on two minority investments impacted by the COVID-19 pandemic.

Net interest expense was $58 million compared to $40 million in the prior year. The increase was 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 first quarter of fiscal 2021 as well as higher debt outstanding.

Net income was $152 million, an increase of 26% compared to $121 million a year ago. Diluted earnings per share grew 25% to $2.75 compared to $2.20 in the prior year driven by strong operating results partially offset by a 1% increase in the number of shares outstanding and an increase in the Company's income tax rate, as compared to the prior year.

Adjusted EBITDA was $329 million, an increase of 30% compared to fiscal 2020.

The effective tax rate for the fiscal year was 21.6% compared to 21.0% in the prior year.

Fourth Quarter Fiscal 2021 Results

Net sales increased 9% to $739 million compared to $676 million in the fourth quarter of fiscal 2020, driven by the Company's four recent acquisitions, partially offset by an organic sales decline of 1%. The organic sales decline was principally due to unprecedented growth in net sales in the fourth quarter of fiscal 2020. On a two-year compound annualized growth rate basis, organic sales increased 11% in the fourth quarter.

Gross margin was largely in line with the prior year quarter, decreasing 20 basis points to 28.8%. The Company was able to mostly offset substantial inflationary cost pressure through a combination of aggressive pricing actions and gross productivity efforts as well as favorable product mix.

Operating income was $10 million compared to $25 million in the fourth quarter of fiscal 2020. Operating margin was 1.3%, a decrease of 240 basis points compared to 3.7% in the prior year quarter, primarily driven by increasing costs for key commodities, freight and labor as well as heightened strategic investment spending, partially offset by pricing actions and favorable product mix as well as improved overhead leverage.

Other expense was $1.9 million in the fourth quarter of fiscal 2021, compared to $35 thousand in the prior year quarter, mainly due to unfavorable minority investment activity.

Net interest expense was $14 million for the fourth quarter compared to $11 million in the prior-year period, primarily due to higher debt outstanding.

This resulted in a net loss of $3.0 million compared to net income of $14 million in the fourth quarter of fiscal 2020, and a loss per share of $0.06 compared to earnings per diluted share of $0.25 in the prior year quarter.

Adjusted EBITDA for the quarter was $32 million, down 23% from $41 million in the fourth quarter of fiscal 2020.

Pet Segment Fourth Quarter Fiscal 2021 Results

Fourth quarter net sales for the Pet segment increased 3% to $459 million. The most significant contributions to the segment's growth came from dog treats and chews, distribution, outdoor cushions and animal health. On a two-year compound annualized growth rate basis, sales increased 14% in the fourth quarter.

The Pet segment’s operating income was $32 million, compared to $36 million in the prior year quarter. Operating margin of 6.9% reflected a decrease of 110 basis points compared to 8.0% in the fourth quarter of fiscal 2020, primarily due to significant cost inflation across key commodities, freight and labor as well as heightened investment levels to build capacity and drive future growth, partially offset by pricing actions and favorable product mix.

Garden Segment Fourth Quarter Fiscal 2021 Results

Net sales for the Garden segment increased 21% to $280 million driven by a $78 million contribution from the Company's recent acquisitions. On an organic basis, net sales for the Garden segment declined 13%, as continued strength in wild bird feed was more than offset by softness across the rest of the Garden portfolio. On a two-year compound annualized growth rate basis, organic Garden segment sales increased 6% in the fourth quarter.

The Garden segment’s operating income was $1.1 million as compared to $14 million in the fourth quarter of fiscal 2020. Operating margin was 0.4%, down 570 basis points compared to 6.1% in the prior year quarter, primarily driven by significant cost inflation and investment which more than offset of pricing and productivity initiatives.

Additional Information

At September 25, 2021, the Company’s cash and cash equivalents was $426 million, compared to $653 million a year ago. Cash flow from operations for fiscal 2021 was $251 million, compared to $264 million in the prior year.

Total debt at September 25, 2021 was $1.2 billion compared to $700 million at September 26, 2020. The Company's leverage ratio, as defined in the Company's credit agreement, at the end of the quarter and the fiscal year was 3.0x compared to 2.2x in the prior year.

Outlook for Fiscal 2022

The Company currently projects fiscal 2022 GAAP EPS of $3.10 or better. The outlook includes the Company's anticipated investments in capacity expansion and automation at or slightly above fiscal 2021 levels, increased investments in brand building and eCommerce to drive sustainable growth, increasing costs for key commodities, freight and labor, muted consumer demand patterns following extraordinary demand spanning the last two fiscal years, as well as pricing actions across the Company's portfolio to help mitigate inflationary headwinds. The Company expects the impact of the headwinds to be more heavily front-half weighted.

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 year 2021 results. The conference call and related materials can be accessed on 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 #13723027.

About Central Garden & Pet

Central Garden & Pet (NASDAQ: CENT) (NASDAQ: CENTA) understands that home is central to life and has proudly nurtured happy and healthy homes for over 40 years. With fiscal 2021 net sales of $3.3 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 helping 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 7,000 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 investment levels to drive capacity expansion, brand building and eCommerce, increases in labor and freight cost as well as key commodities, price increases, in addition to resuming more normal levels of consumer activity and their impact on future growth, and earnings guidance for fiscal year 2022, 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:

• our ability to successfully manage the impact of COVID-19 on our business, including but not limited to, the impact on our workforce, operations, fill rates, supply chain, demand for our products and services, and our financial results and condition;

• the potential for future reductions in demand for product categories that benefited from the COVID-19 pandemic;

• the success of our Central to Home strategy;

• risks associated with our acquisition strategy, including our ability to successfully integrate acquisitions and the impact of purchase accounting on our financial results;

• inflation and other adverse macro-economic conditions;

• fluctuations in market prices for seeds and grains and other raw materials;

• fluctuations in energy prices, fuel and related petrochemical costs;

• our inability to pass through cost increases in a timely manner;

• supply chain delays and interruptions resulting in lost sales, reduced fill rates and service levels and delays in expanding capacity and automating processes;

• adverse weather conditions;

• seasonality and fluctuations in our operating results and cash flow;

• supply shortages in pet birds, small animals and fish;

• dependence on a small number of customers for a significant portion of our business;

• impacts of tariffs or a trade war;

• consolidation trends in the retail industry;

• declines in consumer spending during economic downturns;

• risks associated with new product introductions, including the risk that our new products will not produce sufficient sales to recoup our investment;

• competition in our industries;

• continuing implementation of an enterprise resource planning information technology system;

• potential environmental liabilities;

• risk associated with international sourcing;

• access to and cost of additional capital;

• potential goodwill or intangible asset impairment;

• our dependence upon our key executives and our ability to recruit employees generally;

• our inability to protect our trademarks and other proprietary rights;

• litigation and product liability claims;

• regulatory issues;

• the impact of product recalls;

• potential costs and risks associated with actual or potential cyber attacks;

• potential dilution from issuance of authorized shares;

• the voting power associated with our Class B stock; and

• the impact of new accounting regulations and the possibility our effective tax rate will increase as a result of future changes in the corporate tax rate or other tax law changes.

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 25, 2021					September 26, 2020
Current assets:
Cash and cash equivalents		$	426,422				$	652,712
Restricted cash		13,100					13,685
Accounts receivable, net		385,384					391,773
Inventories, net		685,237					439,615
Prepaid expenses and other		33,514					27,498
Total current assets		1,543,657					1,525,283
Plant, property and equipment, net		328,571					244,667
Goodwill		369,391					289,955
Other intangible assets, net		134,431					134,924
Operating lease right-of-use assets		165,602					115,882
Other assets		575,028					28,653
Total		$	3,116,680				$	2,339,364
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable		$	245,542				$	205,234
Accrued expenses		234,965					201,436
Current lease liabilities		40,731					33,495
Current portion of long-term debt		1,081					97
Total current liabilities		522,319					440,262
Long-term debt		1,184,683					693,956
Long-term lease liabilities		130,125					86,516
Deferred income taxes and other long-term obligations		56,012					40,956
Equity:
Common stock		113					113
Class A common stock		423					419
Class B stock		16					16
Additional paid-in capital		576,446					566,883
Retained earnings		646,082					510,781
Accumulated other comprehensive loss		(831		)			(1,409		)
Total Central Garden & Pet shareholders’ equity		1,222,249					1,076,803
Noncontrolling interest		1,292					871
Total equity		1,223,541					1,077,674
Total		$	3,116,680				$	2,339,364

CENTRAL GARDEN & PET COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
	Three Months Ended										Fiscal Year Ended
	September 25, 2021					September 26, 2020					September 25, 2021					September 26, 2020
Net sales	$	739,127				$	675,969				$	3,303,684				$	2,695,509
Cost of goods sold and occupancy	526,356					479,854					2,332,783					1,898,951
Gross profit	212,771					196,115					970,901					796,558
Selling, general and administrative expenses	203,166					170,948					716,405					598,581
Operating income	9,605					25,167					254,496					197,977
Interest expense	(14,269		)			(10,793		)			(58,597		)			(44,016		)
Interest income	93					248					415					4,027
Other expense, net	(1,876		)			(35		)			(1,506		)			(4,250		)
Income (loss) before income taxes and noncontrolling interest	(6,447		)			14,587					194,808					153,738
Income tax (benefit) expense	(3,225		)			1,007					42,035					32,218
Net income (loss) including noncontrolling interest	(3,222		)			13,580					152,773					121,520
Net income (loss) attributable to noncontrolling interest	(215		)			(9		)			1,027					844
Net income (loss) attributable to Central Garden & Pet Company	$	(3,007	)			$	13,589				$	151,746				$	120,676
Net income (loss) per share attributable to Central Garden & Pet Company:
Basic	$	(0.06	)			$	0.25				$	2.81				$	2.23
Diluted	$	(0.06	)			$	0.25				$	2.75				$	2.20
Weighted average shares used in the computation of net income per share:
Basic	53,926					53,619					53,914					54,008
Diluted	53,926					54,515					55,248					54,738

CENTRAL GARDEN & PET COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Fiscal Year Ended
	September 25, 2021					September 26, 2020					September 28, 2019
	(in thousands)
Cash flows from operating activities:
Net income	$	152,773				$	121,520				$	92,647
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	74,727					55,359					50,828
Amortization of deferred financing costs	2,208					1,873					1,832
Non-cash lease expense	41,044					35,025					—
Stock-based compensation	23,127					18,982					14,662
Debt extinguishment costs	8,577					—					—
Loss on sale of business	2,611					—					—
Deferred income taxes	(14,744		)			(6,615		)			6,659
(Gain) loss on disposal of property, plant and equipment	(256		)			1,171					730
Asset impairments	—					3,566					—
Other	4,716					4,675					(570		)
Changes in assets and liabilities (excluding businesses acquired):
Receivables	69,135					(91,470		)			1,485
Inventories	(132,170		)			27,351					(3,696		)
Prepaid expenses and other assets	13,370					4,683					(2,643		)
Accounts payable	24,583					52,047					30,473
Accrued expenses	6,734					72,278					12,261
Other long-term obligations	14,731					(83		)			306
Operating lease liabilities	(40,322		)			(36,089		)			—
Net cash provided by operating activities	250,844					264,273					204,974
Cash flows from investing activities:
Additions to property, plant and equipment	(80,333		)			(43,055		)			(31,577		)
Businesses acquired, net of cash acquired	(820,453		)			—					(41,161		)
Proceeds from sale of business	2,400					—					—
Payments for investments	(500		)			(4,439		)			(2,010		)
Other investing activities	(473		)			(612		)			(1,515		)
Net cash used in investing activities	(899,359		)			(48,106		)			(76,263		)
Cash flows from financing activities:
Repayments on revolving line of credit	(858,000		)			(200,000		)			—
Borrowings on revolving line of credit	858,000					200,000					—
Premium paid on extinguishment of debt	(6,124		)			—					—
Repayments of long-term debt	(430,401		)			(113		)			(46,193		)
Issuance of long-term debt	900,000					—					—
Repurchase of common stock, including shares surrendered for tax withholding	(27,892		)			(59,129		)			(62,974		)
Payments of contingent consideration	(373		)			(227		)			(170		)
Distribution to noncontrolling interest	(606		)			(143		)			(76		)
Payment of financing costs	(14,129		)			(948		)			(1,352		)
Net cash provided by (used in) financing activities	420,475					(60,560		)			(110,765		)
Effect of exchange rate changes on cash and equivalents	1,165					89					(250		)
Net (decrease) increase in cash, cash equivalents and restricted cash	(226,875		)			155,696					17,696
Cash, cash equivalents and restricted cash at beginning of year	666,397					510,701					493,005
Cash, cash equivalents and restricted cash at end of year	$	439,522				$	666,397		...		$	510,701
Supplemental information:
Cash paid for interest	$	42,762				$	43,892				$	42,702
Cash paid for income taxes – net of refunds