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Blue Buffalo Reports Third Quarter 2017 Results

WILTON, Conn., Nov 07, 2017 (GLOBE NEWSWIRE via COMTEX) --

Blue Buffalo Pet Products, Inc. (the "Company") (NASDAQ:BUFF), the leading natural pet food company in the United States, today announced its third quarter 2017 results.

-- Third Quarter Highlights

? Net sales of $341 million, up 18.4%

? Net income of $53 million, up 147.4%; Adjusted Net Income of $53 million, up 19.1%

? Adjusted EBITDA of $89 million, up 20.0%

? Diluted EPS of $0.27, up 148.4% Adjusted Diluted EPS of $0.27, up 19.6%

-- 2017 Outlook

? Net sales between $1,250 and $1,265 million

? Adjusted Diluted EPS between $0.91 and $0.93

"We are excited about the progress of our launch of BLUE Life Protection Formula into the mass and grocery channel and look forward to growing our business as we expand distribution over the next few years," said Blue Buffalo CEO, Billy Bishop. "In addition, we are continuing to invest behind our exclusive specialty lines to maintain our leadership position in the specialty channel."

Third Quarter of 2017 Compared to Third Quarter of 2016

Net sales increased $52.8 million, or 18.4%, to $340.8 million, driven primarily by volume growth and favorable product mix. Net sales of Dry Foods increased $31.1 million, or 13.3%, to $265.0 million while net sales of Wet Foods, Treats and Other Products increased $21.7 million, or 40.1%, to $75.9 million.

Gross profit increased $27.6 million, or 20.7%, to $160.8 million and gross margin was 47.2%, up 90 bps compared with 46.3% in the third quarter of 2016. The increase in gross margin was driven primarily by favorable product mix and supply chain efficiencies, which were partially offset by higher distribution and warehousing costs.

Selling, general, and administrative expenses increased $9.7 million, or 14.8%, to $75.2 million. Adjusted SG&A, which excludes litigation expenses and costs incurred for our public offerings, increased $12.8 million, or 20.5%. The increase was primarily due to our ongoing investment in advertising and marketing consistent with our brand building strategy.

Net income increased $31.7 million, or 147.4%, to $53.1 million in the third quarter of 2017, as compared to $21.5 million in the third quarter of 2016. Adjusted Net Income, which excludes litigation expenses and costs incurred for our public offerings, increased $8.5 million, or 19.1%, to $53.3 million in the third quarter of 2017, compared to $44.7 million in the third quarter of 2016. Diluted Earnings Per Share in the third quarter of 2017 increased 148.4% to $0.27, compared to $0.11 in the third quarter of 2016. Adjusted Diluted Earnings Per Share in the third quarter of 2017 increased 19.6% to $0.27, compared to $0.22 in the third quarter of 2016.

First Nine Months of 2017 Compared to First Nine Months of 2016

Net sales increased $82.9 million, or 9.7%, to $937.6 million, driven primarily by volume growth and favorable product mix. Net sales of Dry Foods increased $53.4 million, or 7.7%, to $747.6 million while net sales of Wet Foods, Treats and Other Products increased $29.6 million, or 18.4%, to $190.0 million.

Gross profit increased $53.5 million, or 13.9%, to $437.2 million and gross margin was 46.6%, up 170 bps compared with 44.9% in the first nine months of 2016. The increase in gross margin was driven primarily by supply chain efficiencies and favorable product mix.

Selling, general, and administrative expenses increased $20.0 million, or 10.5%, to $210.8 million. Adjusted SG&A, which excludes litigation expenses and costs incurred for our public offerings, increased $25.4 million, or 13.9%. The increase was primarily due to our ongoing investment in advertising and marketing consistent with our brand building strategy.

Net income increased $44.5 million, or 46.6%, to $139.9 million as compared to $95.4 million in the first nine months of 2016. Adjusted Net Income, which excludes litigation expenses and costs incurred for our public offerings, increased $19.9 million, or 16.4%, to $141.2 million in the first nine months of 2017, compared to $121.3 million in the first nine months of 2016. Diluted Earnings Per Share in the first nine months of 2017 increased 46.6% to $0.70 compared to $0.48 in the first nine months of 2016. Adjusted Diluted Earnings Per Share in the first nine months of 2017 increased 16.4% to $0.71, compared to $0.61 in the first nine months of 2016.

Net cash provided by operating activities was $121.2 million in the first nine months of 2017 compared with $111.5 million in the first nine months of 2016. Net cash provided by operating activities for the first nine months of 2016 was reduced by $20.0 million, which includes $12.0 million of cash tax savings, related to our settlement agreement in the U.S. consumer class action lawsuits. Cash and cash equivalents were $308.4 million as of September 30, 2017 as compared to $292.7 million as of December 31, 2016. Capital expenditures for the first nine months of 2017 and 2016 were $71.7 million and $17.9 million, respectively.

Full Year 2017 Outlook

For the full year 2017, the Company expects to deliver net sales between $1,250 million and $1,265 million. The Company expects its Adjusted Diluted Earnings Per Share to be between $0.91 and $0.93. The outlook for full year 2017 Adjusted Earnings Per Share excludes costs related to litigation. The Company expects 2017 capital expenditures to be between $150 million and $170 million. The full year 2017 effective tax rate is expected to be between 36.4% and 36.9%.

Share Repurchase Program

During the three months ended September 30, 2017, the Company repurchased approximately 2.1 million shares of its common stock through open market purchases at an average price of $23.89, and a total cost of $50.0 million, including broker's commissions. As of September 30, 2017, the share repurchase program was fully executed.

Important Information Regarding Non-GAAP Financial Measures

The Company presents non-GAAP financial measures, including Adjusted Net Income, Adjusted EBITDA, Adjusted Diluted EPS, Adjusted SG&A, Adjusted Income Taxes, Adjusted Operating Income and Adjusted Gross Profit, in this press release as management uses these measures in assessing our operating performance, and we believe they are helpful to investors, securities analysts and other interested parties, in evaluating the performance of companies in our industry. We also believe that these non-GAAP financial measures are useful to management and investors, securities analysts and other interested parties as measures of our comparative operating performance from period to period. These non-GAAP financial measures are not measurements of financial performance under GAAP. They should not be considered as alternatives to cash flow from operating activities, as measures of liquidity, or as alternatives to net income as a measure of our operating performance or any other measures of performance derived in accordance with GAAP. The methods used by the Company to calculate its non-GAAP financial measures may differ significantly from methods used by other companies to compute similar measures. As a result, any non-GAAP financial measures presented herein may not be comparable to similar measures provided by other companies. Please see the schedules to this press release for additional information and reconciliations of such non-GAAP financial measures to the nearest GAAP measure. With respect to our expectations under "Full Year 2017 Outlook" above, for Adjusted Diluted EPS a reconciliation to the closest corresponding GAAP financial measure is not available without unreasonable efforts on a forward-looking basis due to the high variability, complexity and low visibility with respect to litigation expenses excluded from this non-GAAP financial measure. We expect the variability of these charges to have a potentially unpredictable, and potentially significant, impact on our future GAAP financial results.

Conference Call:

At 5 p.m. (Eastern Time) today, the Company will host a conference call to provide additional commentary on third quarter 2017 results. Further details will be accessible on the Company's website at http://ir.bluebuffalo.com. Participants may dial 844-743-2498 in the United States or 661-378-9532 internationally and use the access code 99782268, or access the webcast through the Company's website at http://ir.bluebuffalo.com. Participants are encouraged to dial into the call or link to the webcast at least fifteen minutes prior to the scheduled start time. A replay of the call will be available from November 7, 2017 to November 21, 2017 following the call. To access the replay, dial 855-859-2056 or 404-537-3406 and use the access code 99782268. The archive of the webcast will be available for a limited time on the Company's website at http://ir.bluebuffalo.com.

About Blue Buffalo

Blue Buffalo, based in Wilton, CT, is the nation's leading natural pet food company, providing natural foods and treats for dogs and cats under its BLUE Life Protection Formula, BLUE Wilderness, BLUE Basics, BLUE Freedom, BLUE Natural Veterinary Diet and BLUE Earth's Essentials lines. Paying tribute to its founding mission, the Company, through the Blue Buffalo Foundation, is a leading sponsor of pet cancer awareness and of critical research studies of pet cancer, including causes, treatments and the role of nutrition, at leading veterinary medical schools and clinics across the United States. For more information about Blue Buffalo, visit the Company's website at www.BlueBuffalo.com.

Forward-looking Statements

This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include, but are not limited to, statements related to the expectations regarding the performance of the Company's business, financial results, liquidity and capital resources and other non-historical statements, including the statements in the "Full Year 2017 Outlook" section of this press release. You can identify these forward-looking statements by the use of words such as "outlook," "forecast," "guidance," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "approximately," "projects," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties, including, among others, risks inherent to the pet food industry, macroeconomic factors beyond the Company's control, competition for customers, risks related to the Company's manufacturing and supply chain, the success of the Company's Heartland manufacturing facility, risk of disruption at the Company's third party distribution centers, risks related to the Company's expansion outside the United States, the Company's ability to protect the Company's intellectual property and that of third parties, performance of the Company's information technology systems, adverse litigation judgments or settlements and the Company's indebtedness. Additional factors that could cause the Company's results to differ materially from those described in the forward-looking statements can be found under the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (the "SEC") on March 1, 2017, as such risk factors may be updated from time to time in our periodic filings with the SEC, and which are accessible on the SEC's website at www.sec.gov. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this release and in the Company's filings with the SEC. The Company undertakes no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Contacts:

Investors & Financial Analysts

Michael Nathenson

EVP & CFO

203-665-3400

investors@bluebuff.com

Media

Phil Cheevers

VP, Communications

203-665-3234

media@bluebuff.com

Blue Buffalo Pet Products, Inc.
Unaudited Condensed Consolidated Statements of Income
(dollars in thousands, except for share data)
                                             Three Months Ended                    Nine Months Ended
                                             September 30,                         September 30,
                                             2017               2016               2017               2016
Net sales                                    $     340,845      $     287,996      $     937,627      $     854,682
Cost of sales                                180,028            154,787            500,398            470,938
Gross profit                                 160,817            133,209            437,229            383,744
Selling, general and administrative expenses 75,188             65,493             210,799            190,849
Provision for legal settlement               --                 32,000             --                 32,000
Operating income                             85,629             35,716             226,430            160,895
Interest expense                             2,667              3,766              8,979              11,233
Interest income                              (488          )    (137          )    (787          )    (361          )
Other non-operating (income) expense, net    (52           )    --                 32                 --
Income before income taxes                   83,502             32,087             218,206            150,023
Provision for income taxes                   30,365             10,605             78,297             54,584
Net income                                   $     53,137       $     21,482       $     139,909      $     95,439
Basic net income per common share            $     0.27         $     0.11         $     0.71         $     0.49
Diluted net income per common share          $     0.27         $     0.11         $     0.70         $     0.48
Basic weighted average shares                196,121,691        196,445,684        196,577,436        196,311,529
Diluted weighted average shares              198,659,459        199,452,308        199,258,760        199,290,017
Blue Buffalo Pet Products, Inc.
Unaudited Condensed Consolidated Balance Sheets
(dollars in thousands, except for share data)
                                                                                September 30,    December 31,
                                                                                2017             2016
ASSETS
Current assets:
Cash and cash equivalents                                                       $     308,382    $     292,656
Receivables, net                                                                150,545          115,446
Inventories                                                                     77,862           70,941
Prepaid expenses and other current assets                                       7,712            6,130
Total current assets                                                            544,501          485,173
Restricted cash                                                                 781              781
Property, plant and equipment, net                                              242,702          162,232
Deferred income taxes                                                           52               1,311
Other assets                                                                    1,056            853
Total assets                                                                    $     789,092    $     650,350
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt                                            $     4,000      $     3,960
Accounts payable                                                                56,473           35,238
Other current liabilities                                                       68,436           59,629
Total current liabilities                                                       128,909          98,827
Long-term debt                                                                  390,776          379,177
Deferred income taxes                                                           13,687           12,660
Other long-term liabilities                                                     12,465           13,348
Total liabilities                                                               545,837          504,012
Commitments and contingencies
Stockholders' equity:
Preferred stock; $0.01 par value; 150,000,000 shares authorized; none issued or --               --
outstanding at September 30, 2017 and December 31, 2016
Common stock, voting; $0.01 par value; 1,500,000,000 shares authorized;         1,973            1,965
197,344,697 and 196,524,010 shares issued at September 30, 2017 and December
31, 2016, respectively
Additional paid-in capital                                                      78,915           71,420
Retained earnings                                                               212,601          72,692
Accumulated other comprehensive (loss) income                                   (234          )  261
Treasury stock, at cost; 2,092,774 and no shares at September 30, 2017 and      (50,000       )  --
December 31, 2016, respectively
Total stockholders' equity                                                      243,255          146,338
Total liabilities and stockholders' equity                                      $     789,092    $     650,350
Blue Buffalo Pet Products, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(dollars in thousands)
                                                                                  Nine Months Ended September 30,
                                                                                  2017               2016
Cash flows from operating activities:
Net income                                                                        $       139,909    $       95,439
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization                                                     7,767              6,766
Amortization of debt issuance costs                                               247                91
Stock-based compensation                                                          2,976              3,051
(Gain) loss on disposal of fixed assets                                           562                (2              )
Deferred income taxes                                                             2,286              3,061
Provision for legal settlement                                                    --                 32,000
Payment of legal settlement                                                       --                 (32,000         )
Effect of changes in operating assets and liabilities:
Receivables                                                                       (35,324         )  (12,282         )
Inventories                                                                       (6,850          )  8,257
Prepaid expenses and other assets                                                 (1,849          )  (2,066          )
Accounts payable                                                                  20,812             4,055
Other liabilities                                                                 (9,292          )  5,158
Net cash provided by operating activities                                         121,244            111,528
Cash flows from investing activities:
Capital expenditures                                                              (71,665         )  (17,901         )
Restricted cash                                                                   --                 (308            )
Proceeds from the sale of fixed assets                                            --                 15
Net cash used in investing activities                                             (71,665         )  (18,194         )
Cash flows from financing activities:
Proceeds from borrowings of new debt                                              400,000            --
Repayment of long-term debt                                                       (382,147        )  --
Payments related to long-term refinancing                                         (4,382          )  --
Principal payments on long-term debt                                              (1,990          )  (2,970          )
Repurchases of common stock                                                       (50,000         )  --
Proceeds from exercise of stock options                                           4,527              1,805
Net cash used in financing activities                                             (33,992         )  (1,165          )
Effect of exchange rate changes on cash and cash equivalents                      139                (60             )
Net increase in cash and cash equivalents                                         15,726             92,109
Cash and cash equivalents at beginning of period                                  292,656            224,253
Cash and cash equivalents at end of period                                        $       308,382    $       316,362
Supplemental schedule of non-cash investing activities:
Accruals related to property, plant and equipment                                 17,125             --
Blue Buffalo Pet Products, Inc.
Reconciliation of GAAP to Adjusted Results*
(dollars in millions, except for share data)
                                    Three Months Ended September 30, 2017
                                    Gross      % of     SG&A      % of     Operating   % of     Income      % of     Net        % of     Diluted
                                    Profit     Sales              Sales    Income      Sales    Taxes       Sales    Income     Sales    EPS
As reported (GAAP)                  $  160.8   47.2 %   $ 75.2    22.1 %   $   85.6    25.1 %   $  30.4     8.9  %   $  53.1    15.6 %   $  0.27
Litigation expenses (a)             --                  0.2       0.1  %   0.2         0.1  %   0.1         --   %   0.1        --   %   --
As adjusted                         $  160.8   47.2 %   $ 75.0    22.0 %   $   85.8    25.2 %   $  30.4     8.9  %   $  53.3    15.6 %   $  0.27
                                    Three Months Ended September 30, 2016
                                    Gross      % of     SG&A      % of     Operating   % of     Income      % of     Net        % of     Diluted
                                    Profit     Sales              Sales    Income      Sales    Taxes       Sales    Income     Sales    EPS
As reported (GAAP)                  $  133.2   46.3 %   $ 65.5    22.7 %   $   35.7    12.4 %   $  10.6     3.7  %   $  21.5    7.5  %   $  0.11
Litigation expenses (a)             --                  2.1       0.7  %   2.1         0.7  %   0.8         0.3  %   1.3        0.5  %   0.01
Public offering costs (b)           --                  1.2       0.4  %   1.2         0.4  %   (0.3    )   (0.1 )%  1.5        0.5  %   0.01
Provision for legal settlement (c)  --                  --                 32.0        11.1 %   11.6        4.0  %   20.4       7.1  %   0.10
As adjusted                         $  133.2   46.3 %   $ 62.2    21.6 %   $   71.0    24.6 %   $  22.6     7.9  %   $  44.7    15.5 %   $  0.22
                                    Nine Months Ended September 30, 2017
                                    Gross      % of     SG&A      % of     Operating   % of     Income      % of     Net        % of     Diluted
                                    Profit     Sales              Sales    Income      Sales    Taxes       Sales    Income     Sales    EPS
As reported (GAAP)                  $  437.2   46.6 %   $ 210.8   22.5 %   $   226.4   24.1 %   $  78.3     8.4  %   $  139.9   14.9 %   $  0.70
Litigation expenses (a)             --                  2.1       0.2  %   2.1         0.2  %   0.8         0.1  %   1.3        0.1  %   0.01
As adjusted                         $  437.2   46.6 %   $ 208.7   22.3 %   $   228.5   24.4 %   $  79.1     8.4  %   $  141.2   15.1 %   $  0.71
                                    Nine Months Ended September 30, 2016
                                    Gross             % of       SG&A              % of       Operating         % of       Income            % of       Net               % of       Diluted
                                    Profit            Sales                        Sales      Income            Sales      Taxes             Sales      Income            Sales      EPS
As reported (GAAP)                  $       383.7     44.9    %  $       190.8     22.3    %  $       160.9     18.8    %  $       54.6      6.4     %  $       95.4      11.2    %  $       0.48
Litigation expenses (a)             --                           5.4               0.6     %  5.4               0.6     %  2.0               0.2     %  3.5               0.4     %  0.02
Public offering costs (b)           --                           2.1               0.2     %  2.1               0.2     %  --                --      %  2.1               0.2     %  0.01
Provision for legal settlement (c)  --                           --                           32.0              3.7     %  11.6              1.4     %  20.4              2.4     %  0.10
As adjusted                         $       383.7     44.9    %  $       183.3     21.4    %  $       200.4     23.5    %  $       68.2      8.0     %  $       121.3     14.2    %  $       0.61
* Amounts may not be additive due to rounding.
(a) Represents costs primarily related to our litigation against the third party ingredient supplier and broker that sold us mislabeled ingredients, as well as against our insurance providers, in connection with the litigation with Nestle Purina PetCare Company that was settled in November 2016.
(b) Represents costs incurred for our public offerings.
(c) Represents a provision related to the Settlement Agreement entered into in November 2016.
Blue Buffalo Pet Products, Inc.
Reconciliation of GAAP to Adjusted Results*
(dollars in millions, except for share data)
                                    Three Months Ended                                                          Nine Months Ended
                                    September 30, 2017                    September 30, 2016                    September 30, 2017                    September 30, 2016
Net income                          $                 53.1                $                 21.5                $                 139.9               $                 95.4
Interest expense, net               2.2                                   3.6                                   8.2                                   10.9
Provision for income taxes          30.4                                  10.6                                  78.3                                  54.6
Depreciation and amortization       2.5                                   2.3                                   7.8                                   6.8
EBITDA (a)                          88.1                                  38.0                                  234.2                                 167.7
Litigation expenses (b)             0.2                                   2.1                                   2.1                                   5.4
Public offering costs (c)           --                                    1.2                                   --                                    2.1
Provision for legal settlement (d)  --                                    32.0                                  --                                    32.0
Stock-based compensation (e)        0.8                                   1.0                                   3.0                                   3.1
Adjusted EBITDA                     $                 89.2                $                 74.3                $                 239.2               $                 210.2
* Amounts may not be additive due to rounding.
(a) EBITDA represents net income plus interest expense, net, provision for income taxes and depreciation and amortization.
(b) Represents costs primarily related to our litigation against the third party ingredient supplier and broker that sold us mislabeled ingredients, as well as against our insurance providers, in connection with the litigation with Nestle Purina PetCare Company that was settled in November 2016.
(c) Represents costs incurred for our public offerings.
(d) Represents a provision related to the Settlement Agreement entered into in November 2016.
(e) Represents non-cash, stock-based compensation expense.

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