Prestige Consumer Healthcare Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended September 30, 2020 (fiscal 2021 second quarter). The company sells over-the-counter healthcare products in North America and international markets.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2019 periods.
| Metric | Quarter ended Sep. 30, 2020 | Quarter ended Sep. 30, 2019 | Six months ended Sep. 30, 2020 | Six months ended Sep. 30, 2019 |
|---|---|---|---|---|
| Total revenues | $237.4 | $238.1 | $466.8 | $470.2 |
| Gross profit / margin | $137.7 / 58.0% | $136.8 / 57.4% | $271.5 / 58.2% | $270.8 / 57.7% |
| Operating income / margin | $72.9 / 30.7% | $69.3 / 29.1% | $153.0 / 32.8% | $140.8 / 30.0% |
| Net income | $44.6 | $33.3 | $88.3 | $67.2 |
| Diluted EPS | $0.88 | $0.65 | $1.74 | $1.31 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $127.3 | $103.0 |
- Quarterly revenue declined 0.3%; six-month revenue declined 0.7%. North American OTC revenue increased 1.3% for the quarter and 0.6% for the six months, while international revenue fell 13.8% and 13.1%, respectively.
- Quarterly operating expenses were $64.8 million, down from $67.4 million. For the six months, they were $118.5 million versus $130.0 million. Lower general and administrative costs reflected attrition and reduced travel; six-month advertising and marketing expense also declined.
- Quarterly net income increased 34%; six-month net income increased 31%. The effective tax rate declined to 14.1% for the quarter and 19.8% for the six months, from 24.5% and 25.4%, respectively. A $5.1 million release of a valuation allowance on foreign tax credit carryforwards, following final GILTI regulations, contributed to the lower six-month rate.
- Six-month operating cash flow rose $24.3 million year over year, primarily reflecting higher net income after non-cash items. Capital expenditures were $11.6 million, versus $5.8 million; financing used $186.7 million, mainly for debt repayments.
Balance sheet, debt and liquidity
- At September 30, 2020, cash was $26.6 million, compared with $94.8 million at March 31, 2020. Current assets were $269.9 million and current liabilities $136.1 million.
- Long-term debt, net of unamortized debt costs, was $1.548 billion, down from $1.730 billion at March 31. The company repaid $130 million of term loans and ended the period with no revolver borrowings and $132.7 million of available borrowing capacity.
- Debt consisted of $600 million of 6.375% notes due 2024, $400 million of 5.125% notes due 2028, and $560 million of term loans due 2024. The filing reports $1.6 billion of aggregate principal debt.
- Management stated that operating cash flow and existing credit facilities should be adequate for working capital and capital expenditures over the next 12 months, excluding acquisitions. The company was in compliance with debt covenants and expected to remain compliant over the next 12 months.
- Two interest-rate swaps hedge $400 million of variable-rate debt. Approximately $160 million of debt remained variable-rate at period-end. A 1% rate increase would have adversely affected six-month pretax earnings and cash flow by approximately $1.4 million, holding other variables constant.
Changes, outlook and risks
- COVID-19 drove uneven category trends: Women’s Health, Oral Care and Dermatologicals benefited from increased self-care and hygiene focus, while Cough & Cold and Gastrointestinal sales were affected by lower incidence and usage. Australian Hydralyte sales were also weaker amid reduced illness and athletic activity. Management reported no material supply-chain disruption or material aggregate negative impact on results or liquidity to date, but emphasized substantial uncertainty.
- North American gross margin improved, which management attributed mainly to completion of warehouse transition costs and improved logistics. International gross margin declined, primarily due to product mix. Six-month North American contribution margin also benefited from lower advertising spending and efficiencies.
- No numerical earnings or revenue guidance was provided. Management cautioned that COVID-19, consumer demand, supply and distribution disruptions, competition, customer concentration, interest and currency movements, and the company’s high goodwill and intangible-asset balances could adversely affect results. No interim impairment indicators were identified at September 30, 2020.
- Customer and brand concentration remain notable: Walmart represented approximately 22.5% of quarterly gross revenue; the five largest brands represented 45.8%. The company relies on a primary U.S. distribution center, a manufacturing facility for certain products, and third-party manufacturers.
- Routine legal matters and claims were not expected, net of reserves, to have a material adverse effect. The filing reported no material changes to risk factors from the prior annual report and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether category-level demand and international sales, particularly Hydralyte, recover or remain affected by pandemic-related behavior.
- Whether cash generation, lower debt and available revolver capacity remain sufficient amid reduced cash balances and continuing capital needs.
- Whether the lower effective tax rate and the $5.1 million tax valuation-allowance release are recurring; the filing describes the release as a discrete item.
- Whether customer, brand, third-party manufacturing and distribution concentration create material operating or bargaining risks.
- Whether prolonged pandemic effects or weaker sales and margins change assumptions used to value goodwill and intangible assets.