Prestige Consumer Healthcare Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019 (fiscal 2020 first quarter), compared with the three months ended June 30, 2018. Amounts below are in U.S. dollars.
Business context and results
Prestige develops, markets and distributes over-the-counter healthcare products in North America and international markets. The company sold its Household Cleaning segment on July 2, 2018; accordingly, the prior-year quarter includes that segment while the current quarter does not.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $232.2 million | $254.0 million | Down 8.6% |
| OTC healthcare revenue | $232.2 million | $234.2 million | Down 0.9% |
| Gross profit / margin | $134.1 million / 57.8% | $140.6 million / 55.4% | Profit down 4.7%; margin up |
| Operating income | $71.5 million | $72.5 million | Down 1.4% |
| Net income | $33.9 million | $34.5 million | Down 1.6% |
| Basic / diluted EPS | $0.66 / $0.65 | $0.65 / $0.65 | Basic up; diluted unchanged |
| Cash from operations | $52.8 million | $55.9 million | Down $3.1 million |
Gross margin improvement primarily reflected the absence of the lower-margin Household Cleaning business. North American OTC revenue fell 1.9%, mainly due to inventory reductions at certain key retailers and unfavorable currency effects. International OTC revenue grew 10.2%, attributed to increased consumption and geographic expansion. Women's Health and Oral Care declined in North America; international segment margin was lower, primarily due to product mix and increased advertising and promotion.
Cash flow, debt and liquidity
- Cash and cash equivalents were $29.0 million at June 30, 2019, up $1.5 million from March 31, 2019. Capital expenditures were $2.0 million; operating cash flow less capital expenditures was approximately $50.8 million.
- Financing activities used $49.3 million, including $28.8 million for share repurchases. The company repaid $20.0 million net under its revolving credit facility during the quarter.
- Outstanding principal debt was $1.793 billion, comprising $400 million of 5.375% notes due 2021, $600 million of 6.375% notes due 2024, $738 million of term loans, and $55 million drawn on the revolver. Net debt carrying value was $1.779 billion. Revolver borrowing capacity was $102.7 million.
- Current assets were $310.5 million and current liabilities were $143.5 million. Management said operating cash generation and existing credit facilities were expected to support working capital and capital expenditures for the next 12 months, excluding acquisitions.
- The company was in compliance with applicable debt covenants. Management anticipated continued compliance in the normal course of operations. No actual leverage or interest-coverage ratio for the quarter is stated in the filing text.
Material changes, outlook and risks
- The $21.8 million reported revenue decline mainly reflects the prior-year quarter's $19.8 million of Household Cleaning revenue; continuing OTC revenue declined 0.9%. The business received approximately $65.9 million from the segment sale in July 2018 and used net proceeds to repay debt.
- Average indebtedness declined to $1.8 billion from $2.0 billion year over year, while average borrowing cost rose to 5.5% from 5.1%. A 1 percentage-point increase in rates on variable-rate debt would have reduced quarterly pretax earnings and cash flow by approximately $2.0 million, all else equal.
- The company adopted the new lease accounting standard on April 1, 2019, recording operating lease right-of-use assets and liabilities. A five-year logistics-provider lease commencing in July 2019 was expected to add approximately $20.5 million in right-of-use assets and lease liabilities in the following quarter.
- A new share repurchase program authorized up to $50 million through May 2020. The company repurchased 949,825 shares under the program for $28.8 million during the quarter; approximately $21.2 million remained available at June 30.
- Walmart represented approximately 24.2% of gross revenue, and the five largest brands together represented 44.1%. The filing identifies customer concentration, retailer inventory practices, third-party manufacturing and distribution, the distribution-center transition, competition, foreign exchange, interest rates, and the company's substantial goodwill and intangible assets as risks.
- Management reported no events indicating further potential impairment of goodwill or intangible assets at June 30. It expects routine legal matters and claims, after reserves, not to have a material adverse effect. No specific earnings or revenue guidance is provided; management cautions that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- How much of future reported growth reflects underlying OTC demand versus the divestiture comparison, retailer inventory changes, currency and product mix.
- Debt repayment capacity, floating-rate exposure, covenant headroom and the timing of principal maturities, particularly the $455 million scheduled for fiscal 2022 and $1.338 billion for fiscal 2024.
- Execution and cost effects of the distribution-provider transition and the new logistics facility lease.
- Whether repurchases continue at a pace consistent with debt reduction and liquidity needs, and whether customer concentration or brand performance changes.
- Potential impairment sensitivity: goodwill and intangible assets totaled approximately $3.08 billion at June 30, 2019.