Prestige Consumer Healthcare Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and six months ended September 30, 2018, the second quarter and first half of fiscal 2019. Prestige sells over-the-counter healthcare products in North America and international markets. It sold its Household Cleaning segment on July 2, 2018; the company’s current reportable segments are North American OTC Healthcare and International OTC Healthcare.
Financial performance
| Metric | Three months ended Sep. 30, 2018 | Six months ended Sep. 30, 2018 |
|---|---|---|
| Total revenue | $239.4 million, down 7.2% | $493.3 million, down 4.1% |
| Gross profit / margin | $137.5 million / 57.4% | $278.1 million / 56.4% |
| Operating income | $70.9 million, versus $75.7 million | $143.4 million, versus $154.7 million |
| Net income | $30.8 million, versus $30.7 million | $65.3 million, versus $64.5 million |
| Diluted EPS | $0.59, versus $0.57 | $1.24, versus $1.20 |
| Operating cash flow | $95.1 million for the six months, versus $108.5 million |
Six-month cash capital expenditures were $5.1 million. Cash and cash equivalents were $36.9 million at September 30, compared with $32.5 million at March 31. Current assets were $314.5 million and current liabilities $146.0 million. Principal debt totaled $1.913 billion, or $1.896 billion net of unamortized debt costs; cash less principal debt implies net debt of approximately $1.876 billion. The revolving facility had $75 million drawn and $85 million of additional capacity.
Changes versus the prior comparable period
- Reported revenue fell mainly because the Household Cleaning business was sold. OTC revenues, excluding Household Cleaning, increased 1.3% in the quarter and 0.1% in the six-month period. International OTC sales rose 11.7% in the quarter, which management attributed primarily to distributor-order timing; North American OTC sales were nearly flat.
- Gross margin improved on a consolidated basis because the divested cleaning business had lower margins. North American OTC gross margin declined, primarily due to higher distribution costs and BC/Goody’s packaging-change costs; International OTC margin improved with product mix.
- Interest expense was $53.1 million for the six months, nearly level with the prior year, despite lower average debt; management reported a higher average borrowing cost of 5.3%, versus 4.9%.
- The effective tax rate declined to 27.4% for the six months from 36.8%, primarily reflecting the Tax Act. The prior fiscal year included a one-time net Tax Act gain of $270.2 million, not a current-period operating gain.
Outlook, commentary, risks and unusual items
- Management said operating cash flow and existing credit facilities should fund working capital and capital expenditures for the next 12 months, excluding acquisitions. No quantified earnings or revenue guidance was provided.
- The Household Cleaning sale generated $65.9 million in proceeds and a $1.3 million pretax gain; net proceeds were used to repay debt. The company also repaid $100 million of term debt and repurchased $50.0 million of stock during the six months.
- Prestige adopted ASC 606 on April 1, 2018 using the modified retrospective method. For 2018, adoption increased reported revenue versus the amounts that would have been reported without the standard by $16.2 million for the quarter and $22.1 million for the six months. This accounting change affects comparison with prior-year reported results.
- The company was in compliance with debt covenants at September 30 and expected to remain compliant in the normal course of operations. Approximately $913 million of debt was variable-rate; a 1 percentage-point rate increase would have reduced pretax earnings and cash flow by about $5.0 million for the six-month period, holding other factors constant.
- Risks include customer and brand concentration, competition and pricing pressure, dependence on third-party manufacturers and a primary distribution provider, input-cost increases, foreign-exchange and interest-rate exposure, and substantial debt. Walmart represented 24.1% of six-month gross revenue; the five largest brands represented 43.5%.
- The company reported no material change in risk factors, effective disclosure controls, and no material change in internal control over financial reporting during the quarter. Routine legal matters were not expected to have a material adverse effect, taking reserves into account.
Investor facts to verify
- How much of the reported revenue decline reflects the Household Cleaning divestiture versus underlying OTC performance, and how ASC 606 affects comparability.
- Whether North American OTC margin pressure from distribution and packaging costs persists, and whether International growth continues beyond distributor-order timing.
- Debt reduction, borrowing costs, variable-rate exposure, and ongoing covenant headroom.
- Cash-flow generation after the divestiture and share repurchases, and the company’s stated liquidity outlook excluding acquisitions.
- Exposure to key customers, top brands, third-party manufacturing, and the primary distribution operation.