Prestige Brands Holdings, Inc. — Form 10-Q Summary
Entity note: The supplied filing is for Prestige Brands Holdings, Inc., not “Prestige Consumer Healthcare Inc.” The company markets and distributes over-the-counter healthcare and household-cleaning products.
Business context and reporting period
The quarter ended September 30, 2016, the second quarter of fiscal 2017; comparisons are with the quarter ended September 30, 2015. The filing also reports the six months ended September 30, 2016. The company operates North American OTC Healthcare, International OTC Healthcare and Household Cleaning segments. DenTek, acquired in February 2016, contributed to year-over-year growth.
Financial results and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Total revenue | $215.1 million, up 4.4% | $424.6 million, up 6.6% |
| Gross profit / margin | $124.0 million / 57.6% (58.2% prior year) | $245.6 million / 57.8% (58.3% prior year) |
| Operating income | $71.1 million, versus $69.9 million | $83.3 million, versus $132.4 million |
| Net income | $32.2 million, versus $31.8 million | $26.7 million, versus $58.0 million |
| Diluted EPS | $0.60, versus $0.60 | $0.50, versus $1.09 |
| Operating cash flow | Not separately stated for the quarter | $100.3 million, versus $90.6 million |
Six-month operating income and net income were depressed primarily by the $56.2 million pretax loss on selling three brands. The quarter included a $0.5 million net gain on asset sales: a $0.7 million additional loss on those brands was more than offset by a $1.2 million gain on Comet license rights. Six-month investing cash flow was $51.0 million, including $52.4 million from intangible-asset sales. Financing cash use was $147.7 million, including $130.5 million of term-loan repayments. Cash increased $3.2 million to $30.5 million.
At September 30, 2016, current assets were $279.7 million and current liabilities $114.3 million; the current ratio was approximately 2.4. Principal debt was $1.502 billion ($1.480 billion net of unamortized debt costs), down from $1.653 billion principal at March 31. The company had $65.0 million drawn on its ABL revolver and $68.2 million of stated borrowing capacity. It reported compliance with debt covenants. The filing states that cash from operations and existing credit facilities are expected to cover working capital and capital expenditures for the next 12 months, excluding acquisitions; it gives no revenue or earnings forecast.
Material changes versus the prior comparable period
- DenTek added approximately $17.2 million of revenue in the quarter and $33.8 million in the six-month period. Oral Care drove much of the reported growth; excluding DenTek, North American OTC revenue declined.
- Household Cleaning revenue declined 3.6% for the quarter and 3.1% for the six months, partly reflecting the sale of Comet royalty rights. The company will no longer receive the associated future royalties.
- Gross margin declined in both periods, primarily due to unfavorable product mix and weaker Household Cleaning margins. International OTC margins also reflected DenTek integration and product mix.
- General and administrative expense rose to $38.3 million for the six months from $34.1 million, reflecting compensation, DenTek integration and divestiture costs.
- Interest expense was $42.1 million for the six months, slightly below the prior-year $42.6 million; average debt remained about $1.6 billion for the period.
Outlook, risks and unusual items
- Management estimated an approximately 35.5% effective tax rate for the remaining fiscal 2017 quarters, excluding acquisitions and discrete items.
- The July 2016 sale of Pediacare, New Skin and Fiber Choice generated approximately $40.1 million including preliminary inventory and a preliminary pretax loss of $56.2 million. Proceeds were used to repay debt and pay related taxes.
- The buyer elected to exercise an option to acquire Dermoplast. The company expected completion by March 31, 2017, though the buyer had until December 31, 2017; $36.4 million of related assets were classified as held for sale.
- Key risks include high customer concentration (Walmart accounted for 21.1% of quarterly gross revenue and Walgreens 10.7%), reliance on third-party manufacturers and a single principal U.S. distribution center, variable-rate debt, foreign-exchange exposure, and potential impairment of substantial goodwill and intangible assets. Goodwill impairment indicators were not identified at quarter-end.
- The company reported routine legal matters and claims, stating their resolution, with reserves considered, was not expected to materially adversely affect results. It also disclosed that substantially all cash balances were uninsured.
- Management concluded disclosure controls were effective. DenTek’s historical internal-control structure was still being integrated. The filing disclosed an error in prior-quarter consolidating statements, assessed as immaterial to consolidated financial statements; it had no effect on consolidated balance sheet, income statement or cash flows.
Important facts for investors to verify
- Whether ongoing organic sales and margins can offset the nonrecurrence of DenTek-related acquisition growth and the divested brands.
- The timing and final proceeds of the Dermoplast sale, and any further adjustments to the divestiture loss or held-for-sale assets.
- Debt paydown, revolver availability, variable-rate exposure and continued covenant compliance.
- Customer and supplier concentration, product returns and promotional-spend estimates, and any indications of brand or goodwill impairment.
- The actual tax rate and the extent to which the disclosed 12-month liquidity expectation holds, particularly if the company pursues acquisitions.