Prestige Consumer Healthcare Inc. — FY2019 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended March 31, 2019; the fourth quarter ended that date. Prestige markets branded over-the-counter healthcare products in North America and international markets. It sold its Household Cleaning segment on July 2, 2018 and now reports North American and International OTC Healthcare segments. The company changed its name from Prestige Brands Holdings, Inc. in August 2018.
Financial results and position
| Metric | FY2019 | FY2018 |
|---|---|---|
| Revenue | $975.8 million | $1,041.2 million |
| Gross profit / margin | $555.6 million / 56.9% | $576.5 million / 55.4% |
| Operating income | $67.5 million | $215.5 million |
| Net income (loss) | ($35.8 million) | $339.6 million |
| Operating cash flow | $189.3 million | $210.1 million |
| Capital expenditures | $10.5 million | $12.5 million |
| Cash and cash equivalents at year-end | $27.5 million | $32.5 million |
| Total debt principal at year-end | $1.813 billion | $2.013 billion |
Revenue declined 6.3%, principally because the Household Cleaning sale reduced reported sales. OTC Healthcare revenue was down 0.5%: North American OTC fell 0.7%, while International OTC rose 2.0%. Reported gross margin improved 150 basis points, largely because the divested cleaning business had lower margins; North American OTC margin declined amid higher distribution and packaging-change costs. The company recorded $229.5 million of goodwill and tradename impairment, driving the operating-income and net-loss results. FY2018 net income included a $270.2 million one-time tax benefit from U.S. tax reform, so the year-over-year net-income comparison is not operationally comparable.
Fourth-quarter FY2019 revenue was $241.0 million and net loss was $139.3 million, reflecting the quarter’s $229.5 million impairment charge. Interest expense was $105.3 million for FY2019; average borrowing cost rose to 5.4% from 5.0%, while average debt declined to $1.9 billion from $2.1 billion.
Operating cash flow decreased by $20.8 million, which management primarily attributed to the Household Cleaning divestiture. Investing activities provided $55.4 million, including $65.9 million in divestiture proceeds. Financing activities used $249.3 million, including $200.0 million of voluntary term-loan repayments and $50.0 million of common-stock repurchases. Current assets were $300.9 million and current liabilities $127.0 million at year-end. The company reported $95.6 million of available ABL revolver capacity.
Material changes and unusual items
- The Household Cleaning sale generated $65.9 million of proceeds and a $1.3 million pretax gain; proceeds were used to repay debt.
- FY2019 impairment charges comprised $33.5 million of goodwill and $195.9 million of intangible assets, including Fleet, DenTek, Efferdent/Effergrip and other non-core brands. Efferdent/Effergrip was reclassified to a finite-lived asset and will be amortized over 15 years.
- The company adopted ASC 606 using the modified retrospective method. Compared with the prior revenue accounting method, FY2019 reported revenue was $14.8 million lower and net loss was $6.6 million lower; adoption also increased opening retained earnings by $1.3 million.
- The company repurchased approximately 1.45 million shares under its repurchase program for $50.0 million during FY2019. In May 2019, the board authorized an additional program of up to $50.0 million through May 2020.
- Management and the independent auditor concluded that internal control over financial reporting was effective as of March 31, 2019. The auditor gave an unqualified opinion on the financial statements and internal controls.
Outlook, risks and contingencies
Management stated that operating cash generation and existing credit facilities should be adequate for working capital and capital expenditures over the next 12 months, excluding acquisitions; this is not a guarantee. No numerical revenue or earnings guidance is provided. The company anticipated continued international growth and stated it expected to comply with debt covenants in FY2020. It reported covenant compliance at March 31, 2019.
- Leverage is substantial: $1.813 billion of debt principal, restrictive covenants and cross-default provisions. Variable-rate debt was approximately $813.0 million; a 1 percentage-point rate increase was estimated to raise annual pretax loss and cash outflow by about $9.3 million.
- Sales are concentrated: Walmart accounted for 23.7% of gross revenue and 25.1% of receivables. Customer relationships generally lack long-term purchase commitments.
- Manufacturing and distribution depend on third parties. Long-term contracts covered manufacturers producing 65.6% of gross sales, down from 73.6% in FY2018. The planned logistics-provider transition creates execution and service risks.
- Impairment sensitivity remains material. The North American Women’s Health reporting unit and one significant brand had fair values less than 10% above carrying values; additional impairment could follow weaker sales or higher valuation discount rates.
- Other risks include competitive and private-label pressure, retailer inventory reductions, input and freight costs, product regulation and liability, litigation, foreign-exchange exposure, cybersecurity, and dependence on key personnel and intellectual property.
- The company was involved in routine legal matters and believed their resolution, considering recorded reserves, would not materially affect results. The filing does not provide a quantified aggregate exposure.
- A new logistics agreement with GEODIS was signed May 13, 2019, with an initial five-year term and a budgeted facility cost of approximately $20 million over the term. Adoption of the new lease standard was expected to materially affect the balance sheet; the amount was not yet determined.
Important facts for investors to verify
- Underlying organic sales, retailer consumption and inventory trends, separating ongoing OTC performance from the cleaning-business divestiture.
- The assumptions behind the $229.5 million impairment and the valuation headroom for Women’s Health and other brands.
- Debt repayment capacity, covenant headroom, variable-rate exposure and refinancing needs, especially the $400 million notes due 2021 and principal maturities in 2022 and 2024.
- Results and costs of the distribution-center transition, and progress securing long-term manufacturing agreements.
- Cash-flow sustainability and the allocation of cash among debt reduction, acquisitions and share repurchases.
- Effects of ASC 606 and the lease-standard adoption when comparing reported results across periods.