Prestige Consumer Healthcare Inc. — Q3 FY2021 Form 10-Q
Business context and reporting period. Prestige develops, manufactures, markets and distributes over-the-counter healthcare products in North America and international markets. This quarter ended December 31, 2020; fiscal 2021 began April 1, 2020. Results below compare the three and nine months ended December 31, 2020 with the corresponding 2019 periods. Amounts are in millions, except per-share data.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Total revenue | $238.8, down 1.1% | $705.6, down 0.9% |
| Gross profit / margin | $138.9 / 58.2% (56.9% prior year) | $410.4 / 58.2% (57.4% prior year) |
| Operating income | $73.4, versus $76.4 | $226.5, versus $217.2 |
| Net income | $40.9, versus $38.1 | $129.2, versus $105.2 |
| Diluted EPS | $0.81, versus $0.75 | $2.55, versus $2.05 |
| Operating cash flow | Not separately reported for the quarter | $176.5, versus $161.0 |
Quarterly advertising and marketing expense rose to $38.1 from $33.6 million, while nine-month spending declined to $104.2 from $107.0 million. Interest expense fell to $20.1 from $24.3 million for the quarter and to $63.3 from $73.8 million year to date, reflecting lower average debt and borrowing costs. Nine-month effective tax rate was 21.1%, versus 25.2%, including a $5.1 million release of a valuation allowance on foreign tax credit carryforwards related to final GILTI regulations.
Balance sheet, cash flow and liquidity
At December 31, 2020, cash was $62.1 million, down from $94.8 million at March 31, 2020. Total debt was $1.56 billion gross and $1.549 billion net of unamortized debt costs. The company had no ABL revolver balance and reported $123.3 million of available borrowing capacity. Current assets were $301.2 million and current liabilities were $126.2 million.
For the nine months, operating cash flow of $176.5 million less capital expenditures of $17.3 million implies approximately $159.2 million of cash flow after capital expenditures. Financing used $195.7 million, including $130.0 million of term-loan repayments and $9.9 million of common-stock repurchases. Debt principal maturities were $1.16 billion in fiscal 2024 and $400 million thereafter. The company reported compliance with applicable debt covenants and expected to remain compliant over the next twelve months.
Material changes and management commentary
- North American revenue declined 2.0% in the quarter and 0.3% year to date. International revenue increased 5.7% in the quarter but declined 6.2% year to date.
- Cough & Cold revenue fell 33.1% in the quarter and 28.5% year to date; management attributed declines in Cough & Cold and, in some periods, Gastrointestinal to reduced illness incidence and product usage amid COVID-19 restrictions and less travel. Women’s Health, Oral Care and Dermatologicals generally benefited from increased at-home hygiene and self-care.
- Gross margin improved, which management attributed mainly to completion of transition costs and improved logistics following a warehouse and distribution-center transition. Nine-month North American contribution margin also benefited from lower advertising spend; quarterly advertising increases pressured contribution margin.
- Management said COVID-19 had not materially harmed aggregate sales, earnings or liquidity to date, but warned that further spread could disrupt operations, suppliers, manufacturing, distribution and demand. Consumer purchasing patterns and online purchasing have shifted.
Outlook, risks and unusual items
The filing provides no specific financial guidance. Management said operating cash flows and existing credit facilities were expected to fund working capital and capital expenditures for the next twelve months, excluding acquisitions. Forecast results remain uncertain, particularly given COVID-19, consumer demand changes, supply-chain dependence and the concentration of sales among a few customers and brands.
- A $1.2 million impairment was recorded on the Painstop finite-lived intangible asset after a regulatory change required physician prescriptions rather than direct over-the-counter sales.
- The company recognized a $0.2 million pension settlement gain after $7.0 million of plan assets were paid to participants electing lump-sum distributions.
- Walmart represented 21.7% of nine-month gross revenue; the five largest brands together represented 45.6%.
- Goodwill and intangible assets totaled approximately $3.06 billion. Management reported no further impairment indicators at December 31, 2020, but noted prolonged COVID-19 effects could change valuation assumptions and lead to future impairment charges.
- The company relies on third-party manufacturers and logistics providers, including one primary U.S. distribution center. It reported no material supply-chain disruption to date, while identifying disruption as a significant risk. Routine legal matters were not expected to have a material adverse effect.
Key facts for investors to verify
- Whether revenue trends in Cough & Cold, Gastrointestinal and international markets persist as pandemic restrictions and consumer behavior evolve.
- Whether improved gross margins and operating cash generation are sustainable after warehouse-transition benefits and temporary expense changes.
- Debt repayment capacity, covenant headroom, refinancing needs around the 2024 maturities, and the effect of variable interest rates.
- COVID-19 exposure across concentrated customer, brand, manufacturing and distribution relationships, including Walmart’s sales share.
- Potential impairment exposure in the company’s substantial goodwill and intangible asset balances, including the impact of Painstop’s regulatory change.