PBH

Business Context and Reporting Period

Company: Prestige Brands Holdings, Inc. (Prestige Consumer Healthcare Inc.)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Three and six months ended September 30, 2010
Business Overview: The Company markets, sells, and distributes over-the-counter healthcare and household cleaning brands to mass merchandisers, drug stores, and supermarkets primarily in the U.S. and Canada. Operations are divided into two segments: Over-the-Counter (OTC) Healthcare and Household Cleaning.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: For the six months ended September 30, 2010, total revenues increased 0.5% to $149.5 million compared to $148.8 million in the prior year. This was driven by a 3.4% increase in the OTC Healthcare segment, partially offset by a 4.4% decline in the Household Cleaning segment.
• Profitability: Net income increased 13.0% to $20.6 million for the six-month period, compared to $18.2 million in the prior year. Operating income rose 19.0% to $44.5 million.
• Segment Performance:
  • OTC Healthcare: Revenues increased due to growth in Clear Eyes, Compound W, and Little Remedies, offset by declines in Chloraseptic and The Doctor's.
  • Household Cleaning: Revenues declined due to lower consumer demand for Comet and Spic and Span products.
• Discontinued Operations: The Company sold assets related to its nail polish remover brand in September 2010, recognizing a net loss of $550,000. This segment was previously classified as Personal Care.

Guidance, Outlook, and Risks

• Subsequent Acquisition: On November 1, 2010, the Company acquired Blacksmith Brands Holdings, Inc. for $190 million in cash plus a working capital adjustment. This added five OTC brands (Efferdent, Effergrip, PediaCare, Luden's, and NasalCrom). The acquisition was funded by new debt issuances.
• Debt Structure: Following the acquisition, the Company amended its credit agreements, issuing an additional $100 million in Senior Notes and borrowing an incremental $115 million term loan. Total borrowing capacity under the revolving credit facility was increased to $40 million.
• Liquidity: The Company maintains a leverage ratio of less than 4.30 to 1.0 and an interest coverage ratio greater than 2.75 to 1.0. It was in compliance with all covenants as of September 30, 2010.
• Risks:
  • Customer Concentration: Approximately 22.5% of sales for the six months ended September 30, 2010, were made to a single customer.
  • Supply Chain: The Company relies on a single main distribution center in St. Louis, Missouri. A disruption there could materially impair operations.
  • Intangible Assets: Goodwill and intangible assets comprise the majority of the Company's assets ($661.3 million). Future impairments could occur if sales or margins decline.
  • Legal Proceedings: The Company is defending against a qui tam action filed by San Francisco Technology Inc. regarding false patent markings on Dermoplast products.

Investor Verification Checklist

• Acquisition Integration: Verify the financial impact and integration progress of the Blacksmith Brands acquisition completed in November 2010.
• Debt Covenants: Confirm continued compliance with leverage and interest coverage ratios given the increased debt load from the Blacksmith acquisition.
• Customer Concentration: Monitor the stability of the relationship with the single customer representing ~22.5% of sales.
• Intangible Asset Valuation: Review future impairment testing results for goodwill and indefinite-lived intangible assets, which represent a significant portion of the balance sheet.
• Legal Contingencies: Track the status of the San Francisco Technology Inc. litigation regarding Dermoplast patent markings.