Prestige Brands Holdings, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2017, the company’s fiscal first quarter of fiscal 2018. The filing is for Prestige Brands Holdings, Inc.; this differs from the “Prestige Consumer Healthcare Inc.” name in the request metadata.
Business context and financial performance
The company develops, markets and distributes over-the-counter healthcare and household cleaning products. Results include C.B. Fleet, acquired January 26, 2017, and compare with the quarter ended June 30, 2016.
- Revenue: $256.6 million, up 22.4% from $209.6 million. Fleet contributed $54.9 million; divested brands reduced revenue by $11.0 million. Excluding those acquisition and divestiture effects, revenue increased $3.1 million.
- Profit: Gross profit was $143.5 million, up 18.0%; operating income was $79.0 million versus $12.2 million; net income was $33.8 million versus a $5.5 million loss. Diluted EPS was $0.63 versus a $0.10 loss.
- Margins: Gross margin declined to 55.9% from 58.0%, principally because Fleet had lower gross margins. Contribution margin, a company-defined non-GAAP measure, increased to $106.5 million from $94.0 million, but declined as a share of revenue to 41.5% from 44.8%.
- Cash flow: Operating cash flow was $54.1 million versus $51.3 million. Capital expenditures were $2.6 million; investing cash outflow was $1.6 million. The company repaid $50.0 million of term debt, and cash rose to $44.1 million from $41.9 million.
- Debt and liquidity: Principal debt was $2.172 billion, down from $2.222 billion at March 31, 2017; net debt was $2.145 billion. The company reported $90.0 million drawn on its revolving facility and $77.4 million of remaining borrowing capacity. Current assets were $328.2 million and current liabilities $153.6 million. The filing says the company was compliant with applicable covenants.
Changes, outlook, risks and unusual items
- Fleet acquisition drove most of the reported revenue growth and increased borrowing and interest costs. Net interest expense rose to $26.3 million from $21.1 million; average debt increased to $2.2 billion from $1.6 billion.
- Household Cleaning revenue declined 8.4%, and its contribution margin fell 37.3%, partly reflecting lower Comet royalties after the sale of royalty rights in certain regions. Healthcare segment margins also declined, with Fleet cited as a factor.
- The prior-year quarter included a $55.5 million pretax loss on the sale of Pediacare, New Skin and Fiber Choice. This materially affects the comparison: the prior-period net loss does not represent an equivalent recurring operating result.
- Management said cash from operations and existing credit facilities should be adequate for working capital and capital expenditures over the next 12 months, excluding acquisitions, but gave no specific revenue or earnings guidance. It expected an approximately 36.5% effective tax rate for the remaining nine months of fiscal 2018, excluding discrete items.
- Risks include substantial indebtedness and variable-rate exposure, customer concentration (Walmart represented 25.5% of gross revenue), reliance on third-party manufacturers and a distribution center, competition, input-cost inflation, and possible impairment of significant goodwill and intangible assets. A 1% increase in rates on variable-rate debt was estimated to reduce quarterly pretax earnings and cash flow by approximately $3.7 million.
- Fleet was excluded from management’s internal-control-over-financial-reporting assessment because it was recently acquired; the company was evaluating and integrating Fleet’s controls. Disclosure controls were judged effective. The filing also describes an error in prior consolidating statements involving intercompany transactions; management concluded it was not material to consolidated financial statements, and comparative consolidating information was revised.
Key facts for investors to verify
- How much of subsequent growth is organic, given the quarter’s modest $3.1 million increase excluding Fleet and divestitures?
- Whether Fleet integration, acquired-brand margins and synergies improve profitability and cash generation.
- Debt reduction, covenant headroom, refinancing requirements and sensitivity to interest-rate increases.
- Whether Household Cleaning weakness and dependence on major customers and external manufacturers persist.
- Progress integrating Fleet’s internal controls and any subsequent changes to the preliminary acquisition accounting or identified risks.