Prestige Brands Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended December 31, 2015 (the third quarter of fiscal 2016; fiscal year ends March 31). The filing is by Prestige Brands Holdings, Inc.; the supplied company name, Prestige Consumer Healthcare Inc., does not match the registrant name in the filing.
Business context
The company markets and distributes over-the-counter healthcare and household-cleaning products in North America, Australia, and other international markets. It reports North American OTC Healthcare, International OTC Healthcare, and Household Cleaning segments. The prior-year comparison includes the Insight and Hydralyte acquisitions only for the periods after their respective 2014 closing dates.
Financial performance
| Metric | Three months ended Dec. 31, 2015 | Three months ended Dec. 31, 2014 | Nine months ended Dec. 31, 2015 | Nine months ended Dec. 31, 2014 |
|---|---|---|---|---|
| Total revenue | $200.2 million | $197.6 million | $598.4 million | $524.6 million |
| Gross profit / margin | $116.8 million / 58.3% | $111.7 million / 56.5% | $349.0 million / 58.3% | $296.2 million / 56.5% |
| Operating income / margin | $62.6 million / 31.3% | $57.0 million / 28.8% | $195.0 million / 32.6% | $146.3 million / 27.9% |
| Net income | $28.0 million | $21.3 million | $86.0 million | $54.5 million |
| Diluted EPS | $0.53 | $0.40 | $1.62 | $1.04 |
Quarterly revenue rose 1.3%; nine-month revenue increased 14.1%, primarily because Insight contributed approximately $74.1 million of revenue not present in the comparable prior-year period. Nine-month net sales were $596.0 million, compared with $521.0 million. Net income and diluted EPS increased in both comparisons. Gross-margin improvement reflected favorable product mix, including the acquired Insight brands. The filing defines segment contribution margin as gross profit less advertising and promotion; it is a non-GAAP measure.
Cash flow and liquidity: For the nine months, operating cash flow was $136.5 million, versus $104.1 million. Investing activities provided $5.0 million, while financing activities used $113.5 million. Capital expenditures were $2.5 million. Cash was $49.0 million at December 31, 2015, versus $21.3 million at March 31, 2015. Current assets were $228.2 million and current liabilities $86.7 million (current ratio approximately 2.6).
Debt: Principal debt was $1.478 billion, down from $1.594 billion at March 31, 2015; debt net of unamortized issuance costs was $1.447 billion. The company had no revolver borrowings and reported $115.4 million of available borrowing capacity. It was in compliance with debt covenants at quarter-end. Variable-rate term debt was $827.5 million; management estimated a 1 percentage-point rate increase would have raised pre-tax interest expense by approximately $2.1 million for the quarter and $6.3 million for the nine months.
Material changes and unusual items
- North American OTC revenue increased 2.6% in the quarter and 18.7% for the nine months; the year-to-date increase was largely acquisition-related. International OTC revenue declined 11.2% for the quarter and 4.3% for the nine months. Household Cleaning revenue was nearly flat quarterly and down 1.2% year to date.
- Quarterly interest expense fell to $19.5 million from $24.6 million, mainly due to lower average debt and borrowing costs. Nine-month interest expense rose to $62.1 million from $57.5 million because average debt was higher following the Insight acquisition.
- General and administrative expense declined year to date, principally because the prior-year period included Insight acquisition and integration costs. Depreciation and amortization increased, including amortization of Insight-related assets and the Pediacare trade name, which was reclassified as finite-lived.
- The company received $7.2 million from an arbitration settlement concerning Insight working capital; the amount reduced acquisition goodwill. A $0.5 million loss on debt extinguishment was recorded in the nine-month period. No goodwill or intangible-asset impairment charge was recorded in the period.
- Management reported that prior product shortages in women’s health and analgesics had been resolved through increased manufacturing. It also noted continuing Pediacare revenue and market-share declines.
Outlook, risks, and contingencies
- Management stated that operating cash flow and existing credit facilities were expected to support working capital and capital expenditures for the next 12 months, excluding acquisitions; it cautioned that there is no assurance.
- The estimated effective tax rate for the remaining fiscal 2016 quarters was approximately 35.1%, excluding acquisitions and discrete items.
- The company had agreed to acquire DenTek Oral Care for $225 million in cash. The acquisition had not closed as of the filing date; management anticipated financing it with cash, existing facilities, and a short-term bridge loan, with later refinancing.
- The company disclosed that it was conducting product recalls for two products and was in early-stage discussions with regulators regarding a product-registration matter. The filing does not provide clear details on the products, potential costs, or outcome.
- Key exposures include customer concentration (Walmart represented approximately 20.2% of quarterly gross revenue and 20.9% of receivables), dependence on third-party manufacturers and a principal U.S. distribution center, competition, foreign exchange, floating-rate debt, and potential impairment of goodwill and brands. Goodwill and intangible assets totaled approximately $2.399 billion.
- Routine legal matters were not expected by management to be material, taking recorded reserves into account. Actual resolution costs could differ; the filing does not quantify a specific material litigation contingency.
- The CEO changed in June 2015 and a new CFO took office in November 2015. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of reported growth and margin improvement is sustainable organically versus attributable to Insight and other acquisitions.
- DenTek’s closing status, final financing terms, resulting leverage, and effect on debt covenants and interest expense.
- Progress and potential financial impact of the two product recalls and the product-registration discussions with regulators.
- Whether Pediacare and other challenged brands stabilize, and whether revenue or margin trends could trigger impairment of the company’s substantial goodwill and intangible assets.
- Customer and supplier concentration, inventory requirements, and the company’s ability to maintain product availability while controlling working capital.
- Exposure to variable interest rates and foreign currencies, including the sensitivity estimates disclosed by management.