Prestige Consumer Healthcare Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2020, the first quarter of fiscal 2021; comparisons are with the three months ended June 30, 2019. Amounts are in U.S. dollars unless stated otherwise.
Business context and results
Prestige develops, manufactures, markets and distributes over-the-counter healthcare products in North America and selected international markets. It reports North American and International OTC Healthcare segments.
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $229.4 million | $232.2 million | Down 1.2% |
| Gross profit | $133.9 million | $134.1 million | Down $0.2 million |
| Gross margin | 58.4% | 57.8% | Up 0.6 percentage points |
| Operating income | $80.1 million | $71.5 million | Up $8.6 million |
| Net income | $43.7 million | $33.9 million | Up $9.8 million |
| Diluted EPS | $0.86 | $0.65 | Up $0.21 |
| Cash provided by operations | $75.2 million | $52.8 million | Up $22.4 million |
Operating income improved as advertising and marketing expense fell to $27.8 million from $34.8 million and general and administrative expense declined to $19.9 million from $21.7 million. Interest expense also decreased to $22.0 million from $25.1 million, reflecting lower average debt and borrowing costs. The effective tax rate was 24.9%, compared with 26.3%.
Segments and changes versus the prior period
- North American revenue was essentially flat at $210.7 million. Women’s Health, Oral Care and Dermatologicals grew, while Cough & Cold, Eye & Ear Care and Gastrointestinal declined.
- International revenue fell 12.3% to $18.7 million, primarily due to weaker Australian Hydralyte sales amid lower illness incidence and reduced athletic activity during COVID-19 restrictions.
- Consolidated gross profit was nearly unchanged, while gross margin improved, primarily from product mix. North American gross margin also benefited from improved logistics costs following a warehouse transition.
- Contribution margin increased 6.9% to $106.1 million, with the margin rising to 46.3% from 42.8%, largely reflecting lower marketing spending and improved gross margin.
Cash, debt and liquidity
- Cash and cash equivalents were $57.9 million at June 30, down $36.8 million from March 31, 2020. Operating cash flow was $75.2 million; investing cash outflow was $2.6 million; financing cash outflow was $111.4 million, including $56.0 million of term-loan repayments and $55.0 million of revolving-credit repayments.
- Debt principal was $1.634 billion ($1.621 billion net of unamortized debt costs): $600 million of 6.375% notes due 2024, $400 million of 5.125% notes due 2028, and $634 million under the term loan due 2024.
- The company had no revolver borrowings and reported $128.2 million of available borrowing capacity. It made $56 million of voluntary term-loan repayments in the quarter.
- Management said operating cash flow and existing credit facilities should fund working capital and capital expenditures for the next 12 months, excluding acquisitions. The company reported compliance with debt covenants and expected to remain compliant over that period.
Outlook, risks and unusual items
- The filing provides no quantified earnings or revenue guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results.
- COVID-19 drove a late-March sales increase followed by lower consumer consumption in subsequent weeks; effects varied by category. The company reported increased absenteeism at its distribution center and some suppliers early in the quarter, but no material overall supply-chain disruption to date. Further impacts on demand, supply, distribution, liquidity and operations remained uncertain.
- Customer concentration is significant: Walmart represented approximately 22.0% and Amazon 13.3% of gross revenue in the quarter. The five largest brands accounted for approximately 48.0% of gross revenue.
- Operations rely on a primary U.S. distribution center, one manufacturing facility for certain products, and third-party manufacturers. Disruptions, supplier contract risks, competition, consumer trends, foreign exchange and high indebtedness could adversely affect results.
- Goodwill and intangible assets totaled approximately $3.06 billion. No impairment indicators were reported at June 30, 2020, but adverse sales, margin or valuation changes could result in future impairment charges.
- Routine legal matters were not expected to have a material adverse effect, taking reserves into account. Two interest-rate swaps hedge $400 million of variable-rate debt; approximately $234 million of debt remained variable-rate. The filing estimates that a 1 percentage-point rate increase would reduce quarterly pretax earnings and cash flow by approximately $0.8 million, all else equal.
- No common-stock dividends were declared or paid. Repurchases in the quarter were limited to 31,117 shares withheld for employee tax obligations; no shares were bought under the public repurchase program.
Important facts for investors to verify
- How COVID-19-related changes in category demand, retailer ordering and supplier or distribution availability affect subsequent-quarter sales and margins.
- Whether lower marketing spending and other cost reductions are temporary or sustainable, and how they affect brand performance.
- Debt repayment capacity, covenant headroom, interest-rate exposure and the availability of the $128.2 million revolver capacity.
- Exposure to major customers, especially the increased share of revenue from Amazon, and dependence on key brands, manufacturers and logistics operations.
- Whether changing operating assumptions or discount rates create impairment risk for the substantial goodwill and intangible-asset balances.