Business context and reporting period
Prestige Consumer Healthcare Inc. develops, manufactures, markets and distributes over-the-counter healthcare products in North America and selected international markets. This Form 10-Q covers the fiscal second quarter and first six months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Three months ended September 30, 2021 | Six months ended September 30, 2021 |
|---|---|---|
| Total revenue | $276.2 million, up 16.3% | $545.4 million, up 16.8% |
| Gross profit / margin | $157.7 million / 57.1% (prior: 58.0%) | $316.7 million / 58.1% (prior: 58.2%) |
| Operating income | $78.6 million (prior: $72.9 million) | $169.9 million (prior: $153.0 million) |
| Net income | $45.3 million (prior: $44.6 million); diluted EPS $0.89 (prior: $0.88) | $103.1 million (prior: $88.3 million); diluted EPS $2.03 (prior: $1.74) |
| Operating cash flow | Not presented for the quarter | $130.5 million (prior: $127.3 million) |
| Cash and debt at September 30, 2021 | $42.8 million cash; $1.620 billion total debt, including $20.0 million drawn on the revolver |
Quarterly results included $5.1 million of Akorn acquisition-related costs in general and administrative expense and a $2.1 million loss on extinguishment of debt. The six-month cash-flow statement reports $4.3 million of capital expenditures; operating cash flow less capital expenditures was approximately $126.2 million.
Material changes versus the prior comparable period
- Revenue growth reflected increased consumer demand and share gains across much of the portfolio, easing pandemic-related travel restrictions, and the July 1 acquisition of Akorn’s consumer health assets, including TheraTears. North American revenue rose 16.2% in the quarter and 15.7% for the six-month period; international revenue rose 17.5% and 29.6%, respectively.
- Eye & Ear Care, Cough & Cold and Gastrointestinal were notable growth categories in the quarter. For six months, Eye & Ear Care, Gastrointestinal and Cough & Cold were key contributors.
- Quarterly gross margin declined to 57.1%, which management attributed primarily to higher supply-chain costs and $1.6 million in inventory valuation charges for acquired Akorn brands. Six-month gross margin was 58.1%, slightly below the prior-year 58.2%.
- Quarterly operating expenses increased, particularly general and administrative costs, partly due to the Akorn transaction. Lower interest expense supported earnings: six-month net interest expense was $31.4 million versus $43.2 million, with lower average borrowing costs.
- Cash used in investing was $233.0 million, mainly the $228.9 million Akorn purchase. Financing included $597.0 million of term-loan refinancing proceeds, alongside repayments and revolver activity.
Outlook, commentary, risks and unusual items
- No quantified revenue, earnings or margin guidance is provided in the filing. Management says operating cash flow and existing credit facilities are expected to fund working capital and capital expenditures for the next 12 months, excluding acquisitions.
- The Akorn purchase-price allocation remains preliminary. The acquisition added $229.0 million of intangible assets and $1.8 million of goodwill; acquired amortizable intangibles have an estimated weighted-average useful life of 12.5 years.
- On July 1, 2021, the company refinanced its term loan with $600.0 million of new Term B-5 loans, extending maturity to July 1, 2028. Debt agreements include leverage, interest-coverage and fixed-charge covenants. The company reported compliance at September 30 and anticipated continued compliance over the next 12 months.
- Management described potential supplier delays, backorders, shipping and product-cost increases, and labor shortages that could affect manufacturing and supply. It said there had been no material overall supply-chain disruption to date, but pandemic and economic effects remain uncertain.
- Customer and sourcing concentration are relevant: Walmart represented 22.7% of quarterly gross revenue; the five largest brands represented 41.3%. The company relies on third-party manufacturers and a primary third-party distribution center.
- Other exposures include variable-rate debt (about $420 million at September 30, partly hedged by a $200 million swap), foreign-exchange movements, competition, changing consumer demand and possible impairment of goodwill or intangible assets. No potential impairment indicators were identified at September 30.
- The company expects to terminate its U.S. qualified defined-benefit pension plan, with approximately $52.1 million of obligations to be settled through lump sums and annuity purchases; the transaction was expected to close in the first quarter of fiscal 2023. No distributions had occurred by September 30.
Important facts for investors to verify
- Whether revenue gains, particularly in travel-related and pandemic-affected categories, persist and how much growth reflects the Akorn acquisition versus organic performance.
- Whether supply-chain, freight, input-cost and labor pressures further affect gross margin and product availability.
- Final Akorn purchase accounting, integration performance, and the resulting amortization and cash-flow effects.
- Debt levels, borrowing availability, floating-rate exposure and continued covenant compliance.
- Working-capital movements and customer concentration, including the effect of the large accounts-receivable increase on cash conversion.