Prestige Consumer Healthcare Inc. — Form 10-Q Summary
Business context and period: Prestige develops, markets and distributes over-the-counter healthcare products in North America and international markets. This unaudited report covers the second quarter and first six months of fiscal 2023, ended September 30, 2022; comparisons are with the corresponding 2021 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Total revenue | $289.3, up 4.7% | $566.3, up 3.8% |
| Gross profit / margin | $161.0 / 55.7%, versus 57.1% | $321.1 / 56.7%, versus 58.1% |
| Operating income | $84.4, versus $78.6 | $171.4, versus $169.9 |
| Net income | $51.0, versus $45.3 | $106.3, versus $103.1 |
| Diluted EPS | $1.02, versus $0.89 | $2.11, versus $2.03 |
| Operating cash flow | Not separately reported for the quarter | $115.8, versus $130.5 |
Quarterly advertising and marketing expense was $43.8 million, up from $40.7 million; general and administrative expense fell to $26.4 million from $32.3 million, primarily because the prior-year period included Akorn acquisition costs. Quarterly interest expense increased to $17.0 million from $16.3 million. For the six months, the effective tax rate was 22.7%, compared with 24.2%.
Balance sheet, cash flow and debt
- At September 30, cash was $42.4 million, current assets $336.7 million and current liabilities $152.3 million.
- Long-term debt, net, was $1.438 billion; gross borrowings were $1.455 billion. Debt comprised $600 million of 3.750% notes due 2031, $400 million of 5.125% notes due 2028 and $455 million of variable-rate term loans due 2028.
- The ABL revolver had no borrowings and $149.1 million of available capacity. The company reported compliance with debt covenants and expected to remain compliant over the next twelve months.
- Six-month investing cash outflow was $3.4 million, primarily capital expenditures. Financing cash outflow was $95.3 million, including $40 million of term-loan repayment and $50 million of share repurchases. Cash increased $15.3 million from March 31.
- Inventory rose to $140.5 million from $120.3 million. Total assets were $3.679 billion and stockholders’ equity was $1.620 billion.
Material changes and management commentary
- International OTC revenue grew 51.9% in the quarter and 39.9% year to date, mainly on stronger Australian Hydralyte sales as COVID-19 restrictions eased and consumer illnesses increased. North American revenue was nearly flat in both comparisons.
- North American women’s health sales declined 8.7% in the quarter and 6.0% year to date; gastrointestinal sales increased 8.7% and 1.3%, respectively. International growth helped offset weaker North American category results.
- Gross margin declined year over year, mainly due to higher supply-chain costs and product mix; pricing actions partly offset these pressures. North American contribution margin also weakened amid increased marketing spending, while international contribution margin improved.
- Operating cash flow decreased year to date, reflecting higher working-capital needs, including inventory and receivables. Management said operating cash flow and existing credit facilities should fund working capital and capital expenditures for the next twelve months, excluding acquisitions.
- The company repurchased $50 million of shares under a program authorized for up to $50 million through May 2023. No common-stock dividends had been declared or paid.
- The prior-year periods included a $2.1 million debt-extinguishment loss related to the term-loan amendment. The company completed settlement of its U.S. qualified pension plan during the first quarter of fiscal 2023, recording a $0.4 million settlement loss; plan assets funded the settlements.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings or margin guidance. Management cautioned that supply-chain constraints, inflation, rising interest rates, geopolitical events and COVID-19-related uncertainty could pressure costs, supply and demand. The company reported shortages, delays, backorders, shipping difficulties, supplier price increases and labor constraints, although it had not experienced a material overall supply-chain disruption to date. It warned that these conditions could worsen and materially affect operations, liquidity and results.
Other disclosed risks include customer concentration (Walmart represented 20.3% of quarterly gross revenue; Walgreens 10.8%), reliance on third-party manufacturers and logistics providers, variable-rate debt, foreign exchange exposure, competition and potential impairment of goodwill and intangible assets. No events indicating potential goodwill or intangible-asset impairment were identified at September 30. The company said routine legal matters and claims, after considering reserves, were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether pricing and cost-control measures can offset continuing supply-chain and input-cost inflation without further gross-margin pressure.
- Whether international growth, particularly Australian Hydralyte sales, is sustainable and can compensate for softness in selected North American categories.
- Working-capital trends, especially inventory growth, and the durability of operating cash flow.
- Debt-service exposure: $455 million of variable-rate debt, with management estimating a 1% rate increase would have affected six-month pretax earnings and cash flow by approximately $2.4 million.
- Customer and supplier concentration, available revolver capacity, covenant compliance and the effects of ongoing share repurchases on liquidity.