Prestige Consumer Healthcare Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2019, ended December 31, 2018. The company sells OTC healthcare products in North America and international markets; it sold its Household Cleaning segment on July 2, 2018.
Financial results
| Metric | Three months ended Dec. 31, 2018 | Prior-year period | Nine months ended Dec. 31, 2018 | Prior-year period |
|---|---|---|---|---|
| Total revenue | $241.4 million | $270.6 million | $734.8 million | $785.2 million |
| Gross profit | $139.2 million | $147.7 million | $417.3 million | $435.2 million |
| Gross margin | 57.7% | 54.6% | 56.8% | 55.4% |
| Operating income | $77.5 million | $83.9 million | $221.0 million | $238.6 million |
| Net income | $38.2 million | $314.8 million | $103.5 million | $379.3 million |
| Diluted EPS | $0.73 | $5.88 | $1.97 | $7.08 |
| Operating cash flow | Not presented quarterly | $138.4 million | $155.7 million |
Liquidity, debt and capital allocation
- Cash and cash equivalents were $24.7 million at December 31, 2018, versus $32.5 million at March 31, 2018. Current assets were $293.2 million and current liabilities were $128.8 million.
- Net long-term debt was $1.842 billion; principal debt outstanding was $1.858 billion, including $75 million drawn on the ABL revolver. Additional revolver capacity was $89.6 million.
- Operating cash flow of $138.4 million and investing cash inflow of $58.8 million, including $65.9 million of divestiture proceeds, were offset by $204.3 million of financing outflows. The company repaid $155 million of term debt and spent $50.0 million on share repurchases.
- Capital expenditures were $7.1 million for the nine-month period. Interest expense was $79.5 million. The company reported compliance with applicable debt covenants at quarter-end.
Material changes and management commentary
- Revenue declined 10.8% in the quarter and 6.4% for the nine months. The Household Cleaning divestiture was the principal cause; OTC revenue was down 4.0% in the quarter and 1.3% year to date. Management attributed North American OTC weakness mainly to retailer inventory reductions, and international quarterly weakness mainly to foreign exchange.
- Gross margin rose as the divested cleaning business had lower margins. North American OTC margins faced higher distribution costs and costs associated with BC and Goody’s packaging changes; international quarterly margin pressure reflected product mix.
- Prior-year net income and EPS are not directly comparable: the prior-year periods included substantial tax benefits following the Tax Act, including a $270.2 million net one-time gain recorded in fiscal 2018. The current-year nine-month effective tax rate was 26.6%, versus a prior-year benefit-driven rate of (137.6%).
- ASC 606 was adopted April 1, 2018 using the modified retrospective method. The standard affected reported revenue and income, with reported quarterly revenue $13.6 million below the amount calculated without adoption, while nine-month reported revenue was $8.5 million above that comparison amount. This accounting change affects period comparability.
- The company received $65.9 million from the Household Cleaning sale and used net proceeds to repay debt. It expects to provide transition services to the buyer for a specified period.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management said operating cash generation and existing credit facilities should be adequate for working capital and capital expenditures over the next 12 months, excluding acquisitions, and anticipated covenant compliance for the remainder of fiscal 2019.
- Key disclosed risks include retailer inventory practices, competition and pricing pressure, reliance on major customers and third-party manufacturers, dependence on a third-party distribution provider and a single manufacturing facility, foreign exchange, variable-rate debt, and the company’s substantial goodwill and intangible assets.
- Walmart represented 22.3% of quarterly gross revenue; the five largest brands represented approximately 41.7%. A hypothetical 1% increase in rates on variable-rate debt was estimated to reduce pre-tax earnings and cash flow by $2.2 million for the quarter and $7.2 million for the nine months.
- The company reported routine legal matters and claims; it did not expect their resolution, taking recorded reserves into account, to have a material adverse effect. It also expects lease-accounting adoption in fiscal 2020 to materially increase recognized lease assets and liabilities, but could not quantify the effect.
Important facts for investors to verify
- How much of OTC sales weakness reflects temporary retailer inventory reductions versus underlying consumer demand, particularly in North American Oral Care and other declining product groups.
- The continuing effects of ASC 606 on revenue comparisons and the separate contribution of the Household Cleaning divestiture to reported growth and margins.
- Debt reduction progress, interest costs, revolver availability and covenant headroom as variable borrowing costs and cash requirements evolve.
- Whether the company maintains cash generation and margins amid distribution and packaging costs, and whether customer, supplier and distribution concentration risks change.
- The quantified balance-sheet impact of adopting the lease standard and any subsequent impairment indicators for goodwill or intangible assets.