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MarketScreener Homepage  >  Equities  >  Nyse  >  Prestige Consumer Healthcare Inc.    PBH

PRESTIGE CONSUMER HEALTHCARE INC.

(PBH)
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PRESTIGE CONSUMER HEALTHCARE : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (form 10-Q)

08/06/2020 | 06:20am EST
The following discussion of our financial condition and results of operations
should be read together with the Condensed Consolidated Financial Statements and
the related notes included in this Quarterly Report on Form 10-Q, as well as our
Annual Report on Form 10-K for the fiscal year ended March 31, 2020. This
discussion and analysis may contain forward-looking statements that involve
certain risks, assumptions and uncertainties. Future results could differ
materially from the discussion that follows for many reasons, including the
factors described in Part I, Item 1A. "Risk Factors" in our Annual Report on
Form 10-K for the fiscal year ended March 31, 2020 and in future reports filed
with the U.S. Securities and Exchange Commission ("SEC").
See also "Cautionary Statement Regarding Forward-Looking Statements" on page   28   of
this Quarterly Report on Form 10-Q.


Unless otherwise indicated by the context, all references in this Quarterly
Report on Form 10-Q to "we," "us," "our," the "Company" or "Prestige" refer to
Prestige Consumer Healthcare Inc. and our subsidiaries. Similarly, reference to
a year (e.g., 2021) refers to our fiscal year ended March 31 of that year.

General

We are engaged in the development, manufacturing, marketing, sales and
distribution of well-recognized, brand name over-the-counter ("OTC") healthcare
products to mass merchandisers, drug, food, dollar, convenience, and club stores
and e-commerce channels in North America (the United States and Canada) and in
Australia and certain other international markets. We use the strength of our
brands, our established retail distribution network, a low-cost operating model
and our experienced management team to our competitive advantage.

We have grown our brand portfolio both organically and through acquisitions. We
develop our existing brands by investing in new product lines, brand extensions
and strong advertising support. Acquisitions of OTC brands have also been an
important part of our growth strategy. We have acquired strong and
well-recognized brands from consumer products and pharmaceutical companies, as
well as private equity firms. While many of these brands have long histories of
brand development and investment, we believe that, at the time we acquired them,
most were considered "non-core" by their previous owners. As a result, these
acquired brands did not benefit from adequate management focus and marketing
support during the period prior to their acquisition, which created
opportunities for us to reinvigorate these brands and improve their performance
post-acquisition. After adding a core brand to our portfolio, we seek to
increase its sales, market share and distribution in both existing and new
channels through our established retail distribution network.  We pursue this
growth through increased spending on advertising and marketing support, new
sales and marketing strategies, improved packaging and formulations, and
innovative development of brand extensions.

Coronavirus Outbreak
In January 2020, the World Health Organization ("WHO") announced a global health
crisis due to a new strain of coronavirus ("COVID-19"). In March 2020, the WHO
classified the COVID-19 outbreak as a pandemic. This pandemic is affecting the
United States and global economies, including causing significant volatility in
the global economy and resulting in materially reduced economic activity. If the
outbreak continues to spread or if we continue a period of recession or enter a
depression, it may materially affect our operations and those of third parties
on which we rely, including causing disruptions in the supply and distribution
of our products. We may need to limit operations and may experience material
limitations in employee resources. We did see an increase in sales at the end of
March 2020 related to the United States shelter-in-place restrictions, followed
by a significant decrease in consumer consumption in the weeks that followed.
The decrease in consumption varied over the quarter with some categories
positively impacted and some categories negatively impacted. Early in our first
quarter of fiscal 2021, it had been reported to us that there had been an
increase in absenteeism at our distribution center and some of our suppliers,
however, we have not experienced a material disruption to our overall supply
chain to date. These circumstances could change in this dynamic, unprecedented
environment. The extent to which COVID-19 impacts our results will depend on
future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of COVID-19,
and the actions to contain COVID-19 or treat its impact, among others. We do not
yet know the full extent of impacts on our business or the global economy.
However, these effects could have a material, adverse impact on our liquidity,
capital resources, operations and business and those of the third parties on
which we rely.

                                      -21-
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Results of Operations

Three Months Ended June 30, 2020 compared to the Three Months Ended June 30, 2019


Total Segment Revenues

The following table represents total revenue by segment, including product groups, for the three months ended June 30, 2020 and 2019.

                                                                          Three Months Ended June 30,
                                                                                                                  Increase (Decrease)
(In thousands)                          2020                %                2019               %               Amount               %
North American OTC Healthcare
Analgesics                          $   27,867             12.1          $  28,535             12.3          $    (668)             (2.3)
Cough & Cold                            13,438              5.9             17,340              7.5             (3,902)            (22.5)
Women's Health                          65,410             28.5             59,578             25.7              5,832               9.8
Gastrointestinal                        30,050             13.1             31,572             13.6             (1,522)             (4.8)
Eye & Ear Care                          22,852             10.0             26,753             11.5             (3,901)            (14.6)
Dermatologicals                         27,620             12.0             25,738             11.1              1,882               7.3
Oral Care                               22,166              9.7             19,979              8.6              2,187              10.9
Other OTC                                1,255              0.5              1,289              0.6                (34)             (2.6)
Total North American OTC Healthcare    210,658             91.8            210,784             90.9               (126)             (0.1)

International OTC Healthcare
Analgesics                                 274              0.1                230              0.1                 44              19.1
Cough & Cold                             3,902              1.7              5,382              2.3             (1,480)            (27.5)
Women's Health                           2,431              1.1              2,419              1.0                 12               0.5
Gastrointestinal                         5,705              2.5              6,985              3.0             (1,280)            (18.3)
Eye & Ear Care                           2,545              1.1              3,011              1.3               (466)            (15.5)
Dermatologicals                            699              0.3                690              0.3                  9               1.3
Oral Care                                3,179              1.4              2,652              1.1                527              19.9
Other OTC                                    1                -                  1                -                  -                 -
Total International OTC Healthcare      18,736              8.2             21,370              9.1             (2,634)            (12.3)

Total Consolidated                  $  229,394            100.0          $ 232,154            100.0          $  (2,760)             (1.2)



Total segment revenues for the three months ended June 30, 2020 were $229.4
million, a decrease of $2.8 million, or 1.2%, versus the three months ended June
30, 2019. The $2.8 million decrease was primarily related to the decrease in our
International OTC Healthcare segment.

North American OTC Healthcare Segment
Revenues for the North American OTC Healthcare segment were relatively flat,
decreasing $0.1 million, or 0.1%, during the three months ended June 30, 2020
versus the three months ended June 30, 2019. The three months ended June 30,
2020 were positively impacted by the Women's Health, Oral Care and
Dermatologicals categories, but offset by lower Cough & Cold, Eye & Ear Care and
Gastrointestinal revenues as categories we participate in faced declines in
incidence levels and usage rates related to COVID-19.

International OTC Healthcare Segment
Revenues for the International OTC Healthcare segment decreased $2.6 million, or
12.3%, during the three months ended June 30, 2020 versus the three months ended
June 30, 2019. The $2.6 million decrease was primarily attributable to decreased
sales in our Australian subsidiary primarily related to the reduction in sales
of Hydralyte due to both lower general consumer illnesses and activities such as
athletics resulting from the various social distancing measures brought on by
COVID-19.
                                      -22-
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Gross Profit
The following table presents our gross profit and gross profit as a percentage
of total segment revenues, by segment for each of the periods presented.
                                                                                 Three Months Ended June 30,
(In thousands)                                                                                                           Increase (Decrease)
Gross Profit                                2020               %                2019               %                   Amount                  %
North American OTC Healthcare           $ 122,831             58.3          $ 121,973             57.9          $           858                0.7
International OTC Healthcare               11,037             58.9             12,094             56.6                   (1,057)              (8.7)

                                        $ 133,868             58.4          $ 134,067             57.8          $          (199)              (0.1)



Gross profit for the three months ended June 30, 2020 was relatively flat,
decreasing $0.2 million, or 0.1%, when compared with the three months ended June
30, 2019. The decrease in gross profit was primarily due to the decrease in the
International OTC Healthcare segment. As a percentage of total revenues, gross
profit increased to 58.4% during the three months ended June 30, 2020, from
57.8% during the three months ended June 30, 2019. The increase in gross profit
as a percentage of revenues was primarily a result of product mix.
North American OTC Healthcare Segment
Gross profit for the North American OTC Healthcare segment remained relatively
flat, increasing $0.9 million, or 0.7%, during the three months ended June 30,
2020 versus the three months ended June 30, 2019. As a percentage of North
American OTC Healthcare revenues, gross profit increased to 58.3% during the
three months ended June 30, 2020 from 57.9% during the three months ended June
30, 2019, primarily due to improved logistics costs resulting from our warehouse
transition.

International OTC Healthcare Segment
Gross profit for the International OTC Healthcare segment decreased $1.1
million, or 8.7%, during the three months ended June 30, 2020 versus the three
months ended June 30, 2019. As a percentage of International OTC Healthcare
revenues, gross profit increased to 58.9% during the three months ended June 30,
2020 from 56.6% during the three months ended June 30, 2019, primarily due to
customer and product mix.

Contribution Margin
Contribution margin is our segment measure of profitability. It is defined as
gross profit less advertising and marketing expenses.

The following table presents our contribution margin and contribution margin as a percentage of total segment revenues, by segment for each of the periods presented.

                                                                             Three Months Ended June 30,
(In thousands)                                                                                                      Increase (Decrease)
Contribution Margin                        2020               %               2019               %                Amount                %
North American OTC Healthcare          $  98,151             46.6          $ 90,959             43.2          $    7,192                7.9
International OTC Healthcare               7,967             42.5             8,307             38.9                (340)              (4.1)

                                       $ 106,118             46.3          $ 99,266             42.8          $    6,852                6.9



North American OTC Healthcare Segment
Contribution margin for the North American OTC Healthcare segment increased $7.2
million, or 7.9%, during the three months ended June 30, 2020 versus the three
months ended June 30, 2019. As a percentage of North American OTC Healthcare
revenues, contribution margin increased to 46.6% during the three months ended
June 30, 2020 from 43.2% during the three months ended June 30, 2019. The
contribution margin increase as a percentage of revenues was primarily due to
the increase in gross margin noted above as well as a decrease in advertising
and marketing reflecting spend efficiencies and reductions across
brands/categories driven by consumer behavior.

International OTC Healthcare Segment
Contribution margin for the International OTC Healthcare segment decreased $0.3
million, or 4.1%, during the three months ended June 30, 2020 versus the three
months ended June 30, 2019. As a percentage of International OTC Healthcare
revenues, contribution margin increased to 42.5% during the three months ended
June 30, 2020 from 38.9% during the three months ended June 30, 2019. The
contribution margin increase as a percentage of revenues was primarily due to
the increase in gross
                                      -23-
--------------------------------------------------------------------------------

margin noted above as well as a decrease in advertising and marketing reflecting
spend efficiencies and reductions across brands/categories driven by consumer
behavior.
General and Administrative
General and administrative expenses were $19.9 million for the three months
ended June 30, 2020 versus $21.7 million for the three months ended June 30,
2019. The decrease in general and administrative expenses was primarily due to a
decrease in compensation costs resulting from attrition as well as reduced
travel costs.

Depreciation and Amortization
Depreciation and amortization expenses remained relatively flat at $6.1 million
for the three months ended June 30, 2020 and 2019.

Interest Expense
Interest expense was $22.0 million during the three months ended June 30, 2020,
versus $25.1 million during the three months ended June 30, 2019. The average
indebtedness decreased to $1.7 billion during the three months ended June 30,
2020 from $1.8 billion during the three months ended June 30, 2019. The average
cost of borrowing decreased to 5.1% for the three months ended June 30, 2020
from 5.5% for the three months ended June 30, 2019.

Income Taxes
The provision for income taxes during the three months ended June 30, 2020 was
$14.5 million versus $12.1 million during the three months ended June 30,
2019. The effective tax rate during the three months ended June 30, 2020 was
24.9% versus 26.3% during the three months ended June 30, 2019. The decrease in
the effective tax rate for the three months ended June 30, 2020 was primarily
due to discrete items arising from stock-based compensation.

Liquidity and Capital Resources

Liquidity

Our primary source of cash comes from our cash flow from operations. In the
past, we have supplemented this source of cash with various debt facilities,
primarily in connection with acquisitions. We have financed our operations, and
expect to continue to finance our operations over the next twelve months, with a
combination of funds generated from operations and borrowings.  Our principal
uses of cash are for operating expenses, debt service, share repurchases,
capital expenditures, and acquisitions. Based on our current levels of
operations and anticipated growth, excluding acquisitions, we believe that our
cash generated from operations and our existing credit facilities will be
adequate to finance our working capital and capital expenditures through the
next twelve months.

As of June 30, 2020, we had cash and cash equivalents of $57.9 million, a
decrease of $36.8 million from March 31, 2020. The following table summarizes
the change:

                                                                        Three Months Ended June 30,
(In thousands)                                                   2020              2019             $ Change
Cash provided by (used in):
Operating Activities                                         $  75,154$ 52,777$  22,377
Investing Activities                                            (2,553)           (1,956)              (597)
Financing Activities                                          (111,362)          (49,290)           (62,072)
Effects of exchange rate changes on cash and cash
equivalents                                                      1,942               (19)             1,961
Net change in cash and cash equivalents                      $ (36,819)

$ 1,512$ (38,331)




Operating Activities
Net cash provided by operating activities was $75.2 million for the three months
ended June 30, 2020, compared to $52.8 million for the three months ended
June 30, 2019. The $22.4 million increase was due to an increase in net income
after non-cash items and decreased working capital.

Investing Activities
Net cash used in investing activities was $2.6 million for the three months
ended June 30, 2020, compared to $2.0 million for the three months ended
June 30, 2019. The increase was due to an increase in capital expenditures in
the current period.

                                      -24-
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Financing Activities
Net cash used in financing activities was $111.4 million for the three months
ended June 30, 2020, compared to $49.3 million for the three months ended
June 30, 2019. The increase was primarily due to increased repayments of debt of
$76.0 million and decreased borrowings of $15.0 million in the current period,
partly offset by the repurchase of common stock of $28.6 million in the prior
period.

Capital Resources

As of June 30, 2020, we had an aggregate of $1.6 billion of outstanding indebtedness, which consisted of the following:


•$400.0 million of 5.125% 2019 Senior Notes, which mature on January 15, 2028;
•$600.0 million of 6.375% 2016 Senior Notes, which mature on March 1, 2024; and
•$634.0 million of borrowings under the 2012 Term B-5 Loans due January 26,
2024.

As of June 30, 2020, we had no balance outstanding on 2012 ABL Revolver and a borrowing capacity of $128.2 million.


During the years ended March 31, 2020 and 2019, under the 2012 Term Loan, we
made voluntary principal payments against outstanding indebtedness of $48.0
million and $200.0 million, respectively. During the three months ended June 30,
2020, we made voluntary principal payments against outstanding indebtedness of
$56.0 million under the 2012 Term Loan. Under the Term Loan Amendment No. 5, we
are required to make quarterly payments each equal to 0.25% of the aggregate
principal amount, which, as of June 30, 2020, was $634.0 million. Since we have
made optional payments in prior years that exceed a significant portion of our
required quarterly payments, we will not be required to make another payment on
the 2012 Term Loan until the fiscal year ending March 31, 2024.

Maturities:

  (In thousands)
  Year Ending March 31,                                                       Amount
  2021 (remaining nine months ending March 31, 2021)                      $         -
  2022                                                               -
  2023                                                               -
  2024                                                       1,234,000
  2025                                                               -
  Thereafter                                                                  400,000
                                                                          $ 1,634,000

Covenants:

Our debt facilities contain various financial covenants, including provisions
that require us to maintain certain leverage, interest coverage and fixed charge
ratios.  The credit agreement governing the 2012 Term Loan and the 2012 ABL
Revolver and the indentures governing the 2016 Senior Notes and 2019 Senior
Notes contain provisions that accelerate our indebtedness on certain changes in
control and restrict us from undertaking specified corporate actions, including
asset dispositions, acquisitions, payments of dividends and other specified
payments, repurchasing our equity securities in the public markets, incurrence
of indebtedness, creation of liens, making loans and investments and
transactions with affiliates. Specifically, we must:

•Have a leverage ratio of less than 6.50 to 1.0 for the quarter ended June 30, 2020 and thereafter (defined as, with certain adjustments, the ratio of our consolidated total net debt as of the last day of the fiscal quarter to our trailing twelve month consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items ("EBITDA"));


•Have an interest coverage ratio of greater than 2.25 to 1.0 for the quarter
ended June 30, 2020 and thereafter (defined as, with certain adjustments, the
ratio of our consolidated EBITDA to our trailing twelve month consolidated cash
interest expense); and

•Have a fixed charge ratio of greater than 1.0 to 1.0 for the quarter ended
June 30, 2020 (defined as, with certain adjustments, the ratio of our
consolidated EBITDA minus capital expenditures to our trailing twelve month
consolidated interest paid, taxes paid and other specified payments). Our fixed
charge requirement remains level throughout the term of the debt facilities.
                                      -25-
--------------------------------------------------------------------------------


At June 30, 2020, we were in compliance with the applicable financial and
restrictive covenants under the 2012 Term Loan and the 2012 ABL Revolver and the
indentures governing the 2016 Senior Notes and the 2019 Senior Notes.
Additionally, management anticipates that in the normal course of operations, we
will be in compliance with the financial and restrictive covenants during the
next twelve months.

Interest Rate Swaps:
We currently have two interest rate swaps to hedge a total of $400.0 million of
our variable interest debt.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or financing activities with special-purpose entities.



                                      -26-
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Critical Accounting Policies and Estimates


The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements, as well as the reported amounts of
revenues and expenses during the reporting period.  Although these estimates are
based on our knowledge of current events and actions that we may undertake in
the future, actual results could differ from those estimates.  A summary of our
critical accounting policies is presented in our Annual Report on Form 10-K for
the fiscal year ended March 31, 2020.  There were no material changes to our
critical accounting policies during the three months ended June 30, 2020.

Recent Accounting Pronouncements
A description of recently issued and recently adopted accounting pronouncements
is included in the notes to the unaudited Condensed Consolidated Financial
Statements in Part I, Item I, Note 1 of this Quarterly Report on Form 10-Q.

                                      -27-
--------------------------------------------------------------------------------

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS


This Quarterly Report on Form 10-Q contains "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995 (the
"PSLRA"), including, without limitation, information within Management's
Discussion and Analysis of Financial Condition and Results of Operations. The
following cautionary statements are being made pursuant to the provisions of the
PSLRA and with the intention of obtaining the benefits of the "safe harbor"
provisions of the PSLRA.

Forward-looking statements speak only as of the date of this Quarterly Report on
Form 10-Q. Except as required under federal securities laws and the rules and
regulations of the SEC, we do not intend to update any forward-looking
statements to reflect events or circumstances arising after the date of this
Quarterly Report on Form 10-Q, whether as a result of new information, future
events or otherwise. As a result of these risks and uncertainties, readers are
cautioned not to place undue reliance on forward-looking statements included in
this Quarterly Report on Form 10-Q or that may be made elsewhere from time to
time by, or on behalf of, us. All forward-looking statements attributable to us
are expressly qualified by these cautionary statements.

These forward-looking statements generally can be identified by the use of words
or phrases such as "believe," "anticipate," "expect," "estimate," "project,"
"intend," "strategy," "goal," "future," "seek," "may," "should," "would,"
"will," or other similar words and phrases. Forward-looking statements are based
on current expectations and assumptions that are subject to a number of risks
and uncertainties that could cause actual results to differ materially from
those anticipated, including, without limitation:

•The impact of the COVID-19 pandemic or other disease outbreaks on global
economic conditions, consumer demand, retailer product availability, and
business operations including manufacturing, supply chain and distribution;
•The high level of competition in our industry and markets;
•Our inability to increase organic growth via new product introductions, line
extensions, increased spending on advertising and marketing support, and other
new sales and marketing strategies;
•Our dependence on a limited number of customers for a large portion of our
sales;
•Our inability to successfully identify, negotiate, complete and integrate
suitable acquisition candidates and to obtain necessary financing;
•Our inability to invest successfully in research and development to develop new
products;
•Changes in inventory management practices by retailers;
•Our inability to grow our international sales;
•General economic conditions and incidence levels affecting sales of our
products and their respective markets;
•Economic factors, such as increases in interest rates and currency exchange
rate fluctuations;
•Business, regulatory and other conditions affecting retailers;
•Changing consumer trends, additional store brand or branded competition or
other pricing pressures which may cause us to lower our prices;
•Our dependence on third party manufacturers to produce many of the products we
sell;
•Our dependence on third party logistics providers to distribute our products to
customers;
•Price increases for raw materials, labor, energy and transportation costs, and
for other input costs;
•Disruptions in our distribution center or manufacturing facility;
•Acquisitions, dispositions or other strategic transactions diverting managerial
resources, the incurrence of additional liabilities or problems associated with
integration of those businesses and facilities;
•Actions of government agencies in connection with our products, advertising or
regulatory matters governing our industry;
•Product liability claims, product recalls and related negative publicity;
•Our inability to protect our intellectual property rights;
•Our dependence on third parties for intellectual property relating to some of
the products we sell;
•Our inability to protect our internal information technology systems;
•Our dependence on third party information technology service providers and
their ability to protect against security threats and disruptions;
•Our assets being comprised virtually entirely of goodwill and intangibles and
possible changes in their value based on adverse operating results and/or
changes in the discount rate used to value our brands;
•Our dependence on key personnel;
•Shortages of supply of sourced goods or interruptions in the distribution or
manufacturing of our products;
•The costs associated with any claims in litigation or arbitration and any
adverse judgments rendered in such litigation or arbitration;
•Our level of indebtedness and possible inability to service our debt;
•Our inability to obtain additional financing;
•The restrictions imposed by our financing agreements on our operations; and
                                      -28-
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•Changes in federal, state and other geographic tax laws.

For more information, see Part I, Item 1A., "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2020.

                                      -29-

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