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Comprehensive Income
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(Exact Name of Registrant as Specified in Its Charter)
iDelaware
i20-1297589
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i660 White Plains Road
iTarrytown, iNew
Yorki10591
(Address of Principal Executive Offices) (Zip Code)
(i914) i524-6800
(Registrant's
Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
stock, par value $0.01 per share
iPBH
iNew York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files).
iYes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated
filer,”“smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
iLarge Accelerated Filer
☒
Accelerated Filer
☐
Non-Accelerated
Filer
☐
Smaller Reporting Company
i☐
Emerging Growth Company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes i☐ No
☒
As of February 2, 2024, there were i49,649,288 shares of common stock outstanding.
Prestige Consumer Healthcare Inc.
Form 10-Q
Index
PART I.
FINANCIAL INFORMATION
Item 1.
Financial Statements
Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended December
31, 2023 and 2022 (unaudited)
Trademarks
and trade names used in this Quarterly Report on Form 10-Q are the property of Prestige Consumer Healthcare Inc. or its subsidiaries, as the case may be. We have italicized our trademarks and trade names when they appear in this Quarterly Report on Form 10-Q.
-1-
PART I.FINANCIAL INFORMATION
ITEM 1.FINANCIAL
STATEMENTS
Prestige Consumer Healthcare Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
Adjustments
to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
i22,832
i24,762
Loss
on disposal of property and equipment
i231
i171
Deferred
income taxes
i14,892
i14,021
Amortization
of debt origination costs
i3,726
i2,613
Stock-based
compensation costs
i10,283
i9,756
Non-cash
operating lease cost
i4,494
i4,697
Other
i—
i447
Changes
in operating assets and liabilities:
Accounts receivable
(i7,017)
(i17,078)
Inventories
i13,790
(i38,587)
Prepaid
expenses and other current assets
(i2,605)
(i596)
Accounts
payable
(i23,964)
i8,892
Accrued
liabilities
(i7,732)
i8,345
Operating
lease liabilities
(i5,259)
(i4,941)
Other
(i1,533)
(i19)
Net
cash provided by operating activities
i182,019
i170,729
Investing
Activities
Purchases of property, plant and equipment
(i6,407)
(i5,226)
Other
i1,300
i—
Net
cash used in investing activities
(i5,107)
(i5,226)
Financing
Activities
Term loan repayments
(i150,000)
(i55,000)
Borrowings
under revolving credit agreement
i—
i20,000
Repayments
under revolving credit agreement
i—
(i20,000)
Payments
of debt costs
(i769)
i—
Payments of finance leases
(i2,112)
(i2,058)
Proceeds
from exercise of stock options
i10,818
i7,173
Fair
value of shares surrendered as payment of tax withholding
(i5,508)
(i5,466)
Repurchase
of common stock
(i25,000)
(i50,000)
Net
cash used in financing activities
(i172,571)
(i105,351)
Effects
of exchange rate changes on cash and cash equivalents
i785
(i979)
Increase
in cash and cash equivalents
i5,126
i59,173
Cash
and cash equivalents - beginning of period
i58,489
i27,185
Cash
and cash equivalents - end of period
$
i63,615
$
i86,358
Interest
paid
$
i49,666
$
i36,716
Income
taxes paid
$
i38,606
$
i27,632
See
accompanying notes.
-6-
Prestige Consumer Healthcare Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)
1.iBusiness
and Basis of Presentation
Nature of Business
Prestige Consumer Healthcare Inc. (referred to herein as the “Company” or “we,” which reference shall, unless the context requires otherwise, be deemed to refer to Prestige Consumer Healthcare Inc. and all of its direct and indirect 100% owned subsidiaries on a consolidated basis) is engaged in the development, manufacturing, marketing, sales and distribution of 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. Prestige Consumer Healthcare Inc. is a holding company with no operations
and is also the parent guarantor of the senior credit facility and the senior notes described in Note 7 to these Condensed Consolidated Financial Statements.
Economic Environment
There has been economic uncertainty in the United States and globally due to several factors, including global supply chain constraints, rising interest rates, a high inflationary environment and geopolitical events. We expect economic conditions will continue to be highly volatile and uncertain, put pressure on prices and supply, and could affect demand for our products. We have continued to see changes in the purchasing patterns of our consumers, including a reduction in the frequency of visits to retailers and a shift in many markets to purchasing our products online.
The volatile environment
has impacted the supply of labor and raw materials and exacerbated rising input costs. Although we have not experienced a material disruption to our overall supply chain to date, we have and may continue to experience shortages, delays and backorders for certain ingredients and products, difficulty scheduling shipping for our products, as well as price increases from many of our suppliers for both shipping and product costs. In addition, labor shortages have impacted our manufacturing operations and may impact our ability to supply certain products to our customers. To date, these global conditions have not had a material negative impact on our operations, supply chain, overall costs or demand for most of our products or resulting aggregate sales and earnings, and, as such, it has also not materially negatively impacted our liquidity position. We continue to generate operating cash flows to meet our short-term liquidity needs. These circumstances could change, however,
in this dynamic environment. If conditions cause further disruption in the global supply chain, the availability of labor and materials or otherwise further increase costs, it may materially affect our operations and those of third parties on which we rely, including causing material disruptions in the supply and distribution of our products. The extent to which these conditions impact our results and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including global supply chain constraints, inflation, global conflicts and instability, and the potential for further outbreaks of severe illnesses. These effects could have a material adverse impact on our business, liquidity, capital resources, and results of operations and those of the third parties on which we rely.
i
Basis
of Presentation The unaudited Condensed Consolidated Financial Statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. All significant intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, these Condensed Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, that are considered necessary for a fair statement of our consolidated financial position, results of operations and cash flows for the interim periods presented. Our fiscal year ends on March 31st of each year. References in these Condensed Consolidated Financial
Statements or related notes to a year (e.g., 2024) mean our fiscal year ending or ended on March 31st of that year. Operating results for the nine months ended December 31, 2023 are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2024. These unaudited Condensed Consolidated Financial Statements and related notes should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2023.
i
Use
of 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. Our most significant estimates include those made in connection with the valuation of intangible assets, stock-based compensation, fair value of debt, sales returns and allowances, trade promotional allowances, inventory obsolescence, and accounting for income taxes and related uncertain tax positions.
i
-7-
Recently
Adopted Accounting Pronouncements
In October 2021, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to apply Topic 606 to recognize and measure contract assets and liabilities in a business combination. This ASU is effective for fiscal years beginning after December
15, 2022, including interim periods within those fiscal years. We adopted this standard effective April 1, 2023. The impact of the adoption of this new standard will depend on the magnitude of future acquisitions.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting and also issued subsequent amendments to the initial guidance (collectively, "Topic 848"). In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848, which extends the period of time preparers can utilize the reference rate reform relief guidance in Topic 848. Topic 848 provides optional guidance for
contract modifications and certain hedging relationships associated with the transition from reference rates that are expected to be discontinued. On April 4, 2023, we entered into Amendment No. 8 ("ABL Amendment No. 8") to the Company's asset-based revolving credit facility originally entered into on January 31, 2012 (the "2012 ABL Revolver"). ABL Amendment No. 8 provides for the replacement of LIBOR with Secured Overnight Financing Rate ("SOFR") as our reference rate. On June 12, 2023, we entered into Amendment No. 7 ("Term Loan Amendment No. 7") to the
Company’s term loan originally entered into on January 31, 2012 (the “2012 Term Loan”), effective July 1, 2023. Term Loan Amendment No. 7 provides for the replacement of LIBOR with SOFR as our reference rate. Effective July 1, 2023, we have transitioned all discontinued reference rates to SOFR. The adoption of Topic 848 did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The amendments in this update require that entities
disclose, on an annual basis, specific categories in the rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. The amendments in this update also require disclosure, on an annual basis, of income taxes paid, disaggregated by federal, state and foreign taxes and disaggregated by individual jurisdictions in which income taxes paid are equal to or greater than five percent of total income taxes paid. In addition, the amendments in this update also require that income (or loss) before income taxes be disaggregated between domestic and foreign and income tax expense (or benefit) be disaggregated by federal, state and foreign. This ASU is effective for annual periods beginning after December 15, 2024. We are currently evaluating the impact that this ASU may have on our consolidated financial statement disclosures.
In
November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments in this update intend to improve reportable segment disclosure requirements primarily through enhanced disclosures about significant segment expenses. This ASU requires disclosure of significant segment expenses that are regularly provided to the chief operating decision maker, the addition of a category for other segment items by reportable segment, that all annual segment disclosures be disclosed in interim periods, and other related segment disclosures. The ASU is effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. We are currently evaluating the impact that this ASU may have on our consolidated financial
statement disclosures.
Inventories
are carried and depicted above at the lower of cost or net realizable value, which includes a reduction in inventory values of $ii5.8/ million
at both December 31, 2023 and March 31, 2023 related to obsolete and slow-moving inventory.
-8-
3.iGoodwill
i
A
reconciliation of the activity affecting goodwill by operating segment is as follows:
The
date of our annual impairment review was February 28, 2023, and we recorded impairment charges to goodwill of $i48.8 million in our March 31, 2023 financial statements. The estimates and assumptions made in assessing the fair value of our reporting units and the valuation of the underlying assets and liabilities are inherently subject to significant uncertainties related to future sales, gross margins, and advertising and marketing expenses, which can be impacted by increases in competition, changing consumer preferences, technical
advances, supply chain constraints, labor shortages, and inflation. The discount rate assumption may be influenced by such factors as changes in interest rates and rates of inflation, which can have an impact on the determination of fair value. If these assumptions are adversely affected, we may be required to record impairment charges in the future. As of December 31, 2023, we determined no events have occurred that would indicate potential impairment of goodwill.
4.iIntangible
Assets, net
ii
A reconciliation of the activity affecting intangible assets, net is as follows:
(In
thousands)
Indefinite- Lived Trademarks
Finite-Lived Trademarks and Customer Relationships
Amortization
expense was $i4.9 million and $i14.8 million for the three and nine months ended December 31, 2023, respectively, and $i5.6
million and $i16.9 million for the three and nine months ended December 31, 2022, respectively.
i
Finite-lived
intangible assets are expected to be amortized over their estimated useful life, which ranges from a period of i10 to i25 years, and the estimated amortization expense for each of the five succeeding years and the periods thereafter is as follows (in thousands):
The
date of our annual impairment review was February 28, 2023, and we recorded impairment charges to intangible assets of $i321.4 million in our March 31, 2023 financial statements. The assumptions subject to significant uncertainties in the impairment analysis include the discount rate utilized in the analysis, as well as future sales, gross margins, and advertising and marketing expenses.The discount rate assumption may be influenced
by such factors as changes in interest rates and rates of inflation, which can have an impact on the determination of fair value. Additionally, should the related fair values of intangible assets be adversely affected as a result of declining sales or margins caused by competition, changing consumer needs or preferences, technological advances, changes in advertising and marketing expenses, or the potential impacts of supply chain constraints, labor shortages, or inflation, we may be required to record impairment charges in the future.As of December 31, 2023, no events have occurred that would indicate potential impairment of intangible assets.
-10-
5. iiLeases/
We
lease real estate and equipment for use in our operations.
i
The components of lease expense for the three and nine months ended December 31, 2023 and 2022 were as follows:
Three
Months Ended December 31,
Nine Months Ended December 31,
(In thousands)
2023
2022
2023
2022
Finance lease cost:
Amortization of right-of-use assets
$
i665
$
i665
$
i1,994
$
i1,994
Interest
on lease liabilities
i20
i41
i74
i136
Operating
lease cost
i1,624
i1,621
i4,872
i4,872
Short
term lease cost
i34
i35
i101
i120
Variable
lease cost
i14,488
i14,727
i47,885
i43,742
Total
net lease cost
$
i16,831
$
i17,089
$
i54,926
$
i50,864
/
ii
As
of December 31, 2023, the maturities of lease liabilities were as follows:
2021 Senior Notes bearing interest at i3.750%, with interest payable on April 1 and October 1 of each year. The 2021 Senior Notes mature on April 1, 2031.
$
i600,000
$
i600,000
2019
Senior Notes bearing interest at i5.125%, with interest payable on January 15 and July 15 of each year. The 2019 Senior Notes mature on January 15, 2028.
i400,000
i400,000
2012
Term B-5 Loans bearing interest at the Borrower's option at either LIBOR plus a margin of i2.00%, with a LIBOR floor of i0.50%, or an alternate base rate plus a margin of i1.00%
per annum (at March 31, 2023) and SOFR plus a margin of i2.00% plus a credit spread adjustment (at December 31, 2023), due on July 1, 2028.
i210,000
i360,000
Long-term
debt
i1,210,000
i1,360,000
Less:
unamortized debt costs
(i10,660)
(i14,212)
Long-term
debt, net
$
i1,199,340
$
i1,345,788
/
At
December 31, 2023, we had ino balance outstanding on the 2012 ABL Revolver and a borrowing capacity of $i168.9 million.
On
April 4, 2023, we entered into ABL Amendment No. 8. ABL Amendment No. 8 provides for the replacement of LIBOR with SOFR as our reference rate for the 2012 ABL Revolver.
On June 12, 2023, we entered into Term Loan Amendment No. 7, effective July 1, 2023. Term Loan Amendment No. 7 provides for the replacement of LIBOR with SOFR as our reference rate for the 2012 Term Loan.
On December 8, 2023, we entered into Amendment No. 9 ("ABL Amendment No. 9") to the 2012 ABL Revolver. ABL Amendment No. 9 provides for (i) an increase in the aggregate revolving commitment of the facility from $i175.0 million
to $i200.0 million, (ii) an extension of the maturity date of the 2012 ABL Revolver to December 8, 2028, and (iii) increased flexibility under the credit agreement governing the 2012 ABL Revolver, including, but not limited to, increased flexibility related to restricted payments, debt incurrence and borrowing base calculations. There were no changes to interest terms as a result of this amendment.
i
As
of December 31, 2023, aggregate future principal payments required in accordance with the terms of the 2012 Term B-5 Loans under the 2012 Term Loan, the 2012 ABL Revolver and the indentures governing the senior unsecured notes due 2031 (the "2021 Senior Notes") and the senior unsecured notes due 2028 (the "2019 Senior Notes") are as follows:
For certain of our financial instruments, including cash, accounts receivable, accounts payable and other current liabilities, the carrying amounts approximate their respective fair values due to the relatively short maturity of these amounts.
FASB Accounting Standards Codification ("ASC") 820, Fair Value Measurements, requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market assuming an orderly transaction between market participants. ASC 820 established market (observable inputs) as the preferred source of fair value, to be followed by our assumptions of fair value based on hypothetical transactions
(unobservable inputs) in the absence of observable market inputs. Based upon the above, the following fair value hierarchy was created:
Level 1 - Quoted market prices for identical instruments in active markets;
Level 2 - Quoted prices for similar instruments in active markets, as well as quoted prices for identical or similar instruments in markets that are not considered active; and
Level 3 - Unobservable inputs developed by us using estimates and assumptions reflective of those that would be utilized by a market participant.
The market values have been determined based on market values for similar instruments adjusted for certain factors. As
such, the 2021 Senior Notes, the 2019 Senior Notes, the 2012 Term B-5 Loans, and the 2012 ABL Revolver are measured in Level 2 of the above hierarchy. iThe summary below details the carrying amounts and estimated fair values of these instruments at December 31, 2023 and March 31, 2023.
We are authorized to issue i250.0
million shares of common stock, $i0.01 par value per share, and i5.0 million shares of preferred stock, $i0.01
par value per share. The Board of Directors may direct the issuance of the undesignated preferred stock in one or more series and determine preferences, privileges and restrictions thereof.
Each share of common stock has the right to ione vote on all matters submitted to a vote of stockholders. The holders of common stock are also entitled to receive dividends whenever funds are legally available and when declared by the Board of Directors, subject to prior rights of holders of all classes
of outstanding stock having priority rights as to dividends. iNo dividends have been declared or paid on our common stock through December 31, 2023.
-13-
On May 2, 2023, the Company's Board of Directors authorized
the repurchase of up to $i25.0 million of the Company's issued and outstanding common stock through May 31, 2024, utilizing open market transactions, transactions structured through investment banking institutions, in privately-negotiated transactions, by direct purchases of common stock or a combination of the foregoing in compliance with the applicable rules and regulations of the U.S. Securities and Exchange Commission. We completed the repurchase
in the first quarter of fiscal 2024.
During the three and nine months ended December 31, 2023 and 2022, we repurchased shares of our common stock and recorded them as treasury stock. iOur share repurchases consisted of the following:
Components of Accumulated Other Comprehensive Loss
Cumulative translation adjustment
$
(i29,245)
$
(i32,280)
Unrecognized
net gain on pension plans, net of tax of $(i214) and $(i214), respectively
i716
i716
Accumulated
other comprehensive loss, net of tax
$
(i28,529)
$
(i31,564)
/
As
of December 31, 2023 and March 31, 2023, iino/
amounts were reclassified from accumulated other comprehensive loss into earnings.
-14-
11.iEarnings Per Share
i
The
following table sets forth the computation of basic and diluted earnings per share:
Three Months Ended December 31,
Nine Months Ended December 31,
(In thousands, except per share data)
2023
2022
2023
2022
Numerator
Net
income
$
i53,046
$
i51,951
$
i159,881
$
i158,246
Denominator
Denominator
for basic earnings per share — weighted average shares outstanding
i49,740
i49,693
i49,731
i49,919
Dilutive
effect of unvested restricted stock units and options issued to employees and directors
i385
i493
i403
i473
Denominator
for diluted earnings per share
i50,125
i50,186
i50,134
i50,392
Earnings
per Common Share:
Basic earnings per share
$
i1.07
$
i1.05
$
i3.21
$
i3.17
Diluted
earnings per share
$
i1.06
$
i1.04
$
i3.19
$
i3.14
/
For
the three months ended December 31, 2023 and 2022, there were i0.3 million and i0.2
million shares, respectively, attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For the nine months ended December 31, 2023 and 2022, there were i0.3 million and i0.4
million shares, respectively, attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
12.iStock-Based Compensation
In connection
with our initial public offering, the Board of Directors adopted the 2005 Long-Term Equity Incentive Plan (the “2005 Plan”), which provided for grants of up to a maximum of i5.0 million shares of restricted stock, stock options, restricted stock units ("RSUs") and other equity-based awards. In June 2014, the Board of Directors approved, and in July 2014, our stockholders ratified, an increase of an additional i1.8
million shares of our common stock for issuance under the 2005 Plan, among other changes.
On June 23, 2020, the Board of Directors adopted the Prestige Consumer Healthcare Inc. 2020 Long-Term Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on August 4, 2020, upon the approval of the 2020 Plan by our stockholders. On June 23, 2020, a total of i2,827,210
shares were available for issuance under the 2020 Plan (comprised of i2,000,000 new shares plus i827,210
shares that were unissued under the 2005 Plan). Since the 2020 Plan became effective, all equity awards have been made from the 2020 Plan, and the Company will not grant any additional awards under the 2005 Plan.
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i
The following table provides information
regarding our stock-based compensation:
Three Months Ended December 31,
Nine Months Ended December 31,
(In thousands)
2023
2022
2023
2022
Pre-tax
stock-based compensation costs charged against income
$
i2,449
$
i2,433
$
i10,283
$
i9,756
Income
tax benefit recognized on compensation costs
$
i241
$
i49
$
i910
$
i924
Total
fair value of options and RSUs vested during the period
$
i—
$
i63
$
i12,213
$
i10,352
Cash
received from the exercise of stock options
$
i1,635
$
i5,684
$
i10,818
$
i7,173
Tax
benefits realized from tax deductions resulting from RSU issuances and stock option exercises
$
i351
$
i731
$
i1,490
$
i3,626
/
At
December 31, 2023, there were $i3.1 million of unrecognized compensation costs related to unvested stock options under the 2005 Plan and the 2020 Plan, excluding an estimate for forfeitures which may occur. We expect to recognize such costs over a weighted average period of i1.9
years. At December 31, 2023, there were $i12.9 million of unrecognized compensation costs related to unvested RSUs and performance stock units ("PSUs") under the 2005 Plan and the 2020 Plan, excluding an estimate for forfeitures which may occur. We expect to recognize such costs over a weighted average period of i1.7
years.
At December 31, 2023, there were i1.9 million shares available for issuance under the 2020 Plan.
Restricted Stock Units
The fair value of the RSUs is determined using the closing price of our common
stock on the date of the grant. iA summary of the RSUs granted under the 2005 Plan and the 2020 Plan is presented below:
The
fair value of each option award is estimated on the date of grant using the Black-Scholes Option Pricing Model that uses the assumptions presented below:
The
aggregate intrinsic value of options exercised during the nine months ended December 31, 2023 was $i5.4 million.
13.iIncome
Taxes
Income taxes are recorded in our quarterly financial statements based on our estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur. The effective tax rates used in the calculation of income taxes were i23.8% and i23.7%
for the three months ended December 31, 2023 and 2022, respectively. The effective tax rates used in the calculation of income taxes were i23.4% and i23.0% for
the nine months ended December 31, 2023 and 2022, respectively. The increase in the effective tax rate for the three months ended December 31, 2023, compared to the three months ended December 31, 2022, was due to discrete items primarily pertaining to stock-based compensation. The increase in the effective tax rate for the nine months ended December 31, 2023, compared to the nine months ended December 31, 2022, was due to discrete items primarily pertaining to stock-based compensation and state tax rate legislative changes.
14. iCommitments
and Contingencies
We are involved from time to time in legal matters and other claims incidental to our business. We review outstanding claims and proceedings internally and with external counsel as necessary to assess the probability and amount of a potential loss. These assessments are re-evaluated at each reporting period and as new information becomes available to determine
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whether a reserve should be established or if any existing reserve should be adjusted. The actual cost of resolving a claim or proceeding ultimately may be substantially different than the amount of the recorded reserve. In addition, because it is not permissible under GAAP to establish a litigation
reserve until the loss is both probable and estimable, in some cases there may be insufficient time to establish a reserve prior to the actual incurrence of the loss (upon verdict and judgment at trial, for example, or in the case of a quickly negotiated settlement). We believe the reasonably possible losses from resolution of routine legal matters and other claims incidental to our business will not have a material effect on our financial statements.
15.iConcentrations
of Risk
Our revenues are concentrated in the area of OTC Healthcare. We sell our products to mass merchandisers, drug, food, dollar, convenience and club stores and e-commerce channels. During the three and nine months ended December 31, 2023, approximately i37.0% and i37.8%,
respectively, of our gross revenues were derived from our five top selling brands. During the three and nine months ended December 31, 2022, approximately i36.9% and i38.7%, respectively, of our gross revenues were derived from our five top selling brands. Walmart accounted
for approximately i19.0% and i19.6%, respectively, of our gross revenues for the three and nine months ended December 31, 2023. Walmart accounted for approximately i19.9%
and i19.8%, respectively, of our gross revenues for the three and nine months ended December 31, 2022. Amazon accounted for approximately i10.7% and i10.4%,
respectively, of gross revenues for the three and nine months ended December 31, 2023.
Our product distribution in the United States is managed by a third party through one primary distribution center in Clayton, Indiana. In addition, we operate one manufacturing facility for certain of our products located in Lynchburg, Virginia, which manufactures many of the Summer's Eve and Fleet products. A natural disaster, such as tornado, earthquake, flood, or fire, could damage our inventory and/or materially impair our ability to distribute our products to customers in a timely manner or at a reasonable cost. In addition, a serious disruption caused by performance or contractual issues with our third-party distribution manager or labor shortages or public
health emergencies at our distribution center or manufacturing facility could materially impact our product distribution. Any disruption could result in increased costs, expense and/or shipping times, and could cause us to incur customer fees and penalties. We could also incur significantly higher costs and experience longer lead times if we need to replace our distribution center, the third-party distribution manager or the manufacturing facility. As a result, any serious disruption could have a material adverse effect on our business, financial condition and results of operations.
At December 31, 2023, we had relationships with i129
third-party manufacturers. Of those, we had long-term contracts with i27 manufacturers that produced items that accounted for approximately i72.1% of gross sales for the nine
months ended December 31, 2023. At December 31, 2022, we had relationships with i133 third-party manufacturers. Of those, we had long-term contracts with i27
manufacturers that produced items that accounted for approximately i70.5% of gross sales for the nine months ended December 31, 2022. The fact that we do not have long-term contracts with certain manufacturers means that they could cease manufacturing our products at any time and for any reason or initiate arbitrary and costly price increases, which could have a material adverse effect on our business and results of operations. Although we are continually in the process of negotiating long-term contracts
with certain key manufacturers, we may not be able to reach a timely agreement, which could have a material adverse effect on our business and results of operations.
16. iBusiness Segments
Our current reportable segments consist of (i) North American OTC Healthcare and (ii) International OTC Healthcare. We evaluate the
performance of our operating segments and allocate resources to these segments based primarily on contribution margin, which we define as gross profit less advertising and marketing expenses.
i
The tables below summarize information about our reportable segments.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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, 2023. 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, 2023 and in future reports filed with the U.S.
Securities and Exchange Commission ("SEC").
See also “Cautionary Statement Regarding Forward-Looking Statements” on page 31 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, references to a year (e.g., 2024) 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 well-recognized brands from consumer products and pharmaceutical companies
and 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.
Economic
Environment
There has been economic uncertainty in the United States and globally due to several factors, including global supply chain constraints, rising interest rates, a high inflationary environment and geopolitical events. We expect economic conditions will continue to be highly volatile and uncertain, put pressure on prices and supply, and could affect demand for our products. We have continued to see changes in the purchasing patterns of our consumers, including a reduction in the frequency of visits to retailers and a shift in many markets to purchasing our products online.
The volatile environment has impacted the supply of labor and raw materials and exacerbated rising input costs. Although we have not experienced a material disruption to our overall supply chain to date, we have and may continue to experience
shortages, delays and backorders for certain ingredients and products, difficulty scheduling shipping for our products, as well as price increases from many of our suppliers for both shipping and product costs. In addition, labor shortages have impacted our manufacturing operations and may impact our ability to supply certain products to our customers. To date, these global conditions have not had a material negative impact on our operations, supply chain, overall costs or demand for most of our products or resulting aggregate sales and earnings, and, as such, it has also not materially negatively impacted our liquidity position. We continue to generate operating cash flows to meet our short-term liquidity needs. These circumstances could change, however, in this dynamic environment. If conditions cause further disruption in the global supply chain, the availability of labor and materials or otherwise further increase costs, it may materially affect our operations
and those of third parties on which we rely, including causing material disruptions in the supply and distribution of our products. The extent to which these conditions impact our results and liquidity will depend on future developments, which are highly uncertain and cannot be predicted, including global supply chain constraints, inflation, global conflicts and instability, and the potential for further outbreaks of severe illnesses. These effects could have a material adverse impact on our business, liquidity, capital resources, and results of operations and those of the third parties on which we rely.
The following table represents total revenue by segment, including product groups, for the three months ended December 31, 2023 and 2022.
Three
Months Ended December 31,
Increase (Decrease)
(In thousands)
2023
%
2022
%
Amount
%
North
American OTC Healthcare
Analgesics
$
28,680
10.1
$
29,396
10.7
$
(716)
(2.4)
Cough
& Cold
27,359
9.7
31,246
11.3
(3,887)
(12.4)
Women's Health
53,076
18.9
53,918
19.5
(842)
(1.6)
Gastrointestinal
38,919
13.7
38,194
13.9
725
1.9
Eye
& Ear Care
38,503
13.6
32,653
11.9
5,850
17.9
Dermatologicals
26,603
9.4
27,223
9.9
(620)
(2.3)
Oral
Care
20,362
7.2
21,371
7.8
(1,009)
(4.7)
Other OTC
3,063
1.1
2,883
1.0
180
6.2
Total
North American OTC Healthcare
236,565
83.7
236,884
86.0
(319)
(0.1)
International
OTC Healthcare
Analgesics
$
1,586
0.6
$
648
0.2
938
144.8
Cough
& Cold
5,814
2.1
6,336
2.3
(522)
(8.2)
Women's Health
5,190
1.8
4,138
1.5
1,052
25.4
Gastrointestinal
22,707
8.0
18,555
6.6
4,152
22.4
Eye
& Ear Care
6,569
2.3
5,229
2.0
1,340
25.6
Dermatologicals
1,165
0.4
978
0.4
187
19.1
Oral
Care
3,100
1.1
2,738
1.0
362
13.2
Other OTC
45
—
18
—
27
150.0
Total
International OTC Healthcare
46,176
16.3
38,640
14.0
7,536
19.5
Total
Consolidated
$
282,741
100.0
$
275,524
100.0
$
7,217
2.6
Total revenues for the three months ended December 31, 2023
were $282.7 million, an increase of $7.2 million, or 2.6%, versus the three months ended December 31, 2022.
North American OTC Healthcare Segment
Revenues for the North American OTC Healthcare segment decreased $0.3 million, or 0.1%, during the three months ended December 31, 2023 versus the three months ended December 31, 2022. The $0.3 million decrease was primarily attributable to a decline in sales in the Cough & Cold and Oral Care categories, partly offset by an increase in sales in the Eye & Ear Care category.
International OTC Healthcare Segment
Revenues
for the International OTC Healthcare segment increased $7.5 million, or 19.5%, during the three months ended December 31, 2023 versus the three months ended December 31, 2022. The $7.5 million increase was primarily attributable to an increase in sales in the Gastrointestinal, Eye & Ear Care and Women's Health categories.
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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 December 31,
(In thousands)
Increase (Decrease)
Gross Profit
2023
%
2022
%
Amount
%
North
American OTC Healthcare
$
130,475
55.2
$
126,330
53.3
$
4,145
3.3
International OTC Healthcare
27,463
59.5
24,072
62.3
3,391
14.1
$
157,938
55.9
$
150,402
54.6
$
7,536
5.0
Gross
profit for the three months ended December 31, 2023 increased $7.5 million, or 5.0%, when compared with the three months ended December 31, 2022. As a percentage of total revenues, gross profit increased to 55.9% during the three months ended December 31, 2023, from 54.6% during the three months ended December 31, 2022, primarily due to reduced logistics costs in our North American OTC Healthcare segment.
North American OTC Healthcare Segment
Gross profit for the North American OTC Healthcare segment increased $4.1 million, or 3.3%, during the three months ended December 31, 2023 versus the three
months ended December 31, 2022. As a percentage of North American OTC Healthcare revenues, gross profit increased to 55.2% during the three months ended December 31, 2023 from 53.3% during the three months ended December 31, 2022, primarily due to reduced logistics costs.
International OTC Healthcare Segment
Gross profit for the International OTC Healthcare segment increased $3.4 million, or 14.1%, during the three months ended December 31, 2023 versus the three months ended December 31, 2022. As a percentage of International OTC Healthcare revenues, gross profit decreased to 59.5% during the
three months ended December 31, 2023 from 62.3% during the three months ended December 31, 2022, primarily due to increased supply chain costs 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 December 31,
(In thousands)
Increase (Decrease)
Contribution Margin
2023
%
2022
%
Amount
%
North
American OTC Healthcare
$
96,558
40.8
$
101,499
42.8
$
(4,941)
(4.9)
International OTC Healthcare
21,914
47.5
18,480
47.8
3,434
18.6
$
118,472
41.9
$
119,979
43.5
$
(1,507)
(1.3)
North
American OTC Healthcare Segment
Contribution margin for the North American OTC Healthcare segment decreased $4.9 million, or 4.9%, during the three months ended December 31, 2023 versus the three months ended December 31, 2022. As a percentage of North American OTC Healthcare revenues, contribution margin decreased to 40.8% during the three months ended December 31, 2023 from 42.8% during the three months ended December 31, 2022. The contribution margin decrease as a percentage of revenues was primarily due to an increase in advertising and marketing spend in the three months ended December 31, 2023, partly offset by the increase in gross profit margin noted above.
International
OTC Healthcare Segment
Contribution margin for the International OTC Healthcare segment increased $3.4 million, or 18.6%, during the three months ended December 31, 2023 versus the three months ended December 31, 2022. As a percentage of International OTC Healthcare revenues, contribution margin decreased to 47.5% during the three months ended December 31, 2023 from 47.8% during the three months ended December 31, 2022. The contribution margin decrease as a percentage of revenues was primarily due to the decrease in gross profit margin noted above.
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General
and Administrative
General and administrative expenses were $26.0 million for the three months ended December 31, 2023 and $26.5 million for the three months ended December 31, 2022.
Depreciation and Amortization
Depreciation and amortization expenses decreased to $5.6 million for the three months ended December 31, 2023 from $6.3 million for the three months ended December 31, 2022. The decrease in depreciation and amortization expenses was primarily attributable to a decrease in amortization expense due to impairment charges taken on finite-lived brands in fiscal 2023.
Interest
Expense, Net
Interest expense, net was $16.6 million during the three months ended December 31, 2023 versus $17.9 million during the three months ended December 31, 2022. The average indebtedness decreased to $1.3 billion during the three months ended December 31, 2023 from $1.4 billion during the three months ended December 31, 2022. The average cost of borrowing increased to 5.4% for the three months ended December 31, 2023 from 5.0% for the three months ended December 31, 2022.
Income Taxes
The provision
for income taxes during the three months ended December 31, 2023 was $16.5 million versus $16.2 million during the three months ended December 31, 2022. The effective tax rate during the three months ended December 31, 2023 was 23.8% versus 23.7% during the three months ended December 31, 2022. The increase in the effective tax rate for the three months ended December 31, 2023 was due to the impact of discrete items primarily pertaining to stock-based compensation.
The following table represents total revenue by segment, including product groups, for the nine months ended December 31, 2023 and 2022.
Nine
Months Ended December 31,
Increase (Decrease)
(In thousands)
2023
%
2022
%
Amount
%
North
American OTC Healthcare
Analgesics
$
85,838
10.1
$
89,943
10.7
$
(4,105)
(4.6)
Cough
& Cold
73,703
8.7
76,896
9.1
(3,193)
(4.2)
Women's Health
163,031
19.3
174,481
20.7
(11,450)
(6.6)
Gastrointestinal
122,303
14.4
119,533
14.2
2,770
2.3
Eye
& Ear Care
117,719
13.9
109,225
13.0
8,494
7.8
Dermatologicals
94,299
11.1
89,550
10.6
4,749
5.3
Oral
Care
61,400
7.2
63,597
7.6
(2,197)
(3.5)
Other OTC
8,838
1.0
8,231
1.0
607
7.4
Total
North American OTC Healthcare
727,131
85.7
731,456
86.9
(4,325)
(0.6)
International
OTC Healthcare
Analgesics
$
3,814
0.4
$
1,642
0.2
2,172
132.3
Cough
& Cold
19,129
2.3
19,775
2.4
(646)
(3.3)
Women's Health
17,218
2.0
13,750
1.6
3,468
25.2
Gastrointestinal
49,678
5.9
48,619
5.8
1,059
2.2
Eye
& Ear Care
17,715
2.1
14,699
1.7
3,016
20.5
Dermatologicals
3,972
0.5
2,886
0.3
1,086
37.6
Oral
Care
9,591
1.1
8,988
1.1
603
6.7
Other OTC
118
—
41
—
77
187.8
Total
International OTC Healthcare
121,235
14.3
110,400
13.1
10,835
9.8
Total
Consolidated
$
848,366
100.0
$
841,856
100.0
$
6,510
0.8
Total revenues for the nine months ended December 31, 2023
were $848.4 million, an increase of $6.5 million, or 0.8%, versus the nine months ended December 31, 2022.
North American OTC Healthcare Segment
Revenues for the North American OTC Healthcare segment decreased $4.3 million, or 0.6%, during the nine months ended December 31, 2023 versus the nine months ended December 31, 2022. The $4.3 million decrease was primarily attributable to a decrease in sales in the Women's Health, Analgesics and Cough & Cold categories, partly offset by an increase in sales in the Eye & Ear Care, Dermatologicals, and Gastrointestinal categories.
International OTC Healthcare Segment
Revenues
for the International OTC Healthcare segment increased $10.8 million, or 9.8%, during the nine months ended December 31, 2023 versus the nine months ended December 31, 2022. The $10.8 million increase was mainly attributable to an increase in sales in the Women's Health, Eye & Ear Care and Analgesics categories.
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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.
Nine
Months Ended December 31,
(In thousands)
Increase (Decrease)
Gross Profit
2023
%
2022
%
Amount
%
North
American OTC Healthcare
$
403,499
55.5
$
404,448
55.3
$
(949)
(0.2)
International OTC Healthcare
69,132
57.0
67,082
60.8
2,050
3.1
$
472,631
55.7
$
471,530
56.0
$
1,101
0.2
Gross
profit for the nine months ended December 31, 2023 increased $1.1 million, or 0.2%, when compared with the nine months ended December 31, 2022. As a percentage of total revenues, gross profit decreased to 55.7% during the nine months ended December 31, 2023, from 56.0% during the nine months ended December 31, 2022, primarily due to increased supply chain costs and product mix, partly offset by pricing actions.
North American OTC Healthcare Segment
Gross profit for the North American OTC Healthcare segment decreased $0.9 million, or 0.2%, during the nine months ended December 31, 2023 versus the
nine months ended December 31, 2022. As a percentage of North American OTC Healthcare revenues, gross profit increased to 55.5% during the nine months ended December 31, 2023 from 55.3% during the nine months ended December 31, 2022, primarily due to product mix and pricing actions, partly offset by increased supply chain costs.
International OTC Healthcare Segment
Gross profit for the International OTC Healthcare segment increased $2.1 million, or 3.1%, during the nine months ended December 31, 2023 versus the nine months ended December 31, 2022. As a percentage of International OTC Healthcare
revenues, gross profit decreased to 57.0% during the nine months ended December 31, 2023 from 60.8% during the nine months ended December 31, 2022, primarily due to increased supply chain costs 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.
Nine
Months Ended December 31,
(In thousands)
Increase (Decrease)
Contribution Margin
2023
%
2022
%
Amount
%
North
American OTC Healthcare
$
302,792
41.6
$
304,889
41.7
$
(2,097)
(0.7)
International OTC Healthcare
54,040
44.6
52,448
47.5
1,592
3.0
$
356,832
42.1
$
357,337
42.4
$
(505)
(0.1)
North American OTC Healthcare Segment
Contribution margin for the North American OTC Healthcare segment for the nine months ended December 31, 2023 decreased $2.1 million, or 0.7%, when compared with the nine months ended December 31, 2022. As a percentage of North American OTC Healthcare revenues, contribution margin decreased slightly to 41.6% during the nine months ended December 31, 2023 from 41.7% during the nine months ended December 31, 2022, primarily due to a slight increase in advertising and marketing spend in the nine months ended December 31, 2023.
International
OTC Healthcare Segment
Contribution margin for the International OTC Healthcare segment increased $1.6 million, or 3.0%, during the nine months ended December 31, 2023 versus the nine months ended December 31, 2022. As a percentage of International OTC Healthcare revenues, contribution margin decreased to 44.6% during the nine months ended December 31, 2023 from 47.5% during the nine months ended December 31, 2022. The contribution margin decrease as a percentage of revenues was primarily due to the decrease in gross profit margin noted above.
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General
and Administrative
General and administrative expenses remained flat at $79.7 million for the nine months ended December 31, 2023 and nine months ended December 31, 2022.
Depreciation and Amortization
Depreciation and amortization expenses were $16.9 million for the nine months ended December 31, 2023 and $19.1 million for the nine months ended December 31, 2022. The decrease in depreciation and amortization expenses was primarily attributable to a decrease in amortization expense due to impairment charges taken on finite-lived brands in fiscal 2023.
Interest
Expense, Net
Interest expense, net was $51.9 million during the nine months ended December 31, 2023 versus $50.2 million during the nine months ended December 31, 2022. The average indebtedness decreased to $1.3 billion during the nine months ended December 31, 2023 from $1.5 billion during the nine months ended December 31, 2022. The average cost of borrowing increased to 5.4% for the nine months ended December 31, 2023 compared to 4.5% for the nine months ended December 31, 2022.
Income Taxes
The provision
for income taxes during the nine months ended December 31, 2023 was $48.8 million versus $47.4 million during the nine months ended December 31, 2022. The effective tax rate during the nine months ended December 31, 2023 was 23.4% versus 23.0% during the nine months ended December 31, 2022. The increase in the effective tax rate for the nine months ended December 31, 2023 compared to the nine months ended December 31, 2022 was due to the impact of discrete items primarily pertaining to stock-based compensation and state tax rate legislative changes.
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 for the next twelve months and the foreseeable future, 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. See "Economic Environment"
above.
As of December 31, 2023, we had cash and cash equivalents of $63.6 million, an increase of $5.1 million from March 31, 2023. The following table summarizes the change:
Nine Months Ended December 31,
(In thousands)
2023
2022
$
Change
Cash provided by (used in):
Operating Activities
$
182,019
$
170,729
$
11,290
Investing Activities
(5,107)
(5,226)
119
Financing
Activities
(172,571)
(105,351)
(67,220)
Effects of exchange rate changes on cash and cash equivalents
785
(979)
1,764
Net change in cash and cash equivalents
$
5,126
$
59,173
$
(54,047)
Operating
Activities
Net cash provided by operating activities was $182.0 million for the nine months ended December 31, 2023, compared to $170.7 million for the nine months ended December 31, 2022. The $11.3 million increase was primarily due to decreased working capital.
Investing Activities
Net cash used in investing activities was $5.1 million for the nine months ended December 31, 2023, compared to $5.2 million for the nine months ended December 31, 2022.
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Financing
Activities
Net cash used in financing activities was $172.6 million for the nine months ended December 31, 2023, compared to $105.4 million for the nine months ended December 31, 2022. The $67.2 million increase was primarily due to net repayments of $95.0 million compared to the prior year nine month period, partly offset by a decrease in the repurchase of shares of our common stock in conjunction with our share repurchase program of $25.0 million in the nine months ended December 31, 2023.
Capital Resources
As of December 31, 2023, we had an aggregate of $1.2
billion of outstanding indebtedness, which consisted of the following:
•$400.0 million of 5.125% 2019 senior unsecured notes, which mature on January 15, 2028 (the "2019 Senior Notes");
•$600.0 million of 3.750% 2021 senior unsecured notes, which mature on April 1, 2031 (the "2021 Senior Notes"); and
•$210.0 million of borrowings under the Term B-5 Loans under our term loan originally entered into on January 31, 2012 (the "2012 Term Loan”) due July 1, 2028.
As
of December 31, 2023, we had no outstanding balance on our asset-based revolving credit facility originally entered into on January 31, 2012 (the "2012 ABL Revolver”) and a borrowing capacity of $168.9 million.
On December 8, 2023, we entered into Amendment No. 9 ("ABL Amendment No. 9") to the 2012 ABL Revolver. ABL Amendment No. 9 provides for (i) an increase in the aggregate revolving commitment of the facility from $175.0 million to $200.0 million, (ii) an extension of the maturity date of the 2012 ABL Revolver to December 8, 2028, and (iii) increased flexibility under the credit agreement governing the 2012 ABL Revolver, including, but not limited to, increased flexibility
related to restricted payments, debt incurrence and borrowing base calculations. There were no changes to interest terms as a result of this amendment.
Since we have made optional payments that exceed all of our required quarterly payments, we will not be required to make another payment on the 2012 Term Loan until maturity.
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 2021 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 December 31, 2023 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 December 31, 2023 and thereafter (defined as, with certain adjustments, the ratio of our consolidated EBITDA to our trailing twelve month consolidated cash interest expense); and
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•Have
a fixed charge ratio of greater than 1.0 to 1.0 for the quarter ended December 31, 2023 (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.
At December 31, 2023, 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 2021 Senior Notes and the 2019 Senior Notes. 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.
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, 2023. There were no material changes to our critical accounting policies during the nine months ended December 31, 2023.
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.
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,”"plan,"“project,”"intend,""strategy,""goal,""objective,""future,""seek,""may,""might,""should,""would,""will,""will be," 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:
•Price increases for raw materials, labor, energy and transportation costs, and for other input costs;
•Disruptions of supply of sourced goods or components;
•The impact of geopolitical events and severe illness 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;
•The level of success of 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;
•Changes by retailers in inventory management practices, delivery requirements, and demands for marketing and promotional spending in order to retain or increase shelf space or online share;
•Our inability
to grow our international sales;
•General economic conditions and incidence levels affecting sales of our products and their respective markets;
•Financial factors, such as increases in interest rates and currency exchange rate fluctuations;
•Changing consumer trends, additional store brand or branded competition, accelerating shifts to online shopping or pricing pressures;
•Our dependence on third-party manufacturers to produce many of the products we sell and our ability to transfer production to our own facilities or other third-party suppliers;
•Our dependence on third-party logistics providers to distribute our products to customers;
•Disruptions
in our distribution center or manufacturing facility;
•Potential changes in export/import and trade laws, regulations and policies including any increased trade restrictions or tariffs;
•Acquisitions, dispositions or other strategic transactions diverting managerial resources and creating additional liabilities;
•Actions of government agencies in connection with our manufacturing plant, products, advertising or regulatory matters;
•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 information technology systems from threats or disruptions;
•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;
•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 or to obtain additional financing;
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•The restrictions imposed by our financing agreements on our operations; and
•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, 2023.
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ITEM
3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
We are exposed to changes in interest rates because our 2012 Term Loan and 2012 ABL Revolver are variable rate debt. At December 31, 2023, approximately $210.0 million of our debt carries a variable rate of interest.
Holding other variables constant, including levels of indebtedness, a 1.0% increase in interest rates on our variable rate debt would have an adverse impact on pre-tax earnings and cash flows for the three and nine months ended December 31, 2023 of approximately $0.7 million and $2.3 million,
respectively.
Foreign Currency Exchange Rate Risk
During the three and nine months ended December 31, 2023, approximately 17.0% and 14.1%, respectively, of our gross revenues were denominated in currencies other than the U.S. Dollar. During the three and nine months ended December 31, 2022, approximately 14.9% and 13.8%, respectively, of our gross revenues were denominated in currencies other than the U.S. Dollar. As such, we are exposed to transactions that are sensitive to foreign currency exchange rates. These transactions are primarily with respect to the Canadian and Australian Dollars.
We performed a sensitivity
analysis with respect to exchange rates for the three and nine months ended December 31, 2023 and 2022. Holding all other variables constant, and assuming a hypothetical 10.0% adverse change in foreign currency exchange rates, this analysis resulted in a less than 5.0% impact on pre-tax income of approximately $2.7 million for the three months ended December 31, 2023 and approximately $6.8 million for the nine months ended December 31, 2023. It represented a less than 5.0% impact on pre-tax income of approximately $2.3 million for the three months ended December 31, 2022 and $7.1 million for the nine months ended December 31, 2022.
ITEM
4.CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Rule 13a–15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of December 31, 2023. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of December 31,
2023, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes
in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the quarter ended December 31, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II.OTHER INFORMATION
ITEM 1A. RISK FACTORS
You
should carefully consider the risk factors discussed in Part I, Item 1A. "Risk Factors" in our Annual Report on Form 10-K for the year ended March 31, 2023, which could materially affect our business, financial condition or results of operations. The risk factors described in our Annual Report on Form 10-K have not materially changed in the period covered by this Quarterly Report on Form 10-Q, but such risks are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations.
Our quarterly operating results and revenues may fluctuate as a result of any of these or other factors. Accordingly, results for any one quarter are not necessarily indicative of results
to be expected for any other quarter or for any year, and revenues for
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any particular future period may decrease. In the future, operating results may fall below the expectations of securities analysts and investors. In that event, the market price of our outstanding securities could be adversely impacted.
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Cover
Page Interactive Data File (formatted in Inline XBRL and contained in Exhibit 101)
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.