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PBH > SEC Filings for PBH > Form 10-Q on 7-Feb-2014All Recent SEC Filings

Show all filings for PRESTIGE BRANDS HOLDINGS, INC.

Form 10-Q for PRESTIGE BRANDS HOLDINGS, INC.


7-Feb-2014

Quarterly Report


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 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, 2013. 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, 2013, as well as those described in Part II, Item 1A., "Risk Factors" in this Quarterly Report on Form 10-Q and in future reports filed with the Securities and Exchange Commission (the "SEC"). See also "Cautionary Statement Regarding Forward-Looking Statements" on page 54 of this Quarterly Report on Form 10-Q.

General
We are engaged in the marketing, sales and distribution of brand name over-the-counter ("OTC") healthcare and household cleaning products to mass merchandisers, drug stores, supermarkets, club, convenience, and dollar stores in the United States and Canada and in 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 grow our presence in these categories and, as a result, grow our sales and profits.

We have grown our product portfolio both organically and through acquisitions. We develop our core brands by investing in new product lines, brand extensions and providing 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. 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 significant opportunities for us to reinvigorate these brands and improve their performance post-acquisition. After adding a 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. This is achieved through increased spending on advertising and promotional support, new sales and marketing strategies, improved packaging and formulations and innovative development of brand extensions.

Acquisitions and Divestitures

Acquisition of Care Pharmaceuticals Pty Ltd.

On July 1, 2013, we completed the acquisition of Care Pharmaceuticals Pty Ltd. ("Care Pharma"), which was funded through a combination of our existing senior secured credit facility and cash on hand.

The Care Pharma brands include the Fess line of cold/allergy and saline nasal health products, which is the leading saline spray for both adults and children in Australia. Other key brands include Painstop analgesic, Rectogesic for rectal discomfort, and the Fab line of nutritional supplements. Care Pharma also carries a line of brands for children including Little Allergies, Little Eyes, and Little Cough. The brands acquired are complementary to our existing OTC Healthcare portfolio.

This acquisition was accounted for in accordance with the Business Combinations topic of the Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 805, which requires that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition.

We prepared a preliminary analysis of the fair values of the assets acquired and liabilities assumed as of the date of acquisition. The following table summarizes our preliminary allocation of the assets acquired and liabilities assumed as of the July 1, 2013 acquisition date.

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(In thousands)                      July 1, 2013

Cash acquired                     $        1,546
Accounts receivable                        1,658
Inventories                                2,465
Prepaids and other current assets            647
Property, plant and equipment                163
Goodwill                                  23,122
Intangible assets                         31,502
Total assets acquired                     61,103

Accounts payable                           1,537
Accrued expenses                           2,505
Other long term liabilities                  300
Total liabilities assumed                  4,342

Net assets acquired               $       56,761

Based on this analysis, we allocated $29.8 million to non-amortizable intangible assets and $1.7 million to amortizable intangible assets. We are amortizing the purchased amortizable intangible assets on a straight-line basis over an estimated weighted average useful life of 15.1 years. The weighted average remaining life for amortizable intangible assets at December 31, 2013 was 14.1 years.

We also recorded goodwill of $23.1 million based on the amount by which the purchase price exceeded the fair value of the net assets acquired. The full amount of goodwill is deductible for income tax purposes.

The pro-forma effect of this acquisition on revenues and earnings was not material.

Sale of the Phazyme Brand
On October 31, 2012, we divested the Phazyme gas treatment brand, which was a non-core OTC brand that we acquired from GSK in January 2012. We received $21.7 million from the divestiture on October 31, 2012 and the remaining $0.6 million on January 4, 2013. The proceeds were used to repay debt. No significant gain or loss was recorded as a result of the sale.

Concurrent with the completion of the sale of the Phazyme brand, we entered into a Transitional Services Agreement with the buyer (the "Phazyme TSA"), whereby we agreed to provide the buyer with various services, including: marketing, operations, finance and other services, from the date of the acquisition primarily through January 31, 2013, with an option for additional support for the Canadian portion of that business through October 31, 2013, at the buyer's discretion. All Phazyme United States TSA services ended, as agreed, on January 31, 2013. The buyer elected to extend the Canadian portion of the TSA services on a month to month basis and terminated the support on October 31, 2013. The following table presents the assets sold at October 31, 2012 related to the Phazyme brand:

                            October 31,
(In thousands)                  2012
Components of assets sold:
Inventory                  $         220
Prepaid expenses                     100
Trade names                       15,604
Goodwill                           6,382

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Three Months Ended December 31, 2013 compared to the Three Months Ended

December 31, 2012

Revenues
                                              Three Months Ended December 31,
                                                                             Increase
Revenues                    2013          %          2012          %        (Decrease)        %
Analgesics              $   25,903        17.7   $   27,946        17.4   $     (2,043 )     (7.3 )
Cough & Cold                34,330        23.5       37,424        23.4         (3,094 )     (8.3 )
Gastrointestinal            20,190        13.8       24,977        15.6         (4,787 )    (19.2 )
Eye & Ear Care              19,400        13.3       19,702        12.3           (302 )     (1.5 )
Dermatologicals              9,797         6.7       11,496         7.2         (1,699 )    (14.8 )
Oral Care                   11,408         7.8       12,953         8.1         (1,545 )    (11.9 )
Other OTC                    4,570         3.1        4,535         2.8             35        0.8
Total OTC Healthcare
Revenues                   125,598        85.9      139,033        86.8        (13,435 )     (9.7 )
Household Cleaning          20,614        14.1       21,199        13.2           (585 )     (2.8 )
 Consolidated Total
Revenues                $  146,212       100.0   $  160,232       100.0   $    (14,020 )     (8.7 )

Revenues for the three months ended December 31, 2013 were $146.2 million, a decrease of $14.0 million, or 8.7%, versus the three months ended December 31, 2012. The decrease reflects the effects of the return to the market of competitive products that had been recalled and lower cough cold incidence levels. In addition, we estimate an approximate $10.0 million impact to sales resulting from reduced inventory levels at the end of the quarter, largely in the mass customer channel. Revenues from customers outside of North America, which represent 6.0% of total revenues for the quarter ended December 31, 2013, increased by $4.4 million, or 99.1%, during the three months ended December 31, 2013 compared to the three months ended December 31, 2012. The increase in international sales was primarily attributed to inclusion of the acquisition of Care Pharma.

OTC Healthcare Segment
Revenues for the OTC Healthcare segment decreased $13.4 million, or 9.7%, during the three months ended December 31, 2013 versus the three months ended December 31, 2012. This decrease was primarily due to declining revenues in the gastrointestinal, cough and cold, and analgesics product groups and the retailer inventory reductions. The decrease in the gastrointestinal group was caused primarily by decreases in revenues for both the Beano and Gaviscon brands. Beano revenues declined due to consumer shifts to probiotics and the expansion of private label products in the mass channel. Gaviscon was impacted by supply chain issues incurred last year which caused a shift in the timing of sales due to limited supply availability. The decrease in the cough and cold product group was due primarily to the decrease in revenues for the Pediacare brand, resulting from increased competition from products that had previously been recalled and a weak cough and cold season. The decrease in Pediacare was offset partly by the inclusion of the Fess line of cold/allergy and saline nasal health products. The decrease in the analgesics product group was due largely to the decrease in revenues for the Goody's brand, which resulted from a change in the timing of promotional activity.

Household Cleaning Segment
Revenues for the Household Cleaning segment decreased by $0.6 million, or 2.8%,
during the three months ended December 31, 2013 versus the three months ended
December 31, 2012. The slight decline was attributed to an unfavorable product
mix relative to the Spic and Span brand.

Cost of Sales
                                      Three Months Ended December 31,
Cost of Sales        2013       %       2012       %      Increase (Decrease)       %
OTC Healthcare     $ 49,042    39.0   $ 59,381    42.7   $           (10,339 )   (17.4 )
Household Cleaning   15,361    74.5     15,854    74.8                  (493 )    (3.1 )
                   $ 64,403    44.0   $ 75,235    47.0   $           (10,832 )   (14.4 )

Cost of sales decreased $10.8 million, or 14.4% during the three months ended December 31, 2013 versus the three months ended December 31, 2012. As a percentage of total revenue, cost of sales decreased to 44.0% in the three months ended December 31, 2013 from 47.0% in the three months ended December 31, 2012. The decrease in cost of sales as a percentage of revenues was

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primarily due to reductions in product costs attributed to sourcing activities, and a favorable product mix relative to the acquisition of Care Pharma brands.

OTC Healthcare Segment
Cost of sales for the OTC Healthcare segment decreased $10.3 million, or 17.4%, during the three months ended December 31, 2013 versus the three months ended December 31, 2012. As a percentage of OTC Healthcare revenues, cost of sales in the OTC Healthcare segment decreased to 39.0% in the months ended December 31, 2013 from 42.7% during the three months ended December 31, 2012. The decrease in cost of sales as a percentage of revenues was primarily due to reductions in product costs, attributed to sourcing activities, and a favorable product mix relative to the acquisition of Care Pharma brands.

Household Cleaning Segment
Cost of sales for the Household Cleaning segment decreased $0.5 million, or
3.1%, during the three months ended December 31, 2013 versus the three months
ended December 31, 2012. As a percentage of Household Cleaning revenues, cost of
sales decreased to 74.5% during the three months ended December 31, 2013 from
74.8% during the three months ended December 31, 2012. The decrease in the cost
of sales as a percentage of revenues was the result of lower sales promotional
spending and reductions in product costs due to sourcing activities.

Gross Profit
                                     Three Months Ended December 31,
Gross Profit         2013       %       2012       %      Increase (Decrease)      %
OTC Healthcare     $ 76,556    61.0   $ 79,652    57.3   $            (3,096 )   (3.9 )
Household Cleaning    5,253    25.5      5,345    25.2                   (92 )   (1.7 )
                   $ 81,809    56.0   $ 84,997    53.0   $            (3,188 )   (3.8 )

Gross profit for the three months ended December 31, 2013 decreased $3.2 million, or 3.8%, when compared with the three months ended December 31, 2012. As a percentage of total revenues, gross profit increased to 56.0% in the three months ended December 31, 2013 from 53.0% in the three months ended December 31, 2012. The increase in gross profit percentage was primarily due to reductions in product costs, attributed to sourcing activities, and a favorable product mix relative to the acquired Care Pharma brands.

OTC Healthcare Segment
Gross profit for the OTC Healthcare segment decreased $3.1 million, or 3.9%, during the three months ended December 31, 2013 versus the three months ended December 31, 2012. As a percentage of OTC Healthcare revenues, gross profit increased to 61.0% during the three months ended December 31, 2013 from 57.3% during the three months ended December 31, 2012. The increase in gross profit was primarily the result of the acquisition of Care Pharma products and the reduction of product costs due to sourcing activities.

Household Cleaning Segment
Gross profit for the Household Cleaning segment remained at $5.3 million during
the three months ended December 31, 2013 and 2012. As a percentage of Household
Cleaning revenue, gross profit increased to 25.5% during the three months ended
December 31, 2013 from 25.2% during the three months ended December 31, 2012.

Contribution Margin
                                      Three Months Ended December 31,
Contribution Margin   2013       %       2012       %      Increase (Decrease)      %
OTC Healthcare      $ 51,726    41.2   $ 57,242    41.2   $            (5,516 )   (9.6 )
Household Cleaning     4,513    21.9      4,217    19.9                   296      7.0
                    $ 56,239    38.5   $ 61,459    38.4   $            (5,220 )   (8.5 )

Contribution margin, a non-GAAP financial measure used as a primary measure for evaluating segment performance, which is defined as gross profit less advertising and promotional expenses, decreased $5.2 million, or 8.5%, during the three months ended December 31, 2013 versus the three months ended December 31, 2012. The contribution margin decrease was primarily the result

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of lower sales volumes and slightly higher advertising and promotional spending partially offset by the Care Pharma acquisition and the higher gross profit percentage discussed above.

OTC Healthcare Segment
Contribution margin for the OTC Healthcare segment decreased $5.5 million, or 9.6%, during the three months ended December 31, 2013 versus the three months ended December 31, 2012. The contribution margin decline was primarily the result of the effects of lower sales volumes and slightly higher advertising and promotional spending partially offset by the higher gross profit percentage. Advertising and promotional spending increased $2.4 million, or 10.8%, due primarily to BC and Goody's new product launches.

Household Cleaning Segment
Contribution margin for the Household Cleaning segment increased $0.3 million, or 7.0%, during the three months ended December 31, 2013 versus the three months ended December 31, 2012. The contribution margin increase was the result of lower advertising and promotional spending.

General and Administrative
General and administrative expenses were $12.1 million for the three months ended December 31, 2013 versus $11.4 million for the three months ended December 31, 2012. The increase in general and administrative expenses was primarily due to an increase in salaries and benefits of $1.6 million, increased stock-based compensation of $0.3 million, and higher technology costs of $0.1 million incurred due to a new enterprise resource planning ("ERP") system implementation This increase was partially offset by a reduction of bonuses of $1.3 million primarily related to lower payments against our prior year end bonus accruals, decreased costs in business development and consulting costs of $0.3 million, and $0.1 million of costs associated with our office and warehouse relocations incurred in the prior year period.

Depreciation and Amortization
Depreciation and amortization expense was $3.6 million for the three months ended December 31, 2013 versus $3.4 million for the three months ended December 31, 2012. The increase in depreciation and amortization expense was due to the implementation of a new ERP system.

Interest Expense
Net interest expense was $21.3 million during the three months ended December 31, 2013 versus $26.7 million during the three months ended December 31, 2012. The decrease in interest expense was primarily the result of a lower level of indebtedness outstanding resulting from significant payments made on our 2012 Term Loan in 2013, as well as reduced borrowing rates primarily resulting from the amendment of our 2012 Term Loan completed in February 2013. The average cost of borrowing decreased to 8.5% for the three months ended December 31, 2013 from 10.2% for the three months ended December 31, 2012, which is attributed to the refinancing of debt in February 2013. The average indebtedness outstanding decreased from $1,047.3 million during the three months ended December 31, 2012 to $994.4 million during the three months ended December 31, 2013. The decrease in average indebtedness outstanding is the result of the significant payments made on the 2012 Term Loan, which resulted in lower outstanding debt.

Income Taxes
The provision for income taxes during the three months ended December 31, 2013 was $1.1 million versus $7.8 million during the three months ended December 31, 2012. The effective tax rate during the three months ended December 31, 2013 was 25.2% versus 38.9% during the three months ended December 31, 2012. The decrease in the effective tax rate was primarily due to the impact of lower state income tax rates on the lower profitability of the Company due primarily to the loss on debt extinguishment. This benefit was primarily related to a recent change in state law where we have our major distribution center that taxes earnings attributed to in-state revenues only. The estimated effective tax rate for the remaining quarter of the fiscal year ending March 31, 2014 is expected to be 36.2%.

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Nine Months Ended December 31, 2013 compared to the Nine Months Ended

December 31, 2012

Revenues
                                              Nine Months Ended December 31,
                                                                             Increase
Revenues                    2013          %          2012          %        (Decrease)        %
Analgesics              $   84,634        18.5   $   81,727        17.4   $      2,907        3.6
Cough & Cold                89,548        19.6       94,197        20.1         (4,649 )     (4.9 )
Gastrointestinal            64,841        14.2       74,510        15.9         (9,669 )    (13.0 )
Eye & Ear Care              63,519        13.9       63,109        13.5            410        0.6
Dermatologicals             40,223         8.8       41,578         8.9         (1,355 )     (3.3 )
Oral Care                   35,845         7.8       36,032         7.7           (187 )     (0.5 )
Other OTC                   12,522         2.7       12,000         2.6            522        4.4
Total OTC Healthcare
Revenues                   391,132        85.5      403,153        85.9        (12,021 )     (3.0 )
Household Cleaning          66,493        14.5       65,931        14.1            562        0.9
 Consolidated Total
Revenues                $  457,625       100.0   $  469,084       100.0   $    (11,459 )     (2.4 )

Revenues for the nine months ended December 31, 2013 were $457.6 million, a decrease of $11.5 million, or 2.4%, versus the nine months ended December 31, 2012. The decrease in revenues reflects the effects on revenue of increased competition from the introduction of new brands or brands that had previously been recalled, a weak cough and cold season, and the impact of the divestiture of Phazyme, which were offset partly by the acquisition of the Care Pharma products and the launch of new analgesics products. Revenues from customers outside of North America, which represent 5.0% of total revenues for the nine months ended December 31, 2013, increased by $10.8 million, or 90.0%, during the nine months ended December 31, 2013 compared to the nine months ended December 31, 2012. The increase in international sales was largely attributed to the inclusion of the acquired Care products.

OTC Healthcare Segment
Revenues for the OTC Healthcare segment decreased $12.0 million, or 3.0%, during the nine months ended December 31, 2013 versus the nine months ended December 31, 2012. This decrease was largely caused by declines in the gastrointestinal, cough and cold, and dermatological groups, offset by increased revenues in the analgesic group. Revenues for the gastrointestinal group decreased primarily due decreased revenues for both the Beano and Gaviscon brands as well as the effects of the divestiture of Phazyme. Beano revenues declined due to consumer shifts to probiotics and the expansion of private label products in the mass channel. Gaviscon was impacted by supply chain issues incurred last year which caused a shift in the timing of sales due to limited supply availability. The decrease in the cough and cold product group was due primarily to the decrease in revenues for the Pediacare brand, resulting from increased competition from products that had previously been recalled and a weak cough and cold season. The decrease in Pediacare was offset partly by the inclusion of the Fess line of cold/allergy and saline nasal health products. The decrease in the dermatological group was due largely to decreased revenues for the Compound W brand, which experienced an overall decline in the wart removal category. The increased revenue in the analgesic product group reflected new product launches for the BC and Goody's brands and the inclusion of the Painstop brand, one of the acquired Care Pharma products.

Household Cleaning Segment
Revenues for the Household Cleaning segment increased by $0.6 million, or 0.9%,
during the nine months ended December 31, 2013 versus the nine months ended
December 31, 2012 due to increases in the Comet brand attributable to increased
sales volumes and lower promotional spending.

Cost of Sales
                                       Nine Months Ended December 31,
Cost of Sales         2013       %        2012       %      Increase (Decrease)      %
OTC Healthcare     $ 149,378    38.2   $ 160,249    39.7   $           (10,871 )   (6.8 )
Household Cleaning    48,236    72.5      49,689    75.4                (1,453 )   (2.9 )
                   $ 197,614    43.2   $ 209,938    44.8   $           (12,324 )   (5.9 )

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Cost of sales decreased $12.3 million, or 5.9%, during the nine months ended December 31, 2013 versus the nine months ended December 31, 2012. As a percentage of total revenue, cost of sales decreased to 43.2% in the nine months ended December 31, 2013 from 44.8% in the nine months ended December 31, 2012. The decrease in cost of sales as a percentage of revenues was primarily due to reductions in product costs attributed to sourcing activities and a favorable product mix relative to the acquisition of Care Pharma, offset by the one-time adjustment for acquisition costs for the Care Pharma inventory.

OTC Healthcare Segment
Cost of sales for the OTC Healthcare segment decreased $10.9 million, or 6.8%, during the nine months ended December 31, 2013 versus the nine months ended December 31, 2012. As a percentage of OTC Healthcare revenues, cost of sales in the OTC Healthcare segment decreased to 38.2% during the nine months ended December 31, 2013 from 39.7% during the nine months ended December 31, 2012. The decrease in cost of sales as a percentage of revenues was primarily attributable to reductions in product costs due to sourcing activities and a favorable product mix relative to the acquisition of Care Pharma, offset by the one-time adjustment for acquisition costs for the Care Pharma inventory.

Household Cleaning Segment
Cost of sales for the Household Cleaning segment decreased $1.5 million, or
2.9%, during the nine months ended December 31, 2013 versus the nine months
ended December 31, 2012. As a percentage of Household Cleaning revenues, cost of
sales decreased to 72.5% during the nine months ended December 31, 2013 from
75.4% during the nine months ended December 31, 2012. The decrease in the cost
of sales as a percentage of revenues was the result of lower sales promotional
spending, which resulted in higher net revenue relative to product cost.

Gross Profit
                                       Nine Months Ended December 31,
Gross Profit          2013       %        2012       %      Increase (Decrease)      %
OTC Healthcare     $ 241,754    61.8   $ 242,904    60.3   $            (1,150 )   (0.5 )
Household Cleaning    18,257    27.5      16,242    24.6                 2,015     12.4
                   $ 260,011    56.8   $ 259,146    55.2   $               865      0.3

Gross profit for the nine months ended December 31, 2013 increased $0.9 million, or 0.3%, when compared with the nine months ended December 31, 2012. As a percentage of total revenues, gross profit increased to 56.8% during the nine months ended December 31, 2013 from 55.2% in the nine months ended December 31, 2012. The higher gross profit percentage was primarily the result of the decrease in promotion spending in the nine months ended December 31, 2013, . . .

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