# Prestige Consumer Healthcare Inc. (PBH) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from Prestige Consumer Healthcare Inc.'s 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1295947/000129594724000017/pbh-20240331.htm
Accession: 0001295947-24-000017
Filing date: 2024-05-15
Report date: 2024-03-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/PBH/
All MD&A years: /company/PBH/mda/
Previous year: /company/PBH/mda/fy2023/ (FY 2023)
Next year: /company/PBH/mda/fy2025/ (FY 2025)

ITEM 7. 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 related notes included elsewhere in this Annual Report on Form 10-K. This discussion and analysis may contain forward-looking statements that involve certain risks, assumptions and uncertainties that could cause actual results to differ materially from those implied or described by the forward-looking statements. 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 this Annual Report on Form 10-K, as well as those described in future reports filed with the SEC.

General

We are engaged in the development, manufacturing, marketing, sales and distribution of well-recognized, brand name OTC health and personal care 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 create our competitive advantage.

We have grown our product 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 consumer health and personal care 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 certain of these brands have long histories of brand development and investment, we believe that, at the time we acquired them, many 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 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.

Acquisition

Acquisition of Akorn

On July 1, 2021, we completed the acquisition of the consumer health business assets from Akorn Operating Company LLC ("Akorn") pursuant to an Asset Purchase Agreement, dated May 27, 2021 (the "Purchase Agreement"), for a purchase price of $228.9 million in cash, subject to certain closing adjustments specified in the Purchase Agreement. As a result of the purchase, we acquired TheraTears and certain other OTC consumer brands. The financial results from this acquisition are included in our North American and International OTC Healthcare segments. The purchase price was funded by a combination of available cash on hand, additional borrowings under our asset-based revolving credit facility (the "2012 ABL Revolver") and the net proceeds from the refinancing of our term loan originally entered into on January 31, 2012 (the "2012 Term Loan").

The acquisition was accounted for as a business combination. During 2022, we incurred acquisition-related costs of $5.1 million, which are included in General and administrative expense.

We finalized our analysis of the fair values of the assets acquired and liabilities assumed as of the date of acquisition.

Based on this analysis, we allocated $195.9 million to non-amortizable intangible assets and $29.5 million to amortizable intangible assets. The non-amortizable intangible assets are classified as trademarks and, of the amortizable intangible assets, $20.4 million are classified as customer relationships and $9.1 million are classified as trademarks. We are amortizing the purchased amortizable intangible assets on a straight-line basis over an estimated weighted average useful life of 12.5 years.

We recorded goodwill of $1.1 million based on the amount by which the purchase price exceeded the fair value of the net assets acquired. Goodwill is deductible and is being amortized for income tax purposes.

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

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have continued to see changes in the purchasing patterns of our end customers, 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. 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. Certain of our third-party manufacturers are currently having, and have had in the past, difficulty meeting demand, which is and has caused shortages of our products, particularly eye care products. These shortages have negatively impacted our results of operations in the fourth quarter of fiscal 2024, and we expect further shortages may have a negative impact on our sales. In addition, labor shortages have impacted our manufacturing operations and may impact our ability to supply certain products to our customers. 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.

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Critical Accounting Estimates

Our significant accounting policies are described in the notes to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K.  While all significant accounting policies are important to our Consolidated Financial Statements, certain of these policies may be viewed as being critical.  Such policies are those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses or the related disclosure of contingent assets and liabilities.  These estimates are based on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  Actual results may differ materially from these estimates. The following are our most critical accounting estimates:

Revenue Recognition, Customer Programs and Variable Consideration

Revenue is recognized when control of a promised good is transferred to a customer, in an amount that reflects the consideration that we expect to be entitled to receive in exchange for that good. This occurs either when finished goods are transferred to a common carrier for delivery to the customer or when product is picked up by the customer or the customer’s carrier.

Once a product has transferred to the common carrier or been picked up by the customer, the customer is able to direct the use of, and obtain substantially all of the remaining benefits from, the product. It is at this point that we have a right to payment and the customer has legal title.

Provisions for certain rebates, customer promotional programs, product returns, and discounts to customers are accounted for as variable consideration and recorded as a reduction in sales.

We record an estimate of future product returns, chargebacks and logistics deductions concurrent with recording sales, which is made using the most likely amount method that incorporates (i) historical return rates, (ii) current economic trends, (iii) changes in customer demand, (iv) product acceptance, (v) seasonality of our product offerings, and (vi) the impact of changes in product formulation, packaging and advertising.

We participate in the promotional programs of our customers to enhance the sale of our products. These promotional programs consist of direct-to-consumer incentives, such as coupons and temporary price reductions, as well as incentives to our customers, such as allowances for new distribution, including slotting fees, and cooperative advertising. The costs of such activities are recorded as a reduction to revenue when the related sale takes place. Estimates of the costs of these promotional programs are derived using the most likely amount method, which incorporates (i) historical sales experience, (ii) the current promotional offering, (iii) forecasted data, (iv) current market conditions, and (v) communication with customer purchasing/marketing personnel. At the completion of the promotional program, the estimated amounts are adjusted to actual results.

Goodwill and Intangible Assets

At March 31, 2024 and 2023, goodwill and intangible assets were apportioned among similar product groups within our operating segments as follows:

[[GREPCENT_TABLE]]
[["","March 31, 2024"],["(In thousands)","North American OTC Healthcare","","International OTC Healthcare","","","","Consolidated"],["Goodwill","$","498,936","","","$","28,797","","","","","$","527,733"],["Intangible assets"],["Indefinite-lived","2,092,853","","","74,309","","","","","2,167,162"],["Finite-lived","135,932","","","17,489","","","","","153,421"],["Intangible assets, net","2,228,785","","","91,798","","","","","2,320,583"],["Total","$","2,727,721","","","$","120,595","","","","","$","2,848,316"]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","March 31, 2023"],["(In thousands)","North American OTC Healthcare","","International OTC Healthcare","","","","Consolidated"],["Goodwill","$","498,936","","","$","28,617","","","","","$","527,553"],["Intangible assets"],["Indefinite-lived","2,092,852","","","76,050","","","","","2,168,902"],["Finite-lived","154,552","","","18,439","","","","","172,991"],["Intangible assets, net","2,247,404","","","94,489","","","","","2,341,893"],["Total","$","2,746,340","","","$","123,106","","","","","$","2,869,446"]]
[[/GREPCENT_TABLE]]

At March 31, 2024, the brands with the highest carrying value were Monistat, BC/Goody's, Summer's Eve, TheraTears and Fleet, comprising 58.0% of our total intangible assets value.

Goodwill and intangible assets comprise the majority of all of our assets.  Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in a business combination.  Intangible assets generally represent our tradenames, brand names and patents.  When we acquire a brand, we are required to make judgments regarding the value assigned to the associated intangible assets, as well as their respective useful lives.  Management considers many factors both prior to and after the acquisition of an intangible asset in determining the value, as well as the useful life, assigned to each intangible asset that we acquire or continue to own and promote.

The most significant factors are:

•Brand History

A brand that has been in existence for a long period of time (e.g., 25, 50 or 100 years) generally warrants a higher valuation and longer life (sometimes indefinite) than a brand that has been in existence for a very short period of time.  A brand that has been in existence for an extended period of time generally has been the subject of considerable investment by its previous owner(s) to support product innovation and advertising and marketing.

•Market Position

Consumer products that rank number one or two in their respective market generally have greater name recognition and are known as quality product offerings, which warrant a higher valuation and longer life than products that lag in the marketplace.

•Recent and Projected Sales Growth

Recent sales results present a snapshot as to how the brand has performed in the most recent time periods and represent another factor in the determination of brand value.  In addition, projected sales growth provides information about the strength and potential longevity of the brand.  A brand that has both strong current and projected sales generally warrants a higher valuation and a longer life than a brand that has weak or declining sales.  Similarly, consideration is given to the potential investment, in the form of advertising and marketing, required to reinvigorate a brand that has fallen from favor.

•History of and Potential for Product Extensions

Consideration is given to the product innovation that has occurred during the brand’s history and the potential for continued product innovation that will determine the brand’s future.  Brands that can be continually enhanced by new product offerings generally warrant a higher valuation and longer life than a brand that has always “followed the leader.”

After consideration of the factors described above, as well as current economic conditions and changing consumer behavior, management prepares a determination of an intangible asset’s value and useful life based on its analysis.  Under accounting guidelines, goodwill is not amortized, and must be tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below the carrying amount.  In a similar manner, indefinite-lived assets are not amortized.  They are also subject to an annual impairment test or more frequently if events or changes in circumstances indicate that the asset may be impaired.  Additionally, at each reporting period

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an evaluation must be made to determine whether events and circumstances continue to support an indefinite useful life.  Intangible assets with finite lives are amortized over their respective estimated useful lives and must also be tested for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable and exceeds its fair value.

On an annual basis, during the fourth fiscal quarter, concurrent with our annual strategic planning process, or more frequently if conditions indicate that the carrying value of the asset may not be recovered, management performs a review of both the values and, if applicable, useful lives assigned to intangible assets and tests for impairment.

We report goodwill and indefinite-lived intangible assets in two reportable segments: North American OTC Healthcare and International OTC Healthcare. We identify our reporting units in accordance with the FASB ASC Subtopic 280. The carrying value and fair value for intangible assets and goodwill for a reporting unit are calculated based on key assumptions and valuation methodologies.  As a result, any material changes to these assumptions could require us to record additional impairment in the future.

We have experienced declines in revenues and profitability of certain brands in the North American OTC Healthcare segment, as discussed below.  Sustained or significant future declines in revenue, profitability, other adverse changes in expected operating results, and/or unfavorable changes in other economic factors used to estimate fair values of certain brands could indicate that fair value no longer exceeds carrying value, in which case additional non-cash impairment charges may be recorded in future periods.

Goodwill

Goodwill is tested for impairment annually and whenever events and circumstances indicate that impairment may have occurred. As of February 29, 2024 (our annual impairment review date), we had 13 reporting units with goodwill. As part of our annual test for impairment of goodwill, management estimates the discounted cash flows of each reporting unit to estimate their respective fair values. In addition, we considered our market capitalization at February 29, 2024, as compared to the aggregate fair values of our reporting units, to assess the reasonableness of our estimates pursuant to the discounted cash flow methodology. An impairment charge is then recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. In performing the discounted cash flow analysis, management considers current information and assumptions regarding future sales, gross margins, and advertising and marketing expenses, and the discount rate utilized in the analysis, as well as future cash flows, may be influenced by such factors as changes in interest rates and rates of inflation. Future events, such as competition, changing consumer needs, technological advances and changes in advertising support for our trademarks and tradenames, could cause subsequent evaluations to utilize different assumptions. Additionally, should the related fair value of goodwill be adversely affected as a result of declining sales or margins caused by competition, changing consumer needs or preferences, technological advances or changes in advertising and marketing expenses, we may be required to record additional impairment charges in the future.

At February 28, 2022, in conjunction with the annual test for goodwill impairment, which coincides with our annual strategic planning process, we recorded an impairment charge of $0.3 million to write off the remaining goodwill related to our Painstop brand in our International OTC Healthcare segment.

At February 28, 2023, in conjunction with the annual test for goodwill impairment, which coincides with our annual strategic planning process, we recorded an impairment charge of $48.8 million to adjust the carrying amount of goodwill related to our North American Women's Health and North American Oral Care reporting units. The impairment charges were primarily a result of increased discount rates due to macroeconomic conditions.

At February 29, 2024, in conjunction with the annual test for goodwill impairment, which coincides with our annual strategic planning process, the estimated fair value exceeded the carrying value for all reporting units and accordingly, no impairment charge was taken.

Our analysis at February 29, 2024 determined that all reporting units had a fair value that exceeded their carrying value by at least 10%, with the exception of the North American Women's Health reporting unit. We performed a sensitivity analysis on our weighted average cost of capital, and we determined that a 50-basis point increase in the weighted average cost of capital would have resulted in an impairment charge of $9.1 million. Additionally, a 50-basis point decrease in the terminal growth rate used for each reporting unit would not have resulted in any of our reporting units' fair value being less than their carrying value.

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Indefinite-Lived Intangible Assets

Indefinite-lived intangibles are tested for impairment annually and whenever events and circumstances indicate that impairment may have occurred. We utilize the excess earnings method to estimate the fair value of our individual indefinite-lived intangible assets. The discount rate utilized in the analysis, as well as future cash flows, may be influenced by such factors as changes in interest rates and rates of inflation.

At each reporting period, management analyzes current events and circumstances to determine whether the indefinite life classification for a trademark or tradename continues to be valid.  If circumstances warrant a change to a finite life, the carrying value of the intangible asset would then be amortized prospectively over the estimated remaining useful life.

Management tests the indefinite-lived intangible assets for impairment by comparing the carrying value of the intangible asset to its estimated fair value.  Since quoted market prices are seldom available for trademarks and tradenames such as ours, we utilize present value techniques to estimate fair value.  Accordingly, management’s projections are utilized to assimilate all of the facts, circumstances and expectations related to the trademark or tradename and estimate the cash flows over its useful life.  In a manner similar to goodwill, future events, such as competition, technological advances and changes in advertising support for our trademarks and tradenames, could cause subsequent evaluations to utilize different assumptions.  Once that analysis is completed, a discount rate is applied to the cash flows to estimate fair value. In connection with this analysis, management:

•Reviews period-to-period sales and profitability by brand;

•Analyzes industry trends and projects brand growth rates;

•Prepares annual sales forecasts;

•Evaluates advertising effectiveness;

•Analyzes gross margins;

•Reviews contractual benefits or limitations;

•Monitors competitors’ advertising spend and product innovation;

•Prepares projections to measure brand viability over the estimated useful life of the intangible asset; and

•Considers the regulatory environment, as well as industry litigation.

As a result of our annual impairment test at February 28, 2023, the fair values of three of our indefinite-lived intangible assets, Summer’s Eve, DenTek and TheraTears, did not exceed the carrying values and, as such, impairment charges totaling $298.7 million were recorded. The impairment charges were primarily a result of an overall increase in the discount rate used to value the brands, as well as in the case of Summer’s Eve, our reassessment of the long-term sales projections of this brand during our annual planning cycle. The indefinite-lived intangible assets impaired are all part of our North American OTC Healthcare segment.

At February 29, 2024, in conjunction with the annual test for impairment of intangible assets, the estimated fair value exceeded the carrying value for all indefinite-lived intangible assets and accordingly, no impairment charge was taken.

Our analysis at February 29, 2024 determined that all indefinite-lived intangible assets had a fair value that exceeded their carrying value by at least 10%, with the exception of Summer’s Eve and TheraTears within our North American Women’s Health reporting unit and North American Eye & Ear Care reporting unit, respectively. We performed a sensitivity analysis of our weighted average cost of capital, and we determined that a 50-basis point increase in the weighted average cost of capital used to value all of our indefinite-lived intangible assets would have resulted in an impairment charge of $3.2 million. Additionally, a 50-basis point decrease in the terminal growth rate used for each of our indefinite-lived intangible assets would not have resulted in any of our indefinite-lived intangible assets' fair values being less than their carrying values.

Finite-Lived Intangible Assets

On an annual basis, or when events or changes in circumstances indicate the carrying value of the assets may not be recoverable, management performs a review similar to indefinite-lived intangible assets to ascertain the impact of events and circumstances on the estimated useful lives and carrying values of our trademarks and tradenames.

If the analysis warrants a change in the estimated useful life of the intangible asset, management will reduce the estimated useful life and amortize the carrying value prospectively over the shorter remaining useful life.  Management’s projections are utilized to assimilate all of the facts, circumstances and expectations related to the trademark or tradename and estimate the cash flows over its useful life.  Future events, such as competition, technological advances and changes in advertising support for our trademarks and tradenames, could cause subsequent evaluations to utilize different assumptions.  In the event that the long-term projections indicate that the carrying value is in excess of the undiscounted cash flows expected to result from the use of the intangible assets, management is required to record an impairment charge.   The impairment charge is measured as the excess of the carrying amount of the intangible asset over its fair value.

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At February 28, 2022, in conjunction with the annual test for impairment of intangible assets, we recorded an impairment charge of $0.7 million. In connection with our long-term planning, two non-core brands in our North American OTC Healthcare segment were discontinued and therefore the related finite-lived intangible assets were written off.

Our analysis at February 28, 2023 concluded that the fair value of several of our non-core finite-lived intangible assets did not exceed their carrying values, and as such, impairment charges of $22.7 million were recorded. The impairment charges were the result of our reassessment of the long-term sales projections for the associated non-core brands during our annual planning cycle, the largest of which pertains to the strategic exit of our DenTek private label business. The finite-lived trademarks impaired are all part of the North American OTC Healthcare segment.

At February 29, 2024, in conjunction with the annual test for impairment of finite-lived intangible assets, there were no indicators of impairment under the analysis and accordingly, no impairment charge was taken.

Stock-Based Compensation

The Compensation and Equity topic of the FASB ASC 718 requires us to measure the cost of services to be rendered based on the grant-date fair value of the equity award.  For most of our awards, compensation expense is to be recognized over the period during which an employee is required to provide service in exchange for the award, generally referred to as the requisite service period. We also grant performance stock units, which are contingent on the attainment of certain goals of the Company.  Information utilized in the determination of fair value includes the following:

•Type of instrument (i.e., restricted shares, stock options, warrants or performance shares);

•Strike price of the instrument;

•Market price of our common stock on the date of grant;

•Discount rates;

•Duration of the instrument; and

•Volatility of our common stock in the public market.

Additionally, management must estimate the expected attrition rate of the recipients to enable it to estimate the amount of non-cash compensation expense to be recorded in our financial statements.  While management prepares various analyses to estimate the respective variables, a change in assumptions or market conditions, as well as changes in the anticipated or actual attrition rates, could have a significant impact on the future amounts recorded as non-cash compensation expense.  

Recent Accounting Pronouncements

A description of recently issued and adopted accounting pronouncements is included in the notes to the Consolidated Financial Statements in Item 8, Note 1 of this Annual Report.

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Results of Operations

2024 compared to 2023

Total Segment Revenues

The following table represents total revenue by segment, including product groups, for each of the fiscal years ended March 31, 2024 and 2023.

[[GREPCENT_TABLE]]
[["","","","","","Increase (Decrease)"],["(In thousands)","2024","%","2023","%","Amount","%"],["North American OTC Healthcare"],["Analgesics","$","111,996","","10.0","","$","116,582","","10.3","","$","(4,586)","","(3.9)"],["Cough & Cold","93,575","","8.3","","100,218","","8.9","","(6,643)","","(6.6)"],["Women's Health","217,103","","19.3","","231,754","","20.5","","(14,651)","","(6.3)"],["Gastrointestinal","160,889","","14.3","","156,957","","13.9","","3,932","","2.5"],["Eye & Ear Care","156,553","","13.9","","151,879","","13.5","","4,674","","3.1"],["Dermatologicals","123,288","","11.0","","119,822","","10.6","","3,466","","2.9"],["Oral Care","83,212","","7.4","","85,542","","7.6","","(2,330)","","(2.7)"],["Other OTC","11,644","","1.0","","11,020","","1.0","","624","","5.7"],["Total North American OTC Healthcare","958,260","","85.2","","973,774","","86.3","","(15,514)","","(1.6)"],["International OTC Healthcare"],["Analgesics","5,455","","0.5","","2,680","","0.2","","2,775","","103.5"],["Cough & Cold","25,445","","2.3","","26,770","","2.4","","(1,325)","","(4.9)"],["Women's Health","23,318","","2.1","","19,597","","1.7","","3,721","","19.0"],["Gastrointestinal","70,721","","6.2","","69,626","","6.3","","1,095","","1.6"],["Eye & Ear Care","22,870","","2.0","","19,197","","1.7","","3,673","","19.1"],["Dermatologicals","5,814","","0.5","","3,919","","0.3","","1,895","","48.4"],["Oral Care","13,093","","1.2","","12,085","","1.1","","1,008","","8.3"],["Other OTC","381","","\u2014","77","","\u2014","304","","394.8"],["Total International OTC Healthcare","167,097","","14.8","","153,951","","13.7","","13,146","","8.5"],["Total Consolidated","$","1,125,357","","100.0","","$","1,127,725","","100.0","","$","(2,368)","","(0.2)"]]
[[/GREPCENT_TABLE]]

Total segment revenues for 2024 were $1,125.4 million, a decrease of $2.4 million, or 0.2%, versus 2023.

North American OTC Healthcare Segment

Revenues for the North American OTC Healthcare segment decreased $15.5 million, or 1.6%, during 2024 versus 2023. The $15.5 million decrease was primarily attributable to a decrease in sales in the Women's Health, Cough & Cold, and Analgesics categories, partly offset by an increase in sales in the Eye & Ear Care, Gastrointestinal, and Dermatologicals categories.

International OTC Healthcare Segment

Revenues for the International OTC Healthcare segment increased $13.1 million, or 8.5%, during 2024 versus 2023. The $13.1 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 represents our gross profit and gross profit as a percentage of total segment revenues, by segment for each of the fiscal years ended March 31, 2024 and 2023.

[[GREPCENT_TABLE]]
[["(In thousands)","","","","","Increase (Decrease)"],["Gross Profit","2024","%","2023","%","Amount","%"],["North American OTC Healthcare","$","528,899","","55.2","","$","531,930","","54.6","","$","(3,031)","","(0.6)"],["International OTC Healthcare","95,549","","57.2","","93,364","","60.6","","2,185","","2.3"],["","$","624,448","","55.5","","$","625,294","","55.4","","$","(846)","","(0.1)"]]
[[/GREPCENT_TABLE]]

Gross profit for 2024 decreased $0.8 million, or 0.1%, versus 2023. As a percentage of total revenues, gross profit increased to 55.5% in 2024 from 55.4% in 2023, primarily due to product mix and pricing actions, partly offset by increased supply chain costs.

North American OTC Healthcare Segment

Gross profit for the North American OTC Healthcare segment decreased $3.0 million, or 0.6%, during 2024 versus 2023.  As a percentage of North American OTC Healthcare revenues, gross profit increased to 55.2% during 2024 from 54.6% during 2023, 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 $2.2 million, or 2.3%, during 2024 versus 2023. As a percentage of International OTC Healthcare revenues, gross profit decreased to 57.2% during 2024 from 60.6% during 2023, 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 represents our contribution margin and contribution margin as a percentage of total segment revenues, by segment for each of the fiscal years ended March 31, 2024 and 2023.

[[GREPCENT_TABLE]]
[["(In thousands)","","","","","Increase (Decrease)"],["Contribution Margin","2024","%","2023","%","Amount","%"],["North American OTC Healthcare","$","397,405","","41.5","","$","408,004","","41.9","","$","(10,599)","","(2.6)"],["International OTC Healthcare","73,728","","44.1","","72,229","","46.9","","1,499","","2.1"],["","$","471,133","","41.9","","$","480,233","","42.6","","$","(9,100)","","(1.9)"]]
[[/GREPCENT_TABLE]]

North American OTC Healthcare Segment

Contribution margin for the North American OTC Healthcare segment decreased $10.6 million, or 2.6%, during 2024 versus 2023. As a percentage of North American OTC Healthcare revenues, contribution margin for the North American OTC Healthcare segment decreased to 41.5% during 2024 from 41.9% during 2023. The contribution margin decrease as a percentage of revenues was primarily due to an increase in advertising and marketing spend in 2024.

International OTC Healthcare Segment

Contribution margin for the International OTC Healthcare segment increased $1.5 million, or 2.1%, during 2024 versus 2023. As a percentage of International OTC Healthcare revenues, contribution margin for the International OTC Healthcare segment decreased to 44.1% during 2024 from 46.9% during 2023. The contribution margin decrease as a percentage of revenues was primarily due to the decrease in gross profit margin noted above.

General and Administrative

General and administrative expenses were $106.2 million for 2024 versus $107.4 million for 2023. The decrease in general and administrative expenses was primarily due to a decrease in professional fees, partly offset by an increase in compensation costs.

Depreciation and Amortization

Depreciation and amortization expense was $22.6 million for 2024 versus $25.1 million for 2023. 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.

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Goodwill and Tradename Impairment

As a result of our impairment analysis at February 28, 2023, we recorded total goodwill and intangible asset impairment charges of $370.2 million in 2023. Goodwill impairment represented $48.8 million and related to our North American Women's Health and North American Oral Care reporting units. The goodwill impairment charges were primarily a result of increased discount rates due to macroeconomic conditions. Intangible asset impairment represented $321.4 million and was comprised of $298.7 million of indefinite-lived intangible assets (Summer's Eve, DenTek and TheraTears) and $22.7 million of several of our non-core finite-lived intangible assets. The impairment charges recorded on the indefinite-lived assets were primarily a result of an overall increase in the discount rate used to value the brands, as well as in the case of Summer’s Eve, our reassessment of the long-term sales projections of this brand during our annual planning cycle. The impairment charges recorded on the finite-lived intangible assets were the result of our reassessment of the long-term sales projections for the associated non-core brands during our annual planning cycle, the largest of which pertains to the strategic exit of our DenTek private label business. The assets impaired were all part of our North American OTC Healthcare segment.

Interest Expense, Net

Interest expense, net was $67.2 million during 2024 versus $69.2 million during 2023.  The average cost of borrowing increased to 5.4% for 2024 from 4.8% for 2023. The average indebtedness decreased to $1.3 billion during 2024 from $1.5 billion in 2023.

Income Taxes

The provision (benefit) for income taxes during 2024 was a provision of $66.7 million versus a benefit of $(11.6) million in 2023.  The effective tax rate on income (loss) before income taxes was 24.2% during 2024 versus 12.4% during 2023. The increase in the effective tax rate in 2024 compared to 2023 was due to the impact of discrete items primarily pertaining to goodwill impairment charges taken in 2023.

Results of Operations

2023 compared to 2022

For a discussion of fiscal 2023 compared to 2022, please refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2023 Annual Report on Form 10-K, filed with the SEC on May 5, 2023.

Liquidity and Capital Resources

Liquidity

Our primary source of cash comes from our cash flow from operations. In the past, we have supplemented this source of cash with various debt facilities, primarily in connection with acquisitions. We have financed our operations, and expect to continue to finance our operations over the next twelve months, with a combination of funds generated from operations and borrowings.  Our principal uses of cash are for operating expenses, debt service, capital expenditures, share repurchases, 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, although no assurance can be given in this regard. See "Economic Environment" above.

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[[/GREPCENT_TABLE]]

2024 compared to 2023

Operating Activities

Net cash provided by operating activities was $248.9 million for 2024 compared to $229.7 million for 2023.  The $19.2 million increase in net cash provided by operating activities was due to decreased working capital and an increase in net income before non-cash items.

40

Investing Activities

Net cash used in investing activities was $20.1 million for 2024 compared to $11.6 million for 2023.  The increase in net cash used in investing activities was primarily due to a manufacturing acquisition in Australia in 2024.

Financing Activities

Net cash used in financing activities was $241.0 million for 2024 compared to $185.8 million for 2023. This change was primarily due to an increase in net debt repayments of $90.0 million, 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 and an increase in proceeds from the exercise of stock options of $10.7 million.

2023 compared to 2022

Operating Activities

Net cash provided by operating activities was $229.7 million for 2023 compared to $259.9 million for 2022.  The $30.2 million decrease in net cash provided by operating activities was due to increased working capital, partly offset by an increase in net income before non-cash items.

Investing Activities

Net cash used in investing activities was $11.6 million for 2023 compared $256.5 million for 2022.  The decrease in net cash used in investing activities was primarily due to acquisitions of $247.0 million in 2022.

Financing Activities

Net cash used in financing activities was $185.8 million for 2023 compared to $7.6 million for 2022. This change was primarily due to an increase in net debt repayments of $132.0 million, and the repurchase of shares of our common stock in conjunction with our share repurchase program of $50.0 million in 2023.

Capital Resources

2012 Term Loan and 2012 ABL Revolver:

On January 31, 2012, Prestige Brands, Inc. (the “Borrower") entered into a senior secured credit facility, which originally consisted of (i) the $660.0 million 2012 Term Loan with a 7-year maturity and (ii) the $50.0 million 2012 ABL Revolver with a 5-year maturity. In subsequent years, we have utilized portions of our accordion feature to increase the amount of our borrowing capacity under the 2012 ABL Revolver to the current amount of $200.0 million and reduced our borrowing rate on the 2012 ABL Revolver. We have also amended the 2012 Term Loan several times. The 2012 Term Loan is unconditionally guaranteed by Prestige Consumer Healthcare Inc. and certain of its domestic 100% owned subsidiaries, other than the Borrower. Each of these guarantees is joint and several. There are no significant restrictions on the ability of any of the guarantors to obtain funds from their subsidiaries or to make payments to the Borrower or the Company.

On March 21, 2018, we entered into Amendment No. 5 (“Term Loan Amendment No. 5”) to the 2012 Term Loan. Term Loan Amendment No. 5 provided for the creation of Term B-5 Loans (the "Term B-5 Loans") by repricing the then-existing term loans to an interest rate that was based, at our option, on a LIBOR rate plus a margin of 2.00% per annum, with a LIBOR floor of 0.00%, or an alternative base rate plus a margin of 1.00% per annum, with a floor of 1.00%.

On July 1, 2021, we entered into Amendment No. 6 ("Term Loan Amendment No. 6"), to the 2012 Term Loan. Term Loan Amendment No. 6 provides for (i) the refinancing of our outstanding term loans and the creation of a new class of Term B-5 Loans in an aggregate principal amount of $600.0 million, (ii) increased flexibility under the credit agreement governing the 2012 Term Loan and the 2012 ABL Revolver, and (iii) an interest rate on the Term B-5 Loans that is based, at our option, on a LIBOR rate plus a margin of 2.00% per annum, with a LIBOR floor of 0.50%, or an alternative base rate plus a margin of 1.00% per annum. In addition, Term Loan Amendment No. 6 provides for an extension of the maturity date of the 2012 Term Loan to July 1, 2028. In connection with this refinancing, we recorded a loss on extinguishment of debt of $2.1 million to write off a portion of new and old debt costs relating to this refinancing. Under Term Loan Amendment No. 6, we are required to make quarterly payments each equal to 0.25% of the aggregate principal amount of the 2012 Term Loan. 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 on July 1, 2028.

41

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 Secured Overnight Financing Rate ("SOFR") as our reference rate for the 2012 Term Loan.

On December 11, 2019, we entered into Amendment No. 7 ("ABL Amendment No. 7") to the 2012 ABL Revolver. ABL Amendment No. 7 provided for (i) an extension of the maturity date of the 2012 ABL Revolver to December 11, 2024, which was five years from the effective date of ABL Amendment No. 7, (ii) increased flexibility under the 2012 ABL Revolver, including additional investment, restricted payment, and debt incurrence flexibility, (iii) an initial applicable margin for borrowings under the 2012 ABL Revolver that was 1.00% with respect to LIBOR borrowings and 0.0% with respect to base-rate borrowings (which could be increased to 1.25% or 1.50% for LIBOR borrowings and 0.25% or 0.50% for base-rate borrowings, depending on average excess availability under the facility during the prior fiscal quarter), and (iv) a commitment fee to the lenders under the 2012 ABL Revolver in respect of the unutilized commitments thereunder of 0.25% per annum.

On April 4, 2023, we entered into Amendment No. 8 ("ABL Amendment No. 8") to the 2012 ABL Revolver. ABL Amendment No. 8 provides for the replacement of LIBOR with SOFR as our reference rate.

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 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.

2019 Senior Notes:

On December 2, 2019, the Borrower issued $400.0 million aggregate principal amount of 5.125% senior notes due January 15, 2028 (the "2019 Senior Notes") pursuant to an indenture dated December 2, 2019, among the Borrower, the guarantors party thereto (including the Company) and U.S. Bank National Association, as trustee. We used the net proceeds from the 2019 Senior Notes, together with cash on hand, to redeem all $400.0 million of our then-outstanding senior notes issued on December 17, 2013 that were due in 2021, and to pay related fees and expenses.

2021 Senior Notes:

On March 1, 2021, the Borrower issued $600.0 million aggregate principal amount of 3.750% senior notes due April 1, 2031 (the "2021 Senior Notes") pursuant to an indenture dated March 1, 2021, among the Borrower, the guarantors party thereto (including the Company), and U.S. Bank National Association, as trustee. We used the net proceeds from the 2021 Senior Notes to redeem all $600.0 million of our then-outstanding 2016 Senior Notes, which were due in 2024, and to pay related fees and expenses.

Interest, Redemptions and Restrictions:

For the year ended March 31, 2024, the average interest rate on the 2012 Term Loan was 7.3%. There were no borrowings under the 2012 ABL Revolver at any time during 2024. For the year ended March 31, 2023, the average interest rate on the 2012 Term Loan was 4.8% and the average interest rate on the amounts borrowed under the 2012 ABL Revolver was 2.5%. We also had amortization related to our long-term debt of $5.2 million and $4.4 million for 2024 and 2023, respectively. 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 on July 1, 2028.

We have the option to redeem all or a portion of the 2019 Senior Notes at any time on or after January 15, 2023 at the redemption prices set forth in the indenture governing the 2019 Senior Notes, plus accrued and unpaid interest, if any. Subject to certain limitations, in the event of a change of control (as defined in the indenture governing the 2019 Senior Notes), the Borrower will be required to make an offer to purchase the 2019 Senior Notes at a price equal to 101% of the aggregate principal amount of the notes repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

We have the option to redeem all or a portion of the 2021 Senior Notes at any time on or after April 1, 2026 at the redemption prices set forth in the indenture governing the 2021 Senior Notes, plus accrued and unpaid interest, if any. Subject to certain limitations, in the event of a change of control (as defined in the indenture governing the 2021 Senior Notes), the Borrower will be required to make an offer to purchase the 2021 Senior Notes at a price equal to 101% of the aggregate principal amount of the notes repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

42

The credit agreement governing the 2012 Term Loan and the 2012 ABL Revolver and the indentures governing the 2021 Senior Notes and the 2019 Senior Notes contain provisions that restrict us from undertaking specified corporate actions, such as asset dispositions, acquisitions, dividend payments, repurchases of common shares outstanding, changes of control, incurrences of indebtedness, issuance of equity, creation of liens, making of loans and transactions with affiliates. Additionally, the credit agreement governing the 2012 Term Loan and the 2012 ABL Revolver and the indentures governing the 2021 Senior Notes and the 2019 Senior Notes contain cross-default provisions, whereby a default pursuant to the terms and conditions of certain indebtedness will cause a default on the remaining indebtedness under the credit agreement governing the 2012 Term Loan and the 2012 ABL Revolver and the indentures governing the 2021 Senior Notes and the 2019 Senior Notes.

As of March 31, 2024, we had an aggregate of $1.1 billion of outstanding indebtedness, which consisted of the following:

•$400.0 million of 5.125% 2019 Senior Notes due January 15, 2028;

•$600.0 million of 3.750% 2021 Senior Notes due April 1, 2031; and

•$135.0 million of borrowings under the Term B-5 Loans due July 1, 2028.

As of March 31, 2024, we had no balance outstanding on the 2012 ABL Revolver and a borrowing capacity of $171.0 million.

Interest Rate Swaps

In January 2020, we entered into two interest rate swaps to hedge a total of $400.0 million of our variable interest debt. One swap settled on January 31, 2021 and the other settled on January 31, 2022.

Debt Covenants

Our debt facilities contain various financial covenants, including provisions that require us to maintain certain leverage, interest coverage and fixed charge ratios.  Specifically, we must:

•Have a leverage ratio of less than 6.50 to 1.0 for the quarter ended March 31, 2024 and going forward (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 March 31, 2024 and going forward (defined as, with certain adjustments, the ratio of our consolidated EBITDA to our trailing twelve month consolidated cash interest expense); and

•Have a fixed charge ratio of greater than 1.0 to 1.0 (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 agreement.

At March 31, 2024, we were in compliance with the applicable financial and restrictive covenants under the credit agreement governing the 2012 Term Loan and the 2012 ABL Revolver and the indentures governing the 2021 Senior Notes and the 2019 Senior Notes. Additionally, management anticipates that in the normal course of operations, we will be in compliance with the financial and restrictive covenants during fiscal 2025. 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 on July 1, 2028.

Commitments

As of March 31, 2024, we had ongoing commitments under various contractual and commercial obligations as follows:

43

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[[/GREPCENT_TABLE]]

(1)Represents the estimated interest obligations on the outstanding balances at March 31, 2024 of the 2021 Senior Notes, 2019 Senior Notes, Term B-5 Loans, and 2012 ABL Revolver, assuming scheduled principal payments (based on the terms of the loan agreements). We estimate our future obligations for interest on our variable rate debt by assuming the weighted average interest rates in effect on each variable rate debt obligation at March 31, 2024 remain constant into the future. This is an estimate, as actual rates will vary over time. In addition, we assume that the average balance outstanding for the last month of fiscal 2024 remains the same for the remaining term of the agreement. The actual balance outstanding may fluctuate significantly in future periods, depending on the availability of cash flow from operations and future investing and financing considerations. Estimated interest obligations would be different under different assumptions regarding interest rates or timing of principal payments.   

(2)Purchase obligations for inventory costs are legally binding commitments for projected inventory requirements to be utilized during the normal course of our operations.

(3)Purchase obligations for other costs are legally binding commitments for marketing, advertising and capital expenditures. Our capital expenditures primarily relate to manufacturing equipment.  Activity costs for molds and equipment to be paid, based solely on a per unit basis without any deadlines for final payment, have been excluded from the table because we are unable to determine the time period over which such activity costs will be paid.

(4)We have excluded obligations related to uncertain tax positions because we cannot reasonably estimate when they will occur.

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

Inflation

Inflationary factors such as increases in the costs of raw materials, packaging materials, purchased product, labor costs, transportation costs and overhead may adversely affect our operating results and financial condition.  Although we do not believe that inflation has had a material impact on our financial condition or results of operations for the three most recent fiscal years, supply and labor disruptions may have an inflationary impact on our costs and a high rate of inflation in the future could have a material adverse effect on our financial condition and results of operations.  More volatility in crude oil prices may have an adverse impact on transportation costs, as well as certain petroleum based raw materials and packaging material.  Although we make efforts to minimize the impact of inflationary factors, including by raising prices to our customers, a high rate of pricing volatility associated with crude oil supplies or other raw materials used in our products may have an adverse effect on our operating results.