Notes to Consolidated Financial Statements
1. Business 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 10 to these 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, geopolitical events and the effects from the COVID-19 pandemic. 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. In fiscal 2022 and 2023, we experienced solid sales and consumption, with fiscal 2022 benefiting from a significant increase in demand in travel-related categories and channels as well as the Cough & Cold category, previously impacted by COVID-19, however, that may not be sustained at the same levels in the uncertain economic environment. 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, the COVID-19 pandemic and other 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, unprecedented environment. If conditions cause further disruption in the global supply chain, the availability of labor and materials or otherwise increase costs, it may materially affect our operations and those of third parties on which we rely, including causing disruptions in the supply and distribution of our products. 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 new information which may emerge concerning the severity and duration of any further COVID-19 outbreaks, global supply chain constraints, the high inflationary environment and further global instability. 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.
Basis of Presentation
Our Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). All significant intercompany transactions and balances have been eliminated in consolidation. Our fiscal year ends on March 31st of each year. References in these Consolidated Financial Statements or notes to a year (e.g., “2023”) mean our fiscal year ended on March 31st of that year.
Certain prior year amounts have been reclassified to conform to the current year's presentation.
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. As discussed below, 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.
Cash and Cash Equivalents
We consider all short-term deposits and investments with original maturities of three months or less to be cash equivalents. At March 31, 2023, approximately 27% of our cash is held by a bank in Australia and approximately 3% is held by a bank in Singapore. Substantially all of our remaining cash is held by a large U.S. domestic bank. We do not believe that, as a result of this concentration, we are subject to any unusual financial risk beyond the normal risk associated with commercial banking relationships. Substantially all of the Company's cash balances at March 31, 2023 are uninsured.
Accounts Receivable
We extend non-interest-bearing trade credit to our customers in the ordinary course of business. We maintain an allowance for credit losses based upon historical collection experience and expected collectability of the accounts receivable. In an effort to reduce credit risk, we (i) have established credit limits for all of our customer relationships, (ii) perform ongoing credit evaluations of customers’ financial condition, (iii) monitor the payment history and aging of customers’ receivables, and (iv) monitor open orders against an individual customer’s outstanding receivable balance. Included within Accounts Receivable is also a short-term interest-bearing loan receivable from one of our suppliers.
Inventories
Inventories are stated at the lower of cost or net realizable value, where cost is determined by using the first-in, first-out method. We reduce inventories for the diminution of value resulting from product obsolescence, damage or other issues affecting marketability, equal to the difference between the cost of the inventory and its estimated net realizable value. Factors utilized in the determination of estimated net realizable value include (i) product expiration dates, (ii) current sales data and historical return rates, (iii) estimates of future demand, (iv) competitive pricing pressures, (v) new product introductions, and (vi) component and packaging obsolescence.
Property, Plant and Equipment
Property, plant and equipment are stated at cost and are depreciated using the straight-line method based on the following estimated useful lives:
| | | | | |
| Years |
Building | 5 to 40 |
Machinery | 3 to 15 |
Computer equipment and software | 3 to 5 |
Furniture and fixtures | 7 to 10 |
Leasehold improvements | * |
*Leasehold improvements are amortized over the lesser of the lease term or the estimated useful life of the related assets.
Expenditures for maintenance and repairs are charged to expense as incurred. When an asset is sold or otherwise disposed of, we remove the cost and associated accumulated depreciation from the respective accounts and recognize the resulting gain or loss in the Consolidated Statements of (Loss) Income and Comprehensive (Loss) Income.
Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value.
Goodwill
The excess of the purchase price over the fair market value of assets acquired and liabilities assumed in business combinations is classified as goodwill. Goodwill is not amortized, although the carrying value is tested for impairment at least annually in the fourth fiscal quarter of each year, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Goodwill is tested for impairment at the reporting unit level, which is one level below the operating segment level. An impairment loss is recognized if the carrying amount of the reporting unit exceeds its fair value.
Intangible Assets
Intangible assets generally represent tradenames, brand names and patents and are stated at cost less accumulated amortization. For intangible assets with finite lives, amortization is computed using the straight-line method over estimated useful lives, typically ranging from 10 to 25 years.
Indefinite-lived intangible assets are tested for impairment at the individual asset level at least annually in the fourth fiscal quarter of each year, or more frequently if events or changes in circumstances indicate that the asset may be impaired. Intangible assets with finite lives are reviewed for impairment on an annual basis, or whenever events or changes in
circumstances indicate that their carrying amount may exceed their fair values and may not be recoverable. An impairment loss is recognized if the carrying amount of the asset exceeds its fair value.
Debt Origination Costs
We have incurred debt origination costs in connection with the issuance of long-term debt. These costs are amortized over the term of the related debt, using the effective interest method for our senior notes and our term loan facility and the straight-line method for our revolving credit facility. Costs associated with our revolving credit facility are reported as a long-term asset and costs related to our senior notes and the term loan facility are recorded as a reduction of debt.
Revenue Recognition
Nature of Goods and Services
We recognize revenue from product sales. We primarily ship finished goods to our customers and operate in two segments: North American OTC Healthcare and International OTC Healthcare. The segments are based on differences in geographical area. The North American and International OTC Healthcare segments market a variety of personal care and over-the-counter products in the following product groups: Analgesics, Cough & Cold, Women's Health, Gastrointestinal, Eye & Ear Care, Dermatologicals, and Oral Care. Our products are distinct and separately identifiable on customer contracts or invoices, with each product sale representing a separate performance obligation.
We sell consumer products under a variety of brands through a broad distribution platform that includes mass merchandisers, drug, food, dollar, convenience and club stores, and e-commerce channels, all of which sell our products to consumers.
See Note 20 for disaggregated revenue information.
Satisfaction of Performance Obligations
Under Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606, 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.
Variable Consideration
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.
Practical Expedients
Due to the nature (short duration) of our contracts with customers, we apply the practical expedient related to the disclosure of remaining performance obligations. Remaining performance obligations relate to contracts with a duration of less than one year, in which we have the right to invoice the customer at the time the performance obligation is satisfied for the amount of revenue recognized at that time. Accordingly, we have elected the practical expedient available under ASC 606 not to disclose remaining performance obligations for our contracts. The period between when control of the promised products transfers to the customer and when the customer pays for the products is one year or less. As such, we do not adjust product consideration for the effects of a significant financing component. The amortization period of any asset resulting from incremental costs of obtaining a contract would be one year or less.
We expense incremental direct costs of obtaining a contract (broker commissions) when the related sale takes place.
We account for shipping and handling costs as fulfillment activities and therefore recognize them upon shipment of goods.
Cost of Sales
Cost of sales includes costs related to the manufacturing of our products, including raw materials, direct labor and indirect plant costs (including but not limited to depreciation), warehousing costs, inbound and outbound shipping costs, and handling and storage costs. Warehousing, shipping and handling and storage costs were $79.8 million for 2023, $67.8 million for 2022 and $52.1 million for 2021.
Advertising and Marketing Costs
Advertising and marketing costs are expensed as incurred. Allowances for distribution costs associated with products, including slotting fees, are recognized as a reduction of sales.
Stock-based Compensation
We recognize stock-based compensation expense by measuring the cost of services to be rendered based on the grant-date fair value of the equity award. Compensation expense is recognized over the period a grantee is required to provide service in exchange for the award, generally referred to as the requisite service period.
Pension Expense
Certain employees of our Lynchburg manufacturing facility are covered by defined benefit pension plans. The Company’s policy is to contribute at least the minimum amount required under The Employee Retirement Income Security Act of 1974 ("ERISA"). The Company may elect to make additional contributions. Benefits are based on years of service and levels of compensation. On December 16, 2014, the decision was made to freeze the benefits under the Company's U.S. qualified defined benefit pension plan with an effective date of March 1, 2015. During the third quarter of 2021, we offered participants of our qualified defined benefit plan the option to receive a lump sum payout of their benefits. The amount paid out of plan assets during the third quarter of 2021 to those who elected to take the lump sum payout was $7.0 million, and we recognized a settlement gain of $0.2 million as a result of the payout. During the fourth quarter of 2021, we adopted a plan termination date of April 30, 2021 for the U.S. qualified defined benefit pension plan and began the plan termination process. The settlements of the terminated plan occurred during the first quarter of fiscal 2023.
Income Taxes
On August 16, 2022, the Inflation Reduction Act (“IRA”) was signed into law in the United States. Among other provisions, the IRA includes a 15.0% corporate minimum tax rate on the adjusted financial statement income of certain large corporations and a 1.0% excise tax on corporate stock repurchases made after December 31, 2022 by U.S. publicly traded corporations and certain U.S. subsidiaries of non-U.S. publicly traded corporations, as well as significant enhancements of U.S. tax incentives relating to climate and energy investments. We currently do not expect these tax provisions to have a material impact to our consolidated financial statements. We will continue to monitor and evaluate impact as further regulatory guidance becomes available.
Deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized.
The Income Taxes topic of the FASB ASC 740 prescribes a recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The guidance only allows the recognition of those tax benefits that have a greater than 50% likelihood of being sustained upon examination by the various taxing authorities. As a result, we have applied such guidance in determining our tax uncertainties.
We are subject to taxation in the United States and various state and foreign jurisdictions.
We classify penalties and interest related to unrecognized tax benefits as income tax expense in the Consolidated Statements of Income (Loss) and Comprehensive (Loss) Income.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed based on income (loss) available to common stockholders and the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on income available to common stockholders and the weighted average number of shares of common stock outstanding plus the effect of potentially dilutive common shares outstanding during the period using the treasury stock method, which includes stock options
and restricted stock units ("RSUs"). Potential common shares, composed of the incremental common shares issuable upon the exercise of outstanding stock options and unvested RSUs, are included in the diluted earnings per share calculation to the extent that they are dilutive. In loss periods, the assumed exercise of in-the-money stock options and RSUs has an antidilutive effect, and therefore these instruments are excluded from the computation of diluted earnings per share. The following table sets forth the computation of basic and diluted (loss) earnings per share:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
(In thousands, except per share data) | 2023 | | 2022 | | 2021 |
Numerator | | | | | |
Net (loss) income | $ | (82,306) | | | $ | 205,381 | | | $ | 164,682 | |
| | | | | |
| | | | | |
| | | | | |
Denominator | | | | | |
Denominator for basic (loss) earnings per share - weighted average shares outstanding | 49,889 | | | 50,259 | | | 50,210 | |
Dilutive effect of unvested restricted stock units and options issued to employees and directors | — | | | 583 | | | 395 | |
Denominator for diluted (loss) earnings per share | 49,889 | | | 50,842 | | | 50,605 | |
| | | | | |
(Loss) earnings per Common Share: | | | | | |
Basic net (loss) earnings per share | $ | (1.65) | | | $ | 4.09 | | | $ | 3.28 | |
| | | | | |
| | | | | |
| | | | | |
Diluted net (loss) earnings per share | $ | (1.65) | | | $ | 4.04 | | | $ | 3.25 | |
| | | | | |
| | | | | |
For 2023, 2022, and 2021 there were 1.6 million, 0.4 million, and 0.5 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.
Leases
We lease real estate and equipment for use in our operations. These leases have lease terms of 1 to 10 years, some of which include options to terminate or extend leases for up to 1 to 4 years or on a month-to-month basis. The exercise of lease renewal options is at our sole discretion and our lease right-of-use ("ROU") assets and liabilities reflect only the options we are reasonably certain that we will exercise.
We determine if an arrangement is or contains a lease at inception by assessing whether the arrangement contains an identified asset and whether we have the right to control the identified asset. ROU assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. ROU assets are based on the measurement of the lease liability and also include any lease payments made prior to or on lease commencement and exclude lease incentives and initial direct costs incurred, as applicable.
Variable lease payments that do not vary based on an index or rate are excluded from the ROU asset and lease liability determination. Variable lease payments are typically usage-based and are recorded in the period in which the obligation for those payments is incurred. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.
As the implicit rate in our leases is unknown, we used our incremental borrowing rate based on the information available at the date of adoption for existing leases and at the lease commencement date for new leases in determining the present value of future lease payments. We give consideration to our credit risk, term of the lease, total lease payments and adjust for the impacts of collateral, as necessary, when calculating our incremental borrowing rates. Rent expense for our operating leases is recognized on a straight-line basis over the lease term.
For the measurement and classification of our lease agreements, we group lease and non-lease components into a single lease component for all underlying asset classes. We have also elected to exclude any leases within our existing classes of assets with a term of twelve months or less.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued Accounting Standards Update ("ASU") 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this update eliminate the need for an organization to analyze whether certain exceptions apply for tax purposes. It also simplifies GAAP for certain taxes. The amendments in these updates are effective for us for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. We adopted this standard effective April 1, 2021, and the adoption of this standard did not have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements in Topic 820, with a particular focus on Level 3 investments, by eliminating certain required disclosures and incorporating others. The amendments are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We adopted this standard effective April 1, 2020, and the adoption did not have a material impact on our Consolidated Financial Statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments (with subsequent targeted amendments). The amendments in this update provide financial statement users with more useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The guidance requires entities to utilize an expected credit loss model for certain financial instruments, including most trade receivables, which replaces the incurred credit loss model previously used. Under this new model, we are required to recognize estimated credit losses expected to occur over time using a broad range of information including historical information, current conditions and reasonable and supportable forecasts. We adopted this standard effective April 1, 2020 using the modified retrospective approach, and the adoption did not have a material impact on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans by eliminating certain required disclosures and incorporating others. The amendments are effective for public companies for fiscal years ending after December 15, 2020. We adopted this standard effective April 1, 2021, and the adoption did not have a material impact on our Consolidated Financial Statements.
Recently Issued Accounting Pronouncements
In March 2022, the FASB issued ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This ASU responds to feedback received by the FASB during the post-implementation review of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments, which we adopted effective April 1, 2020. The amendments in this update, among other things, eliminate the troubled debt restructuring recognition and measurement guidance and, instead, require the entity to evaluate whether the modification represents a new loan or a continuation of an existing loan. This ASU is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The adoption of the standard is not expected to have a material impact on our Consolidated Financial Statements.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging - Portfolio Layer Method. The purpose of the ASU is to address questions raised on ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU expands the currently used single-layer method of hedge accounting to allow multiple layers of a single closed portfolio under the method. This ASU is effective for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years. The impact of adoption of this new standard is not expected to have a material impact on our Consolidated Financial Statements.
In October 2021, the FASB issued 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. The impact of 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. We have begun the transition to Topic 848 as relevant contracts are
modified to reflect alternate reference rates, and will fully adopt this ASU no later than December 31, 2024. The adoption of the standard is not expected to have a material impact on our Consolidated Financial Statements.
2. Acquisition
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 over-the-counter 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 entered into on January 31, 2012 (the "2012 Term Loan") (see Note 10).
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. In connection with the acquisition, we also entered into a supply arrangement with Akorn for a term of three years with optional renewals at prevailing market rates.
We finalized our analysis of the fair values of the assets acquired and liabilities assumed as of the date of acquisition. The following table summarizes our allocation of the assets acquired and liabilities assumed as of the July 1, 2021 acquisition date.
| | | | | | |
(In thousands) | | |
| July 1, 2021 | |
| | |
| | |
Inventories | $ | 6,455 | | |
| | |
| | |
Goodwill | 1,098 | | |
Intangible assets | 225,410 | | |
| | |
Total assets acquired | 232,963 | | |
| | |
Accounts payable | 428 | | |
Reserves for sales allowances | 497 | | |
Other accrued liabilities | 3,124 | | |
| | |
| | |
Total liabilities assumed | 4,049 | | |
Total purchase price | $ | 228,914 | | |
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 (see Note 7).
We recorded goodwill of $1.1 million based on the amount by which the purchase price exceeded the estimate of the fair value of the net assets acquired (see Note 6). Goodwill is deductible and is being amortized for income tax purposes.
The financial impact of this acquisition was not material to our Consolidated Financial Statements, and, therefore, we have not presented pro forma results of operations for the acquisition.
3. Accounts Receivable
Accounts receivable consist of the following:
| | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Components of Accounts Receivable | | | |
Trade accounts receivable | $ | 183,372 | | | $ | 158,998 | |
Short-term loan receivable | 3,800 | | | — | |
Other receivables | 49 | | | 52 | |
| 187,221 | | | 159,050 | |
Less allowances for discounts, returns and uncollectible accounts | (20,205) | | | (19,720) | |
Accounts receivable, net | $ | 167,016 | | | $ | 139,330 | |
4. Inventories
Inventories consist of the following: | | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Components of Inventories | | | |
Packaging and raw materials | $ | 20,634 | | | $ | 16,984 | |
Work in process | 220 | | | 338 | |
Finished goods | 141,267 | | | 103,020 | |
Inventories | $ | 162,121 | | | $ | 120,342 | |
Inventories are carried and depicted above at the lower of cost or net realizable value, which includes a reduction in inventory values of $5.8 million and $4.9 million at March 31, 2023 and 2022, respectively, related to obsolete and slow-moving inventory.
5. Property, Plant and Equipment
Property, plant and equipment, net consist of the following: | | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Components of Property, Plant and Equipment | | | |
Land | $ | 550 | | | $ | 550 | |
Building | 30,447 | | | 29,046 | |
Machinery | 50,639 | | | 48,390 | |
Computer equipment | 26,413 | | | 25,245 | |
Furniture and fixtures | 3,229 | | | 3,238 | |
Leasehold improvements | 9,040 | | | 9,080 | |
Construction in progress | 17,089 | | | 16,466 | |
| 137,407 | | | 132,015 | |
Accumulated depreciation | (66,995) | | | (60,715) | |
Property, plant and equipment, net | $ | 70,412 | | | $ | 71,300 | |
We recorded depreciation expense of $7.7 million, $8.0 million, and $8.5 million for 2023, 2022, and 2021, respectively.
6. Goodwill
The following table summarizes the changes in the carrying value of goodwill by operating segment for each of 2021, 2022, and 2023:
| | | | | | | | | | | | | | | | | | | |
(In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Balance – March 31, 2021 | | | | | | | |
Goodwill | $ | 710,354 | | | $ | 32,683 | | | | | $ | 743,037 | |
Accumulated impairment losses | (163,711) | | | (1,247) | | | | | (164,958) | |
Balance - March 31, 2021 | 546,643 | | | 31,436 | | | | | 578,079 | |
| | | | | | | |
Acquisitions | 1,648 | | | — | | | | | 1,648 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Effects of foreign currency exchange rates | — | | | (411) | | | | | (411) | |
Impairment loss | — | | | (340) | | | | | (340) | |
| | | | | | | |
Balance – March 31, 2022 | | | | | | | |
Goodwill | 712,002 | | | 32,272 | | | | | 744,274 | |
Accumulated impairment losses | (163,711) | | | (1,587) | | | | | (165,298) | |
Balance - March 31, 2022 | $ | 548,291 | | | $ | 30,685 | | | | | $ | 578,976 | |
| | | | | | | |
Adjustment related to acquisition | (550) | | | — | | | | | (550) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Effects of foreign currency exchange rates | — | | | (2,068) | | | | | (2,068) | |
Impairment loss | (48,805) | | | — | | | | | (48,805) | |
| | | | | | | |
Balance – March 31, 2023 | | | | | | | |
Goodwill | 711,452 | | | 30,204 | | | | | 741,656 | |
Accumulated impairment losses | (212,516) | | | (1,587) | | | | | (214,103) | |
Balance - March 31, 2023 | $ | 498,936 | | | $ | 28,617 | | | | | $ | 527,553 | |
As discussed in Note 2, on July 1, 2021, we completed the acquisition of the consumer health business assets from Akorn. In connection with this acquisition, we recorded goodwill of $1.1 million based on the amount by which the purchase price exceeded the estimate of the fair value of the net assets acquired.
At February 28, 2021, in conjunction with the annual test for goodwill impairment, we recorded an impairment charge of $1.2 million to adjust the carrying amount of goodwill related to our International Analgesics reporting unit in our International OTC Healthcare segment to its fair value. The goodwill impairment was a result of the Painstop tradename impairment discussed in Note 7.
At February 28, 2022, in conjunction with the annual test for goodwill impairment, 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 current macroeconomic conditions discussed in Note 7.
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. The discounted cash flow methodology is a widely accepted valuation technique utilized by market participants in the transaction evaluation process and has been applied consistently. We also considered our market capitalization at February 28, 2023 and February 28, 2022, 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. 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 additional impairment charges in the future.
Our analysis at February 28, 2023 concluded that all other reporting units had a fair value that exceeded their carrying value by at least 10%. 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 not have resulted in any of our other reporting units' fair value being less than their carrying value. Additionally, a 50-basis point decrease in the terminal growth rate used for each reporting unit would also not have resulted in any of our other reporting units' fair value being less than their carrying value.
7. Intangible Assets
A reconciliation of the activity affecting intangible assets, net for each of 2023 and 2022 is as follows:
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2023 |
(In thousands) | Indefinite- Lived Tradenames | | Finite-Lived Tradenames and Customer Relationships | | Totals |
Gross Carrying Amounts | | | | | |
Balance – March 31, 2022 | $ | 2,476,559 | | | $ | 436,174 | | | $ | 2,912,733 | |
| | | | | |
| | | | | |
| | | | | |
Tradename impairment | (298,664) | | | (22,748) | | | (321,412) | |
Effects of foreign currency exchange rates | (8,993) | | | (2,308) | | | (11,301) | |
Balance – March 31, 2023 | $ | 2,168,902 | | | $ | 411,118 | | | $ | 2,580,020 | |
| | | | | |
Accumulated Amortization | | | | | |
Balance – March 31, 2022 | $ | — | | | $ | 216,098 | | | $ | 216,098 | |
Additions | — | | | 22,266 | | | 22,266 | |
| | | | | |
Effects of foreign currency exchange rates | — | | | (237) | | | (237) | |
Balance – March 31, 2023 | $ | — | | | $ | 238,127 | | | $ | 238,127 | |
| | | | | |
Intangible assets, net – March 31, 2023 | $ | 2,168,902 | | | $ | 172,991 | | | $ | 2,341,893 | |
| | | | | |
Intangible Assets, net by Reportable Segment: | | | | | |
North American OTC Healthcare | $ | 2,092,852 | | | $ | 154,552 | | | $ | 2,247,404 | |
International OTC Healthcare | 76,050 | | | 18,439 | | | 94,489 | |
| | | | | |
Intangible assets, net – March 31, 2023 | $ | 2,168,902 | | | $ | 172,991 | | | $ | 2,341,893 | |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, 2022 |
(In thousands) | Indefinite- Lived Tradenames | | Finite-Lived Tradenames and Customer Relationships | | | Totals |
Gross Carrying Amounts | | | | | | |
Balance – March 31, 2021 | $ | 2,281,988 | | | $ | 389,347 | | | | $ | 2,671,335 | |
Additions (a) | 195,900 | | | 47,642 | | | | 243,542 | |
| | | | | | |
| | | | | | |
Tradename impairment | — | | | (1,700) | | | | (1,700) | |
Effects of foreign currency exchange rates | (1,329) | | | 885 | | | | (444) | |
Balance – March 31, 2022 | $ | 2,476,559 | | | $ | 436,174 | | | | $ | 2,912,733 | |
| | | | | | |
Accumulated Amortization | | | | | | |
Balance – March 31, 2021 | $ | — | | | $ | 195,606 | | | | $ | 195,606 | |
Additions | — | | | 21,499 | | | | 21,499 | |
Tradename impairment | — | | | (983) | | | | (983) | |
Effects of foreign currency exchange rates | — | | | (24) | | | | (24) | |
Balance – March 31, 2022 | $ | — | | | $ | 216,098 | | | | $ | 216,098 | |
| | | | | | |
Intangible assets, net – March 31, 2022 | $ | 2,476,559 | | | $ | 220,076 | | | | $ | 2,696,635 | |
| | | | | | |
Intangible Assets, net by Reportable Segment: | | | | | | |
North American OTC Healthcare | $ | 2,391,517 | | | $ | 198,353 | | | | $ | 2,589,870 | |
International OTC Healthcare | 85,042 | | | 21,723 | | | | 106,765 | |
| | | | | | |
Intangible assets, net – March 31, 2022 | $ | 2,476,559 | | | $ | 220,076 | | | | $ | 2,696,635 | |
(a) On July 1, 2021, we completed the acquisition of certain assets from Akorn (see Note 2) and on December 15, 2021, our Australian subsidiary acquired the rights to the Zaditen brand in certain territories from Novartis Pharma AG. In connection with these acquisitions, we allocated $225.4 million to intangible assets for Akorn and $18.1 million for Zaditen.
During the fourth quarter of each fiscal year, in conjunction with our strategic planning process, we perform our annual impairment analysis. We utilized the excess earnings method to estimate the fair value of our individual indefinite-lived intangible assets. The assumptions subject to significant uncertainties in the analysis include the discount rate, 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 additional impairment charges in the future.
During the third quarter of 2021, we determined that the fair value of one of our finite-lived intangible assets in our International OTC Healthcare segment, Painstop, did not exceed its carrying amount. As such, we recorded an impairment charge of $1.2 million. The decline in the fair value of Painstop was primarily related to a decline in expected future sales due to a regulatory change that now requires Painstop to be prescribed by physicians rather than sold over-the-counter direct to consumers.
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.
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.
Our analysis at February 28, 2023 determined that all other indefinite-lived intangible assets tested had a fair value that exceeded their carrying value by at least 10%, with the exception of Monistat within our North American Women’s Health reporting unit. 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 additional impairment of $46.5 million. Additionally, a 50-basis point decrease in the terminal growth rate used for each of our indefinite-lived intangible assets' would have resulted in an additional impairment of $23.3 million.
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.
The weighted average remaining life for finite-lived intangible assets at March 31, 2023 was approximately 8.7 years, and the amortization expense for the year ended March 31, 2023 was $22.3 million. At March 31, 2023, finite-lived intangible assets are expected to be amortized over their estimated useful lives, which ranges from a period of 10 to 25 years, and the estimated amortization expense for each of the five succeeding years and periods thereafter is as follows (in thousands):
| | | | | |
(In thousands) | |
Year Ending March 31, | Amount |
2024 | $ | 19,784 | |
2025 | 18,099 | |
2026 | 16,149 | |
2027 | 14,557 | |
2028 | 12,221 | |
Thereafter | 92,181 | |
| $ | 172,991 | |
8. Leases
The components of lease expense for the years ended March 31, 2023 and 2022 were as follows:
| | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Finance lease cost: | | | |
Amortization of right-of-use assets | $ | 2,658 | | | $ | 2,579 | |
Interest on lease liabilities | 170 | | | 239 | |
Operating lease cost | 6,495 | | | 6,670 | |
Short term lease cost | 153 | | | 107 | |
Variable lease cost | 59,735 | | | 42,868 | |
| | | |
Total net lease cost | $ | 69,211 | | | $ | 52,463 | |
As of March 31, 2023, the maturities of lease liabilities were as follows:
| | | | | | | | | | | | | | | | | | | | |
(In thousands) | | | | | | |
Year Ending March 31, | | Operating Leases | | Financing Leases | | Total |
2024 | | $ | 7,389 | | | $ | 2,922 | | | $ | 10,311 | |
2025 | | 4,745 | | | 1,509 | | | 6,254 | |
2026 | | 2,260 | | | 96 | | | 2,356 | |
2027 | | 1,887 | | | 80 | | | 1,967 | |
2028 | | 1,434 | | | — | | | 1,434 | |
Thereafter | | 257 | | | — | | | 257 | |
Total undiscounted lease payments | | 17,972 | | | 4,607 | | | 22,579 | |
Less amount of lease payments representing interest | | (1,170) | | | (106) | | | (1,276) | |
Total present value of lease payments | | $ | 16,802 | | | $ | 4,501 | | | $ | 21,303 | |
The weighted average remaining lease term and weighted average discount rate were as follows: | | | | | | | | | | | |
| | | March 31, 2023 |
Weighted average remaining lease term (years) | | |
| Operating leases | | 3.28 |
| Financing leases | | 1.68 |
Weighted average discount rate | | |
| Operating leases | | 3.39 | % |
| Financing leases | | 2.95 | % |
Under our Master Services Agreement with GEODIS Logistics LLC ("GEODIS"), GEODIS purchased certain assets for our use that went into service during 2022 and 2021. The noncash lease liability arising from obtaining ROU assets was $0.5 million for the assets that went into service in 2022 and $5.2 million for assets that went into service in 2021. These amounts represent noncash financing activities.
9. Other Accrued Liabilities
Other accrued liabilities consist of the following: | | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Accrued marketing costs | $ | 30,471 | | | $ | 36,149 | |
Accrued compensation costs | 14,292 | | | 19,587 | |
Accrued broker commissions | 1,767 | | | 1,179 | |
Income taxes payable | 10,645 | | | 2,664 | |
Accrued professional fees | 4,254 | | | 4,150 | |
| | | |
| | | |
Accrued production costs | 5,700 | | | 3,686 | |
| | | |
| | | |
| | | |
Other accrued liabilities | 5,395 | | | 6,698 | |
| $ | 72,524 | | | $ | 74,113 | |
10. Long-Term Debt
Long-term debt consists of the following, as of the dates indicated:
| | | | | | | | | | | | | | |
(In thousands, except percentages) | | March 31, 2023 | | March 31, 2022 |
| | | | |
2021 Senior Notes bearing interest at 3.750%, with interest payable on April 1 and October 1 of each year. The 2021 Senior Notes mature on April 1, 2031. | | $ | 600,000 | | | $ | 600,000 | |
| | | | |
| | | | |
2019 Senior Notes bearing interest at 5.125%, with interest payable on January 15 and July 15 of each year. The 2019 Senior Notes mature on January 15, 2028. | | 400,000 | | | 400,000 | |
| | | | |
2012 Term B-5 Loans bearing interest at the Borrower's option at either LIBOR plus a margin of 2.00%, with a LIBOR floor of 0.50%, or an alternate base rate plus a margin of 1.00% per annum, due on July 1, 2028. | | 360,000 | | | 495,000 | |
| | | | |
| | | | |
| | | | |
| | | | |
Long-term debt | | 1,360,000 | | | 1,495,000 | |
Less: unamortized debt costs | | (14,212) | | | (18,342) | |
Long-term debt, net | | $ | 1,345,788 | | | $ | 1,476,658 | |
At March 31, 2023, we had no balance outstanding on the 2012 ABL Revolver and a borrowing capacity of $168.7 million.
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 $175.0 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.
The net proceeds from the new class of Term B-5 Loans were used to refinance our outstanding term loans, finance the acquisition of Akorn and pay fees and expenses incurred in connection with these transactions (see Note 2).
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 is 1.00% with respect to LIBOR borrowings and 0.0% with respect to base-rate borrowings (which may 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.
See Note 21 - Subsequent Events for Amendment No. 8 ("ABL Amendment No. 8") to the 2012 ABL Revolver.
For the year ended March 31, 2023, the average interest rate on the 2012 Term Loan was 5.7% and the average interest rate on the amounts borrowed under the 2012 ABL Revolver was 2.5%. For the year ended March 31, 2022, the average interest rate on the 2012 Term Loan was 3.6% and the average interest rate on the amounts borrowed under the 2021 ABL Revolver was 1.2%. During the year ended March 31, 2022, we made required repayments of $1.5 million as well as voluntary principal payments of $103.5 million against the outstanding balance under our 2012 Term Loan. During the year ended March 31, 2023, we made voluntary repayments of $135.0 million against the outstanding balance under our 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.
2016 Senior Notes:
On February 19, 2016, the Borrower completed the sale of $350.0 million aggregate principal amount of 6.375% senior notes due March 1, 2024 (the “Initial Notes”). On March 21, 2018, the Borrower completed the sale of $250.0 million additional aggregate principal amount of 6.375% senior notes due March 1, 2024 (the “Additional Notes”). Both the Initial Notes and the Additional Notes (the "2016 Senior Notes") were redeemed on March 1, 2021 using funds from the issuance of our 2021 Senior Notes described below. In conjunction with the redemption of the 2016 Senior Notes, we wrote off related debt costs of $2.7 million and paid a premium to redeem the 2016 Senior Notes of $9.6 million in the year ended March 31, 2021.
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 outstanding 2016 Senior Notes, which were due in 2024, and to pay related fees and expenses.
Redemptions and Restrictions:
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.
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. At March 31, 2023, we were in compliance with the covenants under our long-term indebtedness.
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 (see Note 12 for further details).
As of March 31, 2023, aggregate future principal payments required in accordance with the terms of the 2012 Term Loan, 2012 ABL Revolver and the indentures governing the 2021 Senior Notes and the 2019 Senior Notes are as follows:
| | | | | | | | |
(In thousands) | | |
Year Ending March 31, | | Amount |
2024 | | $ | — | |
2025 | | — | |
2026 | | — | |
2027 | | — | |
2028 | | 400,000 | |
Thereafter | 960,000 | |
| $ | 1,360,000 | |
11. Fair Value Measurements
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.
The Fair Value Measurements and Disclosures topic of the FASB ASC 820 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. The Fair Value Measurements and Disclosures topic established market (observable inputs) as the preferred source of fair value, to be followed by the Company's 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 the Company 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, and the Term B-5 Loans are measured in Level 2 of the above hierarchy (see summary below detailing the carrying amounts and estimated fair values of these instruments at March 31, 2023 and 2022).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | March 31, 2022 |
(In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
2019 Senior Notes | | $ | 400,000 | | | $ | 383,500 | | | $ | 400,000 | | | $ | 397,000 | |
2021 Senior Notes | | 600,000 | | | 510,750 | | | 600,000 | | | 534,000 | |
| | | | | | | | |
2012 Term B-5 Loans, No. 6 | | 360,000 | | | 359,550 | | | 495,000 | | | 493,144 | |
| | | | | | | | |
| | | | | | | | |
At March 31, 2023 and 2022, we did not have any assets or liabilities measured in Level 1 or 3. During 2023, 2022 and 2021, there were no transfers of assets or liabilities between Levels 1, 2 and 3.
In accordance with ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), investments that are measured at fair value using net asset value ("NAV") per share as a practical expedient have not been classified in the fair value hierarchy.
12. Derivative Instruments
Changes in interest rates expose us to risks. To help us manage these risks, 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. We do not use derivatives for trading purposes.
The following table summarizes our interest rate swaps, net of tax, for the periods shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | | Location | | 2023 | | 2022 | | 2021 |
Gain Recognized in Other Comprehensive (Loss) Income (effective portion) | Other comprehensive income (loss) | | $ | — | | | $ | 1,819 | | | $ | 3,045 | |
Loss Reclassified from Accumulated Other Comprehensive (Loss) Income into Income | Interest expense, net | | $ | — | | | $ | (2,429) | | | $ | (4,760) | |
Counterparty Credit Risk:
We managed our exposure to counterparty credit risk by only dealing with counterparties who were substantial international financial institutions with significant experience using such derivative instruments.
13. Stockholders' Equity
The Company is authorized to issue 250.0 million shares of common stock, $0.01 par value per share, and 5.0 million shares of preferred stock, $0.01 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 one 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 stock outstanding having priority rights as to dividends. No dividends have been declared or paid on the Company's common stock through March 31, 2023.
During the years ended March 31, 2023 and 2022, we repurchased shares of our common stock and recorded them as treasury stock. Our share repurchases consisted of the following:
| | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 |
Shares repurchased pursuant to the provisions of the various employee restricted stock awards: | | | |
Number of shares | 99,522 | | | 63,314 | |
Average price per share | $54.92 | | $46.04 |
Total amount repurchased | $5.5 million | | $2.9 million |
| | | |
Shares repurchased in conjunction with our share repurchase program: | | | |
Number of shares | 914,236 | | | — | |
Average price per share | $54.69 | | — | |
Total amount repurchased | $50.0 million | | $ | — | |
14. Share-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 5.0 million shares of restricted stock, stock options, 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 1.8 million shares of our common stock for issuance under the 2005 Plan, an increase of the maximum number of shares subject to stock options that could be awarded to any one participant under the 2005 Plan during any fiscal 12-month period from 1.0 million to 2.5 million shares, and an extension of the term of the 2005 Plan by ten years to February 2025. Directors, officers and other employees of the Company and its subsidiaries, as well as others performing services for the Company, were eligible for grants under the 2005 Plan.
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 2,827,210 shares were available for issuance under the 2020 Plan (comprised of 2,000,000 new shares plus 827,210 shares that were unissued under the 2005 Plan). All future equity awards will be made from the 2020 Plan, and the Company will not grant any additional awards under the 2005 Plan.
The following table provides information regarding our stock-based compensation:
| | | | | | | | | | | | | | | | | | | | |
| | March 31, |
(In thousands) | | 2023 | | 2022 | | 2021 |
Pre-tax share-based compensation costs charged against income | | $ | 12,405 | | | $ | 9,039 | | | $ | 8,543 | |
Income tax benefit recognized on compensation costs | | $ | 1,138 | | | $ | 633 | | | $ | 1,224 | |
Total fair value of options and RSUs vested during the period | | $ | 10,352 | | | $ | 7,943 | | | $ | 6,796 | |
Cash received from the exercise of stock options | | $ | 7,372 | | | $ | 7,040 | | | $ | 2,851 | |
Tax benefits realized from tax deductions resulting from RSU issuances and stock option exercises | | $ | 1,500 | | | $ | 3,419 | | | $ | 1,153 | |
At March 31, 2023, there were $3.0 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 1.7 years. At March 31, 2023, there were $9.7 million of unrecognized compensation costs related to unvested RSUs and performance-based stock units ("PSUs") under the 2005 Plan and the 2020 Plan, excluding an estimate for forfeitures that may occur. We expect to recognize such costs over a weighted average period of 1.5 years.
At March 31, 2023, there were 2.2 million shares available for issuance under the 2020 Plan.
On May 2, 2022, the Compensation and Talent Management Committee (the "Committee") of our Board of Directors granted 67,959 PSUs, 65,721 RSUs, and stock options to acquire 195,526 shares of our common stock under the 2020 Plan to certain executive officers and employees. The stock options were granted at an exercise price of $54.47 per share, which was equal to the closing price for our common stock on the date of the grant.
Each of the independent members of the Board of Directors received a grant of 2,495 RSUs on August 2, 2022. The RSUs fully vest one year after receipt of the award, subject to the continued service of the director on such vesting date, and will be settled by delivery to each director of one share of our common stock for each vested RSU either (a) at the election of the director prior to the grant date, immediately upon vesting, or (b) promptly following the earliest of (i) such director's death, (ii) such director's separation from service or (iii) a change in control of the Company.
Restricted Stock Units
RSUs granted to employees under the 2005 Plan and the 2020 Plan generally vest in three years, primarily upon the attainment of certain time vesting thresholds, and, in the case of performance share units, may also be contingent on the attainment of certain performance goals of the Company, including revenue and earnings before interest, income taxes, depreciation and amortization targets. The RSUs provide for accelerated vesting if there is a change of control, as defined in the 2005 Plan and the 2020 Plan. The RSUs granted to employees generally vest either ratably over three years or in their entirety on the three-year anniversary of the date of the grant. Upon vesting, the units will be settled in shares of our common stock. Termination of employment prior to vesting will result in forfeiture of the RSUs, unless otherwise accelerated by the Committee or, in the case of RSUs granted in May 2017 and later, subject to pro-rata vesting in the event of death, disability or retirement. The RSUs granted to directors prior to fiscal 2020 vest immediately upon grant, and will be settled by delivery to the director of one share of our common stock for each vested RSU promptly following the earliest of (i) the director's death, (ii) the director's disability or (iii) the six-month anniversary of the date on which the director's Board membership ceases for reasons other than death or disability. The RSUs granted to directors in fiscal 2020 through fiscal 2022 vest immediately upon grant, and will be settled by delivery to the director of one share of our common stock for each vested RSU promptly following the earliest of (i) the director's death, (ii) the director's separation from service or (iii) a change in control of the Company. The RSUs granted to directors in fiscal 2023 fully vest one year after receipt of the award, subject to the continued service of the director on such vesting date, and will be settled by delivery to each director of one share of our common stock for each vested RSU either (a) at the election of the director prior to the grant date, immediately upon vesting, or (b) promptly following the earliest of (i) such director's death, (ii) such director's separation from service or (iii) a change in control of the Company.
The fair value of the RSUs is determined using the closing price of our common stock on the date of the grant.
A summary of the Company’s RSUs granted under the 2005 Plan and 2020 Plan is presented below:
| | | | | | | | | | | | | | |
RSUs | | Shares (in thousands) | | Weighted Average Grant Date Fair Value |
| | | | |
Unvested at March 31, 2020 | | 387.9 | | | $ | 33.11 | |
| | | | |
Granted | | 179.7 | | | 40.22 | |
Vested | | (100.2) | | | 42.94 | |
Forfeited | | (10.4) | | | 43.37 | |
Unvested at March 31, 2021 | | 457.0 | | | 33.52 | |
Vested at March 31, 2021 | | 150.4 | | | 31.98 | |
| | | | |
Granted | | 170.8 | | | 45.32 | |
Vested | | (162.3) | | | 32.99 | |
Forfeited | | (24.6) | | | 30.54 | |
Unvested at March 31, 2022 | | 440.9 | | | 38.45 | |
Vested at March 31, 2022 | | 106.8 | | | 36.42 | |
| | | | |
Granted | | 151.0 | | | 55.03 | |
Incremental performance shares | | 42.4 | | — | |
Vested | | (223.4) | | | 32.09 | |
Forfeited | | (1.9) | | | 49.51 | |
Unvested at March 31, 2023 | | 409.0 | | | 47.17 | |
Vested at March 31, 2023 | | 108.5 | | | 36.54 | |
Options
The 2005 Plan and the 2020 Plan provide that the exercise price of options granted shall be no less than the fair market value of the Company's common stock on the date the options are granted. Options granted have a term of no greater than ten years from the date of grant and vest in accordance with a schedule determined at the time the option is granted, generally three years. The option awards provide for accelerated vesting in the event of a change in control, as defined in the 2005 Plan and the 2020 Plan. Except in the case of death, disability or retirement, termination of employment prior to vesting will result in forfeiture of the unvested stock options. Vested stock options will remain exercisable by the employee after termination of employment, subject to the terms in the 2005 Plan and the 2020 Plan.
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 noted in the table below. Expected volatilities are based on the historical volatility of our common stock and other factors, including the historical volatilities of comparable companies. We use appropriate historical data, as well as current data, to estimate option exercise and employee termination behaviors. Employees that are expected to exhibit similar exercise or termination behaviors are grouped together for the purposes of valuation. The expected terms of the options granted are derived from our historical experience, management’s estimates, and consideration of information derived from the public filings of companies similar to us, and represent the period of time that options granted are expected to be outstanding. The risk-free rate represents the yield on U.S. Treasury bonds with a maturity equal to the expected term of the granted options.
| | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
Expected volatility | 30.8% - 30.9% | | 31.1% - 31.9% | | 32.1% to 32.2% |
Expected dividends | — | | — | | — |
Expected term in years | 6.0 to 7.0 | | 6.0 to 7.0 | | 6.0 to 7.0 |
Risk-free rate | 2.8% to 2.9% | | 1.0% to 1.3% | | 0.5% |
Weighted average grant date fair value of options granted | $20.10 | | $14.87 | | $12.91 |
A summary of option activity under the 2005 Plan and 2020 Plan is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Options | | Shares (in thousands) | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Aggregate Intrinsic Value (in thousands) |
| | | | | | | | |
Outstanding at March 31, 2020 | | 1,020.2 | | | $ | 35.90 | | | | | |
| | | | | | | | |
Granted | | 249.9 | | | 39.98 | | | | | |
Exercised | | (119.6) | | | 23.83 | | | | | |
Forfeited | | (21.7) | | | 34.65 | | | | | |
Expired | | (13.9) | | | 52.86 | | | | | |
Outstanding at March 31, 2021 | | 1,114.9 | | | 37.92 | | | | | |
| | | | | | | | |
Granted | | 234.2 | | | 44.74 | | | | | |
Exercised | | (226.0) | | | 31.15 | | | | | |
Forfeited | | (13.7) | | | 37.83 | | | | | |
Expired | | (8.5) | | | 56.63 | | | | | |
Outstanding at March 31, 2022 | | 1,100.9 | | | 40.62 | | | | | |
| | | | | | | | |
Granted | | 197.6 | | | 54.48 | | | | | |
Exercised | | (205.2) | | | 35.93 | | | | | |
Forfeited | | (10.3) | | | 49.53 | | | | | |
Expired | | (0.8) | | | 44.33 | | | | | |
Outstanding at March 31, 2023 | | 1,082.2 | | | 43.95 | | | 6.4 | | $ | 20,212 | |
Exercisable at March 31, 2023 | | 665.5 | | | 41.19 | | | 5.2 | | $ | 14,270 | |
The aggregate intrinsic value of options exercised during 2023, 2022 and 2021 was $5.0 million, $6.0 million and $2.2 million, respectively.
15. Accumulated Other Comprehensive Loss
The table below presents accumulated other comprehensive income (loss) (“AOCI”), which affects equity and results from recognized transactions and other economic events, other than transactions with owners in their capacity as owners.
AOCI consisted of the following at March 31, 2023 and 2022:
| | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Components of Accumulated Other Comprehensive Loss | | | |
Cumulative translation adjustment | $ | (32,280) | | | $ | (20,204) | |
| | | |
Unrecognized net gain on pension plans, net of tax of $(214) and $(350), respectively | 716 | | | 1,172 | |
| | | |
Accumulated other comprehensive loss, net of tax | $ | (31,564) | | | $ | (19,032) | |
16. Income Taxes
(Loss) income before income taxes consists of the following: | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
(In thousands) | 2023 | | 2022 | | 2021 |
United States | $ | (130,331) | | | $ | 236,381 | | | $ | 195,796 | |
Foreign | 36,416 | | | 26,077 | | | 8,317 | |
| | | | | |
Total (loss) income before income taxes | $ | (93,915) | | | $ | 262,458 | | | $ | 204,113 | |
The (benefit) provision for income taxes consists of the following: | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
(In thousands) | 2023 | | 2022 | | 2021 |
Current | | | | | |
Federal | $ | 33,475 | | | $ | 34,446 | | | $ | 11,513 | |
State | 3,721 | | | 3,961 | | | 3,403 | |
Foreign | 11,959 | | | 8,709 | | | 5,849 | |
Deferred | | | | | |
Federal | (52,473) | | | 12,055 | | | 14,430 | |
State | (8,201) | | | (1,379) | | | 4,572 | |
Foreign | (90) | | | (715) | | | (336) | |
Total (benefit) provision for income taxes | $ | (11,609) | | | $ | 57,077 | | | $ | 39,431 | |
The principal components of our deferred tax balances are as follows: | | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Deferred Tax Assets | | | |
Allowance for credit losses and sales returns | $ | 4,882 | | | $ | 4,605 | |
Inventory capitalization | 2,508 | | | 2,201 | |
Inventory reserves | 1,707 | | | 1,264 | |
Net operating loss carryforwards | — | | | 115 | |
State income taxes | 7,440 | | | 9,661 | |
Accrued liabilities | 1,616 | | | 2,026 | |
Accrued compensation | 3,757 | | | 4,597 | |
Stock compensation | 4,613 | | | 4,548 | |
Research and development | 1,429 | | | — | |
| | | |
Lease liability | 4,795 | | | 6,808 | |
Unrealized foreign exchange loss | 673 | | | 215 | |
Other | 9,450 | | | 5,682 | |
Total deferred tax assets | $ | 42,870 | | | $ | 41,722 | |
| | | |
Deferred Tax Liabilities | | | |
Property, plant and equipment | $ | (6,874) | | | $ | (7,210) | |
Intangible assets | (410,219) | | | (471,327) | |
| | | |
Right-of-use asset | (4,300) | | | (6,239) | |
Total deferred tax liabilities | $ | (421,393) | | | $ | (484,776) | |
| | | |
| | | |
| | | |
Net deferred tax liability | $ | (378,523) | | | $ | (443,054) | |
The net deferred tax liability shown above is net of $1.9 million of foreign deferred tax assets as of March 31, 2023 and 2022.
We had no valuation allowance as of March 31, 2023 and March 31, 2022.
A reconciliation of the effective tax rate compared to the statutory U.S. Federal tax rate is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
(In thousands) | | | % | | | | % | | | | % |
Income tax (benefit) provision at statutory rate | $ | (19,722) | | | 21.0 | | | $ | 55,116 | | | 21.0 | | | $ | 42,864 | | | 21.0 | |
Foreign tax provision | 4,168 | | | (4.4) | | | 2,876 | | | 1.1 | | | 3,972 | | | 1.9 | |
State income taxes (benefit), net of federal income tax benefit | (5,300) | | | 5.6 | | | 1,737 | | | 0.7 | | | 7,284 | | | 3.6 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Goodwill impairment | 10,232 | | | (10.9) | | | — | | | — | | | — | | | — | |
Research and development | (514) | | | 0.5 | | | (213) | | | (0.1) | | | (156) | | | (0.1) | |
Compensation limitations | 1,483 | | | (1.6) | | | 1,563 | | | 0.6 | | | 735 | | | 0.4 | |
Valuation allowance | — | | | — | | | — | | | — | | | (5,441) | | | (2.7) | |
Foreign tax credit | (1,297) | | | 1.4 | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | |
Uncertain tax positions | (91) | | | 0.1 | | | (369) | | | (0.1) | | | (7,218) | | | (3.5) | |
Other | (568) | | | 0.7 | | | (3,633) | | | (1.5) | | | (2,609) | | | (1.3) | |
Total (benefit) provision for income taxes | $ | (11,609) | | | 12.4 | | | $ | 57,077 | | | 21.7 | | | $ | 39,431 | | | 19.3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Uncertain tax liability activity is as follows: | | | | | | | | | | | | | | | | | |
| 2023 | | 2022 | | 2021 |
(In thousands) | | | | | |
Balance – beginning of year | $ | 3,562 | | | $ | 4,030 | | | $ | 10,369 | |
| | | | | |
Reductions based on lapse of statute of limitations | (495) | | | (585) | | | (6,756) | |
Payments and other movements | 228 | | | 117 | | | 417 | |
Balance – end of year | $ | 3,295 | | | $ | 3,562 | | | $ | 4,030 | |
We recognize interest and penalties related to uncertain tax positions as a component of income tax (benefit) expense. We did not incur any material interest or penalties related to income taxes in 2023, 2022 or 2021. We reasonably anticipate that uncertain tax positions could decrease in the next year by approximately $0.4 million, principally due to the statute of limitation expirations if recognized and would impact the effective tax rate in a future period. We are subject to taxation in the United States and various state and foreign jurisdictions, and we are generally open to examination from the year ended March 31, 2019 forward.
17. Employee Retirement Plans
We have a defined contribution plan in which all U.S. full-time employees are eligible to participate. The participants may contribute from 1% to 70% of their compensation, as defined in the plan. We match 100% of the first 3%, plus 50% of the next 3%, of each participant's base compensation with full vesting immediately. We may also make additional contributions to the plan as determined by the Board of Directors. The total expense for the defined contribution plan was $1.9 million, $1.7 million and $1.6 million for 2023, 2022 and 2021, respectively.
Certain employees of our Lynchburg manufacturing facility were covered by defined benefit pension plans. Benefits were based on years of service and levels of compensation. On December 16, 2014, the decision was made to freeze the benefits under the Company's U.S. qualified defined benefit pension plan (the "Plan") with an effective date of March 1, 2015.
During the third quarter of 2021, we offered participants of the Plan the option to receive a lump sum payout of their benefits. The amount paid out of plan assets during the third quarter of 2021 to those who elected to take the lump sum payout was $7.0 million, and we recognized a settlement gain of $0.2 million as a result of the payout. The settlement credit was determined based on a remeasurement of the Plan as of December 31, 2020, at which point a discount rate of 2.51% and an expected return assumption of 2.75% were selected. Those remeasurement assumptions were also used to determine the net periodic pension income for the Plan for the fourth quarter of fiscal 2021.
During the fourth quarter of 2021, we adopted a plan termination date of April 30, 2021 for the Plan and began the Plan termination process. The settlements of the terminated Plan occurred during the first quarter of fiscal 2023, with lump sum settlements in the amount of $13.8 million being paid to eligible Plan participants who elected such payments and the purchase of annuity contracts for $31.1 million to the remaining participants. These settlements were paid using Plan assets and resulted in a settlement loss of $0.4 million. No further contributions to the Plan were necessary.
Benefit Obligations and Plan Assets
The following table summarizes the changes in the U.S. pension plan obligations and plan assets and includes a statement of the plans' funded status as of March 31, 2023 and 2022:
| | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Change in benefit obligation: | | | |
Projected benefit obligation at beginning of period | $ | 51,507 | | | $ | 56,818 | |
Interest cost | 423 | | | 1,107 | |
Actuarial (gain) loss | (2,044) | | | (2,888) | |
Benefits paid | (46,240) | | | (3,530) | |
Projected benefit obligations at end of year | $ | 3,646 | | | $ | 51,507 | |
| | | |
Change in plan assets: | | | |
Fair value of plan assets at beginning of period | $ | 48,708 | | | $ | 53,275 | |
Actual return on plan assets | (2,820) | | | (1,405) | |
Employer contribution | 370 | | | 368 | |
Benefits paid | (1,371) | | | (3,530) | |
Settlements paid with termination of qualified plan | $ | (44,869) | | | — | |
Fair value of plan assets at end of year | $ | 18 | | | $ | 48,708 | |
| | | |
Funded status at end of year | $ | (3,628) | | | $ | (2,799) | |
Amounts recognized in the balance sheet at the end of the period consist of the following: | | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Noncurrent asset | $ | 18 | | | $ | 1,534 | |
| | | |
Current liability | 362 | | | 365 | |
Long-term liability | 3,284 | | | 3,968 | |
Total liabilities | $ | 3,646 | | | $ | 4,333 | |
| | | |
Total net liability | $ | (3,628) | | | $ | (2,799) | |
The primary components of Net Periodic Benefit Cost (Income) consist of the following: | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
(In thousands) | 2023 | | 2022 | | 2021 |
Interest cost | $ | 423 | | | $ | 1,107 | | | $ | 1,972 | |
Expected return on assets | (252) | | | (1,163) | | | (2,336) | |
Net periodic benefit cost (income) | $ | 171 | | | $ | (56) | | | $ | (364) | |
The following table provides information regarding our pension plans with an accumulated benefit obligation and a projected benefit obligation in excess of plan assets:
| | | | | | | | | | | |
| March 31, |
(In thousands) | 2023 | | 2022 |
Accumulated benefit obligation | $ | 3,646 | | | $ | 51,507 | |
Fair value of plan assets | 18 | | | 48,708 | |
| | | |
Projected benefit obligations | $ | 3,646 | | | $ | 51,507 | |
Fair value of plan assets | 18 | | | 48,708 | |
The pension benefit amounts stated above include one pension plan that is an unfunded plan. The projected benefit obligation and accumulated benefit obligation for this unfunded plan were $3.6 million as of March 31, 2023 and $4.3 million as of March 31, 2022.
The following table includes amounts that are expected to be contributed to the unfunded plan by the Company. It reflects benefit payments that are made directly from the Company's assets. The amounts in the table are actuarially determined and reflect the Company's best estimate given its current knowledge; actual amounts could be materially different.
| | | | | |
(In thousands) | Pension Benefits |
Employer contributions: | |
2024 (expectation) to participant benefits | $ | 362 | |
| |
Expected benefit payments year ending March 31, | |
2024 | $ | 362 | |
2025 | 354 | |
2026 | 344 | |
2027 | 332 | |
2028 | 320 | |
2029-2032 | 1,404 | |
We did not make any contributions to the Plan during 2023 or 2022, and we contributed $3.0 million to the Plan during 2021.
Prior to the termination of the Plan, the Company's primary investment objective for its qualified pension plan assets was to provide a source of retirement income for the Plan's participants and beneficiaries. The asset allocation for the Plan as of March 31, 2023 and 2022, and the target allocation by asset category are as follows:
| | | | | | | | | | | | | | | | | |
| Percentage of Plan Assets |
Asset Category | Target Allocation | | March 31, 2023 | | March 31, 2022 |
| | | | | |
| | | | | |
| | | | | |
Real estate | — | % | | — | % | | — | % |
Fixed income and cash | 100 | | | 100 | | | 100 | |
Total | 100 | % | | 100 | % | | 100 | % |
The remaining plan assets as of March 31, 2023 are held in a cash account. The plan assets at March 31, 2022 were invested in a portfolio consisting primarily of domestic fixed income held within collective investment trust funds due to the Plan termination process, which began during the fourth quarter of fiscal 2021, and the Plan's positive funded status. These assets are measured at NAV as a practical expedient.
The following tables show the unrecognized actuarial loss (gain) included in accumulated other comprehensive income (loss) at March 31, 2023, 2022 and 2021:
| | | | | |
(In thousands) | |
Balances in accumulated other comprehensive loss as of March 31, 2021: | |
Unrecognized actuarial (gain) | $ | (1,202) | |
Unrecognized prior service credit | — | |
| |
Balances in accumulated other comprehensive loss as of March 31, 2022: | |
Unrecognized actuarial (gain) | $ | (1,522) | |
Unrecognized prior service credit | — | |
| |
Balances in accumulated other comprehensive loss as of March 31, 2023: | |
Unrecognized actuarial (gain) | $ | (930) | |
Unrecognized prior service credit | — | |
| |
| |
| |
| |
Assumptions used in determining the actuarial present value of the net periodic benefit cost (income) for the fiscal years ended March 31, 2023, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | |
| March 31, |
| 2023 * | | 2022 | | 2021 ** |
Key assumptions: | | | | | |
Discount rate | 3.26% to 3.48% | | 2.58% to 2.95% | | 3.37% to 3.55% |
Expected return on plan assets, net of administrative fees | 2.75% | | 2.25% | | 5.00% |
| | | | | |
*The qualified plan was remeasured at April 30, 2022 for settlement accounting, at which point a discount rate of 3.98% and an expected return assumption of 2.75% were selected and used to determine the net periodic benefit cost (income) for the remainder of the fourth quarter of fiscal 2023.
**The qualified plan was remeasured at December 31, 2020 for settlement accounting, at which point a discount rate of 2.51% and an expected return assumption of 2.75% were selected and used to determine the net periodic benefit cost (income) for the fourth quarter of fiscal 2021.
Assumptions used in determining the actuarial present value of the benefit obligation as of March 31, 2023 and 2022 were as follows: | | | | | | | | | | | |
| March 31, |
| 2023 | | 2022 |
Key assumptions: | | | |
Discount rate | 4.47% | | 3.26% to 3.48% |
| | | |
| | | |
The determination of the expected long-term rate of return was derived from an optimized portfolio using an asset allocation software program. The risk and return assumptions, along with the correlations between the asset classes, were entered into the program. Based on these assumptions and historical experience, the portfolio is expected to achieve a long-term rate of return of 2.75%.
18. Commitments and Contingencies
We are involved from time to time in routine legal matters and other claims incidental to our business. We review outstanding claims and proceedings internally and with external counsel as necessary to assess probability and amount of potential loss. These assessments are re-evaluated at each reporting period and as new information becomes available to determine 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 resolution of routine legal matters and other claims incidental to our business, taking our reserves into account, will not be material to our financial condition or results of operations.
Lease Commitments
See Note 8 for a description of our operating and finance leases.
Purchase Commitments
We have supply agreements for the manufacture of some of our products. The following table shows the minimum amounts that we are committed to pay under these agreements:
| | | | | |
(In thousands) | |
Year Ending March 31, | Amount |
2024 | $ | 6,235 | |
2025 | 5,959 | |
2026 | 5,709 | |
2027 | 5,746 | |
2028 | 4,519 | |
Thereafter | 2,096 | |
| $ | 30,264 | |
19. Concentrations of Risk
Our revenues are concentrated in the areas of OTC Healthcare. We sell our products to mass merchandisers, drug, food, dollar, convenience and club stores and e-commerce channels. During 2023, 2022, and 2021, approximately 38.7%, 41.3%, and 45.6%, respectively, of our gross revenues were derived from our five top selling brands. One customer, Walmart, accounted for more than 10% of our gross revenues for each of the periods presented. During 2023, 2022, and 2021, Walmart accounted for approximately 19.7%, 20.5%, and 21.6%, respectively, of our gross revenues. At March 31, 2023, approximately 20.0% of our accounts receivable were owed by Walmart.
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 March 31, 2023, we had relationships with 135 third-party manufacturers. Of those, we had long-term contracts with 25 manufacturers that produced items that accounted for approximately 69.8% of our gross sales for 2023, compared to 23 manufacturers with long-term contracts that accounted for approximately 69.0% of gross sales in 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 from 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.
20. Business Segments
Segment information has been prepared in accordance with the Segment Reporting topic of FASB ASC 280. Our 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.
The tables below summarize information about our operating and reportable segments.
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| Year Ended March 31, 2023 |
(In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Total segment revenues* | $ | 973,774 | | | $ | 153,951 | | | | | $ | 1,127,725 | |
Cost of sales | 441,844 | | | 60,587 | | | | | 502,431 | |
Gross profit | 531,930 | | | 93,364 | | | | | 625,294 | |
Advertising and marketing | 123,926 | | | 21,135 | | | | | 145,061 | |
Contribution margin | $ | 408,004 | | | $ | 72,229 | | | | | 480,233 | |
Other operating expenses** | | | | | | | 502,648 | |
Operating loss | | | | | | | $ | (22,415) | |
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*Intersegment revenues of $4.3 million were eliminated from the North American OTC Healthcare segment.
**Other operating expenses for the year ended March 31, 2023 includes a tradename impairment charge of $321.4 million and a goodwill impairment charge of $48.8 million.
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| Year Ended March 31, 2022 |
(In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Total segment revenues* | $ | 967,881 | | | $ | 118,931 | | | | | $ | 1,086,812 | |
Cost of sales | 419,162 | | | 47,004 | | | | | 466,166 | |
Gross profit | 548,719 | | | 71,927 | | | | | 620,646 | |
Advertising and marketing | 138,714 | | | 18,629 | | | | | 157,343 | |
Contribution margin | $ | 410,005 | | | $ | 53,298 | | | | | 463,303 | |
Other operating expenses | | | | | | | 133,384 | |
Operating income | | | | | | | $ | 329,919 | |
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* Intersegment revenues of $3.0 million were eliminated from the North American OTC Healthcare segment.
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| Year Ended March 31, 2021 |
(In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Total segment revenues* | $ | 849,319 | | | $ | 94,046 | | | | | $ | 943,365 | |
Cost of sales | 359,100 | | | 36,793 | | | | | 395,893 | |
Gross profit | 490,219 | | | 57,253 | | | | | 547,472 | |
Advertising and marketing | 122,857 | | | 17,732 | | | | | 140,589 | |
Contribution margin | $ | 367,362 | | | $ | 39,521 | | | | | 406,883 | |
Other operating expenses | | | | | | | 109,481 | |
Operating income | | | | | | | $ | 297,402 | |
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*Intersegment revenues of $3.2 million were eliminated from the North American OTC Healthcare segment.
The tables below summarize information about our segment revenues from similar product groups.
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| Year Ended March 31, 2023 |
(In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Analgesics | $ | 116,582 | | | $ | 2,680 | | | | | $ | 119,262 | |
Cough & Cold | 100,218 | | | 26,770 | | | | | 126,988 | |
Women's Health | 231,754 | | | 19,597 | | | | | 251,351 | |
Gastrointestinal | 156,957 | | | 69,626 | | | | | 226,583 | |
Eye & Ear Care | 151,879 | | | 19,197 | | | | | 171,076 | |
Dermatologicals | 119,822 | | | 3,919 | | | | | 123,741 | |
Oral Care | 85,542 | | | 12,085 | | | | | 97,627 | |
Other OTC | 11,020 | | | 77 | | | | | 11,097 | |
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Total segment revenues | $ | 973,774 | | | $ | 153,951 | | | | | $ | 1,127,725 | |
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| Year Ended March 31, 2022 |
(In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Analgesics | $ | 117,868 | | | $ | 1,455 | | | | | $ | 119,323 | |
Cough & Cold | 86,855 | | | 20,225 | | | | | 107,080 | |
Women's Health | 249,136 | | | 15,373 | | | | | 264,509 | |
Gastrointestinal | 152,191 | | | 52,368 | | | | | 204,559 | |
Eye & Ear Care | 149,454 | | | 13,995 | | | | | 163,449 | |
Dermatologicals | 117,173 | | | 3,213 | | | | | 120,386 | |
Oral Care | 85,239 | | | 12,282 | | | | | 97,521 | |
Other OTC | 9,965 | | | 20 | | | | | 9,985 | |
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Total segment revenues | $ | 967,881 | | | $ | 118,931 | | | | | $ | 1,086,812 | |
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| Year Ended March 31, 2021 |
(In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Analgesics | $ | 117,775 | | | $ | 1,367 | | | | | $ | 119,142 | |
Cough & Cold | 56,158 | | | 14,483 | | | | | 70,641 | |
Women's Health | 252,535 | | | 15,562 | | | | | 268,097 | |
Gastrointestinal | 124,755 | | | 36,381 | | | | | 161,136 | |
Eye & Ear Care | 99,774 | | | 10,635 | | | | | 110,409 | |
Dermatologicals | 103,998 | | | 3,085 | | | | | 107,083 | |
Oral Care | 88,903 | | | 12,528 | | | | | 101,431 | |
Other OTC | 5,421 | | | 5 | | | | | 5,426 | |
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Total segment revenues | $ | 849,319 | | | $ | 94,046 | | | | | $ | 943,365 | |
Our total segment revenues by geographic area are as follows: | | | | | | | | | | | | | | | | | |
| Year Ended March 31, |
| 2023 | | 2022 | | 2021 |
United States | $ | 953,222 | | | $ | 910,106 | | | $ | 799,038 | |
Rest of world | 174,503 | | | 176,706 | | | 144,327 | |
Total | $ | 1,127,725 | | | $ | 1,086,812 | | | $ | 943,365 | |
Our consolidated goodwill and intangible assets have been allocated to the reportable segments as follows:
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March 31, 2023 (In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Goodwill | $ | 498,936 | | | $ | 28,617 | | | | | $ | 527,553 | |
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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 | |
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March 31, 2022 (In thousands) | North American OTC Healthcare | | International OTC Healthcare | | | | Consolidated |
Goodwill | $ | 548,291 | | | $ | 30,685 | | | | | $ | 578,976 | |
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Intangible assets | | | | | | | |
Indefinite-lived | 2,391,517 | | | 85,042 | | | | | 2,476,559 | |
Finite-lived | 198,353 | | | 21,723 | | | | | 220,076 | |
Intangible assets, net | 2,589,870 | | | 106,765 | | | | | 2,696,635 | |
Total | $ | 3,138,161 | | | $ | 137,450 | | | | | $ | 3,275,611 | |
Our goodwill and intangible assets by geographic area are as follows:
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| Year Ended March 31, |
| 2023 | | 2022 |
United States | $ | 2,746,340 | | | $ | 3,138,161 | |
Rest of world | 123,106 | | | 137,450 | |
Total | $ | 2,869,446 | | | $ | 3,275,611 | |
21. Subsequent Events
Share Repurchase Program
On May 2, 2023, the Company's Board of Directors authorized the repurchase of up to $25.0 million of the Company's issued and outstanding common stock. Under the authorization, the Company may purchase 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 Securities and Exchange Commission.
Share Based Compensation
On May 2, 2023, the Committee granted 75,182 performance units, 67,578 RSUs and stock options to acquire 128,149 shares of our common stock to certain executive officers and employees under the 2020 Plan. Performance units are earned based on achievement of the performance objectives set by the Committee and, if earned, vest in their entirety on the three-year anniversary of the date of grant. RSUs vest either 33.3% per year over three years or in their entirety on the three-year or five-year anniversary of the date of grant. Upon vesting, both performance units and RSUs will be settled in shares of our common stock. The stock options will vest 33.3% per year over three years and are exercisable for up to ten years from the date of grant. These stock options were granted at an exercise price of $61.73 per share, which is equal to the closing price for our common stock on the date of the grant. Except in cases of death, disability or retirement, termination of employment prior to vesting will result in forfeiture of the unvested performance units, RSUs and the stock options. Vested stock options will remain exercisable by the employee after termination, subject to the terms of the 2020 Plan.
ABL Revolver Amendment
On April 4, 2023, we entered into ABL Amendment No. 8 to the 2012 ABL Revolver. ABL Amendment No. 8 provides for the replacement of LIBOR with Secured Overnight Financing Rate ("SOFR") as our reference rate.