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EX-32.2 - EXHIBIT 32.2 - Prestige Consumer Healthcare Inc.exhibit3222016-0930.htm
EX-32.1 - EXHIBIT 32.1 - Prestige Consumer Healthcare Inc.exhibit3212016-0930.htm
EX-31.2 - EXHIBIT 31.2 - Prestige Consumer Healthcare Inc.exhibit3122016-09x30.htm
EX-31.1 - EXHIBIT 31.1 - Prestige Consumer Healthcare Inc.exhibit3112016-09x30.htm
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                                                
FORM 10-Q
(Mark One)                                     
[ X ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
[    ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to _____
Commission File Number: 001-32433
pbhlogoa011a01a02a01a03.jpg 

PRESTIGE BRANDS HOLDINGS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
 
20-1297589
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer Identification No.)
660 White Plains Road
Tarrytown, New York 10591
(Address of principal executive offices) (Zip Code)
 
(914) 524-6800
(Registrant's telephone number, including area code)
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x      No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  
Large accelerated filer x
 
 
Accelerated filer o
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company o
                                                                     
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No x
As of October 28, 2016, there were 52,934,148 shares of common stock outstanding.




Prestige Brands Holdings, Inc.
Form 10-Q
Index

PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
Consolidated Statements of Income and Comprehensive Income for the three and six months ended September 30, 2016 and 2015 (unaudited)
 
Consolidated Balance Sheets as of September 30, 2016 (unaudited) and March 31, 2016
 
Consolidated Statements of Cash Flows for the six months ended September 30, 2016 and 2015 (unaudited)
 
Notes to Consolidated Financial Statements (unaudited)
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 6.
Exhibits
 
 
 
 
Signatures
 
 
 

Trademarks and Trade Names
Trademarks and trade names used in this Quarterly Report on Form 10-Q are the property of Prestige Brands Holdings, Inc. or its subsidiaries, as the case may be.  We have italicized our trademarks or trade names when they appear in this Quarterly Report on Form 10-Q.

- 1-



PART I
FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

Prestige Brands Holdings, Inc.
Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
Three Months Ended September 30,
 
Six Months Ended September 30,
(In thousands, except per share data)
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Net sales
$
215,017

 
$
205,262

 
$
423,787

 
$
396,549

Other revenues
35

 
803

 
840

 
1,648

Total revenues
215,052

 
206,065

 
424,627

 
398,197

 
 
 
 
 
 
 
 
Cost of Sales
 

 
 

 
 

 
 

Cost of sales (exclusive of depreciation shown below)
91,087

 
86,125

 
179,071

 
166,021

Gross profit
123,965

 
119,940

 
245,556

 
232,176

 
 
 
 
 
 
 
 
Operating Expenses
 

 
 

 
 

 
 

Advertising and promotion
28,592

 
27,893

 
56,227

 
54,315

General and administrative
18,795

 
16,462

 
38,252

 
34,051

Depreciation and amortization
6,016

 
5,687

 
12,848

 
11,407

(Gain) loss on sales of assets
(496
)
 

 
54,957

 

Total operating expenses
52,907

 
50,042

 
162,284

 
99,773

Operating income
71,058

 
69,898

 
83,272

 
132,403

 
 
 
 
 
 
 
 
Other (income) expense
 

 
 

 
 

 
 

Interest income
(46
)
 
(33
)
 
(103
)
 
(60
)
Interest expense
20,876

 
20,700

 
42,060

 
42,611

Loss on extinguishment of debt

 

 

 
451

Total other expense
20,830

 
20,667

 
41,957

 
43,002

Income before income taxes
50,228

 
49,231

 
41,315

 
89,401

Provision for income taxes
18,033

 
17,428

 
14,651

 
31,425

Net income
$
32,195

 
$
31,803

 
$
26,664

 
$
57,976

 
 
 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

 
 

Basic
$
0.61

 
$
0.60

 
$
0.50

 
$
1.10

Diluted
$
0.60

 
$
0.60

 
$
0.50

 
$
1.09

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 

 
 

 
 

 
 

Basic
52,993

 
52,803

 
52,941

 
52,676

Diluted
53,345

 
53,151

 
53,329

 
53,055

 
 
 
 
 
 
 
 
Comprehensive income, net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
2,703

 
(11,079
)
 
(3,121
)
 
(11,484
)
Total other comprehensive (loss) income
2,703

 
(11,079
)
 
(3,121
)
 
(11,484
)
Comprehensive income
$
34,898

 
$
20,724

 
$
23,543

 
$
46,492

See accompanying notes.

- 2-



Prestige Brands Holdings, Inc.
Consolidated Balance Sheets
(Unaudited)

(In thousands)
September 30,
2016
 
March 31,
2016
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
30,458

 
$
27,230

Accounts receivable, net
92,869

 
95,247

Inventories
97,959

 
91,263

Deferred income tax assets
10,646

 
10,108

Prepaid expenses and other current assets
11,341

 
25,165

Assets held for sale
36,400

 

Total current assets
279,673

 
249,013

 
 
 
 
Property and equipment, net
13,732

 
15,540

Goodwill
351,662

 
360,191

Intangible assets, net
2,181,128

 
2,322,723

Other long-term assets
4,783

 
1,324

Total Assets
$
2,830,978

 
$
2,948,791

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
39,041

 
$
38,296

Accrued interest payable
8,264

 
8,664

Other accrued liabilities
67,006

 
59,724

Total current liabilities
114,311

 
106,684

 
 
 
 
Long-term debt
 
 
 
Principal amount
1,502,000

 
1,652,500

Less unamortized debt costs
(22,337
)
 
(27,191
)
Long-term debt, net
1,479,663

 
1,625,309

 
 
 
 
Deferred income tax liabilities
459,527

 
469,622

Other long-term liabilities
2,837

 
2,840

Total Liabilities
2,056,338

 
2,204,455

 
 
 
 
Commitments and Contingencies — Note 17


 


 
 
 
 
Stockholders' Equity
 

 
 

Preferred stock - $0.01 par value
 

 
 

Authorized - 5,000 shares
 

 
 

Issued and outstanding - None

 

Common stock - $0.01 par value
 

 
 

Authorized - 250,000 shares
 

 
 

Issued - 53,265 shares at September 30, 2016 and 53,066 shares at March 31, 2016
532

 
530

Additional paid-in capital
453,336

 
445,182

Treasury stock, at cost - 331 shares at September 30, 2016 and 306 shares at March 31, 2016
(6,558
)
 
(5,163
)
Accumulated other comprehensive loss, net of tax
(26,646
)
 
(23,525
)
Retained earnings
353,976

 
327,312

Total Stockholders' Equity
774,640

 
744,336

Total Liabilities and Stockholders' Equity
$
2,830,978

 
$
2,948,791

 See accompanying notes.

- 3-



Prestige Brands Holdings, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended September 30,
(In thousands)
2016
 
2015
Operating Activities
 
 
 
Net income
$
26,664

 
$
57,976

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 
Depreciation and amortization
12,848

 
11,407

Loss (gain) on sales of intangible assets and property and equipment
55,112

 
(36
)
Deferred income taxes
(10,602
)
 
21,985

Amortization of debt origination costs
5,097

 
4,055

Stock-based compensation costs
3,933

 
5,034

Loss on extinguishment of debt

 
451

Changes in operating assets and liabilities, net of effects from acquisitions
 

 
 
Accounts receivable
356

 
(3,918
)
Inventories
(10,663
)
 
(3,838
)
Prepaid expenses and other current assets
10,112

 
3,436

Accounts payable
820

 
(4,519
)
Accrued liabilities
6,605

 
(1,443
)
Net cash provided by operating activities
100,282

 
90,590

 
 
 
 
Investing Activities
 

 
 

Purchases of property and equipment
(1,404
)
 
(1,683
)
Proceeds from sales of intangible assets
52,353

 

Proceeds from the sale of property and equipment
75

 
344

Net cash provided by (used in) investing activities
51,024

 
(1,339
)
 
 
 
 
Financing Activities
 

 
 

Term loan repayments
(130,500
)
 
(50,000
)
Borrowings under revolving credit agreement
20,000

 
15,000

Repayments under revolving credit agreement
(40,000
)
 
(55,000
)
Payments of debt origination costs
(9
)
 
(4,211
)
Proceeds from exercise of stock options
3,423

 
6,398

Proceeds from restricted stock exercises

 
544

Excess tax benefits from share-based awards
800

 
1,850

Fair value of shares surrendered as payment of tax withholding
(1,395
)
 
(2,187
)
Net cash used in financing activities
(147,681
)
 
(87,606
)
 
 
 
 
Effects of exchange rate changes on cash and cash equivalents
(397
)
 
(811
)
Increase in cash and cash equivalents
3,228

 
834

Cash and cash equivalents - beginning of period
27,230

 
21,318

Cash and cash equivalents - end of period
$
30,458

 
$
22,152

 
 
 
 
Interest paid
$
37,259

 
$
40,550

Income taxes paid
$
6,743

 
$
3,707

See accompanying notes.

- 4-



Prestige Brands Holdings, Inc.
Notes to Consolidated Financial Statements (unaudited)

1.
Business and Basis of Presentation

Nature of Business
Prestige Brands Holdings, Inc. (referred to herein as the “Company” or “we”, which reference shall, unless the context requires otherwise, be deemed to refer to Prestige Brands Holdings, Inc. and all of its direct and indirect 100% owned subsidiaries on a consolidated basis) is engaged in the marketing, sales and distribution of over-the-counter (“OTC”) healthcare and household cleaning products to mass merchandisers, drug stores, supermarkets, and club, convenience, and dollar stores in North America (the United States and Canada) and in Australia and certain other international markets.  Prestige Brands Holdings, 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.

Basis of Presentation
The unaudited Consolidated Financial Statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  All significant intercompany transactions and balances have been eliminated in these Consolidated Financial Statements.  In the opinion of management, these Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, that are considered necessary for a fair statement of our consolidated financial position, results of operations and cash flows for the interim periods presented.  Our fiscal year ends on March 31st of each year. References in these Consolidated Financial Statements or related notes to a year (e.g., “2017”) mean our fiscal year ending or ended on March 31st of that year. Operating results for the three and six months ended September 30, 2016 are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2017.  These unaudited Consolidated Financial Statements and related notes should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016.

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 and inventory obsolescence, and the recognition of income taxes using an estimated annual effective tax rate.
 
Cash and Cash Equivalents
We consider all short-term deposits and investments with original maturities of three months or less to be cash equivalents.  Substantially all of our cash is held by a large regional bank with headquarters in California.  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. The Federal Deposit Insurance Corporation (“FDIC”) and Securities Investor Protection Corporation (“SIPC”) insure these balances up to $250,000 and $500,000, with a $250,000 limit for cash, respectively. Substantially all of the Company's cash balances at September 30, 2016 are uninsured, and approximately 27.8% of our consolidated cash balances at September 30, 2016 are located in the United States.

Accounts Receivable
We extend non-interest-bearing trade credit to our customers in the ordinary course of business.  We maintain an allowance for doubtful accounts receivable 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.


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Inventories
Inventories are stated at the lower of cost or market value, with cost determined by using the first-in, first-out method.  We reduce inventories for 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 market value.  Factors utilized in the determination of estimated market value include: (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.

Property and Equipment
Property and equipment are stated at cost and are depreciated using the straight-line method based on the following estimated useful lives:
 
 
Years
Machinery
5
Computer equipment and software
3
Furniture and fixtures
7
Leasehold improvements
*
*Leasehold improvements are amortized over the lesser of the term of the lease or the estimated useful life of the related asset.

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 Income and Comprehensive Income.
 
Property 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 product group level, which is one level below the operating segment level.

Intangible Assets
Intangible assets, which are comprised primarily of trademarks, 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 30 years.

Indefinite-lived intangible assets are 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.  Intangible assets with finite lives are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amounts 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 our long-term debt.  These costs are amortized over the term of the related debt, using the effective interest method for our bonds and our term loan facility and the straight-line method for our revolving credit facility.

Revenue Recognition
Revenues are recognized when the following criteria are met: (i) persuasive evidence of an arrangement exists, (ii) the selling price is fixed or determinable, (iii) the product has been shipped and the customer takes ownership and assumes the risk of loss, and (iv) collection of the resulting receivable is reasonably assured.  We have determined that these criteria are met and the transfer of the risk of loss generally occurs when the product is received by the customer, and, accordingly, we recognize revenue at that time.  Provisions are made for estimated discounts related to customer payment terms and estimated product returns at the time of sale based on our historical experience.

As is customary in the consumer products industry, we participate in the promotional programs of our customers to enhance the sale of our products.  The cost of these promotional programs varies based on the actual number of units sold during a finite period of time.  These promotional programs consist of direct-to-consumer incentives, such as coupons and temporary price reductions,

- 6-



as well as incentives to our customers, such as allowances for new distribution, including slotting fees, and cooperative advertising.  Estimates of the costs of these promotional programs are based on (i) historical sales experience, (ii) the current promotional offering, (iii) forecasted data, (iv) current market conditions, and (v) communication with customer purchasing/marketing personnel. We recognize the cost of such sales incentives by recording an estimate of such cost as a reduction of revenue, at the later of (a) the date the related revenue is recognized, or (b) the date when a particular sales incentive is offered.  At the completion of a promotional program, the estimated amounts are adjusted to actual results.

Due to the nature of the consumer products industry, we are required to estimate future product returns.  Accordingly, we record an estimate of product returns concurrent with recording sales, which is made after analyzing (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.

Cost of Sales
Cost of sales includes product costs, warehousing costs, inbound and outbound shipping costs, and handling and storage costs.  Warehousing, shipping and handling and storage costs were $10.9 million and $21.4 million for the three and six months ended September 30, 2016, respectively, and $10.4 million and $19.1 million for the three and six months ended September 30, 2015, respectively.

Advertising and Promotion Costs
Advertising and promotion costs are expensed as incurred.  Allowances for distribution costs associated with products, including slotting fees, are recognized as a reduction of sales.  Under these new distribution arrangements, the retailers allow our products to be placed on the stores' shelves in exchange for such fees.

Stock-based Compensation
We recognize stock-based compensation 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.

Income Taxes
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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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 and Comprehensive Income.

Earnings Per Share
Basic earnings per share is calculated based on income available to common stockholders and the weighted-average number of shares outstanding during the reporting period.  Diluted earnings per share is calculated based on income available to common stockholders and the weighted-average number of common and potential common shares outstanding during the reporting period.  Potential common shares, composed of the incremental common shares issuable upon the exercise of outstanding stock options and unvested restricted stock units, are included in the earnings per share calculation to the extent that they are dilutive. In loss periods, the assumed exercise of in-the-money stock options and restricted stock units has an anti-dilutive effect, and therefore these instruments are excluded from the computation of diluted earnings per share.

Recently Issued Accounting Standards
In August 2016, the FASB issued Accounting Standards Update ("ASU") 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provide clarification and guidance on eight cash flow classification issues. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-15 is not expected to have a material impact on our Consolidated Financial Statements.

- 7-




In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers. The amendments do not change the core principle of the guidance in FASB ASC 606, discussed below. Rather, the amendments in this update affect only certain narrow aspects of FASB ASC 606. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 described below. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers. The amendments in this update clarify the implementation guidance on identifying performance obligations and licensing in FASB ASC 606. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 described below. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendments in this update involve several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers. The amendments in this update clarify the implementation guidance on principals versus agent considerations in FASB ASC 606. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 described below. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The amendments in this update include a new FASB ASC Topic 842, which supersedes Topic 840. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all entities as of the beginning of interim or annual reporting periods. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.
 
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted for all entities as of the beginning of interim or annual reporting periods. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The amendments in this update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards, under which an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2015-11 is not expected to have a material impact on our Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers - Topic 606, which supersedes the revenue recognition requirements in FASB ASC 605. The new guidance primarily states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 from annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.


- 8-





2.
Acquisitions

Acquisition of DenTek
On February 5, 2016, the Company completed the acquisition of DenTek Holdings, Inc. ("DenTek"), a privately-held marketer and distributor of specialty oral care products. The closing was finalized pursuant to the terms of the merger agreement, announced November 23, 2015, under which Prestige agreed to acquire DenTek from its stockholders for a purchase price of $228.3 million. The acquisition expands Prestige's portfolio of brands, strengthens its existing oral care platform and increases its geographic reach in parts of Europe. The Company financed the transaction with a combination of available cash on hand, available cash from its Asset Based Loan revolver, and financing of an additional unsecured bridge loan. The DenTek brands are primarily included in the Company's North American and International OTC Healthcare segments.

The DenTek acquisition was accounted for in accordance with the Business Combinations topic of the FASB ASC 805, which requires that the total cost of an acquisition be allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values at the date of acquisition.

We prepared an analysis of the fair values of the assets acquired and liabilities assumed as of the date of acquisition. The following table summarizes our preliminary allocation of the assets acquired and liabilities assumed as of the February 5, 2016 acquisition date.

(In thousands)
February 5, 2016
 
 
Cash acquired
$
1,359

Accounts receivable
9,187

Inventories
14,304

Deferred income taxes
3,303

Prepaids and other current assets
6,728

Property, plant and equipment, net
3,555

Goodwill
76,529

Intangible assets, net
206,700

Total assets acquired
321,665

 
 
Accounts payable
3,261

Accrued expenses
16,488

Deferred income tax liabilities - long term
73,573

Total liabilities assumed
93,322

Total purchase price
$
228,343


Based on this preliminary analysis, we allocated $179.8 million to non-amortizable intangible assets and $26.9 million to amortizable intangible assets. We are amortizing the purchased amortizable intangible assets on a straight-line basis over an estimated weighted average useful life of 18.5 years. The weighted average remaining life for amortizable intangible assets at September 30, 2016 was 18.0 years.

We also recorded goodwill of $76.5 million based on the amount by which the purchase price exceeded the fair value of the net assets acquired. Goodwill is not deductible for income tax purposes.

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

3.
Divestitures and Assets Held for Sale

Divestitures
Late in the first quarter of fiscal 2017, the Company was approached and discussed the potential to sell certain assets. Prior to these discussions, the Company did not contemplate any divestitures, and the Company did not commit to any course of action to divest any of the assets until entering into an agreement on June 29, 2016 to sell Pediacare, New Skin and Fiber Choice, which

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were reported under the North American OTC Healthcare segment in the Cough & Cold, Dermatologicals and Gastrointestinal product groups, respectively.

On July 7, 2016, we completed the sale of the Pediacare, New Skin and Fiber Choice brands for $40.0 million plus the cost of inventory. As a result, we received approximately $40.1 million including the cost of preliminary inventory of $2.6 million, less certain immaterial holdbacks, which will be paid upon meeting certain criteria as defined in the agreement and within approximately 18 months following the closing date of the transaction. During the six months ended September 30, 2016, we recorded a preliminary pre-tax loss on sale of $56.2 million. The proceeds were used to repay debt and related income taxes due on the disposition.

The following table sets forth the components of the assets sold and the pre-tax loss recognized on the sale.

(In thousands)
July 7,
2016
Components of assets sold:
 
Inventory
$
2,380

Intangible assets, net
91,208

Goodwill
2,920

Assets sold
96,508

Total purchase price to be received
42,380

 
54,128

Costs to sell
2,018

Pre-tax loss on sale
$
56,146


Concurrent with the completion of the sale of these brands, we entered into a transitional services agreement with the buyer, whereby we agreed to provide the buyer with various services, including marketing, operations, finance and other services, from the date of the acquisition through January 7, 2017. We also entered into an option agreement with the buyer to purchase Dermoplast at a specified earnings multiple as defined in the agreement. The buyer paid a $1.25 million deposit in September 2016, and has recently notified us of its election to exercise the option. We currently expect that this transaction will be completed by March 31, 2017, although the buyer has until December 31, 2017 to complete the transaction. Accordingly, the Dermoplast transaction is not included in the table above and the $1.25 million option deposit is included in our other accrued liabilities at September 30, 2016. The inventory and other assets related to Dermoplast are included in the assets held for sale table below.

Assets Held for Sale
In connection with the divestiture above, the buyer recently notified us of its intention to exercise its option and purchase the Dermoplast brand. As such, we expect to conclude this transaction by March 31, 2017 and the following table sets forth the assets held for sale as of September 30, 2016 related to our Dermoplast brand.

(In thousands)
September 30,
2016
Components of assets held for sale:
 
Inventory
$
619

Intangible assets, net
31,030

Goodwill
4,751

Assets Held for Sale
$
36,400



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4.
Accounts Receivable

Accounts receivable consist of the following:
(In thousands)
September 30,
2016
 
March 31,
2016
Components of Accounts Receivable
 
 
 
Trade accounts receivable
$
103,744

 
$
105,592

Other receivables
1,011

 
1,261

 
104,755

 
106,853

Less allowances for discounts, returns and uncollectible accounts
(11,886
)
 
(11,606
)
Accounts receivable, net
$
92,869

 
$
95,247


5.
Inventories

Inventories consist of the following:
(In thousands)
September 30,
2016
 
March 31,
2016
Components of Inventories
 
 
 
Packaging and raw materials
$
7,552

 
$
7,563

Finished goods
90,407

 
83,700

Inventories
$
97,959

 
$
91,263


Inventories are carried and depicted above at the lower of cost or market value, which includes a reduction in inventory values of $4.5 million and $4.8 million at September 30, 2016 and March 31, 2016, respectively, related to obsolete and slow-moving inventory.

6.
Property and Equipment

Property and equipment consist of the following:
(In thousands)
September 30,
2016
 
March 31,
2016
Components of Property and Equipment
 
 
 
Machinery
$
8,122

 
$
7,734

Computer equipment
12,928

 
12,793

Furniture and fixtures
2,501

 
2,445

Leasehold improvements
7,372

 
7,389

 
30,923

 
30,361

Accumulated depreciation
(17,191
)
 
(14,821
)
Property and equipment, net
$
13,732

 
$
15,540


We recorded depreciation expense of $1.5 million and $3.0 million for the three and six months ended September 30, 2016, respectively. We recorded depreciation expense of $1.2 million and $2.5 million for the three and six months ended September 30, 2015, respectively.


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7.
Goodwill

A reconciliation of the activity affecting goodwill by operating segment is as follows:
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
 
 
 
 
 
 
 
 
Balance — March 31, 2016
$
330,615

 
$
22,776

 
$
6,800

 
$
360,191

Reductions
(7,670
)
 

 
(555
)
 
(8,225
)
Effects of foreign currency exchange rates

 
(304
)
 

 
(304
)
Balance — September 30, 2016
$
322,945

 
$
22,472

 
$
6,245

 
$
351,662


In August 2016, we sold the rights to use of the Comet brand in certain geographic areas (see Note 8 below for further information) and reduced goodwill by $0.6 million as a result.

On July 7, 2016, we completed the sale of Pediacare, New Skin and Fiber Choice (see Note 3 above for further details) for $40.0 million plus the cost of inventory and received $40.1 million including preliminary inventory, less certain immaterial holdbacks, and reduced goodwill by $2.9 million as a result. In addition, as discussed in Note 3, in connection with this sale, the buyer has exercised its option and notified us of its intention to purchase Dermoplast. As such, we have reclassified $4.8 million of goodwill to assets held for sale as of September 30, 2016.

Under accounting guidelines, goodwill is not amortized, but must be tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below the carrying amount.

On an annual basis during the fourth quarter of each fiscal year, or more frequently if conditions indicate that the carrying value of the asset may not be recoverable, management performs a review of the values assigned to goodwill and tests for impairment. At February 29, 2016, during our annual test for goodwill impairment, there were no indicators of impairment under the analysis. Accordingly, no impairment charge was recorded in fiscal 2016. We utilize the discounted cash flow method to estimate the fair value of our reporting units as part of the goodwill impairment test. We also considered our market capitalization at February 29, 2016, which was the date of our annual review, 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. Consequently, changing rates of interest and inflation, declining sales or margins, increases in competition, changing consumer preferences, technical advances, or reductions in advertising and promotion may require an impairment charge to be recorded in the future. As of September 30, 2016, no events have occurred that would indicate potential impairment of goodwill.


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8.
Intangible Assets

A reconciliation of the activity affecting intangible assets is as follows:
(In thousands)
Indefinite
Lived
Trademarks
 
Finite Lived
Trademarks and Customer Relationships
 
Totals
Gross Carrying Amounts
 
 
 
 
 
Balance — March 31, 2016
$
2,020,046

 
$
417,880

 
$
2,437,926

Reductions
(77,248
)
 
(60,103
)
 
(137,351
)
Effects of foreign currency exchange rates
(380
)
 
(103
)
 
(483
)
Balance — September 30, 2016
1,942,418

 
357,674

 
2,300,092

 
 

 
 

 
 

Accumulated Amortization
 

 
 

 
 

Balance — March 31, 2016

 
115,203

 
115,203

Additions

 
9,865

 
9,865

Reductions

 
(6,102
)
 
(6,102
)
Effects of foreign currency exchange rates

 
(2
)
 
(2
)
Balance — September 30, 2016

 
118,964

 
118,964

 
 
 
 
 
 
Intangible assets, net - September 30, 2016
$
1,942,418

 
$
238,710

 
$
2,181,128

 
 
 
 
 
 
Intangible Assets, net by Reportable Segment:
 
 
 
 
 
North American OTC Healthcare
$
1,755,636

 
$
215,817

 
$
1,971,453

International OTC Healthcare
85,520

 
1,087

 
86,607

Household Cleaning
101,262

 
21,806

 
123,068

Intangible assets, net - September 30, 2016
$
1,942,418

 
$
238,710

 
$
2,181,128


Historically, we received royalty income from the licensing of the names of certain of our brands in geographic areas or markets in which we do not directly compete. We have had royalty agreements for our Comet brand for several years, which included options on behalf of the licensee to purchase license rights in certain geographic areas and markets in perpetuity. In December 2014, we amended these agreements and we sold rights to use of the Comet brand in certain Eastern European countries to a third-party licensee in exchange for $10.0 million as a partial early buyout. The amended agreement provided that we would continue to receive royalty payments of $1.0 million per quarter for the remaining geographic areas and also granted the licensee an option to acquire the license rights in the remaining geographic areas anytime after June 30, 2016. In July 2016, the licensee elected to exercise its option. In August 2016, we received $11.0 million for the purchase of the remaining license rights and, as a result, we recorded a pre-tax gain of $1.2 million and reduced our indefinite-lived trademarks by $9.0 million. Furthermore, the licensee is no longer required to make additional royalty payments to us, and as a result, our future royalty income will be reduced accordingly.

On July 7, 2016, we completed the sale of Pediacare, New Skin and Fiber Choice (see Note 3 above for further details) brands for $40.0 million plus the cost of inventory and received $40.1 million including the cost of preliminary inventory, less certain immaterial holdbacks, and reduced our indefinite and finite-lived trademarks by $37.2 million and $54.0 million, respectively. During the six months ended September 30, 2016, we recorded a preliminary pre-tax loss of $56.2 million on the sale of these brands. In addition, as discussed in Note 3, in connection with this sale, the buyer has exercised its option and notified us of its intention to purchase Dermoplast. As such, we have reclassified $31.0 million of indefinite-lived intangible assets to assets held for sale as of September 30, 2016.

Under accounting guidelines, indefinite-lived assets are not amortized, but must be tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the asset below the carrying amount.  Additionally, at each reporting period, an evaluation must be made to determine whether events and circumstances continue to support an indefinite useful life.  Intangible assets with finite lives are amortized over their respective estimated useful lives and are also tested for impairment whenever events or changes in circumstances indicate that the carrying value of the asset may not be recoverable and exceeds its fair value.


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

We utilize the excess earnings method to estimate the fair value of our individual indefinite-lived intangible assets. We also considered our market capitalization at February 29, 2016, which was the date of our annual review. 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. Consequently, changing rates of interest and inflation, declining sales or margins, increases in competition, changing consumer preferences, technical advances, or reductions in advertising and promotion may require an impairment charge to be recorded in the future.

The weighted average remaining life for finite-lived intangible assets at September 30, 2016 was approximately 13.1 years, and the amortization expense for the three and six months ended September 30, 2016 was $4.6 million and $9.9 million, respectively. At September 30, 2016, finite-lived intangible assets are being amortized over a period of 10 to 30 years, and the associated amortization expense is expected to be as follows:
(In thousands)
 
 
Year Ending March 31,
 
Amount
2017 (Remaining six months ending March 31, 2017)
$
9,113

2018
18,062

2019
18,062

2020
18,062

2021
17,640

Thereafter
157,771

 
$
238,710


9.
Other Accrued Liabilities

Other accrued liabilities consist of the following:

(In thousands)
September 30,
2016
 
March 31,
2016
 
 
 
 
Accrued marketing costs
$
29,938

 
$
26,373

Accrued compensation costs
5,572

 
9,574

Accrued broker commissions
965

 
1,497

Income taxes payable
10,284

 
3,675

Accrued professional fees
3,050

 
1,787

Deferred rent
690

 
836

Accrued production costs
3,023

 
3,324

Accrued lease termination costs
384

 
448

Income tax related payable
6,354

 
6,354

Other accrued liabilities
6,746

 
5,856

 
$
67,006

 
$
59,724


10.    Long-Term Debt

2012 Term Loan and 2012 ABL Revolver:
On January 31, 2012, Prestige Brands, Inc. (the "Borrower") entered into a new senior secured credit facility, which consists of (i) a $660.0 million term loan facility (the “2012 Term Loan”) with a 7-year maturity and (ii) a $50.0 million asset-based revolving credit facility (the “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 by $85.0 million to $135.0 million and reduced our borrowing rate on the 2012 ABL Revolver by 0.25% (discussed below). The 2012 Term Loan was issued with an original issue discount of 1.5% of the principal amount thereof, resulting in net proceeds to the Borrower of $650.1 million. In connection with these loan facilities, we incurred $20.6 million of costs, which were capitalized as deferred financing costs and

- 14-



are being amortized over the terms of the facilities. The 2012 Term Loan is unconditionally guaranteed by Prestige Brands Holdings, 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 February 21, 2013, we entered into Amendment No. 1 ("Term Loan Amendment No. 1") to the 2012 Term Loan. Term Loan Amendment No. 1 provided for the refinancing of all of the Borrower's existing Term B Loans with new Term B-1 Loans (the "Term B-1 Loans"). The interest rate on the Term B-1 Loans under Term Loan Amendment No. 1 was based, at our option, on a LIBOR rate plus a margin of 2.75% per annum, with a LIBOR floor of 1.00%, or an alternate base rate, with a floor of 2.00%, plus a margin. The new Term B-1 Loans would have matured on the same date as the Term B Loans' original maturity date.  In addition, Term Loan Amendment No. 1 provided the Borrower with certain additional capacity to prepay subordinated debt, the Company's 8.125% senior notes due in 2020 and certain other unsecured indebtedness permitted to be incurred under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver. In connection with Term Loan Amendment No. 1, during the fourth quarter ended March 31, 2013, we recognized a $1.4 million loss on the extinguishment of debt.

On September 3, 2014, we entered into Amendment No. 2 ("Term Loan Amendment No. 2") to the 2012 Term Loan. Term Loan Amendment No. 2 provided for (i) the creation of a new class of Term B-2 Loans under the 2012 Term Loan (the "Term B-2 Loans") in an aggregate principal amount of $720.0 million, (ii) increased flexibility under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver, including additional investment, restricted payment and debt incurrence flexibility and financial maintenance covenant relief, and (iii) an interest rate on (x) the Term B-1 Loans that was based, at our option, on a LIBOR rate plus a margin of 3.125% per annum, with a LIBOR floor of 1.00%, or an alternate base rate, with a floor of 2.00%, plus a margin, and (y) the Term B-2 Loans that was based, at our option, on a LIBOR rate plus a margin of 3.50% per annum, with a LIBOR floor of 1.00%, or an alternate base rate, with a floor of 2.00%, plus a margin (with a margin step-down to 3.25% per annum, based upon achievement of a specified secured net leverage ratio).

Also, on September 3, 2014, we entered into Amendment No. 3 ("ABL Amendment No. 3") to the 2012 ABL Revolver. ABL Amendment No. 3 provided for (i) a $40.0 million increase in revolving commitments under the 2012 ABL Revolver and (ii) increased flexibility under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver, including additional investment, restricted payment and debt incurrence flexibility. Borrowings under the 2012 ABL Revolver, as amended, bear interest at a rate per annum equal to an applicable margin, plus, at our option, either (i) a base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate of Citibank, N.A., and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month, adjusted for certain additional costs, plus 1.00% or (ii) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs. The applicable margin for borrowings under the 2012 ABL Revolver may be increased to 2.00% or 2.25% for LIBOR borrowings and 1.00% or 1.25% for base-rate borrowings, depending on average excess availability under the 2012 ABL Revolver during the prior fiscal quarter. In addition to paying interest on outstanding principal under the 2012 ABL Revolver, we are required to pay a commitment fee to the lenders under the 2012 ABL Revolver in respect of the unutilized commitments thereunder. The initial commitment fee rate is 0.50% per annum. The commitment fee rate will be reduced to 0.375% per annum at any time when the average daily unused commitments for the prior quarter is less than a percentage of total commitments by an amount set forth in the credit agreement covering the 2012 ABL Revolver. We may voluntarily repay outstanding loans under the 2012 ABL Revolver at any time without a premium or penalty.

On May 8, 2015, we entered into Amendment No. 3 ("Term Loan Amendment No. 3") to the 2012 Term Loan. Term Loan Amendment No. 3 provided for (i) the creation of a new class of Term B-3 Loans under the 2012 Term Loan (the "Term B-3 Loans") in an aggregate principal amount of $852.5 million, which combined the outstanding balances of the Term B-1 Loans of $207.5 million and the Term B-2 Loans of $645.0 million, and (ii) increased flexibility under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver, including additional investment, restricted payment, and debt incurrence flexibility and financial maintenance covenant relief. The maturity date of the Term B-3 Loans remains the same as the Term B-2 Loans' original maturity date of September 3, 2021.
The 2012 Term Loan, as amended, bears interest at a rate per annum equal to an applicable margin plus, at our option, either (i) a base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate of Citibank, N.A., (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month, adjusted for certain additional costs, plus 1.00% and (d) a floor of 1.75% or (ii) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, with a floor of 0.75%. For the six months ended September 30, 2016, the average interest rate on the 2012 Term Loan was 5.0%.

On June 9, 2015, we entered into Amendment No. 4 (“ABL Amendment No. 4”) to the 2012 ABL Revolver. ABL Amendment No. 4 provided for (i) a $35.0 million increase in the accordion feature under the 2012 ABL Revolver and (ii) increased flexibility

- 15-



under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver, including additional investment, restricted payment, and debt incurrence flexibility and financial maintenance covenant relief and (iii) extended the maturity date of the 2012 ABL Revolver to June 9, 2020, which is five years from the effective date. We may voluntarily repay outstanding loans under the 2012 ABL Revolver at any time without a premium or penalty. For the six months ended September 30, 2016, the average interest rate on the amounts borrowed under the 2012 ABL Revolver was 2.4%.
In connection with the DenTek acquisition on February 5, 2016, we entered into Amendment No. 5 (“ABL Amendment No. 5”) to the 2012 ABL Revolver. ABL Amendment No. 5 temporarily suspended certain financial and related reporting covenants in the 2012 ABL Revolver until the earliest of (i) the date that was 60 calendar days following February 4, 2016, (ii) the date upon which certain of DenTek’s assets were included in the Company’s borrowing base under the 2012 ABL Revolver and (iii) the date upon which the Company received net proceeds from an offering of debt securities.

2013 Senior Notes:
On December 17, 2013, the Borrower issued $400.0 million of senior unsecured notes, with an interest rate of 5.375% and a maturity date of December 15, 2021 (the "2013 Senior Notes"). The Borrower may redeem some or all of the 2013 Senior Notes at redemption prices set forth in the indenture governing the 2013 Senior Notes. The 2013 Senior Notes are guaranteed by Prestige Brands Holdings, Inc. and certain of its 100% domestic 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. In connection with the 2013 Senior Notes offering, we incurred $7.2 million of costs, which were capitalized as deferred financing costs and are being amortized over the term of the 2013 Senior Notes.

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 2024 (the “2016 Senior Notes”), pursuant to a purchase agreement, dated February 16, 2016, among the Borrower, the guarantors party thereto (the “Guarantors”) and the initial purchasers party thereto. The 2016 Senior Notes are guaranteed by Prestige Brands Holdings, 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. In connection with the 2016 Senior Notes offering, we incurred $5.5 million of costs, which were capitalized as deferred financing costs and are being amortized over the term of the 2016 Senior Notes.

The 2016 Senior Notes were issued pursuant to an indenture, dated February 19, 2016 (the “Indenture”). The Indenture provides, among other things, that interest will be payable on the 2016 Senior Notes on March 1 and September 1 of each year, beginning on September 1, 2016, until their maturity date of March 1, 2024. The 2016 Senior Notes are senior unsecured obligations of the Borrower.

Redemptions and Restrictions:
At any time prior to December 15, 2016, we have the option to redeem the 2013 Senior Notes in whole or in part at a redemption price equal to 100% of the principal amount of notes redeemed, plus an applicable "make-whole premium" calculated as set forth in the indenture governing the 2013 Senior Notes, together with accrued and unpaid interest, if any, to the date of redemption. On or after December 15, 2016, we have the option to redeem some or all of the 2013 Senior Notes at redemption prices set forth in the indenture governing the 2013 Senior Notes. In addition, at any time prior to December 15, 2016, we have to the option to redeem up to 35% of the aggregate principal amount of the 2013 Senior Notes at a redemption price equal to 105.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of certain equity offerings, provided that certain conditions are met. Subject to certain limitations, in the event of a change of control, as defined in the indenture governing the 2013 Senior Notes, the Borrower will be required to make an offer to purchase the 2013 Senior Notes at a price equal to 101% of the aggregate principal amount of the 2013 Senior Notes repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

The Borrower has the option to redeem all or a portion of the 2016 Senior Notes at any time on or after March 1, 2019 at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any. The Borrower may also redeem all or any portion of the 2016 Senior Notes at any time prior to March 1, 2019, at a price equal to 100% of the aggregate principal amount of the notes redeemed, plus an applicable "make-whole premium" calculated as set forth in the Indenture, and accrued and unpaid interest, if any, to the date of redemption. In addition, before March 1, 2019, the Borrower may redeem up to 40% of the aggregate principal amount of the 2016 Senior Notes with the net proceeds of certain equity offerings at the redemption price set forth in the Indenture, provided that certain conditions are met. Subject to certain limitations, in the event of a change of control, as defined in the Indenture, the Borrower will be required to make an offer to purchase the 2016 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.


- 16-



The indentures governing the 2013 Senior Notes and the 2016 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 with respect to the 2012 Term Loan and the 2012 ABL Revolver and the indentures governing the 2013 Senior Notes and the 2016 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 2013 Senior Notes and the 2016 Senior Notes. At September 30, 2016, we were in compliance with the covenants under our long-term indebtedness.

At September 30, 2016, we had an aggregate of $1.1 million of unamortized debt costs related to the 2012 ABL Revolver included in other long-term assets, and $22.3 million of unamortized debt costs included in long-term debt costs, the total of which is comprised of $5.0 million related to the 2013 Senior Notes, $5.1 million related to the 2016 Senior Notes, and $12.2 million related to the 2012 Term Loan.

At March 31, 2016, we had an aggregate of $1.3 million of unamortized debt costs related to the 2012 ABL Revolver included in other long-term assets, and $27.2 million of unamortized debts costs included in long-term debt costs, the total of which is comprised of $5.4 million related to the 2013 Senior Notes, $5.4 million related to the 2016 Senior Notes, and $16.4 million related to the 2012 Term Loan.

At September 30, 2016, we had $65.0 million outstanding on the 2012 ABL Revolver and a borrowing capacity of $68.2 million.

Long-term debt consists of the following, as of the dates indicated:
(In thousands, except percentages)
 
September 30,
2016
 
March 31,
2016
2016 Senior Notes bearing interest at 6.375%, with interest payable on March 1 and September 1 of each year. The 2016 Senior Notes mature on March 1, 2024.
 
$
350,000

 
$
350,000

2013 Senior Notes bearing interest at 5.375%, with interest payable on June 15 and December 15 of each year. The 2013 Senior Notes mature on December 15, 2021.
 
400,000

 
400,000

2012 Term B-3 Loans bearing interest at the Borrower's option at either a base rate with a floor of 1.75% plus applicable margin or LIBOR with a floor of 0.75% plus applicable margin, due on September 3, 2021.
 
687,000

 
817,500

2012 ABL Revolver bearing interest at the Borrower's option at either a base rate plus applicable margin or LIBOR plus applicable margin. Any unpaid balance is due on June 9, 2020.
 
65,000

 
85,000

Total long-term debt (including current portion)
 
1,502,000

 
1,652,500

Current portion of long-term debt
 

 

Long-term debt
 
1,502,000

 
1,652,500

Less: unamortized debt costs
 
(22,337
)
 
(27,191
)
Long-term debt, net
 
$
1,479,663

 
$
1,625,309


At September 30, 2016, aggregate future principal payments required in accordance with the terms of the 2012 Term Loan, 2012 ABL Revolver and the indentures governing the 2016 Senior Notes and the 2013 Senior Notes are as follows:
(In thousands)
 
 
Year Ending March 31,
 
Amount
2017 (remaining six months ending March 31, 2017)
$

2018

2019

2020

2021
65,000

Thereafter
1,437,000

 
$
1,502,000



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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 2016 Senior Notes, the 2013 Senior Notes, the Term B-3 Loans, and the 2012 ABL Revolver are measured in Level 2 of the above hierarchy (see summary below detailing the carrying amounts and estimated fair values of these borrowings at September 30, 2016 and March 31, 2016).

 
 
September 30, 2016
 
March 31, 2016
(In thousands)
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2016 Senior Notes
 
$
350,000

 
$
371,000

 
$
350,000

 
$
363,125

2013 Senior Notes
 
400,000

 
414,000

 
400,000

 
408,000

Term B-3 Loans
 
687,000

 
693,011

 
817,500

 
818,522

2012 ABL Revolver
 
65,000

 
65,000

 
85,000

 
85,000


At September 30, 2016 and March 31, 2016, we did not have any assets or liabilities measured in Level 1 or 3.

12.    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 outstanding stock having priority rights as to dividends.  No dividends have been declared or paid on the Company's common stock through September 30, 2016.

During each of the three months ended September 30, 2016 and 2015, we did not repurchase any shares of restricted common stock from our employees pursuant to the provisions of various employee restricted stock awards. During the six months ended September 30, 2016 and 2015, we repurchased 24,988 shares and 39,429 shares, respectively, of restricted common stock from our employees pursuant to the provisions of various employee restricted stock awards. The repurchases for the six months ended September 30, 2016 and 2015 were at an average price of $55.82 and $41.66, respectively. All of the repurchased shares have been recorded as treasury stock.

13.
Accumulated Other Comprehensive Loss

The table below presents accumulated other comprehensive loss (“AOCI”), which affects equity and results from recognized transactions and other economic events, other than transactions with owners in their capacity as owners.


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AOCI consisted of the following at September 30, 2016 and March 31, 2016:
 
September 30,
 
March 31,
(In thousands)
2016
 
2016
Components of Accumulated Other Comprehensive Loss
 
 
 
Cumulative translation adjustment
$
(26,646
)
 
$
(23,525
)
Accumulated other comprehensive loss, net of tax
$
(26,646
)
 
$
(23,525
)

14.
Earnings Per Share

Basic earnings per share is computed based on the weighted-average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on 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. In loss periods, the assumed exercise of in-the-money stock options and restricted stock units has an anti-dilutive 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 earnings per share:
 
 
Three Months Ended September 30,
 
Six Months Ended September 30,
(In thousands, except per share data)
 
2016
 
2015
 
2016
 
2015
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
32,195

 
$
31,803

 
$
26,664

 
$
57,976

 
 
 

 
 

 
 
 
 
Denominator
 
 

 
 

 
 
 
 
Denominator for basic earnings per share — weighted average shares outstanding
 
52,993

 
52,803

 
52,941

 
52,676

Dilutive effect of unvested restricted stock units and options issued to employees and directors
 
352

 
348

 
388

 
379

Denominator for diluted earnings per share
 
53,345

 
53,151

 
53,329

 
53,055

 
 
 

 
 

 
 
 
 
Earnings per Common Share:
 
 

 
 

 
 
 
 
Basic net earnings per share
 
$
0.61

 
$
0.60

 
$
0.50

 
$
1.10

 
 
 

 
 

 
 
 
 
Diluted net earnings per share
 
$
0.60

 
$
0.60

 
$
0.50

 
$
1.09


For each of the three months ended September 30, 2016 and 2015, there were 0.2 million shares attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For each of the six months ended September 30, 2016 and 2015, there were 0.2 million shares 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.
   
15.
Share-Based Compensation

In connection with our initial public offering, the Board of Directors adopted the 2005 Long-Term Equity Incentive Plan (the “Plan”), which provides for grants of up to a maximum of 5.0 million shares of restricted stock, stock options, restricted stock units and other equity-based awards. In June 2014, the Board of Directors approved, and in July 2014, the stockholders ratified, an increase of an additional 1.8 million shares of our common stock for issuance under the Plan, increased the maximum number of shares subject to stock options that may be awarded to any one participant under the Plan during any 12-month period from 1.0 million to 2.5 million shares, and extended the term of the 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, are eligible for grants under the Plan.

During the three and six months ended September 30, 2016, pre-tax share-based compensation costs charged against income were $2.0 million and $3.9 million, respectively, and the related income tax benefit recorded was $0.5 million and $1.2 million, respectively. During the three and six months ended September 30, 2015, pre-tax share-based compensation costs charged against

- 19-



income were $2.0 million and $5.0 million, respectively, and the related income tax benefit recorded was $0.7 million and $1.8 million, respectively.

At September 30, 2016, there were $12.4 million of unrecognized compensation costs related to nonvested share-based compensation arrangements under the Plan, based on management's estimate of the shares that will ultimately vest.  We expect to recognize such costs over a weighted-average period of 1.0 years.  The total fair value of options and restricted stock units vested during the six months ended September 30, 2016 and 2015 was $6.0 million and $6.5 million, respectively.  For the six months ended September 30, 2016 and 2015, we issued 92,718 and 153,603 shares of restricted stock units, respectively, and received cash from the exercise of stock options of $3.4 million and $6.4 million, respectively. Accordingly, we realized $1.7 million and $3.5 million, respectively, in tax benefits from the tax deductions resulting from these restricted stock issuances and stock option exercises. At September 30, 2016, there were 2.4 million shares available for issuance under the Plan.

On May 9, 2016, the Compensation Committee of our Board of Directors granted 49,064 shares of restricted stock units and stock options to acquire 224,843 shares of our common stock to certain executive officers and employees under the Plan. All of the shares of restricted stock units vest in their entirety on the three-year anniversary of the date of grant. Upon vesting, the units 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 $57.18 per share, which is equal to the closing price for our common stock on the date of the grant. Termination of employment prior to vesting will result in forfeiture of the unvested restricted common stock units and the unvested stock options. Vested stock options will remain exercisable by the employee after termination, subject to the terms of the Plan.
On September 12, 2016, we announced that Christine Sacco had been appointed as Chief Financial Officer of the Company, effective that same day. In connection with Ms. Sacco's appointment as Chief Financial Officer on September 12, 2016, the Company executed an offer letter with Ms. Sacco, which sets forth the terms of her compensation as approved by the Compensation Committee of the Board of Directors. In accordance with the terms of her offer letter, the Company granted Ms. Sacco 5,012 shares of restricted stock units and stock options to acquire 25,746 shares of our common stock under the Plan.The restricted stock units vest in their entirety on the three-year anniversary of the date of grant. Upon vesting, the units 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 $47.39 per share, which is equal to the closing price of our common stock on the date of grant.
Restricted Shares

Restricted shares granted to employees under the Plan generally vest in three to five years, primarily upon the attainment of certain time vesting thresholds, and may also be contingent on the attainment of certain performance goals of the Company, including revenue and earnings before income taxes, depreciation and amortization targets.  The restricted stock unit awards provide for accelerated vesting if there is a change of control, as defined in the Plan.  The restricted stock units granted to employees generally vest 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 restricted stock units, unless otherwise accelerated by the Compensation Committee. The restricted stock units granted to directors vest in their entirety one year after the date of grant so long as membership on the Board of Directors continues through the vesting date, and will be settled by delivery to the director of one share of common stock of the Company for each vested restricted stock unit promptly following the earliest of the director's (i) death, (ii) 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.

At our annual meeting date on August 2, 2016, each of our six independent members of the Board of Directors received a grant of 1,896 restricted stock units under the Plan. Additionally, on May 26, 2016 , the Compensation Committee granted 346 restricted stock units to a newly appointed Board member.

The fair value of the restricted stock units is determined using the closing price of our common stock on the date of the grant. The weighted-average grant-date fair value of restricted stock units granted during the six months ended September 30, 2016 and 2015 was $55.65 and $42.20, respectively.


- 20-



A summary of the Company's restricted stock units granted under the Plan is presented below:
 
 
 
Restricted Stock Units
 
 
Shares
(in thousands)
 
Weighted-
Average
Grant-Date
Fair Value
Six months ended September 30, 2015
 
 
 
 
Vested and nonvested at March 31, 2015
 
362.3

 
$
22.74

Granted
 
259.5

 
42.20

Vested and issued
 
(153.6
)
 
18.16

Forfeited
 
(1.4
)
 
33.50

Vested and nonvested at September 30, 2015
 
466.8

 
35.03

Vested at September 30, 2015
 
69.8

 
14.76

 
 
 

 
 

Six months ended September 30, 2016
 
 
 
 
Vested and nonvested at March 31, 2016
 
467.8

 
$
35.22

Granted
 
65.8

 
55.65

Vested and issued
 
(92.7
)
 
28.47

Forfeited
 
(91.0
)
 
41.69

Vested and nonvested at September 30, 2016
 
349.9

 
39.16

Vested at September 30, 2016
 
63.4

 
20.12


Options
The Plan provides 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 to five years.  The option awards provide for accelerated vesting in the event of a change in control, as defined in the Plan. 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 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.  

The weighted-average grant-date fair values of the options granted during the six months ended September 30, 2016 and 2015 were $21.87 and $17.10, respectively.
 
 
Six months ended September 30,
 
 
2016
 
2015
Expected volatility
 
37.8
%
 
40.2
%
Expected dividends
 
$

 
$

Expected term in years
 
6.0

 
6.0

Risk-free rate
 
1.7
%
 
1.7
%


- 21-



A summary of option activity under the Plan is as follows:
 
 
 
 
Options
 
 
 
Shares
(in thousands)
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Term (years)
 
Aggregate
Intrinsic
Value
(in thousands)
Six months ended September 30, 2015
 
 
 
 
 
 
 
 
Outstanding at March 31, 2015
 
871.2

 
$
23.40

 
 
 
 
Granted
 
200.1

 
41.80

 
 
 
 
Exercised
 
(336.9
)
 
18.99

 
 
 
 
Forfeited or expired
 
(2.1
)
 
38.16

 
 
 
 
Outstanding at September 30, 2015
 
732.3

 
30.42

 
8.1
 
$
10,816

Exercisable at September 30, 2015
 
319.5

 
21.91

 
7.0
 
$
7,430

 
 
 
 
 
 
 
 
 
Six months ended September 30, 2016
 
 

 
 

 
 
 
 

Outstanding at March 31, 2016
 
727.7

 
$
30.70

 
 
 
 
Granted
 
250.6

 
56.17

 
 
 
 
Exercised
 
(107.1
)
 
31.97

 
 
 
 
Forfeited or expired
 
(90.7
)
 
42.56

 
 
 
 
Outstanding at September 30, 2016
 
780.5

 
37.33

 
7.5
 
$
10,326

Exercisable at September 30, 2016
 
383.7

 
25.61

 
6.5
 
$
8,693


The aggregate intrinsic value of options exercised in the six months ended September 30, 2016 was $2.4 million.

16.
Income Taxes

Income taxes are recorded in our quarterly financial statements based on our estimated annual effective income tax rate, subject to adjustments for discrete events, should they occur.  The effective tax rates used in the calculation of income taxes were 35.9% and 35.4% for the three months ended September 30, 2016 and 2015, respectively. The effective rates used in the calculation of income taxes were 35.5% and 35.2% for the six months ended September 30, 2016 and 2015, respectively. The increase in the effective tax rate for the three and six months ended September 30, 2016 was primarily due to non-deductible goodwill associated with the sale of rights to use Comet in certain geographic areas. See Note 8 above for further information on the sale of rights to use Comet.

During the six months ended September 30, 2016, we realized a net reduction to our deferred tax liability of $27.5 million as a result of the sale of Pediacare, New Skin and Fiber Choice.

At September 30, 2016, a 100% owned subsidiary of the Company had a net operating loss carryforward of approximately $14.0 million ($5.0 million, tax effected), which may be used to offset future taxable income of the consolidated group and begins to expire in 2025. The Company expects to fully utilize the loss carryover before it expires.  The net operating loss carryforward is subject to an annual limitation as to usage under Internal Revenue Code Section 382 of approximately $33.6 million.

The balance in our uncertain tax liability was $4.1 million at September 30, 2016 and March 31, 2016. We recognize interest and penalties related to uncertain tax positions as a component of income tax expense.  We did not incur any material interest or penalties related to income taxes in any of the periods presented.


- 22-



17. Commitments and Contingencies

We are involved from time to time in legal matters and other claims incidental to our business.  We review outstanding claims and proceedings internally and with external counsel as necessary to assess the probability and amount of a potential loss.  These assessments are re-evaluated at each reporting period and as new information becomes available to determine 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 have a material adverse effect on our business, financial condition, or results of operations.

Lease Commitments
We have operating leases for office facilities and equipment in New York and other locations, which expire at various dates through fiscal 2022. These amounts have been included in the table below.

The following summarizes future minimum lease payments for our operating leases as of September 30, 2016:
(In thousands)
 
 
 
 
 
Year Ending March 31,
Facilities
 
Equipment
 
Total (a)
2017 (Remaining six months ending March 31, 2017)
$
1,048

 
$
76

 
$
1,124

2018
2,029

 
152

 
2,181

2019
2,023

 
152

 
2,175

2020
1,848

 
89

 
1,937

2021
903

 

 
903

Thereafter
59

 

 
59

 
$
7,910

 
$
469

 
$
8,379

(a) Minimum lease payments have not been reduced by minimum sublease rentals of $1.0 million due to us in the future
under noncancelable subleases.

The following schedule shows the composition of total minimum lease payments that have been reduced by minimum sublease rentals: 

(In thousands)
September 30,
2016
 
March 31, 2016
Minimum lease payments
$
8,379

 
$
8,434

Less: Sublease rentals
(1,036
)
 
(1,165
)
 
$
7,343

 
$
7,269


Rent expense for the three months ended September 30, 2016 and 2015 was $0.5 million and $0.4 million, respectively.
Rent expense for the six months ended September 30, 2016 and 2015 was $1.1 million and $0.8 million, respectively.

Purchase Commitments
Effective November 1, 2009, we entered into a ten year supply agreement for the exclusive manufacture of a portion of one of our Household Cleaning products.  Although we are committed under the supply agreement to pay the minimum amounts set forth in the table below, the total commitment is less than 10% of the estimated purchases that we expect to make during the course of the agreement.

- 23-



(In thousands)
 
Year Ending March 31,
Amount
2017 (Remaining six months ending March 31, 2017)
518

2018
1,013

2019
982

2020
559

2021

 
$
3,072


18.
Concentrations of Risk

Our revenues are concentrated in the areas of OTC Healthcare and Household Cleaning products.  We sell our products to mass merchandisers, food and drug stores, and convenience, dollar and club stores.  During the three and six months ended September 30, 2016, approximately 41.6% and 42.0%, respectively, of our total revenues were derived from our five top selling brands.  During the three and six months ended September 30, 2015, approximately 41.7% and 42.8%, respectively, of our total revenues were derived from our five top selling brands. Two customers, Walmart and Walgreens, accounted for more than 10% of our gross revenues for each of the periods presented. Walmart accounted for approximately 21.1% and 20.9%, respectively, of our gross revenues for the three and six months ended September 30, 2016. Walmart accounted for approximately 19.6% and 19.7%, respectively, of our gross revenues for the three and six months ended September 30, 2015. Walgreens accounted for approximately 10.7% and 10.5% of gross revenues for the three and six months ended September 30, 2016, respectively. Walgreens accounted for approximately 10.0% and 9.7% of gross revenues for the three and six months ended September 30, 2015, respectively. At September 30, 2016, approximately 23.5% and 10.6% of accounts receivable were owed by Walmart and Walgreens, respectively.

We manage product distribution in the continental United States through a third-party distribution center in St. Louis, Missouri.  A serious disruption, such as a flood or fire, to the main distribution center could damage our inventories and could materially impair our ability to distribute our products to customers in a timely manner or at a reasonable cost.  We could incur significantly higher costs and experience longer lead times associated with the distribution of our products to our customers during the time that it takes us to reopen or replace our distribution center.  As a result, any such disruption could have a material adverse effect on our business, sales and profitability.

At September 30, 2016, we had relationships with 116 third-party manufacturers.  Of those, we had long-term contracts with 49 manufacturers that produced items that accounted for approximately 78.8% of gross sales for the six months ended September 30, 2016. At September 30, 2015, we had relationships with 102 third-party manufacturers.  Of those, we had long-term contracts with 48 manufacturers that produced items that accounted for approximately 81.3% of gross sales for the six months ended September 30, 2015. 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 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.

19. Business Segments

Segment information has been prepared in accordance with the Segment Reporting topic of the FASB ASC 280. Our current reportable segments consist of (i) North American OTC Healthcare, (ii) International OTC Healthcare and (iii) Household Cleaning. 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 promotional expenses.

- 24-




The tables below summarize information about our reportable segments.
 
Three Months Ended September 30, 2016
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Gross segment revenues
$
172,590

 
$
18,802

 
$
23,768

 
$
215,160

Elimination of intersegment revenues
(143
)
 

 

 
(143
)
Third-party segment revenues
172,447

 
18,802

 
23,768

 
215,017

Other revenues

 
2

 
33

 
35

Total segment revenues
172,447

 
18,804

 
23,801

 
215,052

Cost of sales
65,402

 
7,096

 
18,589

 
91,087

Gross profit
107,045

 
11,708

 
5,212

 
123,965

Advertising and promotion
24,811

 
3,244

 
537

 
28,592

Contribution margin
$
82,234

 
$
8,464

 
$
4,675

 
95,373

Other operating expenses*
 

 
 
 
 

 
24,315

Operating income
 

 
 
 
 

 
71,058

Other expense
 

 
 
 
 

 
20,830

Income before income taxes
 
 
 
 
 
 
50,228

Provision for income taxes
 

 
 
 
 

 
18,033

Net income
 
 
 
 
 
 
$
32,195

*Other operating expenses for the three months ended September 30, 2016 includes a pre-tax loss on sale of assets of $0.7 million related to Pediacare, New Skin, and Fiber Choice and a pre-tax gain on sale of assets of $1.2 million associated with the sale of license rights in certain geographic areas pertaining to Comet. The assets and corresponding contribution margin associated with the pre-tax loss on sale of assets related to Pediacare, New Skin, and Fiber Choice are included within the North American OTC Healthcare segment, while the pre-tax gain on sale of license rights related to Comet are included in the Household Cleaning segment.
 
Six Months Ended September 30, 2016
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Gross segment revenues
$
345,891

 
$
34,602

 
$
44,658

 
$
425,151

Elimination of intersegment revenues
(1,364
)
 

 

 
(1,364
)
Third-party segment revenues
344,527

 
34,602

 
44,658

 
423,787

Other revenues

 
6

 
834

 
840

Total segment revenues
344,527

 
34,608

 
45,492

 
424,627

Cost of sales
129,636

 
14,044

 
35,391

 
179,071

Gross profit
214,891

 
20,564

 
10,101

 
245,556

Advertising and promotion
49,851

 
5,368

 
1,008

 
56,227

Contribution margin
$
165,040

 
$
15,196

 
$
9,093

 
189,329

Other operating expenses*
 

 
 
 
 

 
106,057

Operating income
 

 
 
 
 

 
83,272

Other expense
 

 
 
 
 

 
41,957

Income before income taxes
 
 
 
 
 
 
41,315

Provision for income taxes
 

 
 
 
 

 
14,651

Net income
 
 
 
 
 
 
$
26,664

*Other operating expenses for the six months ended September 30, 2016 includes a pre-tax loss on sale of assets of $56.2 million related to Pediacare, New Skin, and Fiber Choice and a pre-tax gain on sale of assets of $1.2 million associated with the sale of license rights in certain geographic areas pertaining to Comet. The assets and corresponding contribution margin associated with the pre-tax loss on sale of assets related to Pediacare, New Skin, and Fiber Choice are included within the North American OTC Healthcare segment, while the pre-tax gain on sale of license rights related to Comet are included in the Household Cleaning segment.



- 25-




 
Three Months Ended September 30, 2015
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Gross segment revenues**
$
166,886

 
$
15,954

 
$
23,894

 
$
206,734

Elimination of intersegment revenues
(1,472
)
 

 

 
(1,472
)
Third-party segment revenues
165,414

 
15,954

 
23,894

 
205,262

Other revenues**

 
6

 
797

 
803

Total segment revenues
165,414

 
15,960

 
24,691

 
206,065

Cost of sales**
61,497

 
6,094

 
18,534

 
86,125

Gross profit
103,917

 
9,866

 
6,157

 
119,940

Advertising and promotion
24,440

 
2,777

 
676

 
27,893

Contribution margin
$
79,477

 
$
7,089

 
$
5,481

 
92,047

Other operating expenses
 

 
 
 
 

 
22,149

Operating income
 

 
 
 
 

 
69,898

Other expense
 

 
 
 
 

 
20,667

Income before income taxes
 
 
 
 
 
 
49,231

Provision for income taxes
 

 
 
 
 

 
17,428

Net income
 
 
 
 
 
 
$
31,803


 
Six Months Ended September 30, 2015
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Gross segment revenues**
$
323,978

 
$
29,410

 
$
45,361

 
$
398,749

Elimination of intersegment revenues
(2,200
)
 

 

 
(2,200
)
Third-party segment revenues
321,778

 
29,410

 
45,361

 
396,549

Other revenues**
15

 
31

 
1,602

 
1,648

Total segment revenues
321,793

 
29,441

 
46,963

 
398,197

Cost of sales**
119,624

 
11,383

 
35,014

 
166,021

Gross profit
202,169

 
18,058

 
11,949

 
232,176

Advertising and promotion
47,635

 
5,500

 
1,180

 
54,315

Contribution margin
$
154,534

 
$
12,558

 
$
10,769

 
177,861

Other operating expenses
 

 
 
 
 

 
45,458

Operating income
 

 
 
 
 

 
132,403

Other expense
 

 
 
 
 

 
43,002

Income before income taxes
 
 
 
 
 
 
89,401

Provision for income taxes
 

 
 
 
 

 
31,425

Net income
 
 
 
 
 
 
$
57,976


**Certain immaterial amounts relating to gross segment revenues, other revenues and cost of sales for each of the three and six months ended September 30, 2015 were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.

- 26-



The tables below summarize information about our segment revenues from similar product groups.
 
Three Months Ended September 30, 2016
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Analgesics
$
29,993

 
$
544

 
$

 
$
30,537

Cough & Cold
21,106

 
5,160

 

 
26,266

Women's Health
33,268

 
635

 

 
33,903

Gastrointestinal
16,280

 
6,088

 

 
22,368

Eye & Ear Care
22,934

 
2,989

 

 
25,923

Dermatologicals
22,952

 
567

 

 
23,519

Oral Care
24,368

 
2,820

 

 
27,188

Other OTC
1,546

 
1

 

 
1,547

Household Cleaning

 

 
23,801

 
23,801

Total segment revenues
$
172,447

 
$
18,804

 
$
23,801

 
$
215,052


 
Six Months Ended September 30, 2016
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Analgesics
$
58,119

 
$
1,071

 
$

 
$
59,190

Cough & Cold
39,073

 
9,552

 

 
48,625

Women's Health
66,155

 
1,571

 

 
67,726

Gastrointestinal
35,386

 
10,344

 

 
45,730

Eye & Ear Care
48,941

 
5,785

 

 
54,726

Dermatologicals
45,650

 
1,238

 

 
46,888

Oral Care
48,179

 
5,037

 

 
53,216

Other OTC
3,024

 
10

 

 
3,034

Household Cleaning

 

 
45,492

 
45,492

Total segment revenues
$
344,527

 
$
34,608

 
$
45,492

 
$
424,627


 
Three Months Ended September 30, 2015
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Analgesics
$
29,694

 
$
688

 
$

 
$
30,382

Cough & Cold
24,456

 
4,746

 

 
29,202

Women's Health
33,607

 
804

 

 
34,411

Gastrointestinal
19,061

 
5,342

 

 
24,403

Eye & Ear Care
24,163

 
3,578

 

 
27,741

Dermatologicals
23,197

 
611

 

 
23,808

Oral Care
9,733

 
189

 

 
9,922

Other OTC
1,503

 
2

 

 
1,505

Household Cleaning

 

 
24,691

 
24,691

Total segment revenues
$
165,414

 
$
15,960

 
$
24,691

 
$
206,065



- 27-



 
Six Months Ended September 30, 2015
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Analgesics
$
56,542

 
$
1,218

 
$

 
$
57,760

Cough & Cold
44,215

 
9,252

 

 
53,467

Women's Health
66,515

 
1,504

 

 
68,019

Gastrointestinal
39,381

 
9,150

 

 
48,531

Eye & Ear Care
49,223

 
6,780

 

 
56,003

Dermatologicals
43,292

 
1,145

 

 
44,437

Oral Care
19,710

 
383

 

 
20,093

Other OTC
2,915

 
9

 

 
2,924

Household Cleaning

 

 
46,963

 
46,963

Total segment revenues
$
321,793

 
$
29,441

 
$
46,963

 
$
398,197


During the three months ended September 30, 2016 and 2015, approximately 85.8% of our total segment revenues were from customers in the United States. During the six months ended September 30, 2016 and 2015, approximately 86.7% and 86.5%, respectively, of our total segment revenues were from customers in the United States. Other than the United States, no individual geographical area accounted for more than 10% of net sales in any of the periods presented. During the three months ended September 30, 2016, our Canada and Australia sales accounted for approximately 5.4% and 5.9%, respectively, of our total segment revenues, while during the three months ended September 30, 2015, approximately 5.5% and 6.8%, respectively, of our total segment revenues were attributable to sales to Canada and Australia. During the six months ended September 30, 2016, our Canada and Australia sales accounted for approximately 5.1% and 5.5%, respectively, of our total segment revenues, while during the six months ended September 30, 2015, approximately 5.3% and 6.3%, respectively, of our total segment revenues were attributable to sales to Canada and Australia.
 
At September 30, 2016 and March 31, 2016, approximately 95.7% of our consolidated goodwill and intangible assets were located in the United States and approximately 4.3% were located in Australia and the United Kingdom. These consolidated goodwill and intangible assets have been allocated to the reportable segments as follows:
September 30, 2016
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Goodwill
$
322,945

 
$
22,472

 
$
6,245

 
$
351,662

 
 
 
 
 
 
 
 
Intangible assets
 
 
 
 
 
 
 

Indefinite-lived
1,755,636

 
85,520

 
101,262

 
1,942,418

Finite-lived
215,817

 
1,087

 
21,806

 
238,710

Intangible assets, net
1,971,453

 
86,607

 
123,068

 
2,181,128

Total
$
2,294,398

 
$
109,079

 
$
129,313

 
$
2,532,790


March 31, 2016
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Goodwill
$
330,615

 
$
22,776

 
$
6,800

 
$
360,191

 
 
 
 
 
 
 
 
Intangible assets
 
 
 
 
 
 
 

Indefinite-lived
1,823,873

 
85,901

 
110,272

 
2,020,046

Finite-lived
277,762

 
2,237

 
22,678

 
302,677

Intangible assets, net
2,101,635

 
88,138

 
132,950

 
2,322,723

Total
$
2,432,250

 
$
110,914

 
$
139,750

 
$
2,682,914



- 28-



20. Condensed Consolidating Financial Statements

As described in Note 10, Prestige Brands Holdings, Inc., together with certain of our 100% owned subsidiaries, has fully and unconditionally guaranteed, on a joint and several basis, the obligations of Prestige Brands, Inc. (a 100% owned subsidiary of the Company) set forth in the indentures governing the 2016 Senior Notes and the 2013 Senior Notes, including the obligation to pay principal and interest with respect to the 2016 Senior Notes and the 2013 Senior Notes. The 100% owned subsidiaries of the Company that have guaranteed the 2016 Senior Notes and the 2013 Senior Notes are as follows: Prestige Services Corp., Prestige Brands Holdings, Inc. (a Virginia corporation), Prestige Brands International, Inc., Medtech Holdings, Inc., Medtech Products Inc., The Cutex Company, The Spic and Span Company, Blacksmith Brands, Inc., Insight Pharmaceuticals Corporation, Insight Pharmaceuticals, LLC, Practical Health Products, Inc., and DenTek Holdings, Inc. (collectively, the "Subsidiary Guarantors"). A significant portion of our operating income and cash flow is generated by our subsidiaries. As a result, funds necessary to meet Prestige Brands, Inc.'s debt service obligations are provided in part by distributions or advances from our subsidiaries. Under certain circumstances, contractual and legal restrictions, as well as the financial condition and operating requirements of our subsidiaries, could limit Prestige Brands, Inc.'s ability to obtain cash from our subsidiaries for the purpose of meeting our debt service obligations, including the payment of principal and interest on the 2016 Senior Notes and the 2013 Senior Notes. Although holders of the 2016 Senior Notes and the 2013 Senior Notes will be direct creditors of the guarantors of the 2016 Senior Notes and the 2013 Senior Notes by virtue of the guarantees, we have indirect subsidiaries located primarily in the United Kingdom, the Netherlands and Australia (collectively, the "Non-Guarantor Subsidiaries") that have not guaranteed the 2016 Senior Notes or the 2013 Senior Notes, and such subsidiaries will not be obligated with respect to the 2016 Senior Notes or the 2013 Senior Notes. As a result, the claims of creditors of the Non-Guarantor Subsidiaries will effectively have priority with respect to the assets and earnings of such companies over the claims of the holders of the 2016 Senior Notes and the 2013 Senior Notes.

Presented below are supplemental Condensed Consolidating Balance Sheets as of September 30, 2016 and March 31, 2016, Condensed Consolidating Statements of Income and Comprehensive Income for the three and six months ended September 30, 2016 and 2015, and Condensed Consolidating Statements of Cash Flows for the six months ended September 30, 2016 and 2015. Such consolidating information includes separate columns for:

a)  Prestige Brands Holdings, Inc., the parent,
b)  Prestige Brands, Inc., the Issuer or the Borrower,
c)  Combined Subsidiary Guarantors,
d)  Combined Non-Guarantor Subsidiaries, and
e)  Elimination entries necessary to consolidate the Company and all of its subsidiaries.

The Condensed Consolidating Financial Statements are presented using the equity method of accounting for investments in our 100% owned subsidiaries. Under the equity method, the investments in subsidiaries are recorded at cost and adjusted for our share of the subsidiaries' cumulative results of operations, capital contributions, distributions and other equity changes. The elimination entries principally eliminate investments in subsidiaries and intercompany balances and transactions. The financial information in this note should be read in conjunction with the Consolidated Financial Statements presented and other notes related thereto contained in this Quarterly Report on Form 10-Q.

In the second quarter of fiscal 2017, the Company determined that it had incorrectly recorded certain intercompany transactions relating to the first quarter of fiscal 2017 in the condensed consolidating financial statements. This resulted in an overstatement of equity in earnings of subsidiaries for Prestige Brands, Inc. (the “Issuer”) of $44.6 million and a net understatement of equity in earnings of subsidiaries for the eliminations of $44.6 million for the three months ended June 30, 2016.This item also resulted in corresponding adjustments to the investments in subsidiaries on the condensed consolidating balance sheet as of June 30, 2016 and adjustments to net income (loss) and equity in income of subsidiaries in the condensed consolidating statement of cash flows, although net cash provided by (used in) operating activities for the three months ended June 30, 2016 remained unchanged. These errors had no impact to the Company's consolidated balance sheet, consolidated statement of income or consolidated statement of cash flows.

The Company assessed the materiality of these errors on the previously issued interim financial statements in accordance with SEC Staff Accounting Bulletin No. 99 and No. 108, and concluded that the errors were not material to the consolidated financial statements for the three months ended June 30, 2016. The Company appropriately reflected the intercompany transactions in the condensed consolidating financial statements for the six months ended September 30, 2016 and plans to revise the comparative presentation of the condensed consolidating financial statements for the period ended June 30, 2016 in future filings.


- 29-



Condensed Consolidating Statements of Income and Comprehensive Income
Three Months Ended September 30, 2016

(In thousands)
 
Prestige
Brands
Holdings,
Inc.
 
Prestige
Brands,
Inc.,
the issuer
 
Combined
Subsidiary
Guarantors
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$

 
$
26,013

 
$
171,791

 
$
17,358

 
$
(145
)
 
$
215,017

Other revenues
 

 
72

 
33

 
494

 
(564
)
 
35

        Total revenues
 

 
26,085

 
171,824

 
17,852

 
(709
)
 
215,052

 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation shown below)
 

 
11,066

 
74,380

 
6,478

 
(837
)
 
91,087

        Gross profit
 

 
15,019

 
97,444

 
11,374

 
128

 
123,965

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Advertising and promotion
 

 
3,751

 
21,619

 
3,222

 

 
28,592

General and administrative
 
1,801

 
1,762

 
13,302

 
1,930

 

 
18,795

Depreciation and amortization
 
832

 
151

 
4,917

 
116

 

 
6,016

(Gain) loss on sale of assets
 


 

 
(496
)
 

 

 
(496
)
        Total operating expenses
 
2,633

 
5,664

 
39,342

 
5,268

 

 
52,907

        Operating income (loss)
 
(2,633
)
 
9,355

 
58,102

 
6,106

 
128

 
71,058

 
 
 
 
 
 
 
 
 
 
 
 
 
Other (income) expense
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
(12,077
)
 
(21,459
)
 
(1,292
)
 
(156
)
 
34,938

 
(46
)
Interest expense
 
8,502

 
20,882

 
25,138

 
1,292

 
(34,938
)
 
20,876

Equity in (income) loss of subsidiaries
 
(32,028
)
 
(27,020
)
 
(3,601
)
 

 
62,649

 

        Total other expense (income)
 
(35,603
)
 
(27,597
)
 
20,245

 
1,136

 
62,649

 
20,830

Income (loss) before income taxes
 
32,970

 
36,952

 
37,857

 
4,970

 
(62,521
)
 
50,228

Provision for income taxes
 
775

 
3,526

 
12,363

 
1,369

 

 
18,033

Net income (loss)
 
$
32,195

 
$
33,426

 
$
25,494

 
$
3,601

 
$
(62,521
)
 
$
32,195

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustments
 
2,703

 
2,703

 
2,703

 
2,703

 
(8,109
)
 
2,703

Total other comprehensive (loss) income
 
2,703

 
2,703

 
2,703

 
2,703

 
(8,109
)
 
2,703

Comprehensive (loss) income
 
$
34,898

 
$
36,129

 
$
28,197

 
$
6,304

 
$
(70,630
)
 
$
34,898



- 30-



Condensed Consolidating Statements of Income and Comprehensive Income
Six Months Ended September 30, 2016

(In thousands)
 
Prestige
Brands
Holdings,
Inc.
 
Prestige
Brands,
Inc.,
the issuer
 
Combined
Subsidiary
Guarantors
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$

 
$
53,972

 
$
339,996

 
$
31,184

 
$
(1,365
)
 
$
423,787

Other revenues
 

 
147

 
834

 
980

 
(1,121
)
 
840

        Total revenues
 

 
54,119

 
340,830

 
32,164

 
(2,486
)
 
424,627

 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation shown below)
 

 
23,152

 
145,842

 
12,478

 
(2,401
)
 
179,071

        Gross profit
 

 
30,967

 
194,988

 
19,686

 
(85
)
 
245,556

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Advertising and promotion
 

 
8,496

 
42,423

 
5,308

 

 
56,227

General and administrative
 
3,738

 
3,950

 
27,616

 
2,948

 

 
38,252

Depreciation and amortization
 
1,752

 
302

 
10,550

 
244

 

 
12,848

Loss on sale of assets
 


 

 
54,957

 

 

 
54,957

        Total operating expenses
 
5,490

 
12,748

 
135,546

 
8,500

 

 
162,284

        Operating income (loss)
 
(5,490
)
 
18,219

 
59,442

 
11,186

 
(85
)
 
83,272

 
 
 
 
 
 
 
 
 
 
 
 
 
Other (income) expense
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
(24,044
)
 
(42,721
)
 
(2,566
)
 
(315
)
 
69,543

 
(103
)
Interest expense
 
16,942

 
42,056

 
50,039

 
2,566

 
(69,543
)
 
42,060

Equity in (income) loss of subsidiaries
 
(26,290
)
 
(13,761
)
 
(6,677
)
 

 
46,728

 

        Total other expense (income)
 
(33,392
)
 
(14,426
)
 
40,796

 
2,251

 
46,728

 
41,957

 Income (loss) before income taxes
 
27,902

 
32,645

 
18,646

 
8,935

 
(46,813
)
 
41,315

Provision for income taxes
 
1,238

 
6,704

 
4,451

 
2,258

 

 
14,651

Net income (loss)
 
$
26,664

 
$
25,941

 
$
14,195

 
$
6,677

 
$
(46,813
)
 
$
26,664

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustments
 
(3,121
)
 
(3,121
)
 
(3,121
)
 
(3,121
)
 
9,363

 
(3,121
)
Total other comprehensive (loss) income
 
(3,121
)
 
(3,121
)
 
(3,121
)
 
(3,121
)
 
9,363

 
(3,121
)
Comprehensive (loss) income
 
$
23,543

 
$
22,820

 
$
11,074

 
$
3,556

 
$
(37,450
)
 
$
23,543

























- 31-



Condensed Consolidating Statements of Income and Comprehensive Income
Three Months Ended September 30, 2015

(In thousands)
 
Prestige
Brands
Holdings,
Inc.
 
Prestige
Brands,
Inc.,
the issuer
 
Combined
Subsidiary
Guarantors
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$

 
$
27,957

 
$
164,772

 
$
14,005

 
$
(1,472
)
 
$
205,262

Other revenues
 

 
79

 
798

 
543

 
(617
)
 
803

        Total revenues
 

 
28,036

 
165,570

 
14,548

 
(2,089
)
 
206,065

 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation shown below)
 

 
10,868

 
72,120

 
4,952

 
(1,815
)
 
86,125

        Gross profit
 

 
17,168

 
93,450

 
9,596

 
(274
)
 
119,940

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Advertising and promotion
 

 
3,204

 
21,933

 
2,756

 

 
27,893

General and administrative
 
1,199

 
1,300

 
12,912

 
1,051

 

 
16,462

Depreciation and amortization
 
1,030

 
147

 
4,447

 
63

 

 
5,687

        Total operating expenses
 
2,229

 
4,651

 
39,292

 
3,870

 

 
50,042

        Operating income (loss)
 
(2,229
)
 
12,517

 
54,158

 
5,726

 
(274
)
 
69,898

 
 
 
 
 
 
 
 
 
 
 
 
 
Other (income) expense
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
(12,161
)
 
(21,607
)
 
(1,169
)
 
(126
)
 
35,030

 
(33
)
Interest expense
 
8,964

 
20,303

 
25,294

 
1,169

 
(35,030
)
 
20,700

Equity in (income) loss of subsidiaries
 
(31,441
)
 
(19,746
)
 
(3,385
)
 

 
54,572

 

        Total other (income) expense
 
(34,638
)
 
(21,050
)
 
20,740

 
1,043

 
54,572

 
20,667

Income (loss) before income taxes
 
32,409

 
33,567

 
33,418

 
4,683

 
(54,846
)
 
49,231

Provision for income taxes
 
606

 
4,892

 
10,632

 
1,298

 

 
17,428

Net income (loss)
 
$
31,803

 
$
28,675

 
$
22,786

 
$
3,385

 
$
(54,846
)
 
$
31,803

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustments
 
(11,079
)
 
(11,079
)
 
(11,079
)
 
(11,079
)
 
33,237

 
(11,079
)
Total other comprehensive (loss) income
 
(11,079
)
 
(11,079
)
 
(11,079
)
 
(11,079
)
 
33,237

 
(11,079
)
Comprehensive income (loss)
 
$
20,724

 
$
17,596

 
$
11,707

 
$
(7,694
)
 
$
(21,609
)
 
$
20,724


























- 32-



Condensed Consolidating Statements of Income and Comprehensive Income
Six Months Ended September 30, 2015

(In thousands)
 
Prestige
Brands
Holdings,
Inc.
 
Prestige
Brands,
Inc.,
the issuer
 
Combined
Subsidiary
Guarantors
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
 
$

 
$
55,840

 
$
317,296

 
$
25,613

 
$
(2,200
)
 
$
396,549

Other revenues
 

 
175

 
1,617

 
1,041

 
(1,185
)
 
1,648

        Total revenues
 

 
56,015

 
318,913

 
26,654

 
(3,385
)
 
398,197

 
 
 
 
 
 
 
 
 
 
 
 
 
Cost of Sales
 
 
 
 
 
 
 
 
 
 
 
 
Cost of sales (exclusive of depreciation shown below)
 

 
21,309

 
138,498

 
9,360

 
(3,146
)
 
166,021

        Gross profit
 

 
34,706

 
180,415

 
17,294

 
(239
)
 
232,176

 
 
 
 
 
 
 
 
 
 
 
 
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Advertising and promotion
 

 
5,721

 
43,161

 
5,433

 

 
54,315

General and administrative
 
2,514

 
3,855

 
24,863

 
2,819

 

 
34,051

Depreciation and amortization
 
2,019

 
293

 
8,892

 
203

 

 
11,407

        Total operating expenses
 
4,533

 
9,869

 
76,916

 
8,455

 

 
99,773

        Operating income (loss)
 
(4,533
)
 
24,837

 
103,499

 
8,839

 
(239
)
 
132,403

 
 
 
 
 
 
 
 
 
 
 
 
 
Other (income) expense
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
(24,210
)
 
(43,015
)
 
(2,389
)
 
(238
)
 
69,792

 
(60
)
Interest expense
 
17,454

 
42,211

 
50,349

 
2,389

 
(69,792
)
 
42,611

Loss on extinguishment of debt
 

 
451

 

 

 

 
451

Equity in (income) loss of subsidiaries
 
(56,747
)
 
(36,701
)
 
(4,835
)
 

 
98,283

 

        Total other (income) expense
 
(63,503
)
 
(37,054
)
 
43,125

 
2,151

 
98,283

 
43,002

Income (loss) before income taxes
 
58,970

 
61,891

 
60,374

 
6,688

 
(98,522
)
 
89,401

Provision for income taxes
 
994

 
8,917

 
19,661

 
1,853

 

 
31,425

Net income (loss)
 
$
57,976

 
$
52,974

 
$
40,713

 
$
4,835

 
$
(98,522
)
 
$
57,976

 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustments
 
(11,484
)
 
(11,484
)
 
(11,484
)
 
(11,484
)
 
34,452

 
(11,484
)
Total other comprehensive (loss) income
 
(11,484
)
 
(11,484
)
 
(11,484
)
 
(11,484
)
 
34,452

 
(11,484
)
Comprehensive income (loss)
 
$
46,492

 
$
41,490

 
$
29,229

 
$
(6,649
)
 
$
(64,070
)
 
$
46,492



- 33-



Condensed Consolidating Balance Sheet
September 30, 2016

 
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
Prestige
Brands
Holdings,
Inc.
 
Prestige
Brands,
Inc.,
the issuer
 
Combined
Subsidiary
Guarantors
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
8,168

 
$

 
$
292

 
$
21,998

 
$

 
$
30,458

Accounts receivable, net
 

 
11,677

 
67,356

 
13,836

 

 
92,869

Inventories
 

 
12,910

 
75,088

 
10,578

 
(617
)
 
97,959

Deferred income tax assets
 
297

 
807

 
8,652

 
890

 

 
10,646

Prepaid expenses and other current assets
 
2,189

 
546

 
7,926

 
680

 

 
11,341

Assets held for sale
 

 

 
36,400

 

 

 
36,400

Total current assets
 
10,654

 
25,940

 
195,714

 
47,982

 
(617
)
 
279,673

 
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
7,963

 
314

 
4,889

 
566

 

 
13,732

Goodwill
 

 
66,007

 
263,183

 
22,472

 

 
351,662

Intangible assets, net
 

 
191,521

 
1,901,899

 
87,708

 

 
2,181,128

Other long-term assets
 
2,500

 
2,283

 

 

 

 
4,783

Intercompany receivables
 
1,478,481

 
2,573,184

 
1,461,115

 
12,506

 
(5,525,286
)
 

Investment in subsidiary
 
1,665,764

 
1,538,358

 
83,983

 

 
(3,288,105
)
 

Total Assets
 
$
3,165,362

 
$
4,397,607

 
$
3,910,783

 
$
171,234

 
$
(8,814,008
)
 
$
2,830,978

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
2,643

 
$
9,422

 
$
24,097

 
$
2,879

 
$

 
$
39,041

Accrued interest payable
 

 
8,264

 

 

 

 
8,264

Other accrued liabilities
 
11,731

 
1,841

 
47,137

 
6,297

 

 
67,006

Total current liabilities
 
14,374

 
19,527

 
71,234

 
9,176

 

 
114,311

 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
 
 
 
 
 
 
 
Principal amount
 

 
1,502,000

 

 

 

 
1,502,000

Less unamortized debt costs
 

 
(22,337
)
 

 

 

 
(22,337
)
Long-term debt, net
 

 
1,479,663

 

 

 

 
1,479,663

 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred income tax liabilities
 

 
61,046

 
398,108

 
373

 

 
459,527

Other long-term liabilities
 


 

 
2,682

 
155

 

 
2,837

Intercompany payables
 
2,376,348

 
1,246,668

 
1,821,773

 
80,497

 
(5,525,286
)
 

Total Liabilities
 
2,390,722

 
2,806,904

 
2,293,797

 
90,201

 
(5,525,286
)
 
2,056,338

 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
532

 

 

 

 

 
532

Additional paid-in capital
 
453,336

 
1,280,947

 
1,359,921

 
78,774

 
(2,719,642
)
 
453,336

Treasury stock, at cost
 
(6,558
)
 

 

 

 

 
(6,558
)
Accumulated other comprehensive (loss) income, net of tax
 
(26,646
)
 
(26,646
)
 
(26,646
)
 
(26,646
)
 
79,938

 
(26,646
)
Retained earnings (accumulated deficit)
 
353,976

 
336,402

 
283,711

 
28,905

 
(649,018
)
 
353,976

Total Stockholders' Equity
 
774,640

 
1,590,703

 
1,616,986

 
81,033

 
(3,288,722
)
 
774,640

Total Liabilities and Stockholders' Equity
 
$
3,165,362

 
$
4,397,607

 
$
3,910,783

 
$
171,234

 
$
(8,814,008
)
 
$
2,830,978



- 34-



Condensed Consolidating Balance Sheet
March 31, 2016

(In thousands)
 
Prestige
Brands
Holdings,
Inc.
 
Prestige
Brands,
Inc.,
the issuer
 
Combined
Subsidiary
Guarantors
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
 
 
 
Current assets
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
4,440

 
$

 
$
2,899

 
$
19,891

 
$

 
$
27,230

Accounts receivable, net
 

 
12,025

 
74,446

 
8,776

 

 
95,247

Inventories
 

 
9,411

 
72,296

 
10,088

 
(532
)
 
91,263

Deferred income tax assets
 
316

 
681

 
8,293

 
818

 

 
10,108

Prepaid expenses and other current assets
 
15,311

 
257

 
8,379

 
1,218

 

 
25,165

Total current assets
 
20,067

 
22,374

 
166,313

 
40,791

 
(532
)
 
249,013

 
 
 
 
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
9,166

 
210

 
5,528

 
636

 

 
15,540

Goodwill
 

 
66,007

 
271,409

 
22,775

 

 
360,191

Intangible assets, net
 

 
191,789

 
2,042,640

 
88,294

 

 
2,322,723

Other long-term assets
 

 
1,324

 

 

 

 
1,324

Intercompany receivables
 
1,457,011

 
2,703,192

 
1,083,488

 
10,738

 
(5,254,429
)
 

Investment in subsidiary
 
1,641,477

 
1,527,718

 
81,545

 

 
(3,250,740
)
 

Total Assets
 
$
3,127,721

 
$
4,512,614

 
$
3,650,923

 
$
163,234

 
$
(8,505,701
)
 
$
2,948,791

 
 
 
 
 
 
 
 
 
 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities
 
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
 
$
2,914

 
$
7,643

 
$
24,437

 
$
3,302

 
$

 
$
38,296

Accrued interest payable
 

 
8,664

 

 

 

 
8,664

Other accrued liabilities
 
12,285

 
1,714

 
38,734

 
6,991

 

 
59,724

Total current liabilities
 
15,199

 
18,021

 
63,171

 
10,293

 

 
106,684

 
 
 
 
 
 
 
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
 
 
 
 
 
 
 
Principal amount
 

 
1,652,500

 

 

 

 
1,652,500

Less unamortized debt costs
 

 
(27,191
)
 

 

 

 
(27,191
)
Long-term debt, net
 

 
1,625,309

 

 

 

 
1,625,309

 
 
 
 
 
 
 
 
 
 
 
 
 
Deferred income tax liabilities
 

 
60,317

 
408,893

 
412

 

 
469,622

Other long-term liabilities
 

 

 
2,682

 
158

 

 
2,840

Intercompany payables
 
2,368,186

 
1,241,084

 
1,570,265

 
74,894

 
(5,254,429
)
 

Total Liabilities
 
2,383,385

 
2,944,731

 
2,045,011

 
85,757

 
(5,254,429
)
 
2,204,455

 
 
 
 
 
 
 
 
 
 
 
 
 
Stockholders' Equity
 
 
 
 
 
 
 
 
 
 
 
 
Common stock
 
530

 

 

 

 

 
530

Additional paid-in capital
 
445,182

 
1,280,947

 
1,359,921

 
78,774

 
(2,719,642
)
 
445,182

Treasury stock, at cost
 
(5,163
)
 

 

 

 

 
(5,163
)
Accumulated other comprehensive income (loss), net of tax
 
(23,525
)
 
(23,525
)
 
(23,525
)
 
(23,525
)
 
70,575

 
(23,525
)
Retained earnings (accumulated deficit)
 
327,312

 
310,461

 
269,516

 
22,228

 
(602,205
)
 
327,312

Total Stockholders' Equity
 
744,336

 
1,567,883

 
1,605,912

 
77,477

 
(3,251,272
)
 
744,336

Total Liabilities and Stockholders' Equity
 
$
3,127,721

 
$
4,512,614

 
$
3,650,923

 
$
163,234

 
$
(8,505,701
)
 
$
2,948,791



- 35-



Condensed Consolidating Statement of Cash Flows
Six Months Ended September 30, 2016


(In thousands)
 
Prestige
Brands
Holdings,
Inc.
 
Prestige
Brands,
Inc.,
the issuer
 
Combined
Subsidiary
Guarantors
 
Combined
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
26,664

 
$
25,941

 
$
14,195

 
$
6,677

 
$
(46,813
)
 
$
26,664

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
1,752

 
302

 
10,550

 
244

 

 
12,848

Loss on sales of intangible assets and property and equipment
 


 

 
55,112

 

 

 
55,112

Deferred income taxes
 
19

 
603

 
(11,144
)
 
(80
)
 

 
(10,602
)
Amortization of debt origination costs
 

 
5,097

 

 

 

 
5,097

Stock-based compensation costs
 
3,933

 

 

 

 

 
3,933

Equity in income of subsidiaries
 
(26,290
)
 
(13,761
)
 
(6,677
)
 

 
46,728

 

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 

 
348

 
7,090

 
(7,082
)
 

 
356

Inventories
 

 
(3,499
)
 
(6,596
)
 
(653
)
 
85

 
(10,663
)
Prepaid expenses and other current assets
 
10,622

 
(289
)
 
(735
)
 
514

 

 
10,112

Accounts payable
 
(297
)
 
1,779

 
(164
)
 
(498
)
 

 
820

Accrued liabilities
 
(554
)
 
(273
)
 
8,284

 
(852
)
 

 
6,605

Net cash provided by (used in) operating activities
 
15,849

 
16,248

 
69,915

 
(1,730
)
 

 
100,282

 
 
 
 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
 
(395
)
 
(138
)
 
(785
)
 
(86
)
 

 
(1,404
)
Proceeds from sales of intangible assets
 

 

 
52,353

 

 

 
52,353

Proceeds from the sale of property and equipment
 

 

 
75

 

 

 
75

Net cash provided by (used in) investing activities
 
(395
)
 
(138
)
 
51,643

 
(86
)
 


51,024

 
 
 
 
 
 
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
 
Term loan repayments
 

 
(130,500
)
 

 

 

 
(130,500
)
Borrowings under revolving credit agreement
 

 
20,000

 

 

 

 
20,000

Repayments under revolving credit agreement
 

 
(40,000
)
 

 

 

 
(40,000
)
Payments of debt origination costs
 

 
(9
)
 

 

 

 
(9
)
Proceeds from exercise of stock options
 
3,423

 

 

 

 

 
3,423

Excess tax benefits from share-based awards
 
800

 

 

 

 

 
800

Fair value of shares surrendered as payment of tax withholding
 
(1,395
)
 

 

 

 

 
(1,395
)
Intercompany activity, net
 
(14,554
)
 
134,399

 
(124,165
)
 
4,320

 

 

Net cash (used in) provided by financing activities
 
(11,726
)
 
(16,110
)
 
(124,165
)
 
4,320

 

 
(147,681
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 

 

 

 
(397
)
 

 
(397
)
Increase (decrease) in cash and cash equivalents
 
3,728

 

 
(2,607
)
 
2,107

 

 
3,228

Cash and cash equivalents - beginning of period
 
4,440

 

 
2,899

 
19,891

 

 
27,230

Cash and cash equivalents - end of period
 
$
8,168

 
$

 
$
292

 
$
21,998

 
$

 
$
30,458




- 36-



Condensed Consolidating Statement of Cash Flows
Six Months Ended September 30, 2015

(In thousands)
 
Prestige Brands Holdings, Inc.
 
Prestige
Brands,
Inc.,
the issuer
 
Combined Subsidiary Guarantors
 
Combined Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Operating Activities
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
 
$
57,976

 
$
52,974

 
$
40,713

 
$
4,835

 
$
(98,522
)
 
$
57,976

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
 
2,019

 
293

 
8,892

 
203

 

 
11,407

Gain on sale of property and equipment
 

 

 

 
(36
)
 

 
(36
)
Deferred income taxes
 
171

 
254

 
21,506

 
54

 

 
21,985

Amortization of debt origination costs
 

 
4,055

 

 

 

 
4,055

Stock-based compensation costs
 
4,993

 

 

 
41

 

 
5,034

Loss on extinguishment of debt
 

 
451

 

 

 

 
451

Equity in income of subsidiaries
 
(56,747
)
 
(36,701
)
 
(4,835
)
 

 
98,283

 

Changes in operating assets and liabilities, net of effects from acquisitions:
 
 
 
 
 
 
 
 
 
 
 
 
Accounts receivable
 

 
1,729

 
(3,550
)
 
(2,097
)
 

 
(3,918
)
Inventories
 

 
(1,017
)
 
(2,177
)
 
(883
)
 
239

 
(3,838
)
Prepaid expenses and other current assets
 
3,166

 
(402
)
 
660

 
12

 

 
3,436

Accounts payable
 
269

 
624

 
(3,343
)
 
(2,069
)
 

 
(4,519
)
Accrued liabilities
 
(2,503
)
 
(1,094
)
 
1,012

 
1,142

 

 
(1,443
)
Net cash provided by operating activities
 
9,344

 
21,166

 
58,878

 
1,202

 

 
90,590

 
 
 
 
 
 
 
 
 
 
 
 
 
Investing Activities
 
 
 
 
 
 
 
 
 
 
 
 
Purchases of property and equipment
 
(1,107
)
 
(93
)
 
(103
)
 
(380
)
 

 
(1,683
)
Proceeds from the sale of property and equipment
 

 

 

 
344

 

 
344

Net cash used in investing activities
 
(1,107
)
 
(93
)
 
(103
)
 
(36
)
 

 
(1,339
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Financing Activities
 
 
 
 
 
 
 
 
 
 
 
 
Term loan repayments
 

 
(50,000
)
 

 

 

 
(50,000
)
Borrowings under revolving credit agreement
 

 
15,000

 

 

 

 
15,000

Repayments under revolving credit agreement
 

 
(55,000
)
 

 

 

 
(55,000
)
Payments of debt origination costs
 

 
(4,211
)
 

 

 

 
(4,211
)
Proceeds from exercise of stock options
 
6,398

 

 

 

 

 
6,398

Proceeds from restricted stock exercises
 
544

 

 

 

 

 
544

Excess tax benefits from share-based awards
 
1,850

 

 

 

 

 
1,850

Fair value of shares surrendered as payment of tax withholding
 
(2,187
)
 

 

 

 

 
(2,187
)
Intercompany activity, net
 
(15,675
)
 
73,138

 
(58,775
)
 
1,312

 

 

Net cash (used in) provided by financing activities
 
(9,070
)
 
(21,073
)
 
(58,775
)
 
1,312

 

 
(87,606
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
 

 

 

 
(811
)
 

 
(811
)
Increase (decrease) in cash and cash equivalents
 
(833
)
 

 

 
1,667

 

 
834

Cash and cash equivalents - beginning of period
 
11,387

 

 

 
9,931

 

 
21,318

Cash and cash equivalents - end of period
 
$
10,554

 
$

 
$

 
$
11,598

 
$

 
$
22,152



- 37-



ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of our financial condition and results of operations should be read together with the Consolidated Financial Statements and the related notes included in this Quarterly Report on Form 10-Q, as well as our Annual Report on Form 10-K for the fiscal year ended March 31, 2016.  This discussion and analysis may contain forward-looking statements that involve certain risks, assumptions and uncertainties.  Future results could differ materially from the discussion that follows for many reasons, including the factors described in Part I, Item 1A., “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016, as well as those described in Part II, Item 1A, "Risk Factors" in this Quarterly Report on Form 10-Q and in future reports filed with the Securities and Exchange Commission (the "SEC").
See also “Cautionary Statement Regarding Forward-Looking Statements” on page 62 of this Quarterly Report on Form 10-Q.

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

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

Acquisitions

Acquisition of DenTek
On February 5, 2016, we completed the acquisition of DenTek Holdings, Inc. ("DenTek"), a privately-held marketer and distributor of specialty oral care products. The closing was finalized pursuant to the terms of the merger agreement, announced November 23, 2015, under which we agreed to acquire DenTek from its stockholders for a purchase price of $228.3 million. The acquisition expands our portfolio of brands, strengthens our existing oral care platform and increases our geographic reach in parts of Europe. We financed the transaction with a combination of available cash on hand, available cash from our Asset Based Loan revolver, and financing of an additional unsecured bridge loan. The DenTek brands are primarily included in our North American and International OTC Healthcare segments.

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

We prepared an analysis of the fair values of the assets acquired and liabilities assumed as of the date of acquisition. The following table summarizes our preliminary allocation of the assets acquired and liabilities assumed as of the February 5, 2016 acquisition date.


- 38-



(In thousands)
February 5, 2016
 
 
Cash acquired
$
1,359

Accounts receivable
9,187

Inventories
14,304

Deferred income taxes
3,303

Prepaids and other current assets
6,728

Property, plant and equipment, net
3,555

Goodwill
76,529

Intangible assets, net
206,700

Total assets acquired
321,665

 
 
Accounts payable
3,261

Accrued expenses
16,488

Deferred income tax liabilities - long term
73,573

Total liabilities assumed
93,322

Total purchase price
$
228,343


Based on this preliminary analysis, we allocated $179.8 million to non-amortizable intangible assets and $26.9 million to amortizable intangible assets. We are amortizing the purchased amortizable intangible assets on a straight-line basis over an estimated weighted average useful life of 18.5 years. The weighted average remaining life for amortizable intangible assets at September 30, 2016 was 18.0 years.

We also recorded goodwill of $76.5 million based on the amount by which the purchase price exceeded the fair value of the net assets acquired. Goodwill is not deductible for income tax purposes.

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

Divestitures
Late in the first quarter of fiscal 2017, the Company was approached and discussed the potential to sell certain assets. Prior to these discussions, the Company did not contemplate any divestitures, and the Company did not commit to any course of action to divest any of the assets until entering into an agreement on June 29, 2016 to sell Pediacare, New Skin and Fiber Choice, which were reported under the North American OTC Healthcare segment in the Cough & Cold, Dermatologicals and Gastrointestinal product groups, respectively.

On July 7, 2016, we completed the sale of the Pediacare, New Skin and Fiber Choice brands for $40.0 million plus the cost of inventory. As a result, we received approximately $40.1 million including the cost of preliminary inventory of $2.6 million, less certain immaterial holdbacks, which will be paid upon meeting certain criteria as defined in the agreement and within approximately 18 months following the closing date of the transaction. During the six months ended September 30, 2016, we recorded a preliminary pre-tax loss on sale of $56.2 million. The proceeds were used to repay debt and related income taxes due on the disposition.

The following table sets forth the components of the assets sold and the pre-tax loss recognized on the sale.


- 39-



(In thousands)
July 7,
2016
Components of assets sold:
 
Inventory
$
2,380

Intangible assets, net
91,208

Goodwill
2,920

Assets sold
96,508

Total purchase price to be received
42,380

 
54,128

Costs to sell
2,018

Pre-tax loss on sale
$
56,146


Concurrent with the completion of the sale of these brands, we entered into a transitional services agreement with the buyer, whereby we agreed to provide the buyer with various services, including marketing, operations, finance and other services, from the date of the acquisition through January 7, 2017. We also entered into an option agreement with the buyer to purchase Dermoplast at a specified earnings multiple as defined in the agreement. The buyer paid a $1.25 million deposit in September 2016, and has recently notified us of their election to exercise the option. We currently expect that this transaction will be completed by March 31, 2017, although the buyer has until December 31, 2017 to complete the transaction. Accordingly, the Dermoplast transaction is not included in the table above and the $1.25 million option deposit is included in our other accrued liabilities at September 30, 2016. The inventory and other assets related to Dermoplast are included as assets held for sale as of September 30, 2016.

Sale of license rights
Historically, we received royalty income from the licensing of the names of certain of our brands in geographic areas or markets in which we do not directly compete. We have had royalty agreements for our Comet brand for several years, which included options on behalf of the licensee to purchase license rights in certain geographic areas and markets in perpetuity. In December 2014, we amended these agreements and we sold rights to use of the Comet brand in certain Eastern European countries to a third-party licensee in exchange for $10.0 million as a partial early buyout. The amended agreement provided that we would continue to receive royalty payments of $1.0 million per quarter for the remaining geographic areas and also granted the licensee an option to acquire the license rights in the remaining geographic areas anytime after June 30, 2016. In July 2016, the licensee elected to exercise its option. In August 2016, we received $11.0 million for the purchase of the remaining license rights and, as a result, we recorded a pre-tax gain of $1.2 million and reduced our indefinite-lived trademarks by $9.0 million. Furthermore, the licensee is no longer required to make additional royalty payments to us, and as a result, our future royalty income will be reduced accordingly.


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Results of Operations

Three Months Ended September 30, 2016 compared to the Three Months Ended September 30, 2015

Total Segment Revenues

The following table represents total revenue by segment, including product groups, for the three months ended September 30, 2016 and 2015.
 
Three Months Ended September 30,
 
 
 
 
 
Increase (Decrease)
(In thousands)
2016
%
2015*
%
Amount
%
North American OTC Healthcare
 
 
 
 
 
Analgesics
$
29,993

13.9
$
29,694

14.4
$
299

1.0

Cough & Cold
21,106

9.8
24,456

11.9
(3,350
)
(13.7
)
Women's Health
33,268

15.5
33,607

16.4
(339
)
(1.0
)
Gastrointestinal
16,280

7.6
19,061

9.2
(2,781
)
(14.6
)
Eye & Ear Care
22,934

10.7
24,163

11.7
(1,229
)
(5.1
)
Dermatologicals
22,952

10.7
23,197

11.3
(245
)
(1.1
)
Oral Care
24,368

11.3
9,733

4.7
14,635

(nm)

Other OTC
1,546

0.7
1,503

0.7
43

2.9

Total North American OTC Healthcare
172,447

80.2
165,414

80.3
7,033

4.3

 
 
 
 
 
 
 
International OTC Healthcare
 
 
 
 
 
Analgesics
544

0.2
688

0.3
(144
)
(20.9
)
Cough & Cold
5,160

2.4
4,746

2.3
414

8.7

Women's Health
635

0.3
804

0.4
(169
)
(21.0
)
Gastrointestinal
6,088

2.8
5,342

2.6
746

14.0

Eye & Ear Care
2,989

1.4
3,578

1.7
(589
)
(16.5
)
Dermatologicals
567

0.3
611

0.3
(44
)
(7.2
)
Oral Care
2,820

1.3
189

0.1
2,631

(nm)

Other OTC
1

2

(1
)
(50.0
)
Total International OTC Healthcare
18,804

8.7
15,960

7.7
2,844

17.8

 
 
 
 
 
 
 
Total OTC Healthcare
191,251

88.9
181,374

88.0
9,877

5.4

Household Cleaning
23,801

11.1
24,691

12.0
(890
)
(3.6
)
Total Consolidated
$
215,052

100.0
$
206,065

100.0
$
8,987

4.4

(nm) size of % not meaningful
(*) Certain immaterial amounts in the prior year period relating to gross segment revenues, other revenues and cost of sales were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.
 
Total segment revenues for the three months ended September 30, 2016 were $215.1 million, an increase of $9.0 million, or 4.4%, versus the three months ended September 30, 2015. This increase was primarily related to an increase in the North American OTC Healthcare segment, largely due to the acquisition of DenTek. The DenTek brands accounted for approximately $17.2 million of revenues not included in the comparable period in the prior year. This increase was partially offset by a decrease of $8.2 million primarily due to the lower revenues from certain brands in the Cough & Cold, Gastrointestinal and Eye & Ear Care product groups and Household Cleaning segment.





- 41-



North American OTC Healthcare Segment
Revenues for the North American OTC Healthcare segment increased $7.0 million, or 4.3%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015.  This increase was primarily due to the increase of $14.6 million in the Oral Care product group largely due to the acquisition of DenTek. Excluding the revenue increases contributed by DenTek, revenues would have decreased by approximately $7.5 million, primarily consisting of decreases in the Cough & Cold, Gastrointestinal and Eye & Ear Care product groups including the divested brands.

International OTC Healthcare Segment
Revenues for the International OTC Healthcare segment increased $2.8 million, or 17.8%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015. This increase was primarily due to an increase of $2.6 million in the Oral Care product group largely due to the acquisition of DenTek. Excluding the revenue increases contributed by DenTek, revenues would have increased by approximately $0.1 million, which included an increase in the Gastrointestinal product group that was largely offset by a decrease in the Eye & Ear Care product group.

Household Cleaning Segment
Revenues for the Household Cleaning segment decreased by $0.9 million, or 3.6%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015. This decrease was primarily attributable to decreased royalties as a result of the sale of royalty rights in certain geographic regions.

Cost of Sales
The following table presents our cost of sales and cost of sales as a percentage of total segment revenues, by segment for each of the periods presented.
 
Three Months Ended September 30,
(In thousands)
 
 
 
 
 
 
 
 
Increase (Decrease)
Cost of Sales
2016
 
%
 
2015*
 
%
 
Amount
 
%
North American OTC Healthcare
$
65,402

 
37.9
 
$
61,497

 
37.2
 
$
3,905

 
6.3
International OTC Healthcare
7,096

 
37.7
 
6,094

 
38.2
 
1,002

 
16.4
Household Cleaning
18,589

 
78.1
 
18,534

 
75.1
 
55

 
0.3
 
$
91,087

 
42.4
 
$
86,125

 
41.8
 
$
4,962

 
5.8
(*) Certain immaterial amounts in the prior year period relating to gross segment revenues, other revenues and cost of sales were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.

Cost of sales increased $5.0 million, or 5.8%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015. This increase was largely due to increases in the North American OTC Healthcare segment and the International Healthcare segment primarily resulting from the additional DenTek business. As a percentage of total revenue, cost of sales increased to 42.4% in the three months ended September 30, 2016 from 41.8% in the three months ended September 30, 2015. This increase in cost of sales as a percentage of revenues was primarily the result of an unfavorable product mix in the Household Cleaning segment.

North American OTC Healthcare Segment
Cost of sales for the North American OTC Healthcare segment increased $3.9 million, or 6.3%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015.  This cost of sales increase was due to higher overall sales volume primarily attributable to the acquisition of DenTek. As a percentage of the North American OTC Healthcare revenues, cost of sales remained relatively consistent at 37.9% during the three months ended September 30, 2016 from 37.2% during the three months ended September 30, 2015.

International OTC Healthcare Segment
Cost of sales for the International OTC Healthcare segment increased $1.0 million, or 16.4%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015. This cost of sales increase was due to higher overall sales volume primarily attributable to the acquisition of DenTek. As a percentage of the International OTC Healthcare revenues, cost of sales remained relatively consistent at 37.7% during the three months ended September 30, 2016 from 38.2% during the three months ended September 30, 2015.


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Household Cleaning Segment
Cost of sales for the Household Cleaning segment increased $0.1 million, or 0.3%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015.  As a percentage of Household Cleaning revenues, cost of sales increased to 78.1% during the three months ended September 30, 2016 from 75.1% during the three months ended September 30, 2015. This increase in cost of sales as a percentage of revenues was primarily attributable to an unfavorable product mix.

Gross Profit
The following table presents our gross profit and gross profit as a percentage of total segment revenues, by segment for each of the periods presented.

 
Three Months Ended September 30,
(In thousands)
 
 
 
 
 
 
 
 
Increase (Decrease)
Gross Profit
2016
 
%
 
2015*
 
%
 
Amount
 
%
North American OTC Healthcare
$
107,045

 
62.1
 
$
103,917

 
62.8
 
$
3,128

 
3.0

International OTC Healthcare
11,708

 
62.3
 
9,866

 
61.8
 
1,842

 
18.7

Household Cleaning
5,212

 
21.9
 
6,157

 
24.9
 
(945
)
 
(15.3
)
 
$
123,965

 
57.6
 
$
119,940

 
58.2
 
$
4,025

 
3.4

(*) Certain immaterial amounts in the prior year period relating to gross segment revenues, other revenues and cost of sales were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.

Gross profit for the three months ended September 30, 2016 increased $4.0 million, or 3.4%, when compared with the three months ended September 30, 2015.  As a percentage of total revenues, gross profit decreased to 57.6% in the three months ended September 30, 2016 from 58.2% in the three months ended September 30, 2015. The decrease in gross profit as a percentage of revenues was primarily due to the decreases in gross margin in the Household Cleaning segment.

North American OTC Healthcare Segment
Gross profit for the North American OTC Healthcare segment increased $3.1 million, or 3.0%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015. The increase was due to higher overall sales volume, primarily attributable to the acquisition of DenTek. As a percentage of North American OTC Healthcare revenues, gross profit remained relatively consistent at 62.1% during the three months ended September 30, 2016 from 62.8% during the three months ended September 30, 2015.

International OTC Healthcare Segment
Gross profit for the International OTC Healthcare segment increased $1.8 million, or 18.7%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015. The increase was due to higher overall sales volume, primarily attributable to the acquisition of DenTek. As a percentage of International OTC Healthcare revenues, gross profit remained relatively consistent at 62.3% during the three months ended September 30, 2016 from 61.8% during the three months ended September 30, 2015.

Household Cleaning Segment
Gross profit for the Household Cleaning segment decreased $0.9 million, or 15.3%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015, primarily attributable to decreased royalties as a result of the sale of royalty rights for our Comet brand in certain geographic regions.  As a percentage of Household Cleaning revenue, gross profit decreased to 21.9% during the three months ended September 30, 2016 from 24.9% during the three months ended September 30, 2015. The decrease in gross profit as a percentage of revenues was primarily attributable to decreased sales in certain distribution channels, an unfavorable product mix and the reduced royalties.


- 43-



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

 
Three Months Ended September 30,
(In thousands)
 
 
 
 
 
 
 
 
Increase (Decrease)
Contribution Margin
2016
 
%
 
2015*
 
%
 
Amount
 
%
North American OTC Healthcare
$
82,234

 
47.7
 
$
79,477

 
48.0
 
$
2,757

 
3.5

International OTC Healthcare
8,464

 
45.0
 
7,089

 
44.4
 
1,375

 
19.4

Household Cleaning
4,675

 
19.6
 
5,481

 
22.2
 
(806
)
 
(14.7
)
 
$
95,373

 
44.3
 
$
92,047

 
44.7
 
$
3,326

 
3.6

(*) Certain immaterial amounts in the prior year period relating to gross segment revenues, other revenues and cost of sales were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.

Contribution margin is a non-GAAP financial measure that we use as a primary measure for evaluating segment performance. It is defined as gross profit less advertising and promotional expenses. Contribution margin increased $3.3 million, or 3.6%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015.  This increase was primarily related to the increase in gross profit in the North American OTC Healthcare and International OTC Healthcare segments.

North American OTC Healthcare Segment
Contribution margin for the North American OTC Healthcare segment increased $2.8 million, or 3.5%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015. The contribution margin increase was primarily the result of higher sales volumes and gross profit attributable to the acquisition of DenTek. As a percentage of North American OTC Healthcare revenues, contribution margin remained relatively consistent at 47.7% during the three months ended September 30, 2016 from 48.0% during the three months ended September 30, 2015.

International OTC Healthcare Segment
Contribution margin for the International OTC Healthcare segment increased $1.4 million, or 19.4%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015. The contribution margin increase was primarily the result of higher sales volumes and gross profit as well as lower advertising and promotional costs of DenTek. As a percentage of International OTC Healthcare revenues, contribution margin remained relatively consistent at 45.0% during the three months ended September 30, 2016 from 44.4% during the three months ended September 30, 2015.

Household Cleaning Segment
Contribution margin for the Household Cleaning segment decreased $0.8 million, or 14.7%, during the three months ended September 30, 2016 versus the three months ended September 30, 2015, primarily attributable to decreased royalties as a result of the sale of royalty rights for our Comet brand in certain geographic regions.  As a percentage of Household Cleaning revenues, contribution margin decreased to 19.6% during the three months ended September 30, 2016 from 22.2% during the three months ended September 30, 2015. The contribution margin decrease as a percentage of revenues was primarily due to the gross profit decrease as a percentage of revenues in the Household Cleaning segment discussed above.
 
General and Administrative
General and administrative expenses were $18.8 million for the three months ended September 30, 2016 versus $16.5 million for the three months ended September 30, 2015. The increase in general and administrative expenses was primarily due to an increase in compensation, acquisition and integration costs associated with the acquisition of DenTek and the costs associated with the sale of Pediacare, Fiber Choice and New Skin.

Depreciation and Amortization
Depreciation and amortization expense was $6.0 million and $5.7 million for the three months ended September 30, 2016 and 2015, respectively. The increase in depreciation and amortization expense was primarily due to higher intangible asset amortization during 2017 related to the intangible assets acquired as a result of the DenTek acquisition.

Interest Expense
Net interest expense was $20.9 million during the three months ended September 30, 2016 versus $20.7 million during the three months ended September 30, 2015. The increase in net interest expense was primarily attributable to the increased accelerated amortization of debt origination costs due to the higher repayments of our Term B-3 Loans. This increase was largely offset by

- 44-



the lower interest rate on our 6.375% senior notes due 2024 (the "2016 Senior Notes") compared to our 8.125% senior notes due 2020 (the "2012 Senior Notes"). The 2016 Senior Notes were issued in February 2016 in connection with the acquisition of DenTek and the redemption of the 2012 Senior Notes. The average indebtedness remained consistent at $1.5 billion during the three months ended September 30, 2016 and 2015. The average cost of borrowing increased to 5.5% for the three months ended September 30, 2016 from 5.3% for the three months ended September 30, 2015.

Loss on Sale of Assets
We recorded a net gain on sales of assets of $0.5 million for the three months ended September 30, 2016, which relates to two separate transactions. On July 7, 2016, the Company completed the sale of Pediacare, New Skin and Fiber Choice, which were non-core OTC brands and were reported under the North American OTC Healthcare segment in the Cough & Cold, Dermatologicals and Gastrointestinal product groups, respectively.

As a result, we recorded a preliminary pre-tax loss on sale of assets of $55.5 million in the first quarter of fiscal 2017 and increased the loss by $0.7 million during the three months ended September 30, 2016. This increase in loss was more than offset by a pre-tax gain of $1.2 million in the quarter on the sale of a royalty license for our Comet brand in certain geographic areas, as further discussed in Note 8.

Income Taxes
The provision for income taxes during the three months ended September 30, 2016 was $18.0 million versus a provision for income taxes of $17.4 million during the three months ended September 30, 2015.  The effective tax rate during the three months ended September 30, 2016 was 35.9% versus 35.4% during the three months ended September 30, 2015. The increase in the effective tax rate for the three months ended September 30, 2016 versus the three months ended September 30, 2015 was primarily due to the impact of certain non-deductible items in the current year period related to the sale of rights for our Comet brand. The estimated effective tax rate for the remaining quarters of the fiscal year ending March 31, 2017 is expected to be approximately 35.5%, excluding the impact of acquisitions and discrete items that may occur.


- 45-




Results of Operations

Six Months Ended September 30, 2016 compared to the Six Months Ended September 30, 2015

Total Segment Revenues

The following table represents total revenue by segment, including product groups, for the six months ended September 30, 2016 and 2015.
 
Six Months Ended September 30,
 
 
 
 
 
Increase (Decrease)
(In thousands)
2016
%
2015*
%
Amount
%
North American OTC Healthcare
 
 
 
 
 
Analgesics
$
58,119

13.7
$
56,542

14.2
$
1,577

2.8

Cough & Cold
39,073

9.2
44,215

11.1
(5,142
)
(11.6
)
Women's Health
66,155

15.6
66,515

16.7
(360
)
(0.5
)
Gastrointestinal
35,386

8.3
39,381

9.9
(3,995
)
(10.1
)
Eye & Ear Care
48,941

11.5
49,223

12.4
(282
)
(0.6
)
Dermatologicals
45,650

10.8
43,292

10.9
2,358

5.4

Oral Care
48,179

11.3
19,710

4.9
28,469

(nm)

Other OTC
3,024

0.7
2,915

0.7
109

3.7

Total North American OTC Healthcare
344,527

81.1
321,793

80.8
22,734

7.1

 
 
 
 
 
 
 
International OTC Healthcare
 
 
 
 
 
Analgesics
1,071

0.3
1,218

0.3
(147
)
(12.1
)
Cough & Cold
9,552

2.2
9,252

2.3
300

3.2

Women's Health
1,571

0.4
1,504

0.4
67

4.5

Gastrointestinal
10,344

2.4
9,150

2.3
1,194

13.0

Eye & Ear Care
5,785

1.4
6,780

1.7
(995
)
(14.7
)
Dermatologicals
1,238

0.3
1,145

0.3
93

8.1

Oral Care
5,037

1.2
383

0.1
4,654

(nm)

Other OTC
10

9

1

11.1

Total International OTC Healthcare
34,608

8.2
29,441

7.4
5,167

17.6

 
 
 
 
 
 
 
Total OTC Healthcare
379,135

89.3
351,234

88.2
27,901

7.9

Household Cleaning
45,492

10.7
46,963

11.8
(1,471
)
(3.1
)
Total Consolidated
$
424,627

100.0
$
398,197

100.0
$
26,430

6.6

(nm) size of % not meaningful
(*) Certain immaterial amounts in the prior year period relating to gross segment revenues, other revenues and cost of sales were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.

Total segment revenues for the six months ended September 30, 2016 were $424.6 million, an increase of $26.4 million, or 6.6%, versus the six months ended September 30, 2015. This increase was primarily related to an increase in the North American OTC Healthcare segment, largely due to the acquisition of DenTek. The DenTek brands accounted for approximately $33.8 million of revenues not included in the comparable period in the prior year. The increase was partially offset by a decrease of $7.4 million primarily due to the lower revenues from certain brands in the Cough & Cold, Gastrointestinal and Eye & Ear Care product groups and Household Cleaning segment.




- 46-



North American OTC Healthcare Segment
Revenues for the North American OTC Healthcare segment increased $22.7 million, or 7.1%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015.  This increase was primarily due to the increase of $28.5 million in the Oral Care product group largely due to the acquisition of DenTek. Excluding the revenue increases contributed by DenTek, revenues would have decreased by approximately $6.4 million, primarily consisting of decreases in the Cough & Cold and Gastrointestinal product groups and the impact of the divested brands, which was partially offset primarily by increases in the Dermatologicals and Analgesics product groups.

International OTC Healthcare Segment
Revenues for the International OTC Healthcare segment increased $5.2 million, or 17.6%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015. This increase was primarily due to an increase of $4.7 million in the Oral Care product group largely due to the acquisition of DenTek. Excluding the revenue increases contributed by DenTek, revenues would have increased by approximately $0.4 million, primarily consisting of an increase in the Gastrointestinal product group, partially offset by a decrease in the Eye & Ear Care product group.

Household Cleaning Segment
Revenues for the Household Cleaning segment decreased by $1.5 million, or 3.1%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015. This decrease was primarily attributable to decreased royalties as a result of the sale of royalty rights for our Comet brand in certain geographic regions and lower sales in certain distribution channels.

Cost of Sales
The following table presents our cost of sales and cost of sales as a percentage of total segment revenues, by segment for each of the periods presented.
 
Six Months Ended September 30,
(In thousands)
 
 
 
 
 
 
 
 
Increase (Decrease)
Cost of Sales
2016
 
%
 
2015*
 
%
 
Amount
 
%
North American OTC Healthcare
$
129,636

 
37.6
 
$
119,624

 
37.2
 
$
10,012

 
8.4
International OTC Healthcare
14,044

 
40.6
 
11,383

 
38.7
 
2,661

 
23.4
Household Cleaning
35,391

 
77.8
 
35,014

 
74.6
 
377

 
1.1
 
$
179,071

 
42.2
 
$
166,021

 
41.7
 
$
13,050

 
7.9
(*) Certain immaterial amounts in the prior year period relating to gross segment revenues, other revenues and cost of sales were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.

Cost of sales increased $13.1 million, or 7.9%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015. This increase was largely due to an increase in the North American OTC Healthcare segment. As a percentage of total revenue, cost of sales increased to 42.2% in the six months ended September 30, 2016 from 41.7% in the six months ended September 30, 2015. This increase in cost of sales as a percentage of revenues was primarily the result of an unfavorable product mix.

North American OTC Healthcare Segment
Cost of sales for the North American OTC Healthcare segment increased $10.0 million, or 8.4%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015.  This cost of sales increase was due to higher overall sales volume primarily attributable to the acquisition of DenTek. As a percentage of the North American OTC Healthcare revenues, cost of sales remained relatively consistent at 37.6% during the six months ended September 30, 2016 from 37.2% during the six months ended September 30, 2015.

International OTC Healthcare Segment
Cost of sales for the International OTC Healthcare segment increased $2.7 million, or 23.4%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015. This cost of sales increase was due to higher overall sales volume primarily attributable to the acquisition of DenTek. As a percentage of the International OTC Healthcare revenues, cost of sales increased to 40.6% during the six months ended September 30, 2016 from 38.7% during the six months ended September 30, 2015, primarily attributable to an unfavorable product mix and increased cost of sales as a percentage of revenues from DenTek while we integrate the brand into our existing product portfolio.



- 47-



Household Cleaning Segment
Cost of sales for the Household Cleaning segment increased $0.4 million, or 1.1%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015.  As a percentage of Household Cleaning revenues, cost of sales increased to 77.8% during the six months ended September 30, 2016 from 74.6% during the six months ended September 30, 2015. This increase in cost of sales as a percentage of revenues was primarily attributable to an unfavorable product mix and to a lesser extent to the reduced royalties as a result of the sale of royalty rights for our Comet brand in certain geographic regions.

Gross Profit
The following table presents our gross profit and gross profit as a percentage of total segment revenues, by segment for each of the periods presented.

 
Six Months Ended September 30,
(In thousands)
 
 
 
 
 
 
 
 
Increase (Decrease)
Gross Profit
2016
 
%
 
2015*
 
%
 
Amount
 
%
North American OTC Healthcare
$
214,891

 
62.4
 
$
202,169

 
62.8
 
$
12,722

 
6.3

International OTC Healthcare
20,564

 
59.4
 
18,058

 
61.3
 
2,506

 
13.9

Household Cleaning
10,101

 
22.2
 
11,949

 
25.4
 
(1,848
)
 
(15.5
)
 
$
245,556

 
57.8
 
$
232,176

 
58.3
 
$
13,380

 
5.8

(*) Certain immaterial amounts in the prior year period relating to gross segment revenues, other revenues and cost of sales were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.

Gross profit for the six months ended September 30, 2016 increased $13.4 million, or 5.8%, when compared with the six months ended September 30, 2015.  As a percentage of total revenues, gross profit decreased to 57.8% in the six months ended September 30, 2016 from 58.3% in the six months ended September 30, 2015. The decrease in gross profit as a percentage of revenues was primarily due to the decreases in gross margin in the Household Cleaning segment.

North American OTC Healthcare Segment
Gross profit for the North American OTC Healthcare segment increased $12.7 million, or 6.3%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015. The increase was due to higher overall sales volume, primarily attributable to the acquisition of DenTek. As a percentage of North American OTC Healthcare revenues, gross profit remained relatively consistent at 62.4% during the six months ended September 30, 2016 from 62.8% during the six months ended September 30, 2015.

International OTC Healthcare Segment
Gross profit for the International OTC Healthcare segment increased $2.5 million, or 13.9%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015. The increase was due to higher overall sales volume, primarily attributable to the acquisition of DenTek. As a percentage of International OTC Healthcare revenues, gross profit decreased to 59.4% during the six months ended September 30, 2016 from 61.3% during the six months ended September 30, 2015, primarily due to an unfavorable product mix and increased cost of sales as a percentage of revenues from DenTek while we integrate the brand into our existing product portfolio.

Household Cleaning Segment
Gross profit for the Household Cleaning segment decreased $1.8 million, or 15.5%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015.  As a percentage of Household Cleaning revenue, gross profit decreased to 22.2% during the six months ended September 30, 2016 from 25.4% during the six months ended September 30, 2015. As discussed above, the decrease in gross profit as a percentage of revenues was primarily attributable to decreased sales in certain distribution channels, an unfavorable product mix and the reduced royalties as a result of the sale of royalty rights for our Comet brand in certain geographic regions.


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

 
Six Months Ended September 30,
(In thousands)
 
 
 
 
 
 
 
 
Increase (Decrease)
Contribution Margin
2016
 
%
 
2015*
 
%
 
Amount
 
%
North American OTC Healthcare
$
165,040

 
47.9
 
$
154,534

 
48.0
 
$
10,506

 
6.8

International OTC Healthcare
15,196

 
43.9
 
12,558

 
42.7
 
2,638

 
21.0

Household Cleaning
9,093

 
20.0
 
10,769

 
22.9
 
(1,676
)
 
(15.6
)
 
$
189,329

 
44.6
 
$
177,861

 
44.7
 
$
11,468

 
6.4

(*) Certain immaterial amounts in the prior year period relating to gross segment revenues, other revenues and cost of sales were reclassified between the International OTC Healthcare segment and the North American OTC Healthcare segment. There were no changes to the consolidated financial statements for any periods presented.

Contribution margin is a non-GAAP financial measure that we use as a primary measure for evaluating segment performance. It is defined as gross profit less advertising and promotional expenses. Contribution margin increased $11.5 million, or 6.4%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015.  This increase was primarily related to the increase in gross profit in the North American OTC Healthcare segment.

North American OTC Healthcare Segment
Contribution margin for the North American OTC Healthcare segment increased $10.5 million, or 6.8%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015. The contribution margin increase was primarily the result of higher sales volumes and gross profit attributable to the acquisition of DenTek. As a percentage of North American OTC Healthcare revenues, contribution margin remained relatively consistent at 47.9% during the six months ended September 30, 2016 from 48.0% during the six months ended September 30, 2015.

International OTC Healthcare Segment
Contribution margin for the International OTC Healthcare segment increased $2.6 million, or 21.0%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015. The contribution margin increase was primarily the result of higher sales volumes and gross profit attributable to the acquisition of DenTek. As a percentage of International OTC Healthcare revenues, contribution margin increased to 43.9% during the six months ended September 30, 2016 from 42.7% during the six months ended September 30, 2015. The contribution margin increase as a percentage of revenues was primarily due to lower advertising and promotional costs offset slightly by a decrease in gross profit as a percentage of revenues in the International OTC Healthcare segment discussed above.

Household Cleaning Segment
Contribution margin for the Household Cleaning segment decreased $1.7 million, or 15.6%, during the six months ended September 30, 2016 versus the six months ended September 30, 2015.  As a percentage of Household Cleaning revenues, contribution margin decreased to 20.0% during the six months ended September 30, 2016 from 22.9% during the six months ended September 30, 2015. The contribution margin decrease as a percentage of revenues was primarily due to the gross profit decrease as a percentage of revenues in the Household Cleaning segment discussed above.
 
General and Administrative
General and administrative expenses were $38.3 million for the six months ended September 30, 2016 versus $34.1 million for the six months ended September 30, 2015. The increase in general and administrative expenses was primarily due to an increase in compensation, acquisition and integration costs associated with the acquisition of DenTek and the costs associated with the sale of Pediacare, Fiber Choice and New Skin.

Depreciation and Amortization
Depreciation and amortization expense was $12.8 million and $11.4 million for the six months ended September 30, 2016 and 2015, respectively. The increase in depreciation and amortization expense was primarily due to higher intangible asset amortization during 2017 related to the intangible assets acquired as a result of the DenTek acquisition.

Interest Expense
Net interest expense was $42.1 million during the six months ended September 30, 2016 versus $42.6 million during the six months ended September 30, 2015. The decrease in net interest expense was primarily attributable to the lower interest rate on our 2016

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Senior Notes compared to our 2012 Senior Notes. The 2016 Senior Notes were issued in February 2016 in connection with the acquisition of DenTek and the redemption of the 2012 Senior Notes. This decrease was largely offset by increased accelerated amortization of debt origination costs due to the higher repayments of our Term B-3 Loans in the current period. The average indebtedness remained consistent at $1.6 billion during the six months ended September 30, 2016 and 2015. The average cost of borrowing remained consistent at 5.4% for the six months ended September 30, 2016 and 2015.

Loss on Sale of Assets
We recorded a net loss on sales of assets of $54.9 million for the six months ended September 30, 2016, which relates to two separate transactions. On July 7, 2016, the Company completed the sale of Pediacare, New Skin and Fiber Choice, which were non-core OTC brands and were reported under the North American OTC Healthcare segment in the Cough & Cold, Dermatologicals and Gastrointestinal product groups, respectively. As a result, we recorded a preliminary pre-tax loss on sale of these assets of $56.2 million for the six months ended September 30, 2016. This loss was slightly reduced by a pre-tax gain of $1.2 million on the sale of a royalty license for our Comet brand in certain geographic areas as further discussed in Note 8.

Income Taxes
The provision for income taxes during the six months ended September 30, 2016 was $14.7 million versus a provision for income taxes of $31.4 million during the six months ended September 30, 2015.  The effective tax rate during the six months ended September 30, 2016 was 35.5% versus 35.2% during the six months ended September 30, 2015. The increase in the effective tax rate for the six months ended September 30, 2016 versus the six months ended September 30, 2015 was primarily due to the impact of certain non-deductible items in the current year period related to the sale of rights for our Comet Brand. The estimated effective tax rate for the remaining quarters of the fiscal year ending March 31, 2017 is expected to be approximately 35.5%, excluding the impact of acquisitions and discrete items that may occur.

Liquidity and Capital Resources

Liquidity
Our primary source of cash comes from our cash flow from operations. In the past, we have supplemented this source of cash with various debt facilities, primarily in connection with acquisitions. We have financed our operations, and expect to continue to finance our operations over the next twelve months, with a combination of borrowings and funds generated from operations.  Our principal uses of cash are for operating expenses, debt service, acquisitions, working capital and capital expenditures. Based on our current levels of operations and anticipated growth, excluding acquisitions, we believe that our cash generated from operations and our existing credit facilities will be adequate to finance our working capital and capital expenditures through the next twelve months, although no assurance can be given in this regard.

The following table summarizes our cash provided by (used in) operating activities, investing activities and financing activities as reported in our consolidated statements of cash flows in the accompanying Consolidated Financial Statements.

 
Six Months Ended September 30,
(In thousands)
2016
 
2015
Cash provided by (used in):
 
 
 
Operating Activities
$
100,282

 
$
90,590

Investing Activities
51,024

 
(1,339
)
Financing Activities
(147,681
)
 
(87,606
)

Operating Activities
Net cash provided by operating activities was $100.3 million for the six months ended September 30, 2016 compared to $90.6 million for the six months ended September 30, 2015. The $9.7 million increase in net cash provided by operating activities was primarily due to an increase in non-cash charges of $23.5 million and a decrease in working capital of $17.5 million, partially offset by a decrease in net income of $31.3 million. The decrease in net income was primarily due to a loss on sale of assets associated with the sale of Pediacare, New Skin and Fiber Choice.

Working capital is defined as current assets (excluding cash and cash equivalents) minus current liabilities. Working capital decreased in the six months ended September 30, 2016 compared to the six months ended September 30, 2015 primarily as a result of a decrease in the year-over-year change in prepaid expenses and other current assets and accounts receivable of $6.7 million and $4.3 million, respectively, and an increase in inventory, accrued liabilities and accounts payable of $6.8 million, $8.0 million and $5.3 million, respectively.


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Non-cash charges increased $23.5 million for the six months ended September 30, 2016 compared to the six months ended September 30, 2015, primarily due to a pre-tax loss on sale of assets of $55.1 million associated with loss on sale of assets discussed above. This increase was partially offset by a decrease in deferred income taxes of $32.3 million, of which approximately $27.5 million resulted from the sale of assets discussed above.

Investing Activities
Net cash provided by investing activities was $51.0 million for the six months ended September 30, 2016 compared to net cash used in investing activities of $1.3 million for the six months ended September 30, 2015. The change was primarily due to the proceeds of $52.4 million received in the current period from the sales of intangible assets.

Financing Activities
Net cash used in financing activities was $147.7 million for the six months ended September 30, 2016 compared to net cash used in financing activities of $87.6 million for the six months ended September 30, 2015.  The change was primarily due to an increase in term loan repayments of $80.1 million year-over-year, offset partially by a decrease in net repayments under our existing revolving credit facilities of $20.0 million in the current year period.

Capital Resources

2012 Term Loan and 2012 ABL Revolver:
On January 31, 2012, Prestige Brands, Inc. (the "Borrower") entered into a new senior secured credit facility, which consists of (i) a $660.0 million term loan facility (the “2012 Term Loan”) with a 7-year maturity and (ii) a $50.0 million asset-based revolving credit facility (the “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 by $85.0 million to $135.0 million and reduced our borrowing rate on the 2012 ABL Revolver by 0.25% (discussed below). The 2012 Term Loan was issued with an original issue discount of 1.5% of the principal amount thereof, resulting in net proceeds to the Borrower of $650.1 million. In connection with these loan facilities, we incurred $20.6 million of costs, which were capitalized as deferred financing costs and are being amortized over the terms of the facilities. The 2012 Term Loan is unconditionally guaranteed by Prestige Brands Holdings, 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 February 21, 2013, we entered into Amendment No. 1 ("Term Loan Amendment No. 1") to the 2012 Term Loan. Term Loan Amendment No. 1 provided for the refinancing of all of the Borrower's existing Term B Loans with new Term B-1 Loans (the "Term B-1 Loans"). The interest rate on the Term B-1 Loans under Term Loan Amendment No. 1 was based, at the Borrower's option, on a LIBOR rate plus a margin of 2.75% per annum, with a LIBOR floor of 1.00%, or an alternate base rate, with a floor of 2.00%, plus a margin. The new Term B-1 Loans would have matured on the same date as the Term B Loans' original maturity date.  In addition, Term Loan Amendment No. 1 provided the Borrower with certain additional capacity to prepay subordinated debt, the 2012 Senior Notes and certain other unsecured indebtedness permitted to be incurred under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver. In connection with Term Loan Amendment No. 1, during the fourth quarter ended March 31, 2013, we recognized a $1.4 million loss on the extinguishment of debt.

On September 3, 2014, we entered into Amendment No. 2 ("Term Loan Amendment No. 2") to the 2012 Term Loan. Term Loan Amendment No. 2 provided for (i) the creation of a new class of Term B-2 Loans under the 2012 Term Loan (the "Term B-2 Loans") in an aggregate principal amount of $720.0 million, (ii) increased flexibility under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver, including additional investment, restricted payment and debt incurrence flexibility and financial maintenance covenant relief, and (iii) an interest rate on (x) the Term B-1 Loans that was based, at our option, on a LIBOR rate plus a margin of 3.125% per annum, with a LIBOR floor of 1.00%, or an alternate base rate, with a floor of 2.00%, plus a margin, and (y) the Term B-2 Loans that was based, at our option, on a LIBOR rate plus a margin of 3.50% per annum, with a LIBOR floor of 1.00%, or an alternate base rate, with a floor of 2.00%, plus a margin (with a margin step-down to 3.25% per annum, based upon achievement of a specified secured net leverage ratio).

Also, on September 3, 2014, we entered into Amendment No. 3 ("ABL Amendment No. 3") to the 2012 ABL Revolver. ABL Amendment No. 3 provided for (i) a $40.0 million increase in revolving commitments under the 2012 ABL Revolver and (ii) increased flexibility under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver, including additional investment, restricted payment and debt incurrence flexibility. Borrowings under the 2012 ABL Revolver, as amended, bear interest at a rate per annum equal to an applicable margin, plus, at our option, either (i) a base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate of Citibank, N.A., and (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month, adjusted for certain additional costs, plus 1.00% or (ii) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant

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to such borrowing, adjusted for certain additional costs. The applicable margin for borrowings under the 2012 ABL Revolver may be increased to 2.00% or 2.25% for LIBOR borrowings and 1.00% or 1.25% for base-rate borrowings, depending on average excess availability under the 2012 ABL Revolver during the prior fiscal quarter. In addition to paying interest on outstanding principal under the 2012 ABL Revolver, we are required to pay a commitment fee to the lenders under the 2012 ABL Revolver in respect of the unutilized commitments thereunder. The initial commitment fee rate is 0.50% per annum. The commitment fee rate will be reduced to 0.375% per annum at any time when the average daily unused commitments for the prior quarter is less than a percentage of total commitments by an amount set forth in the credit agreement covering the 2012 ABL Revolver. We may voluntarily repay outstanding loans under the 2012 ABL Revolver at any time without a premium or penalty.

On May 8, 2015, we entered into Amendment No. 3 ("Term Loan Amendment No. 3") to the 2012 Term Loan. Term Loan Amendment No. 3 provided for (i) the creation of a new class of Term B-3 Loans under the 2012 Term Loan (the "Term B-3 Loans") in an aggregate principal amount of $852.5 million, which combined the outstanding balances of the Term B-1 Loans of $207.5 million and the Term B-2 Loans of $645.0 million, and (ii) increased flexibility under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver, including additional investment, restricted payment, and debt incurrence flexibility and financial maintenance covenant relief. The maturity date of the Term B-3 Loans remains the same as the Term B-2 Loans' original maturity date of September 3, 2021.
The 2012 Term Loan, as amended, bears interest at a rate per annum equal to an applicable margin plus, at our option, either (i) a base rate determined by reference to the highest of (a) the Federal Funds rate plus 0.50%, (b) the prime rate of Citibank, N.A., (c) the LIBOR rate determined by reference to the cost of funds for U.S. dollar deposits for an interest period of one month, adjusted for certain additional costs, plus 1.00% and (d) a floor of 1.75% or (ii) a LIBOR rate determined by reference to the costs of funds for U.S. dollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs, with a floor of 0.75%. For the six months ended September 30, 2016, the average interest rate on the 2012 Term Loan was 5.0%.

On June 9, 2015, we entered into Amendment No. 4 (“ABL Amendment No. 4”) to the 2012 ABL Revolver. ABL Amendment No. 4 provided for (i) a $35.0 million increase in the accordion feature under the 2012 ABL Revolver and (ii) increased flexibility under the credit agreement governing the 2012 Term Loan and 2012 ABL Revolver, including additional investment, restricted payment, and debt incurrence flexibility and financial maintenance covenant relief and (iii) extended the maturity date of the 2012 ABL Revolver to June 9, 2020, which is five years from the effective date. We may voluntarily repay outstanding loans under the 2012 ABL Revolver at any time without a premium or penalty. For the six months ended September 30, 2016, the average interest rate on the amounts borrowed under the 2012 ABL Revolver was 2.4%.
In connection with the DenTek acquisition on February 5, 2016, we entered into Amendment No. 5 (“ABL Amendment No. 5”) to the 2012 ABL Revolver. ABL Amendment No. 5 temporarily suspended certain financial and related reporting covenants in the 2012 ABL Revolver until the earliest of (i) the date that was 60 calendar days following February 4, 2016, (ii) the date upon which certain of DenTek’s assets were included in the Company’s borrowing base under the 2012 ABL Revolver and (iii) the date upon which the Company received net proceeds from an offering of debt securities.

2013 Senior Notes:
On December 17, 2013, the Borrower issued $400.0 million of senior unsecured notes, with an interest rate of 5.375% and a maturity date of December 15, 2021 (the "2013 Senior Notes"). The Borrower may redeem some or all of the 2013 Senior Notes at redemption prices set forth in the indenture governing the 2013 Senior Notes. The 2013 Senior Notes are guaranteed by Prestige Brands Holdings, Inc. and certain of its 100% domestic 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. In connection with the 2013 Senior Notes offering, we incurred $7.2 million of costs, which were capitalized as deferred financing costs and are being amortized over the term of the 2013 Senior Notes.

2016 Senior Notes:
On February 19, 2016, the Borrower completed the sale of $350.0 million aggregate principal amount of 2016 Senior Notes, pursuant to a purchase agreement, dated February 16, 2016, among the Borrower, the guarantors party thereto (the “Guarantors”) and the initial purchasers party thereto. The 2016 Senior Notes are guaranteed by Prestige Brands Holdings, 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. In connection with the 2016 Senior Notes offering, we incurred $5.5 million of costs, which were capitalized as deferred financing costs and are being amortized over the term of the 2016 Senior Notes.

The 2016 Senior Notes were issued pursuant to an indenture, dated February 19, 2016 (the “Indenture”). The Indenture provides, among other things, that interest will be payable on the 2016 Senior Notes on March 1 and September 1 of each year, beginning

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on September 1, 2016, until their maturity date of March 1, 2024. The 2016 Senior Notes are senior unsecured obligations of the Borrower.

Redemptions and Restrictions:
At any time prior to December 15, 2016, we have the option to redeem the 2013 Senior Notes in whole or in part at a redemption price equal to 100% of the principal amount of notes redeemed, plus an applicable "make-whole premium" calculated as set forth in the indenture governing the 2013 Senior Notes, together with accrued and unpaid interest, if any, to the date of redemption. On or after December 15, 2016, we have the option to redeem some or all of the 2013 Senior Notes at redemption prices set forth in the indenture governing the 2013 Senior Notes. In addition, at any time prior to December 15, 2016, we have to the option to redeem up to 35% of the aggregate principal amount of the 2013 Senior Notes at a redemption price equal to 105.375% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the net cash proceeds of certain equity offerings, provided that certain conditions are met. Subject to certain limitations, in the event of a change of control, as defined in the indenture governing the 2013 Senior Notes, the Borrower will be required to make an offer to purchase the 2013 Senior Notes at a price equal to 101% of the aggregate principal amount of the 2013 Senior Notes repurchased, plus accrued and unpaid interest, if any, to the date of repurchase.

The Borrower has the option to redeem all or a portion of the 2016 Senior Notes at any time on or after March 1, 2019 at the redemption prices set forth in the Indenture, plus accrued and unpaid interest, if any. The Borrower may also redeem all or any portion of the 2016 Senior Notes at any time prior to March 1, 2019, at a price equal to 100% of the aggregate principal amount of the notes redeemed, plus an applicable "make-whole premium" calculated as set forth in the Indenture, and accrued and unpaid interest, if any, to the date of redemption. In addition, before March 1, 2019, the Borrower may redeem up to 40% of the aggregate principal amount of the 2016 Senior Notes with the net proceeds of certain equity offerings at the redemption price set forth in the Indenture, provided that certain conditions are met. Subject to certain limitations, in the event of a change of control, as defined in the Indenture, the Borrower will be required to make an offer to purchase the 2016 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.

As of September 30, 2016, we had an aggregate of $1,502.0 million of outstanding indebtedness, which consisted of the following:

$400.0 million of 5.375% 2013 Senior Notes due 2021;
$350.0 million of 6.375% 2016 Senior Notes due 2024;
$687.0 million of borrowings under the Term B-3 Loans; and
$65.0 million of borrowings under the 2012 ABL Revolver.

As of September 30, 2016, we had $68.2 million of borrowing capacity under the 2012 ABL Revolver.

As we deem appropriate, we may from time to time utilize derivative financial instruments to mitigate the impact of changing interest rates associated with our long-term debt obligations or other derivative financial instruments.  While we have utilized derivative financial instruments in the past, we did not have any significant derivative financial instruments outstanding at either September 30, 2016 or March 31, 2016 or during any of the periods presented. We have not entered into derivative financial instruments for trading purposes; all of our derivatives were over-the-counter instruments with liquid markets.  

Our debt facilities contain various financial covenants, including provisions that require us to maintain certain leverage, interest coverage and fixed charge ratios.  The credit agreement governing the 2012 Term Loan and the 2012 ABL Revolver and the indentures governing the 2013 Senior Notes and 2016 Senior Notes contain provisions that accelerate our indebtedness on certain changes in control and restrict us from undertaking specified corporate actions, including asset dispositions, acquisitions, payment of dividends and other specified payments, repurchasing our equity securities in the public markets, incurrence of indebtedness, creation of liens, making loans and investments and transactions with affiliates. Specifically, we must:

Have a leverage ratio of less than 6.50 to 1.0 for the quarter ended September 30, 2016 (defined as, with certain adjustments, the ratio of our consolidated total net debt as of the last day of the fiscal quarter to our trailing twelve month consolidated net income before interest, taxes, depreciation, amortization, non-cash charges and certain other items (“EBITDA”)). Our leverage ratio requirement decreases over time to 3.75 to 1.0 for the quarter ending March 31, 2019 and remains level thereafter;

Have an interest coverage ratio of greater than 2.75 to 1.0 for the quarter ended September 30, 2016 (defined as, with certain adjustments, the ratio of our consolidated EBITDA to our trailing twelve month consolidated cash interest expense). Our interest coverage requirement increases over time to 3.50 to 1.0 for the quarter ending March 31, 2018 and remains level thereafter; and


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Have a fixed charge ratio of greater than 1.0 to 1.0 for the quarter ended September 30, 2016 (defined as, with certain adjustments, the ratio of our consolidated EBITDA minus capital expenditures to our trailing twelve month consolidated interest paid, taxes paid and other specified payments). Our fixed charge requirement remains level throughout the term of the agreement.

At September 30, 2016, we were in compliance with the applicable financial and restrictive covenants under the 2012 Term Loan and the 2012 ABL Revolver and the indentures governing the 2013 Senior Notes and the 2016 Senior Notes. Additionally, management anticipates that in the normal course of operations, we will be in compliance with the financial and restrictive covenants during the remainder of 2017. During the years ended March 31, 2016, 2015 and 2014, we made voluntary principal payments against outstanding indebtedness of $60.0 million, $130.0 million and $157.5 million, respectively, under the 2012 Term Loan. Under Term Loan Amendment No. 2, we were required to make quarterly payments each equal to 0.25% of the original principal amount of the Term B-2 Loans, with the balance expected to be due on the seventh anniversary of the closing date. However, since we entered into Term Loan Amendment No. 3, we are required to make quarterly payments each equal to 0.25% of the aggregate principal amount of $852.5 million. Since we have previously made optional payments that exceeded a significant portion of our required quarterly payments, we will not be required to make another payment until the fiscal year ending March 31, 2021.

Off-Balance Sheet Arrangements

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

Inflation

Inflationary factors such as increases in the costs of raw materials, packaging materials, purchased product and overhead may adversely affect our operating results and financial condition.  Although we do not believe that inflation has had a material impact on our financial condition or results from operations for the three and six months ended September 30, 2016, a high rate of inflation in the future could have a material adverse effect on our financial condition or results from operations.  More volatility in crude oil prices may have an adverse impact on transportation costs, as well as certain petroleum based raw materials and packaging material.  Although we make efforts to minimize the impact of inflationary factors, including raising prices to our customers, a high rate of pricing volatility associated with crude oil supplies or other raw materials used in our products may have an adverse effect on our operating results.


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Critical Accounting Policies and Estimates

Our significant accounting policies are described in the notes to the unaudited Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, as well as in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016.  While all significant accounting policies are important to our Consolidated Financial Statements, certain of these policies may be viewed as being critical.  Such policies are those that are both most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, or the related disclosure of contingent assets and liabilities.  These estimates are based on our historical experience and on various other assumptions that we believe to be reasonable under the circumstances.  Actual results may differ materially from these estimates.  The most critical accounting policies are as follows:

Revenue Recognition
We recognize revenue when the following revenue recognition criteria are met: (i) persuasive evidence of an arrangement exists; (ii) the selling price is fixed or determinable; (iii) the product has been shipped and the customer takes ownership and assumes the risk of loss; and (iv) collection of the resulting receivable is reasonably assured.  We have determined that these criteria are met and the transfer of risk of loss generally occurs when product is received by the customer, and, accordingly we recognize revenue at that time.  Provision is made for estimated discounts related to customer payment terms and estimated product returns at the time of sale based on our historical experience.

As is customary in the consumer products industry, we participate in the promotional programs of our customers to enhance the sale of our products.  The cost of these promotional programs varies based on the actual number of units sold during a finite period of time. 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.  Estimates of the costs of these promotional programs are based on (i) historical sales experience, (ii) the current promotional offering, (iii) forecasted data, (iv) current market conditions, and (v) communication with customer purchasing/marketing personnel. We recognize the cost of such sales incentives by recording an estimate of such cost as a reduction of revenue, at the later of (a) the date the related revenue is recognized, or (b) the date when a particular sales incentive is offered.  At the completion of the promotional program, these estimated amounts are adjusted to actual amounts.  Our related promotional expense for the fiscal year ended March 31, 2016 was $56.4 million. For the three and six months ended September 30, 2016, our related promotional expense was $16.5 million and $30.9 million, respectively. We believe that the estimation methodologies employed, combined with the nature of the promotional campaigns, make the likelihood remote that our obligation would be misstated by a material amount. However, for illustrative purposes, had we underestimated the promotional program rate by 10% for the fiscal year ended March 31, 2016, our sales and operating income would have been reduced by approximately $5.6 million.  Net income would have been adversely affected by approximately $3.6 million.  Similarly, had we underestimated the promotional program rate by 10% for the three and six months ended September 30, 2016, our sales and operating income would have been adversely affected by approximately $1.7 million and $3.1 million, respectively.  Net income would have been adversely affected by approximately $1.1 million and $2.0 million, respectively, for the three and six months ended September 30, 2016.

We also periodically run coupon programs in Sunday newspaper inserts, on our product websites, or as on-package instant redeemable coupons.  We utilize a national clearing house to process coupons redeemed by customers.  At the time a coupon is distributed, a provision is made based upon historical redemption rates for that particular product, information provided as a result of the clearing house's experience with coupons of similar dollar value, the length of time the coupon is valid, and the seasonality of the coupon drop, among other factors.  For the fiscal year ended March 31, 2016, we had 395 coupon events.  The amount recorded against revenues and accrued for these events during 2016 was $5.6 million. Cash settlement of coupon redemptions during 2016 was $3.5 million.  During the three and six months ended September 30, 2016, we had 115 and 271 coupon events, respectively.  The amount recorded against revenue and accrued for these events during the three and six months ended September 30, 2016 was $1.8 million and $3.8 million, respectively. Cash settlement of coupon redemptions during the three and six months ended September 30, 2016 was $0.5 million and $1.7 million, respectively.

Allowances for Product Returns
Due to the nature of the consumer products industry, we are required to estimate future product returns.  Accordingly, we record an estimate of product returns concurrent with recording sales.  Such estimates are made after analyzing (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 construct our returns analysis by looking at the previous year's return history for each brand.  Subsequently, each month, we estimate our current return rate based upon an average of the previous twelve months' return rate and review that calculated rate for reasonableness, giving consideration to the other factors described above.  Our historical return rate has been relatively stable; for example, for the years ended March 31, 2016, 2015 and 2014, returns represented 3.7%, 4.2% and 2.2%, respectively, of gross

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sales.  For the three and six months September 30, 2016, product returns represented 3.6% of gross sales.  At September 30, 2016 and March 31, 2016, the allowance for sales returns and cash discounts was $11.0 million and $10.7 million, respectively.

While we utilize the methodology described above to estimate product returns, actual results may differ materially from our estimates, causing our future financial results to be adversely affected.  Among the factors that could cause a material change in the estimated return rate would be significant unexpected returns with respect to a product or products that comprise a significant portion of our revenues.  Based on the methodology described above and our actual returns experience, management believes the likelihood of such an event remains remote.  As noted, over the last three years our actual product return rate has stayed within a range of 2.2% to 4.2% of gross sales.  However, a hypothetical increase of 0.1% in our estimated return rate as a percentage of gross sales would have adversely affected our reported sales and operating income for the fiscal year ended March 31, 2016 by approximately $0.9 million.  Net income would have been reduced by approximately $0.6 million.  A hypothetical increase of 0.1% in our estimated return rate as a percentage of gross sales for the three and six months ended September 30, 2016 would have reduced our reported sales and operating income by approximately $0.2 million and $0.5 million, respectively. Net income would have been reduced by approximately $0.2 million and $0.3 million, respectively.

Lower of Cost or Market for Obsolete and Damaged Inventory
We value our inventory at the lower of cost or market value.  Accordingly, we reduce our 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 market value.  Factors utilized in the determination of estimated market value include (i) current sales data and historical return rates, (ii) estimates of future demand, (iii) competitive pricing pressures, (iv) new product introductions, (v) product expiration dates, and (vi) component and packaging obsolescence.

Many of our products are subject to expiration dating.  As a general rule, our customers will not accept goods with expiration dating of less than 12 months from the date of delivery.  To monitor this risk, management utilizes a detailed compilation of inventory with expiration dating between zero and 15 months and reserves for 100% of the cost of any item with expiration dating of 12 months or less.  Inventory obsolescence costs charged to operations were $2.6 million for the fiscal year ended March 31, 2016, while for the three and six months ended September 30, 2016, we recorded obsolescence costs of $0.7 million and $1.4 million, respectively.  A hypothetical increase of 1.0% in our allowance for obsolescence at March 31, 2016 would have reduced our reported operating income and net income for the fiscal year ended March 31, 2016 by less than $0.1 million.  Similarly, a hypothetical increase of 1.0% in our obsolescence allowance for the three and six months ended September 30, 2016 would have reduced each of our reported operating income and net income by less than $0.1 million.

Allowance for Doubtful Accounts
In the ordinary course of business, we grant non-interest bearing trade credit to our customers on normal credit terms.  We maintain an allowance for doubtful accounts receivable, which is based upon our historical collection experience and expected collectability of the accounts receivable.  In an effort to reduce our credit risk, we (i) establish credit limits for all of our customer relationships, (ii) perform ongoing credit evaluations of our customers' financial condition, (iii) monitor the payment history and aging of our customers' receivables, and (iv) monitor open orders against an individual customer's outstanding receivable balance.

We establish specific reserves for those accounts that file for bankruptcy, have no payment activity for 180 days, or have reported major negative changes to their financial condition.  The allowance for bad debts amounted to 0.7% and 0.8% of accounts receivable at September 30, 2016 and March 31, 2016, respectively.  Bad debt expense for the fiscal year ended March 31, 2016 was approximately $0.1 million, while during the three and six months ended September 30, 2016, we recorded bad debt expense of less than $0.1 million.

While management believes that it is diligent in its evaluation of the adequacy of the allowance for doubtful accounts, an unexpected event, such as the bankruptcy filing of a major customer, could have an adverse effect on our future financial results.  A hypothetical increase of 0.1% in our bad debt expense as a percentage of sales during the fiscal year ended March 31, 2016 would have resulted in a decrease in each of reported operating income and reported net income of less than $0.1 million.  Similarly, a hypothetical increase of 0.1% in our bad debt expense as a percentage of sales for the three and six months ended September 30, 2016 would have resulted in a decrease in each of reported operating income and reported net income of less than $0.1 million.


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Valuation of Intangible Assets and Goodwill
Goodwill and intangible assets amounted to $2,532.8 million and $2,682.9 million at September 30, 2016 and March 31, 2016, respectively.  At September 30, 2016, goodwill and intangible assets were apportioned among our three operating segments as follows:

(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
 
 
 
 
 
 
 
 
Goodwill
$
322,945

 
$
22,472

 
$
6,245

 
$
351,662

 
 
 
 
 
 
 
 

Intangible assets, net
 
 
 
 
 
 
 

Indefinite-lived:
 
 
 
 
 
 


Analgesics
308,205

 
2,062

 

 
310,267

Cough & Cold
138,946

 
19,165

 

 
158,111

Women's Health
532,300

 
1,680

 

 
533,980

Gastrointestinal
213,639

 
60,628

 

 
274,267

Eye & Ear Care
172,318

 

 

 
172,318

Dermatologicals
148,990

 
1,985

 

 
150,975

Oral Care
241,238

 

 

 
241,238

Household Cleaning

 

 
101,262


101,262

Total indefinite-lived intangible assets, net
1,755,636

 
85,520

 
101,262

 
1,942,418

 
 
 
 
 
 
 
 
Finite-lived:
 
 
 
 
 
 


Analgesics
40,707

 

 

 
40,707

Cough & Cold
27,779

 
624

 

 
28,403

Women's Health
34,960

 
258

 

 
35,218

Gastrointestinal
8,806

 
205

 

 
9,011

Eye & Ear Care
27,661

 

 

 
27,661

Dermatologicals
22,085

 

 

 
22,085

Oral Care
39,577

 

 

 
39,577

Other OTC
14,242

 

 

 
14,242

Household Cleaning

 

 
21,806

 
21,806

Total finite-lived intangible assets, net
215,817

 
1,087

 
21,806

 
238,710

Total intangible assets, net
1,971,453

 
86,607

 
123,068

 
2,181,128

Total goodwill and intangible assets, net
$
2,294,398

 
$
109,079

 
$
129,313

 
$
2,532,790


At September 30, 2016, our highest valued brands were Monistat, BC/Goody's, DenTek, Clear Eyes and Chloraseptic, comprising approximately 58.6% of the intangible assets within the OTC Healthcare segments. The Comet, Chore Boy, and Spic and Span brands comprise substantially all of the intangible assets value within the Household Cleaning segment.

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


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The most significant factors are:

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

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

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

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

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

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

We report goodwill and indefinite-lived intangible assets in three reportable segments: North American OTC Healthcare, International OTC Healthcare and Household Cleaning.  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 previously discussed.  As a result, any material changes to these assumptions could require us to record additional impairment in the future.

In the past, we have experienced declines in revenues and profitability of certain brands in the North American OTC Healthcare and Household Cleaning segments. Sustained or significant future declines in revenue, profitability, other adverse changes in expected operating results, and/or unfavorable changes in other economic factors used to estimate fair values of certain brands could indicate that fair value no longer exceeds carrying value, in which case a non-cash impairment charge may be recorded in future periods.

Goodwill
As of February 29, 2016, our annual impairment review date, and March 31, 2016, we had 15 reporting units with goodwill. As part of our annual test for impairment of goodwill, management estimates the discounted cash flows of each reporting unit to estimate their respective fair values. In performing this analysis, management considers current information and future events, such as competition, technological advances and reductions in advertising support for our trademarks and trade names, that could cause subsequent evaluations to utilize different assumptions. In the event that the carrying value of the reporting unit exceeds the fair value, management would then be required to allocate the estimated fair value of the assets and liabilities of the reporting

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unit as if the unit was acquired in a business combination, thereby revaluing the carrying amount of goodwill. As of September 30, 2016, there have been no triggering events that would indicate potential impairment of goodwill, and no impairment charge was recorded during the six months ended September 30, 2016.

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

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

Reviews period-to-period sales and profitability by brand;
Analyzes industry trends and projects brand growth rates;
Prepares annual sales forecasts;
Evaluates advertising effectiveness;
Analyzes gross margins;
Reviews contractual benefits or limitations;
Monitors competitors' advertising spend and product innovation;
Prepares projections to measure brand viability over the estimated useful life of the intangible asset; and
Considers the regulatory environment, as well as industry litigation.

Finite-Lived Intangible Assets
When events or changes in circumstances indicate the carrying value of the assets may not be recoverable, management performs a review similar to indefinite-lived intangible assets to ascertain the impact of events and circumstances on the estimated useful lives and carrying values of our trademarks and trade names.

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

Although we experienced declines in revenues in certain other brands in the past, we continue to believe that the fair values of our remaining brands exceed their carrying values. However, sustained or significant future declines in revenue, profitability, lost distribution, other adverse changes in expected operating results, and/or unfavorable changes in other economic factors used to estimate fair value of certain brands could indicate that the fair value no longer exceeds carrying value, in which case a non-cash impairment charge may be recorded in future periods.

Impairment Analysis
During the fourth quarter of each fiscal year, we perform our annual impairment analysis. We utilized the discounted cash flow method to estimate the fair value of our reporting units as part of the goodwill impairment test and the excess earnings method to estimate the fair value of our individual indefinite-lived intangible assets. The discount rate utilized in the analyses, as well as future cash flows, may be influenced by such factors as changes in interest rates and rates of inflation.  Additionally, should the related fair values of goodwill and intangible assets be adversely affected as a result of declining sales or margins caused by competition, changing consumer preferences, technological advances or reductions in advertising and promotional expenses, we may be required to record impairment charges in the future.  


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Stock-Based Compensation
The Compensation and Equity topic of the FASB ASC 718 requires us to measure the cost of services to be rendered based on the grant-date fair value of an equity award.  Compensation expense is to be recognized over the period during which an employee is required to provide service in exchange for the award, generally referred to as the requisite service period.  Information utilized in the determination of fair value includes the following:

Type of instrument (i.e., restricted shares, stock options, warrants or performance shares);
Strike price of the instrument;
Market price of our common stock on the date of grant;
Discount rates;
Duration of the instrument; and
Volatility of our common stock in the public market.

Additionally, management must estimate the expected attrition rate of the recipients to enable it to estimate the amount of non-cash compensation expense to be recorded in our financial statements.  While management prepares various analyses to estimate the respective variables, a change in assumptions or market conditions, as well as changes in the anticipated attrition rates, could have a significant impact on the future amounts recorded as non-cash compensation expense.  We recorded non-cash compensation expense of $3.9 million and $5.0 million for the six months ended September 30, 2016 and 2015, respectively.
 
Loss Contingencies
Loss contingencies are recorded as liabilities when it is probable that a liability has been incurred and the amount of such loss is reasonably estimable.  Contingent losses are often resolved over longer periods of time and involve many factors, including:

Rules and regulations promulgated by regulatory agencies;
Sufficiency of the evidence in support of our position;
Anticipated costs to support our position; and
Likelihood of a positive outcome.

Recently Issued Accounting Standards
In August 2016, the FASB issued Accounting Standards Update ("ASU") 2016-15, Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provide clarification and guidance on eight cash flow classification issues. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The adoption of ASU 2016-15 is not expected to have a material impact on our Consolidated Financial Statements.

In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers. The amendments do not change the core principle of the guidance in FASB ASC 606 (discussed below). Rather, the amendments in this update affect only certain narrow aspects of FASB ASC 606. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 described below. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers. The amendments in this update clarify the implementation guidance on identifying performance obligations and licensing in FASB ASC 606. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 described below. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. The amendments in this update involve several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers. The amendments in this update clarify the implementation guidance on principals versus agent considerations in FASB ASC 606. The effective date and transition requirements for the amendments in this update are the same as the effective date and transition requirements of ASU 2014-09 described below. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In February 2016, the FASB issued ASU 2016-02, Leases. The amendments in this update include a new FASB ASC Topic 842, which supersedes Topic 840. The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise

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from leases. For public business entities, the amendments in this update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted for all entities as of the beginning of interim or annual reporting periods. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.
 
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. The amendments in this update require that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The amendments in this update may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. For public business entities, the amendments in this update are effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early application is permitted for all entities as of the beginning of interim or annual reporting periods. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.

In July 2015, the FASB issued ASU 2015-11, Simplifying the Measurement of Inventory. The amendments in this update more closely align the measurement of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards, under which an entity should measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The adoption of ASU 2015-11 is not expected to have a material impact on our Consolidated Financial Statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers - Topic 606, which supersedes the revenue recognition requirements in FASB ASC 605. The new guidance primarily states that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. In August 2015, the FASB issued ASU 2015-14, which deferred the effective date of ASU 2014-09 from annual and interim periods beginning after December 15, 2016 to annual and interim periods beginning after December 15, 2017. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. We are evaluating the impact of adopting this guidance on our Consolidated Financial Statements.




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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

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

The high level of competition in our industry and markets;
Our inability to increase organic growth via new product introductions, line extensions, increased spending on advertising and promotional support, and other new sales and marketing strategies;
Our inability to invest successfully in research and development;
Our dependence on a limited number of customers for a large portion of our sales;
Changes in inventory management practices by retailers;
Our inability to grow our international sales;
General economic conditions affecting sales of our products and their respective markets;
Economic factors, such as increases in interest rates and currency exchange rate fluctuations;
Business, regulatory and other conditions affecting retailers;
Changing consumer trends, additional store brand competition or other pricing pressures which may cause us to lower our prices;
Our dependence on third-party manufacturers to produce the products we sell;
Price increases for raw materials, labor, energy and transportation costs, and for other input costs;
Disruptions in our distribution center;
Acquisitions, dispositions or other strategic transactions diverting managerial resources, the incurrence of additional liabilities or integration problems associated with such transactions;
Actions of government agencies in connection with our products or regulatory matters governing our industry;
Product liability claims, product recalls and related negative publicity;
Our inability to protect our intellectual property rights;
Our dependence on third parties for intellectual property relating to some of the products we sell;
Our assets being comprised virtually entirely of goodwill and intangibles and possible changes in their value based on adverse operating results;
Our dependence on key personnel;
Shortages of supply of sourced goods or interruptions in the manufacturing of our products;
The costs associated with any claims in litigation or arbitration and any adverse judgments rendered in such litigation or arbitration;
Our level of indebtedness and possible inability to service our debt;
Our ability to obtain additional financing; and
The restrictions imposed by our financing agreements on our operations.

For more information, see “Risk Factors” contained in Part I, Item 1A., "Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended March 31, 2016 and Part II, Item 1A of this Quarterly Report on Form 10-Q.


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ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We are exposed to changes in interest rates because our 2012 Term Loan and 2012 ABL Revolver are variable rate debt.  Interest rate changes generally do not significantly affect the market value of the 2012 Term Loan and the 2012 ABL Revolver but do affect the amount of our interest payments and, therefore, our future earnings and cash flows, assuming other factors are held constant.  At September 30, 2016, we had variable rate debt of approximately $752.0 million.

Holding other variables constant, including levels of indebtedness, a 1.0% increase in interest rates on our variable rate debt would have had an adverse impact on pre-tax earnings and cash flows for the three and six months ended September 30, 2016 of approximately $1.9 million and $4.1 million, respectively.

Foreign Currency Exchange Rate Risk

During the three and six months ended September 30, 2016, approximately 13.6% and 12.5%, respectively, of our revenues were denominated in currencies other than the U.S. Dollar. During the three and six months ended September 30, 2015, approximately 12.4% and 11.9%, respectively, of our revenues were denominated in currencies other than the U.S. Dollar. As such, we are exposed to transactions that are sensitive to foreign currency exchange rates, including insignificant foreign currency forward exchange agreements. These transactions are primarily with respect to the Canadian and Australian Dollar.

We performed a sensitivity analysis with respect to exchange rates for the three and six months ended September 30, 2016. Holding all other variables constant, and assuming a hypothetical 10.0% adverse change in foreign currency exchange rates, this analysis resulted in a less than 5.0% impact on pre-tax income of approximately $1.2 million for the three months ended September 30, 2016 and a 5.1% impact on pre-tax income of approximately $2.1 million for the six months ended September 30, 2016. Excluding the pre-tax loss on the sale of assets of $55.5 million in the first quarter of 2017, and holding all other variables constant, a hypothetical 10.0% adverse change in foreign currency exchange rates would have resulted in a less than 5.0% impact on pre-tax income for the six months ended September 30, 2016.

ITEM 4.
CONTROLS AND PROCEDURES
              
Disclosure Controls and Procedures

The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures, as defined in Rule 13a–15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), as of September 30, 2016.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016, the Company's disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

As stated in our most recent Annual Report on Form 10-K, we completed the acquisition of DenTek during the fourth quarter of 2016. We are currently in the process of incorporating DenTek's historical internal control over financial reporting structure with ours. Other than the changes noted above, there have been no changes during the quarter ended September 30, 2016 in the Company's internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.


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PART II.
OTHER INFORMATION

ITEM 1A. RISK FACTORS

In addition to the risk factors set forth below and the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended March 31, 2016, which could materially affect our business, financial condition or future results of operations. The risks described below and in our Annual Report on Form 10-K are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and results of operations. The information below amends, updates and should be read in conjunction with the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended March 31, 2016.

Our annual and quarterly results from operations may fluctuate significantly and could fall below the expectations of securities analysts and investors due to a number of factors, many of which are beyond our control, resulting in a decline in the price of our securities.

Our annual and quarterly results from operations may fluctuate significantly because of numerous factors, including:

The timing of when we make acquisitions or introduce new products;

Our inability to increase the sales of our existing products and expand their distribution;

The timing of the introduction or return to the market of competitive products and the introduction of store brand products;

Inventory management resulting from consolidation among our customers;

Adverse regulatory or market events in the United States or in our international markets;

Changes in consumer preferences, spending habits and competitive conditions, including the effects of competitors’ operational, promotional or expansion activities;

Seasonality of our products;

Fluctuations in commodity prices, product costs, utilities and energy costs, prevailing wage rates, insurance costs and other costs;

The discontinuation and return of our products from retailers;

Our ability to recruit, train and retain qualified employees, and the costs associated with those activities;

Changes in advertising and promotional activities and expansion to new markets;

Negative publicity relating to us and the products we sell;

Litigation matters;

Unanticipated increases in infrastructure costs;

Impairment of goodwill or long-lived assets;

Changes in interest rates; and

Changes in accounting, tax, regulatory or other rules applicable to our business.

Our quarterly operating results and revenues may fluctuate as a result of any of these or other factors. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year, and revenues for any particular future period may decrease.  In the future, operating results may fall below the expectations of securities analysts and investors.  In that event, the market price of our outstanding securities could be adversely impacted.

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ITEM 6.     EXHIBITS

 See Exhibit Index immediately following the signature page.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
PRESTIGE BRANDS HOLDINGS, INC.
 
 
 
 
 
 
 
 
 
 
 
Date:
November 3, 2016
By:
/s/ Christine Sacco
 
 
 
 
Christine Sacco
 
 
 
 
Chief Financial Officer
 
 
 
 
(Principal Financial Officer and Duly Authorized Officer)
 
 
 
 
 
 



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Exhibit Index
 
 
 
 
10.1

 
Executive Offer Letter dated as of September 12, 2016, by and between Prestige Brands Holdings, Inc. and Christine Sacco (filed as Exhibit 99.2 to the Company's Current Report on Form 8-K filed with the Securities and Exchange Commission on September 12, 2016).
 
 
 
31.1

 
Certification of Principal Executive Officer of Prestige Brands Holdings, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
 
 
31.2

 
Certification of Principal Financial Officer of Prestige Brands Holdings, Inc. pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.
 
 
 
32.1

 
Certification of Principal Executive Officer of Prestige Brands Holdings, Inc. pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
 
 
32.2

 
Certification of Principal Financial Officer of Prestige Brands Holdings, Inc. pursuant to Rule 13a-14(b) and Section 1350 of Chapter 63 of Title 18 of the United States Code.
 
 
 
101.INS*
 
XBRL Instance Document
101.SCH*
 
XBRL Taxonomy Extension Schema Document
101.CAL*
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
 
XBRL Taxonomy Extension Presentation Linkbase Document

* XBRL information is furnished and not filed for purposes of Section 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934, and is not subject to liability under those sections, is not part of any registration statement, prospectus or other document to which it relates and is not incorporated or deemed to be incorporated by reference into any registration statement, prospectus or other document.



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