10-Q 1 pbh10qdecember312018.htm 10-Q Document
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 December 31, 2018
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
prestigeconsumerhealthcare.jpg

PRESTIGE CONSUMER HEALTHCARE 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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.  
Large accelerated filer
x
 
 
Accelerated filer
o
Non-accelerated filer
o

 
 
Smaller reporting company
o
 
 
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 February 1, 2019, there were 51,798,384 shares of common stock outstanding.



Prestige Consumer Healthcare Inc.
Form 10-Q
Index

PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
 
 
Condensed Consolidated Statements of Income and Comprehensive Income for the three and nine months ended December 31, 2018 and 2017 (unaudited)
 
Condensed Consolidated Balance Sheets as of December 31, 2018 and March 31, 2018 (unaudited)
 
Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 2018 and 2017 (unaudited)
 
Notes to Condensed 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 Consumer Healthcare 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 Consumer Healthcare Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
(In thousands, except per share data)
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
Net sales
$
241,411

 
$
270,522

 
$
734,719

 
$
784,939

Other revenues
3

 
93

 
32

 
275

Total revenues
241,414

 
270,615

 
734,751

 
785,214

 





 
 
 
 
Cost of Sales
 

 
 

 
 

 
 

Cost of sales excluding depreciation
100,997

 
121,730

 
313,713

 
346,067

Cost of sales depreciation
1,182


1,211

 
3,708


3,899

Cost of sales
102,179


122,941

 
317,421


349,966

Gross profit
139,235


147,674

 
417,330


435,248

 





 
 
 
 
Operating Expenses
 


 

 
 

 
 

Advertising and promotion
34,504

 
35,835

 
108,657

 
111,967

General and administrative
20,485

 
20,820

 
68,460

 
63,229

Depreciation and amortization
6,705

 
7,129

 
20,545

 
21,482

Gain on divestiture
—


—

 
(1,284
)

—

Total operating expenses
61,694

 
63,784

 
196,378

 
196,678

Operating income
77,541

 
83,890

 
220,952

 
238,570

 
 
 
 
 
 
 
 
Other (income) expense
 
 
 
 
 

 
 

Interest income
(39
)
 
(119
)
 
(172
)

(273
)
Interest expense
26,366

 
25,983

 
79,509

 
79,314

Other expense (income), net
218

 
387

 
640


(119
)
Total other expense
26,545

 
26,251

 
79,977

 
78,922

Income before income taxes
50,996


57,639

 
140,975


159,648

Provision (benefit) for income taxes
12,829

 
(257,154
)
 
37,501

 
(219,609
)
Net income
$
38,167


$
314,793

 
$
103,474


$
379,257

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 

 
 

Basic
$
0.74

 
$
5.93

 
$
1.99

 
$
7.14

Diluted
$
0.73

 
$
5.88

 
$
1.97

 
$
7.08

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 

 
 

Basic
51,881

 
53,129

 
52,119

 
53,089

Diluted
52,202

 
53,543

 
52,431

 
53,531

 
 
 
 
 
 
 
 
Comprehensive income, net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
(2,020
)

4,492

 
(7,139
)

8,327

Unrecognized net gain on pension plans
—


—

 
—


1

Total other comprehensive (loss) income
(2,020
)

4,492

 
(7,139
)

8,328

Comprehensive income
$
36,147


$
319,285

 
$
96,335


$
387,585

See accompanying notes.

- 2-


Prestige Consumer Healthcare Inc.
Condensed Consolidated Balance Sheets
(Unaudited)


(In thousands)
December 31, 2018
 
March 31, 2018
 
 
 
 
Assets
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
24,672

 
$
32,548

Accounts receivable, net of allowance of $13,444 and $12,734, respectively
140,584

 
140,881

Inventories
120,368

 
118,547

Prepaid expenses and other current assets
7,553

 
11,501

Total current assets
293,177

 
303,477

 
 
 
 
Property, plant and equipment, net
51,567

 
52,552

Goodwill
611,956

 
620,098

Intangible assets, net
2,707,825

 
2,780,916

Other long-term assets
3,557

 
3,569

Total Assets
$
3,668,082

 
$
3,760,612

 
 
 
 
Liabilities and Stockholders' Equity
 

 
 

Current liabilities
 

 
 

Accounts payable
$
48,988

 
$
61,390

Accrued interest payable
13,646

 
9,708

Other accrued liabilities
66,182

 
52,101

Total current liabilities
128,816

 
123,199

 
 
 
 
Long-term debt, net
1,842,288

 
1,992,952

Deferred income tax liabilities
443,587

 
442,518

Other long-term liabilities
20,271

 
23,333

Total Liabilities
2,434,962

 
2,582,002

 
 
 
 
Commitments and Contingencies — Note 16


 


 
 
 
 
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 - 53,670 shares at December 31, 2018 and 53,396 shares at March 31, 2018
536

 
534

Additional paid-in capital
477,872

 
468,783

Treasury stock, at cost - 1,871 shares at December 31, 2018 and 353 shares at March 31, 2018
(59,928
)
 
(7,669
)
Accumulated other comprehensive loss, net of tax
(26,454
)
 
(19,315
)
Retained earnings
841,094

 
736,277

Total Stockholders' Equity
1,233,120

 
1,178,610

Total Liabilities and Stockholders' Equity
$
3,668,082

 
$
3,760,612

 See accompanying notes.

- 3-



Prestige Consumer Healthcare Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended December 31,
(In thousands)
2018
 
2017
Operating Activities
 
 
 
Net income
$
103,474

 
$
379,257

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

 
 
Depreciation and amortization
24,253

 
25,381

Gain on divestiture
(1,284
)
 
—

Loss on disposal of property and equipment
197

 
1,510

Deferred income taxes
3,309

 
(256,850
)
Amortization of debt origination costs
4,543

 
4,746

Excess tax benefits from share-based awards
—

 
470

Stock-based compensation costs
6,160

 
6,912

Write-off of indemnification asset
—

 
704

Other
247

 
—

Lease termination costs
—

 
214

Changes in operating assets and liabilities:
 

 
 
Accounts receivable
5,398

 
(14,073
)
Inventories
(11,081
)
 
1,167

Prepaid expenses and other current assets
4,073

 
18,935

Accounts payable
(12,787
)
 
(11,036
)
Accrued liabilities
13,260

 
(1,033
)
Pension and deferred compensation contribution
—

 
(329
)
Other
(1,325
)
 
(303
)
Net cash provided by operating activities
138,437

 
155,672

 
 
 
 
Investing Activities
 

 
 

Purchases of property, plant and equipment
(7,139
)
 
(9,656
)
Acquisition of Fleet escrow receipt
—

 
970

Proceeds from divestiture
65,912

 
—

Net cash provided by (used in) investing activities
58,773

 
(8,686
)
 
 
 
 
Financing Activities
 

 
 

Term loan repayments
(155,000
)
 
(125,000
)
Borrowings under revolving credit agreement
45,000

 
20,000

Repayments under revolving credit agreement
(45,000
)
 
(40,000
)
Proceeds from exercise of stock options
2,931

 
1,466

Fair value of shares surrendered as payment of tax withholding
(2,281
)
 
(1,075
)
Repurchase of common stock
(49,978
)
 
—

Net cash used in financing activities
(204,328
)
 
(144,609
)
 
 
 
 
Effects of exchange rate changes on cash and cash equivalents
(758
)
 
1,144

(Decrease) increase in cash and cash equivalents
(7,876
)
 
3,521

Cash and cash equivalents - beginning of period
32,548

 
41,855

Cash and cash equivalents - end of period
$
24,672

 
$
45,376

 
 
 
 
Interest paid
$
69,955

 
$
73,779

Income taxes paid
$
19,070

 
$
16,861

See accompanying notes.

- 4-


Prestige Consumer Healthcare Inc.
Notes to Condensed Consolidated Financial Statements (unaudited)

1.    Business and Basis of Presentation

Nature of Business
Prestige Consumer Healthcare Inc. (referred to herein as the “Company” or “we,” which reference shall, unless the context requires otherwise, be deemed to refer to Prestige Consumer Healthcare Inc. and all of its direct and indirect 100% owned subsidiaries on a consolidated basis) is engaged in the development, manufacturing, marketing, sales and distribution of over-the-counter (“OTC”) healthcare and household cleaning products (prior to the sale of our Household Cleaning segment, as discussed in Note 3) to mass merchandisers and drug, food, dollar, convenience and club stores and e-commerce channels in North America (the United States and Canada), and in Australia and certain other international markets.  Prestige Consumer Healthcare Inc. is a holding company with no operations and is also the parent guarantor of the senior credit facility and the senior notes described in Note 8.

Basis of Presentation
The unaudited Condensed Consolidated Financial Statements presented herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial reporting and the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  All significant intercompany transactions and balances have been eliminated in consolidation.  In the opinion of management, these Condensed Consolidated Financial Statements include all adjustments, consisting of normal recurring adjustments, that are considered necessary for a fair statement of our consolidated financial position, results of operations and cash flows for the interim periods presented.  Our fiscal year ends on March 31st of each year. References in these Condensed Consolidated Financial Statements or related notes to a year (e.g., 2019) mean our fiscal year ending or ended on March 31st of that year. Operating results for the three and nine months ended December 31, 2018 are not necessarily indicative of results that may be expected for the fiscal year ending March 31, 2019.  These unaudited Condensed Consolidated Financial Statements and related notes should be read in conjunction with our audited Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2018.

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.  

Reclassification
In accordance with Accounting Standards Update ("ASU") 2017-07, we have reclassified net periodic benefit costs related to our pension plans from general and administrative expense to other (income) expense. The impact of this reclassification on our financial statements was less than $1.0 million.

Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers - Topic 606, including new FASB Accounting Standards Codification ("ASC") 606, which supersedes the revenue recognition requirements in FASB ASC 605. Along with amendments issued in 2015 and 2016, the new guidance eliminates industry-specific revenue recognition guidance under current GAAP and replaces it with a principle-based approach for determining revenue. The core principle of the new guidance is that an entity should recognize revenue for the transfer of goods and services equal to an amount it expects to be entitled to receive for those goods and services. The new standard also requires additional disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. The new guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively by recognizing the cumulative effect of initially applying the guidance to all contracts existing at the date of initial application (the modified retrospective method). The ASU, as amended, is effective for annual reporting periods beginning after December 15, 2017. We adopted this guidance effective April 1, 2018 using the modified retrospective transition method and applied it to contracts that were not completed at the adoption date. See Note 2 for our revenue recognition policy.

The effects of this recently adopted accounting pronouncement to our consolidated balance sheet as of April 1, 2018 are as follows:

- 5-


(In thousands)
Balance
March 31, 2018
 
New Revenue Standard Adjustment
 
Balance
April 1, 2018
Accounts receivable, net
$
140,881


$
5,438


$
146,319

Inventories
118,547


(1,768
)

116,779

Other accrued liabilities
52,101


1,926


54,027

Deferred income tax liabilities
442,518


401


442,919

Retained earnings
736,277


1,343


737,620


In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes the presentation of net periodic benefit cost related to employer sponsored defined benefit plans and other postretirement benefits. Under this ASU, service cost should be included in the same income statement line item as other compensation costs arising from services rendered during the period, while other components of net periodic benefit pension cost should be presented separately outside of operating income. Additionally, only service costs may be capitalized in assets.  Entities should apply the guidance on the presentation of the components of net periodic benefit cost in the income statement retrospectively. The guidance limiting the capitalization of net periodic benefit cost in assets to the service cost component should be applied prospectively. The standard is effective for annual reporting periods beginning after December 15, 2017. The adoption of this standard in the first quarter of 2019 required us to reclassify certain pension costs out of operating income and did not have a material impact on our consolidated financial statements. 

In March 2018, the FASB issued ASU 2018-05, Income Taxes (Topic 740). The amendments in this update reflect the income tax accounting implications of the Tax Cuts and Jobs Act ("Tax Act"). See Note 14 for a discussion of the Tax Act, which was signed into law on December 22, 2017, and the impact it has had, and may have, on our business and financial results.

In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this update allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. See Note 14 for a discussion of the Tax Act and the impact it has had, and may have, on our business and financial results. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. We have early adopted ASU 2018-02, and the adoption did not have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business to help companies evaluate whether transactions should be accounted for as acquisitions or disposals of assets or businesses. The amendments in this update are effective for public companies for annual periods beginning after December 15, 2017, including interim periods within those periods. We adopted this standard effective April 1, 2018, and the adoption did not have a material impact on our consolidated financial statements.

In August 2016, the FASB issued 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 companies, the amendments in this update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. We adopted this standard effective April 1, 2018, and the adoption did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans - General (Topic 715-20): Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans. The amendments in this update modify the disclosure requirements for employers that sponsor defined benefit pension or other postretirement plans and are effective for public companies for fiscal years ending after December 15, 2020. We do not expect the adoption of this standard to have a material impact on our financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements in Topic 820 and are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We do not expect the adoption of this standard to have a material impact on our financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). The amendments in this update simplify the test for goodwill impairment by eliminating Step 2 from the impairment test, which required the entity to perform

- 6-


procedures to determine the fair value at the impairment testing date of its assets and liabilities following the procedure that would be required in determining fair value of assets acquired and liabilities assumed in a business combination. The amendments in this update are effective for public companies for annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. We are evaluating the impact of adopting this guidance on our consolidated financial statements and whether to early adopt this ASU.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments. The amendments in this update provide financial statement users with more useful information about expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, to clarify that receivables arising from operating leases are not within the scope of the credit loss standard, but should be accounted for in accordance with the lease standard. The amendments to this update are effective for us for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We are currently 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 companies, 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. In July 2018, further guidance on this topic was issued with ASU 2018-10, Codification Improvements to Topic 842, Leases, which affects narrow aspects of the guidance in ASU 2016-02, and with ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides an additional transition method to adopt the new lease standard as well as a practical expedient. The required effective dates for the amendments issued in July 2018 are the same as those for Topic 842. In December 2018, the FASB issued ASU 2018-20, Leases (Topic 842): Narrow-Scope Improvements for Lessors, to address certain issues facing lessors when applying Topic 842. This update is effective for us upon adoption of Topic 842. We plan to adopt the standard on April 1, 2019.  We are in the process of aggregating and evaluating our lease arrangements.  We expect that adoption of this standard will result in a material increase in lease-related assets and liabilities recognized on our Consolidated Balance Sheet, but we are unable to quantify the impact at this time.
 
2.    Revenue Recognition

Nature of Goods and Services
We recognize revenue from product sales. We primarily ship finished goods to our customers and operate in three segments: North American OTC Healthcare, International OTC Healthcare, and Household Cleaning (prior to the sale of this segment on July 2, 2018). The segments are based on differences in the nature of products and geographical area. The North America and International OTC Healthcare segments market a variety of personal care and over-the-counter products in the following product groups: Analgesics, Cough & Cold, Women's Health, Gastrointestinal, Eye & Ear Care, Dermatologicals, and Oral Care. Prior to its sale, the Household Cleaning segment focused on the sale of cleaning products. Our products are distinct and separately identifiable on customer contracts or invoices, with each product sale representing a separate performance obligation.

We sell consumer products under a variety of brands through a broad distribution platform that includes mass merchandisers and drug, food, dollar, convenience and club stores and e-commerce channels, all of which sell our products to consumers.

See Note 18 for disaggregated revenue information.

Satisfaction of Performance Obligations
Revenue is recognized when control of a promised good is transferred to a customer, in an amount that reflects the consideration that we expect to be entitled to receive in exchange for that good. This occurs either when finished goods are transferred to a common carrier for delivery to the customer or when product is picked up by the customer or the customer’s carrier. This represents a change in the timing of revenue recognition for some sales. Refer to the table above in Note 1 for disclosure of the adoption date impacts.

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

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

- 7-



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

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

Practical Expedients
Due to the nature (short duration) of our contracts with customers, we apply the practical expedient related to remaining performance obligations disclosure. Remaining performance obligations relate to contracts with a duration of less than one year, in which we have the right to invoice the customer at the time the performance obligation is satisfied for the amount of revenue recognized at that time. Accordingly, we have elected the practical expedient available under ASC 606 not to disclose remaining performance obligations for our contracts. The period between when control of the promised products transfers to the customer and when the customer pays for the products is one year or less. As such, we do not adjust product consideration for the effects of a significant financing component. The amortization period of any asset resulting from incremental costs of obtaining a contract would be one year or less.

We expense incremental direct costs of obtaining a contract (broker commissions) when the related sale takes place.

We account for shipping and handling costs as fulfillment activities and therefore recognize them upon shipment of goods.

The impact of adopting ASC 606 on our Condensed Consolidated Statements of Income and Comprehensive Income is as follows:


Three Months Ended December 31, 2018
 
Nine Months Ended December 31, 2018
(In thousands)
As Reported
 
Impact of Change
 
Without Adoption of ASC 606
 
As Reported
 
Impact of Change
 
Without Adoption of ASC 606
Total revenues
$
241,414


$
13,618


$
255,032

 
$
734,751


$
(8,492
)

$
726,259

Cost of sales
$
102,179


$
5,140


$
107,319

 
$
317,421


$
(3,256
)

$
314,165

Total operating expenses
$
61,694


$
391


$
62,085

 
$
196,378


$
(188
)

$
196,190

Income before income taxes
$
50,996


$
8,087


$
59,083


$
140,975


$
(5,048
)

$
135,927

Provision (benefit) for income taxes
$
12,829


$
2,038


$
14,867

 
$
37,501


$
(1,714
)

$
35,787

Net income
$
38,167


$
6,049


$
44,216

 
$
103,474


$
(3,334
)

$
100,140


3.    Divestiture

On July 2, 2018, we sold the Comet®, Spic and Span®, Chore Boy®, Chlorinol® and Cinch® brands, as well as associated inventory. These brands represented our Household Cleaning segment.

As a result of this transaction, we received proceeds of approximately $65.9 million and recorded a pre-tax gain on sale of $1.3 million. The net proceeds were used to repay debt. 

- 8-



The following table sets forth the components of the assets sold and the pre-tax gain recognized on the sale in July 2018:
(In thousands)
July 2, 2018
Components of assets sold:
 
Inventory
$
6,644

Property, plant and equipment, net
653

Goodwill
6,245

Intangible assets, net
49,315

Assets sold
62,857

Total purchase price received
65,912

 
(3,055
)
Costs to sell
1,771

Pre-tax gain on divestiture
$
(1,284
)

4.     Inventories

Inventories consist of the following:
(In thousands)
December 31, 2018
 
March 31, 2018
Components of Inventories
 
 
 
Packaging and raw materials
$
16,834

 
$
13,112

Work in process
307

 
157

Finished goods
103,227

 
105,278

Inventories
$
120,368

 
$
118,547


Inventories are carried and depicted above at the lower of cost or net realizable value, which includes a reduction in inventory values of $3.3 million and $4.2 million at December 31, 2018 and March 31, 2018, respectively, related to obsolete and slow-moving inventory.

5.    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, 2018









Goodwill
$
711,104


$
32,919


$
71,405


$
815,428


Accumulated impairment loss
(130,170
)

—


(65,160
)

(195,330
)
Balance - March 31, 2018
580,934


32,919


6,245


620,098


2019 Reductions:











     Goodwill
—


—


(71,405
)

(71,405
)

     Accumulated impairment loss
—


—


65,160


65,160


Effects of foreign currency exchange rates
—


(1,897
)

—


(1,897
)
Balance - December 31, 2018








Goodwill
711,104


31,022


—


742,126


Accumulated impairment loss
(130,170
)

—


—


(130,170
)
Balance - December 31, 2018
$
580,934


$
31,022


$
—


$
611,956

 
 
 
 
 
 
 
 
 

As discussed in Note 3, on July 2, 2018, we sold our Household Cleaning segment. As a result, we decreased goodwill by $6.2 million.

- 9-



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 28, 2018, during our annual test for goodwill impairment, there were no indicators of impairment under the analysis. Accordingly, no impairment charge was recorded in fiscal 2018. 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 28, 2018, 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, increasing 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 December 31, 2018, no events have occurred that would indicate potential impairment of goodwill.

6.    Intangible Assets, net

A reconciliation of the activity affecting intangible assets, net is as follows:
(In thousands)
Indefinite-
Lived
Trademarks
 
Finite-Lived
Trademarks and Customer Relationships
 
Totals
Gross Carrying Amounts
 
 
 
 
 
Balance — March 31, 2018
$
2,490,303

 
$
441,314

 
$
2,931,617

Reductions
(30,562
)
 
(34,889
)
 
(65,451
)
Effects of foreign currency exchange rates
(6,921
)
 
(383
)
 
(7,304
)
Balance — December 31, 2018
2,452,820

 
406,042

 
2,858,862

 
 

 
 

 
 

Accumulated Amortization
 

 
 

 
 

Balance — March 31, 2018
—

 
150,701

 
150,701

Additions
—

 
16,548

 
16,548

Reductions
—


(16,136
)

(16,136
)
Effects of foreign currency exchange rates
—

 
(76
)
 
(76
)
Balance — December 31, 2018
—

 
151,037

 
151,037

 
 
 
 
 
 
Intangible assets, net — December 31, 2018
$
2,452,820

 
$
255,005

 
$
2,707,825


As discussed in Note 3, on July 2, 2018, we sold our Household Cleaning segment. As a result, we decreased our indefinite-lived intangibles by $30.5 million and our net finite-lived trademarks by $18.8 million.

Amortization expense was $5.3 million and $16.5 million for the three and nine months ended December 31, 2018, respectively, and $5.8 million and $17.5 million for the three and nine months ended December 31, 2017, respectively.  Based on our amortizable intangible assets as of December 31, 2018, amortization expense is expected to be approximately $5.4 million for the remainder of fiscal 2019, $21.5 million in fiscal 2020, $21.0 million in fiscal 2021 and $20.6 million in each of fiscal 2022, 2023 and 2024.

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. The date of our annual impairment review was February 28, 2018, and we recorded impairment charges in our March 31, 2018 financial statements. 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.


- 10-


We utilize 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 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.

As of December 31, 2018, no events have occurred that would indicate further potential impairment of intangible assets.

7.    Other Accrued Liabilities

Other accrued liabilities consist of the following:

(In thousands)
December 31, 2018
 
March 31, 2018
Accrued marketing costs
$
31,084

 
$
21,473

Accrued compensation costs
8,844

 
10,591

Accrued broker commissions
2,009

 
1,487

Income taxes payable
6,218

 
1,901

Accrued professional fees
1,820

 
2,244

Accrued production costs
5,503

 
7,392

Other accrued liabilities
10,704

 
7,013

 
$
66,182

 
$
52,101


8.    Long-Term Debt

At December 31, 2018, we had $75.0 million outstanding on the asset-based revolving credit facility entered into January 31, 2012, as amended (the "2012 ABL Revolver") and an additional borrowing capacity of $89.6 million.

Long-term debt consists of the following, as of the dates indicated:
(In thousands, except percentages)
 
December 31, 2018
 
March 31, 2018
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.
 
$
600,000

 
$
600,000

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-5 Loans bearing interest at the Borrower's option at either LIBOR plus a margin of 2.00%, with a LIBOR floor of 0.00%, or an alternate base rate plus a margin of 1.00%, with a floor of 1.00%, due on January 26, 2024.
 
783,000

 
938,000

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 January 26, 2022.
 
75,000

 
75,000

Long-term debt
 
1,858,000

 
2,013,000

Less: unamortized debt costs
 
(15,712
)
 
(20,048
)
Long-term debt, net
 
$
1,842,288

 
$
1,992,952


- 11-



As of December 31, 2018, aggregate future principal payments required in accordance with the terms of the 2012 Term B-5 Loans, 2012 ABL Revolver and the indentures governing the 6.375% senior unsecured notes due 2024 (the "2016 Senior Notes") and the 5.375% senior unsecured notes due 2021 (the "2013 Senior Notes") are as follows:
(In thousands)
 
Year Ending March 31,
Amount
2019 (remaining three months ending March 31, 2019)
$
—

2020
 
—

2021
 
—

2022
 
475,000

2023
 
—

Thereafter
1,383,000

 
$
1,858,000


9.    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.

FASB ASC 820, Fair Value Measurements, requires fair value to be determined based on the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market assuming an orderly transaction between market participants. ASC 820 established market (observable inputs) as the preferred source of fair value, to be followed by our assumptions of fair value based on hypothetical transactions (unobservable inputs) in the absence of observable market inputs. Based upon the above, the following fair value hierarchy was created:

Level 1 - Quoted market prices for identical instruments in active markets;

Level 2 - Quoted prices for similar instruments in active markets, as well as quoted prices for identical or similar instruments in markets that are not considered active; and

Level 3 - Unobservable inputs developed by us using estimates and assumptions reflective of those that would be utilized by a market participant.

The market values have been determined based on market values for similar instruments adjusted for certain factors. As such, the 2016 Senior Notes, the 2013 Senior Notes, the 2012 Term B-5 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 December 31, 2018 and March 31, 2018.
 
 
December 31, 2018
 
March 31, 2018
(In thousands)
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
2016 Senior Notes
 
$
600,000

 
$
582,000

 
$
600,000

 
$
610,500

2013 Senior Notes
 
400,000

 
391,000

 
400,000

 
402,000

2012 Term B-5 Loans
 
783,000

 
749,723

 
938,000

 
939,173

2012 ABL Revolver
 
75,000

 
75,000

 
75,000

 
75,000


At December 31, 2018 and March 31, 2018, we did not have any assets or liabilities measured in Level 1 or 3.

10.    Stockholders' Equity

We are 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,

- 12-


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 our common stock through December 31, 2018.

During the three months ended December 31, 2018 and 2017, we made no repurchases of common stock. During the nine months ended December 31, 2018 and 2017, we repurchased 68,939 shares and 20,549 shares, respectively, of common stock from our employees pursuant to the provisions of various employee restricted stock awards. The repurchases for the nine months ended December 31, 2018 and 2017 were at an average price of $33.09 and $52.33, respectively. All of the repurchased shares have been recorded as treasury stock.

During the nine months ended December 31, 2018, we also repurchased 1,449,750 shares of our common stock in conjunction with our share repurchase program. The repurchases were at an average price of $34.47 per share, totaled $50.0 million, and have been recorded as treasury stock.

11.    Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss consisted of the following at December 31, 2018 and March 31, 2018:
(In thousands)
December 31, 2018
 
March 31, 2018
Components of Accumulated Other Comprehensive Loss
 
 
 
Cumulative translation adjustment
$
(27,537
)
 
$
(20,398
)
Unrecognized net gain on pension plans
1,083

 
1,083

Accumulated other comprehensive loss, net of tax
$
(26,454
)
 
$
(19,315
)

As of December 31, 2018 and March 31, 2018, no amounts were reclassified from accumulated other comprehensive income into earnings.

12.    Earnings Per Share

Basic earnings per share is computed based on income available to common stockholders and the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share is computed based on income available to common stockholders and the weighted average number of shares of common stock outstanding plus the effect of potentially dilutive common shares outstanding during the period using the treasury stock method, which includes stock options and restricted stock units ("RSUs"). Potential common shares, composed of the incremental common shares issuable upon the exercise of outstanding stock options and nonvested RSUs, are included in the diluted earnings per share calculation to the extent that they are dilutive. In loss periods, the assumed exercise of in-the-money stock options and RSUs has an anti-dilutive effect, and therefore these instruments are excluded from the computation of diluted earnings per share.


- 13-


The following table sets forth the computation of basic and diluted earnings per share:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
(In thousands, except per share data)
 
2018

2017
 
2018

2017
Numerator
 
 
 
 
 
 
 
 
Net income
 
$
38,167

 
$
314,793

 
$
103,474

 
$
379,257

 
 
 

 
 

 
 
 
 
Denominator
 
 

 
 

 
 
 
 
Denominator for basic earnings per share — weighted average shares outstanding
 
51,881

 
53,129

 
52,119

 
53,089

Dilutive effect of nonvested restricted stock units and options issued to employees and directors
 
321

 
414

 
312

 
442

Denominator for diluted earnings per share
 
52,202

 
53,543

 
52,431

 
53,531

 
 
 

 
 

 
 
 
 
Earnings per Common Share:
 
 

 
 

 
 
 
 
Basic earnings per share
 
$
0.74

 
$
5.93

 
$
1.99

 
$
7.14

 
 
 

 
 

 
 
 
 
Diluted earnings per share
 
$
0.73

 
$
5.88

 
$
1.97

 
$
7.08


For the three months ended December 31, 2018 and 2017, there were 0.4 million and 0.5 million shares, respectively, attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive. For the nine months ended December 31, 2018 and 2017, there were 0.5 million and 0.4 million shares, respectively, attributable to outstanding stock-based awards that were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive.
   
13.    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, RSUs and other equity-based awards. In June 2014, the Board of Directors approved, and in July 2014, our stockholders ratified, an increase of an additional 1.8 million shares of our common stock for issuance under the Plan, an increase of the maximum number of shares subject to stock options that may be awarded to any one participant under the Plan during any fiscal 12-month period from 1.0 million to 2.5 million shares, and an extension of 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 nine months ended December 31, 2018, pre-tax share-based compensation costs charged against income were $1.9 million and $6.2 million, respectively, and the related income tax benefit recognized was $0.3 million and $1.1 million, respectively. During the three and nine months ended December 31, 2017, pre-tax share-based compensation costs charged against income were $2.2 million and $6.9 million, respectively, and the related income tax recognized was an expense of $0.1 million and a benefit of $1.4 million, respectively.

At December 31, 2018, there were $7.6 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 year.  The total fair value of options and RSUs vested during the nine months ended December 31, 2018 and 2017 was $12.0 million and $6.8 million, respectively.  For the nine months ended December 31, 2018 and 2017, we received cash from the exercise of stock options of $2.9 million and $1.5 million, respectively. For the nine months ended December 31, 2018 and 2017, we realized $1.3 million and $1.1 million, respectively, in tax benefits from the tax deductions resulting from RSU issuances and stock option exercises. At December 31, 2018, there were 1.8 million shares available for issuance under the Plan.

On May 7, 2018, the Compensation and Talent Management Committee of our Board of Directors granted 103,406 performance stock units, 100,399 RSUs and stock options to acquire 294,484 shares of our common stock to certain executive officers and employees under the Plan. The stock options were granted at an exercise price of $29.46 per share, which was equal to the closing price for our common stock on the date of the grant.

- 14-


Each of the independent members of the Board of Directors received a grant under the Plan of 3,779 RSUs on July 31, 2018.

Restricted Stock Units

RSUs granted to employees under the Plan generally vest in three years, primarily upon the attainment of certain time vesting thresholds, and, in the case of performance share units, may also be contingent on the attainment of certain performance goals of the Company, including revenue and earnings before income taxes, depreciation and amortization targets.  The RSUs provide for accelerated vesting if there is a change of control, as defined in the Plan.  The RSUs granted to employees generally vest either ratably over three years or in their entirety on the three-year anniversary of the date of the grant. Upon vesting, the units will be settled in shares of our common stock. Termination of employment prior to vesting will result in forfeiture of the RSUs, unless otherwise accelerated by the Compensation and Talent Management Committee or, in the case of RSUs granted in May 2017 and 2018, subject to pro-rata vesting in the event of death, disability or retirement. The RSUs granted to directors vest immediately upon grant, and will be settled by delivery to the director of one share of our common stock for each vested RSU promptly following the earliest of the (i) director's death, (ii) director's disability or (iii) six-month anniversary of the date on which the director's Board membership ceases for reasons other than death or disability.

The fair value of the RSUs is determined using the closing price of our common stock on the date of the grant.

A summary of the RSUs granted under the Plan is presented below:
 
 
 
RSUs
 
 
Shares
(in thousands)
 
Weighted
Average
Grant-Date
Fair Value
Nine Months Ended December 31, 2017
 
 
 
 
Vested and nonvested at March 31, 2017
 
350.1

 
$
39.29

Granted
 
105.8

 
55.61

Vested and issued
 
(53.3
)
 
34.30

Forfeited
 
(8.8
)
 
48.49

Vested and nonvested at December 31, 2017
 
393.8

 
44.14

Vested at December 31, 2017
 
90.5

 
29.88

 
 
 

 
 

Nine Months Ended December 31, 2018
 
 
 
 
Vested and nonvested at March 31, 2018
 
393.5

 
$
44.13

Granted
 
226.4

 
30.09

Vested and issued
 
(175.8
)
 
43.05

Forfeited
 
(31.1
)
 
48.32

Vested and nonvested at December 31, 2018
 
413.0

 
36.58

Vested at December 31, 2018
 
113.2

 
31.05


Options

The Plan provides that the exercise price of options granted shall be no less than the fair market value of our 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. Except in the case of death, disability or retirement, termination of employment prior to vesting will result in forfeiture of the nonvested 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.  

- 15-



The weighted average grant-date fair values of the options granted during the nine months ended December 31, 2018 and 2017 were $10.22 and $21.20, respectively.
 
 
Nine Months Ended December 31,
 
 
2018
 
2017
Expected volatility
 
29.6
%
 
35.2
%
Expected dividends
 
$
—

 
$
—

Expected term in years
 
6.0

 
6.0

Risk-free rate
 
2.9
%
 
2.2
%

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)
Nine Months Ended December 31, 2017
 
 
 
 
 
 
 
 
Outstanding at March 31, 2017
 
772.3

 
$
37.70

 
 
 
 
Granted
 
182.8

 
56.11

 
 
 
 
Exercised
 
(51.0
)
 
28.76

 
 
 
 
Forfeited or expired
 
(22.1
)
 
48.15

 
 
 
 
Outstanding at December 31, 2017
 
882.0

 
41.77

 
7.2
 
$
7,019

Exercisable at December 31, 2017
 
502.9

 
32.50

 
6.1
 
$
6,884

 
 
 
 
 
 
 
 
 
Nine Months Ended December 31, 2018
 
 

 
 

 
 
 
 

Outstanding at March 31, 2018
 
873.2

 
$
41.79

 
 
 
 
Granted
 
294.5

 
29.46

 
 
 
 
Exercised
 
(97.7
)
 
30.02

 
 
 
 
Forfeited or expired
 
(125.4
)
 
47.16

 
 
 
 
Outstanding at December 31, 2018
 
944.6

 
38.45

 
7.2
 
$
2,477

Exercisable at December 31, 2018
 
499.4

 
37.87

 
5.8
 
$
2,076


The aggregate intrinsic value of options exercised during the nine months ended December 31, 2018 was $0.8 million.

14.    Income Taxes

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act represents significant U.S. federal tax reform legislation that includes a permanent reduction to the U.S. federal corporate income tax rate. The permanent reduction to the federal corporate income tax rate resulted in a one-time gain of $267.0 million related to the value of our deferred tax liabilities and a gain of $3.2 million related to the lower blended tax rate on our earnings, in the year ended March 31, 2018, resulting in a net gain of $270.2 million. Additionally, the Tax Act subjects certain of our cumulative foreign earnings and profits to U.S. income taxes through a deemed repatriation, which resulted in a charge of $1.9 million in the year ended March 31, 2018.

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 rates used in the calculation of income taxes were 25.2% and (446.1)% for the three months ended December 31, 2018 and 2017, respectively. The effective rates used in the calculation of income taxes were 26.6% and (137.6)% for the nine months ended December 31, 2018 and 2017, respectively. The increases in the effective tax rates for the three and nine months ended December 31, 2018 versus the respective prior year periods were primarily related to the Tax Act being enacted in the prior year periods, which included a one-time gain as discussed above.

The balance in our uncertain tax liability was $9.8 million at December 31, 2018 and $10.8 million at March 31, 2018. 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.

- 16-



15.     Employee Retirement Plans

The primary components of Net Periodic Benefits consist of the following:
 
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 (In thousands)
 
2018

2017
 
2018

2017
Interest cost
 
$
599

 
$
631

 
$
1,819

 
$
1,894

Expected return on assets
 
(767
)
 
(725
)
 
(2,303
)
 
(2,176
)
Net periodic benefit income
 
$
(168
)
 
$
(94
)
 
$
(484
)
 
$
(282
)

During the nine months ended December 31, 2018, we contributed $0.3 million to our non-qualified defined benefit plan and $1.0 million to the qualified defined benefit plan. During the remainder of fiscal 2019, we expect to contribute an additional $0.1 million to our non-qualified plan and make no contributions to the qualified plan.

16.    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.

17.    Concentrations of Risk

Our revenues are concentrated in the areas of OTC Healthcare and Household Cleaning products (prior to the sale of our Household Cleaning segment, as discussed in Note 3).  We sell our products to mass merchandisers and drug, food, dollar, convenience and club stores and e-commerce channels.  During the three and nine months ended December 31, 2018, approximately 41.7% and 42.8%, respectively, of our gross revenues were derived from our five top selling brands. During the three and nine months ended December 31, 2017, approximately 39.9% and 41.2%, respectively, of our gross revenues were derived from our five top selling brands. One customer, Walmart accounted for more than 10% of our gross revenues for each of the periods presented. Walmart accounted for approximately 22.3% and 23.5%, respectively, of our gross revenues for the three and nine months ended December 31, 2018. For the three and nine months ended December 31, 2017, Walmart accounted for approximately 21.4% and 24.0%, respectively, of our gross revenues. The gross revenues for Walmart are included in our North American OTC Healthcare segment and Household Cleaning segment (prior to the sale of our Household Cleaning segment on July 2, 2018).

Our product distribution in the United States is managed by a third party through one primary distribution center near St. Louis, Missouri, and we operate one manufacturing facility for certain of our products located in Lynchburg, Virginia. A serious disruption, caused by performance or contractual issues with the third party distribution manager or by earthquake, flood, or fire, could damage our inventory and/or materially impair our ability to distribute our products to customers in a timely manner or at a reasonable cost. Any disruption as a result of third party performance at our distribution center could result in increased costs, expense, shipping times, customer fees and penalties. In addition, any serious disruption to our Lynchburg manufacturing facility could materially impair our ability to manufacture many of our products, which would also limit our ability to provide products to customers in a timely manner or at a reasonable cost.  We could also incur significantly higher costs and experience longer lead times if we need to replace our primary distribution center, the third party distribution manager or the manufacturing facility.  As a result, any serious disruption could have a material adverse effect on our business, financial condition and results of operations.

At December 31, 2018, we had relationships with 112 third-party manufacturers.  Of those, we had long-term contracts with 33 manufacturers that produced items that accounted for approximately 60.4% of gross sales for the nine months ended December 31, 2018. At December 31, 2017, we had relationships with 114 third-party manufacturers.  Of those, we had long-term contracts with 46 manufacturers that produced items that accounted for approximately 74.2% of gross sales for the nine months ended December 31, 2017. 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

- 17-


material adverse effect on our business and results of operations. Although we are continually in the process of negotiating long-term contracts with certain key manufacturers, we may not be able to reach a timely agreement, which could have a material adverse effect on our business and results of operations.

18.    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 and (ii) International OTC Healthcare. We sold our Household Cleaning segment on July 2, 2018; see Note 3 for further information. 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.

The tables below summarize information about our reportable segments.
 
Three Months Ended December 31, 2018
(In thousands)
North American OTC
Healthcare

International OTC
Healthcare

Household
Cleaning

Consolidated
Total segment revenues*
$
216,776


$
24,638


$
—


$
241,414

Cost of sales
91,594


10,585


—


102,179

Gross profit
125,182


14,053


—


139,235

Advertising and promotion
30,316


4,188


—


34,504

Contribution margin
$
94,866


$
9,865


$
—


104,731

Other operating expenses
 




 


27,190

Operating income
 




 


77,541

Other expense
 




 


26,545

Income before income taxes








50,996

Provision for income taxes
 




 


12,829

Net income








$
38,167

* Intersegment revenues of $1.3 million were eliminated from the North American OTC Healthcare segment.

 
Nine Months Ended December 31, 2018
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Total segment revenues*
$
647,501


$
67,439


$
19,811


$
734,751

Cost of sales
272,754


28,079


16,588


317,421

Gross profit
374,747


39,360


3,223


417,330

Advertising and promotion
96,899


11,328


430


108,657

Contribution margin
$
277,848


$
28,032


$
2,793


308,673

Other operating expenses
 





 


87,721

Operating income
 





 


220,952

Other expense
 





 


79,977

Income before income taxes









140,975

Provision for income taxes
 





 


37,501

Net income









$
103,474

* Intersegment revenues of $5.6 million were eliminated from the North American OTC Healthcare segment.

- 18-



 
Three Months Ended December 31, 2017
(In thousands)
North American OTC
Healthcare

International OTC
Healthcare

Household
Cleaning

Consolidated
Total segment revenues*
$
225,695


$
25,717


$
19,203


$
270,615

Cost of sales
95,164


10,511


17,266


122,941

Gross profit
130,531


15,206


1,937


147,674

Advertising and promotion
30,794


4,544


497


35,835

Contribution margin
$
99,737


$
10,662


$
1,440


111,839

Other operating expenses
 




 


27,949

Operating income
 




 


83,890

Other expense
 




 


26,251

Income before income taxes








57,639

Benefit for income taxes
 




 


(257,154
)
Net income








$
314,793

* Intersegment revenues of $1.9 million were eliminated from the North American OTC Healthcare segment.

 
Nine Months Ended December 31, 2017
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Total segment revenues*
$
656,812


$
67,572


$
60,830


$
785,214

Cost of sales
268,849


29,757


51,360


349,966

Gross profit
387,963


37,815


9,470


435,248

Advertising and promotion
98,666


11,827


1,474


111,967

Contribution margin
$
289,297


$
25,988


$
7,996


323,281

Other operating expenses
 




 


84,711

Operating income
 




 


238,570

Other expense
 




 


78,922

Income before income taxes








159,648

Benefit for income taxes
 




 


(219,609
)
Net income








$
379,257

* Intersegment revenues of $5.6 million were eliminated from the North American OTC Healthcare segment.

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The tables below summarize information about our segment revenues from similar product groups.
 
Three Months Ended December 31, 2018
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Analgesics
$
29,325

 
$
136

 
$
—

 
$
29,461

Cough & Cold
27,137

 
4,584

 
—

 
31,721

Women's Health
60,946

 
3,306

 
—

 
64,252

Gastrointestinal
30,737

 
10,321

 
—

 
41,058

Eye & Ear Care
23,352

 
3,164

 
—

 
26,516

Dermatologicals
21,508

 
470

 
—

 
21,978

Oral Care
22,177

 
2,656

 
—

 
24,833

Other OTC
1,594

 
1

 
—

 
1,595

Household Cleaning
—

 
—

 
—

 
—

Total segment revenues
$
216,776

 
$
24,638

 
$
—

 
$
241,414

 
Nine Months Ended December 31, 2018
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Analgesics
$
86,221

 
$
418

 
$
—

 
$
86,639

Cough & Cold
63,843

 
15,489

 
—

 
79,332

Women's Health
186,037

 
8,833

 
—

 
194,870

Gastrointestinal
94,065

 
24,261

 
—

 
118,326

Eye & Ear Care
73,669

 
8,778

 
—

 
82,447

Dermatologicals
71,968

 
1,607

 
—

 
73,575

Oral Care
67,516

 
8,050

 
—

 
75,566

Other OTC
4,182

 
3

 
—

 
4,185

Household Cleaning
—

 
—

 
19,811

 
19,811

Total segment revenues
$
647,501

 
$
67,439

 
$
19,811

 
$
734,751

 
Three Months Ended December 31, 2017
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Analgesics
$
31,293

 
$
160

 
$
—

 
$
31,453

Cough & Cold
28,761

 
4,331

 
—

 
33,092

Women's Health
63,107

 
2,940

 
—

 
66,047

Gastrointestinal
29,392

 
11,251

 
—

 
40,643

Eye & Ear Care
21,631

 
3,205

 
—

 
24,836

Dermatologicals
22,736

 
562

 
—

 
23,298

Oral Care
27,144

 
3,267

 
—

 
30,411

Other OTC
1,631

 
1

 
—

 
1,632

Household Cleaning
—

 
—

 
19,203

 
19,203

Total segment revenues
$
225,695

 
$
25,717

 
$
19,203

 
$
270,615


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Nine Months Ended December 31, 2017
(In thousands)
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
Analgesics
$
89,931

 
$
709

 
$
—

 
$
90,640

Cough & Cold
67,738

 
13,603

 
—

 
81,341

Women's Health
187,688

 
8,440

 
—

 
196,128

Gastrointestinal
88,145

 
25,123

 
—

 
113,268

Eye & Ear Care
69,437

 
8,850

 
—

 
78,287

Dermatologicals
72,688

 
1,587

 
—

 
74,275

Oral Care
77,026

 
9,256

 
—

 
86,282

Other OTC
4,159

 
4

 
—

 
4,163

Household Cleaning
—

 
—

 
60,830

 
60,830

Total segment revenues
$
656,812

 
$
67,572

 
$
60,830

 
$
785,214


Our total segment revenues by geographic area are as follows:
 
Three Months Ended December 31,
 
Nine Months Ended December 31,
 
2018
 
2017
 
2018
 
2017
United States
$
204,943


$
232,583

 
$
632,183


$
682,928

Rest of world
36,471


38,032

 
102,568


102,286

Total
$
241,414


$
270,615

 
$
734,751


$
785,214


Our consolidated goodwill and intangible assets have been allocated to the reportable segments as follows:
December 31, 2018
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
(In thousands)
 
 
 
 
 
 
 
Goodwill
$
580,934

 
$
31,022

 
$
—

 
$
611,956

 
 
 
 
 
 
 
 
Intangible assets
 
 
 
 
 
 
 

Indefinite-lived
2,375,735

 
77,085

 
—

 
2,452,820

Finite-lived, net
249,637

 
5,368

 
—

 
255,005

Intangible assets, net
2,625,372

 
82,453

 
—

 
2,707,825

Total
$
3,206,306

 
$
113,475

 
$
—

 
$
3,319,781


March 31, 2018
North American OTC
Healthcare
 
International OTC
Healthcare
 
Household
Cleaning
 
Consolidated
(In thousands)
 
 
 
 
 
 
 
Goodwill
$
580,934


$
32,919


$
6,245


$
620,098