Physicians Formula Holdings Inc. has a market cap of $55.5 million; its shares were traded at around $4.02 with a P/E ratio of 37 and P/S ratio of 0.7. FACE is in the portfolios of Chuck Royce of Royce& Associates.
Highlight of Business Operations:Selling, General and Administrative Expenses. Selling, general and administrative expenses increased $284,000, or 4.3%, to $6.9 million for the three months ended September 30, 2010 from $6.6 million for the three months ended September 30, 2009. The increase was primarily due to a $430,000 increase in bad debt expense which resulted primarily from lower bad debt recoveries in the current period. Also contributing to the increase was a $188,000 increase in sales force and sales administrative expenses, a $188,000 increase in corporate administrative costs and a $106,000 increase in realized and unrealized foreign currency exchange losses, which were partially offset by a $231,000 decrease in marketing spend, a $222,000 decrease in freight and warehouse costs and a $175,000 decrease in distribution costs.
Trade spending with retailers decreased $3.3 million, or 16.3%, to $17.1 million for the nine months ended September 30, 2010 from $20.4 million for the nine months ended September 30, 2009, which included a decrease in markdowns of $1.5 million, a decrease in coupon expense of $1.3 million, a decrease in cooperative advertising of $1.1 million and a decrease in cash discounts and miscellaneous allowances of $326,000, partially offset by an increase in retail marketing of $925,000.
Selling, General and Administrative Expenses. Selling, general and administrative expenses decreased $5.1 million, or 17.4%, to $24.2 million for the nine months ended September 30, 2010 from $29.3 million for the nine months ended September 30, 2009. The decrease was primarily due to a $4.4 million decrease in marketing expenses which resulted primarily from a change in retailer programs. Also contributing to the decrease was a $752,000 decrease in distribution costs and a $389,000 decrease in freight and warehouse costs, which were partially offset by a $316,000 increase in realized and unrealized foreign currency exchange gains and a $153,000 increase in sales force and sales administrative expenses.
Future Liquidity and Capital Needs. Our net working capital increased $4.1 million, or 16.9%, to $28.4 million as of September 30, 2010 from $24.3 million as of December 31, 2009. We anticipate that requirements for working capital will increase during the fourth quarter of 2010, when we typically experience higher inventory levels as we produce new products for shipment in the first quarter of the following year. We have budgeted capital expenditures of $5.1 million for 2010 for several key projects, including $3.6 million in investments in retail permanent fixtures, $800,000 in improvements to other manufacturing and distribution equipment, $623,000 in improvements to our information technology infrastructure, $50,000 to upgrade a product assembly line and $17,000 in improvements to our research and development equipment. We expect capital requirements related to fixture infrastructure to total $7.7 million for the period from September 2008 (inception of the project) to December 2010, of which $5.1 million was incurred as of September 30, 2010. We spent $333,000 for capital expenditures and $1.2 million for investments in retail permanent fixtures for the nine months ended September 30, 2010. We believe that our cash flows from operations and funds from our financing arrangements entered into during November 2009 will provide adequate funds for our working capital needs and planned capital expenditures for at least the next twelve months. No assurance can be given, however, that this will be the case.
The maximum amount available for borrowing under the new revolving credit facility is equal to the lesser of $25.0 million and a borrowing base formula equal to: (i) 65% or such lesser percentage of eligible accounts receivable as Wells Fargo in its discretion as an asset-based lender may deem appropriate; plus (ii) the least of (1) $14.0 million and (2) the sum of specified percentages (or such lesser percentages as Wells Fargo in its discretion as an asset-based lender may deem appropriate) of each of the following items of eligible inventory (as defined in the New Senior Credit Agreement): (A) of eligible inventory consisting of finished goods that are fully packaged, labeled and ready for shipping, not to exceed 65% of such eligible inventory, (B) eligible inventory consisting of semi-finished goods which are ready for packaging and shipping, not to exceed $4.0 million, (C) eligible inventory consisting of raw materials, not to exceed $1.5 million, (D) eligible inventory consisting of blank components, not to exceed $1.0 million and (E) eligible inventory consisting of returned items, not to exceed $0.75 million; plus (iii) the cash balance in a certain Canadian concentration account; less (iv) a working capital reserve of $1.0 million as such amount may be adjusted by Wells Fargo from time to time and a borrowing base reserve that Wells Fargo establishes from time to time in its discretion as a secured asset-based lender; less (v) indebtedness owed to Wells Fargo other than indebtedness outstanding under the new revolving credit facility. Availability under the new revolving credit facility is reduced by outstanding letters of credit.
The New Senior Credit Agreement defines “book net worth” as the Company s stockholders equity, determined in accordance with GAAP and calculated without regard to any change in the valuation of goodwill and intangible assets made in accordance with ASC 350, Intangibles-Goodwill and Other. The New Senior Credit Agreement requires that the Company has a minimum book net worth of $47.25 million as of September 30, 2010. As of September 30, 2010, the Company was in compliance with such covenant. The New Senior Credit Agreement defines “Adjusted EBITDA” as the Company s consolidated net income, calculated before (i) interest expense, (ii) provision (benefit) for income taxes, (iii) depreciation and amortization expense, (iv) gains arising from the write-up of assets, (v) any extraordinary gains, (vi) stock-based compensation expenses, (vii) changes resulting from the valuation of goodwill and intangible assets made in accordance with ASC 350, and (viii) changes resulting from foreign exchange adjustments arising from a revaluation of assets subject to foreign currency revaluation, and (ix) provisions arising from adjustments to the Company s inventory reserves for obsolete, excess, or slow moving inventory. On June 29, 2010, Physicians entered into the First Amendment to the New Senior Credit Agreement (the "First Amendment") with Wells Fargo which reduced the minimum Adjusted EBITDA covenant for the 12 months ended June 30, 2010 by $850,000 to $11.0 million from $11.85 million. All other covenants, including the book net worth covenant, the maximum capital expenditure covenant and the other 2010 minimum Adjusted EBITDA covenants were not modified. In connection with the First Amendment, the Company paid Wells Fargo a fee of $10,000 and related expenses. The New Senior Credit Agreement requires that the Company has a minimum Adjusted EBITDA of $10.15 million for the 12 months ended September 30, 2010. As of September 30, 2010, the Company was in compliance with such covenant.
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