Feb 9 2010
The Female Health Company ( FHCO), which manufactures and markets the FC2 Female Condom®, today reported its operating results for the first quarter of FY2010.
During the three months ended December 31, 2009, the Company's net revenues increased 3% to approximately $5.5 million, compared with approximately $5.3 million in the first quarter of the previous fiscal year. The modest increase in revenues reflects the transition by the Company's customers from the first-generation FC1 Female Condom to the lower-priced FC2 Female Condom®. The final FC1 orders were shipped in October 2009.
The Company recorded a net loss attributable to common stockholders of $(698,351), or $(0.03) per diluted share, in the first quarter of FY2010 compared with net income attributable to common stockholders of $1,608,816, or $0.06 per diluted share, in the first quarter of FY2009. The net loss in the most recent quarter resulted entirely from a previously announced one-time restructuring charge of $1,896,353, along with a foreign currency loss of $48,689 in the first quarter of FY2010, versus a foreign currency gain of $1,194,107 in the first quarter of FY2009. The Company expects the impact of foreign currency fluctuations in the future to be modest, reflecting its U.K. and Malaysian subsidiaries' adoption of the US dollar as their functional currency effective October 1, 2009.
Cost of sales decreased 21% to $2,285,813 in the first quarter of FY2010 compared with $2,903,644 in the first quarter of FY2009, on the 20% increase in unit sales, reflecting the transition to FC2. As a result, gross profit increased 31% to $3,202,861 in the most recent quarter, compared with $2,441,194 in the first quarter of FY2009. Gross profit as a percentage of net revenues increased to 58.4% in the quarter ended December 31, 2009, compared with 45.7% in the prior-year quarter.
Recognition of the one-time restructuring expense of $1,896,353 resulted in an operating loss of $(624,132) in the three months ended December 31, 2009, compared with operating income of $438,935, in the three months ended December 31, 2008. Exclusive of the restructuring expense, operating income rose 190% to $1,272,221, versus $438,935 in the same period last year, reflecting customers' transition to the more profitable second generation product, FC2.
Earnings Guidance
"We maintain our FY2010 guidance that unit sales should increase by 20% to 25%, and operating earnings should increase 35% to 40% over FY2009 results, exclusive of restructuring charges," noted O.B. Parrish, Chief Executive Officer of The Female Health Company. "The transition to our second-generation FC2 Female Condom® and its favorable impact on our profitability is particularly encouraging. We ended the first quarter with a strong, debt-free balance sheet, approximately $3.3 million of cash in the bank, and a current ratio of 4.0 to 1.0."
As noted in previous news releases, the Company expects significant quarter-to-quarter variations in its operating results, due to the timing of large order receipts, production scheduling, and shipping of products.
FC1 to FC2 Transition Restructuring Expenses
The UK employee redundancy charges relating to the FC1 to FC2 transition were recorded in the fourth quarter of FY2009. In connection with the evaluation of its leased U.K. FC1 manufacturing facility, the Company entered into new lease and related agreements (collectively, the "New Lease") with the new owner of the U.K. facility in November 2009. The New Lease replaces the Company's previous lease for its U.K. facility, which had an expiration date of December 10, 2016 and required rental payments of $484,049 per year. The New Lease expires on the earlier of (1) November 1, 2010 or (2) at least three months after the Landlord provides a notice of termination, but in any event not before May 2, 2010. The annual rent remains $484,049 per year, which the Company was required to deposit upon execution of the New Lease. In connection with the New Lease, the Company also made a lease surrender payment of $975,746 to the Landlord on November 2, 2009. A second and final lease surrender payment of $477,859 was made to the landlord on February 1, 2010. As of this date, the landlord has not yet provided a notice of termination.
From a cash flow perspective, replacing the previous lease eliminates future payments of approximately $4.3 million (for rent and related expenses) over the remaining term of the previous lease, producing a positive net impact of approximately $2.8 million, after deducting the surrender payments.
The restructuring costs relating to the lease of approximately $1.9 million, net of the recognition of a deferred gain on sale of the facility, are recorded as a one-time charge in the first quarter of FY2010. The Company expects to incur up to $200,000 in additional restructuring costs, which will be expensed in the period in which they occur. Per the lease terms, the owner has the right to ask the Company to exit the facility prior to the November 1, 2010 lease expiration date. As the actual lease term is uncertain, there is the potential that part of the charge taken in the first quarter of FY2010 would be reversed if the lease term ends before November 1, 2010. The potential reversal of part of the charge could be as much as $246,000 if the lease is terminated as of May 15, 2010. The potential reversal of part of the charge diminishes proportionately over time as the number of months between the early termination date and November 1, 2010 decreases. In addition to the impact on income, if the lease terminates prior to November 1, 2010, the Company would receive a proportionate refund of its rent deposit. Such a refund has a positive cash effect but no income statement impact.
The exit from the new facility lease will complete the FC1 to FC2 transition and related one-time restructuring charges. While FC1 production has ceased, the Company continues to maintain a significant operating presence in the U.K.
SOURCE The Female Health Company