Business context and reporting period
The filing is the Female Health Company’s unaudited Form 10-Q for the quarter and six months ended March 31, 2014 (fiscal Q2 and first half of fiscal 2014). The business manufactures and sells FC2, a female condom, as its sole current product. The filing identifies the registrant as The Female Health Company, not VERU Inc.
Financial performance
| Metric | Three months ended March 31, 2014 | Year-over-year | Six months ended March 31, 2014 | Year-over-year |
|---|---|---|---|---|
| Revenue | $4.35 million | Down 54% | $11.04 million | Down 43% |
| Gross profit / margin | $2.39 million / 55% | Was $5.52 million / 58% | $6.06 million / 55% | Was $11.49 million / 59% |
| Operating income | $0.80 million | Down 76% | $2.38 million | Down 66% |
| Net income / diluted EPS | $0.38 million / $0.01 | Was $3.49 million / $0.12 | $1.84 million / $0.06 | Was $7.03 million / $0.24 |
Management attributed lower revenue primarily to a 56% quarterly and 43% half-year decline in unit sales, driven by the timing and shipment of large orders. Average selling price per unit rose 4.8% in the quarter and 0.5% for the half year. Operating expenses fell 26% for the quarter and 19% for the half, mainly due to lower incentive compensation.
Operating cash flow was $1.17 million for the half, versus $4.99 million in the prior-year period. Changes in operating assets and liabilities used $1.78 million of cash. Investing activities used $0.08 million; financing activities used $4.06 million, including $4.05 million of dividends. Cash declined to $5.94 million at March 31 from $8.92 million at September 30, 2013.
At March 31, current assets were $15.11 million and current liabilities $5.13 million; working capital was approximately $10.0 million. Total liabilities were $5.46 million and stockholders’ equity $27.75 million. No borrowings were outstanding on the $2 million revolving credit facility. The filing reports no material interest-rate exposure while the facility remains undrawn.
Material changes versus the prior comparable period
- Sales volume and revenue fell sharply in both the quarter and first half; gross margin also declined.
- Net income fell 89% for the quarter and 74% for the first half. Higher 2014 tax expense contributed: the prior-year periods benefited from a reduction in the deferred-tax valuation allowance, while the company said it did not expect significant further benefits of that kind after fiscal 2013.
- Cash dividends paid in the first half exceeded operating cash flow, contributing to the cash decline. Inventory rose to $4.12 million from $2.46 million at September 30, 2013.
- Quarterly dividends declared were $0.07 per share, unchanged from the prior-year quarter. The board declared a further approximately $2.0 million dividend for payment on May 7, 2014.
Outlook, commentary, risks and unusual items
The filing provides no numerical revenue or earnings guidance. Management said cash on hand was expected to fund operations for the next 12 months, but gave no assurance. It warned that if operating cash flow does not increase, the company may not have sufficient cash to maintain subsequent 2014 dividends; future dividends are at the board’s discretion. The $2 million revolving facility was scheduled to expire August 1, 2014.
Management said quarter-to-quarter results are materially affected by timing of large public-sector orders and tender processes, not necessarily by changes in underlying demand. Key risks include dependence on FC2, a concentrated customer base, reliance on government and donor-funded programs and distribution partners, regulatory compliance, competition, raw-material prices, foreign exchange, and potential production disruption. The company has $5 million of product-liability insurance coverage. It reported effective disclosure controls and no material change in internal control over financial reporting; it reported no material changes to the risk factors in its 2013 Form 10-K.
The company’s stated plan to invest up to $14 million from 2013 through 2018 in education and training, and its public-sector incentive offering of free product equal to 5% of qualifying purchases, may affect future operating expenses and gross margin. These are plans and programs, not quantified near-term guidance.
Most important facts for investors to verify
- Whether large-order timing explains the sales decline and when, if at all, orders and unit volumes recover.
- Cash generation, inventory levels, and the company’s ability to fund operations and dividends without drawing on credit or raising capital.
- Renewal or replacement of the revolving credit facility before its August 1, 2014 expiration.
- The cash and margin effects of the dividend policy, the 5% free-product incentive, and the up-to-$14 million education commitment.
- Tax expense and realization of deferred tax assets and net operating loss carryforwards; the filing’s tax benefits differ materially from the prior-year comparison.