Business context and reporting period
The filing is for The Female Health Company (FHC), for the unaudited fiscal first quarter ended December 31, 2013. FHC manufactured, marketed and sold FC2, its principal and sole current product, a female condom distributed in public-health and commercial markets. The filing reports operations in 144 countries. The period is compared with the three months ended December 31, 2012.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net revenue | $6.69 million | $9.91 million |
| Gross profit / margin | $3.68 million / 55% | $5.97 million / 60% |
| Operating income | $1.58 million | $3.60 million |
| Net income | $1.46 million | $3.53 million |
| Diluted EPS | $0.05 | $0.12 |
| Operating cash flow | $1.18 million | $1.02 million |
Revenue fell 32%, principally as unit sales declined 31% from a prior-year quarter that included large Brazil and South Africa shipments. Average selling price per unit decreased 2.4%. Gross profit declined 38%; net income declined 59%. Net margin was 22%, compared with 36%.
Cash was $7.99 million at December 31, down from $8.92 million at September 30, 2013. Working capital was $11.4 million. The company had no borrowings under its revolving credit facility; the facility offered up to $2 million, subject to a borrowing base, and was due to expire August 1, 2014. Total liabilities were $5.23 million and stockholders’ equity was $29.27 million.
Operating cash flow included a $0.62 million net use from changes in operating assets and liabilities. Investing cash use was $0.08 million, while financing cash use was $2.03 million, principally dividends paid. The Board declared a $0.07-per-share quarterly dividend, approximately $2.0 million in total, payable February 5, 2014.
Material changes and management commentary
- Lower sales volume and margin drove the year-over-year earnings decline. Management attributed large quarterly swings primarily to timing of large orders and production schedules, rather than a fundamental change in the business.
- Operating expenses decreased 11% to $2.09 million, mainly due to lower legal, consulting and incentive compensation expenses.
- Management said cash was adequate to fund operations for the next 12 months, while cautioning that adequacy could not be assured. Additional capital could be raised through equity or borrowing.
- FHC had pledged to invest up to $14 million from 2013 through 2018 in reproductive-health and HIV-prevention education and training; no specific spending timetable was set. Its program providing major public-sector purchasers with free product equal to 5% of purchases may affect gross margin.
- The company granted 118,910 restricted shares or share promises during the quarter, with stated fair value of approximately $1.05 million. Recognized share-based compensation was approximately $204,000.
Outlook, risks and contingencies
No specific revenue or earnings guidance was provided. Management described demand and orders as subject to substantial timing variation. Key risks include reliance on FC2 as the sole current product; dependence on a small number of large public-sector purchasers, donor funding, tenders and distribution partners; competition; regulatory compliance and product approvals; and manufacturing, raw-material and foreign-currency exposure. Sales are denominated in U.S. dollars, while some costs arise in Malaysia.
The filing states that product liability insurance coverage was $5 million. It reported no material changes to the risk factors in the company’s 2013 Form 10-K. Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether order timing, unit shipments and customer concentration continue to drive material quarter-to-quarter revenue volatility.
- Whether the company can sustain gross margins while providing free product and funding its education commitments.
- Cash available after dividends and other planned expenditures, and the status and renewal of the $2 million credit facility.
- Dividend sustainability, given Board discretion and the filing’s caution that future cash flows may not support continued payments.
- Potential dilution and compensation expense from restricted-stock awards and share promises.
- The filing identifies the registrant as The Female Health Company; confirm the issuer identity when relating this historical filing to VERU INC.