Filing summary
Reporting period and issuer: Unaudited Form 10-Q for the quarter ended March 31, 2013 (the second quarter of the fiscal year ending September 30, 2013). The filing identifies the registrant as The Female Health Company, not VERU INC.; verify the issuer and filing-period association in the source record.
Business: The company manufactures and sells FC2, a female condom, primarily to public health-sector customers and through commercial partners. It reported sales in 139 countries and relies principally on this single product.
Financial performance
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Net revenue | $9.48 million, up 21% | $19.39 million, up 18% |
| Gross profit / margin | $5.52 million / 58% (58% prior year) | $11.49 million / 59% (58% prior year) |
| Operating income | $3.36 million, up 55% | $6.96 million, up 41% |
| Net income | $3.49 million, up 83%; diluted EPS $0.12 | $7.03 million, up 54%; diluted EPS $0.24 |
- Six-month operating cash flow was $4.99 million, compared with $5.05 million a year earlier. Changes in operating assets and liabilities used $2.69 million, primarily reflecting incentive-compensation accrual changes.
- Six-month capital expenditures were $0.26 million; cash dividends paid were $3.46 million and treasury-stock purchases were $0.37 million. Cash increased to $6.15 million from $5.29 million at September 30, 2012.
- At March 31, 2013, working capital was $12.6 million and total assets were $32.5 million. Current liabilities were $6.29 million. No borrowings were outstanding under the revolving credit facility; the filing reports no other debt balance.
- The revolving facility provides up to $2 million, subject to a borrowing base, and was due to expire August 1, 2013. It is secured by substantially all company assets.
Changes, outlook, and risks
- Revenue growth reflected a 20% increase in quarterly unit sales and a 16% increase over the six-month period; average selling price per unit rose 1% in both comparisons. Management attributed higher operating income mainly to higher sales volume.
- Six-month gross margin improved by one percentage point, which management attributed to better absorption of manufacturing overhead at higher production volumes. Operating expenses fell 2% over six months, mainly from lower incentive compensation, partly offset by higher legal, consulting, education, and training costs.
- Quarterly interest and other income included a distribution related to an insurance carrier’s demutualization; the filing attributes the substantial year-over-year increase in this item to that distribution. The amount is not separately quantified.
- Management said cash was adequate for operations over the next 12 months, while cautioning that there was no assurance. No formal revenue or earnings guidance is provided. The company expected to spend approximately $2.3 million on education and training in fiscal 2013 and announced plans to invest up to $14 million over six years. It also planned to provide qualifying public-sector purchasers with free product equal to 5% of annual unit purchases, with the associated cost potentially affecting gross margin.
- The board declared a quarterly dividend of $0.07 per share, up 17% from the prior rate, payable May 8, 2013; approximately $2.0 million was expected to be paid from cash on hand. Future dividends remain at the board’s discretion.
- Key risks include dependence on FC2; concentrated customers and lumpy public-sector tenders and shipments; reliance on governments, donors, and distribution partners; competition and possible new female-condom products; regulatory and product-liability exposure; foreign-currency and raw-material risks; and the possibility of needing additional capital. The filing reported no material changes to the risk factors in its 2012 Form 10-K.
- Inventory rose to $2.48 million from $1.46 million, mainly as finished goods were built to improve lead times and support the free-product program. Accounts receivable was $7.39 million; average days sales outstanding was approximately 66 days.
Most important facts to verify
- Confirm that this 2013 filing for The Female Health Company is the intended filing for the requested company, VERU INC.
- Check the sustainability of sales growth, particularly the timing and size of major public-sector orders and customer concentration.
- Assess the cash and margin implications of the free-product program, planned education spending, dividends, and inventory build.
- Verify renewal or replacement of the credit facility expiring August 1, 2013, and the company’s ability to maintain liquidity if orders are delayed.
- Review the insurer-demutualization-related income and the assumptions supporting recognition and use of deferred tax assets and tax-loss carryforwards.