Business context and reporting period
The filing is The Female Health Company’s Form 10-K for the fiscal year ended September 30, 2013; it also provides unaudited fourth-quarter results. The filing identifies the registrant as The Female Health Company (ticker FHCO), not VERU INC., as stated in the request metadata.
The Company manufactures and sells FC2, a female condom used for contraception and STI prevention. Public health agencies are its primary market, and its business is concentrated among a small number of large buyers.
Financial performance and position
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $31.46 million | $35.03 million |
| Gross profit / gross margin | $17.50 million / 56% | $20.62 million / 59% |
| Operating income | $9.79 million | $10.94 million |
| Net income | $14.34 million | $15.30 million |
| Diluted EPS | $0.50 | $0.53 |
| Cash from operations | $11.79 million | $10.36 million |
- Unit sales declined 11% to 54.76 million; average selling price increased 1%.
- Cash was $8.92 million and working capital was $13.63 million at year-end. Stockholders’ equity was $31.40 million.
- The Company had no borrowings outstanding. Its revolving credit facility provides up to $2 million, subject to a borrowing base, and was extended through August 1, 2014.
- Investing activities used $0.30 million; financing activities used $7.86 million, primarily for dividends. Dividends declared were $0.26 per share for FY2013.
Material changes versus the prior comparable period
- Revenue decreased 10% and gross profit decreased 15%. Management attributed the comparison largely to large Brazil and South Africa orders received in FY2012 that did not recur in FY2013.
- Gross margin fell from 59% to 56%, partly reflecting higher inventory-storage and quality-control costs and the free-product purchasing incentive.
- Operating expenses declined 20%, mainly because of lower incentive compensation, partly offset by increased education and training spending.
- Operating cash flow increased by about $1.44 million, principally due to lower year-end receivables and reduced incentive payments. Year-end cash rose to $8.92 million from $5.30 million.
- Net income included a $4.41 million income tax benefit, including a substantial deferred tax benefit related to reduced valuation allowances on deferred tax assets. This benefit lifted reported earnings above pretax income and is not equivalent to operating cash generation.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management said existing cash was adequate for operations over the next 12 months, while noting there can be no assurance.
- The Company pledged to invest up to $14 million from 2013 through 2018 in education and training, and offers major public-sector buyers 5% additional FC2 units at no cost. Management expects these initiatives to support demand; spending may raise operating costs and free units may affect gross margin.
- Management expects current unfilled orders of $2.94 million at November 29, 2013 to be filled during FY2014. This backlog was down from $11.38 million a year earlier and includes orders with later FY2014 delivery dates.
- Key risks include reliance on FC2 as its sole product, volatile public procurement and tender timing, dependence on major customers, manufacturing concentration in Malaysia, foreign-currency and raw-material cost exposure, regulatory requirements, and potential competition from other female condoms.
- UNFPA accounted for 62% of FY2013 unit sales, versus 40% in FY2012. USAID and Sekunjalo each represented less than 10% in FY2013.
- The Company reported no pending legal proceedings. It maintained $5 million of product-liability insurance coverage. The independent auditor gave unqualified opinions on the financial statements and internal controls.
- NASDAQ notified the Company that its two-member audit committee did not meet the required minimum of three independent directors. The Company had until the earlier of its next annual meeting or September 9, 2014 to cure the deficiency.
Most important facts for investors to verify
- Confirm the registrant and security identity: this filing is for The Female Health Company (FHCO), despite the VERU INC. request metadata.
- Assess the durability and cash impact of earnings given the material deferred-tax benefit and reliance on future taxable income to realize deferred tax assets.
- Track order timing, backlog conversion, and customer concentration, particularly UNFPA’s share of unit sales.
- Evaluate whether education commitments and no-cost product incentives can expand demand without materially weakening margins or liquidity.
- Confirm the status of the audit committee deficiency and the credit facility’s renewal or replacement after its August 2014 expiration.