Business context and reporting period
The filing is a Form 10-Q for the quarter ended March 31, 2012, covering the second quarter and first six months of fiscal 2012. The registrant named in the filing is The Female Health Company, which markets and manufactures the FC2 female condom. The supplied metadata identifies VERU INC.; that does not match the registrant named in this filing.
Financial results
| Metric | Three months ended March 31, 2012 | Three months ended March 31, 2011 | Six months ended March 31, 2012 | Six months ended March 31, 2011 |
|---|---|---|---|---|
| Net revenue | $7.83 million | $4.29 million | $16.47 million | $7.94 million |
| Gross profit / gross margin | $4.56 million / 58% | $1.81 million / 42% | $9.58 million / 58% | $3.82 million / 48% |
| Operating income | $2.16 million | $0.10 million | $4.95 million | $0.54 million |
| Net income | $1.90 million | $0.08 million | $4.56 million | $0.47 million |
| Diluted EPS | $0.07 | $0.00 | $0.16 | $0.02 |
For the six months, operating cash flow was $5.05 million, versus $2.54 million a year earlier. Investing activities used $0.21 million, including $0.27 million in capital expenditures; financing activities used $2.82 million, principally dividends. Cash was $6.27 million at March 31, 2012, up from $4.25 million at September 30, 2011. Working capital was reported as $8.0 million. The company had no borrowings outstanding under its $2.0 million revolving credit facility and reported no other debt balance.
At March 31, current assets were $12.98 million and current liabilities were $5.00 million. Accounts receivable rose to $4.47 million from $2.31 million at September 30, 2011, while net inventory fell to $1.12 million from $2.03 million. The balance sheet included a $1.70 million dividend payable.
Material changes and management commentary
- Second-quarter revenue increased 83% year over year on 57% higher unit volume; management said it was the company’s second-highest quarterly unit sales. The average selling price increased 4%, attributed to customer mix rather than price changes.
- Six-month revenue increased 107% on 94% higher unit volume; average selling price declined 1% due to customer mix.
- Gross margin improved primarily because higher production volume improved absorption of manufacturing overhead. Operating expenses rose 41% in both the quarter and six-month comparison, reflecting incentive accruals and, over six months, higher wages and benefits, share-based compensation, and legal and consulting costs.
- Management attributed the strong 2012 comparison partly to delayed large South Africa and Brazil orders from fiscal 2011: South Africa orders were received and shipped during the first half, while shipments on a 20-million-unit Brazil order were to continue through fiscal year-end.
Outlook, risks and contingencies
- Management expected cash on hand to fund operations for the next 12 months, while cautioning that adequacy was not assured. It planned to expand Malaysian annualized manufacturing capacity to approximately 100 million units by calendar year-end 2012, at an expected cost below $1 million funded from cash.
- The $2.0 million secured revolving facility expires August 1, 2012; availability is subject to a borrowing base. Dividends and repurchases are restricted by a liabilities-to-equity limit. The company said it could seek equity or borrow if it needed additional cash.
- The board declared a quarterly dividend of $0.06 per share, up 20% from $0.05; approximately $1.7 million was scheduled for payment May 9, 2012. Future dividends remain discretionary and depend on cash flows and board approval.
- Key risks include reliance on FC2 as the sole current product, dependence on public-health programs, donors, tenders and distribution partners, volatile timing of large orders, international and currency exposure, raw-material and manufacturing disruptions, competition, regulatory compliance, and intellectual-property risks. The filing reported no material change to the risk factors in the fiscal 2011 Form 10-K.
- Product-liability insurance coverage was $5.0 million. The company disclosed federal, state and U.K. tax-loss carryforwards; some U.S. losses may expire unused. Management’s realization of deferred tax assets depends on future taxable income and related estimates.
Important facts for investors to verify
- Confirm the issuer identity: this filing names The Female Health Company, not VERU INC., and covers the quarter ended March 31, 2012.
- Assess how much of the revenue and earnings improvement reflects unusually timed South Africa and Brazil orders, and whether subsequent shipments and demand supported comparable results.
- Review receivables collection, customer concentration, and the conversion of order growth into operating cash flow.
- Verify renewal or replacement of the revolving credit facility before its August 1, 2012 expiration, planned capacity-expansion costs, and the sustainability of increased dividends.
- Monitor utilization and expiration of tax-loss carryforwards, regulatory and product-liability exposure, and dependence on FC2 and public-sector purchasing.