Filing and reporting period
Registrant: The Female Health Company (NASDAQ: FHCO), not VERU INC. as stated in the request metadata. This is its Form 10-K for the fiscal year ended September 30, 2011. The filing also reports unaudited fiscal fourth-quarter results; it is not a standalone quarterly filing.
The company manufactures and sells FC2, a female condom used for prevention of sexually transmitted infections and unintended pregnancy. Its principal market is public-health agencies and other organizations, and it operates as a single business segment.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net revenue | $18.57 million | $22.22 million |
| Gross profit / margin | $9.87 million / 53% | $12.92 million / 58% |
| Operating income | $3.30 million | $4.35 million |
| Net income | $5.40 million | $6.74 million |
| Diluted earnings per share | $0.19 | $0.24 |
| Cash provided by operations | $6.97 million | $3.99 million |
Fiscal 2011 cash and cash equivalents were $4.31 million; working capital was $7.45 million; total assets were $19.44 million and stockholders’ equity was $16.75 million. The company reported no outstanding borrowings. Its revolving credit facility provided for up to $2 million, subject to a borrowing base, and was scheduled to expire August 1, 2012. The company paid $0.20 per share in fiscal 2011 dividends.
Fiscal fourth-quarter revenue was $7.11 million and net income was $4.51 million, compared with $7.80 million and $5.52 million, respectively, in the prior-year quarter. Fiscal 2011 net income included a $2.17 million income-tax benefit, principally reflecting changes in the valuation allowance for deferred tax assets.
Changes versus the prior year
- Revenue declined 16% and unit sales were 16% lower, primarily due to delays in large orders from Brazil and South Africa. The average FC2 selling price declined 1%.
- Gross profit fell 24%, and gross margin declined five percentage points to 53%; management attributed the margin reduction to lower volume and reduced absorption of fixed overhead.
- Operating expenses fell to $6.57 million from $8.58 million, largely because fiscal 2010 included $1.93 million of restructuring costs related to the former U.K. manufacturing facility. Fiscal 2011 had no restructuring charge.
- Operating cash flow rose to $6.97 million, supported in part by lower accounts receivable. Cash increased to $4.31 million from $2.92 million.
Outlook, risks and notable items
Management said it expected fiscal 2012 results to benefit from a November 2011 South African order for 5 million units and an order expected through UNFPA associated with a Brazilian tender for up to 20 million units. These were expectations, not guaranteed revenue; the filing says order timing and shipments can vary materially. Unfilled orders were $6.48 million at December 1, 2011, including orders requested for delivery later in fiscal 2012.
Management stated that existing cash was expected to fund operations for the next 12 months, while noting that adequacy was not assured. The company’s ability to maintain profitability and dividends depends on sales volume and timing. Principal risks include reliance on FC2 as its sole product; dependence on a small number of public-sector customers (John Snow, Inc. and UNFPA together represented 51% of fiscal 2011 unit sales); government procurement and funding delays; reliance primarily on one Malaysian manufacturing facility; foreign-exchange and raw-material cost exposure; and regulatory, competitive and intellectual-property risks.
The company reported that FDA approval of its application for an FC2 shelf-life extension was granted in early October 2011. It also recognized substantial deferred tax assets; their future value depends on generating sufficient taxable income, and management’s estimates may differ from actual results. No pending legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether the South African order and anticipated Brazil-related order were placed, shipped and collected, and how much revenue they ultimately generated.
- Whether customer concentration and tender timing continue to drive volatile sales, and whether order backlog converts to shipments as expected.
- Whether FC2 volume and gross margin recover, particularly given fiscal 2011’s lower unit sales and reduced overhead absorption.
- Whether the deferred tax assets are realizable and how future valuation-allowance changes affect reported earnings.
- Whether operating cash flow supports dividends and whether the credit facility remains available on acceptable terms.