The Female Health Company (Nasdaq: FHCO), which manufactures and markets the FC2 Female Condom®, today reported its operating results for the third quarter and first nine months of FY2010.
During the three months ended June 30, 2010, the Company's net revenues decreased 75% to approximately $1.8 million, compared with approximately $7.0 million in the third quarter of the previous fiscal year. The decrease was due to a decline in unit sales resulting from the timing of receipt and shipment of large orders.
The lower results for the third quarter were due to the concurrent delay in two multi-million unit orders in process with public sector purchasers. Orders for the fourth quarter are proceeding normally, according to the Company's expectations. The Company has previously disclosed the possibility of such delays in both its earnings releases and SEC filings. Historically, such orders are not lost, they are merely delayed. Delays such as these, which are usually due to bureaucratic issues, politics and/or changes in personnel, generally may last from 3-4 weeks to 6 or more months.
The third quarter reflects the delay noted, but the Company does not believe it reflects any fundamental change in the Company's business or demand for FC2. Strong demand for FC2 was evident in USAID/JSI's recent doubling of its previous 12 million unit order to 24 million units, deliverable over the period ending September 30, 2011. The two pending orders represent significantly larger quantities than the customers' most recent previous orders. The Company cannot predict when the pending orders will be received or which quarters they will impact. As receipt and shipment of the pending orders may not occur until FY2011, the Company is unlikely to "make up" for the impact of the third quarter within FY2010 without these orders.
In the third quarter of FY2010, the Company recorded net income attributable to common stockholders of $75,159, or $0.00 per diluted share, compared with net income attributable to common stockholders of $626,441, or $0.02 per diluted share, in the third quarter of FY2009. The reduction in earnings per share resulted from a decline in unit sales.
Cost of sales declined 78% to $814,764 in the third quarter of FY2010, compared with $3,619,120 in the third quarter of FY2009. Gross profit decreased 72% to $939,447 in the most recent quarter, compared with $3,347,647 in the third quarter of FY2009. Gross profit margin as a percentage of net revenues improved to 54%, versus 48% in the prior-year quarter, reflecting the fact that 100% of the Company's sales are now comprised of the second-generation FC2 Female Condom, which generates a higher gross profit margin than the Company's first-generation product.
Operating expenses for the quarter ended June 30, 2010 totaled $918,397, a decrease of $943,559, or 51%, from $1,861,956 in the same quarter last year. Components of the net decrease include a reduction of $995,000 in performance incentives, $42,000 in restructuring costs and $7,000 in miscellaneous expenses, somewhat offset by increased audit and Sarbanes-Oxley compliance expenses ($62,000), higher consulting fees ($29,000) and higher administrative costs ($10,000).
Operating income for the three months ended June 30, 2010 decreased 99% to $21,050, versus $1,485,691 in the year-earlier quarter. The decrease resulted from a reduction in unit sales due to the timing of the receipt and shipment of large orders.
For the nine months ended June 30, 2010, the Company's net revenues decreased 27% to $14.4 million, compared with $19.6 million in the nine months ended June 30, 2009. The reduction in revenues reflects a 12% decrease in unit volume and a shift in sales mix, from 47% FC2 in the first nine months of FY2009 to 97% FC2 year-to-date during FY2010. Net income attributable to common stockholders for the first nine months of FY2010 was $1.2 million, or $0.04 per diluted share, compared with $4.2 million, or $0.15 per diluted share, in the corresponding period of the previous fiscal year. The decrease was due to the one-time year-to-date restructuring costs of $1,926,444, along with lower unit sales and gross profit in the third quarter.
While unit sales decreased 12% in the first nine months of FY2010, the cost of sales decreased 39%, due to the lower cost of FC2 production. Gross profit decreased 14% to $8.3 million in the nine months of FY2010, compared with $9.7 million in the nine months of FY2009, due to lower unit sales. However, gross profit margin increased to 58% of net revenues in the nine months ended June 30, 2010, versus 49% of net revenues in the prior-year period.
The transition from FC1 to FC2 involved the cessation of FC1 manufacturing in the United Kingdom and closure of the leased FC1 manufacturing facility. One-time restructuring costs of $1,926,444 were incurred in fiscal 2010. The one-time restructuring costs resulted in operating income of $1,287,627 in the nine months ended June, 2010, versus operating income of $4,175,106 in the nine months ended June 30, 2009. Exclusive of the restructuring costs, operating income decreased 23% to $3,214,071, versus $4,175,106 in the same period last year, reflecting the negative impact of the third quarter's low sales volume.
The Company recorded a foreign currency transaction gain of $17,190 in the third quarter of FY2010, versus a foreign currency transaction loss of $816,148 in the quarter ended June 30, 2009. For the nine months ended June 30, 2010, the Company recorded a foreign currency transaction loss of $62,259, compared with a foreign currency transaction gain of $183,672 in the corresponding period of the previous fiscal year.
The Company remains financially strong. During the first nine months of FY2010, the Company generated $3.4 million in cash from operations. As of June 30, 2010, cash balances of approximately $3.9 million represented 27% of the Company's total assets of approximately $14 million. The Company paid $2.7 million in cash dividends and $3 million in non-recurring restructuring costs during the first nine months of FY2010. The Female Health Company has no outstanding debt and $2 million in unused credit lines at the end of its most recent quarter.
On July 23, 2010, the Company's Board of Directors announced a quarterly cash dividend of $0.05 per share. The Company expects to pay, from its cash on hand, a cash dividend of approximately $1.4 million ($0.05 per share) on August 11, 2010 to stockholders of record as of August 4, 2010.
Any future quarterly dividends and the record date for such dividends must be approved each quarter by the Company's Board of Directors and announced by the Company. Payment of any future dividends will be at the discretion of the Board of Directors and will be based upon cash flows, alternative demands upon cash resources, and other factors.
"The Company's fundamentals are solid and we continue to expect healthy growth in revenue and earnings on a long-term basis," stated O.B. Parrish, Chairman and Chief Executive Officer of The Female Health Company. "Almost 50% of all HIV/AIDS' victims are women. HIV/AIDS is the leading cause of death worldwide among women 15-44 years of age. As a result, the relevance of the female condom and demand for FC2 is increasing. USAID/JSI's recent order expansion from 12 million units to 24 million units reflects this increase in demand for FC2. The pending orders may not be received or shipped until fiscal 2011. In this event it would positively impact the outlook and guidance for 2011. While the fourth quarter sales are expected to be good, without the pending orders the Company will not make up for the third quarter. As a result, we have revised our fiscal 2010 guidance. Exclusive of the two large pending orders, unit sales will approximate FY2009 units sold and operating earnings (net of restructuring expenses) will increase 10% to 20% over fiscal 2009 results."
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