United-Guardian, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial statements are unaudited. United-Guardian manufactures and markets cosmetic ingredients, pharmaceuticals, medical lubricants, and specialty industrial products.
Financial results
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $2.570 million | $3.892 million | Down 34% |
| Gross profit | $1.477 million | $2.182 million | Down 32% |
| Gross margin | 57.4% | 56.1% | Up 1.3 percentage points |
| Operating income | $832,000 | $1.504 million | Down 45% |
| Operating margin | 32.4% | 38.6% | Down 6.2 percentage points |
| Net income | $756,000 | $911,000 | Down 17% |
| Diluted EPS | $0.16 | $0.20 | Down $0.04 |
| Operating cash flow | $418,000 | $27,000 | Higher by $390,000 |
Revenue fell primarily because cosmetic ingredient sales declined $1.316 million (63%), including a $1.162 million decrease in purchases by distributor Ashland Specialty Ingredients (ASI). Pharmaceutical sales rose 11% to $1.354 million; medical lubricant sales fell 25% to $421,000. Industrial and other sales were $33,000.
Operating cash flow improved mainly due to increases in accounts payable and deferred revenue. Investing activities used $46,000, principally for marketable securities purchases; there were no financing cash flows. Cash and cash equivalents increased to $1.202 million from $830,000 at year-end.
Financial position and liquidity
At March 31, 2023, current assets were $11.242 million and current liabilities were $1.918 million. Working capital was $9.324 million, up $727,000 from December 31, 2022; the current ratio was 5.9, down from 7.3. Marketable securities were $5.770 million. Inventory increased to $2.470 million from $1.672 million, mainly reflecting higher finished-product inventory. Total liabilities consisted of current liabilities; the filing reports no debt balance.
Management said working capital should be sufficient for operating needs for at least the next 12 months. The company plans a building sprinkler-system upgrade expected to cost $100,000 and begin in Q2 2023. It expects to use cash for dividends, marketable securities purchases, and other opportunities.
Material changes, outlook, and risks
- Cosmetic ingredient sales declined amid weaker demand in China and other Asian markets, customers drawing down excess inventory, and shifts to just-in-time ordering. ASI reported that China represented about 21% of its sales of the company’s products, versus 39% a year earlier.
- Management cited higher raw-material and shipping costs and longer supplier lead times. Product price increases have been implemented where possible, but cost pressures may continue to affect margins.
- The industrial product line is expected to be discontinued in Q2 2023 because of low sales volume. Management noted that it received Q2 orders from major medical-lubricant customers that had purchased in Q1 2022.
- Marketable securities generated a $73,000 gain, versus a $394,000 loss in Q1 2022. The portfolio still had $440,000 of unrealized losses at March 31, 2023, largely on fixed-income mutual funds. Management considers the decline temporary and says it is monitoring the portfolio.
- Management expects an effective income tax rate of approximately 21% for 2023. The filing gives no specific sales or earnings guidance and says pandemic, supply-chain, inflation, and interest-rate impacts remain uncertain.
- On April 20, 2023, Nasdaq notified the company that it did not meet the $50 million minimum market value of listed securities standard for 30 consecutive days. The company planned to submit a compliance plan by June 5, 2023; an extension was not assured.
- Four customers/partners—three pharmaceutical distributors and one cosmetic marketing partner—accounted for 77% of Q1 sales and 80% of receivables at quarter-end. Approximately 24% of total sales were to customers outside the United States.
- About $972,000 of cash exceeded FDIC insurance limits at quarter-end. The company reported no legal proceedings and said disclosure controls were effective.
Investor verification points
- Track ASI orders and whether demand and inventory levels in China and other Asian markets recover.
- Check whether Q2 medical-lubricant orders and announced price increases offset weaker sales and higher input costs.
- Monitor inventory growth, particularly finished goods, and the adequacy of inventory and outdated-product-return reserves.
- Review marketable-security valuation changes and the company’s investment allocation given continuing unrealized losses.
- Confirm the status and outcome of the Nasdaq compliance plan and the planned $100,000 sprinkler-system project.