United-Guardian, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. United-Guardian develops, manufactures, and markets cosmetic ingredients, pharmaceuticals, medical products, and specialty industrial products through its Guardian Laboratories division. Financial statements are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $2.417 million | $3.180 million | $9.936 million | $10.269 million |
| Operating income | $688 thousand | $1.270 million | $3.391 million | $4.310 million |
| Net income | $346 thousand | $1.017 million | $1.890 million | $3.542 million |
| Basic and diluted EPS | $0.07 | $0.22 | $0.41 | $0.77 |
- Sales declined 24% in Q3 and 3% for the first nine months. Q3 gross margin was approximately 55%, versus 58% a year earlier; nine-month gross margin was approximately 55%, versus 59%.
- Cost of sales rose as a share of revenue to 45% for both periods, from 42% in Q3 2021 and 41% for the first nine months of 2021. Higher raw-material and freight costs, product mix, marketing-partner rebates, and the absence of a 2021 Employee Retention Credit contributed.
- Investment income increased, but marketable securities generated losses of $301 thousand in Q3 and $1.154 million for the first nine months, compared with losses of $25 thousand and gains of $40 thousand, respectively, in 2021. The nine-month 2022 loss included $946,528 of unrealized losses on securities still held at period-end.
- Nine-month operating cash flow was $1.900 million, down from $3.649 million. Investing activities used $236 thousand; financing activities used $1.699 million, primarily for dividends. Cash and cash equivalents were $497 thousand at September 30.
- At September 30, marketable securities were $6.657 million, current assets $10.875 million, and current liabilities $1.664 million. Working capital was $9.210 million and the current ratio was 6.5:1. The company reported no borrowings or interest-bearing debt on the balance sheet.
Material changes and drivers
- Q3 cosmetic-ingredient sales fell 47%, largely because of lower shipments to China through marketing partner Ashland Specialty Ingredients (ASI), pandemic-related impacts in China, customer ordering patterns, and a customer’s overstocking and formulation change. Nine-month cosmetic sales declined 15%.
- Pharmaceutical gross sales fell 5% in Q3 but rose 2% for the first nine months; management attributed fluctuations mainly to distributor order timing. Medical-product sales increased 12% in Q3 and 20% year to date, primarily from a large customer in China. Industrial-product sales declined, partly because the company discontinued a product in Q2.
- Operating expenses rose 16% in Q3 and 19% year to date, including higher director fees related to exploring strategic alternatives and recruiting a new President and CEO, as well as increased insurance and legal costs.
- Dividends paid during the first nine months were $1.699 million, or $0.37 per share, compared with $2.205 million, or $0.48 per share, in 2021.
Outlook, risks, and other notable items
- No quantitative revenue or earnings guidance was provided. Management expects the effective tax rate to remain about 21% for 2022 and anticipates minor operating-expense increases due to inflation. It expects approximately $100,000 of fourth-quarter spending to upgrade the building sprinkler system.
- Management said ASI anticipated higher cosmetic-product sales over the next 12 months, but the company could not reliably estimate the future effects of the pandemic. Shipping constraints improved in Q3; higher raw-material, packaging, and freight costs may continue to pressure margins. Price increases had been implemented on many products, but the company may not be able to recover all cost increases.
- Approximately 90% of the marketable-securities portfolio was in fixed-income mutual funds. Management considered the decline from inflation and rising interest rates potentially temporary, while noting continued volatility and ongoing portfolio monitoring.
- Customer concentration is significant: one cosmetic marketing partner and three pharmaceutical distributors represented 89% of Q3 sales and 86% of September 30 receivables. The company also relies primarily on trade-secret protection for proprietary formulations and processes.
- The company said working capital should support operations for at least 12 months, and it did not expect the pandemic to impair asset carrying values or liquidity. It reported no off-balance-sheet arrangements and no legal proceedings. Disclosure controls were deemed effective, with no material changes in internal control reported.
- After quarter-end, the company filed an employment agreement with Beatriz Blanco dated October 10, 2022, and a separation agreement with Ken Globus effective November 1, 2022.
Important facts for investors to verify
- Whether ASI’s anticipated recovery materializes, particularly in China, and how customer inventory and ordering patterns affect cosmetic sales.
- Whether price increases offset raw-material, freight, and other inflationary costs and support gross margins.
- The composition, valuation, and future performance of the marketable-securities portfolio and the effect of further interest-rate or market changes.
- The extent of customer and distributor concentration, including any changes in key relationships or receivable collections.
- Developments in the company’s strategic-alternatives process, executive transition, dividend policy, and planned capital spending.