United-Guardian, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Unaudited interim results. The company develops, manufactures and markets personal care, pharmaceutical, medical and specialty industrial products.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $3.279 million | $3.886 million | $6.460 million | $7.322 million |
| Gross profit | $1.812 million | $2.349 million | $3.704 million | $4.418 million |
| Gross margin | 55.3% | 60.5% | 57.3% | 60.3% |
| Operating income | $1.216 million | $1.723 million | $2.462 million | $3.166 million |
| Net income | $1.079 million | $1.393 million | $2.302 million | $2.453 million |
| Diluted EPS | $0.23 | $0.30 | $0.50 | $0.53 |
| Operating cash flow | Not separately reported | Not separately reported | $2.643 million | $2.716 million |
Q2 sales fell 16%; first-half sales fell 12%. Q2 operating income declined 29% and net income declined 23%; first-half operating income declined 22% and net income declined 6%. Lower sales and weaker gross margins were partly offset by lower operating expenses and higher securities gains. Net gains on marketable securities were $86,849 in Q2 and $344,043 for the first half, versus a Q2 loss of $18,256 and a first-half loss of $153,406 in 2018. Investment income decreased in both comparative periods.
Cost of sales was 45% of sales in Q2 and 43% for the first half, compared with 40% in each 2018 period. Management attributed the margin pressure to a higher proportion of Renacidin sales, which have higher production costs, and lower sales volumes of more profitable personal care products.
Financial position and cash flows
- At June 30, 2019, cash and cash equivalents were $0.911 million and marketable securities were $7.692 million. Current assets were $11.698 million; current liabilities were $1.595 million. Working capital was $10.103 million, down $0.218 million from year-end 2018; the current ratio declined from 8.6 to 7.3.
- Total assets were $12.503 million and stockholders’ equity was $10.700 million. The balance sheet reports no borrowings or other debt.
- First-half operating cash flow was $2.643 million, compared with $2.716 million in 2018. Investing activities provided $0.243 million, primarily reflecting marketable-security purchases and maturities/sales; financing activities used $2.525 million for dividends. Cash increased $0.361 million to $0.911 million.
- The company paid dividends of $0.55 per share in the first half, up from $0.50 per share in 2018. Capital expenditures were $31,655.
Drivers of change and management outlook
- Personal care: Sales declined 38% in Q2 and 31% for the first half. Lower demand in China for a customer product category and competition from lower-priced Asian suppliers were key factors. The largest marketing partner, Ashland Specialty Ingredients, accounted for much of the decline.
- Pharmaceuticals: Sales increased 12% in Q2 and 15% for the first half, primarily from Renacidin. Management linked the increase to expanded marketing, including a new website and internet advertising.
- Medical products: Sales rose 29% in Q2 and 22% for the first half, primarily due to a medical-grade Lubrajel product. Industrial and other sales were slightly lower.
- The company plans to transfer Korean marketing rights from its current partner to ASI effective at year-end 2019; ASI planned to begin marketing in October. Management hopes the transition will help recover lost sales. It is also pursuing more aggressive pricing to compete, while acknowledging potential margin effects that had not been significant to date.
- Management expects operating expenses to remain relatively consistent for the rest of 2019, anticipates a 21% tax rate for the year, and expects no significant capital expenditures for the remainder of 2019. It believes working capital will support operations for at least 12 months. No formal revenue or earnings guidance was provided.
Risks, contingencies and other disclosures
- Sales and receivables are concentrated: one personal-care marketing partner and one pharmaceutical distributor together represented 59% of first-half sales and 53% of receivables at June 30, 2019.
- China demand, lower-priced competition, global economic conditions, customer order timing, product development and acceptance, regulatory changes, and securities-market fluctuations are identified as factors that could affect results. The company relies primarily on trade secrets and proprietary processes; its previously issued patents have expired.
- Cash balances exceeded FDIC insurance limits by $701,000 at June 30, 2019. The filing reports no legal proceedings and no off-balance-sheet arrangements.
- Disclosure controls were assessed as effective; the company reported no material change in internal control over financial reporting. Adoption of the lease standard had no material financial-statement impact.
Key facts for investors to verify
- Whether the decline in China-linked personal-care demand stabilizes and whether ASI’s pricing and marketing efforts improve sales, including in Korea.
- Whether pharmaceutical and medical-product growth can offset personal-care weakness, and how product mix affects gross margins.
- The sustainability and composition of investment gains, which materially supported first-half pretax income relative to the prior year.
- Customer and distributor concentration, updated receivables exposure, and the company’s ability to maintain its dividend while funding operations.