United-Guardian, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; compared with the same 2017 periods. United-Guardian develops and sells personal care, pharmaceutical, medical, and specialty industrial products through its Guardian Laboratories division.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $3.96 million | $3.77 million | $7.48 million | $6.56 million |
| Operating income | $1.72 million | $1.53 million | $3.17 million | $2.40 million |
| Net income | $1.39 million | $1.10 million | $2.45 million | $1.74 million |
| Basic and diluted EPS | $0.30 | $0.24 | $0.53 | $0.38 |
- Net sales increased 5% in Q2 and 14% in the first half; gross sales increased 6% and 15%, respectively. Personal care and pharmaceutical products drove most of the first-half growth.
- Cost of sales fell to 40.7% of net sales in Q2 from 44.1%, and to 40.9% in the first half from 44.7%. Management attributed the improvement to a richer mix of higher-margin personal care products and lower plant and payroll-related overhead.
- Operating expenses rose 28% in Q2 and 20% in the first half, primarily due to plant repairs and maintenance and payroll costs. R&D expense declined 42% and 45%, respectively, mainly because of lower payroll-related costs.
- Other income was $39,521 in Q2 versus $72,796 a year earlier; for the first half it was a net expense of $61,684 versus income of $125,668. Marketable-security gains and losses affected the comparisons. The first-half 2018 results included realized losses of $113,276 and unrealized losses of $40,130.
- First-half effective tax rate was approximately 21%, versus 31% in 2017; management expected a 21% rate for 2018.
- First-half operating cash flow was $2.72 million, compared with $2.03 million. Investing activities provided $2.71 million, principally reflecting security-sale proceeds; dividends used $2.29 million, compared with $1.93 million. Cash increased to $3.86 million from $724,721 at year-end.
Financial position and liquidity
- At June 30, 2018, cash and cash equivalents were $3.86 million, marketable securities $4.82 million, and current assets $12.53 million. Working capital was $10.63 million, up from $10.43 million at December 31, 2017; the current ratio declined to 6.6 from 8.3.
- Total assets were $13.45 million and stockholders’ equity was $11.55 million. The balance sheet lists current and deferred tax liabilities but no debt or borrowings.
- Management said working capital should support operations for at least the next 12 months and expected no significant capital expenditures for the remainder of 2018. It expected to continue dividends and consider security purchases and other opportunities.
Material developments, outlook, and risks
- Personal care sales rose 18% in the first half, including increased shipments to marketing partner Ashland Specialty Ingredients (ASI). Pharmaceutical sales rose 19%, primarily as RENACIDIN sales continued to grow following the introduction of its single-dose format.
- Management said lower-priced imitations, particularly in Western Europe and Asia, have cost the company some customers and may require competitive pricing; margin effects to date were described as not significant.
- Potential U.S.-China tariffs could affect products sold into China through ASI. The company recorded a $53,000 accrual for possible tariffs on goods in transit, based on a potential 25% rate. Management said it may not be able to pass tariff costs on to customers and that absorbing them could materially reduce gross margins on affected sales.
- Two customers—a pharmaceutical distributor and a personal care marketing partner—accounted for approximately 58% of first-half net sales and 64% of receivables at June 30, 2018. Approximately $3.67 million of cash balances exceeded FDIC insurance limits.
- The company adopted ASC 606 in 2018; management said the change did not materially affect the financial statements. Adoption of ASU 2016-01 moved equity-security fair-value changes into net income, making reported investment-related income less comparable with 2017. A $466,025 opening-balance reclassification moved accumulated other comprehensive income to retained earnings.
- Management expected operating expenses to remain relatively consistent for the remainder of 2018. The filing identifies general business risks including competition, product acceptance and development, economic conditions, regulation, and intellectual property matters. No legal proceedings were reported.
Important facts for investors to verify
- Whether proposed or enacted U.S.-China tariffs apply to the company’s exports, how costs are allocated with ASI, and whether the $53,000 accrual is sufficient.
- Whether the growth in personal care and RENACIDIN sales continues, and whether competition or pricing pressure affects margins.
- The sustainability of cash generation and dividends, given first-half dividends of $2.29 million and the company’s stated plans for cash.
- Exposure to major customers and uninsured bank deposits, and any subsequent changes in those concentrations.
- Investment-related gains and losses and their effect on comparisons, following the accounting-standard change.