United-Guardian, Inc. — Q3 2015 Form 10-Q
Business and period: The company develops, manufactures, and markets cosmetic and personal-care ingredients, pharmaceutical and medical products, and specialty industrial products through its Guardian Laboratories Division. This unaudited report covers the three and nine months ended September 30, 2015, compared with the same periods in 2014. About 65% of products are sold to end users outside the United States.
Financial performance
| Metric | Three months ended Sep. 30, 2015 | Three months ended Sep. 30, 2014 | Nine months ended Sep. 30, 2015 | Nine months ended Sep. 30, 2014 |
|---|---|---|---|---|
| Net sales | $3.62 million | $2.52 million | $12.12 million | $9.46 million |
| Operating income | $1.69 million | $0.54 million | $5.88 million | $3.71 million |
| Net income | $1.22 million | $0.41 million | $4.19 million | $2.65 million |
| Diluted EPS | $0.26 | $0.09 | $0.91 | $0.58 |
| Operating margin | 46.8% | 21.6% | 48.5% | 39.2% |
| Net margin | 33.6% | 16.4% | 34.6% | 28.0% |
For the nine months, operating cash flow was $4.11 million, versus $2.90 million in 2014. Investing activities used $2.61 million, primarily reflecting net purchases of marketable securities; financing activities used $2.30 million for dividends. Cash and cash equivalents declined to $1.22 million from $2.02 million at year-end 2014.
At September 30, cash and cash equivalents were $1.22 million and marketable securities were $11.76 million. Working capital was $15.48 million, and the current ratio was 11.7:1. Total assets were $18.11 million and stockholders’ equity was $16.51 million. No borrowings are shown on the balance sheet. The company paid $0.50 per share in dividends during the first nine months, compared with $0.48 in 2014.
Changes and management commentary
- Third-quarter sales increased 43.9%; nine-month sales increased 28.1%. Personal-care products drove most of the increase, with nine-month personal-care sales up 36.9%. Management attributed much of the growth to higher shipments to its largest marketing partner, Ashland Specialty Ingredients (ASI), including demand for LUBRAJEL products in China.
- Nine-month pharmaceutical sales rose 14.9%, primarily on higher RENACIDIN sales. Medical-product sales rose 3.6%; industrial and other product sales declined 7.7%.
- Cost of sales fell to 36.8% of third-quarter sales from 51.7% a year earlier, and to 36.4% from 40.6% for the nine-month periods. Management cited higher production volume, better absorption of fixed overhead and production efficiencies, and a more favorable product mix. It also noted that about $320,000 of primarily fixed overhead had been treated as period costs in 2014.
- Operating expenses and research and development expenses declined modestly in the nine-month comparison, mainly because of lower payroll-related costs. Investment income increased; 2014 also included $24,402 from a completed RENACIDIN supplier settlement.
Outlook, risks and unusual items
- No formal earnings guidance was provided. Management said working capital should support operations for at least the next 12 months and did not expect significant capital expenditures for the rest of 2015.
- The company is working with a new RENACIDIN supplier on a single-dose container and hopes to market it in early 2016, subject to FDA approval. Delays in approval could change that timetable; management expected current-form inventory to be adequate until approval.
- Sales growth depends in part on ASI and demand in China. Other stated risks include competition, product acceptance and development, regulatory changes, intellectual-property matters, and economic and market conditions. The filing does not quantify the effect of these risks.
- In September 2015, the company recorded a $120,848 receivable from its transfer agent for duplicate dividend funds; payment was received in October. Of the recorded amount, $98,954 remains a potential liability if former Guardian Chemical shareholders are located and request conversion and accumulated dividends. The company was researching how to handle funds if holders cannot be located.
- Marketable securities are available-for-sale investments measured at fair value. Nine-month 2015 other comprehensive income included a net-of-tax unrealized loss of $141,738. Management reported no off-balance-sheet arrangements and no legal proceedings.
Important facts for investors to verify
- Whether elevated sales to ASI and China-related LUBRAJEL demand continue, and the degree of customer or partner concentration.
- FDA review timing for the RENACIDIN single-dose supplement, supplier readiness, and current-form inventory coverage.
- Whether the improved cost-of-sales ratio and operating margins are sustainable as production volumes or product mix change.
- The status and eventual disposition of the $120,848 transfer-agent funds and the related potential liability.
- The composition, valuation sensitivity, and performance of the $11.76 million marketable-securities portfolio, alongside dividend funding and cash levels.