United-Guardian, Inc. — Form 10-Q Summary
Business and period: The company develops, manufactures and markets personal-care ingredients, pharmaceuticals, medical products and specialty industrial products. Its key product line is LUBRAJEL; approximately 70% of products are sold to end users outside the United States. This unaudited report covers the three and nine months ended September 30, 2014, compared with 2013; balance-sheet figures are compared with December 31, 2013.
Financial performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $2.517 million | $3.404 million | $9.456 million | $10.985 million |
| Operating income | $544,000 | $1.539 million | $3.707 million | $5.147 million |
| Net income | $411,000 | $1.277 million | $2.648 million | $4.184 million |
| Diluted EPS | $0.09 | $0.28 | $0.58 | $0.91 |
| Operating cash flow | Not provided separately | Not provided separately | $2.904 million | $3.639 million |
Margins: Gross margin was approximately 48.3% in Q3 2014 versus 64.4% in Q3 2013, and 59.4% for the first nine months versus 63.7%. Operating margin was approximately 21.6% versus 45.2% for Q3, and 39.2% versus 46.9% for the nine-month periods. The company attributed weaker cost absorption in Q3 to lower production; about $320,000 of primarily fixed overhead was expensed as period costs.
Liquidity and balance sheet: At September 30, cash and cash equivalents were $1.238 million and marketable securities were $10.059 million, versus $1.634 million and $8.863 million, respectively, at year-end. Working capital was $13.714 million, up from $13.062 million; the current ratio was 15.8:1, up from 11.5:1. Total assets were $15.930 million and stockholders’ equity was $14.782 million. Current liabilities were $924,000; the balance sheet reports no borrowings or debt. The company said working capital should support operations for at least 12 months and anticipated no significant capital expenditures for the remainder of 2014.
Cash and distributions: Nine-month investing cash use was $1.094 million, mainly reflecting net purchases of marketable securities; financing cash use was $2.206 million, consisting of dividends of $0.48 per share. Cash declined by $397,000 during the period to $1.238 million. No interest was paid.
Material changes and management commentary
- Sales fell 26.1% in Q3 and 13.9% for the nine-month period. Personal-care sales declined 41.3% in Q3 and 18.9% year to date, primarily due to lower shipments to Ashland Specialty Ingredients (ASI), the largest marketing partner.
- Management cited a major customer’s move to a second supplier after a change in ownership, leaving ASI with excess inventory and reducing company shipments. The company and ASI were pursuing some of the lost business; management expected sales to that customer to remain significantly below prior years in the near term. Lower ASI purchases also reflected timing of China-related orders; the filing noted significant new orders received in Q4.
- Pharmaceutical sales increased $291,000 in Q3 and $845,000 year to date, with the year-to-date comparison benefiting from RENACIDIN sales resuming in late October 2013. RENACIDIN sales remained below pre-curtailment levels. The company was pursuing FDA approval for a new single-dose presentation, which it hoped to market in 2015; timing depends on FDA review.
- Medical-product sales declined 12.7% in Q3 and 31.8% year to date, primarily following one customer’s product discontinuation and weaker sales to foreign customers. Industrial and other sales were down 7.2% in Q3 but up 11.6% year to date.
- Net income was lower in both comparison periods, reflecting reduced sales and the decline in settlement income. The 2013 results included supplier damage-settlement payments related to RENACIDIN production curtailment: $293,000 in Q3 and $878,000 in the first nine months, compared with none in Q3 2014 and $24,000 year to date. All payments were completed by Q1 2014.
Outlook, risks and other items
Management provided no quantified revenue or earnings guidance. It expected adequate current-form RENACIDIN inventory pending FDA action on the proposed new dosage form and said it was working with ASI to broaden its customer base. Risks identified include product acceptance and competition, product development, customer and marketing-partner demand, economic and industry conditions, regulatory requirements, intellectual-property matters, interest rates and securities-market conditions. The filing also describes continued weakness in Europe and the effects of a significant customer’s supplier diversification. The company reported no off-balance-sheet arrangements or legal proceedings; disclosure controls were deemed effective, with no material changes in internal control reported.
Important facts for investors to verify
- Whether ASI can regain a meaningful share of the major customer’s business and reduce inventory-related order volatility.
- Whether China-related orders and the Q4 orders cited by management translate into sustained shipments.
- RENACIDIN’s sales recovery, supply continuity, and FDA approval and launch timing for the proposed single-dose product.
- Whether lower production volumes and fixed-overhead absorption continue to pressure gross margins.
- Portfolio concentration and the impact of international economic conditions, particularly in Europe.
- The status and outcome of New York State’s routine examination of the company’s 2010–2012 income-tax returns.