United-Guardian, Inc. — Q3 2019 Form 10-Q
Business context and period. The company develops, manufactures and markets personal-care, pharmaceutical, medical and specialty industrial products through its Guardian Laboratories division. This unaudited report covers the three and nine months ended September 30, 2019, compared with the corresponding 2018 periods.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $3.317 million | $3.344 million | $9.777 million | $10.667 million |
| Gross profit / margin | $1.930 million / 58.2% | $2.147 million / 64.2% | $5.634 million / 57.6% | $6.565 million / 61.5% |
| Operating income / margin | $1.281 million / 38.6% | $1.529 million / 45.7% | $3.744 million / 38.3% | $4.695 million / 44.0% |
| Net income | $1.070 million | $1.317 million | $3.371 million | $3.769 million |
| Diluted EPS | $0.23 | $0.29 | $0.73 | $0.82 |
For the first nine months, operating cash flow was $3.627 million, versus $3.908 million in 2018. Investing activities provided $142,000, while financing activities used $2.525 million, principally for dividends. Cash and cash equivalents were $1.795 million at September 30; marketable securities were $7.745 million.
At September 30, current assets were $12.701 million and current liabilities $1.529 million, producing working capital of $11.172 million and a current ratio of 8.3:1. The company reported no debt on the balance sheet. Total assets were $13.534 million and stockholders’ equity was $11.769 million.
Material changes and drivers
- Q3 sales declined less than 1%; nine-month sales fell 8%. Personal-care sales declined 21% for Q3 and 28% year to date, primarily from weaker demand in China and competition from lower-priced Asian suppliers. Personal care represented the largest sales decline.
- Pharmaceutical sales rose 21% in Q3 and 17% year to date, primarily due to higher Renacidin sales. Medical-product sales increased 31% in Q3 and 25% year to date.
- Cost of sales rose to 42% of sales in both 2019 periods, compared with 36% in Q3 2018 and 38% year to date. Management attributed the pressure to a greater share of higher-cost Renacidin sales and lower sales volumes of more profitable personal-care products.
- Net income decreased 19% in Q3 and 11% for the nine-month period. Year-to-date investment gains on marketable securities were $370,000, compared with a $54,000 loss in 2018, partially offsetting weaker operating results.
- Working capital increased $851,000 from year-end 2018, although the current ratio decreased from 8.6:1. Cash increased by $1.244 million during the first nine months.
Outlook, commentary and risks
Management said working capital should be sufficient for operating needs for at least the next 12 months and expected no significant capital expenditures for the remainder of 2019. It expected operating expenses to remain relatively consistent and the effective tax rate to remain approximately 21%. No quantified sales or earnings guidance was provided.
The company plans to transfer Korean marketing rights from its existing partner to ASI; ASI’s marketing efforts began in October 2019. Management hopes the change can recover some lost sales. Other risks include continuing weakness in China and Europe, price competition, dependence on marketing partners and pharmaceutical distributors, and product-development, regulatory, intellectual-property and market-acceptance risks. Two customers together accounted for 51% of Q3 gross sales and 52% of nine-month gross sales. Approximately $928,000 of cash exceeded FDIC insurance limits at quarter-end. The filing reported no legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether personal-care demand, particularly China-related demand and sales through ASI, stabilizes and whether reduced pricing affects margins.
- Whether the Korean distributor transition improves sales without disruption, and whether recent pharmaceutical and medical-product growth continues.
- How much reported earnings depend on volatile marketable-security gains and whether operating profitability recovers as sales mix changes.
- The implications of customer concentration and cash balances exceeding FDIC insurance limits.
- The company’s continued ability to fund dividends and operations from cash generation; nine-month dividends paid were $2.525 million.