United-Guardian, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual report; it does not provide standalone fourth-quarter results. United-Guardian manufactures and markets personal-care ingredients, pharmaceuticals, medical lubricants and specialty industrial products. It reports one business segment.
Financial performance
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Gross sales | $14.46 million | $13.43 million | Up 7.6% |
| Sales allowances and returns | $0.69 million | $0.47 million | Increased $0.22 million |
| Net sales | $13.77 million | $12.97 million | Up 6.2% |
| Gross profit margin | Approximately 59% | Approximately 59% | Flat |
| Income from operations | $5.58 million | $5.24 million | Up 6.6% |
| Net income | $4.35 million | $3.84 million | Up 13.2% |
| Diluted EPS | $0.95 | $0.84 | Up $0.11 |
| Cash from operations | $4.95 million | $3.99 million | Up $0.96 million |
- Personal-care sales rose 10% to $7.53 million, primarily on higher LUBRAJEL sales to Ashland Specialty Ingredients (ASI). Pharmaceutical sales rose 13% to $4.52 million, led by RENACIDIN, up 15%. Medical-product sales fell 8% to $2.24 million; industrial and other sales were $0.17 million.
- Operating expenses increased 19% to $2.12 million. Research and development expense declined to $0.40 million from $0.65 million, mainly after the retirement of two highly paid R&D chemists.
- Investment income fell to $0.23 million. Marketable securities generated a net loss of $0.33 million, including a $0.34 million unrealized loss, versus a $0.03 million realized gain in 2017. The company adopted ASU 2016-01 in 2018, which moved unrealized equity-security gains and losses into net income; prior-year results were not restated.
- Income tax expense declined to $1.11 million from $1.71 million; the effective rate was approximately 20% versus 31%, primarily reflecting the lower federal corporate tax rate. Net income increased despite lower pretax income, partly due to this lower tax expense.
Liquidity, cash flow and capital
- At year-end, cash and cash equivalents were $0.55 million and marketable securities were $7.62 million. Working capital was $10.32 million, down 1%; the current ratio rose to 8.6 from 8.3.
- Accounts receivable declined 12% to $1.67 million; days sales outstanding improved to 47 from 49. Inventory increased to $1.48 million from $1.34 million.
- Investing activities used $0.31 million, mainly reflecting marketable-security purchases and sales; financing activities used $4.82 million, all dividends. The company paid $4.82 million in dividends in 2018, compared with $6.51 million in 2017, which included a special dividend. The 2018 declared dividends were $0.50 and $0.55 per share.
- The filing reports no material commitments for future capital expenditures and no off-balance-sheet arrangements. It does not report outstanding debt. Management said working capital should support operations for the next fiscal year; longer-term liquidity depends on cash generation from profitable operations.
Outlook, risks and notable items
- No earnings or revenue guidance was provided. Management expected 2019 R&D expense to be comparable to 2018 and hoped to begin marketing LUBRAJEL OIL NATURAL by the third quarter of 2019 and launch LUBRAJEL OIL PF during 2019. These product-development plans are subject to testing and market acceptance; the filing cautions that projects may not yield marketable products or significant sales.
- Product and customer concentration are material: LUBRAJEL and RENACIDIN together represented approximately 94% of sales. ASI accounted for about 42% of company sales; two distributors/marketing partners together accounted for about 59%. The ASI agreement was scheduled to run through December 31, 2019, with renewal provisions and termination notice requirements described in the filing. Other marketing arrangements may be cancelled at any time.
- Management cited competition from lower-priced Asian products, pricing pressure that may reduce margins, and the strong U.S. dollar as risks to competitiveness, particularly in foreign markets. ASI reported that 75% of its sales of company products went to foreign customers in 2018, with China its largest foreign market. Customer purchasing patterns also contributed to declines in certain medical products.
- Other risks include reliance on a small number of customers and distributors, possible changes in customer demand and inventory write-downs, availability of some raw materials, regulation of pharmaceutical products, and the sufficiency of financial resources to sustain or expand operations. Six vendors represented approximately 80% of raw-material purchases.
- Environmental compliance costs were approximately $43,000, with no material impact reported. The company reported no legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness.
Important facts for investors to verify
- Reconcile the reported gross-sales growth with net sales: allowances and returns rose to $0.69 million from $0.47 million, including higher pharmaceutical distribution fees, rebates and return reserves.
- Assess how much growth depends on ASI, RENACIDIN and the concentrated customer base, and confirm the status and renewal terms of the ASI agreement after its stated 2019 contract period.
- Monitor marketable-security valuations and the effect of unrealized gains or losses on reported earnings under ASU 2016-01.
- Track pricing, foreign-exchange and competitive pressures, particularly in China, and whether planned natural-product launches progress and generate sales.
- Review the dividend’s sustainability against operating cash flow, investment needs and the company’s stated reliance on profitable operations for longer-term liquidity.