United-Guardian, Inc. — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013; comparative period is Q1 2012. The company develops, manufactures and markets personal care, pharmaceutical, medical and specialty industrial products. Interim financial statements are unaudited.
Financial results and condition
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $3.952 million | $3.889 million; up 1.6% |
| Income from operations | $1.979 million | $1.746 million |
| Net income | $1.565 million | $1.229 million |
| Basic and diluted EPS | $0.34 | $0.27 |
| Operating cash flow | $2.064 million | $2.054 million |
| Cash and cash equivalents | $2.029 million at March 31 | $1.748 million at December 31, 2012 |
| Marketable securities | $9.528 million at March 31 | $7.744 million at December 31, 2012 |
| Working capital | $13.409 million | $11.796 million at December 31, 2012 |
Gross margin rose to approximately 64.3% from 60.4%, and operating margin to approximately 50.1% from 44.9%. The company attributed the gross-margin improvement mainly to product mix, including no RENACIDIN sales and a greater proportion of higher-margin LUBRAJEL sales. Net income also benefited from a $292,830 supplier settlement payment. The filing reports no cash used in financing activities and no interest payments; the balance sheet reports no debt balances.
Current assets were $15.091 million and current liabilities $1.682 million at quarter-end; the reported current ratio was 9:1, down from 15:1 at year-end, mainly because of higher income taxes payable. The company said working capital was sufficient for at least the next 12 months and it did not expect significant capital expenditures for the remainder of 2013.
Changes and operating drivers
- Personal care gross sales increased $367,765, or 14.1%, including a 13.4% increase in sales to the largest marketing partner. Management cited demand, partner inventory replenishment and order timing.
- Pharmaceutical gross sales fell $570,698, or 84.0%, because RENACIDIN was unavailable. The company had depleted inventory in July 2012 after its sole supplier curtailed production.
- Medical product gross sales increased $211,016, or 32.1%, primarily attributed to order timing. Industrial and other product sales increased $21,255, or 98.3%.
- Operating expenses declined $41,295, or 6.8%, mainly from lower insurance costs. Investment income decreased $15,409, or 22.1%.
- Investing activities used $1.783 million, principally reflecting purchases of marketable securities; cash increased $280,730 during the quarter.
Outlook, risks and unusual items
- The RENACIDIN supplier agreed to pay $97,610 per month while production remains curtailed, until production resumes or the supply contract ends January 20, 2014. The company received $292,830 in Q1 2013. Management said production was not expected to resume until Q3 2013.
- The company is working with a new supplier on a single-dose RENACIDIN product and hopes to obtain FDA approval by the end of 2014. These are expectations, not assurances; timing and product availability remain uncertain.
- Management expected the approximately 33% effective tax rate to remain consistent for the year. It also expects to use cash for dividends, marketable-security purchases and other opportunities; no dividends were paid in either first quarter.
- Risks identified include competition and product acceptance, product development and quality, reliance on suppliers and marketing partners, intellectual property, economic and industry conditions, regulation, interest rates and securities-market conditions. The filing says there were no legal proceedings, off-balance-sheet arrangements or material changes in internal controls; management assessed disclosure controls as effective.
Important facts for investors to verify
- Whether RENACIDIN production resumes, the monthly supplier payments continue, and the new supplier and FDA approval milestones are achieved.
- Whether personal care growth and the largest marketing partner’s order patterns are sustained, given the sharp decline in pharmaceutical sales.
- How much reported earnings growth reflects recurring operations versus the supplier settlement, and whether margins hold as product mix changes.
- Collection of receivables and settlement amounts, and the liquidity and valuation risk of the substantial marketable-securities portfolio.