United-Guardian, Inc. — Q1 2022 Form 10-Q
Business context and period. The company develops, manufactures and markets cosmetic ingredients, pharmaceuticals, non-pharmaceutical medical products and specialty industrial products. This filing reports the unaudited three months ended March 31, 2022, compared with the same period in 2021. Its key product line is Lubrajel; Renacidin is its principal pharmaceutical product.
Financial performance
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Net sales | $3.892 million | $3.431 million |
| Gross profit / gross margin | $2.182 million / 56.1% | $2.070 million / 60.3% |
| Operating income / operating margin | $1.504 million / 38.6% | $1.524 million / 44.4% |
| Net income | $911,465 | $1.181 million |
| Diluted and basic EPS | $0.20 | $0.26 |
| Operating cash flow | $27,415 | $990,206 |
- Sales grew about 13%. Cosmetic ingredient sales increased 27% to $2.078 million, and pharmaceutical sales increased 7% to $1.225 million. Medical sales fell 9% to $558,000; industrial and other sales fell 23% to $31,000.
- Cost of sales rose to 44% of sales from 40%, reflecting higher raw-material costs and the prior-year benefit of a one-time employee-retention credit. Operating expenses rose 20%, and R&D expenses rose 49%, partly for the same prior-year credit comparison and higher payroll-related costs.
- Net income declined about 23%, despite higher sales, chiefly as the net loss on marketable securities increased to $394,000 from $72,000. Management said the loss was unrealized and primarily reflected falling values of fixed-income mutual funds amid inflation and rising interest rates.
- Cash from operations fell substantially, primarily due to increases in accounts receivable and prepaid income taxes. Investing activities used $47,128, versus $720,000 in Q1 2021, largely because purchases of marketable securities were lower. There was no cash used in financing activities in either period.
Financial position and liquidity
- At March 31, 2022, cash and cash equivalents were $512,000 and marketable securities were $7.284 million. Total assets were $12.941 million; current liabilities were $2.010 million.
- Working capital was $10.301 million, up from $9.246 million at year-end 2021; the current ratio was 6.1, versus 5.0. Management believes working capital will support operations for at least 12 months.
- The filing reports no borrowings or material immediate cash requirements. It states there are no material capital-expenditure commitments and no off-balance-sheet transactions.
Outlook, risks and notable developments
- Management said cosmetic ingredient sales had rebounded to pre-pandemic levels and expected improvement during 2022 if global pandemic conditions continued to improve. The company did not provide specific revenue or earnings guidance and said pandemic effects could not be accurately projected.
- Higher raw-material and shipping costs pressured margins. Price increases had been implemented on many products, with some taking effect in Q2 2022. Management said raw-material prices had begun declining for certain items and that it had locked in pricing on key materials.
- Shipping capacity and truck-driver shortages delayed customer pickups. Approximately $240,000 of medical-product orders were ready to ship but awaiting vessel availability at quarter-end; management expected logistics constraints to persist well into 2022, then improve.
- Competition from lower-priced Asian and European cosmetic-ingredient suppliers remains significant. Three pharmaceutical distributors and one cosmetic marketing partner together accounted for 79% of Q1 sales and 78% of quarter-end receivables. ASI is the largest cosmetic marketing partner; China is an important end market for its sales of the company’s products.
- The company reported that its board had begun a formal review of strategic alternatives to maximize shareholder value and assess resources for growth. Alternatives could include a sale, joint ventures, partnerships or other transactions. It retained Capstone Partners and legal counsel; the filing does not disclose an outcome.
- Management expected an approximately 21% effective tax rate for fiscal 2022. The company reported no legal proceedings, and disclosure controls were considered effective; no material changes in internal control over financial reporting were reported.
Important facts for investors to verify
- Whether product price increases and any raw-material cost relief offset margin pressure in subsequent quarters.
- Whether the $240,000 of delayed medical-product orders shipped, and how persistent shipping constraints affected sales and cash collection.
- Whether the strategic-alternatives review resulted in a transaction, partnership or other material update.
- How marketable-security valuations and unrealized losses changed, and whether investment volatility continued to affect reported earnings.
- Whether customer and marketing-partner concentration, particularly exposure linked to ASI and international demand, changed.