United-Guardian, Inc. — Q3 2017 Form 10-Q
Business context and period: The company develops, manufactures, and markets cosmetic ingredients, personal and health care products, pharmaceuticals, medical products, and specialty industrial products. This filing covers the three and nine months ended September 30, 2017; financial statements are unaudited. Its LUBRAJEL line is a key product line.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Gross sales | $3.30m | $3.57m | $10.07m | $8.11m |
| Net sales | $3.18m | $3.46m | $9.74m | $7.86m |
| Operating income | $1.47m | $1.24m | $3.87m | $2.47m |
| Net income | $1.09m | $0.90m | $2.83m | $1.83m |
| EPS, basic and diluted | $0.24 | $0.20 | $0.62 | $0.40 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $3.21m | $1.67m |
Gross margin was approximately 65% in Q3 versus 54% a year earlier, and approximately 58% for the nine months versus 55%. The company attributed lower cost of sales as a share of revenue mainly to lower per-unit manufacturing costs and fixed-overhead absorption on higher production. Effective tax rate was approximately 31%.
At September 30, 2017, cash and equivalents were $0.64m and marketable securities were $11.61m. Current assets were $15.56m and current liabilities $1.58m; working capital was $13.98m and the current ratio was 9.8:1. Total assets were $16.58m and stockholders’ equity $14.91m. The filing reports no borrowings or debt balance. Nine-month investing cash use was $1.07m, primarily reflecting purchases of marketable securities; dividends paid were $1.93m. Cash increased $0.22m from year-end to $0.64m.
Changes versus prior comparable periods
- Q3 gross sales fell about 7%, while nine-month gross sales rose about 24%. Q3 net income increased about 21%; nine-month net income increased about 55%.
- Q3 personal-care sales rose about 2%, but pharmaceutical sales fell about 6% and medical-product sales fell about 30%. For the nine months, personal-care sales increased about 48% and pharmaceutical sales about 21%, while medical-product sales declined about 14%.
- Nine-month operating cash flow increased to $3.21m from $1.67m, primarily due to higher net income. Dividends per share increased to $0.42 from $0.35.
- Marketable securities increased to $11.61m from $10.22m at December 31, 2016; accounts receivable rose to $1.96m from $1.60m.
Outlook, commentary, and risks
- Management believes working capital will support operating requirements for at least the next 12 months, expects operating expenses to remain relatively constant, and does not expect significant capital expenditures for the rest of 2017. It expects the tax rate to remain consistent for the year.
- Management plans to continue dividends and purchases of marketable securities, while retaining flexibility for other opportunities. No quantified earnings or sales guidance was provided.
- Management cited European economic weakness, the strong U.S. dollar, and lower-priced Asian competition as pressure on personal-care sales and margins; case-by-case price reductions may be needed. Medical-product sales are uneven due to large, infrequent customer orders and customer inventory levels.
- One pharmaceutical distributor and one personal-care marketing partner together represented approximately 53% of sales and 48% of receivables. ASI, the largest personal-care marketing partner, accounted for approximately 34% of company product purchases in Q3.
- Approximately $554,000 of cash at September 30 exceeded FDIC insurance limits. Management reported no off-balance-sheet arrangements and no legal proceedings. Disclosure controls were assessed as effective, with no material changes to internal control reported.
Important facts for investors to verify
- Whether Q3 sales weakness and medical-product order timing persist, and whether nine-month growth is repeatable.
- Sales, receivables, and order trends for the concentrated distributor and marketing partner, including ASI.
- Whether price competition and foreign-exchange conditions affect future sales or margins.
- The composition, valuation, and risk profile of the $11.61m marketable-securities portfolio, and cash balances above FDIC limits.
- The eventual effect of adopting the new revenue-recognition standard; the company was still evaluating its impact.