United-Guardian, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. The company develops, manufactures, and markets personal-care and cosmetic ingredients, pharmaceuticals, medical products, and specialty industrial products through its Guardian Laboratories division. LUBRAJEL is its most important product line. Results are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | H1 2016 | H1 2015 |
|---|---|---|---|---|
| Net sales | $2.14 million | $4.12 million | $4.40 million | $8.50 million |
| Operating income | $508,275 | $2.12 million | $1.23 million | $4.19 million |
| Net income | $405,381 | $1.51 million | $930,472 | $2.97 million |
| EPS, basic and diluted | $0.09 | $0.33 | $0.20 | $0.65 |
- Sales fell 48.1% in Q2 and 48.2% in H1; net income fell 73.2% and 68.7%, respectively.
- Cost of sales was 47.1% of sales in Q2 versus 34.0% a year earlier, and 43.3% in H1 versus 36.3%. Management attributed the increase chiefly to a higher sales mix of lower-margin, externally manufactured pharmaceutical products, particularly RENACIDIN.
- H1 operating cash flow was $524,379, down from $3.06 million. Investing activities provided $251,960, compared with $927,431 used in H1 2015. Dividends paid were $1.60 million, versus $2.30 million.
- At June 30, cash and cash equivalents were $252,957 and marketable securities were $10.62 million. Working capital was $13.10 million, down $428,557 from year-end; the current ratio declined to 11.6:1 from 14.7:1. The company reported no borrowings on its balance sheet.
- Total assets were $15.54 million and stockholders’ equity was $14.09 million. No debt balance is presented in the reported balance sheet.
Drivers and material changes
- The principal cause of the sales decline was personal-care product sales, down 68.6% in Q2 and 68.7% in H1. Sales to largest marketing partner Ashland Specialty Ingredients (ASI) fell 77.4% and 77.1%, respectively.
- Management said ASI’s reduced orders reflected excess inventory following overly optimistic customer forecasts in China and a Chinese regulatory issue affecting other ingredients in some products containing LUBRAJEL. ASI was working through inventory.
- Pharmaceutical sales increased 59.6% in Q2 and 41.9% in H1, largely due to RENACIDIN. Sales benefited from a new 30 mL single-dose bottle launched in April; RENACIDIN sales remained below historical levels following prior production curtailments.
- Medical product sales decreased 4.5% in Q2 but increased 12.2% in H1. Industrial and miscellaneous product sales declined in both periods.
- Operating expenses rose 4.8% in Q2 and 3.1% in H1, primarily reflecting promotion and advertising of the new RENACIDIN format. R&D expense increased modestly.
Outlook, risks, and other items
- ASI told the company it expected China-related LUBRAJEL purchases to resume at the end of Q3 or beginning of Q4 2016. Management cautioned that sales were expected to remain below prior-year levels and said it was working with ASI and exploring ways to broaden global personal-care sales.
- Management expects operating expenses to remain relatively consistent, the effective tax rate to remain about 31%, and working capital to support operations for at least 12 months. It did not expect significant capital expenditures in the remainder of 2016. No formal earnings guidance was provided.
- Management cited competition from lower-priced imitations, pricing reductions that can pressure margins, continuing economic weakness in Europe, and the strong U.S. dollar as headwinds. Forward-looking results are also exposed to product acceptance and development, regulatory, market, and other risks.
- Dividends per share paid declined from $0.50 in H1 2015 to $0.35 in H1 2016. Management expects continued use of cash for dividends, marketable securities, and other opportunities.
- The filing reports no off-balance-sheet arrangements or legal proceedings. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Investor facts to verify
- Whether ASI’s excess inventory clears and China-related orders resume on the indicated timetable and at what volume.
- Whether RENACIDIN’s new packaging sustains sales growth and production returns toward historical levels.
- Whether lower-priced competition and any required price concessions continue to weaken product margins.
- Whether operating cash flow recovers as earnings improve, and whether elevated inventory, receivables, and accrued expenses normalize.
- How investment values, cash balances, and dividend payments evolve given the company’s stated capital-allocation plans.