Business context and reporting period
United-Guardian, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2012. The company develops, manufactures, and markets personal-care, pharmaceutical, medical, and specialty industrial products. Its RENACIDIN pharmaceutical product is made by a third-party supplier; Ashland Specialty Ingredients is its largest personal-care marketing partner.
Financial performance
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $3.527 million | $3.345 million | $11.151 million | $11.047 million |
| Operating income | $1.595 million | $1.578 million | $5.063 million | $4.970 million |
| Net income | $1.116 million | $1.369 million | $3.538 million | $3.760 million |
| Diluted EPS | $0.24 | $0.30 | $0.77 | $0.82 |
| Gross margin | 62.2% | 63.2% | 61.1% | 60.9% |
Third-quarter sales rose 5.5%; nine-month sales increased 0.9%. Operating margin was 45.2% for Q3 and 45.4% for the nine-month period. Net margin was 31.6% and 31.7%, respectively.
For the first nine months, operating cash flow was $4.268 million, versus $3.769 million in 2011. Investing activities used $1.733 million, primarily reflecting net purchases of marketable securities; dividends used $1.931 million, or $0.42 per share. Cash and cash equivalents were $1.696 million at September 30. Marketable securities were $11.186 million, bringing cash and securities to $12.881 million.
Working capital was $14.878 million, with a current ratio of 16.88:1. Total liabilities were $1.111 million, including deferred taxes; the balance sheet reports no borrowings. Total stockholders’ equity was $15.927 million.
Material changes and unusual items
Pharmaceutical sales fell 56.8% in Q3 and 18.1% for the nine-month period, mainly because RENACIDIN supply was interrupted. RENACIDIN sales declined 79.7% in Q3 and 21.0% year to date. Personal-care sales rose 12.1% in Q3 and 4.5% year to date, led by sales to ASI. Medical-product sales increased 14.2% in Q3 and 2.1% year to date.
Net income declined year over year despite higher sales. The comparison includes $385,182 of supplier damage-settlement income received in Q3 2011, with no comparable settlement income in 2012. Q3 2012 cost of sales also rose to 37.8% of sales from 36.8%; nine-month cost of sales improved slightly to 38.9% from 39.1%.
Outlook, risks, and other disclosures
The company reported that RENACIDIN inventory was depleted by August 1, 2012, and it could not fill further orders until production resumed. The supplier had not identified a resumption date and indicated shipments might not be possible until May 2013 at the earliest. The supplier also said it would stop supplying the product after the contract ends in January 2014. The company is seeking a replacement manufacturer and says it may try to secure additional inventory; it considers the supplier in breach and is seeking compensation. These events are expected to continue materially affecting pharmaceutical sales.
Management believed working capital would support operations for at least the next 12 months and expected no significant capital expenditures for the remainder of 2012. The filing provides no specific earnings or sales guidance. Identified risks include product acceptance and development, competition, supplier and regulatory issues, intellectual-property changes, economic conditions, and interest-rate and securities-market changes. The company reported no legal proceedings or off-balance-sheet arrangements; management assessed disclosure controls as effective.
Important facts for investors to verify
- Whether RENACIDIN production and shipments resume as anticipated, and the effect of continued shortages on sales and earnings.
- Progress and timing in qualifying a replacement manufacturer before the January 2014 supply-contract end date.
- Whether the company recovers damages from the supplier and the amount or timing of any recovery.
- Sustainability of personal-care growth, including the contribution and order patterns of ASI.
- Composition, liquidity, and market value of the $11.186 million securities portfolio, and the company’s dividend plans.