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UNITED GUARDIAN INC - 10-Q Summary (Period Ended Sep 30, 2010)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for United-Guardian, Inc., a Delaware corporation engaged in the research, development, manufacturing, and marketing of cosmetic ingredients, personal care products, pharmaceuticals, and specialty industrial products. The report covers the three and nine-month periods ended September 30, 2010. The company is classified as a smaller reporting company.

Key Financial Metrics

Margins: Cost of sales as a percentage of net sales decreased to 38.2% for the nine months ended September 30, 2010, compared to 40.2% in the prior year period. The effective income tax rate was approximately 33.0%.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 8.5% for the nine months and 13.4% for the three months ended September 30, 2010, compared to the prior year. Growth was driven by a 16.9% increase in personal care product sales (notably to partners ISP and Sederma) and a 49.0% increase in medical product sales for the quarter, offset by an 8.1% decline in pharmaceutical sales for the nine-month period due to timing of price increases.
• Pension Plan Termination: The company terminated its Defined Benefit (DB) Pension Plan on July 13, 2010. This resulted in a one-time before-tax charge of $847,744 (after-tax charge of $559,133) for the nine-month period. This included a non-cash expense of $518,296 and a cash contribution of $337,378.
• Share Repurchase: The company retired 350,000 shares of stock purchased from its President and largest shareholder, Kenneth H. Globus, for $3,762,500. Additionally, 62,200 shares of treasury stock were retired.
• Liquidity: Working capital decreased by $2.14 million primarily due to the share repurchase. However, the current ratio improved significantly to 15.8 to 1 due to the reduction in dividends payable.

Guidance, Outlook, and Risks

Outlook: Management expects working capital to be sufficient for operating requirements for at least the next twelve months. No significant capital expenditures are expected for the remainder of 2010. The company anticipates that pharmaceutical sales for calendar 2010 will increase in dollar value due to a price increase implemented in April 2010.

Dividends: The company paid $3,066,792 in dividends for the nine months ended September 30, 2010 ($0.62 per share).

Risks and Contingencies:

• Market Risks: The company is subject to general economic conditions, changes in interest rates, and competition. Approximately half of personal care products are sold outside the U.S.
• Customer Concentration: Sales are dependent on marketing partners, with International Specialty Products Inc. (ISP) being the largest volume purchaser.
• Regulatory: The company is subject to examination by the IRS and New York State for tax years 2007 through 2009.

Investor Verification Checklist

• Pension Termination Impact: Verify the full extent of the $847,744 charge and confirm no future liabilities remain from the terminated DB Plan.
• Shareholder Transactions: Review the related party transaction regarding the $3.76 million share repurchase from the President to ensure fair valuation and proper disclosure.
• Revenue Quality: Analyze the volatility in sales to partner Sederma (up 49.9% for nine months, down 47.3% for the quarter) to assess order consistency.
• Cash Utilization: Monitor the significant reduction in cash and cash equivalents (from $5.02M to $1.69M) and the company's ability to maintain dividend payments while funding operations.
• Pharmaceutical Pricing: Confirm if the anticipated increase in pharmaceutical sales volume/value materializes in the fourth quarter following the April 2010 price hike.