United-Guardian, Inc. — Q1 2019 Form 10-Q
Business context and period: The company develops, manufactures and markets personal care, pharmaceutical, medical and specialty industrial products through its Guardian Laboratories division. This unaudited report covers the three months ended March 31, 2019, compared with the same period in 2018. Its Lubrajel line is its most important product line.
Financial results
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Gross sales | $3.453 million | $3.667 million |
| Net sales | $3.282 million | $3.520 million |
| Income from operations | $1.246 million | $1.443 million |
| Net income | $1.223 million | $1.060 million |
| Basic and diluted EPS | $0.27 | $0.23 |
| Operating cash flow | $1.532 million | $1.670 million |
Gross sales declined about 6%; net sales declined about 7%. Operating income fell about 14%, while net income rose about 15%, reflecting a $257,194 gain on marketable securities in 2019 versus a $135,150 loss in 2018. Operating margin was approximately 38% of net sales, compared with 41% a year earlier. Cost of sales rose to about 42% of net sales from 41%, partly because Renacidin, which has higher manufacturing costs, represented more sales.
Personal care sales fell approximately 22%, primarily due to lower purchases by ASI and the South Korean distributor C&M International. Pharmaceutical sales increased about 19%, mainly on higher Renacidin sales; medical sales rose about 13%. Sales allowances and returns increased about 16%.
Financial position and liquidity
At March 31, 2019, cash and cash equivalents were $499,256, marketable securities were $9.449 million, and current assets were $13.142 million. Current liabilities were $1.558 million; working capital was $11.584 million and the current ratio was 8.4 to 1. The company reported no debt on the balance sheet. Stockholders’ equity was $12.148 million.
Operating cash flow decreased from $1.670 million to $1.532 million, primarily due to timing of estimated tax payments. Investing activities used $1.583 million, largely reflecting purchases of marketable securities; there was no financing cash flow in either period. Cash ended the quarter at $499,256, down from $550,135 at year-end 2018.
Outlook, risks and other matters
Management said working capital should support operations for at least the next 12 months and did not expect material capital expenditures for the rest of 2019. The company expects a 21% tax rate for the fiscal year. No earnings or sales guidance was provided.
Sales are concentrated: one distributor and one marketing partner together accounted for 55% of Q1 2019 gross sales and 51% of accounts receivable at quarter-end. ASI reported that about 80% of its Q1 sales of the company’s products went to customers outside the U.S., with China representing about half of ASI’s sales of those products. Management cited variable customer demand and ordering patterns, trade issues affecting South Korean sales, and lower-priced competitors as risks. The company relies primarily on trade secrets and proprietary manufacturing methods for product protection; previously issued patents have expired.
Marketable securities are recorded at fair value, and equity investment gains and losses affect net income, which contributed materially to the year-over-year earnings comparison. Approximately $314,000 of cash at quarter-end exceeded FDIC insurance limits. The filing reported no legal proceedings or off-balance-sheet arrangements. Management said disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether personal care demand, particularly purchases by ASI and the South Korean distributor, recovers or remains weaker.
- How much earnings performance depends on changes in marketable-security fair values versus operating results.
- Whether Renacidin and medical-product sales growth continues, and its effect on product mix and gross margin.
- Whether customer concentration, foreign-market exposure, and competition from lower-priced products affect future sales.
- The company’s cash and investment allocation, including dividends and marketable-security purchases; the filing gives no specific future dividend amount.