United-Guardian, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited. United-Guardian develops, manufactures, and markets cosmetic ingredients, pharmaceutical and medical products, and specialty industrial products.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 / comparison |
|---|---|---|
| Net sales | $3.323 million | $3.180 million; up 4% |
| Gross profit / gross margin | $1.934 million / 58.2% | Approx. 59.5% margin |
| Operating income / margin | $1.311 million / 39.4% | $1.246 million / 39.2% |
| Net income / net margin | $790,307 / 23.8% | $1.223 million / 38.4% |
| EPS, basic and diluted | $0.17 | $0.27 |
| Cash from operations | $1.287 million | $1.532 million |
| Cash and cash equivalents, March 31 | $790,190 | $1.048 million at Dec. 31, 2019 |
| Marketable securities, March 31 | $8.055 million | $6.868 million at Dec. 31, 2019 |
| Working capital / current ratio | $10.970 million / 8.0:1 | $10.224 million / 8.6:1 at Dec. 31, 2019 |
Cost of sales rose to approximately 42% of sales from 41%, reflecting a higher mix of Renacidin, which costs more to manufacture. Operating expenses fell 6% to $515,275; R&D expense increased 9% to $107,732. The effective tax rate was approximately 21%. The filing reports no borrowings or debt; current liabilities were $1.572 million and deferred taxes were $303,000 at quarter-end.
Investing activities used $1.545 million, primarily for net purchases of marketable securities; there was no cash used in financing activities. Cash decreased by $258,121 during the quarter. Management said working capital should support operations for at least 12 months and did not expect material capital expenditures for the rest of 2020.
Material changes and business drivers
- Pharmaceutical sales increased 17% to $1.039 million, driven mainly by higher Renacidin purchases from drug wholesalers. Medical product sales declined 12% to $539,196, largely due to a Chinese customer’s delayed orders. Cosmetic ingredient sales increased 3% to $1.703 million; industrial and other sales rose to $42,148.
- Despite higher sales and operating income, net income declined 35% year over year. The principal reason was a $356,595 unrealized loss on marketable securities in Q1 2020, versus a $257,194 net gain in Q1 2019. Management said the portfolio had recovered a substantial portion of the loss by the report date, but gave no updated value.
- Marketable securities increased from year-end, while cash declined. Accounts receivable was $2.105 million and inventory was $1.363 million at March 31.
Outlook, risks, and other disclosures
- The company continued operating as an essential business during COVID-19. Management expected pharmaceutical and medical sales not to be materially affected, but anticipated lower cosmetic ingredient sales as consumer demand and customer production weakened, including in overseas markets. It could not reliably estimate the pandemic’s overall impact or duration.
- Management did not anticipate raw-material shortages or impaired liquidity, citing price protection on a key raw material, multiple suppliers, and additional raw-material purchases. Staggered work hours reduced production hours; management expected to fulfill orders on time, though inventory could remain below usual levels.
- Some customer payments could be delayed, but management did not expect a significant increase in bad debts. The company reported minor COVID-related payment delays to date. Two distributors/marketing partners together represented 57% of Q1 gross sales and 57% of quarter-end receivables.
- Marketable securities are exposed to market fluctuations. Approximately $699,000 of cash at March 31 exceeded FDIC insurance limits. Other stated risks include competition and lower-priced cosmetic ingredient products, customer and geographic demand, and reliance primarily on trade secrets for proprietary formulations and processes.
- The company delayed its first-quarter federal estimated tax payment under IRS relief and planned to pay by July 15, 2020. No legal proceedings were reported; management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Subsequent quarterly trends in cosmetic ingredient demand, especially overseas and in China, and whether delayed medical-product orders were received.
- Performance and fair value of the investment portfolio after its Q1 unrealized loss, and the effect of any further market volatility on earnings and liquidity.
- Customer concentration, receivable collections, and any change in bad-debt or outdated-product-return reserves.
- Whether production constraints, raw-material availability, or COVID-related customer disruptions affect sales, inventory, or margins.
- Dividend declarations and payments, which are not detailed as cash financing flows in this quarter’s cash-flow statement.