United-Guardian, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
United-Guardian develops, manufactures and markets personal-care ingredients and products, pharmaceuticals, medical products and specialty industrial products. This unaudited report covers the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods. The company’s key product line is LUBRAJEL. Its products are marketed through partners, distributors and other channels.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Gross sales | $3.892 million | $2.216 million | $6.764 million | $4.547 million |
| Net sales | $3.775 million | $2.139 million | $6.561 million | $4.402 million |
| Operating income | $1.531 million | $0.508 million | $2.400 million | $1.228 million |
| Net income | $1.104 million | $0.405 million | $1.739 million | $0.930 million |
| Basic and diluted EPS | $0.24 | $0.09 | $0.38 | $0.20 |
| Operating cash flow | Not presented separately | Not presented separately | $2.029 million | $0.524 million |
- Q2 gross sales rose approximately 76%; first-half gross sales rose approximately 49%. Net income increased approximately 172% in Q2 and 87% in the first half.
- Management reported cost of sales at 42.8% of sales in Q2 versus 45.5% a year earlier, reflecting a greater Q2 mix of higher-margin personal-care products. For the first half, the ratio increased to 43.3% from 41.9%, mainly because of greater pharmaceutical sales, including lower-margin RENACIDIN.
- Q2 operating expenses declined about 10% year over year; first-half expenses declined about 5%, primarily due to lower payroll-related expenses. R&D expense was $158,275 in Q2 and $348,004 for the first half.
- Investment income was $72,796 in Q2 and $125,668 for the first half. The effective tax rate was approximately 31% in all periods presented.
- At June 30, cash and cash equivalents were $705,076, marketable securities were $10.272 million, and current assets were $14.128 million. Working capital was $12.803 million; the current ratio was 10.7:1, down from 13.1:1 at year-end 2016.
- Total liabilities were $1.400 million, comprising current liabilities of $1.324 million and deferred taxes of $75,182. No borrowings are reported on the balance sheet. Total equity was $13.780 million.
- First-half cash from investing was $176,689; cash used in financing was $1.925 million, all dividends paid. Cash increased $280,775 to $705,076. Dividends paid per share rose to $0.42 from $0.35 in the first half of 2016.
Material changes, outlook and risks
- Personal-care sales increased $1.306 million in Q2 and $1.711 million in the first half, primarily due to higher shipments to Ashland Specialty Ingredients (ASI). Sales to ASI rose approximately 208% in Q2 and 127% for the first half.
- Pharmaceutical sales grew approximately 40% in Q2 and 46% in the first half, primarily from RENACIDIN. Growth reflected the 2016 introduction of a 30 mL single-dose form and discontinuation of the former 500 mL bottle.
- Medical-product sales increased 19% in Q2 but decreased 4% for the first half. Industrial and miscellaneous sales were broadly flat in Q2 and lower for the first half.
- Management expects operating expenses to remain relatively consistent for the rest of 2017, the effective tax rate to remain consistent, and no significant capital expenditures for the remainder of the year. It believes working capital will support operations for at least 12 months; it expects to continue dividend payments and may purchase marketable securities or pursue other shareholder-beneficial opportunities. No earnings or revenue forecast was provided.
- Management cited economic weakness in Europe, the strong U.S. dollar and lower-priced Asian competition as pressures on personal-care sales and margins; it may reduce prices selectively to retain or win business. Forward-looking results are also subject to product, market acceptance, competition, intellectual-property, regulatory, economic and other risks.
- Customer concentration increased: one pharmaceutical distributor and one personal-care marketing partner together accounted for approximately 55% of net sales and 59% of receivables at June 30, 2017, versus 42% and 45%, respectively, a year earlier. Separately, ASI purchased approximately 49% of company products in Q2.
- Approximately $609,000 of cash exceeded FDIC insurance limits at June 30. The company reported no off-balance-sheet arrangements and no legal proceedings. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- Whether the unusually strong sales and earnings growth—especially sales to ASI and RENACIDIN—continues beyond the first half.
- How customer concentration and the resulting receivable exposure evolve, including the reported 55% combined sales concentration.
- Whether European weakness, currency effects and lower-priced competition lead to further price reductions or margin pressure.
- How dividends, investment purchases and operating cash flows affect liquidity; confirm the timing and sustainability of the $0.42-per-share first-half dividend.
- Management’s assessment of the upcoming revenue-recognition standard’s impact; the filing says evaluation was ongoing. The company also said the inventory standard adopted in Q1 2017 had no material impact.