United-Guardian, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. United-Guardian develops, manufactures, and markets personal care, pharmaceutical, medical, and specialty industrial products through its Guardian Laboratories division. Its LUBRAJEL line is a key personal care product. Comparisons below are with Q1 2017 unless otherwise noted.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Gross sales | $3.667 million | $2.873 million | +27.6% |
| Net sales | $3.520 million | $2.786 million | +26.3% |
| Income from operations | $1.443 million | $869,083 | +66.0% |
| Net income, as reported | $1.060 million | $634,435 | +67.0% |
| Basic and diluted EPS | $0.23 | $0.14 | +$0.09 |
| Cash from operating activities | $1.670 million | $875,146 | +$795,035 |
Gross margin was approximately 58.8%, versus 54.6%; operating margin was approximately 41.0%, versus 31.2%; net margin was approximately 30.1%, versus 22.8%. Higher LUBRAJEL sales and lower plant-related overhead contributed to the improved cost-of-sales ratio. Operating expenses increased 13% to $524,114, while research and development expense fell 46% to $101,664.
Q1 2018 included a $135,150 unrealized loss on marketable securities and a $12,837 loss on an equipment trade-in. Investment income was $46,782, compared with $52,872. The effective tax rate was approximately 21%, versus 31%; management expected it to remain around 21% for 2018.
Liquidity, balance sheet, and cash flow
At March 31, 2018, cash and cash equivalents were $1.071 million and marketable securities were $8.884 million. Total current assets were $13.420 million and current liabilities $1.910 million; working capital was $11.510 million. The current ratio was 7.0, down from 8.3 at December 31, 2017, primarily because accrued expenses and income taxes payable increased. Total assets were $14.372 million and stockholders’ equity was $12.457 million. The balance sheet reports no debt.
Operating cash flow was $1.670 million. Investing activities used $1.324 million, principally for purchases of marketable securities; capital expenditures were $26,500. Cash increased by $346,427 to $1.071 million. No financing cash flow was reported. The company said working capital should support operations for at least 12 months and it did not expect material capital expenditures for the remainder of 2018.
Material changes and accounting
Personal care sales rose approximately 43%, mainly from higher ASI purchases, including for China. Pharmaceutical sales increased approximately 19%, primarily due to RENACIDIN. Medical sales were nearly flat and industrial and other sales declined approximately 3%. Sales allowances and returns increased 71% to $147,435, mainly from higher distributor fees and rebates.
Effective January 1, 2018, the company adopted ASC 606 using the modified retrospective method; it said the change did not materially affect its financial statements and revenue recognition continued generally at shipment. It also adopted ASU 2016-01, requiring fair-value changes on equity investments to be recorded in net income. The adoption moved $466,025 of cumulative unrealized gains from accumulated other comprehensive income to retained earnings. Consequently, 2018 investment losses run through earnings, whereas comparable 2017 unrealized gains were reported in other comprehensive income. The filing presents 2017 net income as reported at $634,435; it states that applying the new investment standard to Q1 2017 would have added $86,903 after tax, producing adjusted net income of $721,338 and EPS of $0.16.
Outlook, risks, and other disclosures
Management cited lower-priced imitation products, particularly in Asia and Western Europe, as a competitive pressure that has led to some customer losses and pricing actions; it said margin effects had not been significant to date and it intended to continue competing aggressively. Forward-looking risks include competition, product development and acceptance, economic and industry conditions, intellectual property, regulation, interest rates, and securities-market conditions.
Two customers—a distributor and a marketing partner—together accounted for 57% of Q1 2018 net sales and 57% of period-end receivables, compared with 48% and 44%, respectively, in Q1 2017. Approximately $883,000 of cash exceeded FDIC insurance limits. The company reported no off-balance-sheet arrangements and no legal proceedings. Management assessed disclosure controls as effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much reported earnings growth reflects underlying operations versus the new accounting treatment for marketable securities; compare Q1 2018 with Q1 2017 on a consistent basis.
- Whether the concentration of sales and receivables with the two major customers, and reliance on ASI for personal care growth, persists.
- Whether higher distributor fees and rebates, pricing competition, or imitation products affect sales allowances and margins in subsequent quarters.
- Whether the stated liquidity outlook, approximately 21% tax-rate expectation, and no-material-capex outlook remain valid.
- How marketable-security values and the uninsured cash balance change, given the reported investment loss and deposit concentration.