United-Guardian, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; financial statements are unaudited. Comparisons are with Q1 2016 unless noted.
Business context
Through its Guardian Laboratories division, the company researches, manufactures and markets cosmetic ingredients, personal and health care products, pharmaceuticals, medical products and specialty industrial products. LUBRAJEL is its most important product line. Most products are manufactured at its Hauppauge, New York facility; RENACIDIN is manufactured by a third party.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Gross sales | $2.873 million | $2.331 million; up 23% |
| Net sales | $2.786 million | $2.263 million; up 23% |
| Cost of sales / gross margin | $1.264 million / 54.6% | $0.898 million / 60.3% |
| Income from operations | $869,083 | $719,729; up 21% |
| Net income | $634,435 | $525,091; up 21% |
| Basic and diluted EPS | $0.14 | $0.11 |
| Operating cash flow | $875,146 | $743,484 |
Operating margin was 31.2% versus 31.8%; net margin was 22.8% versus 23.2%. Investment income was $52,872, and the effective income tax rate was approximately 31% in both periods.
At March 31, 2017, cash and cash equivalents were $1.245 million and marketable securities were $10.403 million. Working capital was $13.483 million, up $814,350 from year-end 2016; the current ratio was approximately 10:1, down from 13:1. Total assets were $16.081 million and stockholders’ equity was $14.542 million. The balance sheet reports no borrowings or other debt; current liabilities were $1.497 million, plus $42,386 in deferred tax liabilities.
Cash increased by $820,716 during the quarter. Investing activities used $54,430, primarily for marketable securities purchases; there was no financing cash flow. Capital expenditures were $1,605.
Material changes and management commentary
- Personal care sales rose $404,328, or 37%, mainly as distributor Ashland resumed more normalized LUBRAJEL purchases for China after resolving a prior overstock situation.
- Pharmaceutical sales rose $285,387, or 53%, primarily due to RENACIDIN sales, including the new 30mL single-dose version introduced in April 2016.
- Medical product sales fell $135,279, or 20%, which the company attributed mainly to order timing and customer ordering patterns. Industrial and other product sales declined $12,289, or 29%.
- Cost of sales increased to approximately 44% of sales from 39%, principally because RENACIDIN has a lower margin than many other products. Operating expenses decreased approximately 1%; R&D expenses increased approximately 7%.
- Management said working capital should support operating requirements for at least the next 12 months and expected no significant capital expenditures for the remainder of 2017. It expected the effective tax rate to remain near 31% and operating expenses to remain relatively consistent. The company expects to use cash for dividends, securities purchases and other opportunities; no specific earnings or revenue guidance was provided.
Risks, contingencies and unusual items
- One distributor and one marketing partner together accounted for 48% of Q1 2017 net sales and 44% of period-end receivables, versus 42% and 33%, respectively, in Q1 2016.
- Approximately $998,000 of cash at March 31 exceeded FDIC insurance limits. Marketable securities were available-for-sale mutual funds measured using Level 1 fair-value inputs; unrealized gains contributed $86,903 of after-tax comprehensive income for the quarter.
- Management cited lower-priced imitations, particularly in Europe and Asia, continuing economic weakness in Europe and the strong U.S. dollar as competitive pressures. It may need to reduce prices in some cases, which could affect margins.
- Other disclosed risks include product acceptance and development, competition, intellectual property, regulatory and economic changes, and interest-rate and securities-market conditions. Actual results may differ from forward-looking statements.
- The filing reports no legal proceedings, off-balance-sheet arrangements, unregistered share sales or defaults upon senior securities. Management reported disclosure controls were effective and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether the China-related LUBRAJEL order recovery and higher RENACIDIN sales continue, and how sales by product category develop.
- Whether the higher cost-of-sales ratio and competitive pricing pressure persist and constrain margins.
- Exposure to the major distributor and marketing partner, including subsequent receivable collections and any changes in customer concentration.
- Investment portfolio composition, market value and cash balances held above FDIC insurance limits.
- Dividend plans and any future capital spending or other uses of the company’s substantial cash and marketable securities.