United-Guardian, Inc. — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013; comparisons are with fiscal 2012. This is an annual report, not a standalone fourth-quarter results filing.
Business context
The company researches, manufactures, and markets personal care and cosmetic ingredients, pharmaceuticals, medical products, and specialty industrial products. It operates as one business segment. LUBRAJEL products represented 91.4% of 2013 revenue; RENACIDIN represented 2.9%. Approximately 70% of sales were to foreign customers.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $15.42 million | $13.83 million | +11.5% |
| Gross profit | $9.81 million | $8.61 million | +13.9% |
| Gross margin | 63.6% | 62.3% | +1.3 percentage points |
| Income from operations | $7.30 million | $6.10 million | +19.7% |
| Net income | $5.90 million | $4.83 million | +22.2% |
| Diluted earnings per share | $1.28 | $1.05 | +21.9% |
| Operating cash flow | $5.81 million | $5.38 million | +7.9% |
Net margin was approximately 38.3%, compared with 35.0% in 2012. Cost of sales declined to 36.4% of sales from 37.7%, reflecting higher sales of higher-margin LUBRAJEL products and lower RENACIDIN sales, among other factors. Other income included a $1.07 million RENACIDIN supplier settlement, versus $518,050 in 2012.
At year-end, working capital was $13.06 million, up 10.7%; the current ratio was 11.5:1, down from 15.3:1. Cash and cash equivalents were $1.63 million and marketable securities were $8.86 million. The balance sheet reports no debt; management said the company had no line of credit and saw no foreseeable need for one. Investing activities used $1.46 million, principally reflecting net purchases of marketable securities. Financing activities used $4.46 million, all for dividends.
Material changes and unusual items
- Personal care sales rose 21.4%, primarily due to higher sales to ASI and growth in LUBRAJEL; sales to China increased by more than 40%.
- Pharmaceutical sales fell 39.9%, mainly because RENACIDIN supply disruptions prevented sales from August 2012 until late October 2013. RENACIDIN sales were down 57% year over year.
- The supplier settlement generated $1.07 million of 2013 income. A remaining $48,805 receivable was collected in February 2014.
- Medical product sales increased 4.3%. Overall LUBRAJEL sales across personal care and medical uses increased 17.9%.
- Cash dividends totaled $4.46 million in 2013, including regular dividends of $0.47 and $0.50 per share. 2012 dividends totaled $6.25 million and included a special dividend.
Outlook, risks, and contingencies
No specific revenue or earnings guidance was provided. Management expected 2014 R&D costs to be comparable to 2013’s approximately $717,000. The company was developing new natural LUBRAJEL products and a water-based condom lubricant; management cautioned that development efforts may not produce marketable products.
- RENACIDIN supply and regulatory risk: The existing supplier agreement was extended into the first quarter of 2015. A replacement supplier and single-dose product were planned, subject to FDA approval; the company expected approval in the fourth quarter of 2014 and anticipated market launch in early 2015. Delays could affect this timetable.
- Customer and distribution concentration: Two customers accounted for approximately 69% of revenue and 72% of year-end receivables, up from 62% and 52%, respectively, in 2012. ASI is the largest marketing partner; its agreement was extended through December 31, 2015. Other foreign distributor arrangements may be terminated at any time.
- Geographic, competitive, and operating risks: Foreign markets comprised about 70% of sales. The filing cites economic conditions, competition, product acceptance, regulation, key personnel, and the sufficiency of resources among factors that could affect results.
- Other exposures: Five major raw-material vendors represented 67% of 2013 raw-material purchases. The company reported no material litigation or off-balance-sheet arrangements. IRS examination of 2010–2012 returns and a New York State examination of the same years were disclosed; no unrecognized tax benefits were reported.
Management stated that working capital was sufficient for the next fiscal year and that there were no material capital expenditure commitments. It reported effective disclosure controls and internal control over financial reporting; the external auditor did not attest to internal control effectiveness.
Important facts for investors to verify
- Whether RENACIDIN supply remains reliable, FDA approval is obtained on schedule, and the new single-dose format gains market acceptance.
- Whether LUBRAJEL growth and sales through ASI and other distributors are sustained, given customer and channel concentration.
- How much reported earnings growth depended on the nonrecurring RENACIDIN settlement and whether product mix supports continued margins.
- Whether cash, marketable securities, working capital, and dividends remain sustainable as sales and operating cash flows evolve.
- The outcomes of the disclosed federal and New York State tax examinations.