United-Guardian, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021; filed November 9, 2021. United-Guardian develops, manufactures and markets cosmetic ingredients, pharmaceuticals, medical products and specialty industrial products through its Guardian Laboratories division.
Financial performance
| Metric | Q3 2021 | Q3 2020 | First 9 months 2021 | First 9 months 2020 |
|---|---|---|---|---|
| Net sales | $3.180 million | $2.336 million | $10.269 million | $8.614 million |
| Operating income | $1.270 million | $0.754 million | $4.310 million | $3.128 million |
| Net income | $1.017 million | $0.718 million | $3.542 million | $2.694 million |
| EPS, basic and diluted | $0.22 | $0.16 | $0.77 | $0.59 |
- Sales grew 36% in Q3 and 19% for the nine-month period; net income increased 42% and 31%, respectively.
- Gross margin was approximately 58% in Q3 (unchanged year over year) and 59% for the nine months, versus 58% in 2020. Operating margin was approximately 40% and 42%, respectively, compared with 32% and 36% in the prior periods. These margins are calculated from reported figures.
- Operating cash flow was $3.649 million for the nine months, up from $2.922 million. Capital spending was $82,000; dividends paid were $2.205 million.
- At September 30, cash and cash equivalents were $692,000 and marketable securities were $8.893 million. Current assets totaled $12.962 million and current liabilities $1.707 million; working capital was $11.255 million and the current ratio 7.6:1. The company reported no debt on the balance sheet.
Material changes and business drivers
- Cosmetic ingredient sales rose 187% in Q3 and 51% for the nine months, primarily from increased shipments through marketing partner Ashland Specialty Ingredients (ASI), including shipments to China.
- Pharmaceutical net sales were broadly steady: gross pharmaceutical sales declined 6% in Q3 and 4% year to date, mainly reflecting lower Renacidin sales after the company exited the Medicaid Drug Rebate Program effective December 31, 2020. Reduced rebates and related allowances more than offset lost sales, increasing net income from these sales, according to management.
- Medical product sales declined 33% in Q3 and 6% year to date, due to a lost customer, lower orders from customers in China and India, pandemic effects and shipping delays. Industrial product sales increased 11% in Q3 and 6% year to date.
- Operating expenses decreased 7% in Q3 and 6% year to date, reflecting lower payroll-related costs and a gain on an asset sale. R&D expense increased 14% in Q3 and 5% year to date.
- Investment income was slightly lower year to date. Marketable-security gains were lower than in 2020; Q3 2021 included a $25,000 unrealized loss, versus a $113,000 gain in Q3 2020.
Outlook, risks and other items
- No formal sales or earnings guidance was provided. Management expected operating expenses to remain relatively consistent for the remainder of 2021, the effective tax rate to remain about 21%, and no significant capital expenditures for the rest of 2021. It believed working capital would support operations for at least 12 months.
- COVID-19’s sales impact had eased, but supply-chain disruption was driving higher packaging, shipping and some raw-material costs; truck-driver shortages were delaying shipments and expected to continue into 2022. Management cautioned that higher costs could pressure margins and might not be recoverable through pricing. The company maintained production and did not expect pandemic-related impairment of asset values or liquidity, but could not project the pandemic’s future financial effect.
- Customer concentration is significant: one marketing partner and three distributors represented 86% of Q3 sales and 79% of receivables at quarter-end. ASI is the largest cosmetic-ingredient marketing partner; its reported product sales to foreign customers were 76% in Q3, with China representing about 29% of those foreign sales.
- The company held $806,000 of cash above FDIC insurance limits. Revenue deductions, including rebates, distribution fees and product-return allowances, require estimates. It also relies primarily on trade secrets for proprietary formulations and manufacturing processes.
- No legal proceedings or off-balance-sheet transactions were reported. Management assessed disclosure controls as effective and reported no material changes in internal control over financial reporting.
Investor verification points
- Check whether cosmetic-ingredient growth, particularly ASI-linked and China-related demand, is sustained and how much sales rely on the concentrated partner and distributor base.
- Track raw-material, packaging and freight costs, delivery delays, and any resulting gross-margin effects.
- Assess the net economics of the Medicaid-program exit, including lost Renacidin sales versus avoided rebates, and monitor remaining pharmaceutical allowances.
- Review investment portfolio values and returns, the company’s substantial marketable-securities balance, and cash held above FDIC limits.
- Confirm dividend levels and capital allocation against operating cash generation; the filing reports $0.48 per share in dividends for 2021 and $0.42 per share for 2020.