United-Guardian, Inc. — Q3 2020 Form 10-Q
Business and period: The company develops, manufactures, and markets cosmetic ingredients, pharmaceutical and medical products, and specialty industrial products through its Guardian Laboratories division. This unaudited report covers the three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $2.336 million | $3.317 million | $8.614 million | $9.777 million |
| Operating income | $754 thousand | $1.281 million | $3.128 million | $3.744 million |
| Net income | $718 thousand | $1.070 million | $2.694 million | $3.371 million |
| Diluted EPS | $0.16 | $0.23 | $0.59 | $0.73 |
| Cost of sales / sales | 42% | 42% | 42% | 42% |
Q3 operating margin was approximately 32.3% versus 38.6% a year earlier; nine-month operating margin was approximately 36.3% versus 38.3%. These margins are calculated from reported figures.
- Cash flow: Nine-month cash from operations was $2.922 million, down from $3.627 million, mainly reflecting lower net income. Investing activities used $1.156 million versus $142 thousand provided in 2019, largely due to increased purchases of fixed-income mutual funds. Dividends paid were $1.929 million versus $2.525 million.
- Liquidity and debt: At September 30, cash was $885 thousand and marketable securities were $8.142 million. Working capital was $10.930 million, and the current ratio was 10.0:1. The balance sheet reports no debt. Management said working capital should support operations for at least 12 months.
- Balance sheet changes: Total assets were $12.847 million, compared with $12.363 million at year-end 2019. Inventory rose to $1.545 million from $1.217 million; accounts receivable fell to $1.284 million from $2.098 million. Stockholders’ equity was $11.398 million.
Material changes and management commentary
- Net sales declined 30% in Q3 and 12% for the first nine months. Cosmetic ingredient sales fell 62% and 26%, respectively, primarily due to lower sales to marketing partner Ashland Specialty Ingredients (ASI), reduced demand in China, pandemic-related disruptions and inventory overstocking, and competition from lower-priced Asian suppliers.
- Pharmaceutical net sales increased 9% in Q3 and 15% year to date, mainly reflecting higher Renacidin sales; management attributed the increase partly to ongoing Google advertising. Medical product sales declined 25% in Q3 and 20% year to date, with reduced orders from several customers. Industrial sales also decreased.
- Operating expenses fell 9% in Q3 and 5% year to date, primarily due to lower payroll costs. Research and development expense increased 10% and 11%, respectively. Cost of sales remained 42% of sales.
- Q3 net gain on marketable securities increased to $113 thousand from $25 thousand; the nine-month gain fell to $144 thousand from $370 thousand, partly because 2019 included larger realized gains. Investment income declined in both comparison periods.
- The company continued operating as an essential business and reported it could maintain production and fulfill orders, with no anticipated raw-material supply issue or impairment to asset values or liquidity. It had price protection on some key raw materials and multiple sources for many others.
Outlook, risks, and unusual items
- Management could not accurately forecast the pandemic’s continuing effect. It expected cosmetic ingredient sales to remain pressured until demand and customer production recover, and said medical customer orders might gradually improve as normal operations resume. Pharmaceutical sales had not been adversely affected.
- Management expected operating expenses to remain relatively consistent for the rest of 2020, the full-year effective tax rate to be about 21%, and no significant capital expenditures for the remainder of 2020. No numerical sales or earnings guidance was provided.
- Key risks include pandemic-related demand and payment delays, reliance on a small group of customers and marketing partners, lower-priced competition, and uncertainty about recovery in China and other markets. One marketing partner and three distributors together represented 79% of sales and 70% of accounts receivable in the first nine months of 2020.
- The company reported no legal proceedings. It disclosed a Q3 payment of approximately $124 thousand to its transfer agent for accrued dividends on unconverted shares of a former corporate entity, to facilitate conversion and escheatment; dividends on remaining unconverted shares continue to accrue.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the period. The filing identifies no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether cosmetic demand, particularly ASI-related sales into China, recovers and whether price reductions can offset lower-priced competitors.
- Whether reduced orders from medical product customers resume, and whether pandemic-related payment delays affect receivables or bad-debt reserves.
- The concentration of sales and receivables among the marketing partner and distributors, and the extent of the company’s exposure to ASI’s downstream markets.
- How marketable-security valuations and investment gains affect reported income, and whether the reduced dividend level is maintained.
- The amount and timing of dividends still accruing on unconverted legacy shares, and any resulting payments or escheatment obligations.