United-Guardian, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014. The company develops, manufactures, and markets personal care, pharmaceutical, medical, and specialty industrial products. Approximately 70% of products are sold to customers outside the United States; Ashland Specialty Ingredients (ASI) is its largest marketing partner.
Financial performance
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Net sales | $2.98 million | $3.63 million | $6.94 million | $7.58 million |
| Operating income | $1.25 million | $1.63 million | $3.16 million | $3.61 million |
| Net income | $0.90 million | $1.34 million | $2.24 million | $2.91 million |
| Diluted EPS | $0.20 | $0.29 | $0.49 | $0.63 |
| Operating margin | 42.0% | 44.9% | 45.6% | 47.6% |
| Net margin | 30.2% | 37.0% | 32.2% | 38.4% |
Cash flow: First-half operating cash flow was $2.49 million, down from $3.61 million. Investing activities used $33,000; financing activities used $2.21 million, primarily for dividends. Cash and cash equivalents rose to $1.88 million from $1.63 million at year-end.
Liquidity and debt: June 30 current assets were $14.53 million and current liabilities $1.19 million; working capital was $13.34 million and the current ratio 12.2:1. Marketable securities were $9.08 million. The balance sheet reports no borrowings or other debt.
Other metrics: First-half dividends were $2.21 million, or $0.48 per share. First-half R&D expense was $275,324. Accounts receivable averaged approximately 40 days outstanding, versus 29 days a year earlier.
Changes versus comparable periods
- Sales fell 17.9% in Q2 and 8.5% in the first half. Personal care sales declined, chiefly due to lower shipments to ASI after unusually high customer-related inventory demand around year-end and early 2014, and weaker Western European demand.
- Pharmaceutical sales increased $324,700 in Q2 and $554,266 in the first half as RENACIDIN sales resumed in late 2013. Sales remained below pre-curtailment levels.
- Medical product sales declined $374,762 in Q2 and $683,320 in the first half. A customer discontinued use of a company product; ordering patterns at other customers also contributed.
- Cost of sales was 37.1% of sales in Q2 versus 37.6%; it was 36.6% in both first-half periods. Lower other income and sales drove lower earnings: the income-tax provision was also lower, while the effective tax rate remained approximately 32%.
Outlook, risks, and notable items
- Management believes working capital will support operations for at least 12 months and expects no significant capital expenditures for the remainder of 2014. No formal earnings or revenue guidance is provided.
- ASI reported higher sell-through of the company’s products and projected full-year 2014 sales growth, with inventory needs expected to reflect that growth over time. The company attributed reduced shipments partly to earlier inventory build-up.
- A new single-dose RENACIDIN presentation is being developed with a new supplier; the company hopes for a market launch in early 2015, subject to FDA approval. Delays could change the timing. Management expected current-form inventory to be adequate until approval.
- RENACIDIN supplier settlement payments ended after deliveries resumed and the remaining ramp-up payments were completed. Settlement income was $24,402 in the first half of 2014 versus $585,660 in the first half of 2013; none was received in Q2 2014.
- Risks discussed include competition, product acceptance and development, intellectual-property and regulatory changes, economic conditions, and dependence on customers and marketing partners. European weakness and the loss of a medical-product customer affected sales. A New York State examination of 2010–2012 income tax returns began in March 2014; it was in early stages. No legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether ASI’s reported sell-through growth translates into renewed company shipments, and whether inventory normalization explains the sales decline.
- RENACIDIN supply continuity, current-form inventory, and the timing and FDA status of the single-dose product.
- The persistence of reduced medical-product sales following the customer discontinuation and the progress of the potential new medical customer.
- Investment portfolio composition and market-value movements: marketable securities were $9.08 million and unrealized gains were recorded in other comprehensive income.
- Outcome of the New York tax examination and continued collection trends after the extension of some foreign-customer payment terms.