United-Guardian, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited interim financial statements. United-Guardian develops, manufactures and markets cosmetic ingredients, pharmaceutical and medical products, and specialty industrial products. Its Lubrajel line is a key business, and Renacidin is its most important pharmaceutical product.
Key financial results
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Net sales | $3.626 million | $3.658 million | $7.519 million | $7.089 million |
| Income from operations | $1.200 million | $1.516 million | $2.704 million | $3.040 million |
| Net income | $0.633 million | $1.345 million | $1.545 million | $2.526 million |
| EPS, basic and diluted | $0.14 | $0.29 | $0.34 | $0.55 |
| Operating cash flow | Not separately presented for the quarter | $1.165 million | $2.617 million |
Q2 sales declined less than 1% year over year; first-half sales rose 6%. Operating income fell about 21% in Q2 and 11% in the first half. Net income fell about 53% and 39%, respectively, reflecting lower operating income and a sharp reversal in investment results.
Gross margin, calculated from reported sales and cost of sales, was approximately 53.3% in Q2 2022 versus 59.0% in Q2 2021, and 54.7% for the first half versus 59.6%. Management cited higher raw-material costs and a $129,600 rebate to a marketing partner; the first-half 2021 comparison also benefited from a one-time Employee Retention Credit.
Net loss on marketable securities was $460,278 in Q2 and $853,938 for the first half, compared with gains of $137,574 and $65,527 in the comparable 2021 periods. Approximately 90% of the portfolio was in fixed-income mutual funds. Management attributed declines to inflation and rising interest rates and believed the decrease would be temporary, while noting it was monitoring the portfolio.
Financial position and liquidity
At June 30, 2022, cash and cash equivalents were $355,572, marketable securities were $6.410 million, and total current assets were $11.079 million. Current liabilities were $1.983 million; working capital was $9.095 million and the current ratio was 5.6:1. Working capital was down $150,210 from year-end 2021. No debt is shown on the balance sheet.
First-half operating cash flow was $1.165 million, down from $2.617 million, primarily due to lower net income. Investing activities provided $359,150, while dividends used $1.699 million. Cash declined $175,641 to $355,572. The company declared and paid dividends of $0.37 per share in Q2, compared with $0.48 per share in Q2 2021. Management said working capital should support operations for at least 12 months and did not expect significant capital expenditures for the rest of 2022.
Business changes, outlook and risks
- Product mix: Q2 cosmetic-ingredient sales fell 25%, mainly due to lower sales to ASI and a prior-year rebound in shipments to China; medical-product sales rose 55%, including delayed orders shipped in Q2 and stronger orders from China. Pharmaceutical net sales increased, while industrial sales were slightly lower. First-half medical sales rose 23% and pharmaceutical sales rose; cosmetic-ingredient sales were nearly flat.
- Costs and operations: Higher raw-material and shipping costs pressured margins. Shipping constraints from truck-driver shortages and limited vessel availability began improving in Q2, but longer lead times remained. Price increases on many products were intended to mitigate raw-material inflation. Management could not reliably estimate the pandemic’s future financial impact.
- Expense outlook: Management expected a minor increase in operating expenses for the remainder of 2022 and an effective tax rate of 21% for the year. No revenue or earnings guidance was provided.
- Strategic review: A formal review of strategic alternatives, including a possible sale, partnerships or joint ventures, ended in June 2022 without an opportunity the board considered in shareholders’ best interests. Active efforts were suspended, though the company said it would continue considering suitable growth opportunities.
- Concentration and other risks: One cosmetic marketing partner and three pharmaceutical distributors accounted for 69% of Q2 sales and 68% of quarter-end receivables. ASI-reported sales of the company’s products remain substantially exposed to foreign demand, particularly China. The company relies primarily on trade secrets and proprietary processes for important product protections. The filing reported no legal proceedings or off-balance-sheet arrangements.
Most important facts for investors to verify
- Whether price increases and easing shipping constraints offset raw-material, freight and other cost pressures and restore gross margins.
- How much of the marketable-securities losses are realized versus unrealized, and whether portfolio values recover; reported first-half unrealized losses on securities still held were $646,002.
- Whether medical-product growth and pharmaceutical sales continue, and whether cosmetic-ingredient demand—especially through ASI and in China—stabilizes.
- The effect of customer and distributor concentration, foreign-market exposure and any further changes in dividend payments.
- Any developments following the strategic-alternatives review and management’s stated expectation that liquidity will cover at least the next 12 months.