United-Guardian, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. United-Guardian develops, manufactures, and markets personal care, pharmaceutical, medical, and specialty industrial products.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $3.414 million | $3.178 million | $10.893 million | $9.739 million |
| Income from operations | $1.529 million | $1.469 million | $4.695 million | $3.869 million |
| Net income | $1.317 million | $1.090 million | $3.769 million | $2.829 million |
| Diluted EPS | $0.29 | $0.24 | $0.82 | $0.62 |
- Net sales grew approximately 7% in Q3 and 12% for the nine months. Gross sales rose approximately 9% and 13%, respectively, while sales allowances and returns increased to $186,000 in Q3 and $515,000 for the nine months.
- Approximate gross margin was 63% in Q3 versus 65% a year earlier, and 60% for the nine months versus 58%. Operating margin was approximately 45% and 43%, respectively, compared with 46% and 40% in 2017.
- Q3 personal care sales increased about 14% and pharmaceutical sales about 7%; nine-month increases were about 17% and 15%. Medical sales were nearly flat for the nine months. Higher ASI orders supported personal care growth, while Korean sales were affected by customers’ greater difficulty exporting finished goods to China.
- Nine-month operating expense increased 20%, mainly from consulting, payroll, and related costs; R&D expense fell 43%, primarily from lower payroll-related costs. Q3 cost of sales as a share of net sales rose because of lower sales of a higher-margin product; nine-month unit manufacturing costs benefited from higher production volume and fixed-overhead absorption.
- Other income was $137,000 in Q3 and $76,000 for the nine months. Investment income declined year over year; reported 2018 results also included marketable-security gains and losses, including a $115,000 realized gain and $16,000 unrealized loss in Q3.
Cash, liquidity, and capital
- At September 30, 2018, cash and equivalents were $725,000 and marketable securities were $9.217 million. Working capital was $11.993 million, up $1.565 million from year-end 2017; the current ratio rose to 10.6 from 8.3.
- Nine-month operating cash flow was $3.908 million, versus $3.214 million in 2017. Investing used $1.616 million, primarily reflecting purchases of marketable securities; financing used $2.291 million, all for dividends. Cash increased by $699, ending at $725,000.
- The balance sheet reports no borrowings. Total liabilities were $1.273 million, including $1.251 million of current liabilities; stockholders’ equity was $12.869 million.
- Dividends paid increased to $0.50 per share for the nine months from $0.42 in 2017. Management said working capital should support operations for at least 12 months and did not expect significant capital expenditures for the remainder of 2018.
Material changes, outlook, and risks
- The effective tax rate for the first nine months was approximately 21%, compared with 31% in 2017. Management expected a 21% rate for full-year 2018.
- Management reversed a $53,000 accrual made in Q2 for potential China retaliatory tariffs after the company’s products were removed from the relevant tariff list. It said it would continue monitoring the situation.
- Two customers—a pharmaceutical distributor and a personal care marketing partner—accounted for approximately 58% of nine-month sales and 51% of receivables. ASI is the largest personal care marketing partner. The filing also notes that some products delivered domestically are later sold or shipped abroad, including to China.
- Management cited lower-priced imitations, particularly in Western Europe and Asia, as a source of competition and customer losses; price adjustments to compete have had a limited, not significant, margin impact to date. Other stated risks include product acceptance and development, regulatory and economic changes, intellectual property, and market conditions.
- Accounting changes affect comparisons: adoption of the fair-value standard for equity investments moved fair-value changes into earnings in 2018. The filing estimates that applying this presentation to 2017 would have increased net income by $37,000 for Q3 and $188,000 for the nine months. Adoption of the new revenue standard did not materially affect results.
- No legal proceedings or off-balance-sheet arrangements were reported. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the Q3 increase in ASI orders reflects durable demand or order timing, and how sales to the largest customers develop.
- Whether higher sales allowances, including distribution fees, pharmaceutical return reserves, and rebates, persist or further affect net sales.
- How lower-priced competition and China-related export or tariff developments affect personal care demand, pricing, and margins.
- The sustainability of operating cash flow, investment portfolio values, and dividend payments relative to earnings and cash needs.
- Reported earnings and year-over-year comparisons in light of the 2018 investment-accounting change and its effect on where marketable-security gains and losses are recognized.