United-Guardian, Inc. — Q3 2013 Form 10-Q
Business and period: United-Guardian develops, manufactures, and markets personal care, pharmaceutical, medical, and specialty industrial products. This unaudited report covers the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $3.404 million | $3.527 million | $10.985 million | $11.151 million |
| Income from operations | $1.539 million | $1.595 million | $5.147 million | $5.063 million |
| Net income | $1.277 million | $1.116 million | $4.184 million | $3.538 million |
| Diluted EPS | $0.28 | $0.24 | $0.91 | $0.77 |
- Sales declined 3.5% in Q3 and 1.5% for the first nine months. Personal-care sales rose 4.3% and 9.4%, respectively, led by higher sales to marketing partner Ashland Specialty Ingredients. Pharmaceutical sales fell 27.9% in Q3 and 75.2% year to date, primarily because RENACIDIN was unavailable.
- Cost of sales was 35.6% of sales in Q3 and 36.3% year to date, down from 37.8% and 38.9%. Management attributed the improvement to product mix, including increased weight from higher-margin LUBRAJEL products and no RENACIDIN sales.
- Operating expenses rose 9.4% in Q3 and 5.8% year to date, mainly due to payroll-related costs, professional fees, and automobile expenses.
- Net income increased 14.4% in Q3 and 18.3% year to date. Those comparisons include a supplier damage-settlement payment of $292,830 in Q3 and $878,490 year to date; therefore, reported profit growth benefited materially from this nonrecurring compensation.
Cash flow, balance sheet, and liquidity
- Nine-month operating cash flow was $3.639 million, versus $4.268 million in 2012; management cited increased accounts receivable. Investing activities used $1.291 million, and dividends used $2.160 million.
- Cash and cash equivalents were $1.936 million at September 30, 2013; marketable securities were $8.698 million. Working capital was $13.605 million, and the current ratio was 15.47:1.
- Total assets were $15.880 million and stockholders’ equity was $14.786 million. The balance sheet reports no borrowings or other debt.
- The company paid $0.47 per share in dividends during the first nine months, versus $0.42 in the prior-year period. It reported no off-balance-sheet arrangements and said working capital should support operations for at least the next 12 months.
Outlook, risks, and notable items
- RENACIDIN deliveries resumed October 30, 2013, after the quarter. Monthly supplier compensation of $97,610 ceased upon resumption; ramp-up payments of $48,805 per month for two months and $24,402 for a third month began accruing November 1.
- The company planned to resume sales of the existing RENACIDIN product and was working with a new supplier on a single-dose plastic-bottle version. It expected to file an FDA application in Q1 2014 and hoped for approval by the end of Q3 2014. The existing supplier agreed to extend production beyond the January 2014 contract end date. Timing and approval remain uncertain.
- A related capital commitment for mold and production equipment was estimated at approximately $167,000; $163,970 had been paid, with the balance expected by year-end 2013.
- Management gave no specific financial earnings or revenue guidance. It cited risks including competition, product acceptance and development, product quality, intellectual-property changes, regulation, economic conditions, and market changes. The company also noted that receivables averaged 42 days outstanding, versus 39 days in 2012.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. No legal proceedings were reported.
Important facts for investors to verify
- How quickly RENACIDIN sales and inventory recover after the October 30 delivery restart, and whether supplier extensions provide adequate supply until the new product receives FDA approval.
- How much of earnings growth reflects ongoing operations versus the supplier settlement, and how results change as settlement payments wind down.
- Whether the sharp year-to-date pharmaceutical sales decline reverses and whether growth in personal-care products, particularly sales through Ashland Specialty Ingredients, continues.
- Whether the increase in receivables and collection period affects operating cash flow, and how dividend payments compare with future cash generation.
- The performance and market value of the available-for-sale securities portfolio, which had $158,282 of net unrealized gains at September 30, 2013.