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UG > SEC Filings for UG > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for UNITED GUARDIAN INC

Form 10-Q for UNITED GUARDIAN INC


13-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

Statements made in this Form 10-Q which are not purely historical are forward-looking statements with respect to the goals, plans, objectives, intentions, expectations, financial condition, results of operations, future performance and business of the Company. Forward-looking statements may be identified by the use of such words as "believes", "may", "will", "should", "intends", "plans", "estimates", "anticipates", or other similar expressions.

Forward-looking statements involve inherent risks and uncertainties, and important factors (many of which are beyond our control) could cause actual results to differ materially from those set forth in the forward-looking statements. In addition to those specific risks and uncertainties set forth in the Company's reports currently on file with the SEC, some other factors that may affect the future results of operations of the Company are: the development of products that may be superior to those of the Company; changes in the quality or composition of the Company's products; lack of market acceptance of the Company's products; the Company's ability to develop new products; general economic or industry conditions; changes in intellectual property rights; changes in interest rates; new legislation or regulatory requirements; conditions of the securities markets; the Company's ability to raise capital; changes in accounting principles, policies or guidelines; financial or political instability; acts of war or terrorism; and other economic, competitive, governmental, regulatory and technical factors that may affect the Company's operations, products, services and prices.

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Accordingly, results actually achieved may differ materially from those anticipated as a result of such forward-looking statements, and those statements speak only as of the date they are made. The Company does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect events or circumstances occurring after the date of such statements.

OVERVIEW

The Company is a Delaware corporation that conducts research, product development, manufacturing and marketing of cosmetic ingredients, personal and health care products, pharmaceuticals, and specialty industrial products. All of the products that the Company manufactures, with the exception of RENACIDIN, are produced at its facility in Hauppauge, New York, and are marketed through marketing partners, distributors, wholesalers, direct advertising, mailings, and trade exhibitions. Its most important personal care product line is its LUBRAJEL® line of water-based moisturizing and lubricating gels. It also sells two pharmaceutical products for urological uses. Those products are sold primarily through the major drug wholesalers which, in turn, sell the products to pharmacies, hospitals, nursing homes and other long-term care facilities, and to government agencies, primarily the U.S. Department of Veterans Affairs.

The Company's pharmaceutical products are distributed primarily in the United States. Its personal care products are marketed worldwide by five marketing partners, of which Ashland Specialty Ingredients ("ASI") purchases the largest volume of products from the Company. Approximately one-half of the Company's personal care products are sold, either directly or through the Company's marketing partners, to end users located outside of the United States.

While the Company does have competition in the marketplace for some of its products, many of its products are either unique in their field or have some unique characteristics, and therefore are not in direct competition with the products of other pharmaceutical, specialty chemical, or health care companies. Many of the Company's products are manufactured using patented or proprietary processes. The Company's research and development department is actively working on the development of new products to expand the Company's line of personal care and performance products.

The Company recognizes revenue when products are shipped, title and risk of loss pass to the customers, persuasive evidence of a sales arrangement exists, and collections are reasonably assured. An allowance for returns, based on historical experience, is taken as a reduction of sales within the same period the revenue is recognized.

The Company has been issued many patents and trademarks and intends, whenever possible, to make efforts to obtain patents in connection with its product development program.

CRITICAL ACCOUNTING POLICIES

As disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2011, the discussion and analysis of the Company's financial condition and results of operations are based on its financial statements, which have been prepared in conformity with U.S. Generally Accepted Accounting Principles (GAAP). The preparation of those financial statements required the Company to make estimates and assumptions that affect the carrying value of assets, liabilities, revenues and expenses reported in those financial statements. Those estimates and assumptions can be subjective and complex, and consequently actual results could differ from those estimates and assumptions. The Company's most critical accounting policies relate to revenue recognition, concentration of credit risk, inventory, and income taxes. Since December 31, 2011, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.

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The following discussion and analysis covers material changes in the financial condition of the Company since the year ended December 31, 2011, and a comparison of the results of operations for the three and nine months ended September 30, 2012 and September 30, 2011. This discussion and analysis should be read in conjunction with "Management's Discussion and Analysis or Plan of Operation" included in the Company's Annual Report on Form 10-K for the year ended December 31, 2011.

RESULTS OF OPERATIONS

Sales

Net sales for the third quarter of 2012 increased $182,352 (5.5%) compared with the comparable period in 2011. Net sales for the first nine months of 2012 increased $103,796 (.9%) as compared with the corresponding period in 2011. The changes in net sales for the three and nine months ended September 30, 2012 were attributable to changes in sales of the following product lines:

(a) Pharmaceuticals: The Company's RENACIDIN product typically accounts for approximately 85% of the Company's net sales of pharmaceutical products. Over the past 20 months, RENACIDIN experienced two disruptions in production at the Company's third-party manufacturing facility, both of which led to product shortages. The first disruption began in November 2010 and lasted until May 2011, and was caused by regulatory issues at the third-party's manufacturing facility. The issues were unrelated to the Company's product, but disrupted all production at that facility. When product became available in May 2011, there was a surge in orders, not only due to the need of the Company's distributors to restock their depleted inventories, but also because of the desire on the part of the distributors to avoid a price increase that was to go into effect on June 1, 2011. The result was unusually strong RENACIDIN sales in the second quarter of 2011.

The second disruption began in May 2012 and continues as of the date of this report, and is related to general production problems at the supplier's manufacturing site. It affects all of the products manufactured at that facility. The resulting failure to supply product to the Company significantly impacted the Company's ability to fill orders for product in the second and third quarters of 2012, and is expected to impact the Company's fourth quarter as well. The Company's inventory of product was completely depleted by August 1, 2012.

As a result of the second disruption in 2012, the Company had very limited inventory of RENACIDIN in the third quarter of 2012 and ran out completely by the end of July, leaving two months of the third quarter with no RENACIDIN sales. As a result, RENACIDIN sales in the third quarter of 2012 decreased by $212,818 (79.7%) compared with the comparable quarter in 2011, and overall pharmaceutical sales decreased by $232,300 (56.8%) in the third quarter of 2012 compared with the third quarter of 2011.

For the nine-month period ended September 30, 2012, RENACIDIN sales decreased by $278,267 (21.0%) compared with the comparable period in 2011, and overall pharmaceutical sales decreased by $309,123 (18.1%) for the nine-month period ended September 30, 2012 compared with the comparable period in 2011.

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As of the date of this report the Company's inventory of RENACIDIN has been depleted. The Company will not be able to fill any further orders for RENACIDIN until production is resumed. The Company has been informed by its supplier that it does not currently know when that will happen, since there are numerous production and regulatory issues that still need to be resolved before production can resume. However, the supplier has indicated it does not expect to be able to ship additional product to the Company until May 2013 at the earliest. The supplier has been holding three batches of product that were manufactured in May 2012, but it is unlikely that those lots will be released due to concerns over multiple quality problems that may have resulted from the production issues. The failure of the supplier to deliver additional inventory will continue to significantly impact the Company's pharmaceutical sales. The Company has notified the supplier that it considers it in breach of its supply agreement, and will seek compensation for all losses incurred as a result of that breach. Discussions to resolve the issue of damages have already begun.

The Company has also been notified by its supplier that it will no longer supply product to the Company after the January 2014 contract termination date. The Company has been actively looking for a new supplier, and is currently working with a company interested in, and capable of, producing the product. The Company is hopeful that it will have the new manufacturer in place prior to the January 2014 contract termination date, but plans, if possible, to bring in additional inventory in the event the new supplier is not approved by that date.

(b) Personal care products: For the third quarter of 2012 the Company's sales of personal care products increased by $262,682 (12.1%) when compared with the third quarter of 2011, and for the nine-month period ended September 30, 2012 the Company's sales of personal care products increased by $323,103 (4.5%) when compared with the comparable period in 2011. The increase in sales in the third quarter of 2012 and the nine months of 2012, was primarily the result of sales to ASI, the Company's largest marketing partner. Sales to ASI increased by $236,394 (14.3%) and increased by $312,859 (5.4%) for the three and nine months periods, respectively, ended September 30, 2012, compared with the corresponding periods in 2011. The Company believes that the increase in sales for the third quarter was primarily attributable to the timing of orders, and the increase in personal product sales for the nine-month period represents a sales volume increase to ASI's customers.

(c) Medical (non-pharmaceutical) products: Sales of the Company's medical products increased by $112,508 (14.2%) for the third quarter of 2012 , and increased by $46,842 (2.1%) for the nine-month period ended September 30, 2012 compared with the comparable periods in 2011. These changes were primarily attributable to the ordering patterns of the Company's customers for these products, and may not reflect an increase in sales of these products on an annualized basis.

(d) Industrial and other products: Sales of the Company's industrial products, as well as other miscellaneous products, increased by $5,428 (15.2%) and $36,095 (38.1%) for the three and nine months, respectively, ended September 30, 2012, when compared with the corresponding periods ended September 30, 2011.

In addition to the above changes in sales, net sales allowances decreased by $34,033 and $6,878 for the three and nine months, respectively, ended September 30, 2012, when compared with the corresponding periods in 2011. The decreases were primarily due to decreases in chargebacks paid to the U.S. Department of Veterans Affairs, pharmaceutical sales rebates to state Medicaid agencies, and distribution fees.

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Cost of Sales

For the third quarter of 2012, cost of sales as a percentage of sales increased to 37.8% from 36.8% in the third quarter of 2011. Cost of sales as a percentage of sales decreased to 38.9% for the nine-months ended September 30, 2012, down from 39.1% for the comparable period in 2011. The increase in cost of sales for the third quarter of 2012 was primarily due to increases in payroll and rebate program costs. The decrease for the nine months was due to decreases in utility and insurance costs, as well as a change in the mix of products sold, with sales of lower margin products replaced by sales of higher margin products.

Operating Expenses

Operating expenses consist of selling, general and administrative expenses. Operating expenses increased by $60,852 (11.3%) for the third quarter of 2012 compared with the comparable quarter in 2011, and decreased by $9,960 (.6%) for the nine months ended September 30, 2012 compared with the nine-months ended September 30, 2011. The increase in operating expenses for the third quarter of 2012 was mainly due to increases in payroll and payroll related expenses and health insurance. The decrease for the nine months of 2012 was primarily attributable to decreases in professional, consulting, legal and accounting fees.

Other Income

In the third quarter of 2011 the Company received income of $385,182 from the partial settlement of a claim for damages between the Company and one of its suppliers. The Company also experienced a decline in investment income in 2012, decreasing by $10,243 (16.7%) and $42,798 (20.9%) for the three and nine months periods, respectively, when compared with the comparable periods in 2011. These decreases were mainly attributable to realized losses on bonds sold. For the nine months ended September 30, 2012 there was a net decrease in income of $15,501 resulting from the sale of assets, declining from $18,251 in the first nine months of 2011 to $2,750 for the comparable period in 2012. For the third quarter of 2011 the Company experienced a gain of $12,267 from the sale of equipment. There was no sale of equipment in the third quarter of 2012.

Provision for Income Taxes

The provision for income taxes decreased by $138,000 (20.7%) and $128,500 (7.1%) for the three and nine months, respectively, ended September 30, 2012, when compared with the comparable periods in 2011. The decrease for the third quarter and the nine months of 2012 was mainly due to a decrease in income before taxes.

The Company's effective income tax rate remained approximately 33.0% for all periods presented.

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LIQUIDITY AND CAPITAL RESOURCES

Working capital increased by $1,982,674 to $14,878,122 at September 30, 2012 from $12,895,448 at December 31, 2011. The current ratio increased to 16.88 to 1 at September 30, 2012, up from 12.97 to 1 at December 31, 2011. The increase in working capital and the current ratio were primarily due to an increase in marketable securities and a decrease in accounts payable.

During the nine-month period ended September 30, 2012 the average period of time that an account receivable was outstanding was approximately 39 days. The average period of time that an account receivable was outstanding during the nine-month period ended September 30, 2011 was 31 days. The increase for 2012 was the result of more favorable payment terms given to some international customers due to longer shipping times.

The Company believes that its working capital is, and will continue to be, sufficient to support its operating requirements for at least the next twelve months. The Company does not expect to incur any significant capital expenditures for the remainder of 2012.

The Company generated cash from operations of $4,268,043 and $3,768,886 for the nine months ended September 30, 2012 and September 30, 2011, respectively. The increase was primarily due to decreases in account receivable and inventory.

Cash used in investing activities for the nine-month period ended September 30, 2012 and September 30, 2011 was $1,732,911, and $2,552,366, respectively. This decrease was primarily due to a decrease in the purchases of marketable securities in the nine months ended September 30, 2012 compared with the nine months ended September 30, 2011.

Cash used in financing activities was $1,930,504 and $1,654,718 for the nine months ended September 30, 2012 and September 30, 2011, respectively. This increase was mainly due to an increase in dividend paid per share, from $0.36 per share in 2011 to $0.42 per share in 2012.

The Company expects to continue to use its cash to make dividend payments, to purchase marketable securities, and to take advantage of other opportunities that are in the best interest of the Company and its shareholders, should they arise.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 4 to the Financial Statements for a description of recent accounting pronouncements, including the expected dates of adoption and the anticipated impact on the financial statements.

OFF-BALANCE-SHEET ARRANGEMENTS

The Company has no off-balance-sheet transactions that have, or are reasonably likely to have, a current or future effect on the Company's financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The information to be reported under this item is not required of smaller reporting companies.

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