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UG > SEC Filings for UG > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for UNITED GUARDIAN INC

Form 10-Q for UNITED GUARDIAN INC


12-Nov-2013

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 products are sold, either directly or through the Company's marketing partners, to end users located outside of the United States. The Company's non-pharmaceutical medical products (referred to hereinafter as "medical products"), such as its catheter lubricants, as well as its specialty industrial products, are sold directly by the Company to the end users or to contract manufacturers utilized by the end users, although they are available for sale on a non-exclusive basis by its marketing partners, as well.

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.

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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, 2012, 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. 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, investments, inventory, and income taxes. Since December 31, 2012, there have been no significant changes to the assumptions and estimates related to those critical accounting policies.

The following discussion and analysis covers material changes in the financial condition of the Company since the year ended December 31, 2012, and a comparison of the results of operations for the three and nine months ended September 30, 2013 and September 30, 2012. 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, 2012.

RESULTS OF OPERATIONS

Sales

Net sales for the third quarter of 2013 decreased by $123,160 (3.5%) compared with the comparable period in 2012. Net sales for the first nine months of 2013 decreased by $166,220 (1.5%) as compared with the corresponding period in 2012. The changes in net sales for the three and nine months ended September 30, 2013 were attributable to changes in sales of the following product lines:

(a) Personal care products: For the third quarter of 2013 the Company's sales of personal care products increased by $103,755 (4.3%) when compared with the third quarter of 2012. For the nine-month period ended September 30, 2013 the Company's sales of personal care products increased by $702,882 (9.4%) when compared with the comparable period in 2012. The increases in sales for the third quarter of 2013 and the first nine months of 2013 were primarily due to an increase in sales of the Company's extensive line of personal care products to ASI, the Company's largest marketing partner. Sales to ASI increased by $261,446 (13.9%) and $787,220 (13.0%) for the three- and nine-month periods, respectively, ended September 30, 2013, compared with the corresponding periods in 2012.

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(b) Pharmaceuticals: For the third quarter of 2013 the Company's sales of pharmaceutical products decreased by $49,346 (27.9%) when compared with the third quarter of 2012. For the nine-month period ended September 30, 2013 the Company's sales of pharmaceutical products decreased by $1,051,087 (75.2%) when compared with the comparable period of 2012. The decreases in pharmaceutical sales for both the third quarter and the first nine months of 2013 were attributable to decreased sales of RENACIDIN. These decreases were the result of RENACIDIN not being available for sale at all during 2013, whereas in 2012 it was available for sale for the first seven months of the year. The lack of RENACIDIN inventory in 2013 was caused by a production curtailment that took place at the manufacturing facility of the Company's RENACIDIN supplier. This supplier has been paying the Company $97,610 for each month that the product is not available, which the Company believes covers most of its lost profits each month. These payments were to continue until either deliveries resumed or the contract with the supplier ended on January 20, 2014, whichever came first. In addition, the supplier agreed to pay the Company $48,805 for the first two months following the resumption of shipments, and $24,402 for the third month following the resumption of shipments (the "ramp-up payments"), while the Company ramped up sales after deliveries resumed. The supplier resumed shipments of RENACIDIN on October 30th. As a result, the regular monthly compensation accrual of $97,610 ceased as of that date, and the ramp-up payments began to accrue on November 1st.

The Company is also working with a new supplier that will manufacture the product in a smaller single-dose plastic bottle. The Company's current timetable is to have its application to sell that new form of the product filed with the U.S. Food and Drug Administration in the first quarter of 2014, with the hope of having an approval to sell the product by the end of the third quarter of 2014. Until then, the Company plans to resume sales of the current form of the product, and its current supplier has agreed to extend production beyond the January 2014 contract termination date, which the Company believes will enable it to bring in sufficient inventory to last until the Company's new supplier is approved and the Company can begin to sell the new single-dose unit.

(c) Medical (non-pharmaceutical) products: Sales of the Company's medical products decreased by $184,801 (20.4%) for the third quarter of 2013, and increased by $128,505 (5.6%) for the nine-month period ended September 30, 2013 compared with the comparable periods in 2012. These changes were primarily attributable to the ordering patterns of the Company's customers for these products.

(d) Industrial and other products: Sales of the Company's industrial products were essentially the same in the third quarters of 2013 and 2012, and decreased by $14,830 (11.3%) for the nine months ended September 30, 2013, when compared with the comparable period in 2012.

In addition to the above changes in sales, net sales allowances decreased by $7,612 and $68,310 for the three and nine months, respectively, ended September 30, 2013, when compared with the corresponding periods in 2012. The decreases were primarily due to: (a) a decrease in chargebacks paid to the U.S. Department of Veterans Affairs; (b) a reduction in pharmaceutical sales rebates to state Medicaid agencies, the Department of Defense, and Medicare; and (c) lower distribution fees to wholesalers due to the lack of RENACIDIN sales.

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Cost of Sales

For the third quarter of 2013, cost of sales as a percentage of sales decreased to 35.6%, down from 37.8% in the third quarter of 2012. Cost of sales as a percentage of sales decreased to 36.3% for the nine-months ended September 30, 2013, down from 38.9% for the comparable period in 2012. The decreases were primarily the result of the change in the company's product mix due to the absence of RENACIDIN sales in 2013, and a proportionate increase in sales of the Company's higher-margin LUBRAJEL products.

Operating Expenses

Operating expenses consist of selling, general and administrative expenses. Operating expenses increased by $55,927 (9.4%) for the third quarter of 2013 compared with the comparable quarter in 2012, and increased by $102,269 (5.8%) for the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012. The increases for the third quarter and the nine months of 2013 were primarily attributable to increases in payroll and payroll related expenses as well as increases in professional fees and automobile expenses.

Other Income

Other income increased by $289,504 for the third quarter of 2013 compared with the third quarter of 2012, and increased by $880,173 for the nine-month period of 2013 compared with the nine-month period of 2012. The increases for the third quarter and nine months of 2013 were mainly attributable to the $292,830 and the $878,490, respectively, that were paid to the Company by its RENACIDIN supplier in connection with the supplier's curtailment of RENACIDIN production (see "Pharmaceuticals" above). For more information on the RENACIDIN production curtailment and the associated compensation payments please see the Company's Annual report on Form 10-K for 2012.

The Company earns interest income from money market funds and bonds, and dividend income from both stock and bond mutual funds. In addition to Other Income increasing in the third quarter of 2013 as a result of the RENACIDIN settlement, the Company's investment income for the third quarter of 2013 decreased by $3,326 (6.5%) compared with the comparable quarter of 2012. For the nine-month period of 2013 investment income increased by $4,433 (2.7%) as compared with the nine-month period of 2012.

Provision for Income Taxes

The provision for income taxes increased by $72,600 (13.7%) and $318,900 (18.9%) for the three and nine months, respectively, ended September 30, 2013, when compared with the comparable periods in 2012. The increase for the third quarter and the nine months of 2013 was due primarily to an increase in income before taxes.

The Company's effective income tax rate remained approximately 32.0% for all periods presented.

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LIQUIDITY AND CAPITAL RESOURCES

Working capital increased from $11,795,895 at December 31, 2012 to $13,605,325 at September 30, 2013, an increase of $1,809,430. The increase was primarily due to an increase in accounts receivable, marketable securities, and cash. The current ratio increased from 15.25 to 1 at December 31, 2012 to 15.47 to 1 at September 30, 2013. The increase in the current ratio was primarily due to the effect of an increase in accounts receivable.

During the nine-month period ended September 30, 2013 the average period of time that an account receivable was outstanding was approximately 42 days. The average period of time that an account receivable was outstanding during the nine-month period ended September 30, 2012 was 39 days. The increase for 2013 was the result of a larger volume of orders placed in the month of September.

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 2013.

The Company generated cash from operations of $3,639,110 and $4,268,043 for the nine months ended September 30, 2013 and September 30, 2012, respectively. The decrease was primarily due to increases in accounts receivable.

Cash used in investing activities for the nine-month period ended September 30, 2013 and September 30, 2012 was $1,291,416, and $1,732,911, respectively. This decrease was primarily due to a decrease in the purchases of marketable securities in the nine months ended September 30, 2013 compared with the nine months ended September 30, 2012.

Cash used in financing activities was $2,160,326 and $1,930,504 for the nine months ended September 30, 2013 and September 30, 2012, respectively. This increase was mainly due to an increase in the dividend paid, from $0.42 per share in 2012 to $0.47 per share in 2013.

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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