Utah Medical Products, Inc. (UTMD) — Q1 2020 Form 10-Q
Business context and period. UTMD manufactures and markets specialty medical devices. This unaudited report covers the three months ended March 31, 2020; financial amounts below are in thousands of U.S. dollars unless otherwise noted. The company reported no debt.
Financial results and position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $10,902 | $10,732 | +1.6% |
| Gross profit / margin | $6,836 / 62.7% | $6,773 / 63.1% | +0.9% profit |
| Operating income / margin | $3,863 / 35.4% | $4,101 / 38.2% | -5.8% |
| Income before tax | $3,988 | $4,137 | -3.6% |
| Net income / net margin | $3,140 / 28.8% | $3,139 / 29.2% | Essentially unchanged |
| EPS, basic / diluted | $0.85 / $0.84 | $0.84 / $0.84 | Basic +0.4%; diluted unchanged |
| Operating cash flow | $5,674 | $3,360 | +$2,314 |
| Capital expenditures | $454 | $12 | Higher equipment investment |
Cash and investments were $39,613 at March 31, 2020, versus $42,787 at year-end 2019. Working capital was $47,422, compared with $51,438 at year-end. Total assets were $103,194 and total liabilities were $8,808. Financing cash outflows included $6,426 for repurchases of 80,000 shares and $1,042 in dividends; the quarter ended with $3,174 less cash than it began with.
Total comprehensive income was $691, including a $2,449 foreign-currency translation loss. The effective income-tax provision rate was 21.3%, versus 24.1% a year earlier. Adjusted EBITDA, a non-GAAP measure defined by the company, was $5,772, or 52.9% of sales, versus $5,665, or 52.8%.
Material changes and management commentary
- Domestic sales rose 11%, while overseas sales fell 10% in reported U.S.-dollar terms. Management estimated currency movements reduced reported sales by $78; on a constant-currency basis, sales increased 2.3%.
- Gross margin declined 0.4 percentage points, primarily because of higher direct material costs. Operating income was lower largely because quarterly amortization of the acquired U.S. Filshie distribution rights rose by $368 year over year, to $1,105. Excluding that amortization, management reported operating margins of 45.6% versus 45.1%.
- Net income remained nearly flat because lower operating income was offset in part by higher non-operating income and a lower tax rate. Non-operating income included a $44 foreign-currency remeasurement gain, compared with a $50 loss in Q1 2019.
- COVID-19 began substantially affecting results in March, especially sales of Filshie and other products used in elective procedures. Management said demand for critical-care devices, including labor-and-delivery and neonatal intensive-care products, should remain more consistent, subject to economic conditions.
Outlook, risks and other items
Management cautioned that forward-looking estimates were unusually uncertain. Based on April incoming orders, it extrapolated that Q2 2020 consolidated revenue could be 40% below Q2 2019; it estimated U.S. direct Filshie sales could be about $700 in Q2 if April's sales rate continued through June, versus $1,979 in Q2 2019. These are conditional estimates, not firm guidance. The company said the recovery would depend in part on when hospitals resume elective procedures and patients return to hospitals.
Management believed cash, operating income and working-capital management would provide liquidity through the pandemic shutdown. Plans included integrating multinational operations, marketing Filshie products, developing products, maintaining dividends, repurchasing shares when considered undervalued, and evaluating acquisitions. Management also anticipated higher capital spending and depreciation during the rest of 2020, including a facility roof replacement.
Key risks include pandemic-related demand disruption, foreign-exchange volatility, regulatory delays and costs, healthcare purchasing practices, product liability, distributor dependence, trade restrictions and tariffs, and competition. The filing reported no current litigation and no warranty reserve at March 31, 2020, which management considered appropriate based on historical claims. Disclosure controls were deemed effective; no material internal-control changes were reported.
Important facts for investors to verify
- Whether COVID-related elective-procedure restrictions and April order trends translated into the projected Q2 sales decline and how quickly demand recovered.
- Filshie sales trends by geography, including the distinction between underlying demand and distributor order timing, and the continuing amortization burden through October 2023.
- Whether gross-margin pressure from direct materials, foreign-exchange movements and operating costs persisted.
- Cash generation, capital spending needs, dividends and any further share repurchases, particularly if revenue weakened.
- Foreign-currency exposure and the potential effects of regulatory, product-liability and trade-policy risks.