Utah Medical Products, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. UTMD manufactures and markets specialty medical devices. Financial amounts below are in thousands of U.S. dollars except per-share data.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Net sales | $10,965 | $10,829 | $21,852 | $21,088 |
| Gross profit | $6,984 | $6,893 | $13,906 | $13,428 |
| Operating income | $5,056 | $5,034 | $10,027 | $9,758 |
| Income before taxes | $5,556 | $5,057 | $10,565 | $9,807 |
| Net income | $4,308 | $3,870 | $8,400 | $7,405 |
| Diluted EPS | $1.15 | $1.04 | $2.24 | $1.98 |
| Gross margin | 63.7% | 63.7% | 63.6% | 63.7% |
| Operating margin | 46.1% | 46.5% | 45.9% | 46.3% |
Sales rose 1.3% in Q2 and 3.6% in the first half. Management estimated favorable currency translation added $177 to Q2 sales and $518 to first-half sales; at prior-year exchange rates, sales would have declined 0.4% in Q2 and increased 1.2% in the first half. First-half U.S. sales grew 2% and reported outside-U.S. sales grew 5%. Year-to-date sales increased across all product categories; neonatal sales were a notable contributor.
Net income growth exceeded operating-income growth, reflecting higher non-operating income and lower U.S. income tax rates. The first-half effective tax rate was 20.5%, versus 24.5% a year earlier. Q2 and first-half operating expenses increased 3.7% and 5.7%, respectively; management attributed most of the increases to foreign-exchange translation. Foreign-currency revenues represented 32.2% of first-half sales.
Cash, liquidity and balance sheet
- Cash was $45,873 at June 30, up from $39,875 at year-end; available-for-sale investments were zero. Working capital was $50,748, versus $43,909 at December 31, 2017.
- First-half operating cash flow was $7,747, compared with $7,742 in 2017. Investing activities provided $735, including $862 from the sale of a storage facility; capital expenditures were $201.
- First-half dividends paid were $2,011; option exercises generated $347. UTMD reported no share repurchases.
- Total liabilities were $13,682 and total equity $83,362. The reported liabilities-to-assets ratio was 14% (8% excluding the repatriation-tax liability). No separate debt balance is presented; cash interest paid was zero.
Material developments, outlook and risks
- Q2 non-operating income included a one-time $418 gain on sale of a no-longer-needed storage facility and a $32 gain on investments. These items lifted income before tax and margins; they are not presented as recurring operating performance.
- Management said UTMD remained on track with its 2018 plan, expected to exceed its beginning-of-year financial objectives, and projected 2018 EPS above $4.00. TTM EPS was $2.53 including a one-time $6,288 repatriation tax recognized in Q4 2017; excluding that charge, TTM EPS was $4.15.
- Management expects second-half gross margins to be below the prior-year period, citing higher variable manufacturing costs and anticipated lower sales and overhead absorption. It cited forecasts for $424 lower second-half 2018 purchases by U.S. distributor CooperSurgical and $402 lower shipments to the China BPM distributor than in second-half 2017.
- Risks highlighted include potential U.S. trade tariffs on exports and tariffs on components or finished products shipped to foreign subsidiaries, stronger-dollar effects on reported sales, uneven distributor orders, regulatory burdens, hospital purchasing practices, product liability, and dependence on distributors. The filing also notes weak Filshie Clip System sales in Australia and Canada.
- Revenue-standard adoption on January 1, 2018 did not materially change revenue recognition or the financial statements. Management reported effective disclosure controls. No litigation expected to be material, warranty reserve, or reportable subsequent event was identified.
Important facts for investors to verify
- Whether management’s full-year EPS projection above $4.00 remains achievable, given expected second-half order declines and lower gross margins.
- How much reported growth reflects underlying demand versus favorable first-half currency translation and the nonrecurring asset-sale gain.
- Whether China distributor order timing, CooperSurgical purchases, and Filshie Clip sales in Australia and Canada recover or remain weak.
- The potential effect and timing of trade tariffs, foreign-exchange movements, and higher input costs on sales, costs, and margins.
- The cash, working-capital, dividend, and tax-liability position, including the continuing impact of the 2017 repatriation tax.