Utah Medical Products, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. UTMD manufactures and markets specialty medical devices. Financial amounts below are in thousands of U.S. dollars, except per-share data.
Financial results
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $10,259 | $10,301 | -0.4% |
| Gross profit | $6,535 | $6,223 | +5.0% |
| Operating income | $4,725 | $4,312 | +9.6% |
| Income before taxes | $4,751 | $4,413 | +7.6% |
| Net income | $3,536 | $3,217 | +9.9% |
| Diluted EPS | $0.95 | $0.85 | +11.1% |
| Operating cash flow | $4,307 | $4,152 | +3.7% |
The statement of income reports pretax income of $4,751; MD&A cites $4,750, apparently a rounding or presentation difference.
- Margins: Gross margin was 63.7% versus 60.4%; operating margin 46.1% versus 41.9%; net margin 34.5% versus 31.2%.
- Cash and liquidity: Cash was $30,679 at quarter-end, up from $26,296 at December 31, 2016; available-for-sale investments were $64. Working capital was $35,150, compared with $31,845 at year-end.
- Debt and liabilities: Management states the company had no debt. Total liabilities were $9,629, up from $7,340, primarily reflecting timing of accrued dividends and estimated taxes. The reported liabilities-to-assets ratio was 12%, versus 10% at year-end.
- Cash uses and other flows: Investing cash outflow was $65, mainly property and equipment purchases. Financing cash inflow was $53 from option exercises; no cash dividends were paid during the quarter, though a quarterly dividend was accrued and paid after quarter-end. Cash increased $4,383 overall.
Material changes and drivers
- Reported sales were nearly flat, but management estimates foreign-exchange movements reduced Q1 2017 sales by $168; constant-currency sales increased approximately $126, or 1%.
- U.S. sales declined 1% and sales outside the U.S. increased 1%. UTMD began direct sales of Femcare devices to medical facilities in Canada and France, replacing third-party distributor sales. Management attributed the improved gross margin primarily to this change.
- Operating expenses declined to $1,810 from $1,911. Management cited lower reported foreign-subsidiary expenses and lower U.S.-dollar amortization expense as the British pound weakened.
- Non-operating income fell to $26 from $101, principally because foreign-currency remeasurement gains were much smaller. This partly offset operating-income growth.
- The effective income tax provision was 25.6% of pretax income, versus 27.1%, reflecting the geographic mix of earnings. Diluted weighted-average shares declined to 3.728 million from 3.770 million.
Outlook, risks and other items
- Management said it was on track to meet its previously stated 2017 objectives; it provided no numerical full-year guidance in this filing. Priorities include integrating multinational operations, developing products, maintaining operating performance, returning cash through dividends or repurchases when appropriate, and pursuing accretive acquisitions.
- Management expects current cash, operating income and working-capital management to fund normal operations and internal growth. Potential cash uses include investment in the UK facility, technology and processes, acquisitions, dividends and share repurchases.
- Foreign-exchange exposure is material. The company does not use separate hedging transactions; it manages exposure through local-currency invoicing, currency conversion and liquidity management.
- Disclosed risks include medical-device regulation and approval delays, healthcare reform and administrative burdens, GPO contracting practices, product liability, distributor dependence, competition, key-employee retention and currency fluctuations. The filing reports no current litigation and no subsequent events requiring disclosure.
- No warranty reserve was recorded at quarter-end because management considered expected warranty obligations immaterial. Adoption of share-based payment accounting guidance had an insignificant impact; management expected the 2018 revenue standard to have an insignificant impact and had not yet assessed the lease standard’s impact.
Important facts for investors to verify
- Whether direct Femcare sales in Canada and France can sustain the reported gross-margin improvement and offset distributor-related changes.
- The sensitivity of sales, margins and subsidiary earnings to foreign-exchange movements, including management’s constant-currency calculations.
- The timing and amount of dividend payments and any future share repurchases; none were made during Q1.
- Whether the company’s stated 2017 objectives remain on track, given the absence of numerical guidance and the risks of regulatory delays and customer purchasing constraints.
- The $1,000 difference in pretax income as presented in the income statement and MD&A, and the timing-related increase in accrued liabilities.