Utah Medical Products, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless otherwise noted. The company manufactures and markets specialty medical devices and operates in the U.S., Ireland, the U.K. and Australia. Amounts below are in U.S. dollars; financial statement amounts are in thousands except per-share data.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net sales | $10.301 million | $10.233 million | +0.7% |
| Gross profit / margin | $6.223 million / 60.4% | $6.112 million / 59.7% | Profit +1.8% |
| Operating income / margin | $4.312 million / 41.9% | $3.877 million / 37.9% | +11.2% |
| Income before taxes | $4.413 million | $3.667 million | +20.3% |
| Net income / margin | $3.217 million / 31.2% | $2.667 million / 26.1% | +20.6% |
| Diluted EPS | $0.85 (MD&A: $0.853) | $0.71 (MD&A: $0.706) | +20.8% per MD&A |
| Operating cash flow | $4.133 million | $2.243 million | +$1.890 million |
Cash was $27.516 million at March 31, up from $23.278 million at year-end 2015; available-for-sale investments were $44,000. Working capital was $31.936 million, versus $28.807 million at December 31. Total liabilities were $11.555 million and equity was $71.659 million. The company reported no bank debt; its acquisition-related notes were fully repaid in February 2015. Q1 investing cash use was $52,000, mainly capital expenditures, and financing provided $167,000, primarily from stock-option exercises. No dividends were paid during the quarter; the regular Q1 dividend was accrued at quarter-end and paid afterward.
Material changes and drivers
- Reported sales rose only 0.7%, while management estimated growth of about 2% at constant currency. Foreign-exchange movements reduced reported sales by about $131,000, or 1.2% of consolidated sales. Nearly 30% of sales were invoiced in foreign currencies.
- U.S. sales fell 2%; international sales rose 3%. Ireland trade sales increased 46%, while U.K. subsidiary trade sales declined 19%. Lower U.S. sales to CooperSurgical (CSI) were a significant offset; management said marketplace feedback did not indicate lower utilization of the Filshie Clip System.
- Gross margin improved with manufacturing productivity and near-full capacity at the U.S. and Ireland facilities. Operating expenses declined to $1.911 million from $2.235 million. The 2016 suspension of the medical device excise tax helped reduce selling and marketing expense; Q1 2015 included $68,000 of that tax. Lower R&D expense followed completion and 2015 commercial introduction of the CVX-Ripe device.
- Other income was $101,000, compared with $210,000 of other expense in Q1 2015. The comparison benefited from no interest expense in 2016 and a $73,000 foreign-currency remeasurement gain versus a $168,000 loss in 2015.
- Operating cash flow improved, partly due to higher earnings and changes in accrued expenses and accounts payable. Receivables increased and were a larger cash use than in the prior-year quarter. Total comprehensive income was $2.800 million, including a $410,000 foreign-currency translation loss.
Outlook, risks and other disclosures
Management said Q1 results represented a solid start toward its 2016 objectives: integrating multinational operations, developing and introducing products, maintaining financial performance, returning cash through dividends and possible repurchases, and pursuing potentially accretive acquisitions. It expects full-year operating expenses to be approximately in line with 2015, setting aside the excise-tax suspension and possible favorable currency effects; manufacturing-capability capital expenditures are expected to exceed 2015 levels. Management believes cash, operating income and working-capital management will fund operating needs and planned growth. No specific full-year revenue or earnings forecast is provided.
Key disclosed risks include foreign-exchange volatility, medical-device regulation and approval delays, healthcare reform and potential future excise taxes, group purchasing organizations and hospital purchasing constraints, product liability, distributor dependence, competition, and retention of key employees. The company does not separately hedge currency risk. Management reported effective disclosure controls and no material quarterly change in internal control over financial reporting. There was no current litigation, and no subsequent event requiring recognition or disclosure was reported.
Investor facts to verify
- Whether sales growth and margins can be sustained, particularly given the small reported sales increase and reliance on constant-currency growth.
- Whether the 2016 excise-tax suspension and stronger manufacturing utilization continue to support operating margins; the filing notes the tax suspension applies for 2016–2017.
- Sales trends by subsidiary and product, including CSI/Filshie Clip sales, Ireland growth and the transfer of Sterishot sales to Ireland.
- Foreign-exchange exposure and the effect of currency movements on sales, costs, balance-sheet translation and reported earnings.
- Cash conversion and working-capital movements, including receivables, accrued liabilities and the timing of tax and dividend payments.
- Progress on the CVX-Ripe product, planned higher capital spending, any acquisitions or share repurchases, and risks described in the 2015 Form 10-K.