Utah Medical Products, Inc. — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Financial amounts are in thousands of dollars, except per-share data. The company manufactures and markets primarily single-use specialty medical devices. Comparisons with 2011 are affected by the March 2011 Femcare acquisition, which contributed only part of that year’s nine-month results.
Financial performance
| Metric | Q3 2012 | Q3 2011 | 9M 2012 | 9M 2011 |
|---|---|---|---|---|
| Net sales | $10,489 | $10,784 | $31,719 | $27,954 |
| Operating income | $3,960 | $3,539 | $11,627 | $8,929 |
| Net income | $2,721 | $2,237 | $7,910 | $5,556 |
| Diluted EPS | $0.73 | $0.61 | $2.13 | $1.53 |
| Gross margin | 61.7% | 60.4% | 60.8% | 59.0% |
| Operating margin | 37.8% | 32.8% | 36.7% | 31.9% |
| Net margin | 25.9% | 20.7% | 24.9% | 19.9% |
Q3 sales declined 2.7% year over year, while operating income rose 11.9% and net income rose 21.6%. For nine months, sales increased 13.5%, operating income 30.2%, and net income 42.4%. Management attributed stronger margins to Femcare-related manufacturing and distribution synergies, lower operating expenses relative to sales, and the absence of prior-year acquisition costs. A stronger U.S. dollar also reduced the reported Q3 sales decline; management said it accounted for about 60% of the decrease.
International sales were 51% of total sales in both Q3 and the nine-month period. Q3 international sales declined 3%, while nine-month international sales increased 17%. U.S. domestic sales declined 2% in Q3 and increased 10% for nine months; direct U.S. end-user device sales were down 6% in both periods.
Cash flow, financial position and debt
- Cash from operations was $10,499 for the first nine months, compared with $7,859 in 2011. Capital expenditures were $195; dividends paid were $1,762.
- Cash increased to $9,288 at September 30 from $6,534 at year-end 2011. Working capital was $8,642, up from $7,385. Current assets were $20,057 and current liabilities $11,415.
- Total notes payable were $14,865 at September 30, down from $21,672 at year-end 2011. The company repaid $7,174 during the nine months and reported that all notes were scheduled to be repaid by April 2016.
- UTMD reported compliance with all loan financial covenants. Its total-liabilities-to-total-assets ratio was 38%, versus 47% at year-end 2011.
- Total assets were $78,803 and stockholders’ equity was $48,710 at September 30. Goodwill and net intangible assets together were approximately 64% of total assets.
Outlook, risks and other notable items
Management said nine-month performance was consistent with its 2012 objectives: capture Femcare integration synergies, begin direct sales in Ireland, introduce three gynecology products, maintain strong financial performance, and use cash generation to reduce debt while continuing dividends. It expected remaining-2012 capital expenditures to be below depreciation. The filing provides no numerical earnings or revenue guidance.
Management cited continued weakness in medical-device utilization and pricing, foreign-exchange fluctuations, regulatory and premarketing-approval burdens, healthcare reform-related costs, hospital purchasing bureaucracy and GPO pressures, product-liability exposure, distributor dependence in some overseas markets, and acquisition debt as risks. The company does not use separate foreign-currency hedges. No litigation was identified as likely to have a material effect, and no material subsequent events were reported. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Most important facts for investors to verify
- Whether the Q3 sales decline and softness in direct U.S. hospital sales persist, and how product-category trends develop.
- Whether Femcare integration benefits continue to support margins and operating performance, given the acquisition’s effect on year-over-year comparisons.
- Debt repayment progress, covenant compliance, interest costs and liquidity needs.
- Exposure to currency movements, healthcare regulation, medical-device taxes and hospital purchasing practices.
- The pace and commercial contribution of planned new products and direct sales in Ireland; the filing gives no quantified forecast.