Utah Medical Products, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. UTMD manufactures and markets specialty medical devices. Financial amounts below are in thousands of U.S. dollars, except per-share data and percentages, unless noted. Statements are unaudited.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior period | Change |
|---|---|---|---|
| Net sales | $12,520 | $12,323 | +1.6% |
| Gross profit / margin | $7,843 / 62.6% | $7,533 / 61.1% | Profit +4.1% |
| Operating income / margin | $4,439 / 35.5% | $4,522 / 36.7% | −1.9% |
| Income before taxes | $5,119 | $4,530 | +13.0% |
| Net income / net margin | $4,214 / 33.7% | $3,534 / 28.7% | +19.2% |
| Diluted EPS | $1.16 | $0.96 | +20.2% |
| Cash from operations | $6,915 | $5,046 | +$1,869 |
Sales outside the U.S. rose 22.9% as reported, while domestic sales fell 10.0%. Management said constant-currency sales increased 3.4% overall and outside-U.S. sales rose 28.1%; a stronger U.S. dollar reduced reported sales by $223. By product category, worldwide Gynecology/Electrosurgery/Urology sales were $5,593, Blood Pressure Monitoring and Accessories $4,150, Neonatal $1,762, and Obstetrics $1,015.
At March 31, cash and investments were $80,912, versus $75,052 at December 31, 2022. Current assets were $95,112 and current liabilities $6,074; management reported working capital of $89,038 and a 15.7 current ratio. Total liabilities were $9,752 and total equity $118,018. The company reported no debt. Cash rose $5,860 during the quarter. Investing activities used $43, mainly for property and equipment; financing activities used $1,049, including $1,070 of dividends. No interest was paid.
Material changes and management explanation
- Gross margin improved 1.5 percentage points, which management attributed mainly to better Irish manufacturing overhead absorption and lower U.S. employee healthcare costs. Selective price increases also occurred; management expected full-year gross margin to remain consistent with 2022.
- Operating income declined despite higher gross profit. Litigation expense increased by $348, to $409 from $61, and management identified this as the primary reason for lower operating margin. Selling, general and administrative expense was $3,260 versus $2,888; research and development expense was $144 versus $123.
- Other income was $680 versus $8. Management attributed the increase primarily to $646 more interest income from higher average cash balances and interest rates. The income-tax provision rate fell to 17.7% from 22.0%, partly because some interest income was tax-exempt.
- Domestic direct sales were down 9.3%, with management citing sterilizer-capacity constraints. OEM sales declined 14.0%; sales to the largest U.S. OEM customer were $391 lower year over year. The filing identifies lack of predictability from a major OEM customer representing over 20% of sales as a risk.
- Inventory increased to $9,940 from $8,814 at year-end, while receivables declined to $3,818 from $5,538. Management attributed the receivables decrease to faster collections; average receivables age fell from 37 to 27 days. Average inventory turns were 2.0, versus 2.6 for 2022.
Outlook, risks and unusual items
Management said Q1 results support its expectation of achieving its 2023 plan as described in the 2022 Form 10-K; this filing provides no new quantified full-year guidance. Priorities include integrating multinational operations, expanding U.S. marketing of the Filshie Clip System, developing products, maintaining profitability, returning cash through dividends or potentially repurchases, and considering accretive acquisitions. Management also said available cash could support investment, acquisitions, dividends, or repurchases.
UTMD faces lawsuits concerning Filshie clips, initiated by a single U.S. law firm. Litigation costs rose materially during the quarter, although the company said it does not expect the litigation outcome to be material to consolidated financial results. The company also cites regulatory burdens, product-liability exposure, healthcare-market and purchasing changes, reliance on distributors, supply-chain and trade-policy disruption, foreign-exchange volatility, and key-employee retention as risks. It does not separately hedge foreign-currency risk. The $21 million purchase price for exclusive U.S. Filshie distribution rights is being amortized; the related asset is expected to be fully amortized in October 2023. No warranty reserve was recorded, based on management’s assessment that existing obligations were immaterial. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether domestic sales recover from sterilizer constraints and lower OEM demand, particularly given the major customer concentration disclosed in the filing.
- Progress, legal costs and eventual outcomes of the Filshie clip litigation, notwithstanding management’s view that the outcome will not be material.
- Whether international growth continues and how exchange rates affect reported revenue, expenses and margins.
- Whether elevated interest income persists; it was a significant contributor to the increase in pretax and net income.
- Whether management’s 2023 plan and gross-margin expectations are achieved, and how cash is allocated among investment, acquisitions, dividends and potential repurchases.