Utah Medical Products, Inc. (NASDAQ: UTMD) — FY 2019 Form 10-K
Reporting period: Year ended December 31, 2019. Financial amounts are in U.S. dollars, in thousands, except per-share data. UTMD develops, manufactures and sells specialty medical devices, primarily for hospital use, including obstetrics, gynecology, neonatal-care and blood-pressure-monitoring products.
Financial performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $46,904 | $41,998 | +11.7% |
| Gross profit | $29,466 | $26,306 | +12.0% |
| Operating income | $17,632 | $18,697 | -5.7% |
| Income before tax | $17,884 | $19,459 | -8.1% |
| GAAP net income | $14,727 | $18,555 | -20.6% |
| GAAP diluted EPS | $3.94 | $4.95 | -20.4% |
| Operating cash flow | $17,056 | $16,834 | +1.3% |
Gross margin was 62.8%, up from 62.6%; operating margin fell to 37.6% from 44.5%. Management’s supplemental results excluding TCJA-related tax estimate changes show net income of $14,145 versus $15,504 and diluted EPS of $3.784 versus $4.136. These non-GAAP figures are not substitutes for GAAP results.
U.S. sales rose 29.7% to $27,493, while sales outside the U.S. fell 6.7% to $19,411. Domestic growth included a $3,501 increase in Filshie Clip System sales and a $2,452 increase in OEM sales. A stronger U.S. dollar accounted for about $631, or 45%, of the OUS sales decline. By product category, gynecology/electrosurgery/urology accounted for 54% of revenue and blood-pressure-monitoring products and accessories 22%.
Cash and cash equivalents were $42,787 at year-end, down from $51,112; working capital was $51,438, down from $55,643. Total liabilities were $8,694 and total assets $109,787; the company reported no debt. Net cash from operations was $17,056. Capital expenditures were $540. The company paid $4,112 in dividends and spent $398 to repurchase shares. The quarterly dividend was $0.275 per share.
Material changes and unusual items
- In February 2019, UTMD paid $21,000 for the remaining life of its exclusive U.S. Filshie Clip distribution rights from CooperSurgical and acquired remaining inventory for approximately $2,100. The rights were recorded as an intangible asset and generated $4,053 of amortization expense in 2019, contributing to lower operating income. Management said fourth-quarter results began to show accretive profits after this amortization.
- General and administrative expense rose to $9,613 from $5,447, principally reflecting the new Filshie rights amortization. Without noncash Femcare and CSI intangible amortization, operating expenses were 12.2% of sales versus 13.0% in 2018.
- GAAP net income included a $266 favorable tax estimate adjustment in 2019 related to the TCJA repatriation tax. The 2018 comparison included a substantial favorable tax adjustment; consequently, reported GAAP net income and EPS comparisons are distorted by tax estimate changes. The 2019 effective tax rate was 17.7%, versus 4.6% in 2018.
- Non-operating income was lower, in part because a $450 gain on asset sales recorded in 2018 did not recur. Non-GAAP EBITDA, as defined by management, increased 10.9% to $24,917.
Fourth-quarter 2019 sales were $11,831, gross profit $7,814, net income $4,359 and diluted EPS $1.17. The comparable 2018 figures were $9,756, $6,106, $3,393 and $0.91, respectively.
Outlook, risks and other disclosures
Management’s 2020 revenue outlook was cautious: it described expected growth as no more than low single digits and elsewhere projected sales about the same as 2019. It expected higher gross margin and continued growth in its non-GAAP EBITDA measure. Planned priorities include direct marketing of Filshie in the U.S., product development, multinational operating synergies, dividends and opportunistic repurchases, and potential acquisitions. The company expected 2020 intangible amortization of approximately $4,421 for the CSI rights.
- Key operating uncertainties include demand from the largest OEM customer, whose 2019 purchases rose sharply as it built inventory; management anticipated lower purchases in 2020. Distributor ordering patterns and foreign-exchange movements also make results less predictable.
- Filshie is a material product exposure: the filing says its sales represented 36% of total U.S.-dollar-denominated sales in 2019. Management cited possible slower growth and reputational effects from public confusion between Filshie and the discontinued Essure device.
- Other disclosed risks include regulatory costs and approval delays, hospital purchasing restrictions and group purchasing organizations, competition and pricing pressure, reliance on third-party distributors, key-personnel retention, product-liability claims, and trade restrictions or tariffs.
- The filing specifically identified possible coronavirus-related supply-chain or employee-availability disruption. UTMD said it maintained safety stocks and had financial capacity to carry additional inventory.
- UTMD is self-insured for product liability. It reported no material pending or threatened litigation and no product-liability judgments in its history. Operating lease and purchase commitments totaled $3,058 at year-end. No off-balance-sheet arrangements were reported.
Management and the independent auditor reported effective internal control over financial reporting as of December 31, 2019. The financial statements received an unqualified audit opinion.
Investor verification points
- Track whether Filshie U.S. sales generate enough gross profit to offset the related amortization and support management’s outlook.
- Monitor the largest OEM customer’s actual orders against its 2019 inventory build and management’s expected 2020 decline.
- Separate operating trends from TCJA-related tax estimate effects when comparing GAAP net income and EPS across years.
- Assess the effects of foreign-exchange rates, distributor demand and product mix on OUS revenue and margins.
- Verify the reported cash-flow strength, inventory growth and liquidity against subsequent filings, particularly given the disclosed pandemic and supply-chain risks.