Utah Medical Products, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Financial statements are unaudited; dollar amounts below are in thousands except per-share data.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $10,732 | $10,887 | (1.4%) |
| Gross profit / margin | $6,773 / 63.1% | $6,922 / 63.6% | Profit (2.2%) |
| Operating income / margin | $4,101 / 38.2% | $4,971 / 45.7% | (17.5%) |
| Income before taxes | $4,137 | $5,008 | (17.4%) |
| Net income / margin | $3,139 / 29.2% | $4,092 / 37.6% | (23.3%) |
| Diluted EPS | $0.84 | $1.09 | (23.1%) |
| Operating cash flow | $3,360 | $3,766 | (10.8%) |
Management estimated that constant-currency sales increased 0.8% ($83); currency movements reduced reported sales by $237. Domestic sales rose 10% to $5,794, while sales outside the U.S. fell 12% to $4,938. By product category, gynecology/electrosurgery/urology sales were $5,582, blood-pressure monitoring and accessories $2,301, neonatal $1,510, and obstetrics $1,339.
Cash and investments were $32,665 at March 31, down from $51,112 at year-end, primarily reflecting the Filshie transaction and dividends. Investing cash outflow was $21,012, including $21,000 for distribution rights; management reported spending approximately $23.1 million for the rights and remaining inventory combined. Working capital was $38,625. The company reported no debt; total liabilities were $12,876 and total assets $105,051. Q1 dividends were $1,027, or $0.275 per share.
Material changes and unusual items
- On February 1, UTMD acquired exclusive U.S. distribution rights to the FILSHIE Clip System from CooperSurgical for $21,000, recognized as an intangible asset to be amortized over 4.75 years. The company also purchased about $2,000 of remaining inventory. New amortization expense was $737 in Q1 and was the principal driver of lower operating income; management said the adverse year-over-year operating-margin comparison was likely greatest in Q1.
- The remaining acquired inventory was sold at the same price CooperSurgical had paid, delaying the expected gross-margin benefit of direct distribution. UTMD estimated the inventory might not be depleted until the end of Q3 and did not expect significant gross-margin improvement until Q4.
- Q1 sales comparisons also reflected a pause in neonatal exports to Brazil and China while distributors obtained regulatory re-registrations. Those export sales were $418 lower year over year. U.S. OEM sales increased 54%.
- The effective income-tax provision rate rose to 24.1% from 18.3%. Management attributed the increase to GILTI-related tax, nonrecurring foreign-currency-related tax deductions in Q1 2018, and a shift in Filshie-related earnings from the UK to the U.S.
- Adoption of the lease standard on January 1 added right-of-use assets and lease liabilities; the filing reports $442 of lease liabilities at quarter-end and no income-statement effect from adoption.
Outlook, risks, and contingencies
Management said it remained on track with its previously stated 2019 objectives, but provided no specific numerical full-year forecast in this filing. Priorities include integrating operations, marketing FILSHIE directly in the U.S., developing products, maintaining dividends, considering repurchases when shares appear undervalued, and pursuing accretive acquisitions. Management expected domestic Filshie sales for 2019 to exceed twice the 2018 level and anticipated higher U.S. Filshie-related earnings after the acquired inventory is consumed. It also expected the tax rate to remain closer to Q1 2019’s 24% than Q1 2018’s 18%.
Key disclosed risks include foreign-exchange exposure, medical-device regulatory and approval delays, distributor dependence, hospital purchasing practices and group purchasing organizations, product liability, healthcare reform, and difficulty competing as a smaller medical-device company. The company does not use separate currency hedges. Management reported effective disclosure controls and no material litigation; it recorded no warranty reserve because estimated obligations were considered immaterial. Planned equipment investment for Utah processing capabilities may increase capital expenditures during the rest of 2019.
Most important facts for investors to verify
- Whether direct U.S. FILSHIE distribution delivers the expected sales and earnings gains after the acquired inventory is depleted, and whether margin improvement emerges in Q4 as management anticipated.
- Whether neonatal exports resume following distributor re-registrations in Brazil and China, and how U.S. OEM growth develops.
- Whether currency movements, self-insured employee healthcare costs, tariffs, and raw-material costs continue to pressure sales or margins.
- Whether the higher tax rate persists and how it affects full-year earnings and cash generation.
- Whether working capital and cash remain adequate after the acquisition, planned equipment spending, dividends, and any potential share repurchases.