Utah Medical Products, Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. UTMD manufactures and markets specialty medical devices. Financial statement amounts below are in $ thousands except per-share data.
Financial performance
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Net sales | $10,390 | $10,125 | $32,242 | $31,213 |
| Gross profit | $6,294 | $6,496 | $20,200 | $19,925 |
| Operating income | $4,402 | $4,679 | $14,429 | $14,438 |
| Income before taxes | $4,481 | $4,696 | $15,046 | $14,503 |
| GAAP net income | $6,762 | $3,622 | $15,162 | $11,027 |
| Diluted EPS | $1.80 | $0.97 | $4.04 | $2.95 |
| Operating cash flow | — | — | $12,351 | $12,323 |
Margins: Gross margin was 60.6% in Q3 and 62.7% for 9M, versus 64.2% and 63.8% a year earlier. Operating margin was 42.4% and 44.8%, versus 46.2% and 46.3%. GAAP net margin was unusually elevated by the tax adjustment; management’s non-GAAP net margin, excluding the repatriation-tax adjustment and GILTI accrual, was 34.5% for Q3 and 37.2% for 9M.
Liquidity and balance sheet: Cash was $49,352 at September 30, up from $39,875 at year-end 2017. Working capital was $54,285, versus $43,909. Total assets were $99,152 and total liabilities $10,321; the company reported a 10% liabilities-to-assets ratio, including remaining repatriation tax payable. No loan interest was incurred. Nine-month capital expenditures were $255 and dividends paid were $3,018.
Changes and drivers
- Sales rose 2.6% in Q3 and 3.3% for 9M. Q3 domestic sales increased 7.2%, while sales outside the U.S. declined 1.7% in reported dollars, largely reflecting currency effects. Nine-month sales growth included a favorable $443 foreign-exchange impact.
- Profitability weakened despite sales growth: Q3 gross profit fell 3.1% and operating income fell 5.9%; nine-month operating income was essentially flat. Management attributed margin pressure mainly to higher direct-material costs and limited customer price increases. The prior-year Q3 gross margin also benefited from a nonrecurring $80 health-plan reserve adjustment.
- GAAP net income increased 86.7% in Q3 and 37.5% for 9M, principally because of a $3,230 favorable adjustment to the estimated one-time repatriation tax liability. The liability estimate was revised from $6,288 to $3,058. Management’s non-GAAP net income, excluding that adjustment and the 2018 GILTI accrual, was $3,582 for Q3, down 1.1%, and $11,982 for 9M, up 8.7%.
- Nine-month non-operating income was $617 versus $65, including a $418 gain on the sale of a Utah storage facility and a $32 investment-sale gain. Cash dividends rose to $3,018 from $1,969.
Outlook, risks and other items
- Management expected Q4 sales to be lower year over year, mainly due to shipment timing to China’s blood-pressure-monitoring distributor and the U.S. Filshie Clip distributor. It nevertheless expected to meet or exceed its beginning-of-year projection of flat sales for full-year 2018, and to exceed its initial full-year financial objectives and non-GAAP EPS projection. It also expected 2018 EBITDA to exceed 2017’s $21,979.
- Management cited possible further foreign-exchange pressure and shipment delays by distributors purchasing in U.S. dollars. It noted that roughly one-third of revenue was invoiced in foreign currencies. Other disclosed risks include medical-device regulation and approval delays, healthcare purchasing bureaucracy and group purchasing organizations, distributor reliance, product liability, competition, and key-person retention.
- The company adopted the new revenue-recognition standard in January 2018 with no reported financial-statement impact. Management reported effective disclosure controls and no material litigation expected to affect results. No subsequent event requiring disclosure was identified.
Important facts for investors to verify
- Reconcile the $3,230 repatriation-tax adjustment and the GILTI provision with the final tax rules and future cash-tax obligations; management noted that some guidance remained incomplete.
- Track gross-margin recovery, especially direct-material costs, pricing actions, and whether Q4 distributor shipment timing reverses in 2019.
- Assess revenue and earnings sensitivity to foreign-exchange rates and distributor demand, including the expected Q4 currency impact.
- Review the composition and sustainability of non-operating income, including the one-time property and investment-sale gains.
- Compare management’s full-year sales, non-GAAP EPS, and EBITDA expectations with subsequent reported results; these are forward-looking estimates and may change.