Utah Medical Products, Inc. — Q2 2014 Form 10-Q
Business context and period. UTMD manufactures and markets specialty medical devices. This report covers the quarter and six months ended June 30, 2014; financial amounts below are in thousands of dollars except per-share data. Comparisons are with the same periods in 2013.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $10,491 | $10,002 | $20,318 | $20,376 |
| Gross profit | $6,349 | $6,048 | $12,399 | $12,329 |
| Operating income | $4,062 | $3,715 | $7,905 | $7,605 |
| Net income | $2,834 | $2,632 | $5,556 | $5,368 |
| Diluted EPS | $0.751 | $0.698 | $1.470 | $1.426 |
- Q2 sales increased 4.9%; first-half sales were down 0.3%. Q2 net income rose 7.6%, and first-half net income rose 3.5%.
- Gross margin was 60.5% in Q2 and 61.0% for the first half, versus 60.5% in both prior-year periods. Operating margin improved to 38.7% in Q2 and 38.9% in the first half, from 37.1% and 37.3%. First-half net margin was 27.3%, up from 26.3%.
- Operating cash flow was $5,760 for the first half, versus $5,042. Capital expenditures were $836, including $550 for an Australian facility. Cash increased to $15,939 from $14,395 at year-end.
- At June 30, total notes payable were $7,239: $2,450 to the U.S. lender and $4,789 to the U.K. lender. Total liabilities were $19,325; total assets were $84,292. Debt principal is scheduled to be fully repaid by April 2016. The company reported compliance with all loan covenants.
- Working capital was $18,568, compared with $16,675 at year-end. Dividends paid in the first half were $938; the company also repurchased 17,344 shares for $818 in Q2.
Changes and management commentary
- Q2 sales growth reflected stronger U.S. domestic sales (up 6%) and international sales (up 4%). First-half U.S. sales rose 1%, while international sales fell 2%.
- UTMD recorded no 2014 sales of blood-pressure-monitoring products to its China distributor, versus $396 in Q2 2013 and $784 in the first half of 2013. A $396 shipment remained on hold pending full payment; the distributor made a $200 partial payment, held as a deposit, and revenue was not recognized. The related finished kits contributed to higher inventory.
- Management attributed the first-half gross-margin improvement mainly to product mix, including the absence of lower-margin China sales. Lower operating expenses, including costs in Australia, and reduced interest expense also supported operating results. A $71 currency-translation loss on euro cash balances contributed to higher Q2 non-operating expense.
- Management said the company was on track after the first half to potentially exceed its 2014 projection in the 2013 Form 10-K. It plans to continue product development, integration of international operations, debt repayment, dividends and opportunistic share repurchases, while considering accretive acquisitions. No specific numerical 2014 forecast is provided in this filing.
Risks, contingencies and unusual items
- Foreign-exchange movements affect reported international sales, assets and expenses; UTMD does not use separate hedging transactions. Management noted that lower Australian operating expenses may not persist if staffing increases or the Australian dollar strengthens.
- Disclosed risks include medical-device regulation and approval delays, healthcare reform and the device excise tax, hospital purchasing-group pressures, product liability, distributor dependence, competition and key-employee retention. The 2.3% U.S. medical-device excise tax was included in selling and marketing expense.
- The filing reports no litigation believed likely to materially affect financial results, no material subsequent events, and no warranty reserve at June 30 based on management’s estimate that existing warranty obligations were immaterial.
- New revenue-recognition guidance issued in May 2014 was under assessment; adoption was expected in 2017. Management reported effective disclosure controls and no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether the China distributor pays the remaining amount and whether the held BPM shipment is ultimately delivered and recognized as revenue.
- Whether sales growth, margins and operating-expense savings continue, especially as Australia costs and currency rates change.
- Debt repayment progress, covenant compliance, and cash allocation among dividends, repurchases, capital spending and potential acquisitions.
- The impact of regulatory requirements, the medical-device excise tax and forthcoming revenue-recognition guidance on future results.