Utah Medical Products, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. UTMD manufactures and markets specialty medical devices. Amounts below are in USD thousands except per-share data and percentages.
Financial results
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $12,955 | $12,572 | $38,707 | $36,140 |
| Gross profit | $8,186 | $8,073 | $23,869 | $22,804 |
| Operating income | $5,141 | $5,098 | $14,720 | $13,750 |
| Income before tax | $5,339 | $5,157 | $15,068 | $13,880 |
| Net income | $4,280 | $4,206 | $11,918 | $10,656 |
| Diluted EPS | $1.18 | $1.15 | $3.26 | $2.91 |
| Gross margin | 63.2% | 64.2% | 61.7% | 63.1% |
| Operating margin | 39.7% | 40.6% | 38.0% | 38.0% |
| Net margin | 33.0% | 33.5% | 30.8% | 29.5% |
- Sales grew 3.0% in Q3 and 7.1% for nine months. Management estimates sales growth would have been 5.9% and 9.8%, respectively, using prior-year exchange rates.
- Q3 sales increased across all four major product categories. For nine months, neonatal and blood-pressure-monitoring/accessory sales rose 15% and 16%; gynecology/electrosurgery sales were slightly lower.
- Operating cash flow was $15,467 for 9M 2022, versus $16,216 in 2021. Net investing cash outflow was $780, principally equipment spending; financing cash outflow was $4,564, including $2,495 of share repurchases and $2,112 of dividends. Cash and investments ended the period at $69,511, up from $60,974 at year-end 2021.
- At September 30, 2022, working capital was $77,972; total assets were $118,413 and total liabilities $10,227. UTMD reported no debt; its liabilities include a $1,895 repatriation tax liability payable over three years. The company’s reported total-liabilities-to-assets ratio was 9%.
Changes, drivers, and management commentary
- Q3 net income increased 1.8%; 9M net income increased 11.8%. The 2021 nine-month comparison included a one-time $390 tax provision for a UK deferred-tax-liability adjustment. Excluding that item, management said 9M 2022 net income was 7.9% higher and diluted EPS 8.1% higher than the comparable adjusted 2021 figures.
- Higher wages, raw-material and freight costs— including roughly doubled incoming raw-material freight—compressed gross margin. UTMD said it generally raised prices about 6.5% near the end of 2021 but did not broadly raise prices again in 2022, while retaining the ability to do so if costs continue to outpace sales.
- Management cited expense controls and lower foreign-currency operating costs as support for maintaining the 9M operating margin. Litigation expense was $409 for 9M 2022 versus $10 in 2021; the 2022 amount related to ten product-liability lawsuits involving alleged Filshie clip migration. UTMD said motions to dismiss were under consideration and expressed confidence in the system’s safety and effectiveness.
- Foreign-exchange movements materially affected reported results. The stronger U.S. dollar reduced reported foreign sales and translated foreign expenses; UTMD does not use separate hedging transactions.
- Inventory rose to $8,310 from $6,596 at year-end, which management attributed in part to buying larger raw-material quantities to address inflation, supplier uncertainty, and available quantity discounts. Capital spending included new manufacturing equipment in Utah and Ireland.
Outlook, risks, and other items
- Management expected organic device revenue to improve in Q4 2022 and 2023, and projected approximately $28 million of full-year 2022 adjusted consolidated EBITDA, a non-GAAP measure.
- Management said it intended to continue integrating international operations, expand manufacturing capacity, develop products, and consider dividends, share repurchases when shares appear undervalued, and affordable accretive acquisitions.
- Key disclosed risks include the ongoing Filshie-related litigation, product-liability exposure, inflation and supply-chain disruption, labor availability, foreign-exchange volatility, regulatory burdens, and healthcare purchasing and policy changes. The filing reported no material changes to internal controls and no other subsequent events requiring disclosure.
Important facts for investors to verify
- Progress and potential financial impact of the ten Filshie clip lawsuits, including legal costs and any developments in the motions to dismiss.
- Whether cost inflation and freight pressures ease, and whether pricing changes affect demand and gross margins.
- Revenue trends by product category, geography, and currency, particularly the effect of exchange rates on reported sales.
- Execution of the $28 million adjusted EBITDA outlook and the expected revenue improvement in Q4 2022 and 2023.
- Cash deployment, including dividends, any further repurchases, capital investment, and acquisition activity.