UTAH MEDICAL PRODUCTS INC quarterly report, Q2 FY2020

Business context and reporting period

Utah Medical Products, Inc. (UTMD) manufactures and markets specialty medical devices. This Form 10-Q covers the quarter and six months ended June 30, 2020; financial amounts below are in USD thousands except per-share data. Management attributed substantial demand weakness to COVID-19 restrictions on elective hospital procedures, particularly procedures using gynecology and Filshie products.

Financial performance and position

• Sales declined 25.8% in Q2 and 12.8% in H1 year over year. Operating income fell 55.9% and 32.0%, respectively; GAAP net income fell 62.8% and 33.2%.
• Gross margin was 56.3% in Q2 and 59.9% in H1, versus 63.3% and 63.2% a year earlier. Operating margin was 22.5% and 29.7%, versus 37.8% and 38.0%.
• Operating cash flow was $9,351 in H1, compared with $5,043 in H1 2019. Capital expenditures were $711; cash dividends were $2,077; share repurchases were $6,426.
• At June 30, cash and investments were $42,352, working capital was $49,873, and total liabilities were $8,258. Management reported no debt. The current ratio was approximately 16.4x.
• Total assets were $103,545 and stockholders’ equity was $95,287. Cash and investments were down $435 from year-end 2019; total liabilities declined $436.

Material changes and notable items

• COVID-related procedure restrictions drove the downturn. Q2 U.S. sales declined 21% and outside-U.S. sales declined 32%. Filshie sales declined 43% domestically and 60% outside the U.S. in Q2.
• Product mix shifted toward lower-margin critical-care and OEM products, while fixed manufacturing costs and expenses did not fall proportionally with sales. Management also cited pandemic-related safety, staffing and productivity costs.
• GAAP Q2 and H1 results included a $225 deferred tax charge after the UK retained a 19% corporate tax rate rather than reducing it to 17%. Excluding this item, management reported non-GAAP net income of $1,537 for Q2 and $4,677 for H1, and diluted EPS of $0.420 and $1.268, respectively.
• Intangible-asset amortization remained significant, including $1,105 in Q2 and $2,211 in H1 related to the 2019 purchase of U.S. Filshie distribution rights.
• UTMD repurchased 80,000 shares in Q1 for $6,426, or $80.32 per share including costs. H1 dividends were $0.28 per share, up from $0.275.
• H1 capital spending included a $327 facility roof and $249 for Ireland equipment intended to support in-house Filshie clip manufacturing. The filing reports no current litigation and no material subsequent events.

Outlook, risks and management commentary

Management expected H2 2020 sales to remain below H2 2019, but likely not fall as sharply as Q2’s 26% year-over-year decline. It said recovery—especially for gynecology and Filshie products—would depend substantially on government policy, hospital procedure activity and patients’ willingness to return to hospitals. U.S. Filshie sales improved in June and early July but had slowed again by late July. Management expected OEM sales growth to continue, supported by demand for a customer’s biopharmaceutical and bioprocess control systems. A weaker U.S. dollar could benefit foreign-currency sales.

Management said cash, operating income and working-capital management should fund normal operations, investment and dividends. Its plans included product development, Filshie marketing, operational integration, dividends and opportunistic share repurchases or acquisitions. Key disclosed risks include pandemic-related demand uncertainty, foreign-exchange volatility, medical-device regulation and certification delays, healthcare-market bureaucracy and purchasing-group pressures, distributor dependence, product liability, and retention of key employees. Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting.

Important facts for investors to verify

• Track hospital procedure volumes and the timing and durability of recovery in Filshie and other elective-procedure products, particularly outside the U.S.
• Reconcile reported GAAP earnings with management’s non-GAAP figures and confirm the treatment and remaining impact of the $225 UK deferred-tax adjustment.
• Monitor gross-margin recovery, product mix, pandemic-related manufacturing costs and fixed-cost absorption as sales change.
• Assess the returns and operating progress from the Filshie distribution-rights purchase and Ireland manufacturing investment, including ongoing amortization expense.
• Review cash deployment, dividend coverage, share repurchases and any potential acquisitions alongside currency exposure and regulatory risks.