Utah Medical Products, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2020. UTMD manufactures and markets specialty medical devices. Financial amounts are in thousands of U.S. dollars except per-share data.
Financial performance
| Metric | 3Q 2020 | 3Q 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $10,479 | $12,494 | $30,168 | $35,073 |
| Gross profit | $6,497 | $7,379 | $18,283 | $21,652 |
| Operating income | $3,587 | $4,371 | $9,428 | $12,954 |
| Net income | $2,933 | $3,705 | $7,386 | $10,369 |
| Diluted EPS | $0.80 | $0.99 | $2.01 | $2.77 |
| Gross margin | 62.0% | 59.1% | 60.6% | 61.7% |
| Operating margin | 34.2% | 35.0% | 31.3% | 36.9% |
| Net margin | 28.0% | 29.7% | 25.2% | 29.6% |
Sales declined 16.1% in the quarter and 14.0% year to date. Management attributed the downturn principally to the COVID-19 pandemic, including reduced demand for procedures classified as nonessential and weaker international sales. In 3Q, U.S. domestic sales were down 8% and outside-U.S. sales down 28% year over year; for 9M, they were down 7% and 23%, respectively. Foreign-exchange movements increased 3Q sales by $85 but reduced 9M sales by $36.
Quarterly gross margin improved, which management attributed to sales mix, including a lower share of international distributor sales, and an unusually weak 3Q 2019 comparison. The year-to-date gross margin declined as lower volume reduced absorption of manufacturing overhead. Operating income fell faster than gross profit, in part because fixed intangible-asset amortization weighed more heavily on lower sales. Lower interest income and a less favorable mix of taxable earnings also contributed to lower earnings.
Cash flow, balance sheet and capital allocation
- Operating cash flow: $14,359 for 9M 2020, compared with $11,415 in 9M 2019. Capital expenditures were $806, mainly for a Midvale facility roof and manufacturing capabilities in Ireland.
- Cash and investments: $46,294 at September 30, 2020, versus $42,787 at December 31, 2019. Cash increased by $3,507 over the period.
- Liquidity: Current assets were $57,260 and current liabilities $3,627; working capital was $53,632. Management said cash, operating income and working-capital management should fund normal operations, capital spending and dividends.
- Debt and liabilities: Management reported no debt. Total liabilities were $8,657 and the total-liabilities-to-assets ratio was 8%. Liabilities include a $2,074 remaining REPAT tax liability payable over five years.
- Shareholder returns: UTMD paid $3,097 in dividends and spent $6,977 to repurchase 87,000 shares during 9M 2020. The repurchases reduced the diluted share count and partially offset the earnings decline on a per-share basis.
Material changes and unusual items
- COVID-19-related weakness was most visible in the second quarter; management reported improvement in several sales trends in the third quarter. Filshie Clip System sales, affected by fewer procedures, were a significant factor in domestic and overseas comparisons.
- 9M 2020 net income included a $225 tax provision increase following the UK decision not to enact a previously planned corporate tax-rate reduction. Management stated that 9M diluted EPS would have been $2.069 excluding this charge, versus reported EPS of $2.008.
- Noncash amortization of acquired intangible assets was $4,839 in 9M 2020, including amortization related to the Femcare acquisition and the 2019 purchase of U.S. Filshie distribution rights. The acquired Filshie rights were originally recorded at $21,000; the filing says cash flow is unaffected by this amortization.
- UTMD’s non-GAAP adjusted EBITDA was $15,004 for 9M 2020, down 18.1% from $18,317. The company presents this as supplemental information, not a GAAP measure.
Outlook, commentary and risks
Management expected 4Q 2020 sales to continue recovering and exceed 3Q levels, assuming no significant new lockdowns or prohibitions on nonessential procedures. It did not provide numerical financial guidance. Management said it would preserve resources needed for future capabilities rather than cut them to protect near-term margins, and described its broader plan as continuing product development, Filshie marketing, operational integration and disciplined capital returns.
Key risks identified include further pandemic-related restrictions on medical procedures; foreign-exchange volatility; regulatory burden and approval delays; reliance on distributors; competition and hospital purchasing constraints; product-liability exposure; and loss of key employees. UTMD stated that it does not use separate foreign-currency hedges. The filing reports no current litigation, effective disclosure controls, and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether the expected 4Q sales recovery occurred and how pandemic-related procedure restrictions affected demand and product mix.
- Revenue trends by geography and product category, particularly Filshie devices and international distributor shipments.
- The effect of intangible-asset amortization and the UK tax-law change on reported earnings, taxes and future comparisons.
- Cash generation, capital spending, dividends and repurchases, including whether buybacks remain consistent with management’s stated valuation discipline.
- Foreign-currency exposure and the company’s ability to manage regulatory, distributor and product-liability risks.