Utah Medical Products, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars, in thousands, except per-share amounts. UTMD manufactures and markets specialty medical devices.
Financial performance
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $12,494 | $10,390 | $35,073 | $32,242 |
| Gross profit | $7,379 | $6,294 | $21,652 | $20,200 |
| Operating income | $4,371 | $4,402 | $12,954 | $14,429 |
| Net income | $3,705 | $6,762 | $10,369 | $15,162 |
| Diluted EPS | $0.99 | $1.80 | $2.77 | $4.04 |
| Gross margin | 59.1% | 60.6% | 61.7% | 62.7% |
| Operating margin | 35.0% | 42.4% | 36.9% | 44.8% |
- Tax-comparison caveat: 2018 net income and EPS include a favorable $3,230 adjustment to the company’s one-time repatriation-tax estimate. Excluding that item, 2018 net income was $3,582 for Q3 and $11,982 for 9M, and diluted EPS was $0.954 and $3.194, respectively. Against these adjusted comparisons, Q3 2019 net income increased 3.4% and EPS increased 3.9%; 9M net income declined 13.5% and EPS declined 13.1%.
- Sales grew 20.2% in Q3 and 8.8% in 9M. At constant exchange rates, growth was 21.6% and 10.6%. Q3 U.S. sales rose 44%, while sales outside the U.S. fell 4%; 9M U.S. sales rose 27% and non-U.S. sales fell 9%.
- Margins were pressured by sales mix, including faster growth in lower-margin OEM products and pressure-transducer kits. Management also cited weaker neonatal-device exports to China. A stronger U.S. dollar reduced reported sales by $145 in Q3 and $576 in 9M.
- Operating expenses rose substantially, principally because amortization began on the acquired U.S. Filshie distribution rights: $1,105 in Q3 and $2,947 in 9M. Excluding that new amortization, operating income increased 24.4% in Q3 and 10.2% in 9M, according to management.
- Adjusted consolidated EBITDA, a non-GAAP measure, was $6,255 in Q3, up 20.1%, and $18,317 in 9M, up 5.7%.
Cash, liquidity and balance sheet
- Cash and investments were $37,393 at September 30, 2019, down from $51,112 at December 31, 2018. UTMD reported no debt; total liabilities were $9,108, and its total-liabilities-to-assets ratio was 9%.
- Working capital was $45,827, compared with $55,643 at year-end 2018. Management said working capital and operating cash generation were sufficient for normal operations, planned capital expenditures and dividends.
- For 9M 2019, operating cash flow was $11,415 versus $12,351 in 9M 2018. Investing activities used $21,252, including $21,000 for the distribution-rights acquisition; financing activities used $3,258, including $3,083 in dividends and $398 for share repurchases.
- The company completed its $21,000 purchase of exclusive U.S. Filshie Clip System distribution rights from CooperSurgical on February 1, 2019, and also bought approximately $2,100 of remaining inventory. Net intangible assets increased to $30,847; goodwill plus net other intangible assets represented 42% of total assets.
- UTMD paid $0.275 per share in Q3 dividends. It repurchased 5,000 shares for $398 during 9M 2019. Stockholders’ equity was $94,986 at September 30, up $5,994 from year-end 2018.
Outlook, commentary and risks
- Management expected Q4 2019 sales to be about 20% above Q4 2018, citing direct U.S. Filshie sales, higher OEM shipments and a planned shipment of blood-pressure-monitoring kits to the China distributor. If those expectations and other sales assumptions held, management expected full-year revenue growth to exceed its original 9%–10% projection.
- Management said the lower-margin product mix could leave full-year gross margin about three percentage points below its beginning-of-year projection. It expected Filshie gross profit to improve after the acquired inventory was depleted; the timing and sales assumptions remain important.
- Key risks discussed include foreign-exchange volatility, reliance on distributors (including China), regulatory and FDA approval burdens, potential reinstatement of the U.S. medical-device excise tax in 2020, product liability, and competitive or purchasing pressures from hospital groups. The filing reported no litigation expected to materially affect results and no other subsequent event requiring disclosure.
- The company adopted lease accounting on January 1, 2019, recording right-of-use assets and lease liabilities; management said the change did not affect the income statement. Disclosure controls were deemed effective, with no material change in internal control over financial reporting reported for the period.
Important facts for investors to verify
- Whether Q4 and full-year sales expectations were achieved, and whether growth depended on the cited distributor shipment pattern and OEM demand.
- Filshie inventory depletion, direct-sales growth, and the resulting gross-profit contribution relative to ongoing distribution-rights amortization.
- Whether lower-margin product mix and China neonatal export delays continued to weigh on gross margin and sales.
- Reported results against adjusted 2018 comparisons, especially the $3,230 repatriation-tax benefit and the 2019 Filshie-related amortization expense.
- Cash and working-capital trends, foreign-exchange exposure, and the potential effects of regulatory changes or medical-device excise-tax reinstatement.