Utah Medical Products, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; balance-sheet figures are as of March 31, 2018, compared with December 31, 2017. Financial amounts are in thousands of U.S. dollars except per-share data. UTMD manufactures and markets specialty medical devices.
Financial results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net sales | $10,887 | $10,259 | +6.1% |
| Gross profit / margin | $6,922 / 63.6% | $6,535 / 63.7% | Profit +5.9% |
| Operating income / margin | $4,971 / 45.7% | $4,725 / 46.1% | +5.2% |
| Income before taxes | $5,008 | $4,750 | +5.4% |
| Net income | $4,092 | $3,536 | +15.7% |
| Diluted EPS | $1.09 | $0.95 | +15.1% |
| Operating cash flow | $3,766 | $4,307 | Down $541 |
Revenue and margins: Domestic sales rose 1% to $5,254; outside-U.S. sales rose 12% to $5,633. Management estimates foreign-exchange movements added $340 to reported sales; at prior-year exchange rates, total sales increased about 3%. Gross margin was nearly flat despite manufacturing cost inflation. Operating margin declined as foreign-currency expenses, including Femcare intangible amortization, translated into higher U.S.-dollar costs.
Cash, liquidity and debt: Cash was $42,853 and available-for-sale investments were $72, versus combined cash and investments of $39,955 at year-end 2017. Working capital was $47,998, up from $43,909. Total liabilities were $14,502; management states the company had no debt. Operating cash flow was $3,766, capital expenditures were $173, and a $1,005 dividend was paid. Cash ended the quarter at $42,853. Management believes available cash, operating income and working-capital management are sufficient for normal needs, investment and planned dividends.
Changes and notable items
- Net income grew faster than operating income mainly because the effective tax provision rate fell to 18.3% from 25.6%. Management attributes the lower rate chiefly to the U.S. federal tax-rate reduction and tax deductions in Ireland and the UK related to currency translation losses on cash balances. The filing estimates $366 of tax savings from the lower provision rate.
- Foreign-exchange effects materially influenced reported results: management estimates they contributed $340 to sales growth; constant-currency sales growth was approximately 3%. Currency translation also increased reported operating costs.
- Operating cash flow fell year over year, principally reflecting a larger reduction in accrued expenses, partly offset by higher net income. Working capital increased during the quarter.
- UTMD adopted the new revenue-recognition standard on January 1, 2018. The company says adoption did not materially change revenue-recognition timing or affect the financial statements; for more than 99% of revenue, the performance obligation is met upon shipment.
- No material litigation was reported, and management reported effective disclosure controls and no material change in internal controls during the quarter.
Outlook, risks and contingencies
Management said Q1 results were consistent with its previously announced 2018 goals and that it remained on track. Priorities include integrating international operations, developing products, maintaining financial performance, returning cash through dividends and possible repurchases when shares appear undervalued, and pursuing accretive acquisitions. No specific numerical full-year guidance is provided in this filing.
Risks highlighted include foreign-currency volatility, medical-device regulation and approval delays, healthcare reform and administrative burdens, group purchasing organizations, product liability, distributor dependence, competition, and loss of key personnel. The company does not separately hedge currency exposure; it manages it through local-currency invoicing, conversion as transactions occur and liquidity management. Management noted CSI’s forecasts indicated lower Femcare product purchases for the remainder of 2018 than in 2017. The company said the only significant lease it anticipated under the forthcoming lease standard was for its Utah facility parking lot; it had not yet assessed the standard’s impact.
Important facts for investors to verify
- Whether sales growth persists after excluding the estimated $340 favorable foreign-exchange contribution, and how domestic and international product demand develops.
- Whether the reduced tax rate is sustainable; Q1’s improvement in net income and EPS was partly tax-driven.
- Whether foreign-currency movements continue to affect both reported revenue and operating expenses, given the company’s unhedged exposure.
- Whether operating cash flow improves and planned capital spending, dividends, acquisitions or repurchases affect the substantial cash balance.
- Whether CSI purchases and regulatory approvals affect Femcare sales and the company’s 2018 objectives.