UTAH MEDICAL PRODUCTS INC annual report, FY2017

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Utah Medical Products, Inc. — 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. Dollar amounts are in thousands except per-share data. UTMD develops, manufactures and sells specialized medical devices, primarily for hospital use, with 51% of 2017 sales generated outside the United States.

Financial results and position

  • Revenue: $41.414 million, up 5.4% from $39.298 million in 2016. Gross profit was $26.395 million, up 11.4%; gross margin expanded to 63.7% from 60.3%.
  • Operating profit: Operating income rose 17.4% to $19.011 million; operating margin increased to 45.9% from 41.2%. Pretax income was $19.082 million, up 16.2%.
  • Net income and EPS: GAAP net income was $8.505 million and diluted EPS was $2.28, compared with $12.128 million and $3.22 in 2016. Results included a $6.288 million one-time deemed repatriation tax. Excluding the repatriation tax and specified deferred-tax adjustments, management reported non-GAAP net income of $14.562 million and diluted EPS of $3.897, up 21% and 22%, respectively, from comparable adjusted 2016 results.
  • Cash flow: Operating cash flow was $16.908 million, versus $14.528 million in 2016. Capital expenditures were $1.597 million. Cash at year-end was $39.875 million, up from $26.296 million.
  • Liquidity and debt: Working capital was $43.909 million, compared with $31.451 million. UTMD had no debt; total liabilities were $14.623 million, including the repatriation-tax liability. Total assets were $92.745 million and stockholders’ equity was $78.122 million.
  • Shareholder returns: Cash dividends declared for 2017 totaled $1.065 per share; the fourth-quarter dividend was paid in January 2018. No shares were repurchased in 2017.

Changes versus 2016

  • Sales growth was driven principally by shifting Filshie Clip System sales in Canada and France from distributors to direct end-user sales, and by higher U.S. sales to CooperSurgical. OUS sales increased 7% to $21.129 million; domestic sales increased 4% to $20.286 million.
  • Gynecology/electrosurgery/urology revenue increased to $23.175 million from $20.683 million. Blood-pressure-monitoring and accessories revenue declined to $7.586 million from $8.076 million, including the loss of a $516,000 German OEM order.
  • Operating expenses declined 2% to $7.385 million despite new direct-sales activity and the Canadian operation. Management attributed margin gains to direct-sales mix, manufacturing productivity, and product mix.
  • GAAP net income fell because the Tax Act’s one-time repatriation provision more than offset improved operating results. Fourth-quarter 2017 reported a $2.522 million net loss and diluted loss per share of $0.67; the filing attributes the annual earnings distortion to tax items.
  • Cash increased substantially, while current and total liabilities rose, largely from the tax accrual and a $1.005 million fourth-quarter dividend payable at year-end. The UK operation also moved into a company-owned, fitted-out facility.

Outlook, risks and unusual items

  • 2018 outlook: Management expects revenue to be about level with 2017 and targets diluted EPS of $3.80–$3.90. It expects higher operating expenses and does not expect to maintain 2017’s gross margin. The plan excludes acquisitions, repurchases and sales from unannounced products.
  • Management anticipates lower sales to CooperSurgical, continued OUS Filshie Clip growth, double-digit OUS neonatal growth and stronger domestic OEM sales. It also cited a $0.8 million lower annual order from the China blood-pressure-monitoring distributor than in 2017.
  • The U.S. Tax Cuts and Jobs Act generated a provisional $6.288 million transition-tax charge. Management said the estimate could change as further guidance becomes available and expects to pay the net transition tax over eight years.
  • Key risks include medical-device regulation and approval delays, hospital purchasing restrictions and group purchasing organizations, competition and distributor dependence, foreign-exchange movements, product-liability exposure, and retaining key personnel. UTMD self-insures product liability for most products; the Filshie Clip System has third-party coverage.
  • A 2017 Filshie Clip-related complaint remained subject to a stay while insurance coverage obligations were resolved. The company stated it did not believe litigation or threatened litigation would materially affect results. The filing reports effective disclosure controls and internal control over financial reporting; auditors issued unqualified opinions.

Investor facts to verify

  • Reconcile the $6.288 million repatriation-tax provision, its provisional status, payment schedule and potential state-tax component with the eventual filed tax returns.
  • Assess whether 2018 revenue and EPS guidance remains achievable, particularly given the lower China distributor order, anticipated lower CooperSurgical sales and higher costs.
  • Monitor Filshie Clip concentration and channel performance: the system represented 36% of 2017 U.S.-dollar-denominated sales, and CooperSurgical accounted for 25% of global Filshie Clip System sales.
  • Review foreign-currency exposure, product-liability developments, and the effect of the new UK facility and direct-sales strategy on margins and cash generation.
  • Note the quarterly disclosure: fourth-quarter sales were $10.201 million, but reported net loss was $2.522 million. Verify the quarter’s tax and earnings presentation against the detailed financial statements.