Utah Medical Products, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. UTMD manufactures and markets specialty medical devices. Financial amounts below are in thousands of U.S. dollars except per-share data.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $10,829 | $10,490 | $21,088 | $20,791 |
| Gross profit | $6,893 | $6,252 | $13,428 | $12,475 |
| Operating income | $5,034 | $4,315 | $9,758 | $8,627 |
| Net income | $3,870 | $3,259 | $7,405 | $6,476 |
| Diluted EPS | $1.037 | $0.863 | $1.985 | $1.716 |
Q2 sales increased 3.2%, operating income 16.7%, net income 18.7% and diluted EPS 20.2% year over year. First-half sales rose 1.4%, operating income 13.1%, net income 14.4% and diluted EPS 15.7%.
Gross margin was 63.7% in both Q2 and the first half, versus 59.6% and 60.0% in the comparable 2016 periods. Operating margin was 46.5% in Q2 and 46.3% for the first half, versus 41.1% and 41.5%. First-half net margin was 35.1%, compared with 31.1%.
Cash flow, liquidity and balance sheet
- First-half operating cash flow was $7,742, approximately unchanged from $7,764 a year earlier. Increased net income was largely offset by a greater cash use from receivables.
- Capital expenditures were $114; dividends paid were $984. Cash increased $7,441 to $33,737. Cash and available-for-sale investments totaled $33,809 at June 30.
- Working capital was $39,395, up from $31,845 at December 31, 2016. Total assets were $85,945 and stockholders’ equity was $77,253.
- Total liabilities were $8,692; management reported a total liabilities-to-assets ratio of 10%. The filing does not disclose interest-bearing borrowings as a separate balance-sheet item; cash interest paid was zero.
Changes and management commentary
Higher gross profit reflected a shift from distributor sales to direct end-user sales of the Filshie Clip System in France and Canada, which carry retail rather than wholesale pricing. Operating expenses declined year over year. U.S. domestic sales increased 11% in Q2 and 4% in the first half, while sales outside the U.S. declined 3% and 1%, respectively.
Foreign exchange reduced reported sales: management estimated that Q2 and first-half sales would each have been about 2% higher at prior-year exchange rates. Constant-currency sales growth was 4.5% for Q2 and 2.9% for the first half. The weaker pound also reduced reported costs. First-half net income benefited from lower tax provisions, including the UK corporate tax rate reduction from 20% to 19% effective April 1, 2017.
Management said first-half results suggested the company could significantly exceed its prior 2017 goals. It projected 2017 diluted EPS above $3.60, adjusted EBITDA growth of more than $2 million, and double-digit growth in net income and EPS. Management also expected faster sales growth in the second half, citing higher anticipated Filshie purchases by U.S. distributor CSI, favorable currency translation, and Bayer’s announced discontinuation of Essure sales in the UK, Netherlands and Finland beginning September 2017. These are forward-looking expectations, not guarantees.
Risks, contingencies and other items
- Currency fluctuations, regulatory and FDA approval delays, healthcare purchasing bureaucracy and GPO practices, product liability, distributor dependence, and the loss of key employees are identified risks. The company does not use separate currency hedging transactions.
- Management cautioned that expected Filshie sales gains following Essure’s discontinuation may not materialize.
- No litigation outcome was expected to be material. No subsequent event requiring recognition or disclosure was reported, and no warranty reserve was recorded at June 30, 2017.
- The adoption of share-based payment accounting guidance had an insignificant impact. Management expected the 2018 revenue-recognition standard to have an insignificant effect; the impact of the new lease standard had not yet been assessed.
Investor facts to verify
- Whether second-half Filshie orders and the anticipated market opportunity after Essure’s withdrawal translate into sales growth.
- Whether the EPS-above-$3.60 and adjusted-EBITDA-growth-above-$2-million outlook is achieved, and how much depends on tax and currency effects.
- Whether improved gross margins from direct sales persist and offset foreign-exchange pressure or changes in distributor demand.
- Receivables grew materially and constrained operating cash flow; monitor collections, working capital and cash conversion.
- Review the full 2016 Form 10-K risk factors and the company’s future disclosures on regulatory exposure, currency risk and adoption of the lease standard.