Utah Medical Products, Inc. — Q3 2016 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in thousands of U.S. dollars except per-share data. UTMD manufactures and markets specialty medical devices.
Financial results
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $9,655 | $9,945 | $30,446 | $30,575 |
| Gross profit | $5,775 | $6,079 | $18,250 | $18,290 |
| Gross margin | 59.8% | 61.1% | 59.9% | 59.8% |
| Operating income | $3,939 | $4,000 | $12,566 | $11,845 |
| Operating margin | 40.8% | 40.2% | 41.3% | 38.7% |
| Net income | $2,935 | $3,047 | $9,411 | $8,633 |
| Diluted EPS | $0.78 | $0.81 | $2.49 | $2.29 |
For the nine months, operating income rose 6.1%, net income 9.0%, and diluted EPS 8.9%, despite nearly flat reported sales. Q3 net income declined 3.7%. The 9M effective tax rate was approximately 26.3%, similar to 2015.
Cash, liquidity, and debt
Operating cash flow was $11,106 for 9M 2016, versus $9,895 a year earlier. Capital expenditures were $246; dividends paid were $1,954. Cash increased $8,278 from year-end 2015 to $31,556. Working capital was $36,375 and the current ratio was 7.6, compared with 8.1 at year-end. UTMD had no bank debt; it repaid its remaining notes in February 2015. Total liabilities were $10,144, or 12% of assets. Stockholders’ equity was $72,672.
Material changes and management commentary
- Lower Q3 sales primarily reflected a $398 (50%) decline in Filshie Clip System sales to U.S. distributor Cooper Surgical. Those sales were down $1,114 (31%) year to date. Excluding Cooper Surgical, domestic sales increased 8% in Q3 and 4% year to date.
- Foreign exchange reduced reported sales by an estimated $173 in Q3 and $405 year to date. Management attributed the main Q3 currency pressure to the weaker British pound following the Brexit referendum. At constant currency, sales were down 1% in Q3 and up 1% year to date.
- Year-to-date operating expenses declined, reflecting favorable currency translation, the suspension of the U.S. Medical Device Excise Tax for 2016–2017, and operating-resource consolidation. Lower expenses supported improved operating margins. Q3 gross margin also reflected product mix, lower sales, and start-up molding costs.
- Management said the company remained on track with its previously stated 2016 objectives. Plans included integrating multinational operations, developing products, paying dividends, considering repurchases when shares appear undervalued, and evaluating accretive acquisitions. The filing does not provide numerical full-year earnings or sales guidance.
- Management planned to complete purchases in Q4 of facilities in Romsey, England, and Mississauga, Canada; the Canada facility was intended to support direct distribution beginning in 2017. Capital expenditures for 2016 were expected to exceed 2015’s full-year level.
Outlook, risks, and unusual items
Key disclosed risks include foreign-exchange movements, medical-device regulation and approval delays, healthcare reform and possible future excise taxes, group purchasing organizations, product liability, distributor dependence, competition, and retention of key employees. UTMD does not use separate currency hedges. The filing reports no current litigation and no material change in internal controls; management judged disclosure controls effective.
Q3 2015 included $74 of Medical Device Excise Tax expense, and 9M 2015 included $212; the tax was suspended for 2016 and 2017. The prior-year comparison also included $65 of interest expense related to debt repaid in February 2015. TTM EPS of $3.35 included a one-time $0.09 benefit from a UK tax-rate-related deferred-tax adjustment recorded in Q4 2015. Intangible assets, including goodwill, were 41% of total assets at September 30, down from 49% at year-end 2015, reflecting amortization and currency translation.
Most important facts for investors to verify
- Whether the decline in Cooper Surgical Filshie Clip sales continues and how it affects domestic revenue and margins.
- Whether currency movements—especially the British pound—continue to pressure reported sales, profits, and asset values.
- Whether operating-margin gains are sustainable after the excise-tax suspension and favorable currency effects.
- The costs, timing, and expected returns of the planned UK and Canadian facility purchases and Canadian direct-distribution initiative.
- Future cash deployment among dividends, capital investment, repurchases, and potential acquisitions; management gave no quantified full-year guidance.