Utah Medical Products, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. Unless otherwise noted, dollar amounts are in thousands; per-share amounts are in dollars. The filing also reports quarterly results, including fourth-quarter 2015.
Business context
UTMD develops, manufactures and sells specialized medical devices, primarily disposable products used in hospitals and clinical settings. Its principal areas include gynecology/electrosurgery/urology, neonatal care, obstetrics and blood-pressure monitoring. International sales represented 49% of 2015 revenue. Products from four acquisitions accounted for 63% of sales.
Financial performance and liquidity
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $40,157 | $41,278 | -2.7% |
| Gross profit / margin | $24,185 / 60.2% | $24,983 / 60.5% | -3.2% gross profit |
| Operating income / margin | $15,651 / 39.0% | $16,202 / 39.3% | -3.4% |
| Net income | $11,843 | $11,378 | +4.1% |
| Diluted EPS | $3.14 | $3.02 | +4.1% |
| Operating cash flow | $13,801 | $15,387 | -10.3% |
Net income included a $351 reduction in tax expense from a UK tax-rate change affecting the deferred tax liability. Excluding that item, management reported 2015 net income of $11,493 and diluted EPS of $3.047, each up approximately 1% from 2014. Net margin was 29.5% reported, or 28.6% excluding the tax adjustment.
At year-end, cash and investments were $23,333, working capital was $28,807, and the current ratio was 8.1, versus 3.3 in 2014. Total liabilities were $9,527, down 42%; bank loans were fully repaid in February 2015, leaving no debt at year-end. Total assets were $79,175 and shareholders’ equity was $69,648. Cash dividends paid were $3,846; the annual dividend per share was $1.025. The company repurchased 13,000 shares for $683.
Fourth-quarter 2015 sales were $9,582, net income $3,211 and diluted EPS $0.85, compared with $10,243, $3,000 and $0.80, respectively, in fourth-quarter 2014.
Changes and drivers
- Currency translation was the principal reported revenue headwind: foreign-currency sales were reduced by $1,635, or 12%, versus constant currency. On a constant-currency basis, consolidated sales increased 1.2%.
- Domestic sales rose 5% to $20,364; international sales fell 9% to $19,793 in reported dollars. Domestic growth included higher Filshie Clip and OEM sales.
- Gross margin remained strong, supported by manufacturing overhead absorption, more in-house production, and lower health-plan and transportation costs. Operating expenses declined to $8,534 from $8,781.
- Operating cash flow was lower than 2014, while cash increased to $23,278. The company repaid $4,777 of notes payable, paid $3,846 in dividends and spent $683 on share repurchases.
Outlook, risks and unusual items
Management’s 2016 plan calls for flat to slightly higher sales, gross profit approximately equal to 2015, operating income about 2% higher, and net income and EPS 2–3% higher. It projected gross margin of 59%–59.5%, pretax income of $15.9–$16.1 million, and diluted EPS of $3.10–$3.14. These are management targets, not guarantees. The plan assumes continuing foreign-exchange pressure; management estimated a further 3–4% average currency impact on foreign-currency sales and about a 1% effect on consolidated sales.
Key disclosed risks include currency fluctuations, regulatory costs and approval delays, hospital purchasing restrictions and group purchasing organizations, competitive pressure, reliance on distributors, product-liability exposure, and the ability to retain key employees. The U.S. medical device excise tax was suspended for 2016–2017. UTMD reported no current material litigation or threatened litigation. Product-liability risk is self-insured in the U.S. and Ireland, while Femcare maintains third-party coverage. Management reported effective disclosure controls and internal control over financial reporting; the auditors issued unqualified opinions.
New product and operational items include FDA clearance in 2015 for the CVX-RIPE cervical-ripening catheter and planned 2016 introduction of ENFit-compliant enteral products. Management also noted potential uses for excess cash, including investment, acquisitions, dividends and repurchases.
Important facts for investors to verify
- How much of future sales and earnings growth can offset the continuing foreign-exchange headwind, particularly given international exposure?
- Whether reported 2015 earnings growth is sustainable: the $351 UK deferred-tax adjustment raised GAAP net income and EPS; adjusted growth was about 1%.
- Progress toward 2016 targets for sales, gross margin, operating income, pretax income and EPS, including the assumptions behind them.
- Whether Filshie Clip and other acquired-product sales remain resilient, and whether customer, distributor and product concentration creates material exposure.
- Whether liquidity and cash generation are maintained while funding dividends, repurchases, product development and any acquisition; also monitor the $930 of operating lease obligations and $2,610 of purchase obligations.
- Regulatory developments, ENFit product conversion and new-product commercialization, as well as any product-liability claims or changes in the deferred-tax liability and intangible-asset carrying values.