Utah Medical Products, Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars, thousands, except per-share data. UTMD manufactures and markets specialty medical devices, with operations in the U.S., Ireland, the U.K. and Australia.
Financial results
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $10,490 | $10,397 | $20,791 | $20,630 |
| Gross profit | $6,252 | $6,099 | $12,475 | $12,211 |
| Operating income | $4,315 | $3,967 | $8,627 | $7,844 |
| Net income | $3,259 | $2,918 | $6,476 | $5,586 |
| Diluted EPS | $0.86 | $0.77 | $1.72 | $1.48 |
| Gross margin | 59.6% | 58.7% | 60.0% | 59.2% |
| Operating margin | 41.1% | 38.2% | 41.5% | 38.0% |
Q2 sales rose 0.9% and first-half sales 0.8% year over year; management said both periods’ sales would have been about 2% higher at prior-year exchange rates. First-half operating income increased 10.0%, net income 15.9%, and diluted EPS 16.0%. Net income margins were 31.1% in both 2016 periods, versus 28.1% in Q2 2015 and 27.1% in first-half 2015.
- Cash flow: First-half operating cash flow was $7,729, versus $5,733 a year earlier. Capital spending was $99 ($90 for property and equipment; $9 for intangibles). Dividends paid were $976.
- Liquidity: Cash was $29,395 at June 30, up $6,117 from year-end. Current assets were $39,224 and current liabilities $5,184; working capital was $34,040 and the current ratio 7.6.
- Debt and equity: The company had repaid its remaining bank debt in February 2015; no interest expense was recorded in 2016. Total liabilities were $9,972, including deferred tax liabilities. Stockholders’ equity was $71,071.
Material changes and management commentary
- U.S. domestic sales fell 9% in Q2 and 5% in the first half. Lower Filshie Clip System sales to U.S. distributor CooperSurgical were the main cause: down $457 (36%) in Q2 and $716 (26%) in the first half. Domestic OEM sales increased, partly offsetting the decline.
- Outside-U.S. sales increased 11% in Q2 and 7% in the first half, supported by international distributor orders, including higher blood-pressure-monitoring kit shipments. Foreign-exchange movements reduced reported sales growth.
- Margins benefited from manufacturing cost improvements, better fixed-cost absorption, lower operating expenses, and suspension of the U.S. medical-device excise tax for 2016–2017. First-half non-operating results also improved: a $111 foreign-currency remeasurement gain versus a $229 loss in first-half 2015, and no interest expense.
- Goodwill and other intangible assets declined by $4,305 from year-end, mainly from amortization and the weaker pound sterling. Foreign-currency translation also reduced accumulated other comprehensive income.
Outlook, risks and other items
Management said the company was on track to meet or exceed its previously announced 2016 financial projection, but did not provide the projection’s numerical target in this filing. It cautioned that second-half EPS was unlikely to match first-half performance. Q3 sales could be about $800 lower than either Q1 or Q2, reflecting lower scheduled CooperSurgical orders, weaker sterling and normalization of elevated Q2 international kit orders. Management expected improved production planning to help clear a domestic direct-sales backlog and expected OEM sales to continue growing.
Key risks discussed include foreign-exchange volatility, medical-device regulation and approval delays, U.S. healthcare reform, dependence on distributors and major customers, hospital purchasing practices, product liability, and reliance on key employees. UTMD reported no current litigation. It does not separately hedge foreign-currency exposure. Management reported effective disclosure controls and no material internal-control changes during the quarter.
The company expects to adopt the new revenue-recognition standard in 2018 and was assessing its impact. It expected the 2017 adoption of new share-based-payment guidance to have an insignificant effect.
Important facts for investors to verify
- Whether CooperSurgical Filshie Clip orders and U.S. domestic sales stabilize after the reported declines.
- Whether second-half sales and EPS track management’s outlook, including the estimated Q3 sales reduction and the undisclosed annual projection target.
- How foreign-exchange movements, especially sterling, affect reported revenue, operating expenses, intangible assets and equity.
- Whether higher manufacturing capacity and production planning resolve delivery constraints and support expected OEM growth.
- The remaining amortization and carrying value of Femcare-related intangible assets, and any future impact from the revenue-recognition standard.