Utah Medical Products, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone fourth-quarter filing; amounts below are in thousands of dollars except per-share data.
Business context
UTMD develops, manufactures and markets specialized medical devices, primarily disposable products used in obstetrics, gynecology/electrosurgery/urology, neonatal intensive care and blood-pressure monitoring. Its products are sold in the U.S. and internationally. International sales were 53% of 2013 revenue. Products originating from four acquisitions, including Femcare, accounted for 63% of sales; Filshie Clip System sales alone represented 35%.
Financial performance and liquidity
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net sales | $40,493 | $41,552 | (2.5%) |
| Gross profit / margin | $24,273 / 59.9% | $25,307 / 60.9% | Profit (4.1%) |
| Operating income / margin | $14,828 / 36.6% | $15,196 / 36.6% | (2.4%) |
| Income before tax | $14,476 | $14,537 | (0.4%) |
| Net income | $11,406 | $10,169 | 12.2% |
| Diluted EPS | $3.02 | $2.74 | 10.3% |
| Operating cash flow | $12,309 | $13,563 | (9.2%) |
Fourth quarter: Sales were $10,085 versus $9,832 in Q4 2012; gross profit was $5,994 versus $6,021; net income was $3,468 versus $2,259; diluted EPS was $0.92 versus $0.61.
Cash and short-term investments were $14,451 at year-end, up from $8,913. Working capital was $16,675, and the current ratio rose to 3.2 from 2.4. Total liabilities declined 22%; total debt ratio fell to 25% from 34%. Notes payable totaled $9,117, including $4,052 current and $5,065 long-term. UTMD repaid $3,908 of debt during 2013. Dividends paid were $3,675, or $0.985 per share.
Material changes and unusual items
- Net income included a $976 reduction in the tax provision from the remeasurement of the Femcare deferred tax liability following UK tax-rate reductions. Excluding this item, management reported 2013 net income of $10,430 and diluted EPS of $2.76; these are non-GAAP measures.
- Sales declined partly because of currency translation and the reversal of known 2012 distributor overstocking. U.S. domestic neonatal sales fell $832 amid competition, lower specialty-device use and tighter GPO contract compliance. Domestic OEM sales rose 11%.
- Gross margin declined one percentage point, attributed to product mix and higher employee health-plan costs. Lower G&A expenses helped preserve the operating margin.
- The company reported no material litigation and no material changes in internal control over financial reporting. Independent auditors issued unqualified opinions; portions of Femcare’s financial statements and controls were audited by another firm.
Outlook, commentary and risks
Management expected 2014 sales, gross profit and operating income to be approximately level with 2013; targeted an operating margin of about 37%, pretax income of $14.6–$14.9 million, and diluted EPS of $2.78–$2.83. These expectations exclude the 2013 deferred-tax benefit when comparing projected net income and EPS. Management anticipated continued debt repayment, dividends and potential share repurchases, while remaining alert to acquisition opportunities.
Key uncertainties include weaker U.S. demand for specialty neonatal and obstetric devices, foreign-exchange movements (particularly AUD and GBP), uncertain forecasts from two major international blood-pressure-monitoring distributors, and competitive and GPO purchasing pressures. Other disclosed risks include medical-device regulation and approval delays, the U.S. medical-device excise tax, distributor dependence, product-liability exposure, and retention of key employees. The company self-insures most product-liability risk; Femcare maintains third-party coverage. No material litigation was pending at year-end.
Most important facts to verify
- Assess underlying earnings excluding the $976 deferred-tax benefit and distinguish this nonrecurring tax adjustment from operating performance.
- Track whether 2014 revenue and EPS targets were achieved, especially given distributor forecast uncertainty and currency sensitivity.
- Monitor U.S. neonatal and obstetric demand, Filshie Clip sales, and the sustainability of international growth and margins.
- Confirm debt repayment, cash generation, dividend commitments and any acquisition or capital-investment plans.
- Review the concentration of revenue in acquired products and major distributors, as well as regulatory, excise-tax and product-liability exposures.