Utah Medical Products, Inc. — Q2 2013 Form 10-Q
Business and period: UTMD manufactures and markets specialty medical devices. This report covers the quarter and six months ended June 30, 2013; financial amounts below are in thousands of dollars except per-share amounts. The statements are unaudited.
Financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Net sales | $10,002 | $10,025 | $20,376 | $21,230 |
| Gross profit / margin | $6,048 / 60.5% | $6,071 / 60.6% | $12,329 / 60.5% | $12,809 / 60.3% |
| Operating income / margin | $3,715 / 37.1% | $3,552 / 35.4% | $7,605 / 37.3% | $7,667 / 36.1% |
| Income before taxes | $3,627 | $3,430 | $7,414 | $7,367 |
| Net income / margin | $2,632 / 26.3% | $2,401 / 24.0% | $5,368 / 26.3% | $5,190 / 24.4% |
| Diluted EPS | $0.698 | $0.647 | $1.426 | $1.405 |
Cash flow and balance sheet: First-half operating cash flow was $5,042, versus $6,537 a year earlier. Investing activities used $116; financing activities used $2,246, including $1,935 of debt repayments and $911 of dividends. Cash increased $2,514 to $11,385. At June 30, current assets were $22,289 and current liabilities $8,607, producing working capital of $13,682. Total assets were $76,429 and total liabilities $23,788. Notes payable totaled $10,543 ($3,834 current and $6,709 long term); the reported total-debt ratio was 31%, down from 34% at year-end 2012.
Other metrics: Operating expenses were $2,333 in Q2 and $4,725 for the first half, down from $2,519 and $5,143, respectively. The income tax provision rate declined to 27.4% in Q2 and 27.6% for the first half, from 30.0% and 29.6%. Accumulated other comprehensive loss was $3,343 at June 30, including the effect of foreign currency translation.
Changes and management explanation
- Q2 sales were essentially flat year over year; first-half sales fell 4.0%. Management attributed the first-half comparison in part to distributor overstocking in Q1 2012 and to a stronger U.S. dollar. It estimated that exchange rates reduced 2013 sales by about $44 in Q2 and $103 for the first half.
- Despite lower first-half sales, gross margin remained broadly stable and operating income margin improved. Lower operating expenses contributed; these were reduced by $186 in Q2 and $418 for the first half, despite medical device excise tax expense of $71 and $146, respectively.
- Net income rose 9.6% in Q2 and 3.4% in the first half. Management cited lower interest expense, improved operating performance, and lower consolidated tax rates. Q2 diluted EPS rose 7.9%; first-half diluted EPS rose 1.5%.
- First-half operating cash flow declined mainly because of a larger increase in trade receivables and a less favorable accounts-payable movement. Cash generation supported debt reduction and dividends. Total debt declined from year-end, and management said scheduled repayments should retire the loans by April 2016.
- Intangible assets and goodwill declined by $3,988 from year-end, principally because of foreign currency translation and amortization. The stronger dollar also reduced the reported value of foreign subsidiary assets.
Outlook, risks, and notable matters
Management said it remained on track with its 2013 objectives: integrate multinational operations, develop additional gynecology products, maintain strong operating performance, repay debt, pay dividends, consider share repurchases when the stock appears undervalued, and pursue potentially accretive acquisitions. The filing gives no numerical earnings or revenue guidance. Planned 2013 capital expenditures were expected to be below depreciation.
The company reported compliance with all loan covenants at June 30, 2013. It identified foreign-exchange exposure and risks including the medical device excise tax and broader healthcare-reform requirements, FDA regulation and premarket approval delays, hospital purchasing and group purchasing organization pressures, product liability, distributor dependence, acquisition debt, and reliance on key employees. Management reported no litigation it believed could materially affect financial results, no material subsequent events requiring disclosure, and no material changes in internal controls. No shares were repurchased in Q2.
Most important facts for investors to verify
- Whether sales trends improve, especially given first-half weakness, distributor inventory comparisons, currency effects, and varying product and geographic performance.
- Whether operating-margin gains persist after the medical device excise tax and other operating costs.
- Whether receivables convert to cash and operating cash flow recovers after the first-half working-capital use.
- Debt repayment progress, covenant compliance, and the scheduled repayment timeline through April 2016.
- Foreign-currency movements, particularly their effects on reported sales, foreign assets, and accumulated other comprehensive loss.
- Regulatory, healthcare-reform, product-liability, distributor, and acquisition risks described in the filing and the company’s 2012 Form 10-K.