Business context and reporting period
Utah Medical Products, Inc. (UTMD) manufactures and markets specialty medical devices. This Form 10-Q covers the three months ended March 31, 2013; financial amounts below are in thousands of dollars except per-share figures. The unaudited statements include normal recurring adjustments.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $10,374 | $11,206 | (7.4%) |
| Gross profit / margin | $6,281 / 60.5% | $6,738 / 60.1% | Profit (6.8%) |
| Operating income / margin | $3,889 / 37.5% | $4,115 / 36.7% | Income (5.5%) |
| Income before tax | $3,787 | $3,937 | (3.8%) |
| Net income / margin | $2,735 / 26.4% | $2,789 / 24.9% | (1.9%) |
| Diluted earnings per share | $0.73 | $0.76 | (4.1%) |
| Operating cash flow | $2,719 | $3,434 | (20.8%) |
Cash increased to $10,870 from $8,871 at year-end 2012. Working capital was $12,573, versus $10,712. Capital expenditures were $52. UTMD repaid $969 of notes payable and reported total notes payable of $11,494 at quarter-end ($3,831 current and $7,663 long-term). Debt covenants were met; the loans are scheduled to be repaid by April 2016. Total liabilities were $25,646 and the reported total debt ratio was 34%.
Comprehensive income was $222, reflecting a $2,516 foreign-currency translation loss. Accumulated other comprehensive loss increased to $3,365. The company attributed lower translated foreign subsidiary asset values and intangible assets partly to a stronger U.S. dollar.
Material changes versus comparable periods
Sales and earnings were below Q1 2012, when some major OEM and international distributor customers made unusually large purchases. Management said Q1 2013 sales were nearly level with the 2012 quarterly average; operating income was 2.4% higher and net income 7.6% higher than that average. Revenue comparisons were also affected by distributor ordering patterns and currency movements.
Domestic sales including Femcare sales to Cooper Surgical declined 11%, with Cooper Surgical sales down $656, or 37%. International sales declined 4%; approximately one-quarter of that decrease was attributed to currency translation. Ireland subsidiary shipments increased 6% in U.S. dollars, while Femcare UK and Australia shipments declined 20% and 16%, respectively, in U.S. dollars.
Margins improved despite lower sales: gross margin rose to 60.5% from 60.1%, operating margin to 37.5% from 36.7%, and net margin to 26.4% from 24.9%. Management cited product mix, lower operating expenses, reduced interest expense and a lower effective tax rate. Operating expenses fell to $2,392 from $2,623, despite $75 of medical device excise tax (MDET) expense. Net interest and other expense decreased to $102 from $178, mainly due to lower interest costs.
Operating cash flow decreased, with management citing less cash generated by accrued expenses and increased inventory, partly offset by a smaller cash use from receivables. Receivables rose $1,022 during the quarter. Accrued expenses increased $1,229, including a $911 dividend accrued but payable after quarter-end and estimated income taxes due in April.
Outlook, commentary, risks and unusual items
Management said UTMD remained on track with its 2013 objectives: integrate multinational operations, develop additional gynecology products, maintain operating performance, use cash generation to reduce debt and fund dividends and potentially repurchase undervalued shares, and consider accretive acquisitions. No quantified earnings or revenue guidance was provided. Planned 2013 capital expenditures were expected to be below depreciation.
The MDET, a 2.3% tax on domestic medical-device sales, added $75 of Q1 expense; management estimated operating margin would have been 38.2% without it. Management also noted that the U.K. corporate tax rate fell from 24% to 23% effective April 1, 2013. Foreign currency exposure affects operations and reported results; UTMD said it does not use separate hedging transactions.
Key disclosed risks include healthcare reform and the device excise tax, regulatory requirements and approval delays, product-liability claims, distributor-dependent and potentially uneven sales, hospital purchasing practices and group purchasing organizations, debt-related risk, and reliance on key employees. UTMD reported no litigation believed likely to materially affect financial results, no material warranty reserve, and no subsequent events requiring disclosure. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer order timing, particularly Cooper Surgical and distributor purchases, continues to affect sales comparability.
- Whether improved margins and cost control can be sustained while absorbing the MDET and other regulatory or administrative costs.
- Cash conversion and working-capital trends, including receivables, accrued expenses and the timing of dividend and tax payments.
- Debt repayment progress, covenant compliance and the scheduled repayment horizon through April 2016.
- Foreign-exchange effects on subsidiary results and reported asset values, and execution of management’s 2013 plans; the filing provides no quantified forecast.
- The status of the employee stock-option plan, for which shareholder approval was stated to be required in May 2013.