Utah Medical Products, Inc. — Q2 2011 Form 10-Q
Business context and period. This report covers the quarter and six months ended June 30, 2011. UTMD manufactures and markets specialty medical devices. Results include Femcare Holdings Ltd. from its March 18, 2011 acquisition; Q2 was the first full quarter consolidating Femcare. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2011 | Q2 2010 | First half 2011 | First half 2010 |
|---|---|---|---|---|
| Net sales | $10.377 | $6.276 | $17.170 | $12.712 |
| Gross profit | $6.260 | $3.267 | $9.969 | $6.590 |
| Operating income | $3.233 | $2.195 | $5.390 | $4.484 |
| Net income | $1.982 | $1.467 | $3.319 | $2.994 |
| Diluted EPS | $0.54 | $0.40 | $0.91 | $0.82 |
| Gross margin | 60.3% | 52.1% | 58.1% | 51.8% |
| Operating margin | 31.2% | 35.0% | 31.4% | 35.3% |
| Net margin | 19.1% | 23.4% | 19.3% | 23.6% |
- Sales rose 65.3% in Q2 and 35.1% in the first half, principally from Femcare, which contributed $4.187 million in Q2 and $4.679 million year to date. Excluding Femcare, first-half sales were down 1.7% year over year.
- Femcare represented 40% of Q2 consolidated sales and 27% of first-half sales. Its higher-margin product mix lifted gross margin; excluding Femcare, UTMD’s reported gross margin was about 53.2% in both periods.
- Operating and net margins declined as acquisition-related expenses, intangible amortization, Femcare operating costs, and acquisition debt interest offset gross-margin improvement. Intangible amortization was $0.767 million in the first half.
- Operating cash flow was $4.447 million versus $3.669 million in the first half of 2010. Investing cash use was $26.594 million, including the $41.084 million net cash acquisition outlay, partly offset by investment liquidation. Financing provided $24.555 million, including $26.934 million of note proceeds. Ending cash was $6.267 million.
Financial position and material changes
- Total assets increased to $80.767 million from $41.238 million at year-end 2010, largely reflecting Femcare goodwill and intangible assets. Goodwill was $16.218 million and net intangible assets were $37.956 million.
- Notes payable totaled approximately $26.163 million at June 30, including $5.573 million current and $20.590 million long term. The acquisition was financed with U.S. and U.K. loans; repayment is scheduled by April 2016. Debt agreements include leverage, interest-coverage, and tangible-net-worth covenants and collateral requirements.
- Current assets were $17.064 million and current liabilities $9.964 million; working capital was $7.100 million and the current ratio 1.7, down from 13.2 at year-end 2010. Management stated working capital was sufficient for normal operating needs.
- Total liabilities were $40.770 million and stockholders’ equity $39.997 million. The debt ratio rose to 50% from 8% at year-end 2010. Cash and investments fell by $12.186 million from year-end, primarily due to acquisition funding.
- Dividends paid in the first half were $0.851 million. No shares were repurchased in Q2 or the first half.
Outlook, commentary, and risks
- Management projected 2011 diluted EPS of $1.95–$2.00 and expected sales to exceed 2010 because of Femcare. The prior objective of approximately flat 2011 sales excluding Femcare remained achievable. Management anticipated a combined operating margin of about 30%, including intangible amortization of roughly 6%–7% of sales.
- Management expected to use operating cash flow to repay acquisition debt within five years. Planned 2011 capital expenditures were expected to be below 2010 levels. Management said performance after six months was consistent with its stated 2011 objectives.
- The Femcare purchase price was approximately $41 million and subject to adjustment; $3.2 million was placed in a two-year escrow. Purchase-price allocation remained provisional, including valuation of acquired assets and goodwill. Subsequent valuation work could change the allocation or purchase price.
- Key disclosed risks include acquisition debt and the possibility that weaker sales or margins could impair debt service; medical-device regulation and healthcare reform; hospital purchasing constraints and GPO costs; product-liability exposure; foreign-exchange movements; reliance on overseas distributors; and loss of key personnel. UTMD did not hedge currency exposure separately.
- The company reported no litigation it believed would materially affect results, no material subsequent events, and effective disclosure controls as of June 30, 2011.
Important facts for investors to verify
- Whether Femcare delivers the anticipated accretion and integration benefits, and how its sales and margins develop relative to management’s projections.
- Final purchase-price allocation, acquired intangible-asset values and useful lives, escrow claims, and resulting amortization and deferred-tax effects.
- Debt amortization, interest-rate and currency exposure, and ongoing compliance with loan covenants.
- Underlying legacy-business demand: excluding Femcare, first-half sales declined, including lower domestic direct sales and neonatal product sales.
- Whether the $1.95–$2.00 EPS outlook and approximately 30% operating-margin expectation are achieved; these are forward-looking estimates, not guarantees.