UTAH MEDICAL PRODUCTS INC annual report, FY2018

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Utah Medical Products, Inc. — FY2018 Form 10-K

Reporting period: Fiscal year ended December 31, 2018. Unless otherwise noted, amounts are in thousands of U.S. dollars; per-share amounts are in dollars. UTMD develops, manufactures and sells specialized medical devices, primarily for hospital labor and delivery, neonatal care, gynecology and blood-pressure monitoring. About half of 2018 sales were outside the U.S.

Financial results and liquidity

  • Revenue: $41,998, up 1.4% from $41,414. U.S. sales rose 4.5% to $21,192; OUS sales declined 1.5% to $20,806.
  • Profitability: Gross profit was $26,306, down 0.3%; gross margin declined to 62.6% from 63.7%. Operating income fell 1.6% to $18,697, and operating margin was 44.5% versus 45.9%. Pretax income increased 2.0% to $19,458.
  • Net income and EPS: GAAP net income was $18,555 ($4.95 diluted EPS), versus $8,505 ($2.28) in 2017. The comparison is substantially affected by one-time tax items. Management’s non-GAAP figures, excluding specified TCJA-related tax items, were net income of $15,504 and EPS of $4.136, increases of 6.5% and 6.1%, respectively.
  • Fourth quarter: Sales were $9,756 versus $10,201 in Q4 2017; gross profit was $6,106 versus $6,470. Net income was $3,393 ($0.91 diluted EPS), compared with a $2,522 net loss (negative $0.67 EPS) in Q4 2017.
  • Cash flow: Operating cash flow was $16,834, compared with $16,908 in 2017. Capital expenditures were $402. Cash increased to $51,112 from $39,875 at year-end 2017.
  • Liquidity and debt: Working capital was $55,643, up from $43,909. Total assets were $99,768; total liabilities were $10,776 and the company reported no debt. The total-liabilities-to-assets ratio was 11%, down from 16%.
  • Capital returns: Cash dividends paid were $4,026; the company repurchased 15,000 shares for $1,205. The filing reports 2018 dividends of $1.085 per share in its outlook discussion; selected financial data lists $1.085, while the dividend schedule’s calendar-year payment totals reflect timing differences.

Changes and notable items

  • Domestic OEM sales rose 31% to approximately $4.1 million, while sales to CooperSurgical (CSI), then the exclusive U.S. distributor of FILSHIE Clips, declined 12.3% to approximately $3.3 million. FILSHIE Clips, applicators and accessories represented 35% of total U.S.-dollar-denominated sales in 2018.
  • Higher material and labor costs and a shift toward lower-margin OEM sales contributed to the lower gross margin. Sales and marketing expense increased 11%; research and development expense was $454, or 1.1% of sales.
  • GAAP net income includes a $3,230 favorable 2018 adjustment to the repatriation-tax estimate, recorded in Q3, and a $179 estimated GILTI tax provision. In 2017, the company recorded a $6,288 estimated repatriation-tax charge and a $230 favorable deferred-tax adjustment. These items explain much of the year-over-year GAAP net-income and EPS swing; management’s non-GAAP comparisons are supplemental, not a substitute for GAAP.
  • Net non-operating income was $761 versus $71, including a $450 gain on an asset sale and higher interest income. The company adopted the new revenue-recognition standard in 2018 without a material financial-statement impact.

Outlook, risks and contingencies

  • Management projected 2019 revenue growth of 9–10%, driven by direct U.S. FILSHIE distribution and continued OEM growth, while noting foreign-exchange headwinds and economic uncertainty. It projected operating income to decline 4–5%, pretax income to decline 7–8%, and EPS of $3.70–$3.80.
  • On February 1, 2019, UTMD completed its $21 million purchase of CSI’s remaining 4.75-year exclusive U.S. FILSHIE distribution rights and acquired about $2 million of resaleable inventory. The rights are expected to generate $4,053 of amortization expense in 2019 and about $4,421 annually in 2020–2022. Management indicated that this amortization would exceed the projected increase in gross profit.
  • Key risks cited include foreign-exchange exposure, regulatory costs and delays, hospital purchasing restrictions and GPO influence, distributor dependence, competition and product-liability claims. UTMD self-insures product-liability risk. Management said no pending or threatened litigation was expected to have a material financial effect; one FILSHIE-related claim remained in discovery, with no evidence of defective clips reported by the company.
  • Management expected 2019 capital spending for ongoing operations to be below depreciation. It anticipated no material BREXIT impact but cautioned that a stronger U.S. dollar could reduce reported foreign sales.

Important facts for investors to verify

  • Reconcile the GAAP and non-GAAP earnings comparison, especially the timing and final amounts of repatriation and GILTI taxes.
  • Track post-acquisition U.S. FILSHIE sales, margins, inventory consumption and the effect of the $4,053 annualized 2019 amortization burden.
  • Test the assumptions underlying 2019 revenue, operating-income and EPS guidance, including OEM growth, currency rates and FILSHIE demand.
  • Monitor gross-margin trends, receivables and inventory turns; 2018 gross margin and inventory turns declined, while receivable days increased to 36 from 32.
  • Review foreign-exchange exposure, product-liability developments and the concentration of sales in FILSHIE and major distributors or OEM customers.