Utah Medical Products, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017, compared with the corresponding 2016 periods. UTMD manufactures and markets specialty medical devices. Unless otherwise indicated, financial amounts below are in thousands of U.S. dollars.
Financial performance
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Net sales | $10,125 | $9,655 | $31,213 | $30,446 |
| Gross profit | $6,496 | $5,775 | $19,925 | $18,250 |
| Operating income | $4,679 | $3,939 | $14,438 | $12,566 |
| Net income | $3,622 | $2,935 | $11,027 | $9,411 |
| Diluted EPS | $0.97 | $0.78 | $2.95 | $2.49 |
| Gross margin | 64.2% | 59.8% | 63.8% | 59.9% |
| Operating margin | 46.2% | 40.8% | 46.3% | 41.3% |
| Net margin | 35.8% | 30.4% | 35.3% | 30.9% |
Cash flow and liquidity: Nine-month operating cash flow was $12,323, versus $11,143 in 2016. Capital expenditures were $174; dividends paid were $1,969. Cash increased $11,142 during the period to $37,438; cash plus available-for-sale investments totaled $37,516. Working capital was $42,838, up from $31,845 at year-end 2016. Total assets were $90,675 and stockholders’ equity was $81,197. Total liabilities were $9,478; the company reported a 10% total-liabilities-to-assets ratio. No borrowings are listed on the balance sheet.
Changes and principal drivers
- Sales grew 4.9% in Q3 and 2.5% for the first nine months. Constant-currency sales growth was 4.1% and 3.3%, respectively; foreign exchange increased Q3 reported sales by $71 but reduced nine-month sales by $235.
- Margin expansion was primarily attributed to shifting Filshie Clip System sales in France and Canada from distributors to direct end-user sales. Gross profit rose faster than revenue, while nine-month operating expenses fell $196.
- Nine-month operating income increased 14.9% and net income increased 17.2%. The effective tax provision rate was 24.0% for 9M 2017 versus 26.3% in 2016; management cited the UK tax-rate reduction and tax effects of translating subsidiary cash balances.
- Q3 U.S. domestic sales were approximately flat; overseas sales increased 10%. Nine-month domestic sales rose 3% and overseas sales rose 2% in reported dollars. Growth in gynecology/electrosurgery/urology products was partly offset by lower blood-pressure-monitoring sales.
- Cash generation and equity strengthened. The company paid dividends but made no open-market share repurchases during the first nine months.
Outlook, risks, and other matters
- Management said 2017 results were likely to significantly exceed the year’s previously announced objectives and projected approximately $21.5 million in adjusted consolidated EBITDA for 2017, compared with trailing-twelve-month adjusted EBITDA of $21.0 million.
- Management expected Q4 sales growth to exceed Q3’s year-over-year rate, citing a higher-than-usual opening backlog, a committed CSI Filshie order 47% above Q4 2016, expected currency effects, and Bayer’s announced cessation of OUS Essure sales. The filing cautions that incremental Filshie sales from Essure’s withdrawal may not materialize.
- Some late Q3 orders shipped in early October following a weaker hospital ordering pattern, hurricane impacts, one fewer shipping day, and a sterilizer delivery glitch. Management reported a larger-than-normal Q4 opening backlog.
- Planned UK facility fit-out capital spending was approximately $1.5 million in Q4. Management said existing cash, operating income, and working-capital management should fund operations and plans.
- Key risks include medical-device regulation and approval delays, U.S. healthcare policy and potential medical-device taxes, hospital purchasing constraints and group purchasing organizations, product liability, distributor dependence, foreign-exchange fluctuations, and retention of key employees. No litigation expected to be material was reported; management stated disclosure controls were effective.
- The company adopted share-based-payment accounting guidance in January 2017 with an immaterial impact. It expected the 2018 revenue standard to have an insignificant impact; it had not yet assessed the impact of the new lease standard.
Important facts for investors to verify
- Whether Q4 orders and the reported backlog converted to shipments and sales, including the expected CSI order and any demand shift following Essure’s withdrawal.
- Whether direct-sales expansion in France and Canada continues to support gross margins, and how the Ireland-to-UK/Canada distribution changes affect subsidiary results.
- Actual foreign-exchange effects, particularly given the material share of sales invoiced in foreign currencies and the absence of separate hedging transactions.
- Completion, cost, and timing of the planned UK facility fit-out, alongside working-capital movements and collection of increased trade receivables.
- Full-year results against management’s forecast and the assumptions underlying the approximately $21.5 million adjusted EBITDA estimate.