Utah Medical Products, Inc. (UTMD) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Amounts are in thousands of U.S. dollars, except per-share data. UTMD manufactures and markets specialty medical devices.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net sales | $12,505 | $12,955 | $37,891 | $38,707 |
| Gross profit | $7,359 | $8,186 | $22,940 | $23,869 |
| Operating income | $3,969 | $5,141 | $12,833 | $14,720 |
| Income before tax | $4,781 | $5,339 | $15,072 | $15,068 |
| Net income | $3,935 | $4,280 | $12,349 | $11,918 |
| Diluted EPS | $1.08 | $1.18 | $3.39 | $3.26 |
| Gross margin | 58.8% | 63.2% | 60.5% | 61.7% |
| Operating margin | 31.7% | 39.7% | 33.9% | 38.0% |
- Revenue and earnings: Q3 sales fell 3.5%, operating income fell 22.8%, and net income fell 8.1% year over year. For 9M, sales declined 2.1% and operating income declined 12.8%, while net income increased 3.6% and diluted EPS increased 4.0%.
- Cash flow: 9M operating cash flow was $16,949, versus $15,467 in 2022. Capital spending was $549; dividends paid were $3,211. Cash and investments rose to $88,209 from $75,052 at year-end 2022.
- Liquidity and debt: Current assets were $101,847 and current liabilities $4,177, for working capital of $97,670. The company reported no borrowings and a total debt ratio below 6%; liabilities totaled $7,541. The filing identifies a remaining $1,675 repatriation-tax liability.
- Other metrics: Total assets were $131,243 and stockholders’ equity $123,702 at September 30. The quarterly dividend was $0.295 per share. No shares were repurchased in 9M 2023.
Material changes and management explanation
- Management attributed the sales decline primarily to lower biopharmaceutical OEM sales: down $1,217 in Q3 and $1,847 in 9M year over year. Domestic sales declined, while outside-U.S. sales grew; 9M domestic sales were down 12.1% and outside-U.S. sales up 15.0%.
- Management cited continued input-cost inflation, higher manufacturing overhead with less absorption on lower sales, and an unfavorable Q3 mix from increased lower-priced foreign distributor sales as causes of weaker gross margin. Customer price increases had not kept pace with cost increases.
- Litigation costs included in U.S. G&A were about 2.8% of sales in both Q3 and 9M 2023, versus 1.4% and 1.1%, respectively, in the comparable 2022 periods. Management said higher litigation expense further reduced operating margins.
- Net non-operating income rose to $812 in Q3 and $2,239 in 9M, largely reflecting interest earned on cash balances: $743 in Q3 and $2,038 in 9M, compared with $152 and $211 in 2022. This helped keep 9M pretax income essentially flat and lift net income.
- Intangible-asset amortization remained significant: $4,800 for 9M. Management said amortization of the CooperSurgical-related asset would finish in Q4 2023; Femcare acquisition amortization was expected to continue for about another 2.5 years.
Outlook, risks, and contingencies
- Based on order backlog, management expected 2023 worldwide biopharmaceutical OEM sales to its largest customer to be about $3 million below 2022, or approximately 17% of 2023 sales versus 22% in 2022. Management estimated a net full-year consolidated sales decline of about $2 million. These are forward-looking estimates, not guarantees.
- Management cited potential unresolved raw-material constraints and third-party sterilization-capacity limits. It also noted continuing supply-chain disruption affecting direct device sales.
- UTMD is a party to litigation related to the safety of the Filshie Clip System; the filing states the system remains FDA-approved under a PMA as safe and effective. Litigation expenses increased in 2023; the filing text does not provide a clear total amount of those expenses or a quantified potential liability.
- Other disclosed risks include medical-device regulation and approval delays, product-liability exposure, healthcare purchasing restrictions, reliance on distributors, foreign-exchange fluctuations, trade restrictions, and supply-chain disruption. The company does not use separate currency-hedging transactions.
- Management said it continued its 2023 operating plan, including capacity expansion, product development, dividends, potential share repurchases when the stock appears undervalued, and consideration of accretive acquisitions. No specific earnings or margin guidance was provided.
Important facts for investors to verify
- Whether the projected approximately $2 million 2023 sales decline and roughly $3 million reduction in major-customer biopharmaceutical OEM sales materialized.
- Whether margins stabilize as sales mix, overhead absorption, inflation, and litigation expenses change.
- The scope, timing, and financial exposure of Filshie Clip-related litigation and any change in its regulatory status.
- Whether higher interest income on cash balances is sustainable and how cash will be allocated among investment, acquisitions, dividends, and possible repurchases.
- Progress on supply-chain and sterilization constraints, and the continuing impact of foreign currency movements on reported results.