Utah Medical Products, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. UTMD manufactures and markets specialty medical devices. This unaudited report covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods. Unless otherwise noted, financial amounts below are in thousands of U.S. dollars.
Financial performance
| Metric | Q2 2019 | Q2 2018 | 1H 2019 | 1H 2018 |
|---|---|---|---|---|
| Net sales | $11,846 | $10,965 | $22,579 | $21,852 |
| Gross profit / margin | $7,500 / 63.3% | $6,984 / 63.7% | $14,273 / 63.2% | $13,906 / 63.6% |
| Operating income / margin | $4,481 / 37.8% | $5,056 / 46.1% | $8,582 / 38.0% | $10,027 / 45.9% |
| Net income / margin | $3,525 / 29.8% | $4,308 / 39.3% | $6,664 / 29.5% | $8,400 / 38.4% |
| Diluted EPS | $0.94 | $1.15 | $1.78 | $2.24 |
| Operating cash flow | — | $5,043 | $7,747 |
- Q2 sales increased 8.0%; first-half sales increased 3.3%. At constant exchange rates, management reported growth of 9.8% and 5.3%, respectively.
- Operating expenses rose to $3,019 in Q2 and $5,691 in 1H, principally reflecting amortization of the newly acquired U.S. Filshie distribution rights. The related amortization was $1,105 in Q2 and $1,842 in 1H.
- Other income was $85 in Q2 and $120 in 1H, versus $501 and $538 in 2018. The 2018 periods included a one-time gain from asset sales. The 1H 2019 effective tax provision rate was 23.4%, versus 20.5% in 1H 2018.
Financial position and cash flow
- At June 30, cash and investments were $32,880, down from $51,112 at year-end 2018. Total assets were $103,361; current assets were $46,225 and current liabilities $3,821, yielding working capital of $42,405.
- Total liabilities were $9,449; management reported no debt. The balance sheet includes $433 of operating lease right-of-use assets and lease liabilities. The total-liabilities-to-assets ratio was 9%.
- Cash used in investing was $21,130, including $21,000 to acquire the U.S. Filshie distribution rights and approximately $2,100 for remaining inventory. Financing used $2,282, including $2,055 of dividends and $398 of share repurchases.
- Inventories rose to $7,712 from $5,412 at year-end, and net intangible assets rose to $32,890 from $14,803, primarily reflecting the acquisition and amortization.
Material changes, outlook and risks
- Filshie distribution rights: UTMD acquired exclusive U.S. distribution rights from CooperSurgical on February 1, 2019 for $21,000. It now sells directly to U.S. clinical facilities. Repurchased distributor inventory was expected to last well into Q4 2019, delaying the expected gross-margin benefit; management did not expect significant gross-margin improvement until 2020.
- Sales mix and currency: Domestic sales rose 28% in Q2 and 19% in 1H, while outside-U.S. sales fell 12% in both periods. A stronger U.S. dollar reduced reported sales by an estimated $194 in Q2 and $431 in 1H. Neonatal exports were affected by order pauses while distributors in China, Brazil and Mexico pursued regulatory re-registrations.
- Management outlook: Management said 1H performance remained on track to substantially achieve its 2019 financial objectives. It expected 2H U.S. Filshie sales to exceed the comparable 2018 period by about $3,000, and anticipated continued substantial OEM sales growth. Foreign-exchange effects and recovery of neonatal distributor orders remained uncertain; the filing does not provide a numerical full-year earnings forecast.
- Risks and contingencies: The filing highlights medical-device regulation and approval delays, product liability, distributor dependence, hospital purchasing and GPO pressures, healthcare-policy changes, competition and foreign-exchange exposure. Management reported no litigation expected to have a material financial effect and no other material subsequent events. Disclosure controls were deemed effective.
Important facts for investors to verify
- Whether the expected U.S. Filshie sales ramp and inventory sell-through occur, and when they translate into improved gross margin and earnings.
- Whether neonatal distributor orders resume and the impact of currency movements on foreign sales and costs.
- How the $21 million intangible asset’s amortization affects reported operating income, net income and future margins.
- Whether management’s stated 2019 objectives are achieved, given lower first-half net income and operating cash flow versus 2018.
- The company’s capacity to fund dividends, share repurchases and investments while preserving liquidity after the acquisition.