Utah Medical Products, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. Amounts are in thousands of U.S. dollars, except per-share data. The filing is an annual report; fourth-quarter figures are noted separately.
Business context and financial performance
UTMD develops, manufactures and sells specialty medical devices, principally for hospital labor and delivery, neonatal care, gynecology/urology and blood-pressure monitoring. About half of 2016 sales were outside the U.S. Its products are sold through direct channels, distributors and OEM relationships.
| Metric | 2016 | 2015 | Change |
|---|---|---|---|
| Net sales | $39,298 | $40,157 | (2.1%) |
| Gross profit / margin | $23,690 / 60.3% | $24,185 / 60.2% | Profit (2.0%); margin +0.1 pt |
| Operating income / margin | $16,187 / 41.2% | $15,651 / 39.0% | +3.4% |
| Income before tax | $16,422 | $15,545 | +5.6% |
| Net income / margin | $12,128 / 30.9% | $11,843 / 29.5% | +2.4% |
| Diluted EPS | $3.22 | $3.14 | +2.6% |
| Cash from operations | $14,528 | $13,801 | +$727 |
Fourth-quarter sales were $8,852, gross profit $5,440, net income $2,717 and diluted EPS $0.72, versus $9,582, $5,894, $3,211 and $0.85, respectively, in Q4 2015.
Liquidity, debt and capital allocation
- Year-end cash and investments were $26,360, up from $23,333; current assets were $34,867 and working capital was $31,845, up 11% year over year. The current ratio rose to 11.5 from 8.1.
- Total assets were $76,584 and total liabilities $7,340; the total-liabilities-to-assets ratio was about 10%, compared with 12% a year earlier. Long-term debt was zero; acquisition loans had been repaid in February 2015.
- Operating cash flow funded $3,293 of property and equipment spending, $3,916 of dividends and $2,850 of share repurchases. Cash increased to $26,296 at year-end after the reported foreign-exchange effect on cash.
- UTMD paid annual dividends of $1.045 per share, up from $1.025. It repurchased 50,000 shares at an average $57.00 per share.
Material changes and unusual items
- Sales fell primarily because Filshie Clip System sales to exclusive U.S. distributor CooperSurgical declined $1,298 and foreign-exchange movements reduced translated foreign-currency sales by about $600. Management estimated sales would have been $1,898 higher, or up about 3%, with constant exchange rates and prior-year CooperSurgical purchases.
- The weaker British pound reduced reported operating expenses, including Femcare intangible amortization; total operating expenses declined to $7,503 from $8,534. The U.S. medical-device excise tax was suspended for 2016–2017, reducing expense versus 2015.
- Reported 2016 net income included a $123 benefit from a UK tax-rate change that reduced the deferred tax liability. Excluding that and the comparable $351 benefit in 2015, management reported non-GAAP net income growth of 4% and diluted EPS growth of 5%. These non-GAAP figures are supplemental, not substitutes for GAAP results.
- Foreign-currency translation reduced accumulated other comprehensive income by $6,289 in 2016. UTMD also purchased facilities in Canada and the UK, contributing to capital expenditures and a $2,597 increase in net property and equipment.
- Sales by product category included $20,683 in gynecology/electrosurgery/urology, $8,076 in blood-pressure monitoring and accessories, $6,007 in neonatal products and $4,532 in obstetrics. Blood-pressure monitoring sales rose; gynecology/electrosurgery/urology sales declined.
Outlook, commentary and risks
Management’s 2017 plan assumes 2%–3% consolidated sales growth and targets income before tax of $17.2–$17.6 million, up 5%–7%. If sales growth occurs, management expects operating income growth of 6%–8% and higher single-digit growth in net income and EPS. It expects operating expenses to rise by $200–$300, gross margin to improve with direct sales in Canada and France, and R&D spending of about $500. Management cautioned that geopolitical and currency uncertainty makes sales difficult to predict; a further currency-related sales decline of about 1% was possible if exchange rates and GBP sales remained near the described assumptions.
- Key exposures include foreign-exchange movements, especially GBP; weaker purchases from the exclusive U.S. Filshie Clip distributor; hospital purchasing and GPO pressures; regulatory approval delays and costs; and reliance on third-party distributors in some markets.
- UTMD cited product liability, retention of experienced employees, competition and the possibility that new products may fail to gain regulatory clearance or market adoption. It reported no current product-liability litigation and no litigation expected to materially affect results.
- Management stated that disclosure controls and internal control over financial reporting were effective at year-end, and the auditors issued unqualified opinions on the consolidated financial statements and internal controls.
Important facts for investors to verify
- Whether the 2016 decline in CooperSurgical Filshie Clip purchases was temporary, and how Sterishot adoption and direct sales in Canada and France affect subsequent revenue and margins.
- Actual 2017 sales, currency impacts and achievement of management’s forecast, particularly given the stated uncertainty around foreign markets and exchange rates.
- Whether higher blood-pressure monitoring sales, including China distributor demand, are sustainable and whether neonatal sales stabilize following customer conversion to ENFit connectors.
- The cash needs and returns associated with UK facility renovation, Canadian operations, future acquisitions, dividends and share repurchases.
- The assumptions supporting the Femcare intangible-asset and goodwill balances, future amortization and deferred-tax liability; net intangible assets were $31,751 at year-end.