Utah Medical Products, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
UTMD manufactures and markets specialty medical devices. This unaudited report covers the three and six months ended June 30, 2015; amounts below are in thousands of U.S. dollars except per-share data.
Financial performance
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $10,397 | $10,491 | $20,630 | $20,318 |
| Gross profit / margin | $6,099 / 58.7% | $6,349 / 60.5% | $12,211 / 59.2% | $12,399 / 61.0% |
| Operating income / margin | $3,967 / 38.2% | $4,062 / 38.7% | $7,844 / 38.0% | $7,905 / 38.9% |
| Income before tax | $3,924 | $3,930 | $7,592 | $7,712 |
| Net income | $2,918 | $2,834 | $5,586 | $5,556 |
| Diluted EPS | $0.773 | $0.751 | $1.480 | $1.470 |
Second-quarter sales fell 0.9% year over year, while first-half sales rose 1.5%. Management estimated that at prior-year exchange rates sales would have increased 4% in Q2 and 6% in the first half; these are non-GAAP constant-currency comparisons. About one-third of sales were invoiced in foreign currencies, and the weighted average exchange rate on those sales was about 13% lower than in 2014.
Gross margin declined in both periods, which management attributed to the stronger U.S. dollar raising foreign subsidiaries’ costs for USD-priced inputs and to less favorable product mix. Operating expenses were lower, partly because foreign subsidiary expenses translated into fewer dollars. Net income increased slightly in the first half despite lower operating income and higher foreign-exchange losses, aided by lower effective tax rates.
Cash, debt, and liquidity
- Operating cash flow was $5,733 in the first half, versus $5,760 in 2014. Capital spending was $116, compared with $836 a year earlier.
- Cash ended the period at $19,169, versus $19,274 at year-end 2014. The company paid $4,778 of remaining loan principal in Q1 and reported no notes payable at June 30; the loans used to finance the Femcare acquisition were fully repaid in February.
- Working capital increased to $24,643 from $20,704 at December 31, 2014. Current assets were $29,976 and current liabilities $5,333. Total liabilities were $11,737, or 15% of assets, compared with 20% at year-end.
- First-half dividends were $957. UTMD repurchased 4,000 shares for $215 in Q2 and the first half.
Material changes, outlook, and risks
U.S. domestic sales increased 7% in the first half. International sales declined 3% in reported dollars but would have risen 5% at constant exchange rates. Growth included resumed China distributor purchases of blood-pressure-monitoring kits and higher neonatal device sales to international distributors. Management also described a shift in Sterishot manufacturing and shipments from the UK to Ireland.
Management said first-half performance was on track to meet previously stated 2015 objectives despite a larger-than-expected currency headwind. It cautioned that further U.S.-dollar strengthening in the second half could put full-year objectives at risk. Priorities include multinational integration, new product development, dividends and selective share repurchases; management is also evaluating acquisitions but emphasized high valuations and the need for patience. No numeric full-year forecast is provided in the filing.
Principal disclosed risks include currency volatility, medical-device regulation and approval delays, the U.S. medical-device excise tax, hospital purchasing bureaucracy and group purchasing organizations, distributor dependence, product liability, and the possibility that strategy or new products do not deliver expected results. The company reported no current litigation. It manages currency exposure without separate hedging transactions. Management reported effective disclosure controls and no material internal-control changes during the quarter.
Other notable items: first-half net non-operating expense was $252, including a larger foreign-currency loss on remeasured cash balances, partly offset by lower interest expense. The company was assessing the impact of the new revenue-recognition standard, effective for its annual reporting periods beginning after December 15, 2016.
Important facts for investors to verify
- Whether currency movements and foreign-currency cash remeasurement continue to pressure reported sales, gross profit, and earnings.
- Whether U.S. domestic growth and international demand can offset weaker translated results and product-mix effects.
- Whether management’s 2015 objectives remain achievable given its warning about further dollar strength; the filing gives no numeric guidance.
- How the company deploys its substantial cash and debt-free balance sheet, including dividends, buybacks, capital spending, and potential acquisitions.
- Whether the deferred tax liability tied to Femcare acquisition intangibles and ongoing amortization materially affect future earnings or cash taxes.