Utah Medical Products, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. UTMD manufactures and markets specialty medical devices. Financial amounts below are in thousands of U.S. dollars except per-share data.
Financial performance
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net sales | $10,233 | $9,827 | +4.1% |
| Gross profit / margin | $6,112 / 59.7% | $6,050 / 61.6% | Margin down 1.9 points |
| Operating income / margin | $3,877 / 37.9% | $3,843 / 39.1% | Income +0.9% |
| Income before taxes | $3,667 | $3,782 | -3.0% |
| Net income | $2,667 | $2,722 | -2.0% |
| Diluted EPS | $0.71 ($0.706 per MD&A) | $0.72 ($0.719 per MD&A) | Down about 1.8% |
| Operating cash flow | $2,243 | $1,922 | +16.7% |
Gross, operating, pretax and net margins were 59.7%, 37.9%, 35.8% and 26.1%, respectively, versus 61.6%, 39.1%, 38.5% and 27.7% a year earlier. The tax provision was $1,000, or 27.3% of pretax income, compared with $1,060, or 28.0%.
Balance sheet and liquidity
- Cash was $16,102 at March 31, down from $19,274 at year-end; working capital was $21,430, versus $20,704.
- Total assets were $75,375 and total liabilities $11,534. UTMD repaid the remaining $4,778 of acquisition-related notes in February 2015; no notes payable remained at quarter-end. The total-liabilities-to-assets ratio fell to 15% from 20%.
- Cash from operations of $2,243 and option proceeds were more than offset by $4,778 of debt repayment and $656 of adverse exchange-rate effects on cash. Capital expenditures were $70, compared with $658 in Q1 2014.
- No cash dividends were paid during the quarter. The filing says the Q1 dividend was accrued at March 31 and paid afterward.
Changes, drivers and outlook
- Management described the quarter as a solid start toward its 2015 objectives, despite substantial foreign-exchange headwinds. About one-third of sales were invoiced in foreign currencies. At prior-year exchange rates, Q1 2015 sales would have been about $397 higher and growth approximately 8%, rather than reported growth of 4.1%.
- U.S. domestic sales rose 11% to $5,377. International sales fell 3% in reported dollars; at prior-year exchange rates they would have increased 5%. Ireland trade sales rose sharply, partly due to shipments not present in the prior-year quarter, while UK and Australian sales were affected by currency translation and other sales changes.
- Management attributed lower gross margin to the stronger U.S. dollar’s effect on foreign subsidiaries’ costs and a less favorable product mix. Pretax income also reflected a $177 loss on remeasurement of euro cash balances in the UK; total foreign-exchange loss was $168, versus none in Q1 2014. Lower interest expense partly offset this, and the acquisition loans were fully repaid.
- Management said it remained on track with plans to integrate multinational operations, develop products, maintain operating performance, return cash through dividends and possible repurchases, and consider accretive acquisitions. Planned 2015 capital spending was expected to be below depreciation, except for a possible UK facility purchase or acquisition. No specific earnings or revenue guidance was provided.
Risks, contingencies and other disclosures
Key disclosed risks include foreign-exchange volatility, medical-device regulation and approval delays, U.S. medical-device excise tax and healthcare reform burdens, hospital purchasing and GPO practices, distributor dependence, product liability, and competition or execution risks. UTMD reported no current litigation, no material warranty reserve, and no subsequent event requiring disclosure. Management stated that disclosure controls were effective and reported no material change in internal control over financial reporting.
Goodwill and other intangible assets represented 54% of total assets at quarter-end. The company was assessing a new revenue-recognition standard scheduled to take effect in 2017. The filing contains a discrepancy in its MD&A operating-expense detail: the financial statements report R&D expense of $156, while an MD&A summary table lists $153; the statements’ $156 figure reconciles to total operating expenses of $2,235.
Important facts for investors to verify
- Whether reported sales and profit trends persist after separating foreign-exchange effects from underlying demand and product mix.
- The scale and recurrence of foreign-exchange losses, given the company’s stated practice of managing currency exposure without separate hedging transactions.
- Post-debt-repayment cash use, including dividend payments, any share repurchases, capital spending and potential acquisitions.
- The operating-expense disclosure discrepancy and the effect of amortization and the substantial intangible-asset balance.
- Developments in regulation, the U.S. medical-device excise tax, and other risks identified in the company’s 2014 Form 10-K.