Business context and reporting period
Utah Medical Products, Inc. (UTMD) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2011. UTMD manufactures and markets specialty medical devices. Results include Femcare Holdings Ltd. from its March 18, 2011 acquisition, so year-over-year comparisons include a partial-year contribution from Femcare.
Unless stated otherwise, financial amounts are in thousands of U.S. dollars, except per-share data.
Financial performance
| Metric | Q3 2011 | Q3 2010 | 9M 2011 | 9M 2010 |
|---|---|---|---|---|
| Net sales | $10,784 | $6,201 | $27,954 | $18,912 |
| Gross profit | $6,518 | $3,336 | $16,487 | $9,925 |
| Operating income | $3,539 | $2,257 | $8,929 | $6,741 |
| Income before tax | $3,274 | $2,289 | $8,368 | $6,807 |
| Net income | $2,237 | $1,512 | $5,556 | $4,505 |
| Diluted EPS | $0.61 | $0.42 | $1.53 | $1.24 |
| Gross margin | 60.4% | 53.8% | 59.0% | 52.5% |
| Operating margin | 32.8% | 36.4% | 31.9% | 35.6% |
| Net margin | 20.7% | 24.4% | 19.9% | 23.8% |
Management reported sales growth of 73.9% in Q3 and 47.8% for the nine months. Excluding Femcare sales of $4,544 in Q3 and $9,223 year to date, sales were up 0.6% in Q3 and down 1.0% for the nine months. Femcare represented 42% of Q3 and 33% of nine-month consolidated sales. International sales were 51% of Q3 sales and 49% of nine-month sales.
Gross margin improved with the addition of Femcare’s higher-margin products. Operating and net margins declined as acquisition-related amortization, expenses, and interest costs increased. Identifiable-intangible amortization was $651 in Q3 and $1,404 for the nine months; acquisition expenses were $8 and $293, respectively. Interest expense was $281 in Q3 and $635 for the nine months, versus $6 and $19 in the comparable 2010 periods.
Cash flow, balance sheet, and liquidity
- Operating cash flow was $7,859 for the first nine months of 2011, compared with $5,487 in 2010.
- Investing cash flow was negative $26,633, primarily reflecting the $41,084 net cash paid for Femcare, partly offset by $15,155 of investment-sale proceeds. Financing cash flow was positive $22,019, including $26,934 of note proceeds.
- Cash at September 30 was $7,040, up from $3,818 at year-end 2010. Cash and investments together were $7,098, down $11,438 from year-end, primarily due to acquisition funding.
- Total assets were $79,059, compared with $41,238 at year-end. Net intangible assets were $36,281 and goodwill was $15,970, reflecting the acquisition and related purchase accounting.
- Total notes payable were approximately $24,006: $12,000 U.S. debt, $11,249 U.K. debt, and $757 Ireland debt. Current notes payable were $5,470. UTMD said the notes were scheduled to be repaid by April 2016 and expected to repay bank debt within four years using operating cash flow.
- Working capital was $7,249, down from $23,239 at year-end; the current ratio was 1.7 versus 13.2. Total liabilities were $38,692 and stockholders’ equity was $40,367. The total debt ratio was 49%, compared with 8% at year-end.
- UTMD reported compliance with loan financial covenants at September 30. The agreements require specified interest-coverage, tangible-net-worth, and leverage ratios and secure lenders’ interests in company assets and certain foreign subsidiary stock.
Material changes, outlook, and risks
The March acquisition of Femcare, which sells the Filshie Clip System, materially changed UTMD’s scale, asset mix, geographic sales, and debt. The purchase-price allocation remained subject to refinement during the measurement period; management said liabilities and intangible-asset balances remained uncertain and no allocation adjustments had been recorded as of September 30. A $3,200 escrow was established for two years to support seller warranties and representations.
Management projected at least $2.00 EPS for calendar 2011 and approximately $38 million in full-year sales, about 50% above 2010. It expected Q4 sales could be about 8% below Q3 because of uneven international-distributor and OEM orders and the holiday season. Management targeted a combined operating margin of about 30%, noting that intangible amortization would continue to weigh on margins, and said 2011 performance was consistent with its objectives.
Management cited risks including higher acquisition debt and the possibility that weaker sales or margins could amplify its effects; foreign-exchange fluctuations; medical-device regulation and healthcare reform; hospital purchasing and GPO pressures; reliance on overseas distributors; product-liability exposure; and dependence on key employees. UTMD does not use separate foreign-currency hedges. The filing reported no litigation believed likely to have a material financial impact and no material subsequent events. Disclosure controls were assessed as effective; no material internal-control changes were reported.
Important facts for investors to verify
- How much of future sales and earnings growth is attributable to Femcare versus UTMD’s existing operations, and whether the stated sales and EPS outlook was achieved.
- Whether Femcare’s purchase-price allocation, deferred tax liability, goodwill, and amortization estimates changed after the reporting date.
- Debt repayment progress, covenant headroom, interest costs, and the effect of currency movements on foreign operations and debt.
- Whether working capital, receivables, and inventory remain within management’s targets as the acquired business is integrated.
- Whether regulatory, hospital purchasing, distributor, product-liability, or healthcare-reform risks materially affect sales, costs, or product development.