Utah Medical Products, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. UTMD manufactures and markets specialty medical devices. Financial amounts below are in thousands of U.S. dollars, except per-share data and percentages.
Financial performance
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Net sales | $9,945 | $10,717 | $30,575 | $31,035 |
| Gross profit / margin | $6,079 / 61.1% | $6,196 / 57.8% | $18,290 / 59.8% | $18,595 / 59.9% |
| Operating income / margin | $4,000 / 40.2% | $4,002 / 37.3% | $11,845 / 38.7% | $11,907 / 38.4% |
| Income before taxes | $4,127 | $3,895 | $11,719 | $11,607 |
| Net income | $3,047 | $2,822 | $8,633 | $8,378 |
| Diluted EPS | $0.81 | $0.75 | $2.29 | $2.22 |
Cash flow and liquidity: Nine-month operating cash flow was $9,895, versus $10,858 in 2014. Cash increased to $21,622 from $19,274 at year-end 2014. Working capital was $26,565 (current ratio 5.6), compared with $20,704 (current ratio 3.3). Capital expenditures were $206, including $151 for property and equipment; dividends paid were $1,914 and share repurchases were $683.
Debt and balance sheet: The remaining acquisition-related bank loans were repaid in February 2015; notes payable were zero at September 30. Total assets were $80,155, total liabilities $11,802, and stockholders’ equity $68,353. The reported total-liabilities-to-assets ratio was 15%.
Changes versus comparable periods
- Reported sales declined 7.2% in Q3 and 1.5% for nine months. Management attributed a substantial part of the decline to currency translation: foreign currencies were down about 12.5%–12.6% on a sales-weighted basis. At constant exchange rates, sales were down 3% in Q3 but up 3% for nine months.
- Domestic sales rose 4% in Q3 and 6% for nine months. International sales fell 16% and 8%, respectively, on a reported basis; management said nine-month international sales were approximately flat at constant currency. Q3 constant-currency international sales fell 9%, partly reflecting uneven orders from two large distributors.
- Net income rose 8.0% in Q3 and 3.0% for nine months despite lower reported sales. Higher Q3 gross margin, lower non-operating expense (including no Q3 debt interest and a currency remeasurement gain), and lower effective tax rates supported earnings. Nine-month operating income was nearly flat year over year.
- Q3 gross margin improved to 61.1%, helped by product and distribution mix and $95 lower U.S. employee health-plan costs, which management described as a one-time benefit. Nine-month gross margin was essentially unchanged.
- Foreign-currency translation losses were $1,711 for the nine months, versus $1,459 in 2014. The stronger U.S. dollar reduced reported sales and affected foreign operations’ costs and margins.
Outlook, risks, and notable items
- Management said nine-month operating performance was on track to meet previously stated 2015 financial objectives despite a larger-than-expected foreign-exchange impact. The filing gives no specific numerical forecast for full-year revenue or earnings.
- Management’s priorities include integrating international manufacturing and distribution, developing products, maintaining operating performance, using cash for dividends and potential share repurchases, and considering accretive acquisitions. It expected remaining 2015 capital spending to be below depreciation, except for a possible UK facility purchase or acquisition.
- Key disclosed risks include currency volatility, medical-device regulation and approval delays, U.S. healthcare reform and the device excise tax, distributor dependence and order variability, hospital purchasing constraints, product liability, and retention of key employees. The 2.3% U.S. medical-device excise tax was included in selling and marketing expense.
- The company reported no current litigation and no subsequent event requiring recognition or disclosure. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
- UTMD was assessing the impact of the new revenue-recognition standard, then expected to take effect for the company in 2017. Management reported no accounting policy changes during the quarter.
Investor facts to verify
- Whether sales and distributor ordering trends improved after Q3, particularly internationally, and how much reported growth remains affected by currency exchange rates.
- Whether Q3’s favorable product mix and one-time health-plan cost reduction persist, and how foreign-exchange movements affect margins.
- Whether earnings growth is sustainable given lower reported sales and the contribution from lower tax rates and non-operating items.
- Capital-allocation plans, including dividends, share repurchases, and any facility purchase or acquisition; the company had repaid all bank debt by February 2015.
- Exposure to regulatory, healthcare-policy, distributor, and product-liability risks described in the filing.