Utah Medical Products, Inc. — FY 2012 Form 10-K
Business context and reporting period. This filing covers the fiscal year ended December 31, 2012; amounts are in thousands except per-share data. UTMD develops, manufactures and sells specialized medical devices, principally for hospital use, with operations in the U.S., Ireland and the U.K. Its 2011 Femcare acquisition added the Filshie Clip System and expanded gynecology products and international distribution. Femcare represented a full year in 2012, versus results only from March 18 onward in 2011, limiting year-over-year comparability.
Financial performance and condition
| Metric | 2012 | 2011 | Change / context |
|---|---|---|---|
| Net sales | $41,552 | $37,860 | +9.8%; 2011 pro forma sales including Femcare for the full year were $41,780 |
| Gross profit / margin | $25,307 / 60.9% | $22,400 / 59.2% | Margin improved 1.7 percentage points |
| Operating income / margin | $15,196 / 36.6% | $11,842 / 31.3% | Operating income +28.3% |
| Net income / margin | $10,169 / 24.5% | $7,414 / 19.6% | Net income +37.2% |
| Diluted EPS | $2.74 | $2.03 | +34.7% |
| Operating cash flow | $13,563 | $11,365 | Up $2,198 |
| Cash and investments | $8,913 | $6,599 | At year-end |
| Notes payable | $13,004 | $21,672 | Down $8,668; $4,001 current and $9,003 long-term at year-end |
| Working capital / current ratio | $10,712 / 2.4 | $7,385 / 1.8 | Liquidity improved |
Management attributed better margins to Femcare-related distribution and manufacturing synergies, improved resource productivity and product mix. Operating cash flow funded debt repayments, dividends and repurchases: UTMD repaid $9,093 of notes, paid $3,555 in dividends and repurchased 15,000 shares for $504. The year-end total debt ratio fell to 34% from 47%.
In the fourth quarter, sales were $9,832 versus $9,907 in Q4 2011; gross profit was $6,021 versus $5,913; net income was $2,259 versus $1,858; and diluted EPS was $0.61 versus $0.51.
Material changes and business mix
- International sales rose to $21,596, or 52% of total sales, from $19,007, or 50%. Domestic sales were $19,955, up from $18,853.
- Gynecology/electrosurgery/urology sales were $23,142, or 56% of total sales, reflecting Femcare and Filshie Clip products. Filshie Clip System sales were 35% of total sales; sales to U.S. distributor Cooper Surgical were $3,882, or 9.3% of total sales.
- Obstetrics sales declined to $5,194 from $5,742; neonatal sales fell to $6,539 from $6,951. Blood-pressure-monitoring and accessories sales increased to $6,677 from $5,971.
- Year-end receivables declined $600 and inventory fell 13% from 2011. Average year-end receivable days improved to 35 from 41.
Outlook, risks and unusual items
Management’s 2013 estimates were for sales and net income to decline about 2%, with gross profit, operating income, pretax income and EPS down about 3%. It projected operating margin of about 36%, pretax income of $14.0–$14.2 million and diluted EPS of $2.65–$2.68. Estimates incorporated lower expected Cooper Surgical purchases, no repeat of a $570 unusual Far East electrosurgery order, and anticipated offsets from direct sales, new distributors and product launches. These are management estimates, not guaranteed results.
- The 2.3% U.S. medical-device excise tax began in 2013; UTMD estimated its cost at about $311 for 2013, based on roughly one-third of consolidated revenue being subject to the tax.
- Management identified regulatory burdens and approval delays, hospital purchasing restrictions and group purchasing organizations, competition and distributor dependence, product-liability exposure, employee retention, foreign-exchange movements and the remaining Femcare acquisition debt as risks.
- UTMD recorded a $177 impairment loss on its Citigroup investment in 2012. Femcare-related intangible amortization was $2,561; goodwill was $15,488 at year-end. Management did not expect goodwill impairment in 2013.
- UTMD reported no litigation it believed could materially affect results and no current product-liability lawsuits in which it was a defendant. UTMD self-insures product-liability risk except for Femcare, which carries third-party coverage.
- Management reported effective disclosure controls and internal control over financial reporting, with no material weaknesses. The consolidated audit opinion was unqualified and relied in part on the other auditors’ work on Femcare.
Investor verification priorities
- Assess comparable underlying growth: 2011 reported results included only part-year Femcare, while pro forma full-year 2011 sales were $41,780 versus 2012 sales of $41,552.
- Track 2013 Cooper Surgical orders, the expected excise-tax burden and whether planned offsets and sales forecasts materialize.
- Review debt repayment, covenant compliance and liquidity; remaining Femcare loan principal was $13,005 at December 31, 2012, with scheduled repayment through 2016.
- Monitor product mix, margins, direct-sales integration and customer/distributor concentration, including Filshie Clip and China blood-pressure-kit sales.
- Evaluate the assumptions supporting acquired intangible and goodwill carrying values, and the effect of ongoing amortization on reported earnings.