Utah Medical Products, Inc. — Q3 2021 Form 10-Q
Business context and period: UTMD manufactures and markets specialty medical devices. This unaudited filing covers the quarter and nine months ended September 30, 2021; dollar amounts below are in millions unless noted. Management cautions that 2020 comparisons are affected by COVID-19 restrictions on elective procedures and also compares results with 2019.
Financial performance
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $12.572 | $10.479 | $36.140 | $30.168 |
| Gross profit | $8.073 | $6.497 | $22.804 | $18.283 |
| Operating income | $5.098 | $3.587 | $13.750 | $9.428 |
| Net income | $4.206 | $2.933 | $10.656 | $7.386 |
| Diluted EPS | $1.15 | $0.80 | $2.91 | $2.01 |
| Gross margin | 64.2% | 62.0% | 63.1% | 60.6% |
| Operating margin | 40.6% | 34.2% | 38.0% | 31.3% |
| Net margin | 33.5% | 28.0% | 29.5% | 24.5% |
- Year-over-year sales increased 20.0% in Q3 and 19.8% in 9M; net income rose 43.4% and 44.3%, respectively. Management attributed margin gains chiefly to stronger fixed manufacturing overhead absorption and relatively modest operating-expense growth.
- Versus pre-pandemic 2019, sales were up 0.6% for Q3 and 3.0% for 9M; 9M net income was up 2.8% and diluted EPS up 5.1%.
- Q3 sales growth was broad, including 55% growth in worldwide blood-pressure monitoring and related OEM products; 9M growth in that category was 48%. Outside-U.S. sales increased 37% in Q3 and 21% in 9M, with foreign exchange contributing to reported growth.
Cash, liquidity, and capital
- Cash and investments were $64.321 million at September 30, 2021, versus $51.590 million at year-end 2020. Working capital was $70.830 million, up from $58.471 million.
- Operating cash flow was $16.216 million for 9M 2021, compared with $14.359 million in 9M 2020. Capital expenditures were $0.299 million; dividends paid were $3.116 million.
- The company reported no debt and a total-liabilities-to-assets ratio of 8%. Total liabilities were $9.772 million; they include a remaining $2.047 million repatriation-tax liability payable over four years.
- Total assets were $119.752 million and stockholders’ equity $109.980 million. Net intangible assets declined, reflecting amortization and currency effects; intangible assets including goodwill were 28% of assets, down from 34% at year-end 2020.
Outlook, commentary, and risks
- Management expected organic device sales to continue improving in Q4 2021 and 2022. It said the company had recovered from the pandemic better than expected and exceeded targeted 2019 financial performance.
- Management warned of gross-margin pressure from raw-material and packaging costs rising 8%–15%, more than doubled freight costs, a 5% direct-labor cost-of-living adjustment, and higher sterilization costs. It said pricing flexibility should support its minimum 60% gross-margin target.
- Q2 2021 included a $0.390 million unfavorable tax provision adjustment related to the UK corporate tax rate rising to 25% in 2023. Management’s non-GAAP 9M EPS excluding that item was $3.021; GAAP diluted EPS was $2.915.
- Significant identifiable-intangible amortization weighs on reported earnings but is non-cash. Management estimated the completion of the two Filshie-related amortization schedules would lift annualized EPS, assuming stated share counts and tax rates.
- Key risks include foreign-exchange movements, regulatory burdens and approval delays, pandemic-related procedure restrictions or supply interruptions, trade restrictions, reliance on distributors, product-liability exposure, and competition or hospital purchasing constraints. The filing reported no litigation expected to materially affect results; disclosure controls were deemed effective.
Investor verification priorities
- Track whether Q4 2021 and 2022 organic sales improve as management expected, and distinguish underlying growth from currency effects.
- Test whether cost inflation and freight, labor, and sterilization increases affect margins or pricing enough to challenge the 60% gross-margin target.
- Review cash generation, dividends, potential share repurchases or acquisitions, and the remaining tax liabilities.
- Confirm the treatment and timing of UK tax changes and intangible-asset amortization when evaluating reported earnings and EPS.
- Reconcile the cash-flow statement’s $16.216 million operating-cash-flow figure with the MD&A text, which states $16.217 million.