UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Amendment No. 1
For the quarterly period ended |
OR |
For the transition period from to |
Commission File No. |
(Exact name of Registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code) |
( |
(Registrant’s telephone number, including area code) |
Securities registered pursuant to Section 12(b) of the Act: |
|
|
|
|
|
Title of each class: | Trading Symbol: | Name of each exchange on which registered: |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | |
Non-accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 5, 2020:
Explanatory Note
Utah Medical Products, Inc. (the “Company,” “we”, “us”, “our”) is filing this amendment (this “Form 10-Q/A”) to our Quarterly Report on Form 10-Q for the quarter ended September 30, 2020 (the “Form 10-Q”), filed with the U.S. Securities and Exchange Commission (“the Commission”) on November 6, 2020, solely
UTAH MEDICAL PRODUCTS, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES | |||
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF | |||
SEPTEMBER 30, 2020 AND DECEMBER 31, 2019 | |||
(in thousands) | |||
| (unaudited) |
| (audited) |
SEPTEMBER 30, 2020 |
| DECEMBER 31, 2019 | |
ASSETS |
|
|
|
Current assets: |
|
|
|
Cash & investments | $ |
| $ |
Accounts & other receivables, net |
| ||
Inventories |
| ||
Other current assets |
| ||
Total current assets |
| ||
Property and equipment, net |
| ||
Operating lease – right of use assets, net |
| ||
Goodwill |
| ||
Other intangible assets |
| ||
Other intangible assets - accumulated amortization | ( |
| ( |
Other intangible assets, net |
| ||
Total assets | $ |
| $ |
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
Current liabilities: |
|
|
|
Accounts payable | $ |
| $ |
Accrued expenses |
| ||
Total current liabilities |
| ||
Deferred tax liability – Femcare IIA |
| ||
Other long term liabilities | |
| |
Operating lease liability | |
| |
Deferred income taxes |
| ||
Total liabilities |
| ||
|
|
|
|
Stockholders' equity: |
|
|
|
Preferred stock - $ |
| ||
Common stock - $ |
| ||
Accumulated other comprehensive income (loss) | ( |
| ( |
Additional paid-in capital |
| ||
Retained earnings |
| ||
Total stockholders' equity |
| ||
|
|
|
|
Total liabilities and stockholders' equity | $ |
| $ |
|
|
|
|
see notes to consolidated condensed financial statements |
|
|
|
1
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE | ||||||||
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019 | ||||||||
(in thousands, except per share amounts - unaudited) | ||||||||
|
| Three Months Ended |
| Nine Months Ended | ||||
|
| September 30, 2020 |
| September 30, 2019 |
| September 30, 2020 |
| September 30, 2019 |
|
|
|
| |||||
Sales, net |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
Cost of goods sold |
|
|
|
| ||||
Gross profit |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
Operating expense |
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
|
| ||||
Research & development |
|
|
|
| ||||
Total operating expenses |
|
|
|
| ||||
Operating income |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
| ||||
Income before provision for income taxes |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
|
| ||||
Net income |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
Earnings per common share (basic) |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
Earnings per common share (diluted) |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
|
|
Shares outstanding - basic |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
Shares outstanding - diluted |
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation net of taxes of $ |
| $ |
| $ ( |
| $ ( |
| $ ( |
Total comprehensive income |
| $ |
| $ |
| $ |
| $ |
|
|
|
|
|
|
|
| |
see notes to consolidated condensed financial statements |
|
|
|
|
|
|
|
|
2
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS | ||||
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019 | ||||
(in thousands - unaudited) | ||||
|
| Nine Months Ended | ||
| 2020 |
| 2019 | |
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
Net income |
| $ |
| $ |
Adjustments to reconcile net income to net |
|
|
|
|
Depreciation |
|
| ||
Amortization |
|
| ||
Provision for (recovery of) losses on accounts receivable |
| ( |
| ( |
Amortization of Right-of-Use Assets |
|
| ||
(Gain) loss on disposal of assets |
|
| ||
Deferred income taxes |
| ( |
| ( |
Stock-based compensation expense |
|
| ||
Tax benefit attributable to exercise of stock options |
|
| ||
Changes in operating assets and liabilities: |
|
|
|
|
Accounts receivable and other receivables |
|
| ( | |
Inventories |
|
| ( | |
Prepaid expenses and other current assets |
|
| ||
Accounts payable |
| ( |
| ( |
Accrued expenses |
|
| ( | |
Total adjustments |
|
| ||
Net cash provided by operating activities |
|
| ||
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
Capital expenditures for: |
|
|
|
|
Property and equipment |
| ( |
| ( |
Intangible assets |
|
| ( | |
Net cash used in investing activities |
| ( |
| ( |
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
Proceeds from issuance of common stock - options |
|
| ||
Common stock purchased and retired |
| ( |
| ( |
Payment of dividends |
| ( |
| ( |
Net cash used in financing activities |
| ( |
| ( |
|
|
|
|
|
Effect of exchange rate changes on cash |
| ( |
| ( |
Net decrease in cash and cash equivalents |
|
| ( | |
Cash at beginning of period |
|
| ||
Cash at end of period |
| $ |
| $ |
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
|
|
| |
Cash paid during the period for income taxes |
| $ |
| $ |
Cash paid during the period for interest |
|
| ||
|
|
|
| |
see notes to consolidated condensed financial statements |
|
|
|
|
3
UTAH MEDICAL PRODUCTS, INC. | |||||||||||
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE | |||||||||||
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2020 AND SEPTEMBER 30, 2019 | |||||||||||
(In thousands - unaudited) | |||||||||||
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| Additional |
| Other |
|
|
| Total |
| Common Stock |
| Paid-in |
| Comprehensive |
| Retained |
| Stockholders' | ||
Shares |
| Amount |
| Capital |
| Income |
| Earnings |
| Equity | |
Balance at June 30, 2020 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
Shares issued upon exercise of employee |
|
|
|
|
| ||||||
Stock option compensation expense |
|
|
|
|
| ||||||
Common stock purchased and retired | ( |
|
| ( |
|
| ( |
| ( | ||
Foreign currency translation adjustment |
|
|
|
|
| | |||||
Common stock dividends |
|
|
|
| ( |
| ( | ||||
Net income |
|
|
|
|
| ||||||
Balance at September 30, 2020 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
|
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2019 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
Shares issued upon exercise of employee |
|
|
|
|
| ||||||
Stock option compensation expense |
|
|
|
|
| ||||||
Common stock purchased and retired | ( |
| ( |
| ( |
|
| ( |
| ( | |
Foreign currency translation adjustment |
|
|
| ( |
|
| ( | ||||
Common stock dividends |
|
|
|
| ( |
| ( | ||||
Net income |
|
|
|
|
| ||||||
Balance at September 30, 2020 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
|
|
|
|
|
|
|
|
|
|
| |
Balance at June 30, 2019 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
Shares issued upon exercise of employee |
|
|
|
|
| ||||||
Stock option compensation expense |
|
|
|
|
| ||||||
Common stock purchased and retired |
|
| ( |
|
|
| |||||
Foreign currency translation adjustment |
|
|
| ( |
|
| ( | ||||
Common stock dividends |
|
|
|
| ( |
| ( | ||||
Net income |
|
|
|
|
| ||||||
Balance at September 30, 2019 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
|
|
|
|
|
|
|
|
|
|
| |
Balance at December 31, 2018 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
Shares issued upon exercise of employee |
|
|
|
|
| ||||||
Stock option compensation expense |
|
|
|
|
| ||||||
Common stock purchased and retired | ( |
|
| ( |
|
|
| ( | |||
Foreign currency translation adjustment |
|
|
| ( |
|
| ( | ||||
Common stock dividends |
|
|
|
| ( |
| ( | ||||
Net income |
|
|
|
|
| ||||||
Balance at September 30, 2019 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
|
|
|
|
|
|
|
|
|
|
| |
see notes to consolidated condensed financial statements |
|
|
|
|
|
|
|
|
|
|
|
4
UTAH MEDICAL PRODUCTS, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1) The unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States. These statements should be read in conjunction with the financial statements and notes included in the Utah Medical Products, Inc. ("UTMD" or "the Company") annual report on Form 10-K for the year ended December 31, 2019. In the opinion of management, the accompanying financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company's financial position and results of operations. Currency amounts are in thousands except per-share amounts and where noted.
(2) Recent Accounting Standards.
(3) Inventories at September 30, 2020, and December 31, 2019, consisted of the following:
| September 30, 2020 |
|
| December 31, 2019 | |
Finished goods | $ |
| $ | ||
Work-in-process |
|
|
| ||
Raw materials |
|
|
| ||
Total | $ |
| $ |
5
(4) Stock-Based Compensation. At September 30, 2020, the Company has stock-based employee compensation plans which authorize the grant of stock options to eligible employees and directors. The Company accounts for stock compensation under FASB Accounting Standards Codification (“ASC”) 718, Compensation - Stock Compensation. This statement requires the Company to recognize compensation cost based on the grant date fair value of options granted to employees and directors. In the quarters ended September 30, 2020, and 2019, the Company recognized $
(5) Warranty Reserve. The Company’s published warranty is: “UTMD warrants its products to conform in all material respects to all published product specifications in effect on the date of shipment, and to be free from defects in material and workmanship for a period of thirty (30) days for supplies, or twenty-four (24) months for equipment, from date of shipment. During the warranty period UTMD shall, at its option, replace any products shown to UTMD's reasonable satisfaction to be defective at no expense to the Purchaser or refund the purchase price.”
UTMD maintains a warranty reserve to provide for estimated costs which are likely to occur. The amount of this reserve is adjusted, as required, to reflect its actual experience. Based on its analysis of historical warranty claims and its estimate that existing warranty obligations were immaterial,
6
(6) Global 3Q 2020 revenues (USD) by product category:
|
| Domestic |
|
| Outside US |
|
| Total | |
Obstetrics |
| $ |
| $ |
| $ | |||
Gynecology/Electrosurgery/Urology |
|
|
|
|
|
| |||
Neonatal |
|
|
|
|
|
| |||
Blood Pressure Monitoring and Accessories |
|
|
|
|
|
| |||
Total |
| $ |
| $ |
| $ |
Global 9M 2020 revenues (USD) by product category:
|
| Domestic |
|
| Outside US |
|
| Total | |
Obstetrics |
| $ |
| $ |
| $ | |||
Gynecology/Electrosurgery/Urology |
|
|
|
|
|
| |||
Neonatal |
|
|
|
|
|
| |||
Blood Pressure Monitoring and Accessories |
|
|
|
|
|
| |||
Total |
| $ |
| $ |
| $ |
(7) Leases
UTMD has operating leases for a portion of its parking lot at its Midvale facility and an automobile at its Ireland facility. The remaining lease term on the parking lot is
The components of lease cost were as follows: | Three Months Ended September 30, 2020 |
Operating Lease Cost (in thousands) | $ |
Right of Use Assets obtained in exchange for new operating lease Obligations | $ |
| |
Other Information | Three Months Ended September 30, 2020 |
Weighted Average Remaining Lease Term - Operating Leases | |
Weighted Average Discount Rate – Operating Leases |
Operating lease liabilities/ payments (in thousands) |
|
Operating lease payments, 2020 | $ |
Operating lease payments, 2021 | $ |
Operating lease payments, 2022 | $ |
Operating lease payments, 2023 | $ |
Operating lease payments, 2024 | $ |
Thereafter | $ |
Reconciliation of operating lease liabilities/ payments to operating lease liabilities | (in thousands) |
Total operating lease liabilities/ payments | $ |
Operating lease liabilities – current (included in Accrued Expenses) | $ |
Operating lease liabilities – long term | $ |
Present value adjustment | $ |
Maturities of lease liabilities were as follows:(in thousands)
Maturities of lease liabilities were as follows: | (in thousands) |
Year ending December 31, |
|
2020 | $ |
2021 | $ |
2022 | $ |
2023 | $ |
2024 | $ |
Thereafter | $ |
7
(8) Distribution Agreement Purchase. UTMD completed the purchase of exclusive U.S. distribution rights for the Filshie Clip System from CooperSurgical, Inc. (CSI) on February 1, 2019. The $
(9) Earnings Per Share. Basic earnings per share is calculated by dividing net income attributable to the common stockholders of the company by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by assuming the exercise of stock options at the closing price of stock at the end of 3rd quarter 2020.
The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:
(in thousands) | Three months ended |
| Nine months ended | ||||
| September 30, |
| September 30, | ||||
2020 |
| 2019 |
| 2020 |
| 2019 | |
Numerator |
|
|
|
|
|
|
|
Net income |
|
|
| ||||
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
Weighted average shares, basic |
|
|
| ||||
Dilutive effect of stock options |
|
|
| ||||
Diluted shares |
|
|
| ||||
|
|
|
|
|
|
|
|
Earnings per share, basic |
|
|
| ||||
Earnings per share, diluted |
|
|
| ||||
(10) Subsequent Events. UTMD has evaluated subsequent events through the date the financial statements were issued, and concluded there were no other events or transactions during this period that required recognition or disclosure in its financial statements.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
General
Utah Medical Products, Inc. (UTMD) manufactures and markets a well-established range of specialty medical devices. The Company’s Form 10-K Annual Report for the year ended December 31, 2019, provides a detailed description of products, technologies, markets, regulatory issues, business initiatives, resources and business risks, among other details, and should be read in conjunction with this report. Because of the relatively short span of time, results for any given three month period in comparison with a previous three month period may not be indicative of comparative results for the year as a whole. Currency amounts in the report are in thousands, except per share amounts or where otherwise noted. Currencies in this report are denoted as $ or USD = U.S. Dollars; A$ or AUD = Australia Dollars; £ or GBP = UK Pound Sterling; C$ or CAD = Canadian Dollars; and € or EUR = Euros.
Analysis of Results of Operations
a)Overview
Income statement results in 3Q and 9M 2020 compared to the same periods of 2019 were as follows:
| 3Q 2020 | 3Q 2019 | change | 9M 2020 | 9M 2019 | change |
Net Sales | $ 10,479 | $ 12,494 | (16.1%) | $ 30,168 | $ 35,073 | (14.0%) |
Gross Profit | 6,497 | 7,379 | (12.0%) | 18,283 | 21,652 | (15.6%) |
Operating Income | 3,588 | 4,371 | (17.9%) | 9,428 | 12,954 | (27.2%) |
Income Before Tax | 3,588 | 4,448 | (19.3%) | 9,553 | 13,150 | (27.4%) |
Net Income (NI) | 2,933 | 3,705 | (20.8%) | 7,386 | 10,369 | (28.8%) |
Earnings per Diluted Share (EPS) | 0.803 | 0.991 | (19.0%) | 2.008 | 2.774 | (27.6%) |
UTMD management believes that the presentation of sequential 2020 quarterly results provides meaningful supplemental information to both management and investors. Keeping in mind that results for any given three month period in comparison with a previous three month period may not be indicative of comparative results for the year as a whole, the following table shows the percent changes in 2020 quarterly results compared to the same periods of time in 2019:
Consolidated Income Statement | 1Q | 2Q | 3Q | 9M |
Worldwide Revenues | + 1.6% | (25.8%) | (16.1%) | (14.0%) |
Gross Profit | + 0.9% | (34.0%) | (12.0%) | (15.6%) |
Operating Income | ( 5.8%) | (55.9%) | (17.9%) | (27.2%) |
Earnings Before Income Tax | ( 3.6%) | (56.7%) | (19.3%) | (27.4%) |
Net Income | - | (62.8%) | (20.8%) | (28.8%) |
Earnings Per Share | - | (62.0%) | (19.0%) | (27.6%) |
Revenues [USD denominated] | 1Q | 2Q | 3Q | 9M |
U.S. domestic (excluding OEM) | + 14.5% | (29.1%) | (8.0%) | ( 9.2%) |
Canada domestic | (21.7%) | (62.9%) | ( 5.6%) | (32.0%) |
Ireland domestic | (26.2%) | (48.6%) | (18.1%) | (30.9%) |
UK domestic | (11.2%) | (72.8%) | (34.4%) | (38.7%) |
France domestic | (11.8%) | (72.1%) | (12.3%) | (32.6%) |
Australia domestic | ( 8.6%) | (43.0%) | (13.6%) | (22.0%) |
Subtotal, Direct to End User: | + 4.2% | (39.1%) | (11.1%) | (16.3%) |
All Other OUS (Sales to Int’l Distributors) |
( 5.2%) |
( 4.5%) |
(34.7%) |
(15.6%) |
U.S. OEM Sales | + 0.7% | + 9.5% | ( 8.9%) | ( 0.6%) |
Worldwide Revenues | + 1.6% | (25.8%) | (16.1%) | (14.0%) |
UTMD subsidiary direct domestic sales in Canada, Ireland, the United Kingdom, France and Australia are invoiced in foreign currencies. Foreign currency exchange (FX) rates for income statement purposes are transaction-weighted averages. The average rates from the applicable foreign currency to USD during 3Q 2020 and 9M 2020 compared to the same periods in 2019 follow:
| 3Q 20 | 3Q 19 | Change | 9M 20 | 9M 19 | Change |
GBP | 1.295 | 1.233 | +5.0% | 1.279 | 1.273 | +0.5% |
EUR | 1.173 | 1.108 | +5.8% | 1.128 | 1.123 | +0.4% |
AUD | 0.714 | 0.687 | +4.0% | 0.677 | 0.700 | (3.3%) |
CAD | 0.751 | 0.758 | (0.8%) | 0.745 | 0.752 | (1.0%) |
9
Although the volatility of FX rates for OUS sales when consolidated in USD terms continues to impact period-to-period relative financial results because of UTMD’s significant percentage of foreign currency sales, the FX rate impact in 9M 2020 was less significant than in the recent past. Except for the CAD FX rate which had not changed as significantly as other currencies, a healthy 3Q 2020 decline in the USD offset its strengthening during the first half of the year. Foreign currency revenues in 3Q 2020 were increased by $85 as a result of a weaker USD compared to 3Q 2019. In contrast, the difference in period-to-period FX rates reduced revenues by $36 in 9M 2020. Foreign currency sales as a percentage of total sales were 21.0% of total sales in 3Q 2020 and 22.0% of total sales in 9M 2020. UTMD’s 3Q 2019 and 9M 2019 revenues invoiced in foreign currencies represented 23.6% and 27.2% of total consolidated USD sales respectively.
Other factors that affected period-to-period revenue comparisons included
1)International distributors’ quarter-to-quarter orders fluctuate more than domestic end user orders.
2)1Q 2019 was a partial quarter of U.S. domestic Filshie Clip System (Filshie device) sales, as the UTMD acquisition of the Cooper Surgical Inc. (CSI) exclusive Filshie device distribution rights took effect February 1, 2019.
UTMD profit margins in 3Q 2020 and 9M 2020 compared to 3Q 2019 and 9M 2019 follow:
| 3Q 2020 (Jul – Sep) | 3Q 2019 (Jul – Sep) | 9M 2020 (Jan – Sep) | 9M 2019 (Jan – Sep) |
Gross Profit Margin (gross profits/ sales): | 62.0% | 59.1% | 60.6% | 61.7% |
Operating Income Margin (operating profits/ sales): | 34.2% | 35.0% | 31.3% | 36.9% |
Net Income Margin (profit after taxes/ sales): | 28.0% | 29.7% | 25.2% | 29.6% |
Gross Profit in 3Q 2020 declined less than the sales decline primarily as a result of sales mix. The 9M 2020 gross profit margin (GPM), gross profit divided by sales, was lower than in 9M 2019 despite the better 3Q GPM because 14% lower sales during 9M 2020 absorbed marginally less of UTMD’s fixed critical mass of manufacturing overhead. Because UTMD believes that the lower sales are transitory, knows it can remain very profitable even at the lower sales levels experienced during the pandemic and has a significant cash reserve relative to operational needs, management will not cut important resources and sacrifice future capabilities just to maintain short term profit margins.
Operating Income declined more than gross profit in both 3Q 2020 and 9M 2020 because UTMD’s non-cash identifiable intangible asset (IIA) amortization expense included in operating expenses was 15.5% of sales in 3Q 2020 compared to 12.8% of sales in 3Q 2019, and 16.0% in 9M 2020 compared to 12.7% in 9M 2019. This was due not only to the lower sales in 2020 (less absorption of a fixed expense) but also the GBP FX rate difference in the 3Q and the timing of beginning the CSI IIA amortization in 2019.
Earnings before tax (EBT) declined more than operating income simply because UTMD did not receive interest on its cash balances in 2020 like it did in 2019, although average cash balances were about 20% higher during 9M 2020. Net Income declined slightly more than EBT as a result of the sovereignty mix of taxable profits in 2020 compared to 2019. The lowest tax regimes of Ireland and the UK had the greatest declines in EBT. Finally, Earnings Per Share (EPS) declined less than net income as a result of the benefit of share repurchases in 2020.
UTMD’s FX rates for balance sheet purposes are the applicable rates at the end of each reporting period. The FX rates from the applicable foreign currency to USD for assets and liabilities at the end of September 2020 and the end of September 2019 follow:
| Sep 30, 2020 | Sep 30, 2019 | Change |
GBP | 1.292 | 1.230 | +5.0% |
EUR | 1.172 | 1.091 | +7.5% |
AUD | 0.716 | 0.675 | +6.1% |
CAD | 0.751 | 0.755 | (0.6%) |
UTMD’s September 30, 2020 Balance Sheet remained strong with an absence of debt. During 2020, inventories declined $0.6 million despite much lower sales, which is an indication of good manufacturing planning and control. Due to the increase in value of the GBP, EUR and AUD noted above, despite depreciation of fixed assets, the USD net book value of fixed assets in the UK, Ireland and Australia increased $0.6 million as of September 30, 2020 from September 30, 2019. Over the one year period of time, the intangible asset balance declined $5.5 million, about 12%. Ending cash and investments were $46.3 million on September 30, 2020 compared to $42.8 million on December 31, 2019, after paying $3.1 million in cash dividends to stockholders and repurchasing $7.0 million in UTMD stock during 9M 2020. After reducing stockholders’ equity a combined $10.1 million in 9M 2020 stockholder dividends and share repurchases, September 30, 2020 stockholders’ equity was down only $2.7 million from December 31, 2019.
10
b)Revenues
Beginning on January 1, 2018, the Company adopted ASU 2014-09, the new revenue recognition accounting standard. Management completed an extensive assessment and implementation of the standard, including UTMD’s various contracts with customers and associated performance obligations and the Company’s conclusions regarding its revenue recognition practices and procedures. Other items like commissions and rights of return were also evaluated by the Company. Management is confident that the Company has properly evaluated the standard’s requirements and has arrived at appropriate conclusions in recognizing revenue in accordance with the new standard. Those practices and procedures the Company will use to recognize revenue under the new standard are not significantly different than the methods used previously since UTMD has traditionally recognized revenue upon shipping a physical product to a customer, which is also when the Company has met its performance obligations under contracts it has with its customers that represent over 99% of its revenue. While the Company’s revenue not associated with shipping a physical product is immaterial, management believes the Company’s practices in recognizing that revenue is also in accordance with ASU 2014-09.
Terms of sale are established in advance of UTMD’s acceptance of customer orders. In the U.S., Ireland, UK, France, Canada and Australia, UTMD generally accepts orders directly from and ships directly to end user clinical facilities, as well as third party medical/surgical distributors, under UTMD’s Standard Terms and Conditions (T&C) of Sale. About 14% of UTMD’s domestic end user sales, excluding Filshie device sales, go through third party med/surg distributors which contract separately with clinical facilities to provide purchasing, storage and scheduled delivery functions for the applicable facility. UTMD’s T&C of Sale to end user facilities are substantially the same in the U.S., Ireland, UK, France, Canada and Australia.
UTMD may have separate discounted pricing agreements with a specific clinical facility or group of affiliated facilities based on volume of purchases. Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities, if applicable, are established in advance of orders accepted or shipments made. For existing customers, past actual shipment volumes typically determine the fixed price by part number for the next agreement period of one year. For new customers, the customer’s best estimate of volume is usually accepted by UTMD for determining the ensuing fixed prices for the agreement period. Prices are not adjusted after an order is accepted. For the sake of clarity, the separate pricing agreements with clinical facilities based on volume of purchases disclosure is not inconsistent with UTMD’s disclosure that the selling price is fixed prior to the acceptance of a specific customer order.
Total consolidated 3Q 2020 UTMD sales were $2,016 (16.1%) lower than in 3Q 2019. Constant currency sales were $2,101 (16.8%) lower. Total consolidated 9M 2020 UTMD sales were $4,905 (14.0%) lower than in 9M 2019. Constant currency sales in 9M 2020 were $4,869 (13.9%) lower than in 9M 2019.
In 3Q 2020 compared to 3Q 2019, U.S. domestic sales were 8% lower and OUS sales were 28% lower. In 9M 2020 compared to 9M 2019, U.S. domestic sales were 7% lower and OUS sales were 23% lower.
Domestic sales in 3Q 2020 were $6,950 compared to $7,575 in 3Q 2019. Domestic sales in 9M 2020 were $18,906 compared to $20,366 in 9M 2019. The components of domestic sales include 1) “direct sales” of UTMD’s medical devices to user facilities (and med/surg stocking distributors for hospitals), excluding Filshie Clip System (“Filshie device”) sales, 2) “OEM sales” of components and other products manufactured by UTMD for other medical device and non-medical device companies, and 3) Filshie device sales direct to U.S. medical facilities starting in February 2019.
Domestic direct sales in 3Q 2020 excluding Filshie devices, representing 50% of total domestic sales, were $178 (5%) lower than in 3Q 2019. Domestic direct sales in 9M 2020 excluding Filshie devices, representing 51% of total domestic sales, were $1,078 (10%) lower than in 9M 2019. OEM sales in 3Q 2020, representing 25% of total domestic sales, were $172 (9%) lower than in 3Q 2019. OEM sales in 9M 2020, also representing 25% of total domestic sales, were $27 (1%) lower than in 9M 2019. Filshie device sales direct to U.S. domestic end-user facilities were $275 (14%) lower in 3Q 2020 compared to sales in 3Q 2019. Filshie device sales direct to U.S. domestic end-user facilities were $355 (7%) lower in 9M 2020 compared to Filshie device sales in 9M 2019. Because Filshie device sales are a significant portion of UTMD’s domestic business and a UTMD device most affected by the COVID-19 pandemic, management believes the following table might help to see the overall 2020 pandemic impact and recovery trend:
Filshie device sequential quarterly USD domestic direct sales in the U.S.
Year | 1Q | 2Q | 3Q | 9M |
2020 | 1,689 | 1,135 | 1,733 | 4,557 |
2019 | 925 | 1,979 | 2,008 | 4,912 |
11
OUS sales in 3Q 2020 were $3,528 compared to $4,919 in 3Q 2019. OUS sales in 9M 2020 were $11,262 compared to $14,707 in 9M 2019.
OUS sales invoiced in GBP, EUR, AUD and CAD currencies were $85 higher in 3Q 2020 and $36 lower in 9M 2020 as a result of changes in FX rates. Foreign currency OUS sales in 3Q 2020 were $2,205, which was 62% of all OUS sales and 21% of total consolidated sales. In comparison, foreign currency OUS sales in 3Q 2019 were $2,944, which was 60% of all OUS sales and 24% of total consolidated sales.
The foreign currency OUS sales in 9M 2020 were $6,653, which was 59% of all OUS sales and 22% of total consolidated sales. In comparison, foreign currency OUS sales in 9M 2019 were $9,534, which was 65% of all OUS sales and 27% of total consolidated sales. Because Filshie device sales are also a significant portion of UTMD’s OUS business and an implanted device most affected by the COVID-19 pandemic, management believes the following table might help to see the overall 2020 pandemic impact and recovery trend:
Filshie device OUS sequential quarterly USD-denominated sales:
| Year | 1Q | 2Q | 3Q | 9M |
Direct | 2020 | 1,798 | 681 | 1,426 | 3,905 |
| 2019 | 2,135 | 2,036 | 1,810 | 5,981 |
Distributor | 2020 | 318 | 323 | 133 | 774 |
| 2019 | 494 | 487 | 437 | 1,418 |
Total OUS | 2020 | 2,117 | 1,003 | 1,559 | 4,679 |
| 2019 | 2,630 | 2,523 | 2,246 | 7,399 |
OUS Filshie sales obviously took a deeper hit from the pandemic than in the U.S.
UTMD segments sales into the following general product categories: gynecology/ electrosurgery, labor & delivery, neonatal, and miscellaneous including blood pressure monitoring kits and accessories as well as related OEM products.
In 3Q 2020 compared to 3Q 2019, worldwide gynecology/ electrosurgery device sales were down 21%, worldwide labor & delivery device sales were essentially the same, worldwide neonatal device sales were down 6% and worldwide blood pressure monitoring and related OEM product sales were down 18%. Devices in the gynecology/ electrosurgery category were mostly classified as “nonessential” during the pandemic. In the blood pressure monitoring category, UTMD’s largest OUS distributor took a double quarterly shipment in 3Q 2019.
In 9M 2020 compared to 9M 2019, worldwide gynecology/ electrosurgery device sales were down 22%, worldwide labor & delivery device sales were down 13%, worldwide neonatal device sales were down 2% and worldwide blood pressure monitoring and related OEM product sales were down 3%.
The following table provides USD sales amounts divided into general product categories for total sales and the subset of OUS sales:
Global 3Q 2020 revenues (USD) by product category:
| Domestic | Outside US | Total |
Obstetrics | $ 1,032 | $ 247 | $ 1,279 |
Gynecology/Electrosurgery/Urology | 2,847 | 2,202 | 5,049 |
Neonatal | 1,151 | 348 | 1,499 |
Blood Pressure Monitoring and Accessories* | 1,920 | 732 | 2,652 |
Total: | $ 6,950 | $ 3,529 | $ 10,479 |
Global 9M 2020 revenues (USD) by product category:
| Domestic | Outside US | Total |
Obstetrics | $ 2,739 | $ 612 | $ 3,351 |
Gynecology/Electrosurgery/Urology | 7,686 | 6,945 | 14,631 |
Neonatal | 3,266 | 1,169 | 4,435 |
Blood Pressure Monitoring and Accessories* | 5,215 | 2,536 | 7,751 |
Total: | $ 18,906 | $ 11,262 | $ 30,168 |
*includes molded components sold to OEM customers.
Looking forward, although an increase in COVID-19 infections is likely in the winter months of 4Q 2020 in the northern hemisphere, assuming no significant new lockdowns or prohibitions of “nonessential procedures” are imposed by governments, UTMD expects that its 4Q 2020 sales will continue to recover and be higher than in 3Q 2020.
12
c)Gross Profit
Gross Profit results from subtracting the costs of manufacturing and shipping products to customers from revenues. Gross Profit was $883 (12.0%) lower in 3Q 2020 than in 3Q 2019, and $3,369 (15.6%) lower in 9M 2020 than in 9M 2019. UTMD’s 3Q 2020 GPM improved to 62.0% compared to 59.1% in 3Q 2019 so that the decline in 3Q Gross Profit was not as significant as the 3Q decline in sales. Sales to international distributors are at lower prices for the same devices because the distributor incurs direct marketing expenses instead of UTMD. Sales to international distributors were only 18% of total sales in 3Q 2020 compared to 23% in 3Q 2019. The 3Q 2019 GPM was also exceptionally low because of a “double” shipment of blood pressure monitoring kits to UTMD’s China distributor. For 9M 2020 compared to 9M 2019, Gross Profit declined slightly more than the sales decline as a result of UTMD not cutting critical manufacturing overhead resources, and providing special incentives in 2Q 2020 for employees to come to work. Nevertheless, the 60.6% GPM for the 2020 year to date has met management’s long term objective.
d)Operating Income
Operating Income results from subtracting Operating Expenses from Gross Profit. Operating Expenses, comprised of general and administrative (G&A) expenses, sales and marketing (S&M) expenses and product development (R&D) expenses, were 27.8% of sales in 3Q 2020 compared to 24.1% of sales in 3Q 2019. Operating Expenses were 29.4% of sales in 9M 2020 compared to 24.8% of sales in 9M 2019. Although the operating expense percentage of sales increased due to the 2020 short term pandemic reduction in sales, management continued to tightly manage operating expenses without sacrificing resources needed for longer term growth.
Summary comparison of (USD) consolidated operating expenses:
| 3Q 2020 | 3Q 2019 | 9M 2020 | 9M 2019 |
S&M Expense | $ 352 | $ 421 | $ 1,195 | $ 1,304 |
R&D Expense | 125 | 130 | 375 | 357 |
G&A Expense | 2,432 | 2,457 | 7,285 | 7,037 |
Total Operating Expenses: | $ 2,909 | $ 3,008 | $ 8,855 | $ 8,698 |
Lower S&M expenses were due primarily to the lack of trade show expenses during the pandemic. S&M expenses were 3.4% of sales in both 3Q 2020 and 3Q 2019. S&M expenses were 4.0% of sales in 9M 2020 compared to 3.7% of sales in 9M 2019.
R&D expenses were consistent with the prior year’s same periods of time, varying only by specific project expenses. R&D expenses were 1.2% of sales in 3Q 2020 compared to 1.0% of sales in 3Q 2019. R&D expenses in 9M 2020 were also 1.2% of sales compared to 1.0% of sales in 9M 2019.
The higher G&A expense in 9M 2020 was due to amortization expense of the CSI IIA for a full quarter in 1Q 2020 compared to a partial quarter in 1Q 2019. Consolidated G&A expenses were 23.2% of sales in 3Q 2020 compared to 19.7% of sales in 3Q 2019. Consolidated G&A expenses were 24.1% of sales in 9M 2020 compared to 20.1% of sales in 9M 2019. G&A expenses included non-cash expense from the amortization of IIA resulting from the March 2011 Femcare Group Ltd (UK) acquisition and the amortization of IIA from the purchase of the CSI U.S. exclusive Filshie devices distribution rights effective in February 2019.
The initial amount of IIA for the 2011 Femcare UK purchase was £23,998. After 9.5 years of amortization, the IIA balance is £8,686. For both years of 2020 and 2019, the amortization expense rate was a constant £399 per calendar quarter. The USD amortization expense amount in each period, however, varied according to the USD/GBP FX rate.
The initial amount of IIA for the 2019 acquisition of 4.75 years’ remaining exclusive U.S. Filshie device distribution rights from CSI was $21,000. The straight-line amortization of this IIA is $1,105/ calendar quarter over the remaining 4.75 years of the prior distribution agreement. After 20 months of amortization, the CSI IIA balance as of September 30, 2020 is $13,632. The difference in 9M CSI IIA amortization expense is due to the start of the amortization in February 2019, i.e. 9 months of expense in 2020 through September versus 8 months in 2019.
13
Because the IIA amortization expenses represent a significant portion of UTMD’s G&A expenses, UTMD provides the following table that separates the IIA amortization expenses from all other G&A expenses:
| 3Q 2020 | 3Q 2019 | 9M 2020 | 9M 2019 |
IIA amortization expense | $ 1,621 | $ 1,597 | $ 4,839 | $ 4,471 |
All other G&A expense | 811 | 860 | 2,445 | 2,566 |
Total G&A Expenses: | $ 2,432 | $ 2,457 | $ 7,284 | $ 7,037 |
Percent of Sales: | 3Q 2020 | 3Q 2019 | 9M 2020 | 9M 2019 |
IIA amortization expense | 15.5% | 12.8% | 16.0% | 12.8% |
All other G&A expense | 7.7% | 6.9% | 8.1% | 7.3% |
Total G&A Expenses: | 23.2% | 19.7% | 24.1% | 20.1% |
Eventually, when the two Filshie-related IIA balances are fully amortized, stockholders can look forward to a substantial increase in EBT. The Femcare acquisition IIA amortization expense has 5.5 more years to run at about $516 per quarter using the same 1.295 USD/GBP FX rate as in 3Q 2020. The CSI IIA amortization expense has 3.1 more years to run at $1,105 per quarter. Stockholders will appreciate that, although cash flow will not be affected, annualized reported EPS will increase $.90 after another 3.1 years, based on current shares outstanding and if current U.S. and Utah income tax rates remain the same. Similarly, after another 5.5 years annualized EPS would be $1.36 higher based on current shares outstanding and unchanged income tax rates.
Other G&A expenses were lower in both periods primarily because UTMD’s CEO has taken 50% salary in 2020 compared to 2019, and 2020 management bonuses based on the projected 2020 annual EBT have been accrued at a lower rate than in 2019.
In summary, Operating Income in 3Q 2020 was $3,588 (34.2% of sales) compared to $4,371 (35.0% of sales) in 3Q 2019. Operating Income in 9M 2020 was $9,428 (31.3% of sales) compared to $12,954 (36.9% of sales) in 9M 2019. Lower gross profits in 2020 were leveraged down further by higher IIA amortization expense absorbed by fewer sales. In any event, the operating income margins achieved in 2020 were excellent compared to industry peers.
e)Non-operating expense/ Non-operating income
Non-operating expense includes 1) bank fees; 2) losses from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms; and 3) losses from disposition of assets. Non-operating income includes 1) investment income from cash deposit balances; 2) rent of underutilized property; 3) royalties received from licensing the Company’s technology; 4) gains from dispositions of assets; and 5) gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms.
UTMD’s net non-operating income in 3Q 2020 was less than $1 compared to $76 in 3Q 2019. Net non-operating income in 9M 2020 was $126 compared to $196 in 9M 2019.
In 3Q 2020 and 3Q 2019, gains or losses from remeasurement of the value of foreign currency bank balances were negligible. In 9M 2020, UTMD recognized a $41 gain from remeasurement of the value of foreign currency bank balances compared to a $44 loss in 9M 2019. Royalties received were $5 in 3Q 2020 compared to $0 in 3Q 2019, and $10 in 9M 2020 compared to $6 in 9M 2019. Interest earned on cash balances were $2 and $64 in 3Q and 9M 2020 respectively, compared to interest of $61 and $199 in 3Q and 9M 2019 respectively.
f)Income Before Income Taxes (EBT)
EBT results from subtracting net non-operating expense or adding net non-operating income from or to, as applicable, Operating Income. Consolidated 3Q 2020 EBT was $3,588 (34.2% of sales) compared to $4,448 (35.6% of sales) in 3Q 2019. Consolidated 9M 2020 EBT was $9,553 (31.7% of sales) compared to $13,150 (37.5% of sales) in 9M 2019.
The EBT of Utah Medical Products, Inc. in the U.S. was $6,469 in 9M 2020 compared to $8,674 in 9M 2019. The EBT of Utah Medical Products, Ltd (Ireland) was EUR 2,393 in 9M 2020 compared to EUR 2,157 in 9M 2019. The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP (297) in 9M 2020 compared to GBP 1,449 in 9M 2019. The 9M 2020 EBT of Utah Medical Products Canada, Inc. (dba Femcare Canada) was CAD 565 in 9M 2020 compared to CAD 926 in 9M 2019. The EBT of UTMD’s manufacturing subsidiaries varies as a result of intercompany shipments which are eliminated in the consolidation of results.
14
EBITDA is a non-US GAAP metric that UTMD management believes is of interest to investors because it provides meaningful supplemental information to both management and investors that represents profitability performance without factoring in effects of financing, accounting decisions regarding non-cash expenses, capital expenditures or tax environments. Although the U.S. Securities and Exchange Commission advises that EBITDA is a non-GAAP metric, UTMD’s non-US GAAP EBITDA is the sum of the following elements in the table below, each of which is a US GAAP number:
Component of EBITDA | 3Q 2020 | 3Q 2019 | Change | 9M 2020 | 9M 2019 | Change |
EBT | $ 3,588 | $ 4,448 | (19.3%) | $ 9,553 | $13,150 | (27.4%) |
Depreciation of fixed assets | 160 | 171 |
| 495 | 526 |
|
Amortization of patent expenses | 13 | 13 |
| 37 | 41 |
|
Amortization of Femcare IIA | 516 | 492 |
| 1,523 | 1,524 |
|
Amortization of CSI distribution agreement IIA | 1,105 | 1,105 |
| 3,316 | 2,947 |
|
Stock option compensation expense | 49 | 29 |
| 121 | 85 |
|
Remeasured currency (gains) or losses | 2 | (3) |
| (41) | 44 |
|
Adjusted Consolidated EBITDA: | $ 5,433 | $ 6,255 | (13.2%) | $15,004 | $18,317 | (18.1%) |
Management believes that the non-US GAAP EBITDA decline is more indicative of the COVID-19 negative impact on UTMD’s 2020 operating results than the change represented by EBT.
g)Net Income
Net Income is EBT minus a provision for income taxes. Net Income in 3Q 2020 was $2,933 (28.0% of sales) compared to $3,705 (29.7% of sales) in 3Q 2019. The average consolidated income tax provision (as a % of EBT) in 3Q 2020 was 18.3% compared to 16.7% in 3Q 2019.
Net Income in 9M 2020 was $7,386 (24.5% of sales) compared to Net Income of $10,369 (29.6% of sales) in 9M 2019. Net Income in 9M 2020 included a 2Q 2020 unfavorable $225 tax provision increase for a future UK income tax increase on non-deductible IIA amortization expense over the next six years. The average consolidated income tax provisions (as a % of EBT) in 9M 2020 and 9M 2019 were 22.7% and 21.1%, respectively.
h)Earnings Per Share (EPS)
EPS are consolidated Net Income divided by the number of shares of stock outstanding (diluted to take into consideration stock option awards which are “in the money,” i.e., have exercise prices below the applicable period’s weighted average market value).
Diluted EPS in 3Q 2020 were $.803 compared to $.991 in 3Q 2019. Diluted EPS in 9M 2020 were $2.008 compared to $2.774 in 9M 2019. According to U.S. GAAP, the UK tax law change in 2Q 2020 which increased UTMD’s deferred tax liability, to be amortized over the next six years, was recognized as an income tax provision increase in the 2Q 2020 income statement. Without the 2Q 2020 $225 tax provision adjustment, 9M 2020 EPS were $2.069.
Diluted shares were 3,653,500 in 3Q 2020 compared to 3,737,335 in 3Q 2019, and 3,678,210 in 9M 2020 compared to 3,738,056 in 9M 2019. The lower diluted shares in 9M 2020 were the combined result of 80,000 shares repurchased in 1Q 2020, 7,000 shares repurchased in 3Q 2020, 5,614 employee option exercises in 9M 2020 and an employee option award of 26,300 shares in March 2020.
Outstanding shares at the end of 3Q 2020 were 3,640,371 compared to 3,721,757 at the end of calendar year 2019. The difference was due to employee option exercises of 5,614 during 9M 2020 offset by 87,000 shares repurchased in the open market. Outstanding shares were 3,720,344 one year ago at the end of 3Q 2019. The number of shares used for calculating diluted EPS was higher than ending shares because of a time-weighted calculation of average outstanding shares plus dilution from unexercised employee and director options. The total number of outstanding unexercised employee and outside director options at September 30, 2020 was 71,700 at an average exercise price of $65.80, including shares awarded but not yet vested. This compares to 51,690 unexercised option shares at the end of 2019 at an average exercise price of $58.50/ share, including shares awarded but not yet vested.
15
The number of shares added as a dilution factor in 3Q 2020 was 11,130 compared to 17,588 in 3Q 2019. The number of shares added as a dilution factor in 9M 2020 was 14,514 compared to 16,435 in 9M 2019. In March 2020, 26,300 option shares were awarded to 48 employees at an exercise price of $77.05 per share. No options were awarded in 2019. UTMD paid $1,020 ($0.280/share) in dividends to stockholders in 3Q 2020 compared to $1,028 ($0.275/ share) paid in 3Q 2019. Dividends paid to stockholders during 3Q 2020 were 35% of 3Q 2020 Net Income. UTMD paid $3,097 ($0.280/share) in dividends to stockholders in 9M 2020 compared to $3,083 ($0.275/ share) paid in 9M 2019. Dividends paid to stockholders during 9M 2020 were 41% of 9M 2020 Net Income.
In March 2020, UTMD repurchased 80,000 of its shares in the open market at $80.32/ share. In September 2020, UTMD repurchased 7,000 of its shares in the open market at $78.67/ share. The total 87,000 shares repurchased in 9M 2020 were at an average price of $80.19/ share. In May 2019, UTMD repurchased 5,000 shares at $79.52/ share. No other shares were repurchased in 2019. The Company retains the strong desire and financial ability for repurchasing its shares at a price it believes is attractive for remaining stockholders.
i) Return on Stockholder Equity (ROE) and Stock Value
ROE is the portion of Net Income retained by UTMD to internally finance its growth, divided by the average accumulated stockholders’ equity for the applicable time period. After payment of cash dividends to stockholders, annualized ROE in 9M 2020 was 6% compared to annualized ROE of 11% in 9M 2019. Before the payment of dividends, annualized ROE in 9M 2020 was 10% compared to 15% in 9M 2019. The lower ROE before dividends in 9M 2020 was due to an 8% increase in average accumulated stockholders’ equity together with a 29% decrease in Net Income. Targeting a high ROE of 20% (before dividends) remains a key financial objective for UTMD management.
UTMD’s closing share price at the end of 3Q 2020 was $79.87, down 26% from the $107.90 closing price at the end of 2019. The closing share price at the end of 3Q 2019 was $95.84.
Liquidity and Capital Resources
j)Cash flows
Net cash provided by operating activities, including adjustments for depreciation and amortization and other non-cash expenses along with changes in working capital, totaled $14,359 in 9M 2020 compared to $11,415 in 9M 2019. The $2,944 higher cash provided by operating activities in 9M 2020 was due primarily to a $6,187 difference from 1) 1,184 decreased trade accounts receivable and inventories compared to a $2,588 increase in 9M 2019, yielding a significant $3,772 working capital change difference in the two periods, 2) a $651 increase in accrued expenses compared to a $1,023 decrease in 9M 2019, yielding another $1,674 working capital change difference in the two periods, 3) $363 higher intangible asset amortization expense, and 4) $378 lower decrease in deferred income taxes, minus 1) $2,983 lower net income and 2) $251 higher decrease in accounts payable.
Capital expenditures for property and equipment (PP&E) were $806 in 9M 2020 compared to $251 in 9M 2019. The higher capital expenditures were due to a new roof on the Midvale facility and investment in new manufacturing capabilities in Ireland. There were no capital expenditures for intangible assets in 9M 2020 compared to $21,000 in 9M 2019 for the purchase of the remaining life of CSI’s exclusive U.S.distribution rights for the Filshie Clip System.
UTMD made cash dividend payments of $3,097 in 9M 2020 compared to $3,083 in 9M 2019. The Company used $6,976 of its cash to repurchase 87,000 of its own shares in 9M 2020 compared to using $398 of its cash to repurchase 5,000 of its own shares during 9M 2019.
In 9M 2020, UTMD received $282 and issued 5,614 shares of its stock upon the exercise of employee and director stock options. Option exercises in 9M 2020 were at an average price of $50.15 per share. In comparison, in 9M 2019 the Company received $222 and issued 5,629 shares of stock on the exercise of employee and director stock options. Option exercises in 9M 2019 were at an average price of $39.53 per share.
Management believes that current cash balances, income from operations and effective management of working capital will provide the liquidity needed to finance internal growth plans. The Company may utilize cash not needed to support normal operations in one or a combination of the following: 1) in general, to continue to invest at an opportune time in ways that will enhance future profitability; 2) to make additional investments in new technology and/or processes; and/or 3) to acquire a product line or company that will augment revenue and EPS growth and better utilize UTMD’s existing infrastructure. If there are no better strategic uses for UTMD’s cash, the Company will continue to return cash to stockholders in the form of dividends and share repurchases when the stock appears undervalued.
16
k)Assets and Liabilities
September 30, 2020 total consolidated assets were $107,072, a net decrease of $2,715 from December 31, 2019. Net intangible assets declined by $5,397, inventories declined by $609 and receivables declined by $466. Offsetting that combined $6,472 asset decline was a $3,507 increase in cash and a $308 increase in PP&E net of $495 in depreciation. As a result of the increase in cash, consolidated current assets increased $2,375.
UTMD’s Ireland subsidiary EUR-denominated assets and liabilities on September 30, 2020 were translated into USD at an FX rate 4.4% higher (stronger EUR relative to the USD) than the FX rate at the end of 2019. UTMD’s UK subsidiary GBP-denominated assets were translated into USD at an FX rate 2.6% lower (weaker GBP) than the FX rate at the end of 2019. UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 1.9% higher (stronger AUD) than the FX rate at the end of 2019. UTMD’s Canada subsidiary CAD-denominated assets were translated into USD at an FX rate 2.7% lower (weaker CAD) than the FX rate at the end of 2019. The net book value of consolidated property, plant and equipment increased $308 at September 30, 2020 from the end of 2019 due to period-ending changed FX rates, $806 in new asset purchases and $495 in depreciation.
Working capital (current assets minus current liabilities) was $53,632 at September 30, 2020 compared to $51,438 at December 31, 2019. Consolidated receivables and inventories declined $466 and $609, respectively, but cash increased $3,507. Accrued liabilities increased $649, primarily from $550 higher income taxes payable as UTMD had over-accrued income taxes payable by $514 at the end of 2019, and $244 higher customer deposits as a result of the timing of international distributor shipments in 4Q 2020 requiring prepayment. UTMD management believes that its working capital remains sufficient to meet normal operating needs, new capital expenditures and continued cash dividend payments to stockholders.
September 30, 2020 net intangible assets (goodwill plus other intangible assets less amortization) declined $5,397 from the end of 2019. No new intangible assets were acquired in 9M 2020. At September 30, 2020, net intangible assets including goodwill were 36% of total consolidated assets compared to 40% at year-end 2019, and 42% at September 30, 2019.
The long term deferred tax liability (DTL) balance for Femcare IIA ($9,084 on the date of the acquisition) was $2,132 (£1,650) at September 30, 2020, compared to $2,239 (£1,688) at December 31, 2019, and $2,170 (£1,764) at September 30, 2019. Reduction of the DTL occurs as the book/tax difference of IIA amortization is eliminated over the remaining useful life of the Femcare IIA (because the amortization expense is not tax deductible in the UK). The DTL only declined $107 at September 30, 2020 from December 31, 2019, despite 9M 2020 amortization expense of $1,523, which reduced the DTL balance by $289. The difference was due to a 2Q 2020 UK tax law change which increased the DTL balance by $225 (£182) plus the change in ending FX rates. The UK decided to not reduce its corporate income tax rate from 19% to 17% beginning in 2Q 2020, as previously enacted. (The $225 increase in deferred UK taxes over the following six years was also booked in the 2Q 2020 tax provision, reducing 9M 2020 net income $225.)
UTMD’s total debt ratio (total liabilities/ total assets) as of September 30, 2020 was 8%, including a remaining $2,074 REPAT tax liability payable over another five years. The total debt ratio as of December 31, 2019 was also 8%, and as of September 30, 2019 was 9%.
The $2,715 decrease in total liabilities and equity (same as total assets) was primarily due to a $2,677 September 30, 2020 ending decrease in stockholders’ equity compared to December 31, 2019. Stockholders’ equity was reduced during 9M 2020 by $10,074 from share repurchases and dividends paid to stockholders, offset by $7,386 net profit accumulated during 9M 2020.
l)Management's Outlook
As outlined in its December 31, 2019 SEC 10-K report, UTMD’s general plan for 2020 was to
1) exploit distribution and manufacturing synergies by further integrating capabilities and resources in its multinational operations;
2) focus on effective direct marketing of the benefits of the Filshie Clip System in the U.S;
3) introduce additional products helpful to clinicians through internal new product development;
4) continue to achieve excellent overall financial operating performance;
5) utilize positive cash generation to continue providing cash dividends to stockholders and make open market share repurchases if/when the UTMD share price seems undervalued; and
6) be vigilant for accretive acquisition opportunities which may be brought about by difficult burdens on small, innovative companies.
Although not on its plan relative to specific financial numbers due to the COVID-19 pandemic, the Company continues to effectively execute its general plan outlined above.
17
m)Accounting Policy Changes
None
Forward-Looking Information. This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by management based on information currently available. When used in this document, the words “anticipate,” “believe,” “project,” “estimate,” “expect,” “intend” and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current view of the Company respecting future events and are subject to certain risks, uncertainties and assumptions, including the risks and uncertainties stated throughout the document. Although the Company has attempted to identify important factors that could cause the actual results to differ materially, there may be other factors that cause the forward statement not to come true as anticipated, believed, projected, expected, or intended. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those described herein as anticipated, believed, projected, estimated, expected or intended. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results, and the Company assumes no obligation to update or disclose revisions to those estimates.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
UTMD has manufacturing and trading operations, including related assets, in the U.S. denominated in the U.S. Dollar (USD), in Ireland denominated in the Euro (EUR), in England denominated in the British Pound (GBP), in Australia denominated in the Australia Dollar (AUD), and, starting in 2017, in Canada denominated in the Canadian Dollar (CAD). The currencies are subject to exchange rate fluctuations that are beyond the control of UTMD. The exchange rates were .8529, .8907 and .9169 EUR per USD as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively. Exchange rates were .7741, .7537 and .8129 GBP per USD as of September 30, 2020, December 31, 2019 and September 30, 2019, respectively. Exchange rates were 1.3964, 1.4226 and 1.4823 AUD per USD on September 30, 2020, December 31, 2019, and September 30, 2019, respectively. Exchange rates were 1.3323, 1.2962, and 1.3242 CAD per USD on September 30, 2020, December 31, 2019, and September 30, 2019, respectively. UTMD manages its foreign currency risk without separate hedging transactions by either invoicing customers in the local currency where costs of production were incurred, by converting currencies as transactions occur, and by optimizing global account structures through liquidity management accounts.
Item 4. Controls and Procedures
The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2020. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that, as of September 30, 2020, the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal controls over financial reporting that occurred during the nine months ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may be a party from time to time in litigation incidental to its business. Presently, there is no litigation.
Item 1A. Risk Factors
In addition to the other information set forth in this report, investors should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in UTMD’s Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect its business, financial condition or future results. The risks described in the Annual Report on Form 10-K are not the only risks facing the Company. Additional risks and uncertainties not currently known to UTMD or currently deemed to be immaterial also may materially adversely affect the Company’s business, financial condition and/or operating results.
Legislative or executive order healthcare reform in the United States, particularly as suggested by leading candidates in a presidential election year, have the potential to render the U.S. medical device marketplace unpredictable. A fully government-run healthcare system would likely eliminate healthcare consumer choice as well as commercial incentives for innovation. Government-mandated shutdowns of “nonessential” medical procedures with the intent of protecting the public from a virus have the potential to substantially reduce demand for UTMD’s medical devices.
Increasing regulatory burdens, including premarketing approval delays, may result in significant loss of revenue, unpredictable costs and loss of management focus on developing and marketing products that improve the quality of healthcare:
Thousands of small focused medical device manufacturers including UTMD that do not have the overhead structure that the few large medical device companies can afford are increasingly burdened with bureaucratic and underqualified regulator demands that are not reasonably related to assuring the safety or effectiveness of the devices that they provide. Premarketing submission administrative burdens, and substantial “user fees” or notified body review fees, represent a significant non-clinical and/or non-scientific barrier to new product introduction, resulting in lack of investment or delays to revenues from new or improved devices. The risks associated with such circumstances relate not only to substantial out-of-pocket costs, including potential litigation in millions of dollars, but also loss of business and a diversion of attention of key employees for an extended period of time from managing their normal responsibilities, particularly in new product development and routine quality assurance activities.
The dominance of Group Purchasing Organizations (GPOs) adds non-productive costs, typically weakens the Company’s marketing and sales efforts and may result in lower revenues:
GPOs, theoretically acting as bargaining agents for member hospitals, but actually collecting revenues from the companies that they are negotiating with, have made a concerted effort to turn medical devices that convey special patient safety advantages and better health outcomes, like UTMD’s, into undifferentiated commodities. GPOs have been granted an antitrust exemption by the U.S. Congress. Their business model based on “kickbacks” would be a violation of law in any other industry. These bureaucratic entities do not recognize or understand the overall cost of care as it relates to safety and effectiveness of devices, and they create a substantial administrative burden that is primarily driven by collection of administrative fees.
The Company’s business strategy may not be successful in the future:
As the level of complexity and uncertainty in the medical device industry increases, evidenced, for example, by the unpredictable regulatory environment, the Company’s views of the future and product/ market strategy may not yield financial results consistent with the past.
As the healthcare industry becomes increasingly bureaucratic, it puts smaller companies like UTMD at a competitive disadvantage:
An aging population is placing greater burdens on healthcare systems, particularly hospitals. The length of time and number of administrative steps required in adopting new products for use in hospitals has grown substantially in recent years. Smaller companies like UTMD typically do not have the administrative resources to deal with broad new administrative requirements, resulting in either loss of revenue or increased costs. As UTMD introduces new products it believes are safer and more effective, it may find itself excluded from certain clinical users because of the existence of long term supply agreements for preexisting products, particularly from competitors which offer hospitals a broader range of products and services. Restrictions used by hospital administrators to limit clinician involvement in device purchasing decisions makes communicating UTMD’s clinical advantages much more difficult.
19
A product liability lawsuit could result in significant legal expenses and a large award against the Company:
UTMD’s devices are frequently used in inherently risky situations to help physicians achieve a more positive outcome than what might otherwise be the case. In any lawsuit where an individual plaintiff suffered permanent physical injury, the possibility of a large award for damages exists whether or not a causal relationship exists.
The Company’s reliance on third party distributors in some markets may result in less predictable revenues:
UTMD’s distributors have varying expertise in marketing and distributing specialty medical devices. They also sell other devices that may result in less focus on the Company’s products. In some countries, notably China, Pakistan and India not subject to similarly rigorous standards, a distributor of UTMD’s products may eventually become a competitor with a cheaper but lower quality version of UTMD’s devices.
The loss of one or more key employees could negatively affect UTMD performance:
In a small company with limited resources, the distraction or loss of key personnel at any point in time may be disruptive to performance. The Company’s benefits programs are key to recruiting and retaining talented employees. An increase in UTMD’s employee healthcare plan costs, for example, may cause the Company to have to reduce coverages which in turn represents a risk to retaining key employees.
Fluctuations in foreign currencies relative to the USD can result in significant differences in period to period financial results:
Since a significant portion of UTMD’s sales are invoiced in foreign currencies and consolidated financial results are reported in USD terms, a stronger USD can have negative revenue effects. Conversely, a weaker USD would increase foreign subsidiary operating costs in USD terms. For the portion of sales to foreign entities made in fixed USD terms, a stronger USD makes the devices more expensive and weakens demand. For the portion invoiced in a foreign currency, not only USD-denominated sales are reduced, but also gross profits may be reduced because finished distributed devices and/or U.S. made raw materials and components are likely being purchased in fixed USD.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
During 9M 2020, UTMD purchased 87,000 of its shares in the open market for $6,977 including commissions and fees. During 9M 2019 UTMD purchased 5,000 of its shares in the open market for $398 including commissions and fees.
Item 6. Exhibits
Exhibit # | Title of Document |
|
|
31.1 | |
|
|
31.2 | |
|
|
32.1 | |
|
|
32.2 | |
|
|
101 | The following financial information from the Utah Medical Products, Inc. quarterly report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Consolidated Condensed Balance Sheets, (ii) Consolidated Condensed Statements of Income, (iii) Consolidated Condensed Statements of Cash Flows, (iv) Consolidated Statements of Stockholders’ Equity, and (v) related Notes to the Consolidated Condensed Financial Statements, tagged in detail. |
|
|
104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
20
SIGNATURES
Pursuant to the requirements of the Securities Exchanges Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UTAH MEDICAL PRODUCTS, INC.
REGISTRANT
Date: 11/9/20 By: /s/ Kevin L. Cornwell
Kevin L. Cornwell
CEO
Date: 11/9/20 By: /s/ Brian L. Koopman
Brian L. Koopman
Principal Financial Officer
21