Utah Medical Products(UTMD) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated condensed financial statements for Utah Medical Products, Inc. and its subsidiaries, including balance sheets, income statements, cash flow statements, and statements of stockholders' equity, along with explanatory notes covering accounting policies, inventory, stock-based compensation, warranty, revenue breakdown, leases, and the acquisition of distribution rights Consolidated Condensed Balance Sheets Consolidated Condensed Balance Sheets (in thousands) | Metric (in thousands) | June 30, 2019 | December 31, 2018 | | :-------------------- | :------------ | :---------------- | | Cash & investments | $32,880 | $51,112 | | Total current assets | $46,225 | $60,903 | | Total assets | $103,361 | $99,768 | | Total current liabilities | $3,821 | $5,260 | | Total liabilities | $9,449 | $10,776 | | Total stockholders' equity | $93,912 | $88,992 | - Total assets increased by $3,593 thousand from December 31, 2018, to June 30, 2019, primarily due to an increase in intangible assets and inventories, offset by a decrease in cash and investments[8][85] - Other intangible assets, net, significantly increased from $14,803 thousand at December 31, 2018, to $32,890 thousand at June 30, 2019, largely due to the acquisition of Filshie Clip System distribution rights[8][85] Consolidated Condensed Statements of Income Consolidated Condensed Statements of Income (in thousands, except per share) | Metric (in thousands, except per share) | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :------------------------------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Sales, net | $11,846 | $10,965 | $22,579 | $21,852 | | Gross profit | $7,500 | $6,984 | $14,273 | $13,906 | | Operating income | $4,481 | $5,056 | $8,582 | $10,027 | | Net income | $3,525 | $4,308 | $6,664 | $8,400 | | Earnings per common share (diluted) | $0.94 | $1.15 | $1.78 | $2.24 | - Net sales increased by 8.0% for the three months ended June 30, 2019, and by 3.3% for the six months ended June 30, 2019, compared to the same periods in 2018[10][30] - Net income decreased by 18.2% for the three months and 20.7% for the six months ended June 30, 2019, primarily due to increased operating expenses (amortization of new intangible assets) and a higher income tax provision rate[10][30][72][73] Consolidated Condensed Statements of Cash Flows Consolidated Condensed Statements of Cash Flows (in thousands) | Metric (in thousands) | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 | | :-------------------- | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $5,043 | $7,747 | | Net cash provided by (used in) investing activities | $(21,130) | $735 | | Net cash provided by (used in) financing activities | $(2,282) | $(1,664) | | Net increase (decrease) in cash and cash equivalents | $(18,232) | $5,998 | | Cash at end of period | $32,880 | $45,873 | - Net cash used in investing activities significantly increased to $(21,130) thousand in 1H 2019, primarily due to a $21,000 thousand investment in intangible assets (Filshie Clip distribution rights)[12][25][80] - Net cash provided by operating activities decreased by $2,704 thousand in 1H 2019 compared to 1H 2018, mainly due to lower net income, increased amortization expense, and higher inventory investment[12][80] Consolidated Statement of Stockholders' Equity Consolidated Statement of Stockholders' Equity (in thousands) | Metric (in thousands) | Balance at Dec 31, 2018 | Balance at Jun 30, 2019 | | :-------------------- | :---------------------- | :---------------------- | | Common Stock | $37 | $37 | | Additional Paid-in Capital | $121 | $0 | | Accumulated Other Comprehensive Income | $(11,290) | $(10,807) | | Retained Earnings | $100,123 | $104,682 | | Total Stockholders' Equity | $88,991 | $93,912 | - Total stockholders' equity increased by $4,921 thousand from December 31, 2018, to June 30, 2019, driven by net income and foreign currency translation adjustments, partially offset by common stock dividends and repurchases[14][37] - The company paid $2,055 thousand in common stock dividends and repurchased $398 thousand of common stock during the six months ended June 30, 2019[14][77][110] Notes to Consolidated Condensed Financial Statements - The company adopted new accounting guidance for leases (ASU 2016-02, Topic 842) on January 1, 2019, resulting in the addition of $452 thousand in right-of-use assets and lease liabilities to the balance sheet, with no effect on the income statement[17] Inventories (in thousands) | Category | June 30, 2019 | December 31, 2018 | | :-------------- | :------------ | :---------------- | | Finished goods | $3,145 | $1,615 | | Work-in-process | $1,217 | $1,103 | | Raw materials | $3,350 | $2,694 | | Total | $7,712 | $5,412 | - UTMD completed the purchase of exclusive U.S. distribution rights for the FILSHIE Clip System from CooperSurgical, Inc. (CSI) on February 1, 2019, for $21,000 thousand, which is recognized as an identifiable intangible asset amortized over 4.75 years[25] Global Revenues by Product Category (in thousands) | Product Category | 2Q 2019 | 2Q 2018 | 1H 2019 | 1H 2018 | | :-------------------------------- | :------- | :------- | :------- | :------- | | Obstetrics | $1,232 | $1,095 | $2,571 | $2,181 | | Gynecology/Electrosurgery/Urology | $6,763 | $6,073 | $12,345 | $12,275 | | Neonatal | $1,436 | $1,806 | $2,947 | $3,603 | | Blood Pressure Monitoring and Accessories | $2,415 | $1,991 | $4,716 | $3,793 | | Total | $11,846| $10,965| $22,579| $21,852| Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance for the second quarter and first half of 2019, discussing key drivers of revenue, profitability, and cash flows. It highlights the impact of foreign exchange rates, the acquisition of Filshie Clip distribution rights, and changes in operating expenses and tax rates. The section also covers liquidity, capital resources, and management's outlook for the remainder of 2019 General - UTMD manufactures and markets a range of specialty medical devices, with its 2018 Form 10-K providing detailed business descriptions[28] - Financial results for short periods may not indicate full-year comparative results, and currency amounts are in thousands, except per share amounts[28] Analysis of Results of Operations Overview Income Statement Results (in thousands, except per share) | Metric | 2Q 2019 | 2Q 2018 | Change | 1H 2019 | 1H 2018 | Change | | :---------------------- | :------- | :------- | :------- | :------- | :------- | :------- | | Net Sales | $11,846 | $10,965 | +8.0% | $22,578 | $21,852 | +3.3% | | Gross Profit | $7,500 | $6,984 | +7.4% | $14,273 | $13,906 | +2.6% | | Operating Income | $4,481 | $5,056 | (11.4%) | $8,582 | $10,027 | (14.4%) | | Net Income | $3,525 | $4,308 | (18.2%) | $6,664 | $8,400 | (20.7%) | | Earnings per Diluted Share | $0.944 | $1.148 | (17.8%) | $1.783 | $2.239 | (20.4%) | - Financial results were negatively impacted by a stronger USD, new intangible asset amortization from the Filshie Clip System acquisition, and a higher consolidated income tax provision rate[30] - Foreign currency exchange rates had a weighted average negative impact of 5.6% on foreign currency sales in 2Q 2019 and 6.1% in 1H 2019, reducing reported USD sales by $194 thousand and $431 thousand, respectively[31] Profit Margins | Margin Metric | 2Q 2019 | 2Q 2018 | 1H 2019 | 1H 2018 | | :------------------------ | :------ | :------ | :------ | :------ | | Gross Profit Margin | 63.3% | 63.7% | 63.2% | 63.6% | | Operating Income Margin | 37.8% | 46.1% | 38.0% | 45.9% | | Net Income Margin | 29.8% | 39.3% | 29.5% | 38.4% | Revenues - Total consolidated sales increased by 8.0% in 2Q 2019 and 3.3% in 1H 2019, with constant currency sales up 9.8% and 5.3% respectively[41] - Domestic sales increased by 28% in 2Q 2019 and 19% in 1H 2019, while OUS sales decreased by 12% in both periods, partly due to a stronger USD and a pause in U.S. neonatal device exports[42][43][45] - Filshie device sales direct to U.S. domestic end-user facilities increased by 64% in 2Q 2019 and 24% in 1H 2019 compared to sales to CSI in the prior year[43] OUS Revenues by Product Category (in thousands) | Product Category | 2Q 2019 | 2Q 2018 | 1H 2019 | 1H 2018 | | :-------------------------------- | :------- | :------- | :------- | :------- | | Obstetrics | $194 | $204 | $507 | $413 | | Gynecology/Electrosurgery/Urology | $3,534 | $3,695 | $7,038 | $7,602 | | Neonatal | $287 | $707 | $627 | $1,455 | | Blood Pressure Monitoring and Accessories | $835 | $878 | $1,616 | $1,646 | | Total | $4,850 | $5,484 | $9,788 | $11,116| Gross Profit (GP) - Gross profit increased by 7.4% in 2Q 2019 and 2.6% in 1H 2019, roughly consistent with revenue growth[53] - Gross Profit Margin did not increase from the Filshie device sales direct to U.S. end-users in 2019 because UTMD was selling repurchased CSI inventory, with significant improvement not expected until 2020[33][53] Operating Income (OI) - Operating expenses increased significantly to $3,019 thousand (25.5% of sales) in 2Q 2019 and $5,691 thousand (25.2% of sales) in 1H 2019, up from $1,928 thousand (17.6% of sales) and $3,880 thousand (17.8% of sales) in the prior year periods[53] - The increase in operating expenses was primarily due to a new $1,105 thousand (2Q 2019) and $1,842 thousand (1H 2019) identifiable intangible asset (IIA) amortization expense from the Filshie device distribution rights acquisition[34][56][58] - Excluding Filshie-related IIA amortization, G&A expenses decreased slightly in 2Q and 1H 2019, while S&M expenses increased due to direct marketing of Filshie devices[56][59][63] Consolidated Operating Expenses (in thousands) | Expense Category | 2Q 2019 | 2Q 2018 | 1H 2019 | 1H 2018 | | :---------------------- | :------ | :------ | :------ | :------ | | S&M Expense | $466 | $430 | $883 | $839 | | R&D Expense | $113 | $117 | $228 | $230 | | G&A Expense | $2,440 | $1,382 | $4,580 | $2,810 | | Total Operating Expenses | $3,019| $1,928| $5,691| $3,880| Non-operating expense (NOE)/ Non-operating income (NOI) - Net non-operating income (NOI) was $85 thousand in 2Q 2019 and $120 thousand in 1H 2019, significantly lower than $501 thousand and $538 thousand in the same periods of 2018[66][69] - The decrease in NOI was primarily due to a one-time $418 thousand gain on the sale of an unneeded storage facility in 2Q 2018 that did not recur in 2019[30][35][66][69] Income Before Income Taxes (EBT) - Consolidated EBT decreased to $4,565 thousand (38.5% of sales) in 2Q 2019 and $8,702 thousand (38.5% of sales) in 1H 2019, from $5,556 thousand (50.7% of sales) and $10,565 thousand (48.3% of sales) in the prior year periods[68] - Adjusted consolidated EBITDA (excluding noncash effects, currency gain/loss, and interest expense) was $6,397 thousand in 2Q 2019 and $12,062 thousand in 1H 2019, indicating consistent operating performance despite the non-recurring gain in 2018[71] Net Income (NI) - Net income decreased by 18.2% to $3,525 thousand in 2Q 2019 and by 20.7% to $6,664 thousand in 1H 2019[72][73] - Net Income Margin (NIM) was 29.8% in 2Q 2019 and 29.5% in 1H 2019, down from 39.3% and 38.4% respectively in the prior year periods[72][73] - The average consolidated income tax provision rate increased to 22.8% in 2Q 2019 (from 22.5% in 2Q 2018) and 23.4% in 1H 2019 (from 20.5% in 1H 2018), partly due to the new GILTI tax and a shift of Filshie-related EBT to the U.S.[36][72][73][74] Earnings Per Share (EPS) - Diluted EPS decreased by 17.8% to $0.944 in 2Q 2019 and by 20.4% to $1.783 in 1H 2019, consistent with the decline in net income[74] - The company paid $0.275 per share in dividends in 2Q 2019 and 1H 2019, representing 29% and 31% of net income, respectively[77] - UTMD repurchased 5,000 shares at an average price of $79.52 per share during 1H 2019, following 15,000 shares repurchased in 4Q 2018[78][110] Return on Equity (ROE) - Annualized ROE (before stockholder dividends) in 1H 2019 was 15%, down from 21% in 1H 2018, primarily due to lower net income resulting from the new IIA amortization expense[79] - Targeting a high ROE of 20% remains a key financial objective for management[79] Liquidity and Capital Resources Cash flows - Net cash provided by operating activities decreased to $5,043 thousand in 1H 2019 from $7,747 thousand in 1H 2018, mainly due to lower net income, no gain from asset sales, and increased investment in inventories[80] - Capital expenditures for property and equipment were $130 thousand in 1H 2019, down from $201 thousand in 1H 2018[81] - Management believes current cash balances, operating income, and working capital management will provide sufficient liquidity for internal growth, with excess cash potentially used for investments, acquisitions, dividends, or share repurchases[83] Assets and Liabilities - Total consolidated assets increased by $3,593 thousand to $103,361 thousand at June 30, 2019, from December 31, 2018[85] - Working capital decreased to $42,405 thousand at June 30, 2019, from $55,643 thousand at December 31, 2018, primarily due to an $18,232 thousand decrease in cash and investments related to the Filshie device distribution rights and inventory purchase[86] - Net intangible assets, including goodwill, increased by $18,063 thousand to 45% of total consolidated assets at June 30, 2019, compared to 29% at year-end 2018[87] - UTMD's total debt ratio (total liabilities/total assets) improved to 9% at June 30, 2019, from 11% at the end of 2018[89] Management's Outlook - Management expects to substantially achieve its 2019 financial objectives, including exploiting distribution synergies, focusing on direct marketing of the Filshie Tubal Ligation System in the U.S., introducing new products, maintaining strong financial performance, returning cash to stockholders, and seeking accretive acquisition opportunities[89] Accounting Policy Changes - UTMD adopted ASU 2014-09 (Revenue from Contracts with Customers) on January 1, 2018, and ASC Update No. 2016-02 (Leases) on January 1, 2019[89] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, primarily foreign currency exchange rate fluctuations, given its multinational operations in USD, EUR, GBP, AUD, and CAD. UTMD manages this risk through invoicing strategies and liquidity management, rather than separate hedging transactions - UTMD is exposed to foreign currency exchange rate fluctuations due to manufacturing and trading operations in the U.S. (USD), Ireland (EUR), England (GBP), Australia (AUD), and Canada (CAD)[91] - The company manages foreign currency risk by invoicing customers in local currency where costs are incurred, converting currencies as transactions occur, and optimizing global account structures, without using separate hedging transactions[91] Item 4. Controls and Procedures Management, including the CEO and Principal Financial Officer, evaluated the effectiveness of the company's disclosure controls and procedures as of June 30, 2019, concluding they were effective. No material changes to internal controls over financial reporting occurred during the six months ended June 30, 2019 - The CEO and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective as of June 30, 2019[93] - There were no material changes in the company's internal controls over financial reporting during the six months ended June 30, 2019[94] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company may be involved in litigation incidental to its business, but currently, there is no litigation expected to have a material impact on financial results - Currently, there is no litigation whose outcome is expected to be material to UTMD's financial results[96] Item 1A. Risk Factors This section refers investors to the detailed risk factors in the company's 2018 Form 10-K and highlights additional risks, including legislative healthcare reform (e.g., MDET), increasing regulatory burdens and premarketing approval delays, the impact of Group Purchasing Organizations (GPOs), challenges to business strategy, competitive disadvantages for smaller companies in a bureaucratic healthcare industry, product liability lawsuits, reliance on third-party distributors, loss of key employees, and fluctuations in foreign currencies - Investors should consider risk factors from the 2018 Form 10-K, as well as additional risks not currently known or deemed immaterial[97] - Key risks include the unpredictable U.S. medical device marketplace due to healthcare reform (e.g., suspended MDET), increasing regulatory burdens leading to potential revenue loss and management distraction, and the negative impact of Group Purchasing Organizations (GPOs) on marketing and sales efforts[98][99][102] - Other risks involve the potential for an unsuccessful business strategy, competitive disadvantages for smaller companies in a bureaucratic healthcare industry, significant legal expenses from product liability lawsuits, less predictable revenues due to reliance on third-party distributors, the loss of key employees, and significant financial differences from foreign currency fluctuations[104][105][106][107][108][109] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the first half of 2019, UTMD repurchased 5,000 shares of its common stock in the open market for $398 thousand, including commissions and fees - UTMD purchased 5,000 shares of its common stock in the open market for $398 thousand during 1H 2019[110] - No shares were purchased in 1H 2018[110] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications from the CEO and Principal Financial Officer as required by the Sarbanes-Oxley Act, and various XBRL-related documents - Exhibits include certifications from the CEO and Principal Financial Officer (pursuant to Rules 13a-14(a) and 18 U.S.C. §1350) and various XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation)[111] SIGNATURES The report is duly signed on behalf of Utah Medical Products, Inc. by Kevin L. Cornwell, CEO, and Brian L. Koopman, Principal Financial Officer, on August 7, 2019 - The report was signed by Kevin L. Cornwell (CEO) and Brian L. Koopman (Principal Financial Officer) on August 7, 2019[115]