Utah Medical Products(UTMD) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements Presents unaudited consolidated condensed financial statements for the nine months ended September 30, 2019, covering balance sheet, income, cash flow, and equity, with notes on policies and the FILSHIE Clip System acquisition Consolidated Condensed Balance Sheets Compares financial position as of September 30, 2019, to December 31, 2018, showing decreased cash and investments, increased intangible assets due to acquisition, and overall growth in total assets with reduced liabilities Consolidated Condensed Balance Sheet Highlights (in thousands) | Account | Sep 30, 2019 | Dec 31, 2018 | | :--- | :--- | :--- | | Cash & investments | $37,393 | $51,112 | | Total current assets | $49,513 | $60,903 | | Other intangible assets, net | $30,847 | $14,803 | | Total assets | $104,094 | $99,768 | | Total current liabilities | $3,686 | $5,260 | | Total liabilities | $9,108 | $10,776 | | Total stockholders' equity | $94,986 | $88,992 | Consolidated Condensed Statements of Income Details revenues, costs, and profits for the three and nine-month periods ended September 30, 2019, showing increased net sales but decreased operating and net income, largely due to a 2018 one-time tax benefit Nine Months Ended September 30, (in thousands, except per share amounts) | Metric | 2019 | 2018 | Change | | :--- | :--- | :--- | :--- | | Sales, net | $35,073 | $32,242 | +8.8% | | Gross profit | $21,652 | $20,200 | +7.2% | | Operating income | $12,954 | $14,429 | -10.2% | | Net income | $10,369 | $15,162 | -31.6% | | Earnings per common share (diluted) | $2.77 | $4.04 | -31.4% | Consolidated Condensed Statements of Cash Flows Outlines cash flows for the nine months ended September 30, 2019, detailing cash from operations, significant outflows for intangible asset purchases and dividends, resulting in a net decrease in cash - Net cash provided by operating activities decreased to $11.4 million in 9M 2019 from $12.4 million in 9M 2018[10] - Investing activities used $21.3 million in cash, driven by a $21.0 million purchase of intangible assets[10] - Financing activities used $3.3 million, including $3.1 million for dividend payments and $398 thousand for stock repurchases[10] Notes to Consolidated Condensed Financial Statements Provides supplementary details on accounting policies, inventory, stock-based compensation, and revenue breakdown, highlighting the $21 million FILSHIE Clip System distribution rights acquisition and the adoption of the new lease accounting standard - On February 1, 2019, UTMD purchased exclusive U.S. distribution rights for the FILSHIE Clip System from CooperSurgical, Inc. (CSI) for $21,000k. This intangible asset will be amortized over 4.75 years[24] Global 9M 2019 Revenues by Product Category (in thousands) | Product Category | Domestic | Outside US | Total | | :--- | :--- | :--- | :--- | | Obstetrics | $3,137 | $710 | $3,847 | | Gynecology/Electrosurgery/Urology | $8,503 | $10,237 | $18,740 | | Neonatal | $3,545 | $988 | $4,533 | | Blood Pressure Monitoring and Accessories | $5,181 | $2,772 | $7,953 | | Total | $20,366 | $14,707 | $35,073 | - The company adopted the new lease standard (ASU 2016-02) on January 1, 2019, which resulted in the addition of right-of-use assets and lease liabilities of $452k to the balance sheet[14] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial performance for Q3 and 9M 2019, highlighting the impact of a 2018 one-time tax benefit, foreign exchange rates, the FILSHIE Clip System acquisition, and product mix shifts on gross margins, while affirming a strong, debt-free financial position - Financial comparisons to 2018 are masked by a favorable $3.23 million adjustment to the company's repatriation (REPAT) tax liability recorded in Q3 2018[29] - The acquisition of FILSHIE Clip System U.S. distribution rights from CSI in February 2019 increased sales but also added $2,947k in new amortization expense for the first nine months of 2019[37][40] - A stronger U.S. dollar negatively impacted sales, reducing reported USD revenues by $576k in the first nine months of 2019 compared to the same period in 2018[36] Analysis of Results of Operations Provides detailed financial results for Q3 and 9M 2019, noting domestic sales growth driven by Filshie and OEM, a decline in OUS sales due to currency and exports, gross margin dilution from product mix, and increased operating expenses from amortization Non-GAAP Financial Comparison (9M 2019 vs 9M 2018) | Metric | 9M 2019 | 9M 2018 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $35,073 | $32,242 | +8.8% | | Operating Income | $12,954 | $14,429 | -10.2% | | NI Before REPAT Tax Adjust | $10,369 | $11,982 | -13.5% | | EPS Before REPAT Tax Adjust | $2.774 | $3.194 | -13.1% | - Gross Profit Margin (GPM) dilution in 2019 was caused by a product mix shift, with faster growth in lower-margin U.S. OEM sales and higher sales of low-GPM pressure transducer kits to the China distributor[38][59] - Operating Expenses in 9M 2019 increased by $2,927k year-over-year, almost entirely due to the new $2,947k amortization expense from the CSI distribution rights acquisition[61][62] Liquidity and Capital Resources Details cash flow and balance sheet changes, noting a decrease in cash and investments due to significant outflows for FILSHIE distribution rights, inventory, dividends, and stock repurchases, while maintaining a strong, debt-free financial position with sufficient working capital - Cash and investments decreased by $13.7 million to $37.4 million at September 30, 2019, after investing $23.1 million in the CSI Filshie distribution rights and inventory, paying $3.1 million in dividends, and repurchasing $0.4 million in stock[45] - Net cash from operating activities was $11.4 million in 9M 2019, a decrease from $12.4 million in 9M 2018[86] - The company's total debt ratio was 9% as of September 30, 2019, which includes the remaining $2.4 million REPAT tax liability payable over six years[93] Management's Outlook Management reaffirms its 2019 strategic plan, focusing on multinational integration, direct U.S. marketing of the FILSHIE Clip System, internal product development, and maintaining strong financial performance, alongside continued cash returns to shareholders - The company's strategic plan includes exploiting distribution synergies, focusing on direct U.S. marketing of the FILSHIE Clip System, and introducing new products[94] - UTMD will continue to return cash to stockholders via dividends and share repurchases if the stock price seems undervalued and no better strategic uses for cash are identified[89][94] Quantitative and Qualitative Disclosures about Market Risk Addresses the company's exposure to market risks, primarily foreign currency exchange rate fluctuations across multiple currencies, managed by invoicing in local currencies and optimizing global account structures without formal hedging instruments - The company is exposed to foreign currency risk from its operations in Ireland (EUR), England (GBP), Australia (AUD), and Canada (CAD)[97] - UTMD manages foreign currency risk without using separate hedging transactions, instead invoicing in local currencies and optimizing global liquidity management[97] Controls and Procedures Management, including the CEO and Principal Financial Officer, concluded that the company's disclosure controls and procedures were effective as of September 30, 2019, with no material changes to internal controls over financial reporting identified - Based on an evaluation as of September 30, 2019, the CEO and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective[98] - No changes occurred during the nine months ended September 30, 2019, that materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting[99] PART II – OTHER INFORMATION Legal Proceedings The company reports no pending litigation expected to have a material impact on its financial results, despite potential incidental litigation - There is no current litigation whose outcome is expected to be material to the company's financial results[100] Risk Factors Highlights key business risks, including the scheduled return of the medical device excise tax, increasing regulatory burdens, GPO market power, reliance on third-party distributors, and foreign currency fluctuations, referencing the 2018 Form 10-K for more detail - The medical device excise tax (MDET), suspended through 2019, is scheduled to be reinstated in 2020, posing a risk to future financial results[102] - Increasing regulatory burdens, such as premarketing approval delays, and the influence of Group Purchasing Organizations (GPOs) could result in lost revenue and unpredictable costs[103][106] - Reliance on third-party distributors in some markets and fluctuations in foreign currencies relative to the USD are identified as significant risks[111][113] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 5,000 of its own shares in the open market for $398,000 during the first nine months of 2019, including commissions and fees - During the first nine months of 2019, UTMD purchased 5,000 of its shares in the open market for $398,000[114] Exhibits Lists exhibits filed with the 10-Q report, primarily consisting of CEO and Principal Financial Officer certifications required by the Sarbanes-Oxley Act, and the company's financial data in XBRL format - The exhibits filed include CEO and CFO certifications pursuant to the Sarbanes-Oxley Act of 2002 and XBRL data files[116] Signatures Contains the formal signatures of the company's CEO, Kevin L. Cornwell, and Principal Financial Officer, Brian L. Koopman, dated November 7, 2019, authorizing the report filing - The report was duly signed and authorized on November 7, 2019, by Kevin L. Cornwell, CEO, and Brian L. Koopman, Principal Financial Officer[120]