Utah Medical Products(UTMD) - 2020 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited consolidated condensed financial statements for Q3 and 9M 2020, showing decreased assets, equity, sales, and net income compared to 2019 Consolidated Condensed Balance Sheets Total assets decreased to $107.1 million by September 30, 2020, from $109.8 million at year-end 2019, primarily due to reduced net intangible assets, while cash and investments increased Consolidated Condensed Balance Sheet Highlights (in thousands) | Account | Sep 30, 2020 | Dec 31, 2019 | | :--- | :--- | :--- | | Total Assets | $107,072 | $109,787 | | Cash & investments | $46,294 | $42,787 | | Inventories | $6,304 | $6,913 | | Other intangible assets, net | $24,993 | $30,212 | | Total Liabilities | $8,657 | $8,694 | | Total Stockholders' Equity | $98,415 | $101,093 | Consolidated Condensed Statements of Income Q3 2020 net sales decreased to $10.5 million and net income to $2.9 million, with similar declines for the nine-month period compared to 2019 Q3 Performance Comparison (in thousands, except per share) | Metric | Q3 2020 | Q3 2019 | | :--- | :--- | :--- | | Sales, net | $10,479 | $12,494 | | Gross profit | $6,497 | $7,379 | | Operating income | $3,587 | $4,371 | | Net income | $2,933 | $3,705 | | Earnings per share (diluted) | $0.80 | $0.99 | Nine-Month Performance Comparison (in thousands, except per share) | Metric | 9M 2020 | 9M 2019 | | :--- | :--- | :--- | | Sales, net | $30,168 | $35,073 | | Gross profit | $18,283 | $21,652 | | Operating income | $9,428 | $12,954 | | Net income | $7,386 | $10,369 | | Earnings per share (diluted) | $2.01 | $2.77 | Consolidated Condensed Statements of Cash Flows Net cash from operating activities increased to $14.4 million for 9M 2020, while financing activities included $7.0 million in stock repurchases and $3.1 million in dividends Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Activity | 2020 | 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $14,359 | $11,415 | | Net cash used in investing activities | ($806) | ($21,252) | | Net cash used in financing activities | ($9,792) | ($3,258) | | Net increase (decrease) in cash | $3,507 | ($13,719) | - Financing activities in the first nine months of 2020 included $7.0 million for stock repurchases and $3.1 million for dividend payments[13] Notes to Consolidated Condensed Financial Statements Financial statement notes detail inventory, disaggregated revenue by product category, operating leases, and amortization of the Filshie Clip System distribution rights Global 9M 2020 Revenues by Product Category (in thousands) | 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 & Accessories | $5,215 | $2,536 | $7,751 | | Total | $18,906 | $11,262 | $30,168 | - In February 2019, the company purchased exclusive U.S. distribution rights for the Filshie Clip System for $21 million, with this intangible asset being amortized over a remaining life of 3.08 years as of September 30, 2020[26] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the COVID-19 pandemic's significant negative impact on Q3 and 9M 2020 sales, particularly in OUS and gynecology, while maintaining profitability and a strong balance sheet Overview The company experienced a significant financial downturn in Q3 and 9M 2020 due to COVID-19, with double-digit declines in sales and income, yet maintained a strong, debt-free balance sheet Financial Performance vs. Prior Year | Metric | 3Q 2020 vs 3Q 2019 | 9M 2020 vs 9M 2019 | | :--- | :--- | :--- | | Net Sales | (16.1%) | (14.0%) | | Gross Profit | (12.0%) | (15.6%) | | Operating Income | (17.9%) | (27.2%) | | Net Income (NI) | (20.8%) | (28.8%) | | EPS (Diluted) | (19.0%) | (27.6%) | - The company's balance sheet remained strong with no debt, as cash and investments grew to $46.3 million at the end of Q3 2020 from $42.8 million at year-end 2019, even after paying $3.1 million in dividends and repurchasing $7.0 million in stock[37] Revenues Q3 2020 consolidated sales decreased 16.1% to $10.5 million, with OUS sales down 28% and gynecology/electrosurgery sales down 21%, though Filshie device sales showed Q3 recovery - In Q3 2020, U.S. domestic sales were 8% lower and OUS sales were 28% lower compared to Q3 2019, with nine-month U.S. domestic sales 7% lower and OUS sales 23% lower[41] - The gynecology/electrosurgery device category, largely deemed "nonessential" during the pandemic, saw a 21% worldwide sales decline in Q3 2020 compared to Q3 2019[49] Filshie Device Sequential Quarterly USD Domestic Sales (in thousands) | Year | 1Q | 2Q | 3Q | 9M | | :--- | :--- | :--- | :--- | :--- | | 2020 | $1,689 | $1,135 | $1,733 | $4,557 | | 2019 | $925 | $1,979 | $2,008 | $4,912 | Gross Profit Q3 2020 gross profit decreased 12.0% to $6.5 million, but gross profit margin improved to 62.0% due to a favorable sales mix, despite a slight 9M GPM decline - The Q3 2020 Gross Profit Margin (GPM) improved to 62.0% from 59.1% in Q3 2019, mainly due to a favorable sales mix, as lower-margin sales to international distributors constituted a smaller portion of total sales[53] - For the first nine months of 2020, the GPM was 60.6%, meeting management's long-term objective despite a slight decline from 61.7% in the same period of 2019[53] Operating Income Q3 2020 operating income decreased to $3.6 million, with the operating margin falling to 34.2%, primarily due to lower gross profits and increased intangible asset amortization - Operating expenses were 27.8% of sales in Q3 2020, up from 24.1% in Q3 2019, as management maintained resources for long-term growth despite the short-term sales reduction[54] Identifiable Intangible Asset (IIA) Amortization Expense (in thousands) | Expense Category | 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 | Net Income and Earnings Per Share (EPS) Q3 2020 net income decreased to $2.9 million and diluted EPS to $0.803, with share repurchases partially mitigating the EPS decline - The average consolidated income tax provision was higher in 2020 (18.3% in Q3, 22.7% in 9M) compared to 2019 (16.7% in Q3, 21.1% in 9M), partly due to a $225k tax provision increase in Q2 2020 related to a UK tax law change[69][70] - Share repurchases helped mitigate the decline in EPS, with diluted shares outstanding at 3.65 million in Q3 2020, down from 3.74 million in Q3 2019[72] Liquidity and Capital Resources The company maintained strong liquidity, with net cash from operations increasing to $14.4 million in 9M 2020, while allocating $7.0 million to share repurchases and $3.1 million to dividends - Net cash from operations increased by $2.9 million in 9M 2020 compared to 9M 2019, largely due to a $3.8 million positive change from decreased receivables and inventories[76] - In the first nine months of 2020, the company repurchased 87,000 shares for $7.0 million and paid $3.1 million in dividends[78] Assets and Liabilities Total assets decreased to $107.1 million due to a $5.4 million decline in net intangible assets, while working capital improved to $53.6 million and the debt ratio remained low - Working capital increased to $53.6 million at September 30, 2020, from $51.4 million at December 31, 2019, as a $3.5 million increase in cash more than offset a decrease in receivables and inventories[83] - Net intangible assets, including goodwill, declined to 36% of total assets at the end of Q3 2020, down from 40% at year-end 2019[84] Management's Outlook Management's 2020 outlook focuses on integrating operations, marketing the Filshie Clip System, new product development, and returning cash to shareholders while seeking acquisitions - The company's 2020 plan focuses on integrating operations, direct marketing of the Filshie Clip System, new product development, and maintaining financial performance[86][87] - UTMD will continue to use cash for dividends and share repurchases, while also seeking potential acquisitions[86] Quantitative and Qualitative Disclosures About Market Risk The company faces foreign currency exchange rate risk from international operations and manages it through operational strategies rather than hedging transactions - The company has operations denominated in USD, EUR, GBP, AUD, and CAD, making it subject to foreign exchange rate risk[89] - UTMD manages currency risk without using hedging instruments, instead relying on operational strategies like invoicing in local currencies and optimizing liquidity management[89] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2020, with no material changes to internal controls over financial reporting - As of September 30, 2020, the CEO and Principal Financial Officer concluded that the company's disclosure controls and procedures were effective[90] - No material changes were made to internal controls over financial reporting during the nine months ended September 30, 2020[91] PART II – OTHER INFORMATION Legal Proceedings The company is not currently involved in any litigation, though it may participate in incidental legal proceedings as part of normal business - As of the filing date, the company is not involved in any litigation[94] Risk Factors Key risks include healthcare reform unpredictability, government-mandated procedure shutdowns, increasing regulatory burdens, GPO dominance, reliance on distributors, and foreign currency fluctuations - Government-mandated shutdowns of "nonessential" medical procedures, as seen during the pandemic, have the potential to substantially reduce demand for the company's devices[96] - Increasing regulatory burdens and the dominance of Group Purchasing Organizations (GPOs) add costs, weaken marketing efforts, and create competitive disadvantages for smaller companies like UTMD[97][98][100] - A significant portion of sales are invoiced in foreign currencies, exposing the company to financial risk from fluctuations in exchange rates relative to the USD[104] Unregistered Sales of Equity Securities and Use of Proceeds In 9M 2020, the company repurchased 87,000 shares for $6.977 million, significantly more than the 5,000 shares for $398,000 in 9M 2019 Share Repurchase Activity | Period | Shares Purchased | Cost (in thousands) | | :--- | :--- | :--- | | 9M 2020 | 87,000 | $6,977 | | 9M 2019 | 5,000 | $398 | Exhibits This section lists exhibits filed with the Form 10-Q, including CEO and CFO certifications and iXBRL financial statements - Exhibits filed include CEO and CFO certifications (31.1, 31.2, 32.1, 32.2) and iXBRL financial data (101, 104)[106] SIGNATURES Signatures The report was signed and authorized by CEO Kevin L. Cornwell and Principal Financial Officer Brian L. Koopman on November 6, 2020 - The Form 10-Q was signed on November 6, 2020, by CEO Kevin L. Cornwell and Principal Financial Officer Brian L. Koopman[108]