Form 10-Q UTAH MEDICAL PRODUCTS For: Jun 30
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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: |
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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 ☐ | 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 August 11, 2022:
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 | |||
JUNE 30, 2022 AND DECEMBER 31, 2021 | |||
(in thousands) | |||
| (unaudited) |
| (audited) |
JUNE 30, 2022 |
| DECEMBER 31, 2021 | |
ASSETS |
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Current assets: |
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Cash & investments | $ |
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Accounts & other receivables, net |
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Inventories |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Operating lease – right-of-use assets, net |
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Goodwill |
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Other intangible assets |
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Other intangible assets - accumulated amortization | ( |
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Other intangible assets, net |
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Total assets | $ |
| $ |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable | $ |
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Accrued expenses |
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Total current liabilities |
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Deferred tax liability – Femcare IIA |
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Other long term liabilities | |
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Operating lease liability | |
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Deferred income taxes |
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Total liabilities |
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Stockholders' equity: |
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Common stock - $ |
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Accumulated other comprehensive loss | ( |
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Additional paid-in capital |
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Retained earnings |
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Total stockholders' equity |
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Total liabilities and stockholders' equity | $ |
| $ |
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see notes to consolidated condensed financial statements |
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1
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES | ||||||||
CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE | ||||||||
THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021 | ||||||||
(in thousands, except per share amounts - unaudited) | ||||||||
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| Three Months Ended |
| Six Months Ended | ||||
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| June 30, 2022 |
| June 30, 2021 |
| June 30, 2022 |
| June 30, 2021 |
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Sales, net |
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| $ |
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Cost of goods sold |
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Gross profit |
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Operating expense |
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Selling, general and administrative |
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Research & development |
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Total operating expenses |
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Operating income |
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Other income |
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Income before provision for income taxes |
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Provision for income taxes |
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Net income |
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| $ |
| $ |
| $ |
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Earnings per common share (basic) |
| $ |
| $ |
| $ |
| $ |
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Earnings per common share (diluted) |
| $ |
| $ |
| $ |
| $ |
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Shares outstanding - basic |
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Shares outstanding - diluted |
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Other comprehensive income (loss): |
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Foreign currency translation net of taxes of $ |
| $ ( |
| $ |
| $ ( |
| $ ( |
Total comprehensive income |
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| $ |
| $ |
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see notes to consolidated condensed financial statements |
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2
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES | ||||
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS | ||||
FOR THE SIX MONTHS ENDED JUNE 30, 2022 AND JUNE 30, 2021 | ||||
(in thousands - unaudited) | ||||
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| Six Months Ended | ||
| 2022 |
| 2021 | |
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
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Adjustments to reconcile net income to net |
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Depreciation |
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Amortization |
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Provision for (recovery of) losses on accounts receivable |
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Amortization of Right-of-Use Assets |
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Deferred income taxes |
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Stock-based compensation expense |
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Tax benefit attributable to exercise of stock options |
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Changes in operating assets and liabilities: |
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Accounts receivable and other receivables |
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Inventories |
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Prepaid expenses and other current assets |
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Accounts payable |
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Accrued expenses |
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Total adjustments |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Capital expenditures for: |
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Property and equipment |
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Intangible assets |
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Net cash used in investing activities |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from issuance of common stock - options |
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Common stock purchased and retired |
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Payment of dividends |
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Net cash used in financing activities |
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Effect of exchange rate changes on cash |
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Net increase in cash and cash equivalents |
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Cash at beginning of period |
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Cash at end of period |
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: |
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Cash paid during the period for income taxes |
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Cash paid during the period for interest |
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see notes to consolidated condensed financial statements |
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3
UTAH MEDICAL PRODUCTS, INC. | |||||||||||
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE | |||||||||||
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021 | |||||||||||
(In thousands - unaudited) | |||||||||||
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| Accumulated |
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| Additional |
| Other |
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| Total |
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| Comprehensive |
| Retained |
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Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity | |
Balance at December 31, 2021 |
| $ |
| $ |
| $ ( |
| $ |
| $ | |
Shares issued upon exercise of employee |
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Stock option compensation expense |
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Foreign currency translation adjustment |
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Common stock dividends |
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Net income |
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Balance at March 31, 2022 |
| $ |
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| $ ( |
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Shares issued upon exercise of employee | |
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Stock option compensation expense | |
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Common stock purchased and retired | ( |
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Foreign currency translation adjustment | |
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Common stock dividends | |
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Net income | |
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Balance at June 30, 2022 | |
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| $ ( |
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Balance at December 31, 2020 |
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Shares issued upon exercise of employee |
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Stock option compensation expense |
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Foreign currency translation adjustment |
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Common stock dividends |
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Net income |
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Balance at March 31, 2021 |
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| $ ( |
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Shares issued upon exercise of employee | |
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Stock option compensation expense | |
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Foreign currency translation adjustment | |
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Common stock dividends | |
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Net income | |
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Balance at June 30, 2021 | |
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| $ ( |
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see notes to consolidated condensed financial statements |
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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, 2021. 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.
The Company has determined that recently issued accounting standards will either have no material impact on its consolidated financial position or results of operations or cash flows, or will not apply to its operations.
(3) Inventories at June 30, 2022 and December 31, 2021 consisted of the following:
| June 30, 2022 |
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| December 31, 2021 | |
Finished goods | $ |
| $ | ||
Work-in-process |
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Raw materials |
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Total | $ |
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(4) Stock-Based Compensation. At June 30, 2022, 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 June 30, 2022 and 2021, 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) Global 2Q 2022 revenues (USD) by product category:
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| Outside US |
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Obstetrics |
| $ |
| $ |
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Gynecology/Electrosurgery/Urology |
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Neonatal |
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Blood Pressure Monitoring and Accessories |
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Total |
| $ |
| $ |
| $ |
Global 1H 2022 revenues (USD) by product category:
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| Domestic |
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| Outside US |
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Obstetrics |
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Gynecology/Electrosurgery/Urology |
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Neonatal |
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Blood Pressure Monitoring and Accessories |
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Total |
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| $ |
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(7) 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 $
(8) 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 on June 30, 2022.
The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:
(in thousands) | Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, | ||||
2022 |
| 2021 |
| 2022 |
| 2021 | |
Numerator |
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Net income |
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Denominator |
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Weighted average shares, basic |
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Dilutive effect of stock options |
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Diluted shares |
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Earnings per share, basic |
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Earnings per share, diluted |
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(9) 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.
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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, 2021 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 or six month period in comparison with a previous three or six 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; AUD = Australia Dollars; £ or GBP = UK Pound Sterling; CAD = Canadian Dollars; and € or EUR = Euros.
Analysis of Results of Operations
a) Overview
Income statement results in 2Q and 1H 2022 compared to the same periods of 2021 were as follows:
| 2Q 2022 | 2Q 2021 | change | 1H 2022 | 1H 2021 | change |
Net Sales | $ 13,428 | $ 12,604 | +6.5% | $ 25,752 | $ 23,568 | +9.3% |
Gross Profit | 8,151 | 7,785 | 4.7% | 15,683 | 14,732 | 6.5% |
Operating Income | 5,057 | 4,765 | 6.1% | 9,579 | 8,652 | 10.7% |
Income Before Tax | 5,199 | 4,825 | 7.7% | 9,729 | 8,723 | 11.5% |
Net Income (US GAAP) | 4,103 | 3,426 | 19.7% | 7,638 | 6,450 | 18.4% |
Earnings per Diluted Share | 1.124 | 0.937 | 19.9% | 2.088 | 1.765 | 18.3% |
The comparisons of 2Q and 1H 2022 results with the results in the same periods of 2021, according to U.S. Generally Accepted Accounting Principles (US GAAP), were affected by a long term deferred tax liability increase on the balance of Femcare intangible assets (the amortization of which is not tax-deductible in the UK) in 2Q 2021. The 2Q 2021 $390 increase in deferred UK taxes over the next five years resulted from the fact that the UK decided to increase its corporate income tax rate from 19% to 25% beginning on April 1, 2023. Therefore, the remaining amortization of Femcare intangible assets from April 1, 2023 through March 11, 2026 will have a 6% ($390) higher income tax impact. According to US GAAP, a deferred tax liability increase must be booked in the quarter in which the tax law change is enacted. UTMD management believes that the presentation of results excluding the unfavorable deferred tax liability adjustments to its 2021 income tax provisions provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results in 2022 compared to 2021. Please note that the non-US GAAP exclusion of tax provision adjustments only affects Net Income and Earnings Per Diluted Share (EPS), as follows:
| 2Q 2022 | 2Q 2021 |
| 1H 2022 | 1H 2021 |
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Net Income (non-US GAAP) | 4,103 | 3,817 | +7.5% | 7,638 | 6,840 | +11.7% |
EPS (non-US GAAP) | 1.124 | 1.044 | 7.7% | 2.088 | 1.871 | 11.6% |
The non-US GAAP comparisons of Net Income and EPS with the prior year’s same periods were consistent with the Income Before Tax comparisons. Income Before Tax obviously is not affected by income tax provisions.
Consolidated USD sales were 6.5% higher in 2Q 2022 and 9.3% higher in 1H 2022 higher compared to the same periods in 2021, despite the fact that sales invoiced in foreign currencies in 2022 were hindered by a stronger USD compared to other currencies. An unfavorable foreign currency exchange (FX) rate impact decreased total consolidated 2Q 2022 USD sales by 3.3% ($456) and 1H 2022 sales by 2.3% ($608). Sales invoiced in foreign currencies represented 29% of total consolidated sales (when expressed in USD) during 2Q 2022, and 26% during 1H 2022.
Sales in all product categories, except for sales of the Filshie Clip System which declined in the U.S., were up in 2Q and 1H 2022 compared to the same periods in 2021.
U.S. domestic sales in 2Q 2022 were 2.4% lower than in 2Q 2021, and 6.8% higher in 1H 2022 than in 1H 2021. Sales in 2Q 2022 to customers outside the U.S. (OUS) were 22.2% higher in USD terms, but 32.2% higher using the same FX rates as in 2Q 2021 (“constant currency”). Sales in 1H 2022 to OUS customers were 13.4% higher in USD terms, but 20.4% higher in constant currency.
7
Gross profits (GP) increased less than revenues primarily due to inflation in the variable costs of manufacturing, despite better absorption of fixed manufacturing overhead costs with higher sales. On the Operating Income line, the lower GP margins (GP divided by sales) in both 2Q and 1H periods were offset by the impact of a stronger USD on the foreign currency expenses of UTMD’s overseas subsidiaries, as well as better absorption of USD fixed identifiable intangible asset (IIA) amortization expenses which resulted from UTMD’s February 2019 acquisition of CooperSurgical Inc’s (CSI’s) U.S. exclusive distribution rights for the Filshie Clip System. Operating Income represented 37.7% of sales in 2Q 2022 compared to 37.8% of sales in 2Q 2021, and 37.2% of sales in 1H 2022 compared to 36.7% of sales in 1H 2021. UTMD was able to maintain consistent Operating Income margins despite the lower GPMs and litigation expenses which it did not have in the prior year.
Net Income and Earnings per Diluted Share (EPS) per US GAAP increased 19.7% and 19.9% respectively in 2Q 2022 compared to 2Q 2021. Net Income and EPS per US GAAP increased 18.4% and 18.3% respectively in 1H 2022 compared to 1H 2021. Non-US GAAP Net Income and EPS, which ignores the $390 additional income tax provision adjustment in 2021, increased 7.5% and 7.7% respectively in 2Q 2022 compared to a 2Q 2021 normal non-US GAAP operating result. Non-US GAAP Net Income and EPS increased 11.7% and 11.6% respectively in 1H 2022 compared to a 1H 2021 non-US GAAP operating result. The non-US GAAP increases in operating income were greater than the increases in sales as a result of $82 higher non-operating income in 2Q 2022 compared to 2Q 2021, and $79 higher non-operating income in 1H 2022 compared to 1H 2021. The consolidated average income tax rates (income tax provision divided by Earnings Before Taxes) follow:
| 2Q 2022 | 2Q 2021 | 1H 2022 | 1H 2021 |
Average Consolidated Income Tax Provision Rate (US GAAP) | 21.1% | 29.0% | 21.5% | 26.1% |
Average Consolidated Income Tax Provision Rate (non-GAAP) | 21.1% | 20.9% | 21.5% | 21.6% |
The impact of the 2Q 2021 deferred tax adjustment is apparent when comparing the US GAAP income tax provision rates with the non-US GAAP rates.
The percentage increase in 2Q 2022 EPS compared to 2Q 2021 EPS was slightly higher than the increase in Net Income because of shares repurchased in 2Q 2022.
UTMD profit margins in 2Q 2022 and 1H 2022 compared to 2Q 2021 and 1H 2021 follow:
| 2Q 2022 (Apr – Jun) | 2Q 2021 (Apr – Jun) | 1H 2022 (Jan – Jun) | 1H 2021 (Jan – Jun) |
Gross Profit Margin (gross profits/ sales): | 60.7% | 61.8% | 60.9% | 62.5% |
Operating Income Margin (operating profits/ sales): | 37.7% | 37.8% | 37.2% | 36.7% |
Net Income Margin (US GAAP): | 30.6% | 27.2% | 29.7% | 27.4% |
Net Income Margin (Non-US GAAP, B4 DTL Adj): | 30.6% | 30.3% | 29.7% | 29.0% |
Note: The Net Income Margin is Net Income after subtracting a provision for income taxes divided by sales. | ||||
UTMD’s June 30, 2022 Balance Sheet continued strong, with no debt. Ending Cash and Investments were $66.2 million on June 30, 2022 compared to $61.0 million on December 31, 2021. The June 30, 2022 cash balance resulted after paying $1.1 million in cash dividends to stockholders and repurchasing $2.5 million in UTMD stock during 2Q 2022. During the last twelve months (TTM) since June 30, 2021, UTMD has returned $12,943 to stockholders in the form of cash dividends and UTMD share repurchases.
Foreign currency exchange (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 2Q 2022 compared to the end of calendar year 2021 and the end of 2Q 2021 were
| 6-30-22 | 12-31-21 | Change | 6-30-21 | Change |
GBP | 1.21601 | 1.35358 | (10.2%) | 1.38065 | (11.9%) |
EUR | 1.04657 | 1.13765 | (8.0%) | 1.18514 | (11.7%) |
AUD | 0.69042 | 0.72678 | (5.0%) | 0.74952 | (7.9%) |
CAD | 0.77691 | 0.79016 | (1.7%) | 0.80619 | (3.6%) |
b) Revenues
Terms of sale are established in advance of UTMD’s acceptance of customer orders. In the U.S., Ireland, UK, France, Canada, Australia and New Zealand, UTMD accepts orders directly from and ships directly to end user medical facilities, as well as third party medical/surgical distributors, under UTMD’s Standard Terms and Conditions (T&C) of Sale. UTMD’s T&C of Sale to end user facilities are substantially the same in the U.S. and OUS. UTMD also has standard T&C of Sale for OEM customers, other medical device and non-medical device customers for components manufactured by UTMD, which are substantially the same, except that prices are generally quoted prior to acceptance of each order.
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UTMD may have separate discounted pricing agreements with a specific clinical facility, or group of affiliated facilities or large OEM customers based on volume of purchases. Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities or OEM customers, 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 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.
2Q 2022 Sales
Total consolidated 2Q 2022 UTMD worldwide (WW) sales were $824 (+6.5%) higher than in 2Q 2021. Without the negative impact of a stronger USD in converting foreign currency sales, WW constant currency sales were $1,280 higher (+10.2%) than in 2Q 2021, which was the second highest sales quarter of 2021. “Constant currency” sales means exchanging foreign currency sales into USD-denominated sales at the same FX rate as was in the previous period of time being compared.
Overall 2Q 2022 U.S. domestic sales were 2.4% lower and outside the U.S. (OUS) sales were 22.2% higher, despite an FX rate $456 (10.6%) negative impact on sales invoiced in foreign currencies. In other words, 2Q 2022 constant currency OUS sales were 32.2% higher than in 2Q 2021. In 2021, U.S. domestic sales recovered from the COVID-19 pandemic faster than OUS sales. In 2022, it appears that OUS sales are catching up with the U.S. recovery.
Domestic U.S. sales in 2Q 2022 were $7,829 compared to $8,023 in 2Q 2021. Domestic sales are invoiced in USD and not subject to FX rate fluctuations. The components of domestic sales include 1) “direct non-Filshie device sales” of UTMD’s medical devices to user facilities (and med/surg stocking distributors for hospitals), 2) “OEM sales” of components and other products manufactured by UTMD for other medical device and non-medical device companies, and 3) “domestic Filshie device sales”. UTMD separates domestic Filshie device sales from other medical device sales direct to medical facilities because UTMD is simply a distributor for Femcare in the U.S. Direct non-Filshie device sales, representing 51% of total domestic sales, were $266 (+7.1%) higher in 2Q 2022 than in 2Q 2021. Domestic OEM sales, representing 34% of total domestic sales, were $16 (0.6%) lower. Domestic Filshie device sales, representing 15% of total domestic sales, were $444 (27.9%) lower in 2Q 2022 compared to 2Q 2021.
OUS sales in 2Q 2022 were $5,599 compared to $4,581 in 2Q 2021. The increase in USD-denominated OUS sales is understated in constant currency terms. The stronger USD subtracted $456 from 2Q 2022 OUS sales invoiced in GBP, EUR, AUD and CAD currencies. FX rates for income statement purposes are transaction-weighted averages. The average FX rates from the applicable foreign currency to USD during 2Q 2022 and 2Q 2021 for revenue purposes follow:
| 2Q 2022 | 2Q 2021 | Change |
GBP | 1.2525 | 1.3986 | (10.4%) |
EUR | 1.0571 | 1.2043 | (12.2%) |
AUD | 0.7178 | 0.7696 | (6.7%) |
CAD | 0.7847 | 0.8119 | (3.4%) |
The weighted average unfavorable impact on 2Q 2022 foreign currency OUS sales was 10.6%. In constant currency terms, foreign currency sales in 2Q 2022 were 32.2% higher than in 2Q 2021. The portion of OUS sales invoiced in foreign currencies in USD terms were 29% of total consolidated 2Q 2022 sales compared to 27% in 2Q 2021.
OUS sales invoiced in foreign currencies are due to direct end-user sales in Ireland, the UK, France, Canada, Australia and New Zealand, and to shipments to OUS distributors of products manufactured by UTMD subsidiaries in Ireland and the UK. Export sales from the U.S. to OUS distributors are invoiced in USD. Direct to end-user OUS 2Q 2022 sales in USD terms (including the negative impact of FX rate differences) were 11% lower in Ireland with the EUR FX rate down 12%, 1% lower in Canada with the CAD FX rate down 3%, about the same in the UK with the GBP FX rate down 10%, 23% lower in Australia/New Zealand with the AUD FX rate down 7%, and 15% higher in France with the EUR FX rate down 12%. Sales to OUS distributors were 41% higher in 2Q 2022 than in 2Q 2021.
1H 2022 Sales
Total consolidated 1H 2022 UTMD WW sales were $2,184 (+9.3%) higher than in 1H 2021. Constant currency sales were $2,792 (+11.8%) higher. U.S. domestic sales were 6.8% higher and OUS sales were 13.4% higher in 1H 2022 compared to 1H 2021. In constant currency terms, 1H 2022 OUS sales were up 20.4%.
Domestic U.S. sales in 1H 2022 were $15,813 compared to $14,805 in 1H 2021. Direct non-Filshie device sales, representing 51% of total domestic sales, were $859 (+12.0%) higher in 1H 2022 than in 1H 2021, led by an increase in domestic neonatal device sales. OEM sales, representing 34% of total domestic sales, were $767 (+16.7%) higher. Domestic Filshie device sales, representing 15% of total domestic sales, were $618 (20.1%) lower in 1H 2022 compared to 1H 2021.
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OUS sales in 1H 2022 were $9,938 compared to $8,762 in 1H 2021. The increase in USD-denominated OUS sales is understated in constant currency terms. The stronger USD subtracted $608 from 1H 2022 OUS sales invoiced in GBP, EUR, AUD and CAD currencies. The transaction-weighted average FX rates from the applicable foreign currency to USD during 1H 2022 and 1H 2021 for revenue purposes follow:
| 1H 2022 | 1H 2021 | Change |
GBP | 1.2886 | 1.3908 | (7.3%) |
EUR | 1.0852 | 1.2037 | (9.8%) |
AUD | 0.7206 | 0.7711 | (6.6%) |
CAD | 0.7866 | 0.8009 | (1.8%) |
The weighted-average FX rate negative impact on 1H 2022 foreign currency OUS sales was 8.3%. In constant currency terms, foreign currency sales in 1H 2022 were 20.4% higher than in 1H 2021. The portion of OUS sales invoiced in foreign currencies in USD terms were 26% of total consolidated 1H 2022 sales compared to 27% in 1H 2021. Direct to end-user OUS 1H 2022 sales in actual USD terms were 5% higher in Ireland with a 10% lower EUR, 8% lower in Canada with a 2% lower CAD, 3% lower in France with a 10% lower EUR, 23% higher in the UK with a 7% lower GBP, and 28% lower in Australia/New Zealand with a 7% lower AUD. Sales to OUS distributors were 24% higher in 1H 2022 than in 1H 2021.
The following table provides USD-denominated sales amounts divided into general product categories for total revenues and the subset of OUS revenues:
Global revenues by product category:
| 2Q 2022 | 2Q 2021 | 1H 2022 | 1H 2021 |
Obstetrics | $ 1,206 | $ 1,159 | $ 2,255 | $ 2,176 |
Gynecology/ Electrosurgery/ Urology | 5,423 | 5,674 | 10,525 | 10,802 |
Neonatal | 1,913 | 1,642 | 3,786 | 3,229 |
Blood Pressure Monitoring and Accessories* | 4,886 | 4,129 | 9,186 | 7,361 |
Total: | $ 13,428 | $ 12,604 | $ 25,752 | $ 23,568 |
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OUS revenues by product category:
| 2Q 2022 | 2Q 2021 | 1H 2022 | 1H 2021 |
Obstetrics | $ 200 | $ 213 | $ 326 | $ 326 |
Gynecology/ Electrosurgery/ Urology | 3,029 | 2,801 | 5,550 | 5,316 |
Neonatal | 399 | 339 | 690 | 753 |
Blood Pressure Monitoring and Accessories* | 1,971 | 1,228 | 3,373 | 2,368 |
Total: | $ 5,599 | $ 4,581 | $ 9,939 | $ 8,763 |
* includes assemblies and molded components sold to OEM customers.
UTMD continues to be assembly labor limited in the U.S., in addition to continuing supply chain disruption worldwide for timely providing raw materials needed in manufacturing operations. Also, a continued strengthening of the USD would create a drag on improved 2H 2022 OUS foreign currency sales. Looking forward, without any additional price increases for UTMD devices (which is unlikely based on continuing cost increases), if UTMD is able to duplicate its 1H 2022 revenues in the 2H, sales for the 2022 year would be up about 5% compared to the 2021 year.
c) Gross Profit (GP)
GP results from subtracting the costs of production, manufacturing engineering, depreciation of equipment, maintenance and repairs, quality assurance including regulatory compliance, and purchasing including freight for receiving materials from suppliers. As expected, despite dilution of fixed overhead costs from higher sales, the 2Q and 1H significant inflationary increases in UTMD’s variable manufacturing costs squeezed UTMD’s GP Margin (GPM). UTMD’s 2Q 2022 GP was $365 (+4.7%) higher than in 2Q 2021. UTMD’s 1H 2022 GP was $951 (+6.5%) higher than in 1H 2021. Although revenue was up more than GP in both 1Q and 1H periods, the resulting lower GPMs remained consistent with UTMD’s long term profitability goals. Incremental direct labor costs increased significantly as a result of competition for a limited number of people currently seeking work, and the Company’s efforts to help mitigate the negative impact of inflation on its long-term employees. UTMD also experienced double-digit percentage cost increases in raw materials costs. Incoming freight costs to receive raw materials doubled. The growing administrative burden of compliance with regulatory requirements, particularly OUS, continued to pressure UTMD’s GPM. Although managing the rapid rise in variable manufacturing costs will apparently continue to be a significant challenge for the rest of 2022, the 1H 2022 GPM helps confirm that UTMD is likely to be able to successfully manage it.
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d) Operating Income
Operating Income results from subtracting Operating Expenses (OE) from GP. After subtracting OE from higher 2Q and 1H 2022 GP, Operating Income in 2Q 2022 was $5,057 compared to $4,765 in 2Q 2021, an increase of 6.1%, representing a healthy Operating Income Margin (Operating Income as a percentage of sales) of 37.7%. Operating Income in 1H 2022 was $9,579 compared to $8,652 in 1H 2021, an increase of 10.7%, representing an Operating Income Margin of 37.2%. The increase in Operating Income was almost the same as the increase in sales despite a lower GPM and higher litigation expenses (included in G&A OE) because of two offsetting factors; 1) better absorption of fixed IIA amortization expenses (i.e. a lower percentage of sales for relatively fixed non-cash expenses), and 2) a reduction in USD-denominated foreign currency OE of foreign subsidiaries as a result of a stronger USD (i.e. lower FX rates for the EUR, GBP, AUD and CAD expenses).
OE are comprised of Sales and Marketing (S&M) expenses, General and Administrative (G&A) expenses and Product Development (R&D) expenses. The following table summarizes OE in 2Q and 1H 2022 compared to the same periods in 2021 by OE category:
OE Category | 2Q 2022 | % of sales | 2Q 2021 | % of sales | 1H 2022 | % of sales | 1H 2021 | % of sales |
S&M: | $ 357 | 2.7 | $ 364 | 2.9 | $ 693 | 2.7 | $ 748 | 3.2 |
G&A: | 2,602 | 19.3 | 2,528 | 20.1 | 5,153 | 20.0 | 5,073 | 21.5 |
R&D: | 135 | 1.0 | 128 | 1.0 | 258 | 1.0 | 259 | 1.1 |
Total OE: | $ 3,094 | 23.0 | $ 3,020 | 24.0 | $ 6,104 | 23.7 | $ 6,080 | 25.8 |
A stronger USD helped decrease foreign currency OE when converted to USD by $100 in 2Q 2022 and $135 in 1H 2022. The following table summarizes “constant currency” OE in 2Q and 1H 2022 compared to the same periods in 2021 by OE category:
OE Category | 2Q 2022 const FX |
| 2Q 2021 |
| 1H 2022 const FX |
| 1H 2021 |
|
S&M: | $ 366 |
| $ 364 |
| $ 707 |
| $ 748 |
|
G&A: | 2,693 |
| 2,528 |
| 5,274 |
| 5,073 |
|
R&D: | 135 |
| 128 |
| 258 |
| 259 |
|
Total OE: | $ 3,194 |
| $ 3,020 |
| $ 6,239 |
| $ 6,080 |
|
OUS OE when converted to USD were decreased 10% in 2Q 2022 and 7% in 1H 22 by the FX rate change. Constant currency 2Q 2022 OE were 6% higher than in 2Q 2021, and 3% higher in 1H 2022 than in 1H 2021. In other words, the FX rate change which decreased foreign OE in USD terms almost offset the higher G&A expenses in the U.S.
The change in FX rates decreased 2Q 2022 OUS S&M expenses by $9, and 1H 2022 OUS S&M expense by $14. The lower constant currency S&M expenses were due primarily to a reduction of outside sales representatives in the UK.
A segmentation of USD-denominated G&A expenses by subsidiary location follows. Note that over 60% of G&A expenses were non-cash expenses from the amortization of IIA associated with the Filshie Clip System:
G&A Expense Category | 2Q 2022 | % of sales | 2Q 2021 | % of sales | 1H 2022 | % of sales | 1H 2021 | % of sales |
IIA Amort– UK: | $ 498 | 3.7 | $ 556 | 4.4 | $ 1,030 | 4.0 | $ 1,106 | 4.7 |
IIA Amort– CSI: | 1,105 | 8.2 | 1,105 | 8.8 | 2,210 | 8.6 | 2,210 | 9.4 |
Other– UK: | 142 |
| 155 |
| 296 |
| 312 |
|
U.S. Litigation: | 165 |
| - |
| 226 |
| - |
|
Other– US: | 528 |
| 552 |
| 1,082 |
| 1,113 |
|
IRE: | 85 |
| 77 |
| 152 |
| 161 |
|
AUS: | 42 |
| 42 |
| 85 |
| 88 |
|
CAN: | 37 |
| 41 |
| 72 |
| 83 |
|
Total G&A: | $ 2,602 | 19.3 | $ 2,528 | 20.1 | $ 5,153 | 20.0 | $ 5,073 | 21.5 |
OUS G&A expenses were $804 in 2Q 2022 compared to $871 in 2Q 2021. OUS G&A expenses were $1,634 in 1H 2022 compared to $1,750 in 1H 2021. The table below identifies “constant currency” OUS G&A expenses for 2Q and 1H 2022 compared to the same periods in 2021:
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G&A Expense Category | 2Q 2022 const FX |
| 2Q 2021 |
| 1H 2022 const FX |
| 1H 2021 |
|
IIA Amort– UK: | $ 556 |
| $ 556 |
| $ 1,106 |
| $ 1,106 |
|
Other– UK: | 159 |
| 155 |
| 318 |
| 312 |
|
IRE: | 97 |
| 77 |
| 168 |
| 161 |
|
AUS: | 44 |
| 42 |
| 91 |
| 88 |
|
CAN: | 38 |
| 41 |
| 73 |
| 83 |
|
Total G&A: | $ 894 |
| $ 871 |
| $ 1,756 |
| $ 1,750 |
|
Period to period product development (R&D) expenses varied slightly depending on specific project costs. Since almost all R&D is being carried out in the U.S., there was negligible FX rate impact.
e) Non-operating expense/ Non-operating income
Non-operating expense includes bank fees and expenses from losses, if applicable, from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms. Non-operating income includes 1) income from rent of underutilized property, 2) investment income (interest on cash balances), 3) royalties received from licensing the Company’s technology, and 4) income from gains, if applicable, from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms. Non-operating income or expense can also include gains or losses from the disposition of assets from time to time. Net non-operating income is non-operating income minus non-operating expense during a particular time period. Net non-operating income in 2Q 2022 was $142 compared to $60 in 2Q 2021. Net non-operating income in 1H 2022 was $150 compared to $71 in 1H 2021.
The main difference in net non-operating income during both 2Q and 1H 2022 was due to greater rental income received from renting underutilized warehouse space in Ireland to a third party, and to more interest received on cash bank balances. Because UTMD owns its own facilities with space in excess of current needs, this sort of opportunistic rental income occurs from time to time. UTMD Ireland realized $17 more in 2Q 2022 rental income than in 2Q 2021, and $69 more in 1H 2022 rental income than in 1H 2021. With higher cash balances and higher interest rates in 2022 compared to 2021, UTMD received $90 more in 2Q 2022 interest income and $34 more in 1H interest income. In 2Q 2022, a loss of $2 on remeasured foreign currency balances was recognized compared to a gain of $5 in 2Q 2021. In both 1H 2022 and 1H 2021, a loss of $5 on remeasured foreign currency balances was recognized. Royalties received were $5 in 2Q 2022 and $10 in 1H 2022 compared to $0 in both 2Q and 1H 2021. Bank fees were $25 in 2Q 2022 compared to $18 in 2Q 2021. Bank fees were $49 in 1H 2022 compared to $35 in 1H 2021.
f) Income Before Income Taxes (EBT)
Consolidated EBT results from subtracting net non-operating expense or adding net non-operating income from or to, as applicable, Operating Income. Consolidated 2Q 2022 EBT was $5,199 (38.7% of sales) compared to $4,825 (38.3% of sales) in 2Q 2021. Consolidated 1H 2022 EBT was $9,729 (37.8% of sales) compared to $8,723 (37.0% of sales) in 1H 2021.
The EBT of Utah Medical Products, Inc. in the U.S. was $5,981 in 1H 2022 compared to $5,466 in 1H 2021. The EBT of Utah Medical Products, Ltd (Ireland) was EUR 3,825 in 1H 2022 compared to EUR 3,122 in 1H 2021. The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was (GBP 232) in 1H 2022 compared to (GBP 295) in 1H 2021. The EBT of Utah Medical Products Canada, Inc. (dba Femcare Canada) was CAD 332 in 1H 2022 compared to CAD 303 in 1H 2021. EBT of subsidiaries includes the result of intercompany shipments which are netted out of consolidated results.
EBITDA is a non-US GAAP metric that measures profitability performance without factoring in effects of financing, accounting decisions regarding non-cash expenses, capital expenditures or tax environments. Management believes that this operating performance metric provides meaningful supplemental information to both management and investors and confirms UTMD’s ongoing excellent financial operating performance, as well as its ability to sustain performance during a challenging economic time. Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 2Q 2022 consolidated EBT excluding the remeasured bank balance currency gain or loss (“adjusted consolidated EBITDA”) was $7,005 (+4.6%) compared to $6,695 in 2Q 2021. Adjusted consolidated EBITDA at $13,376 in 1H 2022 was 7.3% higher compared to $12,471 in 1H 2021. Adjusted consolidated TTM EBITDA was $27,435 as of June 30, 2022. TTM EBITDA as of June 30, 2021, a year earlier, was $3,411 lower.
UTMD’s non-US GAAP adjusted consolidated EBITDA as a percentage of sales (EBITDA margin) was 52.2% in 2Q 2022 compared to 53.1% in 2Q 2021. UTMD’s EBITDA margin was 51.9% in 1H 2022 compared to 52.9% in 1H 2021. The lower 2022 EBITDA margins reflect the 2022 GPM squeeze. Nevertheless, management believes that current EBITDA margins demonstrate continued outstanding operating performance.
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UTMD’s non-US GAAP adjusted consolidated EBITDA is the sum of the elements in the following table, each element of which is a US GAAP number:
| 2Q 2022 | 2Q 2021 | 1H 2022 | 1H 2021 |
EBT | $ 5,199 | $ 4,825 | $ 9,729 | $ 8,723 |
Depreciation Expense | 153 | 162 | 302 | 326 |
Femcare IIA Amortization Expense | 498 | 556 | 1,030 | 1,106 |
CSI IIA Amortization Expense | 1,105 | 1,105 | 2,211 | 2,211 |
Other Non-Cash Amortization Expense | 8 | 10 | 16 | 18 |
Stock Option Compensation Expense | 40 | 41 | 83 | 82 |
Interest Expense | - | - | - | - |
Remeasured Foreign Currency Balances | 2 | (4) | 5 | 5 |
UTMD non-US GAAP EBITDA: | $ 7,005 | $ 6,695 | $ 13,376 | $ 12,471 |
Note
All UTMD income statement measures from GP through EBT, including non-US GAAP adjusted consolidated EBITDA, for both 2022 and 2021 time periods were unaffected by the 2Q 2021 enacted change in the UK corporate income tax rate.
g) Net Income
Net Income in 2Q 2022 of $4,103 (30.6% of sales) was 19.7% higher than the US GAAP Net Income of $3,426 (27.2% of sales) in 2Q 2021. Excluding the “one-time” income tax provision increase recognized in 2Q 2021 as a result of a future UK tax rate increase and resulting DTL adjustment, diluted Net Income in 2Q 2022 was $4,103 (30.6% of sales) compared to non-US GAAP Net Income of $3,817 (30.3% of sales) in 2Q 2021, a 7.7% increase, which is consistent with the increase in EBT per US GAAP.
As a reminder, in 2Q 2021, because the UK reset its corporate tax rate from 19% to 25% beginning with 2Q 2023, it caused UTMD to have to book an additional $390 in its 2Q 2021 income tax provision that represents the additional tax which would be paid in the UK over the remaining IIA amortization life of the 2011 Femcare acquisition. Excluding the $390 DTL increase in 2Q 2021 which reduced Net Income by that same amount, 2Q 2021 non-US GAAP Net Income was $3,817 (30.3% of sales) compared to 2Q 2021 US GAAP Net Income of $3,427 (27.2% of sales). Excluding the same tax provision increase in 1H 2021 due to the DTL adjustment, non-US GAAP 1H 2021 Net Income was $6,840 (29.0% of sales), compared to US GAAP 1H 2021 Net Income of $6,450 (27.4% of sales).
The average consolidated income tax provisions (as a % of the same period EBT) per US GAAP in 2Q 2022 and 2Q 2021 were 21.1% and 29.0% respectively, and were 21.5% and 26.1% in 1H 2022 and 1H 2021 respectively. As the tax rates for 2Q and 1H 2021 are not directly related to EBT generated in the same periods, UTMD provides the following tax rates excluding the 2Q 2021 $390 tax provision adjustment: The resulting non-GAAP income tax provision rates were 21.1% and 20.9% for 2Q 2022 and 2Q 2021 respectively, and were 21.5% and 21.6% for 1H 2022 and 1H 2021 respectively.
The consolidated income tax provision rate varies as the mix in taxable income among U.S. and foreign subsidiaries with differing income tax rates differs from period to period. The basic corporate income tax rates in each of the sovereignties were the same as in the prior year.
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 2Q 2022 were $1.124 compared to US GAAP diluted EPS of $0.937 in 2Q 2021, a 19.9% increase. Excluding the “one-time” income tax provision increase recognized in 2Q 2021 as a result of a future UK tax rate increase and a DTL adjustment, diluted EPS in 2Q 2022 were $1.124 compared to non-US GAAP diluted EPS of $1.044 in 2Q 2021, 7.7% higher, consistent with the increase in EBT.
Diluted EPS in 1H 2022 were $2.088 compared to US GAAP diluted EPS of $1.765 in 1H 2021, an 18.3% increase. Excluding the “one-time” income tax provision increase recognized in 2Q 2021 as a result of a future UK tax rate increase and a DTL adjustment, diluted EPS in 1H 2022 were $2.088 compared to non-US GAAP diluted EPS of $1.871 in 1H 2021, an 11.6% increase, also consistent with the increase in EBT per US GAAP.
Diluted shares were 3,650,242 in 2Q 2022 compared to 3,655,319 in 2Q 2021. Diluted shares were 3,657,864 in 1H 2022 compared to 3,655,514 in 1H 2021. The lower diluted shares in 2Q 2022 were the result of shares repurchased during 2Q 2022 offset by employee options exercised, and a lower dilution factor for unexercised options. The number of shares added as a dilution factor in 2Q 2022 was 7,375 compared to 9,526 in 2Q 2021. The number of shares added as a dilution factor in 1H 2022 was 9,069 compared to 10,569 in 1H 2021.
The number of shares used for calculating EPS was higher than ending shares because of a time-weighted calculation of average outstanding shares plus dilution from unexercised employee and director options. Outstanding shares at the end of 2Q 2022 were 3,624,932 compared to 3,654,737 at the end of calendar year 2021. The difference was due to 300 shares added from employee option exercises during 1H 2022, offset by 30,105 shares repurchased in the open market and retired during 2Q 2022. For comparison, outstanding shares were 3,645,798 at the end of 2Q 2021. The total number of outstanding unexercised employee and outside director options at June 30, 2022 was 50,408 at an average exercise price of $69.07, including shares awarded but not yet vested. This compares to 63,874 unexercised option shares at the end of 2Q 2021 at an average exercise price of $68.38/ share, including shares awarded but not vested. No options were awarded in 2021 and to date in 2022.
UTMD paid $1,060 ($0.290/share) in dividends to stockholders in 2Q 2022 compared to $1,039 ($0.285/ share) paid in 2Q 2021. The dividends paid to stockholders during 2Q 2022 were 26% of NI. UTMD paid $1,060 ($0.290/share) in dividends to stockholders in 1H 2022 compared to $2,077 ($0.285/ share) paid in 1H 2021. The 1H 2022 dividend total excludes a dividend normally paid in January. A special dividend of $7,309 ($2.00/share) was paid in December 2021 in lieu of January 2022.
In 2Q 2022, UTMD repurchased 30,105 of its shares for $2,495, an average cost of $82.88/ share. No UTMD shares were repurchased in 2021. The Company retains the strong desire and financial ability for repurchasing its shares at a price it believes is attractive for remaining stockholders. UTMD’s closing share price at the end of 2Q 2022 was $85.90, down 4.4% from the closing price of $89.86 at the end of 1Q 2022, and down 14.1% from the closing price of $100.00 at the end of 2021. The closing share price one year ago at the end of 2Q 2021 was $85.04.
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i) Return on Equity (ROE)
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. Annualized ROE (using non-GAAP net income in 2021 and before stockholder dividends) in 1H 2022 was 14% compared to 13% in 1H 2021. The higher ROE in 1H 2022 was due to the higher 1H 2022 net income, despite being diluted by higher average Stockholder’s Equity. Targeting a high ROE of 20% remains a financial objective for UTMD management. ROE can be increased by increasing net income, or by reducing stockholders’ equity by paying cash dividends to stockholders or by repurchasing shares.
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 $9,878 in 1H 2022 compared to $10,225 in 1H 2021. Although UTMD achieved a $1,187 higher increase in US GAAP Net Income in 1H 2022 and a $591 higher contribution to cash provided by a $102 decrease in accounts receivable compared to a $489 increase in 1H 2021, a $347 lower net increase in operating cash in 1H 2022 than in 1H 2021 was due to offsetting working capital change differences including 1) a $929 increase in inventories compared to a $75 decrease in 1H 2021, 2) a $357 decrease in accrued expenses compared to a $34 increase in 1H 2021, 3) a $335 smaller increase in accounts payable than in 1H 2021, and 4) a $286 decrease in deferred income taxes compared to a $22 increase in 1H 2021.
Capital expenditures for property and equipment (PP&E) were $450 in 1H 2022 compared to $222 in 1H 2021. The amount spent in 1H 2021 was for typical expenditures required to keep facilities and equipment, particularly in molding operations, in good working order. The larger capital expenditures in 1H 2022 were primarily due to purchasing new equipment and tooling needed to expand production capacity for UTMD’s largest OEM customer. Depreciation of PP&E was $302 in 1H 2022 compared to $325 in 1H 2021.
UTMD made cash dividend payments of $1,060 in 1H 2022 compared to $2,077 in 1H 2021. The difference was due to an earlier payment of a special dividend in December 2021, which in the prior year was paid in January 2021. UTMD’s normal quarterly dividend in 1H 2022 was 1.8% higher per share than in the previous year (excluding the 2021 year-end special dividend).
In 1H 2022, UTMD received $23 and issued 300 shares of its stock upon the exercise of employee and director stock options. Option exercises in 1H 2022 were at an average price of $76.25 per share. In comparison, in 1H 2021, UTMD received $92 and issued 2,763 shares of its stock upon the exercise of employee and director stock options. Option exercises in 1H 2021 were at an average price of $33.17 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.
k) Assets and Liabilities
At June 30, 2022 compared to the end of 2021, UTMD’s cash and investments increased $5,249 to $66,224 primarily as a result of 1H 2022 Net Income of $7,638 less $3,555 use of cash for dividends to stockholders and UTMD share repurchases. At June 30, 2022, net Intangible Assets decreased to 22.9% of total consolidated assets from 27.2% on December 31, 2021 due in part to a stronger USD which lowers the USD value of Femcare’s GBP IIA. UTMD’s still strong 17.8 current ratio at June 30, 2022 was lower than the 19.5 current ratio at December 31, 2021 as a result of $636 higher accrued liabilities. The average age of trade receivables was 33 days from date of invoice at June 30, 2022 compared to 36 days at December 31, 2021 based on the most recent calendar quarter of sales. Average inventory turns declined slightly to 2.9 in 2Q 2022 compared to 3.0 for the last quarter of 2021 due to increasing safety stocks of raw material.
June 30, 2022 total consolidated assets were $116,149, an increase of $513 from December 31, 2021. Current assets were $5,795 higher than at December 31, 2021 primarily because of a $5,249 increase in cash and a $741 increase in inventories. The modest increase in total assets despite the large increase in current assets was primarily due to a $4,806 decline in net intangible assets from 1H 2022 IIA amortization and a 10% lower GBP/USD FX rate on the Femcare UK intangible asset balance, in addition to a $462 USD-value decline in UK and Ireland Property and Equipment from the difference in the foreign currency exchange (FX) rate at December 31, 2021 and June 30, 2022.
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For clarity, the net book value of consolidated property, plant and equipment decreased $476 at June 30, 2022 from the end of 2021 due to the net effect of period-ending changed FX rates, $450 in new asset purchases minus $302 in depreciation, including right of use assets totaling $420 (which were $449 at December 31, 2021).
June 30, 2022 net intangible assets (goodwill plus other intangible assets) declined $4,806 from the end of 2021 as a result of $3,240 in amortization and a 10.2% stronger USD/GBP FX rate on UK intangible asset balances. At June 30, 2022, net intangible assets including goodwill were 23% of total consolidated assets compared to 27% at year-end 2021 and 30% at June 30, 2021.
Working capital (current assets minus current liabilities) was $74,514 at June 30, 2022 compared to $69,412 at December 31, 2021. Cash balances were $66,224 of the June 30, 2022 working capital. Current assets at June 30, 2022 compared to December 31, 2021 were $5,795 higher primarily as the result of a $5,249 increase in cash and investments and a $742 increase in inventories. Current liabilities were $693 higher at June 30, 2022 compared to December 31, 2021 as the result of a $636 increase in accrued liabilities and $57 higher accounts payable. The higher accrued liabilities resulted from no stockholder dividend, which was paid earlier than normal in December 2021, accrued at the end of 2021, whereas at the end of 2Q 2022 a $1,060 dividend, which was paid in July, was included in June 30, 2022 accrued liabilities. The increase in accrued liabilities was less than the $1,060 accrued dividend primarily because the accrued profit-sharing bonus at the end of 2021, based on 2021 full year results, was $349 higher than the profit-sharing bonus accrued at June 30, 2022 based on 6 months’ results. UTMD management believes that its working capital remains more than sufficient to meet normal operating needs, new capital expenditures and projected cash dividend payments to stockholders.
June 30, 2022 total consolidated liabilities were $8,679, an increase of $180 from December 31, 2021. Current liabilities were $693 higher than at December 31, 2021. Long term liabilities were $513 lower primarily as a result of the deferred tax liability balance resulting from non-tax deductible Femcare remaining IIA amortization expense being $397 lower.
The deferred tax liability balance for Femcare IIA ($9,084 on the date of the acquisition), was $1,707 at June 30, 2022 compared to $2,105 at December 31, 2021 and $2,355 at June 30, 2021. Reduction of the deferred tax liability occurs as the book/tax difference of amortization is eliminated over the remaining useful life of the Femcare IIA, i.e. as Femcare pays its taxes in the UK without the benefit of a deduction for IIA amortization expense.
UTMD’s total debt ratio (total liabilities/total assets) as of June 30, 2022 and December 31, 2021 was 7%, compared to June 30, 2021 at 8%.
l) Management's Outlook
As outlined in its December 31, 2021 SEC 10-K report, UTMD’s plan for 2022 was to
1) leverage distribution and manufacturing synergies by further integrating capabilities and resources in UTMD’s multinational operations;
2) expand manufacturing capacity at a time when resources are particularly scarce;
3) focus on effectively differentiating the benefits of the Filshie Clip System in the U.S.;
4) introduce additional products helpful to clinicians through internal product development;
5) continue to achieve excellent overall financial operating performance;
6) 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
7) remain vigilant for affordable accretive acquisition opportunities which may be brought about by difficult burdens on small, innovative companies.
Despite continuing economic challenges created by government reaction to the COVID-19 pandemic, especially including inflation in costs and lack of availability of workers, the Company continues to effectively execute its 2022 plan as outlined above.
m) Accounting Policy Changes
None.
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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 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 .9555, .8790 and .8438 EUR per USD as of June 30, 2022, December 31, 2021 and June 30, 2021, respectively. Exchange rates were .8224, .7388 and .7243 GBP per USD as of June 30, 2022, December 31, 2021 and June 30, 2021, respectively. Exchange rates were 1.4484, 1.3759 and 1.3342 AUD per USD on June 30, 2022, December 31, 2021 and June 30, 2021, respectively. Exchange rates were 1.2872, 1.2656, and 1.2404 CAD per USD on June 30, 2022, December 31, 2021 and June 30, 2021, 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/or 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 June 30, 2022. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that, as of June 30, 2022, 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 six months ended June 30, 2022, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company is currently a party in litigation incidental to its business related to the safety of the Filshie Clip System, which remains approved under a PMA by the U.S. FDA as safe and effective.
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, 2021, 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 interference in the United States renders 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. Restrictions on “nonessential” medical procedures during a pandemic reduce the demand for certain of 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.
Group Purchasing Organizations (GPOs) in the U.S. add non-productive costs, weaken the Company’s marketing and sales efforts and cause lower revenues by restricting access:
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. Otherwise, their business model based on “kickbacks” would be a violation of law. Despite rhetoric otherwise, 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 their 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 and overly cumbersome regulatory environment, the Company’s views of the future and product/ market strategy may not yield financial results consistent with the past.
18
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 more difficult.
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 selling 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.
Trade restrictions and /or tariffs resulting from changing government trade policies have the potential to disrupt UTMD’s supply chain.
The COVID-19 pandemic could continue to disrupt UTMD’s supply chain or interfere with normal business operations due to the loss of employee availability and rapidly rising input costs.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During 2Q 2022/ 1H 2022 UTMD purchased 30,105 of its shares in the open market for $2,495 including commissions and fees ($82.88/ share.) UTMD did not purchase any of its own securities during 1H 2021.
19
Item 6. Exhibits
Exhibit # | Title of Document |
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31.1 | |
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31.2 | |
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32.1 | |
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32.2 | |
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101 | The following financial information from the Utah Medical Products, Inc. quarterly report on Form 10-Q for the quarter ended June 30, 2022, 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 Condensed Statements of Stockholders’ Equity, and (v) related Notes to the Consolidated Condensed Financial Statements, tagged in detail. |
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104 | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
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: 8/11/22 By: /s/ Kevin L. Cornwell
Kevin L. Cornwell
CEO
Date: 8/11/22 By: /s/ Brian L. Koopman
Brian L. Koopman
Principal Financial Officer
20
Exhibit 31.1
CERTIFICATION OF CEO
PURSUANT TO RULE 13a-14(a) AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Kevin L. Cornwell, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Utah Medical Products, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 11, 2022
/s/ Kevin L. Cornwell
Kevin L. Cornwell
Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
PURSUANT TO RULE 13a-14(a) AS ADOPTED PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Brian L. Koopman, certify that:
1.I have reviewed this quarterly report on Form 10-Q of Utah Medical Products, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
4.The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
(a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 11, 2022
/s/ Brian L. Koopman
Brian L. Koopman
Principal Financial Officer
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Utah Medical Products, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Kevin L. Cornwell, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Kevin L. Cornwell
Kevin L. Cornwell
Chief Executive Officer
August 11, 2022
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Utah Medical Products, Inc. (the “Company”) on Form 10-Q for the period ending June 30, 2022, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Brian L. Koopman, Principal Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1)the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Brian L. Koopman
Brian L. Koopman
Principal Financial Officer
August 11, 2022
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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