Utah Medical Products Inc 10-Q for FY2021 Q3
Utah Medical Products Inc (UTMD)
About this 10-Q
Utah Medical Products Inc filed this 10-Q on November 12, 2021, covering the quarter ended September 30, 2021 (FY2021 Q3).
Headline figures
Quarter ended September 30, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $12.57M
- up 20.0% from $10.48M a year earlier
- Net income
- $4.21M
- up 43.4% from net income of $2.93M a year earlier
- Diluted EPS
- $1.15
- up 43.8% from $0.80 a year earlier
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 November 11, 2021:
UTAH MEDICAL PRODUCTS, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES | |||
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF | |||
SEPTEMBER 30, 2021 AND DECEMBER 31, 2020 | |||
(in thousands) | |||
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| (audited) |
SEPTEMBER 30, 2021 |
| DECEMBER 31, 2020 | |
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 income (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 NINE MONTHS ENDED SEPTEMBER 30, 2021 AND SEPTEMBER 30, 2020 | ||||||||
(in thousands, except per share amounts - unaudited) | ||||||||
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| Three Months Ended |
| Nine Months Ended | ||||
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| September 30, 2021 |
| September 30, 2020 |
| September 30, 2021 |
| September 30, 2020 |
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Sales, net |
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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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Earnings per common share (basic) |
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| $ |
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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 $ |
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Total comprehensive income |
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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 NINE MONTHS ENDED SEPTEMBER 30, 2021 AND SEPTEMBER 30, 2020 | ||||
(in thousands - unaudited) | ||||
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| Nine Months Ended | ||
| 2021 |
| 2020 | |
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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(Gain) loss on disposal of 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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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 AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND SEPTEMBER 30, 2020 | |||||||||||
(In thousands - unaudited) | |||||||||||
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| Accumulated |
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| Additional |
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Shares |
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| Capital |
| Income |
| Earnings |
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Balance at June 30, 2021 |
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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 September 30, 2021 |
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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 September 30, 2021 |
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Balance at June 30, 2020 |
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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 September 30, 2020 |
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Balance at December 31, 2019 |
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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 September 30, 2020 |
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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, 2020. 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 other recently issued accounting standards will either have no material impact on its consolidated financial position, results of operations or cash flows, or will not apply to its operations.
(3) Inventories at September 30, 2021, and December 31, 2020, consisted of the following:
| September 30, 2021 |
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Finished goods | $ |
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Work-in-process |
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Raw materials |
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Total | $ |
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(4) Stock-Based Compensation. At September 30, 2021, the Company has stock-based employee compensation plans which authorize the grant of stock options to eligible employees and directors. The Company accounts for stock compensation under FASB Accounting Standards Codification (“ASC”) 718, Compensation - Stock Compensation. This statement requires the Company to recognize compensation cost based on the grant date fair value of options granted to employees and directors. In the quarters ended September 30, 2021, and 2020, 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 3Q 2021 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 |
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Global 9M 2021 revenues (USD) by product category:
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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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5
(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 at the end of 3rd quarter 2021.
The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:
(in thousands) | Three months ended |
| Nine months ended | ||||
| September 30, |
| September 30, | ||||
2021 |
| 2020 |
| 2021 |
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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.
6
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, 2020, 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 government mandates for medical facilities to not perform certain “elective” procedures in order to theoretically preserve capacity for treating COVID-19 infected patients in 2020, the comparison of 2021 performance with the prior year’s same periods of time represents an unusual change. As a result, UTMD provides an additional summary comparison of 2021 results to the same periods of time in 2019, prior to the pandemic. Because of the relatively short span of time, results for any given three month period in comparison with a previous three month period may not be indicative of comparative results for the year as a whole.
Currency amounts in the report are in thousands, except per share amounts or where otherwise noted. Currencies in this report are denoted as $ or USD = U.S. Dollars; A$ or AUD = Australia Dollars; £ or GBP = UK Pound Sterling; C$ or CAD = Canadian Dollars; and € or EUR = Euros.
Analysis of Results of Operations
a)Overview
Income statement results in 3Q and 9M 2021 compared to the same periods of 2020 were as follows:
| 3Q 2021 | 3Q 2020 | change | 9M 2021 | 9M 2020 | change |
Net Sales | $ 12,572 | $ 10,479 | 20.0% | $ 36,140 | $ 30,168 | 19.8% |
Gross Profit | 8,073 | 6,497 | 24.3% | 22,804 | 18,283 | 24.7% |
Operating Income | 5,098 | 3,588 | 42.1% | 13,750 | 9,428 | 45.8% |
Income Before Tax | 5,157 | 3,588 | 43.7% | 13,880 | 9,553 | 45.3% |
Net Income (NI) | 4,206 | 2,933 | 43.4% | 10,656 | 7,386 | 44.3% |
Earnings per Diluted Share (EPS) | 1.150 | 0.803 | 43.2% | 2.915 | 2.008 | 45.2% |
Income statement results in 3Q and 9M 2021 compared to the same periods of 2019 were as follows:
| 3Q 2021 | 3Q 2019 | change | 9M 2021 | 9M 2019 | change |
Net Sales | $ 12,572 | $ 12,494 | 0.6% | $ 36,140 | $ 35,073 | 3.0% |
Gross Profit | 8,073 | 7,379 | 9.4% | 22,804 | 21,652 | 5.3% |
Operating Income | 5,098 | 4,371 | 16.6% | 13,750 | 12,954 | 6.2% |
Income Before Tax | 5,157 | 4,448 | 16.0% | 13,880 | 13,150 | 5.6% |
Net Income (NI) | 4,206 | 3,705 | 13.5% | 10,656 | 10,369 | 2.8% |
Earnings per Diluted Share (EPS) | 1.150 | 0.991 | 16.0% | 2.915 | 2.774 | 5.1% |
UTMD profit margins in 3Q 2021 and 9M 2021 compared to the same periods in the prior two years follow:
| 3Q 2021 | 3Q 2020 | 3Q 2019 | 9M 2021 | 9M 2020 | 9M 2019 |
| (Jul – Sep) | (Jul – Sep) | (Jul – Sep) | (Jan – Sep) | (Jan – Sep) | (Jan – Sep) |
Gross Profit Margin: (gross profit/ sales) | 64.2% | 62.0% | 59.1% | 63.1% | 60.6% | 61.7% |
Operating Income Margin: (operating income/ sales) | 40.6% | 34.2% | 35.0% | 38.0% | 31.3% | 36.9% |
Net Income Margin: (profit after taxes/ sales) | 33.5% | 28.0% | 29.7% | 29.5% | 24.5% | 29.6% |
Gross Profit in 2021 periods increased more than sales primarily as a result of greater absorption of fixed manufacturing overhead expenses. Because UTMD believed that lower 2020 sales were transitory, and that it could remain profitable even at the lower sales levels experienced during the pandemic, 2021 results benefited from having the resources the Company needed in 2021 to support the higher sales activity.
Operating Income increased substantially more than the Gross Profit increase in both 2021 periods because UTMD’s non-cash identifiable intangible asset (IIA) amortization expense included in operating expenses was relatively fixed (except for foreign exchange rate difference on GBP), and therefore enjoyed better absorption from higher sales. IIA amortization expense was 13.1% of 3Q 2021 sales compared to 15.5% of 3Q 2020 sales, and 13.8% of 9M 2021 sales compared to 16.0% of 9M 2020 sales.
7
Income before tax (EBT) increased slightly differently from the increases in operating income as a result of small differences in period-to-period non-operating income, as explained later in this report. Similarly, Net Income increased slightly differently from the increase in EBT as a result of the sovereignty mix of taxable profits in 2021 compared to 2020.
UTMD’s FX rates for balance sheet purposes are the applicable rates at the end of each reporting period. The FX rates from the applicable foreign currency to USD for assets and liabilities at the end of September 2021 and the end of September 2020 follow:
| Sep 30, 2021 | Sep 30, 2020 | Change |
GBP | 1.347 | 1.292 | +4.3% |
EUR | 1.158 | 1.172 | (1.3%) |
AUD | 0.723 | 0.716 | +0.9% |
CAD | 0.789 | 0.751 | +5.1% |
UTMD’s September 30, 2021 Balance Sheet remained strong with an absence of debt. UTMD’s consolidated cash balances gained $12.7 million from the end of 2020. September 30, 2021 inventories were essentially the same as one year ago. September 30, 2021 trade receivables were up just 13% despite the 20% increase in sales. The USD net book value of fixed assets in the U.S., as well as outside the U.S. (OUS), remained about the same as of September 30, 2021 from a year earlier. Over the one year period of time, the net intangible asset balance declined $5.8 million, about 15%. Ending cash and investments were $64.3 million on September 30, 2021 compared to $51.6 million on December 31, 2020, after paying $3.1 million in cash dividends to stockholders during 9M 2021. September 30, 2021 stockholders’ equity was up $7.2 million from December 31, 2020.
b)Revenues
Terms of sale are established in advance of UTMD’s acceptance of customer orders. In the U.S., Ireland, UK, France, Canada and Australia, UTMD generally accepts orders directly from and ships directly to end user clinical facilities, as well as third party medical/surgical distributors, under UTMD’s Standard Terms and Conditions (T&C) of Sale. About 14% of UTMD’s domestic end user sales, excluding Filshie device sales, go through third party med/surg distributors which contract separately with clinical facilities to provide purchasing, storage and scheduled delivery functions for the applicable facility. UTMD’s T&C of Sale to end user facilities are substantially the same in the U.S., Ireland, UK, France, Canada and Australia..
UTMD may have separate discounted pricing agreements with a specific clinical facility or group of affiliated facilities based on volume of purchases. Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities, if applicable, are established in advance of orders accepted or shipments made. For existing customers, past actual shipment volumes typically determine the fixed price by part number for the next agreement period of one year. For new customers, the customer’s best estimate of volume is usually accepted by UTMD for determining the ensuing fixed prices for the agreement period. Prices are not adjusted after an order is accepted. For the sake of clarity, the separate pricing agreements with clinical facilities based on volume of purchases disclosure is not inconsistent with UTMD’s disclosure that the selling price is fixed prior to the acceptance of a specific customer order.
Total consolidated 3Q 2021 UTMD sales were $2,094 (20.0%) higher than in 3Q 2020. Constant currency sales were $2,006 (19.1%) higher. Total consolidated 9M 2021 UTMD sales were $5,972 (19.8%) higher than in 9M 2020. Constant currency sales in 9M 2021 were $5,303 (17.6%) higher than in 9M 2020.
In 3Q 2021 compared to 3Q 2020, U.S. domestic sales were 11% higher and OUS sales were 37% higher. In 9M 2021 compared to 9M 2020, U.S. domestic sales were 19% higher and OUS sales were 21% higher.
Domestic sales in 3Q 2021 were $7,749 compared to $6,950 in 3Q 2020. Domestic sales in 9M 2021 were $22,555 compared to $18,906 in 9M 2020. The components of domestic sales include 1) “direct sales” of UTMD’s medical devices to user facilities (and med/surg stocking distributors for hospitals), excluding Filshie Clip System (“Filshie device”) sales, 2) “OEM sales” of components and other products manufactured by UTMD for other medical device and non-medical device companies, and 3) Filshie device sales direct to U.S. medical facilities starting in February 2019.
Domestic direct sales in 3Q 2021 excluding Filshie devices, representing 48% of total domestic sales, were $277 (+8%) higher than in 3Q 2020. Domestic direct sales in 9M 2021 excluding Filshie devices, also representing 48% of total domestic sales, were $1,229 (+13%) higher than in 9M 2020. OEM sales in 3Q 2021, representing 32% of total domestic sales, were $704 (+40%) higher than in 3Q 2020. OEM sales in 9M 2021, representing 31% of total domestic sales, were $2,350 (+50%) higher than in 9M 2020. Filshie device sales direct to U.S. domestic end-user facilities were $182 (10%) lower in 3Q 2021 compared to sales in 3Q 2020. Filshie device sales direct to U.S. domestic end-user facilities were $69 (+2%) higher in 9M 2021 compared to Filshie device sales in 9M 2020.
OUS sales in 3Q 2021 were $4,823 (+37%) compared to $3,528 in 3Q 2020. OUS sales in 9M 2021 were $13,585 (+21%) compared to $11,262 in 9M 2020.
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UTMD subsidiary direct domestic sales in Canada, Ireland, the United Kingdom, France and Australia are invoiced in foreign currencies. Foreign currency exchange (FX) rates for income statement purposes are transaction-weighted averages. The average rates from the applicable foreign currency to USD during 3Q 2021 and 9M 2021 compared to the same periods in 2020 follow:
| 3Q 21 | 3Q 20 | Change | 9M 21 | 9M 20 | Change |
GBP | 1.379 | 1.295 | +6.5% | 1.386 | 1.279 | +8.3% |
EUR | 1.179 | 1.173 | +0.6% | 1.196 | 1.128 | +6.0% |
AUD | 0.735 | 0.714 | +2.9% | 0.758 | 0.677 | +12.0% |
CAD | 0.794 | 0.751 | +5.7% | 0.798 | 0.745 | +7.2% |
The volatility of FX rates for OUS sales when consolidated in USD terms continues to impact period-to-period relative financial results because of UTMD’s significant percentage of foreign currency sales. Foreign currency revenues in 3Q 2021 were increased by $88 as a result of a weaker USD compared to 3Q 2020. The difference in period-to-period FX rates increased revenues by $669 in 9M 2021. Foreign currency sales as a percentage of total sales were 26.7% of total sales in 3Q 2021 and 27.0% of total sales in 9M 2021. UTMD’s 3Q 2020 and 9M 2020 revenues invoiced in foreign currencies represented 21.0% and 22.0% of total consolidated USD sales respectively.
Foreign currency OUS sales were more affected by the pandemic in 2020 than USD sales. Foreign currency OUS sales in 3Q 2021 were $3,352, which was 70% of all OUS sales. In comparison, foreign currency OUS sales in 3Q 2020 were $2,205, which was 62% of all OUS sales. The foreign currency OUS sales in 9M 2021 were $9,766, which was 72% of all OUS sales. In comparison, foreign currency OUS sales in 9M 2020 were $6,653, which was 59% of all OUS sales.
UTMD segments sales into the following general product categories: gynecology/ electrosurgery, labor & delivery, neonatal, and miscellaneous including blood pressure monitoring kits and accessories as well as related OEM products.
In 3Q 2021 compared to 3Q 2020, worldwide gynecology/ electrosurgery and neonatal device sales were both up 10%, worldwide labor & delivery device sales were 3% lower, and worldwide blood pressure monitoring and related OEM product sales were up 55%. In 9M 2021 compared to 9M 2020, worldwide gynecology/ electrosurgery device sales were up 12%, worldwide labor & delivery device sales were up 2%, worldwide neonatal device sales were up 10% and worldwide blood pressure monitoring and related OEM product sales were up 48%. Medical facility procedures in L&D and the NICU during the 2020 pandemic did not decline as much as procedures utilizing devices in the gynecology/ electrosurgery category.
The following table provides USD sales amounts divided into general product categories for total sales and the subset of OUS sales:
Global 3Q 2021 revenues (USD) by product category:
| Domestic | Outside US | Total |
Obstetrics | $ 1,014 | $ 232 | $ 1,246 |
Gynecology/Electrosurgery/Urology | 2,743 | 2,815 | 5,558 |
Neonatal | 1,336 | 312 | 1,648 |
Blood Pressure Monitoring and Accessories* | 2,656 | 1,464 | 4,120 |
Total: | $ 7,749 | $ 4,823 | $ 12,572 |
Global 9M 2021 revenues (USD) by product category:
| Domestic | Outside US | Total |
Obstetrics | $ 2,864 | $ 559 | $ 3,423 |
Gynecology/Electrosurgery/Urology | 8,229 | 8,130 | 16,359 |
Neonatal | 3,813 | 1,064 | 4,877 |
Blood Pressure Monitoring and Accessories* | 7,649 | 3,832 | 11,481 |
Total: | $ 22,555 | $ 13,585 | $ 36,140 |
*includes molded components sold to OEM customers.
Looking forward, UTMD expects that its 4Q 2021 and year 2022 organic device sales will continue to improve.
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c)Gross Profit
Gross Profit results from subtracting the costs of manufacturing products, including relatively fixed critical mass of overhead expenses associated with quality assurance, engineering and supervision, from revenues. Gross Profit was $1,576 (+24.3%) higher in 3Q 2021 than in 3Q 2020, and $4,522 (+24.7%) higher in 9M 2021 than in 9M 2020. UTMD’s 3Q 2021 Gross Profit Margin (GPM) (Gross Profit/ Sales) improved to 64.2% compared to 62.0% in 3Q 2020, and to 63.1% compared to 60.6% in 9M 2021 compared to 9M 2020. The GPM expansion in both periods allowed a higher increase in Gross Profit than in revenues. In 2020, UTMD did not reduce critical mass manufacturing overhead expenses in proportion to its temporary pandemic decline in sales. As a result, the 2021 GPM has expanded as a result of UTMD not needing to increase manufacturing overhead expenses in proportion to the sales recovery. Looking forward, UTMD management expects new pressure on its GPM as a result of recent increases in raw material and packaging costs in the range of 8%-15%, a more than doubling of freight costs associated with obtaining materials from vendors, a recent 5% cost-of-living adjustment for its direct labor force, and higher sterilization costs, among other cost increases. Management believes, however, that UTMD does retain the ability to adjust prices for its specialty devices to allow it to continue to achieve its minimum GPM target of 60%.
d)Operating Income
Operating Income results from subtracting Operating Expenses from Gross Profit. Operating Expenses, comprised of general and administrative (G&A) expenses, sales and marketing (S&M) expenses and product development (R&D) expenses, were 23.7% of sales in 3Q 2021 compared to 27.8% of sales in 3Q 2020. Operating Expenses were 25.1% of sales in 9M 2021 compared to 29.4% of sales in 9M 2020. The operating expense percentage of sales declined in 3Q 2021 as a result of expenses increasing only 2.3% when sales increased 20.0%, and in 9M 2021 when Operating Expense increased only 2.2% when sales increased 19.8%.
Summary comparison of (USD) consolidated operating expenses:
| 3Q 2021 | 3Q 2020 | 9M 2021 | 9M 2020 |
S&M Expense | $ 324 | $ 352 | $ 1,071 | $ 1,195 |
R&D Expense | 126 | 125 | 385 | 375 |
G&A Expense | 2,524 | 2,432 | 7,598 | 7,285 |
Total Operating Expenses: | $ 2,974 | $ 2,909 | $ 9,054 | $ 8,855 |
A weaker USD helped increase consolidated USD sales in 2021, but it also helped increase the USD-denominated operating expenses of UTMD’s foreign subsidiaries by $49 in 3Q 2021 and $221 in 9M 2021. In “constant currency” terms, operating expenses in 3Q and 9M 2021 were almost the same as in the prior year:
| 3Q 2021 | 3Q 2020 | 9M 2021 | 9M 2020 |
S&M Expense | $ 321 | $ 352 | $ 1,049 | $ 1,195 |
R&D Expense | 126 | 125 | 384 | 375 |
G&A Expense | 2,478 | 2,432 | 7,400 | 7,285 |
Total Operating Expenses: | $ 2,925 | $ 2,909 | $ 8,833 | $ 8,855 |
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The following lower operating expense ratios in 2021 were essentially due to higher sales, rather than the change in actual expenses.
S&M expenses were 2.6% of sales in 3Q 2021 and 3.4% of sales in 3Q 2020. S&M expenses were 3.0% of sales in 9M 2021 compared to 4.0% of sales in 9M 2020. Somewhat lower actual S&M expenses were due primarily to one less sales person in the U.S.
R&D expenses were 1.0% of sales in 3Q 2021 compared to 1.2% of sales in 3Q 2020. R&D expenses in 9M 2021 were 1.1% of sales compared to 1.2% of sales in 9M 2020. R&D expenses varied only by specific project expenses.
Consolidated G&A expenses were 20.1% of sales in 3Q 2021 compared to 23.2% of sales in 3Q 2020. Consolidated G&A expenses were 21.0% of sales in 9M 2021 compared to 24.2% of sales in 9M 2020. G&A expenses included non-cash expense from the amortization of IIA resulting from the March 2011 Femcare Group Ltd (UK) acquisition and the amortization of IIA from the purchase of the CSI exclusive Filshie devices U.S. distribution rights effective in February 2019.
The initial amount of IIA for the 2011 Femcare UK purchase was £23,998. After 10.5 years of amortization, the IIA balance is £7,094. For 3Q 2021 and 3Q 2020, the IIA amortization expenses were £397 and £399 respectively. For 9M 2021 and 9M 2020, the IIA amortization expenses were £1,193 and £1,196 respectively. The USD amortization expense amount in each period, however, varied according to the USD/GBP FX rate which explains the differences in IIA amortization expenses in the table below.
The initial amount of IIA for the 2019 acquisition of 4.75 years’ remaining exclusive U.S. Filshie device distribution rights from CSI was $21,000. The straight-line amortization of this IIA is $1,105/ calendar quarter over the remaining 4.75 years of the prior distribution agreement. After 32 months of amortization, the CSI IIA balance as of September 30, 2021 is $9,211. The CSI IIA amortization expenses were the same in both years’ 3Q and 9M periods.
Because the IIA amortization expenses represent a significant portion of UTMD’s G&A expenses, UTMD provides the following table that separates the IIA amortization expenses from all other G&A expenses:
| 3Q 2021 | 3Q 2020 | 9M 2021 | 9M 2020 |
IIA amortization expense | $ 1,653 | $ 1,621 | $ 4,969 | $ 4,839 |
All other G&A expense | 871 | 811 | 2,629 | 2,445 |
Total G&A Expenses: | $ 2,524 | $ 2,432 | $ 7,598 | $ 7,284 |
Percent of Sales: | 3Q 2021 | 3Q 2020 | 9M 2021 | 9M 2020 |
IIA amortization expense | 13.1% | 15.5% | 13.7% | 16.0% |
All other G&A expense | 7.0% | 7.7% | 7.3% | 8.1% |
Total G&A Expenses: | 20.1% | 23.2% | 21.0% | 24.1% |
Eventually, when the two Filshie-related IIA balances are fully amortized, stockholders can look forward to a substantial increase in EBT. The Femcare acquisition IIA amortization expense has 4.5 more years to run at about $547 per quarter using the same USD/GBP FX rate as in 3Q 2021. The CSI IIA amortization expense has 2.1 more years to run at $1,105 per quarter. Stockholders will appreciate that, although cash flow will not be affected, annualized reported EPS will increase $.90 after another 2.1 years, based on current shares outstanding and if current U.S. and Utah income tax rates remain the same. Similarly, after another 4.5 years annualized EPS would be $1.35 higher based on current shares outstanding and a 25% income tax rate in the UK beginning in April 2023.
Other G&A expenses were higher in both periods primarily because UTMD’s CEO took 50% salary in 2020, and 2021 employee profit-sharing bonuses based on the projected 2021 annual EBT have been accrued at a higher rate than in 2020.
In summary, Operating Income in 3Q 2021 was $5,098 (40.6% of sales) compared to $3,588 (34.2% of sales) in 3Q 2020. Operating Income in 9M 2021 was $13,750 (38.0% of sales) compared to $9,428 (31.3% of sales) in 9M 2020. A higher GPM on higher sales in 2021 was leveraged further by lower Operating Expenses as a ratio of sales.
e)Non-operating expense/ Non-operating income
Non-operating expense includes 1) bank fees; 2) losses from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms; and 3) losses from disposition of assets. Non-operating income includes 1) investment income from cash deposit balances; 2) rent of underutilized property; 3) royalties received from licensing the Company’s technology; 4) gains from dispositions of assets; and 5) gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms.
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UTMD’s net non-operating income in 3Q 2021 was $59 compared to less than $1 in 3Q 2020. Net non-operating income in 9M 2021 was $130 compared to $126 in 9M 2020.
In 3Q 2021 and 3Q 2020, losses from remeasurement of the value of foreign currency bank balances were negligible in both periods. In 9M 2021, UTMD recognized a $13 loss from remeasurement of the value of foreign currency bank balances compared to a $41 gain in 9M 2020. Royalties received were $10 in 3Q 2021 compared to $5 in 3Q 2020, and $10 in 9M 2021 compared to $10 in 9M 2020. Interest earned on cash balances were $6 and $31 in 3Q and 9M 2021 respectively, compared to interest of $2 and $64 in 3Q and 9M 2020 respectively.
f)Income Before Income Taxes (EBT)
EBT results from subtracting net non-operating expense or adding net non-operating income from or to, as applicable, Operating Income. Consolidated 3Q 2021 EBT was $5,157 (41.0% of sales) compared to $3,588 (34.2% of sales) in 3Q 2020. Consolidated 9M 2021 EBT was $13,880 (38.4% of sales) compared to $9,553 (31.7% of sales) in 9M 2020.
The EBT of Utah Medical Products, Inc. in the U.S. was $8,736 in 9M 2021 compared to $6,469 in 9M 2020. The EBT of Utah Medical Products, Ltd (Ireland) was EUR 4,662 in 9M 2021 compared to EUR 2,393 in 9M 2020. The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP (361) in 9M 2021 compared to GBP (297) in 9M 2020. The EBT of Utah Medical Products Canada, Inc. (dba Femcare Canada) was CAD 450 in 9M 2021 compared to CAD 565 in 9M 2020. The EBT of UTMD’s manufacturing subsidiaries varies as a result of intercompany shipments which are eliminated in the consolidation of results.
EBITDA is a non-US GAAP metric that UTMD management believes is of interest to investors because it provides meaningful supplemental information to both management and investors that represents profitability performance without factoring in effects of financing, accounting decisions regarding non-cash expenses, capital expenditures or tax environments. Although the U.S. Securities and Exchange Commission advises that EBITDA is a non-GAAP metric, UTMD’s non-US GAAP EBITDA is the sum of the following elements in the table below, each of which is a US GAAP number:
Component of EBITDA | 3Q 2021 | 3Q 2020 | Change | 9M 2021 | 9M 2020 | Change |
EBT | $ 5,157 | $ 3,588 | +43.7% | $ 13,880 | $ 9,553 | +45.3% |
Depreciation of fixed assets | 157 | 160 |
| 483 | 495 |
|
Amortization of patent expenses | 9 | 12 |
| 27 | 37 |
|
Amortization of Femcare IIA | 548 | 517 |
| 1,653 | 1,523 |
|
Amortization of CSI distribution agreement IIA | 1,105 | 1,105 |
| 3,316 | 3,316 |
|
Stock option compensation expense | 41 | 49 |
| 123 | 121 |
|
Remeasured currency (gains) or losses | 7 | 2 |
| 13 | (41) |
|
Adjusted Consolidated EBITDA: | $ 7,024 | $ 5,433 | +29.3% | $19,495 | $15,004 | +29.9% |
Management believes that the non-US GAAP EBITDA improvement is more indicative of UTMD’s recovery from the COVID-19 negative impact on UTMD’s 2020 operating results than the change represented by EBT.
g)Net Income
Net Income is EBT minus a provision for income taxes. Net Income in 3Q 2021 was $4,206 (33.5% of sales) compared to $2,933 (28.0% of sales) in 3Q 2020. The average consolidated income tax provision (as a % of EBT) in 3Q 2021 was 18.4% compared to 18.3% in 3Q 2020.
Net Income in 9M 2021 was $10,656 (29.5% of sales) compared to Net Income of $7,386 (24.5% of sales) in 9M 2020. Net Income in 9M 2021 included a 2Q 2021 unfavorable $390 tax provision increase for a future UK income tax increase on non-deductible IIA amortization expense beginning in 2023. Net Income in 9M 2020 included a 2Q 2020 unfavorable $225 tax provision increase for a future UK income tax increase on non-deductible IIA amortization expense over the ensuing six years. The average consolidated income tax provisions (as a % of EBT) in 9M 2021 and 9M 2020 were 23.2% and 22.7%, respectively.
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h)Earnings Per Share (EPS)
EPS are consolidated Net Income divided by the number of shares of stock outstanding (diluted to take into consideration stock option awards which are “in the money,” i.e., have exercise prices below the applicable period’s weighted average market value).
Diluted EPS in 3Q 2021 were $1.150 compared to $.803 in 3Q 2020. Diluted US GAAP EPS in 9M 2021 were $2.915 compared to $2.008 in 9M 2020. According to U.S. GAAP, the UK tax law change in 2Q 2021 which increased UTMD’s deferred tax liability as a result of the UK corporate tax rate increasing to 25% in 2023, and the UK tax law change in 2Q 2020, resulted in income tax provision increases in both the 2Q 2021 and the 2Q 2020 income statements. Without the $390 tax provision adjustment in 2Q 2021, 9M 2021 non-US GAAP EPS were $3.021. Without the $225 tax provision adjustment in 2Q 2020, 9M 2020 non-US GAAP EPS were $2.069.
Diluted shares were 3,657,733 in 3Q 2021 compared to 3,653,500 in 3Q 2020, and 3,656,255 in 9M 2021 compared to 3,678,210 in 9M 2020. The differences in diluted shares resulted from employee option exercises, shares repurchased during 2020, an employee option award in 2020, and the time-weighted calculation of outstanding shares and options “in the money” at an average applicable period stock price. The number of shares added as a dilution factor in 3Q 2021 was 10,933 compared to 11,130 in 3Q 2020. The number of shares added as a dilution factor in 9M 2021 was 10,685 compared to 14,514 in 9M 2020. In March 2020, 26,300 option shares were awarded to 48 employees at an exercise price of $77.05 per share. No options have been awarded in 2021. In March 2020, UTMD repurchased 80,000 of its shares in the open market at $80.32/ share. In September 2020, UTMD repurchased 7,000 of its shares in the open market at $78.67/ share. The total 87,000 shares repurchased in 9M 2020 were at an average price of $80.19/ share. No shares have been 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.
Outstanding shares at the end of 3Q 2021 were 3,648,984 compared to 3,643,035 at the end of calendar year 2020. The difference was due to employee option exercises of 5,949 shares during 9M 2021. Outstanding shares were 3,640,371 one year ago at the end of 3Q 2020. The number of shares used for calculating diluted EPS was higher than ending shares because of a time-weighted calculation of average outstanding shares plus dilution from unexercised employee and director options. The total number of outstanding unexercised employee and outside director options at September 30, 2021 was 59,869 at an average exercise price of $68.74, including shares awarded but not yet vested. This compares to 71,700 unexercised option shares at the end of 3Q 2020 at an average exercise price of $65.80/ share, including shares awarded but not yet vested.
UTMD distributed $1,039 ($0.285/share) in dividends to stockholders in 3Q 2021 compared to $1,020 ($0.280/ share) distributed in 3Q 2020. Dividends paid to stockholders during 3Q 2021 were 25% of 3Q 2021 Net Income. UTMD paid $3,116 ($0.285/share) in dividends to stockholders in 9M 2021 compared to $3,097 ($0.280/ share) paid in 9M 2020. Dividends paid to stockholders during 9M 2021 were 28% of 9M 2021 Net Income.
i) Return on Stockholder Equity (ROE) and Stock Value
ROE is the portion of Net Income retained by UTMD to internally finance its growth, divided by the average accumulated stockholders’ equity for the applicable time period. After payment of cash dividends to stockholders, annualized ROE in 9M 2021 was 10% compared to annualized ROE of 6% in 9M 2020. Before the payment of dividends, annualized ROE in 9M 2021 was 14% compared to 10% in 9M 2020. The higher ROE in 9M 2021 was due to a 7% increase in average accumulated stockholders’ equity together with a 44% decrease in Net Income. Targeting a high ROE of 20% (before dividends) remains a key financial objective for UTMD management.
UTMD’s closing share price at the end of 3Q 2021 was $92.84, up 10% from the $84.30 closing price at the end of 2020. The closing share price at the end of 3Q 2020 was $79.87.
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 $16,217 in 9M 2021 compared to $14,359 in 9M 2020. The $1,857 higher cash provided by operating activities in 9M 2021 was due primarily to differences from $3,271 higher net income offset by greater net $1,269 decreases in working capital from 1) $926 decreased trade accounts receivable and inventories compared to a $1,184 increase in 9M 2020, yielding a $2,110 lower working capital change difference in the two periods, and 2) a $1,053 increase in accounts payable and accrued expenses compared to a $212 increase in 9M 2020, yielding a $841 higher working capital change difference in the two periods.
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Capital expenditures for property and equipment (PP&E) were $299 in 9M 2021 compared to $806 in 9M 2020. The higher capital expenditures in 2020 were due to a new roof on the Midvale facility and investment in new manufacturing capabilities in Ireland. There were no capital expenditures for intangible assets in either 9M 2021 or 9M 2020.
UTMD made cash dividend payments of $3,116 in 9M 2021 compared to $3,097 in 9M 2020. There were no share repurchases in 9M 2021. The Company used $6,976 of its cash to repurchase 87,000 of its own shares in 9M 2020.
In 9M 2021 the Company received $281 and issued 5,949 shares of stock on the exercise of employee and director stock options. Option exercises in 9M 2021 were at an average price of $47.25 per share. In comparison, in 9M 2020, UTMD received $282 and issued 5,614 shares of its stock upon the exercise of employee and director stock options. Option exercises in 9M 2020 were at an average price of $50.15 per share.
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
September 30, 2021 total consolidated assets were $119,752, a net increase of $8,007 from December 31, 2020. Primarily as a result of the increase in cash, consolidated current assets increased $13,584. The total asset increase was due to a $12,731 increase in cash plus a $749 increase in net accounts and other receivables, a $77 increase in inventories and a $27 increase in other current assets, offset by decreases of $5,183 in Net Intangible Assets and $394 in net consolidated Property, Plant and Equipment (PP&E). The decreases in Net Intangibles and PP&E were due to a combination of depreciation exceeding new purchases and amortization of Intangibles combined with changes in FX rates for OUS assets.
UTMD’s Ireland subsidiary EUR-denominated assets and liabilities on September 30, 2021 were translated into USD at an FX rate 5.3% lower (weaker EUR relative to the USD) than the FX rate at the end of 2020. UTMD’s UK subsidiary GBP-denominated assets were translated into USD at an FX rate 1.4% lower (weaker GBP) than the FX rate at the end of 2020. UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 6.2% lower (weaker AUD) than the FX rate at the end of 2020. UTMD’s Canada subsidiary CAD-denominated assets were translated into USD at an FX rate 0.6% higher (stronger CAD) than the FX rate at the end of 2020. The net book value of PP&E declined $394 at September 30, 2021 from the end of 2020 due to the period-ending changed FX rates above, $299 in new asset purchases and $483 in depreciation.
Working capital (current assets minus current liabilities) was $70,830 at September 30, 2021 compared to $58,471 at December 31, 2020. The whole source of the working capital increase was from an increase of $12,731 in cash. Consolidated receivables and inventories increased $749 and $77, respectively, but current liabilities also increased $1,225. The current liabilities of accounts payable and accrued liabilities increased $238 and $986 respectively, due to higher sales/production activity and higher accrued income taxes. UTMD management believes that its working capital remains sufficient to meet normal operating needs, new capital expenditures and continued cash dividend payments to stockholders.
September 30, 2021 net intangible assets (goodwill plus other intangible assets less amortization) declined $5,183 from the end of 2020. No new intangible assets were acquired in 9M 2021. At September 30, 2021, net intangible assets including goodwill were 28% of total consolidated assets compared to 34% at year-end 2020, and 36% at September 30, 2020.
The long term deferred tax liability (DTL) balance for Femcare IIA ($9,084 on the date of the acquisition) was $2,196 (£1,630) at September 30, 2021, compared to $2,151 (£1,575) at December 31, 2020, and $2,132 (£1,650) at September 30, 2020. Reduction of the DTL occurs as the book/tax difference of IIA amortization is eliminated over the remaining useful life of the Femcare IIA (because the amortization expense is not tax deductible in the UK). The DTL increased $45 at September 30, 2021 from December 31, 2020, despite 9M 2021 amortization expense of $1,654, which reduced the DTL balance by $314 (using UK tax rate = 19%). The difference was due to a UK tax law change enacted in 2Q 2021 which increased the DTL balance by $390 (£283), combined with a change in ending FX rates. The UK increased its corporate income tax rate from 19% to 25% beginning April 1, 2023, which affects non-deductible amortization expense after March 31, 2023. (The $390 increase in deferred UK taxes was booked in the 2Q 2021 tax provision, reducing 9M 2021 net income $390.)
UTMD’s total debt ratio (total liabilities/ total assets) as of September 30, 2021 was 8%, including a remaining $2,047 REPAT tax liability payable over another four years. The total debt ratio as of December 31, 2020, as well as of September 30, 2020, was also 8%.
The $8,007 increase in total liabilities and stockholders’ equity (same as in total assets) was primarily due to a $7,158 September 30, 2021 ending increase in stockholders’ equity compared to December 31, 2020. Stockholders’ equity was increased during 9M 2021 by $10,656 US GAAP Net Profit minus $3,116 in dividends paid to stockholders.
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l)Management's Outlook
As outlined in its December 31, 2020 SEC 10-K report, UTMD’s general plan for 2021 was to
1) exploit distribution and manufacturing synergies by further integrating capabilities and resources in its multinational operations;
2) focus on effective direct marketing of the benefits of the Filshie Clip System in the U.S.;
3) introduce additional products helpful to clinicians through internal new product development;
4) continue to achieve excellent overall financial operating performance;
5) utilize positive cash generation to continue providing cash dividends to stockholders and make open market share repurchases if/when the UTMD share price seems undervalued; and
6) be vigilant for accretive acquisition opportunities which may be brought about by difficult burdens on small, innovative companies.
The Company has recovered better than expected from the COVID-19 pandemic, exceeding targeted 2019 financial performance prior to the pandemic.
m)Accounting Policy Changes
None
Forward-Looking Information. This report contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by management based on information currently available. When used in this document, the words “anticipate,” “believe,” “project,” “estimate,” “expect,” “intend” and similar expressions, as they relate to the Company or its management, are intended to identify forward-looking statements. Such statements reflect the current view of the Company respecting future events and are subject to certain risks, uncertainties and assumptions, including the risks and uncertainties stated throughout the document. Although the Company has attempted to identify important factors that could cause the actual results to differ materially, there may be other factors that cause the forward statement not to come true as anticipated, believed, projected, expected, or intended. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those described herein as anticipated, believed, projected, estimated, expected or intended. Financial estimates are subject to change and are not intended to be relied upon as predictions of future operating results, and the Company assumes no obligation to update or disclose revisions to those estimates.
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Item 3. Quantitative and Qualitative Disclosures about Market Risk
UTMD has manufacturing and trading operations, including related assets, in the U.S. denominated in the U.S. Dollar (USD), in Ireland denominated in the Euro (EUR), in England denominated in the British Pound (GBP), in Australia denominated in the Australia Dollar (AUD), and, starting in 2017, in Canada denominated in the Canadian Dollar (CAD). The currencies are subject to exchange rate fluctuations that are beyond the control of UTMD. The exchange rates were .8638, .8178 and .8529 EUR per USD as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively. Exchange rates were .7425, .7318 and .7741 GBP per USD as of September 30, 2021, December 31, 2020 and September 30, 2020, respectively. Exchange rates were 1.3834, 1.2974 and 1.3964 AUD per USD on September 30, 2021, December 31, 2020, and September 30, 2020, respectively. Exchange rates were 1.2673, 1.2754, and 1.3323 CAD per USD on September 30, 2021, December 31, 2020, and September 30, 2020, respectively. UTMD manages its foreign currency risk without separate hedging transactions by either invoicing customers in the local currency where costs of production were incurred, by converting currencies as transactions occur, and by optimizing global account structures through liquidity management accounts.
Item 4. Controls and Procedures
The Company’s management, under the supervision and with the participation of the Chief Executive Officer and the Principal Financial Officer, evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of September 30, 2021. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that, as of September 30, 2021, the Company’s disclosure controls and procedures were effective.
There were no changes in the Company’s internal controls over financial reporting that occurred during the nine months ended September 30, 2021, that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company may be a party from time to time in litigation incidental to its business. Presently, there is no litigation the outcome of which is expected to be material to financial results.
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, 2020, 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) 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 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.
As the healthcare industry becomes increasingly bureaucratic it puts smaller companies like UTMD at a competitive disadvantage:
An aging population is placing greater burdens on healthcare systems, particularly hospitals. The length of time and number of administrative steps required in adopting new products for use in hospitals has grown substantially in recent years. Smaller companies like UTMD typically do not have the administrative resources to deal with broad new administrative requirements, resulting in either loss of revenue or increased costs. As UTMD introduces new products it believes are safer and more effective, it may find itself excluded from certain clinical users because of the existence of long term supply agreements for preexisting products, particularly from competitors which offer hospitals a broader range of products and services. Restrictions used by hospital administrators to limit clinician involvement in device purchasing decisions makes communicating UTMD’s clinical advantages much more difficult.
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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 corona virus pandemic could potentially disrupt UTMD’s supply chain or interfere with normal business operations due to the loss of employee availability.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
UTMD did not purchase any of its own securities during 9M 2021. During 9M 2020 UTMD purchased 87,000 of its shares in the open market for $6,976 including commissions and fees.
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 September 30, 2021, 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) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchanges Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
UTAH MEDICAL PRODUCTS, INC.
REGISTRANT
Date: 11/12/21 By: /s/ Kevin L. Cornwell
Kevin L. Cornwell
CEO
Date: 11/12/21 By: /s/ Brian L. Koopman
Brian L. Koopman
Principal Financial Officer
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