Utah Medical Products Inc 10-Q for FY2020 Q2
Utah Medical Products Inc (UTMD)
About this 10-Q
Utah Medical Products Inc filed this 10-Q on August 7, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $8.79M
- down 25.8% from $11.85M a year earlier
- Net income
- $1.31M
- down 62.8% from net income of $3.53M a year earlier
- Diluted EPS
- $0.36
- down 61.7% from $0.94 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 ☐ | |
Non-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 6, 2020:
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, 2020 AND DECEMBER 31, 2019 | |||
(in thousands) | |||
| (unaudited) |
| (audited) |
JUNE 30, 2020 |
| DECEMBER 31, 2019 | |
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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Preferred stock - $ |
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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, 2020 AND JUNE 30, 2019 | ||||||||
(in thousands, except per share amounts - unaudited) | ||||||||
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| June 30, 2020 |
| June 30, 2019 |
| June 30, 2020 |
| June 30, 2019 |
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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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| $ |
| $ |
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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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| $ |
| $ |
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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 SIX MONTHS ENDED JUNE 30, 2020 AND JUNE 30, 2019 | ||||
(in thousands - unaudited) | ||||
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| Six Months Ended | ||
| 2020 |
| 2019 | |
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 decrease 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 STATEMENTS OF STOCKHOLDERS’ EQUITY FOR THE | |||||||||||
THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2020 AND 2019 | |||||||||||
(In thousands - unaudited) | |||||||||||
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| Accumulated |
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| Additional |
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| Total |
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Shares |
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| Capital |
| Income |
| Earnings |
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Balance at December 31, 2019 |
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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 March 31, 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 June 30, 2020 | |
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Balance at December 31, 2018 | |
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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 March 31, 2019 | |
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Shares issued upon exercise of employee | 1 |
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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, 2019 | |
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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)
(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, 2020 and December 31, 2019 consisted of the following:
| June 30, 2020 |
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| December 31, 2019 | |
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 June 30, 2020, 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, 2020 and 2019, 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,
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| Outside US |
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| Total | |
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 1H 2020 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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5
(7) Leases
UTMD has operating leases for a portion of its parking lot at its Midvale facility and an automobile at its Ireland facility. The remaining lease term on the parking lot is
The components of lease cost were as follows: | Three Months Ended June 30, 2020 |
Operating Lease Cost (in thousands) | $ |
Right of Use Assets obtained in exchange for new operating lease Obligations | |
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Other Information | Three Months Ended June 30, 2020 |
Weighted Average Remaining Lease Term - Operating Leases | |
Weighted Average Discount Rate – Operating Leases |
Operating lease liabilities/ payments (in thousands) | |
Operating lease payments, 2020 | $ |
Operating lease payments, 2021 | $ |
Operating lease payments, 2022 | $ |
Operating lease payments, 2023 | $ |
Operating lease payments, 2024 | $ |
Thereafter | $ |
Reconciliation of operating lease liabilities/ payments to operating lease liabilities | (in thousands) |
Total operating lease liabilities/ payments | $ |
Operating lease liabilities – current (included in Accrued Expenses) | |
Operating lease liabilities – long term | |
Present value adjustment | $ |
Maturities of lease liabilities were as follows: | (in thousands) |
Year ending December 31, | |
2020 | $ |
2021 | $ |
2022 | $ |
2023 | $ |
2024 | $ |
Thereafter | $ |
(8) 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 $
6
(9) 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 2nd quarter 2020.
(in thousands) | Three months ended |
| Six months ended | ||||
| June 30, |
| June 30, | ||||
2020 |
| 2019 |
| 2020 |
| 2019 | |
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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(10) 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.
7
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, 2019 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. In the current year of 2020, because of government mandates for hospitals to not perform certain “elective” procedures in order to theoretically preserve capacity for treating COVID-19 infected patients, it is likely that the 2Q 2020 comparison with 2Q 2019 will 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
As many of the gynecology devices provided by UTMD are used in “nonessential” or “elective” procedures, as medical procedures have been reclassified during the COVID-19 pandemic, the Company’s financial performance in the second calendar quarter (2Q) and first half (1H) of 2020 reflects a substantial negative change relative to the same periods in 2019. Income statement results in 2Q and 1H 2020 compared to the same periods of 2019 were as follows:
| 2Q 2020 | 2Q 2019 | change | 1H 2020 | 1H 2019 | change |
Net Sales | $ 8,787 | $ 11,846 | (25.8%) | $ 19,869 | $ 22,579 | (12.8%) |
Gross Profit | 4,950 | 7,500 | (34.0%) | 11,786 | 14,273 | (17.4%) |
Operating Income | 1,977 | 4,481 | (55.9%) | 5,840 | 8,582 | (32.0%) |
Income Before Tax | 1,977 | 4,565 | (56.7%) | 5,965 | 8,702 | (31.5%) |
Net Income (US GAAP) | 1,313 | 3,525 | (62.8%) | 4,452 | 6,664 | (33.2%) |
Earnings per Diluted Share | 0.359 | 0.944 | (62.0%) | 1.207 | 1.783 | (32.3%) |
The comparison of 2Q and 1H 2020 results with the results in the same periods of 2019, according to U.S. Generally Accepted Accounting Principles (US GAAP), was 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). This $225 increase in deferred UK taxes over the next six years, according to US GAAP, must be booked in the quarter in which the tax law change is enacted. The UK decided to not reduce its corporate income tax rate from 19% to 17% beginning in 2Q 2020, as was previously enacted. UTMD management believes that the presentation of results excluding the unfavorable deferred tax liability adjustment to its 2Q 2020 and 1H 2020 income tax provision provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results in 2020 compared to 2019. The non-US GAAP 2Q 2020 and 1H 2020 exclusion only affects Net Income and Earnings Per Share (EPS), as follows:
| 2Q 2020 | 2Q 2019 |
| 1H 2020 | 1H 2019 |
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Net Income (non-US GAAP) | 1,537 | 3,525 | (56.4%) | 4,677 | 6,664 | (29.8%) |
EPS (non-US GAAP) | 0.420 | 0.944 | (55.5%) | 1.268 | 1.783 | (28.9%) |
Although a minor impact compared to the device demand loss resulting from the COVID-19 pandemic, USD sales in 2020 continued to be hampered by a stronger USD compared to other currencies. The unfavorable foreign currency exchange (FX) rate impact lowered total consolidated 2Q 2020 sales by 0.5% ($43) and 1H 2020 sales by 0.6% ($121). The FX rate impact during 2Q 2020 was also smaller because outside the U.S. (OUS) medical device demand invoiced in foreign currencies were more negatively impacted by the COVID-19 virus than inside the U.S.
U.S. domestic sales in 2Q 2020 were 21% lower than in 2Q 2019, compared to 32% lower OUS. This geographical difference resulted not only from the fact that medical procedure shutdowns started in Europe before the U.S., but also from the fact that Filshie sales comprise a larger proportion of OUS sales (31% in 2Q 2020, and 52% in 2Q 2019) than of domestic sales (21% in 2Q 2020, and 28% in 2Q 2019). For example, in the two key UK and France markets where Femcare Ltd sells directly to medical device user facilities, 2Q 2020 sales were 72.5% lower in USD terms than in 2Q 2019.
8
Gross profits (GP) declined more than revenues due to 1) additional manufacturing costs related to managing COVID-19 as the Company continued to work as an “essential” business without any U.S. government subsidy, 2) less absorption of fixed manufacturing overhead costs and 3) a product sales mix difference with lower margin OEM product sales continuing to grow. On the operating income (OI) line, the same identifiable intangible asset (IIA) amortization expense of $1,105 in both 2Q 2020 and 2Q 2019 from UTMD’s February 2019 acquisition of CooperSurgical Inc’s (CSI’s) U.S. exclusive distribution rights for the Filshie Clip System represented 12.6% of sales in 2Q 2020 compared to 9.3% of sales in 2Q 2019. In other words, half of the 22 percentage point more negative change in OI compared to the change in GP was the result of the lower absorption (decline in the sales denominator) of fixed IIA amortization expense. The other half of the greater decline in OI compared to GP was due to lower absorption of operating expenses (OE), which in absolute dollars were lower but did not decline nearly as much as sales declined.
Except for the 2Q 2020 income tax provision addition required for a UK tax rate increase on non-deductible IIA amortization expense over the next six years, 2Q 2020 NI declined in the same proportion as OI. Lower Non-Operating Income (NOI) from the lack of interest on cash balances in 2Q 2020 was offset by a lower consolidated income tax provision rate. In 1H 2020 compared to 1H 2019, NOI was about the same but non-US GAAP NI declined less than OI as a result of a lower estimated tax provision rate. EPS in 2Q and 1H 2020 improved relative to the decline in NI from the March 2020 repurchase of 80,000 UTMD shares.
UTMD profit margins in 2Q 2020 and 1H 2020 compared to 2Q 2019 and 1H 2019 follow:
| 2Q 2020 (Apr – Jun) | 2Q 2019 (Apr – Jun) | 1H 2020 (Jan – Jun) | 1H 2019 (Jan – Jun) |
Gross Profit Margin (gross profits/ sales): | 56.3% | 63.3% | 59.9% | 63.2% |
Operating Income Margin (operating profits/ sales): | 22.5% | 37.8% | 29.7% | 38.0% |
Net Income Margin (US GAAP): | 14.9% | 29.8% | 22.6% | 29.5% |
Net Income Margin (Non-US GAAP, B4 DTL Adj): | 17.5% | 29.8% | 23.8% | 29.5% |
Note: The Net Income Margin is NI after subtracting a provision for taxes divided by sales. | ||||
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 June 2020 and the end of June 2019 follow:
| June 30, 2020 | June 30, 2019 | Change |
GBP | 1.237 | 1.271 | (2.7%) |
EUR | 1.123 | 1.138 | (1.3%) |
AUD | 0.689 | 0.701 | (1.8%) |
CAD | 0.734 | 0.765 | (3.9%) |
UTMD’s June 30, 2020 Balance Sheet, in the absence of debt, remains solid. Ending Cash and Investments were $42.4 million on June 30, 2020 compared to $42.8 million on December 31, 2019, after investing $0.7 million in new equipment, paying $2.1 million in cash dividends to stockholders and repurchasing $6.4 million in UTMD stock during 1H 2020. Stockholders’ Equity was down just $5.8 million in the six month period from December 31, 2019 after netting a combined $8.5 million in dividends and stock repurchases which reduce Stockholders’ Equity.
b)Revenues
Terms of sale are established in advance of UTMD’s acceptance of customer orders. In the U.S., Ireland, UK and Australia prior to 2017, UTMD generally accepted orders directly from and shipped 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. The same was true in 2017 with the addition of direct shipments to end user facilities in Canada and France. About 14% of UTMD’s domestic end user sales, excluding Femcare’s Filshie Clip System sales to its exclusive U.S. distributor, CooperSurgical Inc. (CSI), 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., Canada, Ireland, UK, France and Australia.
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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 2Q 2020 UTMD revenues (sales) were $3,059 (25.8%) lower than in 2Q 2019. Constant currency sales were $3,016 (25.5%) lower. Total consolidated 1H 2020 UTMD sales were $2,890 (12.8%) lower than in 1H 2019. Constant currency sales in 1H 2020 were $2,769 (12.3%) lower than in 1H 2019. The negative impact on sales due to the COVID-19 virus began in March.
In 2Q 2020 compared to 2Q 2019, U.S. domestic sales were 21% lower and OUS sales were 32% lower. In general, 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. In the current year of 2020, because of government mandates for hospitals to not perform certain procedures in order to theoretically preserve capacity for treating COVID-19 infected patients, it is likely that the comparison with 2Q 2019 will not be indicative of comparative results for the year as a whole. In 1H 2020 compared to 1H 2019, U.S. domestic sales were 7% lower and OUS sales were 21% lower.
Domestic sales in 2Q 2020 were $5,513 compared to $6,697 in 2Q 2019. Domestic sales in 1H 2020 were $11,956 compared to $12,791 in 1H 2019. 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 sales, 2) “OEM sales” of components and other products manufactured by UTMD for other medical device and non-medical device companies, and 3) “Filshie sales”, for which UTMD in the U.S. is simply a distributor for Filshie Clip System devices manufactured OUS. Domestic direct sales in 2Q 2020 (excluding Filshie sales), representing 51% of total domestic sales, were $775 (22%) lower than in 2Q 2019. The lower decline was due to the fact that many of the Company’s critical care devices used in L&D, the NICU and the ICU departments of U.S. hospitals were still clearly needed, although order patterns for these devices were disrupted. Domestic direct sales in 1H 2020 (excluding Filshie sales), representing 52% of total domestic sales, were $900 (13%) lower than in 1H 2019. OEM sales in 2Q 2020, representing 28% of total domestic sales, were $136 (+9%) higher than in 2Q 2019. OEM sales in 1H 2020, representing 25% of total domestic sales, were $145 (+5%) higher than in 1H 2019. Demand for UTMD’s biopharmaceutical manufacturing control system customer is increasing due to the pandemic. Filshie sales direct to U.S. domestic end-user facilities were $845 (43%) lower in 2Q 2020 compared to Filshie sales in 2Q 2019. Filshie sales direct to U.S. domestic end-user facilities were $80 (3%) lower in 1H 2020 compared to domestic Filshie sales in 1H 2019. The Filshie device implantation is performed in the hospital, and in the COVID-19 pandemic environment, has been deemed an “elective” procedure. During 2Q 2020, U.S. Filshie sales improved each month with sales in June 136% higher than April Filshie sales.
OUS sales in 2Q 2020 were $3,274 compared to $4,850 in 2Q 2019. OUS sales in 1H 2020 were $7,733 compared to $9,788 in 1H 2019. OUS sales invoiced in GBP, EUR, AUD and CAD currencies were $43 lower in 2Q 2020 and $121 lower in 1H 2020 as a result of changes in FX rates. In other words, 3% of the lower 2Q 2020 OUS sales and 6% of the lower 1H 2020 OUS sales were due to a stronger USD. The foreign currency OUS sales in 2Q 2020 were $1,583, which was 48% of all OUS sales and 18% of total consolidated sales. In comparison, foreign currency OUS sales in 2Q 2019 were $3,385, which was 70% of all OUS sales and 29% of total consolidated sales. The large period-to-period percentage difference was due to the fact that UTMD’s foreign currency sales occur in countries where UTMD subsidiaries primarily sell Filshie devices directly to user facilities. Foreign currency OUS sales in 1H 2020 were $4,448, which was 58% of all OUS sales and 23% of total consolidated sales. Foreign currency OUS sales in 1H 2019 were $6,590, which was 67% of all OUS sales and 29% of total consolidated sales. In 2Q 2020 compared to 2Q 2019, OUS Filshie sales (in USD terms) were 60% lower and domestic Filshie sales were 43% lower. Although the lower performance OUS hurt 2Q 2020 overall performance disproportionately, the Company expects that the sales recovery rate during the remainder of 2020 will also likely be disproportionately higher OUS.
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Although only a minor negative FX rate impact occurred compared to the COVID-19 impact, the volatility of foreign currency exchange (FX) rates for sales and expenses OUS did continue to have an impact on period-to-period relative financial results. FX rates for income statement purposes are transaction-weighted averages. For the record, the average rates from the applicable foreign currency to USD during 2Q 2020 and 1H 2020 compared to the same periods in 2019 follow:
| 2Q 2020 | 2Q 2019 | Change | 1H 2020 | 1H 2019 | Change |
GBP | 1.242 | 1.285 | (3.4%) | 1.272 | 1.295 | (1.8%) |
EUR | 1.110 | 1.125 | (1.4%) | 1.109 | 1.129 | (1.8%) |
AUD | 0.664 | 0.701 | (5.3%) | 0.659 | 0.707 | (6.8%) |
CAD | 0.723 | 0.748 | (3.3%) | 0.741 | 0.750 | (1.3%) |
Trade sales are sales to third parties, excluding sales from one UTMD entity to another (intercompany sales). USD-denominated OUS trade sales are affected by the change in FX rates. UTMD’s revenues invoiced in the above foreign currencies represented only 18.0% of total consolidated USD sales in 2Q 2020, and 22.6% in 1H 2020. The weighted average negative impact on all foreign currency sales from the change in FX rates was 2.7% in both 2Q 2020 and 1H 2020, reducing reported USD sales in 2Q 2020 by $43 relative to the same FX rates in 2Q 2019 and by $121 in 1H 2020 relative to the same FX rates in 1H 2019.
Ireland subsidiary USD-denominated trade sales were 46% of OUS sales in 2Q 2020 compared to 33% of OUS sales in 2Q 2019. Ireland subsidiary USD-denominated trade sales were 34% of OUS sales in 1H 2020 compared to 30% of OUS sales in 1H 2019. The much higher portion of OUS sales by Ireland in 2Q 2020 was due to a combination of a positive fluctuation in international distributor demand for pressure monitoring kits, which varies from quarter-to-quarter due to larger purchase quantities, and substantially lower Filshie device sales in larger OUS direct markets than in Ireland. In its native currency, Ireland (EUR) 2Q 2020 trade sales were 4% lower than in 2Q 2019.
USD-denominated trade sales by UTMD’s UK subsidiary, Femcare Limited (Femcare UK), were 12% of OUS sales in 2Q 20 and 21% in 1H 2020, compared to 26% of OUS sales in 2Q19 and 27% in 1H 2019. Included in the Femcare UK sales were the direct sales to end users in France which comprised 4% of OUS sales in 2Q 2020 and 7% of OUS sales in 1H 2020, compared to 9% of OUS sales in 2Q 2019 and 10% of OUS sales in 1H 2019. In native currencies, UK (GBP) 2Q 2020 trade sales were 69% lower than in 2Q 2019, and France (EUR) 2Q 2020 trade sales were 72% lower than in 2Q 2019. This was UTMD’s poorest 2Q 2020 sales performance in all geographical regions as a result of the negative impact of the COVID-19 virus pandemic on Filshie device sales.
USD-denominated sales by UTMD’s Australia subsidiary to Australia end user facilities were 8% of OUS sales in both 2Q 2020 and 1H 2020, compared to 9% of OUS sales in both 2Q 2019 and 1H 2019. Native currency Australia
(AUD) trade sales were 40% lower in 2Q 2020 than in 2Q 2019.
USD-denominated sales by UTMD’s Canada subsidiary direct to Canada end user facilities were 6% of OUS sales in 2Q 2020 and 8% in 1H 2020, compared to 12% of OUS sales in both 2Q 2019 and 1H 2019. Native currency Canada (CAD) trade sales were 62% lower in 2Q 2020 than in 2Q 2019.
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 2020 | 2Q 2019 | 1H 2020 | 1H 2019 |
Obstetrics | $ 914 | $ 1,232 | $ 2,072 | $ 2,571 |
Gynecology/ Electrosurgery/ Urology | 3,690 | 6,763 | 9,582 | 12,345 |
Neonatal | 1,354 | 1,436 | 2,937 | 2,947 |
Blood Pressure Monitoring and Accessories* | 2,829 | 2,415 | 5,098 | 4,716 |
Total: | $ 8,787 | $ 11,846 | $ 19,689 | $ 22,579 |
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OUS revenues by product category:
| 2Q 2020 | 2Q 2019 | 1H 2020 | 1H 2019 |
Obstetrics | $ 115 | $ 194 | $ 365 | $ 507 |
Gynecology/ Electrosurgery/ Urology | 1,669 | 3,534 | 4,743 | 7,038 |
Neonatal | 379 | 287 | 822 | 627 |
Blood Pressure Monitoring and Accessories* | 1,111 | 835 | 1,803 | 1,616 |
Total: | $ 3,274 | $ 4,850 | $ 7,733 | $ 9,788 |
*includes assemblies and molded components sold to OEM customers.
Additional comments on the above revenue tables:
1)In addition to surgical sterilization procedures, other medical procedures which include significant use of UTMD’s Gynecology/ Electrosurgery/ Urology devices were deemed “elective” in 2Q 2020 during the COVID-19 pandemic, e.g. loop excision of the transformation zone, tonsillectomy, uvulopalatoplasty, breast augmentation, ureteroscopic stone ablation and urethral catheterization.
2)The Filshie Clip System sales loss had a disproportionate impact, representing 24% of 2Q 2020 consolidated sales and 30% in 1H 2020, compared to 38% of 2Q 2019 consolidated sales and 36% in 1H 2019.
3)Management does not have a clear explanation for lower obstetrics device category sales worldwide and neonatal device sales in the U.S. during 2Q 2020, as the gestation period for women already pregnant was not extended by the corona virus. It is evident, however, that all medical device order patterns of hospitals were substantially disrupted in 2Q 2020.
Looking forward, UTMD believes that the slope of a recovery curve for its gynecology/ electrosurgery/ urology devices will be driven primarily by government policy responses, at all levels, to the corona virus pandemic in each of its major markets rather than clinical need. After experiencing a nice increase in June and early July Filshie device sales, U.S. demand has slowed again as of this report writing in late-July. UTMD also expects 2H 2020 OEM domestic sales, which were 5% higher in 1H 2020 compared to 1H 2019, to continue to grow, as its primary customer is utilizing UTMD pressure monitoring devices in its pharmaceutical and bioprocess control systems, which are experiencing greater demand in the current environment. The recent weakening of the USD may help 2H 2020 OUS foreign currency sales. More generally, UTMD expects 2H 2020 sales to be lower than in 2H 2019, but probably not as low as the 26% decline in 2Q 2020 compared to 2Q 2019. It might take some time for patients to regain confidence in going to a hospital.
c)Gross Profit (GP)
GP results from subtracting the costs of manufacturing and shipping products to customers. UTMD’s GP was $2,550 (34.0%) lower in 2Q 2020 than in 2Q 2019, and $2,487 (17.4%) lower in 1H 2020 than in 1H 2019. A change in the mix of products sold represented about half of the eight percentage point higher decline in GP relative to the decline in sales. The Company’s critical care and OEM devices have lower GP margins (GPM, GP divided by sales) than its proprietary gynecology/urology devices which experienced the large decline in sales. Manufacturing overhead costs including supervision, quality assurance, engineering, depreciation on equipment and facilities, and other facility costs such as utilities and property taxes, did not decline in the same proportion as the decline in sales. The Company carefully cleaned, disinfected, monitored employees’ health, subsidized quarantined employees without government help (except for a few employees in the UK), purchased masks and other PPE, and reorganized work centers to ensure proper social distancing, thus incurring a negative impact on overall productivity. In addition, UTMD paid incentive bonuses to manufacturing personnel, 10% of whom are over the age of sixty-five, who continued to come to work to produce important “essential” medical devices when the news media and government officials were strongly encouraging people to stay at home and collect government subsidies for not working.
d)Operating Income
Operating income results from subtracting operating expenses from GP. Operating expenses, comprised of General and Administrative (G&A) expenses, sales and marketing (S&M) expenses and product development (R&D) expenses, were $2,973 in 2Q 2020 (33.8% of sales) compared to $3,019 in 2Q 2019 (25.5% of sales). It’s evident that although 2Q 2020 operating expenses were somewhat lower in absolute dollar terms, they did not decline in proportion to the sales decline which leveraged a 34% decline in GP into a 56% decline in operating income. Operating expenses were $5,946 in 1H 2020 (30.2% of sales) compared to $5,691 in 1H 2019 (25.2% of sales). Operating expenses in absolute dollar terms were $255 higher in 1H 2020 than in 1H 2019 because the amortization of the CSI IIA occurred for only a portion of 1Q 2019, yielding $368 higher IIA amortization expense in G&A.
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Ignoring the identifiable intangible asset (IIA) amortization expense from purchasing the CSI exclusive U.S. distribution agreement in early 2019, 2Q 2020 operating expenses were $1,868 (21.3% of sales) compared to 2Q 2019 operating expenses of $1,914 (16.2% of sales), and 1H 2020 operating expenses were $3,735 (19.0% of sales) compared to 1H 2019 operating expenses of $3,849 (17.0% of sales). In 2Q 2020 compared to 2Q 2019, a stronger USD reduced OUS operating expenses excluding Femcare IIA amortization expense in USD terms by $15. The £399 Femcare IIA amortization expense in both 2Q 2020 and 2Q 2019 was reduced by $17. In 1H 2020 compared to 1H 2019, a stronger USD reduced OUS operating expenses excluding Femcare IIA amortization expense in USD terms by $27. The constant £798 Femcare IIA amortization expense was reduced by $25.
Consolidated G&A expenses were $2,433 (27.7% of sales) in 2Q 2020 compared to $2,440 (20.6% of sales) in 2Q 2019. The G&A expenses in 2Q 2020 included $495 (5.6% of sales) of non-cash expense from the amortization of IIA resulting from the 2011 Femcare acquisition, which were $512 (4.3% of sales) in 2Q 2019. The lower USD amortization expense was the result of the stronger USD, as the Femcare amortization expense in GBP was £399 in both periods. In addition, 2Q 2020 G&A expenses included a $1,105 (12.6% of sales) IIA amortization expense resulting from the purchase of the CSI U.S. exclusive Filshie devices distribution rights. The same $1,105 CSI IIA amortization expense in 2Q 2019 represented 9.3% of 2Q 2019 sales. Excluding the Filshie-related non-cash IIA amortization expenses, G&A expenses were $833 (9.5% of sales) in 2Q 2020 compared to $823 (6.9% of sales) in 2Q 2019. The change in FX rates reduced 2Q 2020 OUS G&A expenses excluding IIA amortization expense by $9.
Consolidated G&A expenses were $4,852 (24.6% of sales) in 1H 2020 compared to $4,580 (20.3% of sales) in 1H 2019. The 1H 2020 G&A expense $272 increase was due to $368 higher IIA amortization expense resulting from the purchase of the CSI exclusive U.S. Filshie Clip System distribution rights. The CSI IIA amortization expense was $368 lower in 1Q 2019 than in 1Q 2020 because the purchase occurred part way through 1Q 2019. The CSI IIA amortization expense in 1H 2020 was $2,211 (11.2% of sales) compared to $1,842 (8.2% of sales) in 1H 2019. Also included in 1H 2020 G&A expenses was $1,007 (5.1% of sales) of non-cash expense from the amortization of IIA resulting from the 2011 Femcare acquisition, which was $1,032 (4.6% of sales) in 1H 2019. The $25 lower USD amortization expense was the result of the stronger USD, as the Femcare amortization expense in GBP was £798 in both 1H periods. Excluding the Filshie-related non-cash IIA amortization expenses, consolidated G&A expenses were $1,634 (8.3% of sales) in 1H 2020 compared to $1,706 (7.6% of sales) in 1H 2019. The change in FX rates reduced 1H 2020 OUS G&A expenses excluding IIA amortization expense by $17.
Consolidated S&M expenses were $424 (4.8% of sales) in 2Q 2020 compared to $466 (3.9% of sales) in 2Q 2019. S&M expenses were $844 (4.3% of sales) in 1H 2020 compared to $883 (3.9% of sales) in 1H 2019. The lower S&M expenses, which occurred in the 2Q, were due to UTMD not attending planned trade shows, which were cancelled due to the COVID-19 virus. Although the Company received from the UK government approximately 80% of the compensation paid to four S&M employees in the UK who were furloughed for a portion of 2Q 2020, the subsidy was less than the severance and statutory notice compensation accrued for two of the UK employees who were permanently laid off. The change in FX rates reduced 2Q 2020 OUS S&M expenses by $6, and 1H 2020 OUS S&M expenses by $10.
UTMD promises prospective customers that it will provide, at no charge in reasonable quantities, copies of instruction materials developed for the use of its products. UTMD provides customer support from offices in the U.S., Canada, the UK, Ireland and Australia by telephone, and employed representatives on a geographically dispersed basis, to answer user questions and help troubleshoot any user issues. Occasionally, on a case-by-case basis, UTMD may utilize the services of an independent practitioner to provide educational assistance to clinicians. All inservice and training expenses are routinely expensed as they occur. All of these services are allocated from S&M overhead costs included in operating expense. Historically, marginal consulting costs have been immaterial to financial results.
R&D expenses in 2Q 2020 were $116 (1.3% of sales) compared to $113 (1.0% of sales) in 2Q 2019. R&D expenses in 1H 2020 were $250 (1.3% of sales) compared to $228 (1.0% of sales) in 1H 2019. Since almost all R&D is being carried out in the U.S., the FX rate impact was negligible.
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Summary comparison of (USD) consolidated operating expenses:
| 2Q 2020 | 2Q 2019 | 1H 2020 | 1H 2019 |
S&M Expense | $ 424 | $ 466 | $ 844 | $ 883 |
R&D Expense | 116 | 113 | 250 | 228 |
G&A Expense | 2,433 | 2,440 | 4,852 | 4,580 |
Total Operating Expenses: | $ 2,973 | $ 3,019 | $ 5,946 | $ 5,691 |
In summary, operating income in 2Q 2020 was $1,977 (22.5% of sales) compared to $4,481 (37.8% of sales) in 2Q 2019. The $2,504 lower operating income in 2Q 2020 was the clear result of substantially lower sales and GP, since 2Q 2020 operating expenses themselves were lower than in 2Q 2019. The Company did not make drastic cuts to its 2Q 2020 operating expenses to match lower sales activity in the short run because those expenses represent critical resources needed to support the business as it is expected to recover. In any case, stockholders should be aware that a 22.5% operating income margin represents a solid business enterprise, even though not up to UTMD standards of performance. Operating income in 2Q 2020 remained high enough to support UTMD’s ongoing stockholder dividend. Operating income in 1H 2020 was $5,840 (29.7% of sales) compared to $8,582 (38.0% of sales) in 1H 2019. The year-to-year 1H difference was not as extreme as in 2Q since the COVID-19 negative impact on UTMD device demand did not appear to begin until March.
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 2020 was $0 compared to $85 in 2Q 2019. Net non-operating income in 1H 2020 was $125 compared to $120 in 1H 2019.
The loss on remeasured foreign currency balances in 2Q 2020 was $1 compared to a gain of $3 in 2Q 2019. In 1H 2020, a gain of $42 on remeasured foreign currency balances was recognized compared to a loss of $46 in 1H 2019. Royalties received were $5 in 2Q 2020 compared to $4 in 2Q 2019, and $5 in 1H 2020 compared to $6 in 1H 2019. Interest earned on cash balances was $(2) in 2Q 2020 compared to $59 in 2Q 2019. Interest earned on cash balances was $62 in 1H 2020 compared to $139 in 1H 2019. Income from rent of underutilized property was $8 in 2Q 2020 compared to $24 in 2Q 2019. Income from rent of underutilized property was $35 in 1H 2020 compared to $35 in 1H 2019. Bank fees were $15 in 2Q 2020 compared to $11 in 2Q 2019. Bank fees were $29 in 1H 2020 compared to $21 in 1H 2019.
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 2020 EBT was $1,977 (22.5% of sales) compared to $4,565 (38.5% of sales) in 2Q 2019. Consolidated 1H 2020 EBT was $5,965 (30.3% of sales) compared to $8,702 (38.5% of sales) in 1H 2019.
The EBT of Utah Medical Products, Inc. in the U.S. was $3,963 in 1H 2020 compared to $5,515 in 1H 2019. The EBT of Utah Medical Products, Ltd (Ireland) was EUR 2,062 in 1H 2020 compared to EUR 1,479 in 1H 2019. The increase in Ireland EBT was primarily due to intercompany shipments of Filshie devices to the U.S. In 1H 2019, there were no Filshie shipments from Ireland to the U.S. as UTMD in the U.S. was selling Filshie inventory acquired from CSI. The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was (GBP 235) in 1H 2020 compared to GBP 1,172 in 1H 2019. The negative 1H 2020 Femcare Group EBT was primarily the result of a 52% drop in Group revenues and operating expense overhead in the UK about an order of magnitude higher than UTMD’s other foreign subsidiaries. The 1H 2020 EBT of Utah Medical Products Canada, Inc. (dba Femcare Canada) was CAD 331 in 1H 2020 compared to CAD 732 in 1H 2019. 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 metric provides meaningful supplemental information to both management and investors.
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Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 2Q 2020 consolidated EBT excluding the remeasured bank balance currency gain or loss and interest expense (“adjusted consolidated EBITDA”) were $3,800 compared to $6,397 in 2Q 2019, representing only a 40.6% decline in EBITDA compared to a 55.9% decline in operating income. Despite the substantial negative change in 2Q financial results compared to the prior year, 2Q 2020 EBITDA at 43.2% of sales represents a functionally healthy company. Of course, 2Q 2019 EBITDA at 54.0% of sales represented an even more healthy company. 1H 2020 adjusted consolidated EBITDA were $9,572 (48.6% of sales) compared to $12,062 (53.4% of sales) in 1H 2019, down only 20.6% compared to a 32.0% decline in 1H operating income.
g)Net Income
Net income is EBT minus a provision for income taxes. US GAAP net income in 2Q 2020 of $1,313 (14.9% of sales) was 62.8% lower than the net income of $3,525 (29.8% of sales) in 2Q 2019. Because the UK reset its corporate tax rate from 17% to 19% going forward, it caused UTMD to have to book an additional $225 in income taxes that represents the additional tax which will be paid in the UK over the remaining six year life of the 2011 Femcare acquisition IIA, which are not tax deductible. Excluding the $225 deferred tax liability (DTL) increase which reduced 2Q 2020 net income by $225, non-US GAAP 2Q 2020 net income of $1,537 (17.5% of sales) was 56.4% lower than net income in 2Q 2019, consistent with the decline in operating income. The average consolidated income tax provisions (as a % of EBT) per US GAAP in 2Q 2020 and 2Q 2019 were 33.6% and 22.8%, respectively. Because the $225 DTL adjustment included in the 2Q 2020 tax provision does not relate to 2Q 2020 EBT, the non-US GAAP 2Q 2020 income tax provision rate of 22.2% is more indicative relative to the 22.8% rate in 2Q 2019.
US GAAP net income in 1H 2020 of $4,452 (22.6% of sales) was 33.2% lower than the net income of $6,664 (29.5% of sales) in 1H 2019. Again, excluding the $225 DTL adjustment, non-US GAAP 1H 2020 net income of $4,677 (23.8% of sales) was 29.8% lower than 1H 2019 net income, and more indicative of comparative period-to-period net income results. The smaller net income percentage decline relative to 1H operating income is a result of higher 1Q 2020 NOI. The average consolidated income tax provisions (as a % of EBT) in 1H 2020 per US GAAP and in 1H 2019 were 25.4% and 23.4%, respectively. A comparison of provision tax rates excluding the $225 DTL adjustment is 21.6% in 1H 2020 compared to 23.4% in 1H 2019.
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). US GAAP EPS of $.359 in 2Q 2020 were 62.0% lower than $.944 in 2Q 2019, and US GAAP EPS of $1.207 in 1H 2020 were 32.3% lower than $1.783 in 1H 2019. Excluding the deferred tax liability (DTL) increase which reduced 2Q and 1H 2020 net income by $225, non-US GAAP 2Q 2020 EPS of $.420 were 55.5% lower than $.944 in 2Q 2019, and non-US GAAP EPS of $1.268 in 1H 2020 were 28.9% lower than $1.783 in 1H 2019. Diluted shares were 3,658,626 in 2Q 2020 compared to 3,735,070 in 2Q 2019, and 3,689,878 in 1H 2020 compared to 3,736,872 in 1H 2019. The lower diluted shares in 2020 were the combined result of 80,000 shares repurchased in 1Q 2020, 1,189 shares employee option exercises, a 26,300 share option award in March 2020 and a lower dilution factor for unexercised options due to a lower share price.
Outstanding shares at the end of 2Q 2020 were 3,642,946 compared to 3,721,757 at the end of calendar year 2019. The change was due to employee option exercises of 1,189 offset by 80,000 shares repurchased in the open market during 1H 2020. Outstanding shares were 3,719,106 at the end of 2Q 2019. 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. The total number of outstanding unexercised employee and outside director options at June 30, 2020 was 76,625 at an average exercise price of $64.72, including shares awarded but not yet vested. This compares to 51,689 unexercised option shares at the end of 2019 at an average exercise price of $58.50/ share, including shares awarded but not vested. In 1H 2020, 26,300 option shares were awarded to 48 employees at an exercise price of $77.05 per share. No options were awarded in 1H 2019. The number of shares added as a dilution factor in 2Q 2020 was 16,040 compared to 14,176 in 2Q 2019. The number of shares added as a dilution factor in 1H 2019 was 15,342 compared to 15,404 in 1H 2019.
UTMD paid $1,035 ($0.280/share) in dividends to stockholders in 2Q 2020 compared to $1,028 ($0.275/ share) paid in 2Q 2019. Dividends paid to stockholders during 2Q 2020 were 79% of US GAAP net income and 67% of non-US GAAP net income. UTMD paid $2,077 ($0.280/share) in dividends to stockholders in 1H 2020 compared to $2,055 ($0.275/ share) paid in 1H 2019. Dividends paid to stockholders during 1H 2020 were 47% of US GAAP net income and 44% of non-US GAAP net income.
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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 and before stockholder dividends) in 1H 2020 was 10% compared to 15% in 1H 2019. The lower ROE in 1H 2020 was due to the lower 2Q 2020 net income. Targeting a high ROE of 20% remains a key 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 $9,352 in 1H 2020 compared to $5,043 in 1H 2019. The $4,309 higher increase in operating cash, despite a $2,211 lower increase in net income, was due to working capital change differences: 1) an $862 decrease in accounts receivable compared to a $1,255 increase in 1H 2019, 2) a $387 decrease in inventories compared to $2,323 increase in 1H 2019, primarily as a result of the purchase of remaining Filshie device inventories from CSI, and 3) a $386 increase in accrued expenses compared to a $1,011 decrease in 1H 2019.
Capital expenditures for property and equipment (PP&E) were $711 in 1H 2020 compared to $130 in 1H 2019. The large increase was primarily due to installing a new $327 roof on UTMD’s 110,000 SF Midvale facility, and investing $249 in new equipment for Ireland to eventually be able to manufacture Filshie clips in-house. Depreciation of PP&E was $335 in 1H 2020 compared to $355 in 1H 2019.
UTMD made cash dividend payments of $2,077 in 1H 2020 compared to $2,055 in 1H 2019. The difference was due to a 1.8% annual increase in the dividend, and 0.5% lower average shares outstanding due to the March 2020 80,000 share repurchase offset slightly by 1H 2020 employee option exercises of 1,189 shares.
In 1H 2020, UTMD received $79 and issued 1,189 shares of its stock upon the exercise of employee and director stock options. Option exercises in 1H 2020 were at an average price of $66.62 per share. In comparison, in 1H 2019, UTMD received $170 and issued 4,391 shares of its stock upon the exercise of employee and director stock options. Option exercises in 1H 2019 were at an average price of $38.83 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
June 30, 2020 total consolidated assets were $103,545, a decrease of $6,242 from December 31, 2019. The decrease was due to the combination of a $4,557 decrease in net intangible assets (from 1H 2020 IIA amortization and a lower FX rate on the Femcare IIA balance), together with a $333 decrease in inventories, a $950 decrease in accounts receivable and a $435 decrease in cash and investments.
June 30, 2020 total consolidated liabilities were $8,258, a decrease of $437 from December 31, 2019. Significant changes in liabilities included a $538 reduction in accounts payable, a $356 increase in accrued liabilities, a $105 decrease in the deferred tax liability associated with the UK amortization of acquired Femcare identifiable intangible assets (IIA) in 2011 (despite the $225 increase from the UK tax law change in 2Q 2020), and a $137 decrease in the transition (REPAT) tax still due resulting from the U.S. “Tax Cuts and Jobs Act” enacted in December 2017.
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UTMD’s Ireland subsidiary EUR-denominated assets and liabilities were translated into USD at an FX rate 0.1% higher (slightly stronger EUR) than the FX rate at the end of 2019. UTMD’s UK subsidiary GBP-denominated assets were translated into USD at an FX rate 6.8% lower (weaker GBP) than the FX rate at the end of 2019. UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 2.0% lower (weaker AUD) than the FX rate at the end of 2019. UTMD’s Canada subsidiary CAD-denominated assets were translated into USD at an FX rate 4.8% lower (weaker CAD) than the FX rate at the end of 2019.
The net book value of consolidated property, plant and equipment increased $84 at June 30, 2020 from the end of 2019 due to the net effect of period-ending changed FX rates, $711 in new asset purchases minus $335 in depreciation, including right of use assets totaling $395 (which were $414 at December 31, 2019).
Working capital (current assets minus current liabilities) was $49,873 at June 30, 2020 compared to $51,438 at December 31, 2019. Cash balances were $42,352 of the June 30, 2020 working capital. Current assets at June 30, 2020 compared to December 31, 2019 were $1,769 lower primarily as the result of a $435 decrease in cash and investments, a $950 decrease in receivables and a $333 decrease in inventories. Current liabilities were $204 lower at June 30, 2020 compared to December 31, 2019 primarily as the result of a $538 decrease in accounts payable offset by a $357 increase in accrued liabilities. UTMD management believes that its working capital remains sufficient to meet normal operating needs, new capital expenditures and projected cash dividend payments to stockholders.
June 30, 2020 net intangible assets (goodwill plus other intangible assets) declined $4,557 from the end of 2019 as a result of $3,242 in amortization and a weaker FX rate on foreign intangible asset balances. At June 30, 2020, net intangible assets including goodwill were 38% of total consolidated assets compared to 40% at year-end 2019, and 45% at June 30, 2019.
The deferred tax liability balance for Femcare IIA ($9,084 on the date of the acquisition), was $2,135 at June 30, 2020 compared to $2,239 at December 31, 2019 and $2,339 at June 30, 2019. 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) both as of June 30, 2020 and at December 31, 2019 was 8%. UTMD’s total debt ratio as of June 30, 2019 was 9%.
l)Management's Outlook
As outlined in its December 31, 2019 SEC 10-K report, UTMD’s plan for 2020 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® Tubal Ligation 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 making 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.
Despite the economic challenges created by government reaction to the COVID-19 pandemic, the Company continues to execute its 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 .8901, .8785 and .8729 EUR per USD as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively. Exchange rates were .8085, .7865 and .7837 GBP per USD as of June 30, 2020, December 31, 2019 and June 30, 2019, respectively. Exchange rates were 1.4514, 1.4260 and 1.4193 AUD per USD on June 30, 2020, December 31, 2019 and June 30, 2019, respectively. Exchange rates were 1.3617, 1.3080, and 1.3644 CAD per USD on June 30, 2020, December 31, 2019 and June 30, 2019, 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, 2020. Based on this evaluation, the Chief Executive Officer and Principal Financial Officer concluded that, as of June 30, 2020, 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, 2020, 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.
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, 2019, 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 and/or Executive branch regulatory healthcare intervention in the United States, as embodied in The Patient Protection and Affordable Care Act, the Health Care and Education Reconciliation Act of 2010 and the Coronavirus, Aid, Relief and Economic Security Act, not to mention federal agency rules and regulations as well as state and local legislation and rules, (the “Acts”), have added substantial costs and have led to decreased revenues in the U.S.
The voluminous Acts and administrative rules to enforce the Acts, promised efforts to reform the Acts and the ongoing coronavirus pandemic, make the U.S. medical device marketplace unpredictable, particularly for the thousands of small medical device manufacturers including UTMD that do not have the overhead structure that the larger medical device companies can afford. To the extent that the Acts will in the future continue to place additional burdens on small medical device companies in the form of another excise tax on medical device sales, price controls, additional oversight of marketing and sales activities and new reporting requirements, the result is likely to be negative for UTMD’s ability to effectively compete and support continued investments in new product development and marketing of specialty devices in the U.S.
Increasing regulatory burdens including premarketing approval delays may result in significant loss of revenue, unpredictable costs and loss of management focus on helping the Company proactively conform with requirements and thrive:
Premarketing submission administrative burdens and substantial increases in “user fees” increase product development costs and result in delays to revenues from new or improved devices. The ongoing uncertainties related to BREXIT continue to affect UTMD’s notified body’s ability to function responsively to provide product certifications required to market devices outside the U.S.
The growth of Group Purchasing Organizations (GPOs) adds non-productive costs, typically weakens the Company’s marketing and sales efforts and may result in lower revenues:
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. 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 related to 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 regulatory environment, the Company’s views of the future and product/ market strategy may not yield financial results consistent with the past.
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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.
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 suffers 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, by copying, 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 products and/or U.S. made raw materials and components are likely being purchased in fixed USD.
Changing tax burdens related to increased government spending have the potential to significantly negatively affect shareholder returns..
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
During 1H 2020, UTMD purchased 80,000 of its shares in the open market for $6,426 including commissions and fees ($80.32/ share). During 1H 2019, UTMD purchased 5,000 of its shares in the open market for $398 including commissions and fees.
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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, 2020, 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 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: 8/7/20 By: /s/ Kevin L. Cornwell
Kevin L. Cornwell
CEO
Date: 8/7/20 By: /s/ Brian L. Koopman
Brian L. Koopman
Principal Financial Officer
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