UTAH MEDICAL PRODUCTS INC - Quarter Report: 2005 June (Form 10-Q)

     In 1H 2005, UTMD received $541 and issued 61,697 shares of stock upon the exercise of employee stock options. Employees exercised a total of 69,961 option shares in 1H 2005, with 8,264 shares immediately being retired as a result of the individual trading the shares in payment of the exercise price of the options and related tax withholding requirements. UTMD paid $47 to meet tax withholding obligations in 1H 2005, compared to $6 in 1H 2004. UTMD repurchased 238,737 shares of stock in the open market at a cost of $5,171 during 1H 2005. Option exercises in 1H 2005 were at an average price of $9.64 per share. Share repurchases in the open market were at an average cost of $21.66 per share, including commissions and fees.

     In 1H 2004, the Company received $1,012 from issuing 103,562 shares of stock on the exercise of employee stock options. 1,200 additional shares were retired upon an employee trading those shares in payment of the stock option exercise price. UTMD repurchased 124,843 shares of stock in the open market at a cost of $3,057 during 1H 2004.

     UTMD did not utilize its bank line of credit during either period. UTMD paid $1,230 in cash dividends during 1H 2005.

     Management believes that future income from operations and effective management of working capital will provide the liquidity needed to finance growth plans. Planned capital expenditures during the remainder of 2005 are expected to be approximately $300 to keep facilities, equipment and tooling in good working order. In addition to capital expenditures, UTMD plans to use cash in 2005 for selective infusions of technological, marketing or product manufacturing rights to broaden the Company’s product offerings; for litigation expenses; for continued share repurchases if the price of the stock remains undervalued; and if available for a reasonable price, acquisitions that may strategically fit UTMD’s business and are accretive to performance.

   j) Assets and Liabilities

     June 30, 2005 total assets were $4,347 lower than at December 31, 2004, while current assets decreased $3,687. The decreases resulted primarily from a $3,626 decrease in cash and investments. Cash and investments declined due to share repurchases, and payment of litigation costs and dividends.

     Working capital was $18,150 at June 30, 2005, a $2,044 decrease from 2004 year-end. On the liabilities side, total liabilities were $1,740 lower and current liabilities $1,643 lower, due to decreases in accrued expenses. UTMD’s current ratio increased to 7.7 at the end of 1H 2005 from 5.7 at year-end 2004.

     Inventories decreased $209 during 1H 2005, well within management’s targets for current sales activity. Average inventory turns improved to 4.3 times in 2Q 2005 from 4.1 times in the prior quarter, and 3.3 times in 2Q 2004.

     Receivables balances as of June 30, 2005 were $205 higher than at the beginning of the year. 2Q 2005 ending receivables yielded average “days in receivables” of 50 days, well within management’s target of 55 days. At the end of 2004 and at June 30, 2004, days in receivables were 51 and 47, respectively.

     Net property and equipment decreased $635 in 1H 2005 because depreciation of $324 exceeded new equipment purchases of $230, and due to a $591 decrease in the dollar-denominated value of Ireland P&E. The U.S. dollar increased about 13% relative to the EURO during 1H 2005. Goodwill remained the same. Net intangible assets, excluding goodwill, decreased $25 as a result of amortization of patents and other intellectual property. At June 30, 2005, net intangible assets including goodwill were 21% of total assets, an increase from 19% at year-end 2004.

     As of June 30, 2005, UTMD’s total debt ratio (total liabilities/ total assets) decreased to 9% from 12% on December 31, 2004.

   k) Management's Outlook.

     As outlined in its December 31, 2004 10-K/A Report, UTMD's plan for 2005 is to

     a) clear up its unresolved QSR status with the U.S. FDA that has hindered sales, slowed new product development, stymied business development, clouded UTMD’s previously excellent reputation for quality products and consumed an inordinate amount of human and financial capital since 2001;

     b) continue outstanding operating performance;

     c) actively look for new acquisitions to facilitate sales growth; and

     d) utilize current cash balances in shareholders’ best long-term interest.

     1H 2005 performance demonstrated progress toward achieving the above 2005 plan.

     Part II Item 1 of this report describes the current status of legal proceedings regarding UTMD’s dispute with the FDA. The U.S. Court will determine if UTMD is violating any provisions of the QSR. The FDA has the burden to prove its allegations. UTMD and its highly reputable independent experts maintain that UTMD has been and is in substantial compliance with all applicable government regulations.

     If the Court agrees with any of the FDA allegations, the Company’s responsibility would be to implement procedures that satisfy the Court’s determination. Because the FDA is not claiming that the Company’s devices are unsafe or ineffective, or do not meet predetermined specifications, UTMD and its lawyers believe that an injunction to cease manufacturing and shipping products is not a realistic possibility, even if the Court agrees with FDA allegations. Because of this and because UTMD does not understand the factual basis for FDA’s allegations, the Company has not spent resources analyzing the potential financial impact of the relief being sought by the FDA.

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     There is not and never has been an imminent public health risk relating to use of UTMD’s products. The FDA has a variety of remedies to address device risks without any resort to the courts. None of those remedies has ever been applied to any UTMD device, because none has been justified. The FDA Denver District Office shut off communication with UTMD after 2001 while it performed inspection after inspection in an attempt to build a case. The case that was finally filed involves alleged QSR violations that the agency has been unable to substantiate, despite an effort coordinated by the CDRH including four comprehensive inspections, some involving “national expert” FDA inspectors. An independent expert, a nearly thirty year FDA compliance veteran and former District Director, retained by UTMD, has alleged misconduct within FDA.

     There continue to be no FDA restrictions on UTMD’s production and distribution of its products, the clinical acceptance and differentiation of which have been clearly demonstrated by continued customer demand through 2Q 2005.

   l) Accounting Policy Changes.

     In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS 123 (revised 2004), “Accounting for Stock Based Compensation.” This statement supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” This revised statement establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods and services, including the grant of stock options to employees and directors. The revised Statement is effective for UTMD starting in 1Q 2006, and will require the Company to recognize compensation cost based on the grant date fair value of the equity instruments it awards. The Company currently accounts for those instruments under the recognition and measurement principles of APB Opinion 25, including the disclosure-only provisions of the original SFAS 123. Accordingly, no compensation cost from issuing equity instruments has been recognized in the Company’s financial statements. The Company estimates that the required adoption of SFAS 123 (R) in first quarter 2006 will have a negative impact on its consolidated financial statements. See note 3, above for an estimate of the impact this Statement would have had on the Company’s net income for the periods covered by this report. The Company estimates that adoption of this Statement will result in about $150 additional compensation expense during the year 2006 related to options outstanding on the date of this report. The Company intends to continue granting stock options or other equity instruments, although at a lower level than in the past, which will increase the amount of stock based compensation in 2006 and beyond. The Board of Director’s action on May 6, 2005 to accelerate the vesting of under water options reduced the financial statement impact of this accounting policy change.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     UTMD has manufacturing operations, including related assets, in Ireland denominated in the EURO, and sells products under agreements denominated in various Western European currencies. The EURO and other currencies are subject to exchange rate fluctuations that are beyond the control of UTMD. The exchange rate was 0.8282 EURO per USD as of June 30, 2005, and 0.8218 EURO per USD as of June 30, 2004. UTMD manages its foreign currency risk without separate hedging transactions by converting currencies to USD as transactions occur.

Item 4. Controls and Procedures

     The company’s management, under the supervision and with the participation of the Chief Executive Officer and the Chief 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). Based on this evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2005, 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 quarter ended June 30, 2005, 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 routine litigation for which the Company believes the outcome may be material to its financial results.

     On August 9, 2004, the United States of America filed a lawsuit in The United States District Court, Central District of Utah v. UTMD, Kevin L. Cornwell, Chairman & CEO, and Ben D. Shirley, Vice President, Product Development & Quality Assurance. The presiding judge is Judge Bruce R. Jenkins. The government (FDA) is seeking a permanent injunction from alleged deviations of the Quality System Regulation (QSR). The FDA did not seek a preliminary injunction. The relief being sought is to enjoin the Company from manufacturing and shipping products until it conforms with the QSR in a manner that is acceptable to the FDA. The trial is scheduled to start August 30, 2005.

     On June 30, 2005 the Court indicated that it would issue an order to dismiss UTMD’s counterclaim for damages for abuse of process without prejudice. In response, on July 15, 2005, UTMD filed an administrative claim under the Federal Tort Claims Act with the U.S. Department of Health and Human Services.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table details purchases by UTMD of its own securities during 2Q 2005.

ISSUER PURCHASES OF EQUITY SECURITIES

Period			Total Number of Shares Purchased (1)			Average Price Paid per Share			Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (1)			Maximum Number (or Approximate Dollar Value) of Shares that May be Purchased Under the Plans or Programs (1)
4/01/05 - 4/30/05				55,101		$	21.80			55,101
5/01/05 - 5/31/05				22,242			22.16			22,242
6/01/05 - 6/30/05				108,270			21.58			108,270
Total				185,613		$	21.72			185,613

(1)   In 2Q 2005 UTMD repurchased the above shares pursuant to a continued open market repurchase program initially announced in August 1992. Since 1992 through 2Q 2005, the Company has repurchased 6.2 million shares at an average cost of $11.12 per share including broker commissions and fees in open market transactions. In addition, the Company conducted tender offer transactions in which it purchased an additional 2.8 million shares at an average cost of $9.76 per share including fees and administrative costs. In total, UTMD has repurchased 9.0 million of its shares at an average price of $10.70 per share since 1992. To complete the picture relating to current shares outstanding, since 1992 the Company’s employees and directors have exercised and purchased 1.5 million option shares at an average price of $6.41 per share. All options were awarded at the market value of the stock on the date of the award.

     The frequency of UTMD’s open market share repurchases depends on the availability of sellers and the price of the stock. The board of directors has not established an expiration date or a maximum dollar or share limit for UTMD’s continuing and long term pattern of open market share repurchases.

     The purpose of UTMD’s ongoing share repurchases is to maximize the value of the Company for its continuing shareholders, and maximize its return on shareholder equity by employing excess cash generated by effectively managing its business. UTMD does not intend to repurchase shares that would result in terminating its Nasdaq National Market listing.

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Item 6. Exhibits

	Exhibit #	SEC Reference #	Title of Document
	1	31	Certification of CEO pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	2	31	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	3	32	Certification of CEO pursuant to 18 U.S.C. ss.1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	4	32	Certification of Principal Financial Officer pursuant to 18 U.S.C. ss.1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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:       8/5/05	By:      /s/ Kevin L. Cornwell
	Kevin L. Cornwell       CEO
Date:       8/5/05	By:      /s/ Greg A. LeClaire
	Greg A. LeClaire       CFO

 

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