UTAH MEDICAL PRODUCTS INC - Quarter Report: 2006 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
Quarterly
Report Under Section 13 or 15(d) of
The
Securities Exchange Act of 1934
For
quarter ended: September 30, 2006
|
Commission
File No. 0-11178
|
UTAH
MEDICAL PRODUCTS, INC.
(Exact
name of Registrant as specified in its charter)
UTAH
|
87-0342734
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
7043
South 300 West
Midvale,
Utah 84047
Address
of principal executive offices
Registrant's
telephone number: (801)
566-1200
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Sections 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. Yes
x
No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (check
one):
Large accelerated filer o |
Accelerated
filer x
|
Non-accelerated
filer o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o
No x
Indicate
the number of shares outstanding of each of the issuer’s classes of common stock
as of November 2, 2006: 3,950,000.
UTAH
MEDICAL PRODUCTS, INC.
INDEX
TO FORM 10-Q
PART
I - FINANCIAL INFORMATION
|
PAGE
|
|
Item
1.
|
Financial
Statements
|
|
Consolidated
Condensed Balance Sheets as of September 30, 2006 and December 31,
2005
|
1
|
|
Consolidated
Condensed Statements of Income for the three and nine months ended
September 30, 2006 and September 30, 2005
|
2
|
|
Consolidated
Condensed Statements of Cash Flows for the nine months ended September
30,
2006 and September 30, 2005
|
3
|
|
Notes
to Consolidated Condensed Financial Statements
|
4
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
7
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market Risk
|
12
|
Item
4.
|
Controls
and Procedures
|
12
|
PART
II - OTHER INFORMATION
|
||
Item
1A.
|
Risk
Factors
|
13
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
13
|
Item
6.
|
Exhibits
|
14
|
SIGNATURES
|
14
|
PART
I -
FINANCIAL INFORMATION
Item
1. Financial Statements
UTAH
MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED BALANCE SHEETS AS OF
SEPTEMBER
30, 2006 AND DECEMBER 31, 2005
(in
thousands)
(unaudited)
|
(audited)
|
||||||
ASSETS
|
SEPTEMBER
30, 2006
|
DECEMBER
31, 2005
|
|||||
Current
assets:
|
|||||||
Cash
|
$
|
796
|
$
|
703
|
|||
Investments,
available-for-sale
|
19,058
|
16,750
|
|||||
Accounts
& other receivables - net
|
3,815
|
4,418
|
|||||
Inventories
|
3,379
|
3,305
|
|||||
Other
current assets
|
613
|
682
|
|||||
Total
current assets
|
27,661
|
25,858
|
|||||
Property
and equipment - net
|
8,347
|
8,160
|
|||||
Goodwill
|
7,191
|
7,191
|
|||||
Other
intangible assets
|
2,718
|
2,718
|
|||||
Other
intangible assets - accumulated amortization
|
(2,451
|
)
|
(2,285
|
)
|
|||
Other
intangible assets - net
|
267
|
433
|
|||||
TOTAL
|
$
|
43,466
|
$
|
41,642
|
|||
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|||||||
Current
liabilities:
|
|||||||
Accounts
payable
|
$
|
693
|
$
|
757
|
|||
Accrued
expenses
|
2,538
|
2,418
|
|||||
Total
current liabilities
|
3,231
|
3,175
|
|||||
Note
payable
|
4,989
|
5,336
|
|||||
Deferred
income taxes
|
190
|
274
|
|||||
Total
liabilities
|
8,410
|
8,785
|
|||||
Stockholders'
equity:
|
|||||||
Preferred
stock - $.01 par value; authorized - 5,000 shares; no shares issued
or
outstanding
|
|||||||
Common
stock - $.01 par value; authorized - 50,000 shares; issued - September
30,
2006, 3,934 shares - December 31, 2005, 3,856 shares
|
39
|
39
|
|||||
Accumulated
other comprehensive income
|
(683
|
)
|
(495
|
)
|
|||
Retained
earnings
|
35,699
|
33,314
|
|||||
Total
stockholders' equity
|
35,056
|
32,857
|
|||||
TOTAL
|
$
|
43,466
|
$
|
41,642
|
|||
see
notes to consolidated condensed financial statements
|
1
UTAH
MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF INCOME FOR THE
THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
(in
thousands - unaudited)
THREE
MONTHS ENDED
|
NINE
MONTHS ENDED
|
||||||||||||
SEPTEMBER
30,
|
SEPTEMBER
30
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
NET
SALES
|
$
|
7,001
|
$
|
7,001
|
$
|
21,398
|
$
|
20,681
|
|||||
COST
OF SALES
|
3,030
|
2,987
|
9,343
|
8,911
|
|||||||||
Gross
Margin
|
3,971
|
4,014
|
12,055
|
11,770
|
|||||||||
OPERATING
EXPENSES:
|
|||||||||||||
Selling,
general and administrative
|
1,154
|
1,894
|
3,728
|
4,484
|
|||||||||
Research
& development
|
81
|
82
|
363
|
225
|
|||||||||
Total
|
1,235
|
1,976
|
4,092
|
4,709
|
|||||||||
Income
from Operations
|
2,736
|
2,038
|
7,963
|
7,061
|
|||||||||
OTHER
INCOME, NET
|
268
|
203
|
1,253
|
670
|
|||||||||
Income
Before Income Tax Expense
|
3,004
|
2,241
|
9,216
|
7,731
|
|||||||||
INCOME
TAX EXPENSE
|
1,000
|
452
|
3,118
|
2,086
|
|||||||||
Net
Income
|
$
|
2,003
|
$
|
1,789
|
$
|
6,098
|
$
|
5,645
|
|||||
BASIC
EARNINGS PER SHARE
|
$
|
0.51
|
$
|
0.46
|
$
|
1.55
|
$
|
1.41
|
|||||
DILUTED
EARNINGS PER SHARE
|
$
|
0.50
|
$
|
0.44
|
$
|
1.51
|
$
|
1.34
|
|||||
SHARES
OUTSTANDING - BASIC
|
3,929
|
3,882
|
3,943
|
3,995
|
|||||||||
SHARES
OUTSTANDING - DILUTED
|
4,021
|
4,104
|
4,045
|
4,219
|
|||||||||
see
notes to consolidated condensed financial statements
|
2
UTAH
MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005
(in
thousands - unaudited)
SEPTEMBER
30,
|
|||||||
2006
|
2005
|
||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|||||||
Net
income
|
$
|
6,098
|
$
|
5,645
|
|||
Adjustments
to reconcile net income to net cash provided by operating activities:
|
|||||||
Depreciation
and amortization
|
606
|
514
|
|||||
Gain
on investments
|
(1,120
|
)
|
(70
|
)
|
|||
Provision
for (recovery of) losses on accounts receivable
|
8
|
(6
|
)
|
||||
Deferred
income taxes
|
(11
|
)
|
(330
|
)
|
|||
Stock-based
compensation expense
|
108
|
-
|
|||||
Tax
benefit attributable to exercise of stock options
|
2,186
|
255
|
|||||
Changes
in operating assets and liabilities:
|
|||||||
Accounts
receivable - trade
|
(132
|
)
|
49
|
||||
Accrued
interest and other receivables
|
756
|
88
|
|||||
Inventories
|
(307
|
)
|
(414
|
)
|
|||
Prepaid
expenses and other current assets
|
(21
|
)
|
(13
|
)
|
|||
Accounts
payable
|
168
|
138
|
|||||
Accrued
expenses
|
105
|
(1,243
|
)
|
||||
Total
adjustments
|
2,345
|
(1,032
|
)
|
||||
Net
cash provided by operating activities
|
8,443
|
4,613
|
|||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|||||||
Capital
expenditures for:
|
|||||||
Property
and equipment
|
(361
|
)
|
(286
|
)
|
|||
Purchases
of investments
|
(5,200
|
)
|
(4,100
|
)
|
|||
Proceeds
from the sale of investments
|
3,804
|
7,202
|
|||||
Net
cash provided by (used in) investing activities
|
(1,757
|
)
|
2,816
|
||||
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|||||||
Proceeds
from issuance of common stock - options
|
533
|
646
|
|||||
Common
stock purchased and retired
|
(1,804
|
)
|
(6,503
|
)
|
|||
Common
stock purchased and retired - options
|
(2,488
|
)
|
(48
|
)
|
|||
Repayments
of note payable
|
(711
|
)
|
-
|
||||
Payment
of dividends
|
(2,116
|
)
|
(1,842
|
)
|
|||
Net
cash used in financing activities
|
(6,586
|
)
|
(7,746
|
)
|
|||
Effect
of exchange rate changes on cash
|
(8
|
)
|
10
|
||||
NET
INCREASE (DECREASE) IN CASH
|
93
|
(307
|
)
|
||||
CASH
AT BEGINNING OF PERIOD
|
703
|
1,818
|
|||||
CASH
AT END OF PERIOD
|
$
|
796
|
$
|
1,511
|
|||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|||||||
Cash
paid during the period for income taxes
|
$
|
924
|
$
|
2,317
|
|||
Cash
paid during the period for interest
|
196
|
-
|
|||||
see
notes to consolidated condensed financial statements
|
3
UTAH
MEDICAL PRODUCTS, INC.
NOTES
TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(unaudited)
(1)
The
unaudited financial statements have been prepared in accordance with the
instructions to form 10-Q and do not include all of the information and note
disclosures required by accounting principles generally accepted in the United
States. These statements should be read in conjunction with the financial
statements and notes included in the Utah Medical Products, Inc. ("UTMD" or
"the
Company") annual report on form 10-K for the year ended December 31, 2005.
In
the opinion of management, the accompanying financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
summarize fairly the Company's financial position and results of operations.
Dollar amounts are in thousands except per-share amounts and where
noted.
(2) Inventories
at September 30, 2006 and December 31, 2005 consisted of the
following:
September
30,
|
December
31,
|
||||||
2006
|
2005
|
||||||
Finished
goods
|
$
|
974
|
$
|
1,058
|
|||
Work-in-process
|
890
|
657
|
|||||
Raw
materials
|
1,515
|
1,590
|
|||||
Total
|
$
|
3,379
|
$
|
3,305
|
(3) Stock-Based
Compensation. At September 30, 2006 the Company had stock-based employee
compensation plans, which authorized the grant of stock options to eligible
employees and directors. Effective January 1, 2006, the Company adopted
Statement of Financial Accounting Standards (SFAS) 123R, Share-Based
Payment,
using
the modified prospective method. 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 third quarter and nine months ended
September 30, 2006, the Company recognized $33 and $108, respectively, in
compensation cost related to adoption of the statement. Prior to December 31,
2005, the Company accounted for its stock-based employee compensation plans
under the recognition and measurement principles of APB Opinion No. 25,
Accounting
for Stock Issued to Employees,
and
related Interpretations, and had adopted the disclosure-only provisions of
SFAS
No. 123, Accounting
for Stock-Based Compensation.
Accordingly, no compensation cost was recognized in the financial statements
prior to 2006, as all options granted under those plans had exercise prices
equal to or greater than the market value of the underlying common stock on
the
date of grant.
A
comparison of reported net income for the three and nine months ended September
30, 2006 and 2005, and pro-forma net income for the three and nine months ended
September 30, 2005, including effects of expensing stock options, follows.
Three
months ended
|
Nine
months ended
|
||||||||||||
September
30,
|
September
30,
|
||||||||||||
2006
|
2005
|
2006
|
2005
|
||||||||||
Net
income, as reported
|
$
|
2,003
|
$
|
1,789
|
$
|
6,098
|
$
|
5,645
|
|||||
Earnings
per share, as reported
|
|||||||||||||
Basic
|
0.51
|
0.46
|
1.55
|
1.41
|
|||||||||
Diluted
|
0.50
|
0.44
|
1.51
|
1.34
|
|||||||||
Stock
option expense included in calculation of net income
|
33
|
-
|
108
|
-
|
|||||||||
Pro-forma
effects
|
|||||||||||||
Stock
option expense not included in net income, net of related tax
effects
|
156
|
768
|
|||||||||||
Net
income on a pro-forma basis
|
1,633
|
4,877
|
|||||||||||
Earnings
per share, on a pro-forma basis
|
|||||||||||||
Basic
|
0.42
|
1.22
|
|||||||||||
Diluted
|
0.40
|
1.16
|
4
On
May 6,
2005, the Compensation and Option Committee of the Board accelerated the vesting
of certain unvested stock options awarded to employees, officers and directors
under the Company’s stock option plans, which had exercise prices that were
under water as of market close on May 5, 2005.
Options
to purchase 124,800 shares became fully exercisable on December 1, 2005 as
a
result of the vesting acceleration. Exercise prices of the options that were
accelerated are $24.02 and $25.59 per share. These options previously were
to
become fully vested on October 1, 2007 and January 1, 2008. The Company took
this action to avoid an accounting charge (as compensation expense) for these
options starting in the quarter ending March 31, 2006, as required by SFAS
123R.
(4) Comprehensive
Income. Comprehensive income for the three and nine months ending September
30,
2006 was $2,011 and $5,933, net of taxes, respectively. The components used
to
adjust net income in order to obtain comprehensive income were foreign currency
translation adjustments of $1 and ($46), and unrealized holding losses of $6
and
($119), respectively.
(5) Warranty
Reserve. The Company accrues provisions for estimated costs that are likely
to
be incurred for product warranties and uncollectible accounts. The amount of
the
provision is adjusted, as required, to reflect historical experience. The
following table summarizes changes to UTMD’s warranty reserve during 3Q
2006:
Beginning
Balance, July 1, 2006
|
$
|
60
|
||
Changes
in Warranty Reserve during 3Q 2006:
|
||||
Aggregate
reductions for warranty repairs
|
-
|
|||
Aggregate
changes for warranties issued during reporting period
|
-
|
|||
Aggregate
changes in reserve related to preexisting warranties
|
-
|
|||
Ending
Balance, September 30, 2006
|
$
|
60
|
(6)
Investments.
Investments, classified as available-for-sale consist of the
following:
September
30, 2006
|
September
30, 2005
|
||||||
Investments,
at cost
|
$
|
19,075
|
$
|
12,007
|
|||
Equity
Securities:
|
|||||||
Unrealized
holding gains
|
-
|
135
|
|||||
Unrealized
holding (losses)
|
(17
|
)
|
(73
|
)
|
|||
Investments,
at fair value
|
$
|
19,058
|
$
|
12,069
|
Changes
in the unrealized holding gain/loss on investment securities available-for-sale
and reported as a separate component of accumulated other comprehensive income
are as follows:
3Q
2006
|
3Q
2005
|
||||||
Balance,
beginning of period
|
$
|
(17
|
)
|
$
|
53
|
||
Reversal
of unrealized gain from securities included in beginning balance,
realized
in the period
|
-
|
-
|
|||||
Unrealized
holding gains (losses), in equity securities
|
10
|
(24
|
)
|
||||
Deferred
income taxes on unrealized holding gain (loss)
|
(3
|
)
|
9
|
||||
Balance,
end of period
|
$
|
(10
|
)
|
$
|
38
|
Available-for-sale
debt securities
|
September
30, 2006
|
September
30, 2005
|
|||||
Maturity
less than 1 year
|
$
|
-
|
$
|
2,052
|
|||
Maturity
greater than 10 years
|
-
|
1,425
|
5
(7)
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, and information currently available to,
management. When used in this document, the words “anticipate,” “believe,”
“should,” “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 noted
throughout this 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.
General
risk factors that may impact the Company’s revenues include the market
acceptance of competitive products; administrative practices of group purchasing
organizations; obsolescence caused by new technologies; the possible
introduction by competitors of new products that claim to have many of the
advantages of UTMD’s products at lower prices; the timing and market acceptance
of UTMD’s own new product introductions; changes in clinical practices; UTMD’s
ability to efficiently and responsively manufacture its products, including
the
possible effects of lack of performance of suppliers; access to important global
distribution channels; budgetary constraints; the timing of regulatory approvals
for newly introduced products; regulatory intervention in current operations;
and third party reimbursement of health care costs of patients.
Risk
factors, in addition to the risks outlined in the previous paragraph that may
impact the Company’s assets and liabilities, as well as cash flows, include:
risks inherent to companies manufacturing products used in healthcare, including
claims resulting from the improper use of devices and other product liability
claims; defense of the Company’s intellectual property; productive use of assets
in generating revenues; management of working capital, including inventory
levels required to meet delivery commitments at a minimum cost; and timely
collection of accounts receivable.
Additional
risk factors that may affect non-operating income include: the continuing
viability of the Company’s technology license agreements; actual cash and
investment balances; asset dispositions; and acquisition activities that may
require external funding.
6
Item
2. Management's
Discussion and Analysis of Financial Condition and Results of
Operations
General
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, 2005
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 month period in comparison
with
a previous three month period may not be indicative of comparative results
for
the year as a whole. Dollar amounts in the report are in thousands, except
per-share amounts or where otherwise noted.
Analysis
of Results of Operations
a) |
Overview
|
In
third
quarter (3Q) 2006, UTMD’s consolidated global sales were the same as 3Q 2005. 3Q
2006 earnings per share (EPS) were $.50, an increase of 14% compared to $.44
EPS
in 3Q 2005. UTMD achieved the following profitability as a ratio of sales in
3Q
2006 and 3Q 2005:
3Q
06
|
3Q
05
|
|
Gross
Profit Margin:
|
56.7%
|
57.3%
|
Operating
Profit Margin:
|
39.1%
|
29.1%
|
Net
(Income) Margin:
|
28.6%
|
25.6%
|
For
the
first nine months (9M) of 2006, UTMD’s total sales increased 3% relative to 9M
2005. 9M 2006 diluted EPS were $1.51, an increase of 13% compared to $1.34
diluted EPS in 9M 2005. UTMD achieved the following profitability as a ratio
of
sales in 9M 2006 and 9M 2005:
9M
06
|
9M
05
|
|
Gross
Profit Margin:
|
56.3%
|
56.9%
|
Operating
Profit Margin:
|
37.2%
|
34.1%
|
Net
(Income) Margin:
|
28.5%
|
27.3%
|
b) |
Revenues
|
The
Company believes that revenue should be recognized at the time of shipment
as
title generally passes to the customer at the time of shipment. Revenue
recognized by UTMD is based upon documented arrangements and fixed contracts
in
which the selling price is fixed prior to completion of an order. Revenue from
product and service sales is generally recognized at the time the product is
shipped or service completed and invoiced, and collectibility is reasonably
assured. There are circumstances under which revenue may be recognized when
product is not shipped, all of which meet the criteria of SAB 104. For example,
the Company provides engineering services, and/or design and production of
manufacturing tooling, which may be used in subsequent UTMD manufacturing of
custom components for other companies. This revenue is recognized when UTMD’s
service has been completed according to a fixed contractual
agreement.
Total
sales, which were the same in 3Q 2006 as in 3Q 2005, were comprised of
international sales up 12% and domestic sales down 3%. Domestic sales were
comprised of domestic direct sales (sales of finished devices to users or
distributors) down 3% and domestic OEM sales (sales of components to other
companies for use in their products) down 10%. Domestic OEM sales and
international sales have an uneven quarter-to-quarter sales pattern because
customers tend to purchase several months’ supply of products at a time to
minimize costs.
Total
9M
2006 sales increased 3% compared to 9M 2005. International sales increased
14%
and domestic sales increased less than 1%. International sales were 25% of
total
sales in 9M 2006, up from 23% in 9M 2005. 9M 2006 shipments from UTMD’s Ireland
facility including intercompany sales of subassemblies to Utah were 10% higher
in US Dollar terms, and 12% in EURO terms, compared to 9M 2005.
The
following table provides the actual sales dollar amounts divided into general
product categories for total sales and the subset of international
sales:
7
Global
revenues by product category:
3Q
2006
|
|
3Q
2005
|
|
9M
2006
|
|
9M
2005
|
|||||||
Obstetrics
|
$
|
2,355
|
$
|
2,528
|
$
|
7,124
|
$
|
7,332
|
|||||
Gynecology/
Electrosurgery/ Urology
|
1,507
|
1,298
|
4,501
|
3,929
|
|||||||||
Neonatal
|
1,827
|
1,861
|
5,312
|
4,819
|
|||||||||
Blood
Pressure Monitoring and Accessories*
|
1,312
|
1,314
|
4,461
|
4,601
|
|||||||||
Total:
|
$
|
7,001
|
$
|
7,001
|
$
|
21,398
|
$
|
20,681
|
|||||
*includes
molded components sold to OEM
customers.
|
International
revenues by product category:
3Q
2006
|
|
3Q
2005
|
|
9M
2006
|
|
9M
2005
|
|||||||
Obstetrics
|
$
|
149
|
$
|
126
|
$
|
613
|
$
|
407
|
|||||
Gynecology/
Electrosurgery/ Urology
|
428
|
264
|
1,379
|
807
|
|||||||||
Neonatal
|
125
|
175
|
414
|
315
|
|||||||||
Blood
Pressure Monitoring and Accessories*
|
905
|
865
|
3,000
|
3,228
|
|||||||||
Total:
|
$
|
1,607
|
$
|
1,430
|
$
|
5,406
|
$
|
4,757
|
|||||
*includes
molded components sold to OEM
customers.
|
c)
|
Gross
Profit
|
UTMD’s
average gross profit margin (GPM), gross profits as a percentage of sales,
was
56.7% and 56.3% in 3Q and 9M 2006, respectively, compared to 57.3% and 56.9%
in
3Q and 9M 2005, respectively. UTMD’s prices for its products remained generally
consistent with the prior year, but in 9M 2006 the sales mix favored lower
margin products as a result of higher international sales compared to 9M 2005.
The Company is also experiencing inflationary pressures in its manufacturing
costs associated both with labor and with raw materials. Within the last twelve
months, UTMD has made several cost of living pay adjustments for its employees.
Since nearly all of UTMD’s products are made of petroleum-based compounds, the
worldwide substantial increase in cost of oil has a significant impact on raw
materials costs. In addition, the higher cost of oil has direct impact on
transportation costs, both those included in manufacturing overhead for shipping
and receiving products and raw materials, and those in operating expenses
associated with sales and marketing traveling expenses. Because UTMD owns and
has maintained facilities and other manufacturing overheads in excess of its
needs, some dilution of overhead costs as a result of higher sales is helping
to
offset the increases in incremental direct material and labor costs. Management
projects that it can achieve a GPM for the year of 2006 about the same as 9M
2006, which would be about a half percentage point lower as a percentage of
sales than the GPM achieved in 2005.
OEM
sales
are sales of UTMD components that are marketed by other companies as part of
their product offerings. UTMD utilizes OEM sales as a means to optimize the
utilization of its capabilities established to satisfy its finished devices
business. As a general rule, prices for OEM sales expressed as a multiple of
direct variable manufacturing expenses are lower than for direct sales because,
in the OEM and international channels, UTMD’s business partners incur
significant expenses of sales and marketing. Because of UTMD’s small size and
period-to-period fluctuations in OEM business activity, nonvariable
manufacturing overhead expenses cannot be meaningfully allocated between direct
and OEM sales. Therefore, UTMD does not report GPM by sales
channels.
d) |
Operating
Profit
|
Operating
Profit, or income from operations, is the profit remaining after subtracting
operating expenses from gross profits. Operating expenses include sales and
marketing (S&M), research and development (R&D) and general and
administrative (G&A) expenses. Operating expenses in 3Q 2006 were $741 lower
than 3Q 2005, and $617 lower in 9M 2006 than 9M 2005. Please see the table
below. Operating expenses decreased in 3Q 2006 primarily as a result of lower
litigation expenses included in G&A, which were $710 lower than in 3Q 2005.
The lower litigation expenses were offset by $33 higher G&A expenses for
estimated option expense per SFAS 123R, which didn’t occur in 3Q 2005. For 9M
2006 compared to 9M 2005, lower litigation expenses were again the primary
difference, with the new option expense of $108 and a $130 2Q 2006 write-off
of
intellectual property included in R&D expenses partially offsetting those
decreases.
Operating
expenses were 17.6% of sales in 3Q 2006 compared to 28.2% in 3Q 2005, and 19.1%
of sales in 9M 2006 compared to 22.8% in 9M 2005. For the year of 2006,
management expects to hold operating expenses to less than 19% of sales. This
compares to an actual operating expense ratio of 23.5% of sales in 2005.
Operating profit margins were 39.1% of sales in 3Q 2006 compared to 29.1% in
3Q
2005, and 37.2% in 9M 2006 compared to 34.1% in 9M 2005.
8
Because
UTMD sells internationally through third party distributors, its S&M
expenses are predominantly for U.S. business activity. S&M expenses in 3Q
2006 were 7.1% of sales compared to 8.5% of sales in 3Q 2005. S&M expenses
in 9M 2006 were 8.0% of sales compared to 8.1% of sales in 9M 2005. For the
year, UTMD expects S&M expenses as a ratio of total sales to be about 8.0%,
which is consistent with 9M 2006 and the prior year 2005.
R&D
expenses were 1.2% of sales in both 3Q 2006 and 3Q 2005. In 2Q 2006, R&D
expenses included a $130 write-off of intellectual property for which the
Company expects to receive repayment in 4Q 2006. Excluding the $130, R&D
expenses in 9M 2006 and 9M 2005 were both 1.1% of sales. UTMD expects R&D
expenses during 2006 as a whole to be about the same as in 2005.
G&A
expenses in 3Q 2006 were 9.4% of sales compared to 18.6% of 3Q 2005 sales.
G&A expenses in 9M 2006 were 9.5% of sales compared to 13.6% of 9M 2005
sales. Litigation expenses in 3Q 2006 were $710 lower than in 3Q 2005 due to
the
3Q 2005 cost of the frivolous FDA lawsuit filed in August 2004. In addition
to
litigation costs, G&A expenses include the cost of outside auditors and
corporate governance activities relating to the implementation of SEC rules
resulting from the Sarbanes-Oxley Act of 2002. Starting in 2006, G&A
expenses also include the estimated stock-based compensation expense related
to
adoption of SFAS 123R, which were $33 in 3Q 2006 and $108 in 9M 2006. Barring
expenses resulting from unexpected new litigation, G&A expenses as a
percentage of sales for the year 2006 should be about the same as 9M
2006.
3Q
2006
|
|
3Q
2005
|
|
9M
2006
|
|
9M
2005
|
|||||||
S&M
Expense
|
$
|
496
|
$
|
592
|
$
|
1,702
|
$
|
1,673
|
|||||
R&D
Expense
|
81
|
82
|
363
|
225
|
|||||||||
G&A
Expense
|
658
|
1,302
|
2,026
|
2,811
|
|||||||||
Total
Operating Expenses:
|
$
|
1,235
|
$
|
1,976
|
$
|
4,091
|
$
|
4,709
|
e) |
Non-operating
income
|
Non-operating
income in 3Q 2006 was $268 compared to $203 in 3Q 2005, and $1,253 in 9M 2006
compared to $670 in 9M 2005. UTMD received interest, dividends and capital
gains
of $234 in 3Q 2006 and $1,120 in 9M 2006, compared to $65 in 3Q 2005 and $298
in
9M 2005, from investing its cash balances. In 3Q and 9M 2006, UTMD paid $71
and
$196, respectively, for interest expense because its Ireland subsidiary borrowed
€4.5 million ($5,336) in December 2005 to allow the repatriation of profits
generated by its Ireland operations between 1996 and 2005. The loan will have
to
be repaid by the Ireland subsidiary from its profits generated in the future,
which should take about four years. UTMD had no interest expense during 9M
2005.
Royalty income, which UTMD receives from licensing its technology to other
companies, was approximately the same for the applicable periods in both years.
Management expects non-operating income for 2006 as a whole (after subtracting
interest expense for the Ireland loan) to be about $600 higher than in 2005.
This projection is based on the Company continuing to receive substantial
investment income for the remainder of the year.
f) |
Earnings
Before Income Taxes
|
3Q
2006
earnings before income taxes (EBT) were $3,004 compared to $2,241 in 3Q 2005.
9M
2006 EBT were $9,216 compared to $7,731 in 9M 2005. 3Q and 9M 2006 EBT margin
was 42.9% and 43.1% of sales, respectively, compared to 32.0% and 37.4% in
3Q
and 9M 2005, respectively. The higher margins were due primarily to higher
non-operating income and lower litigation expenses compared to the previous
year.
g) |
Net
Income and Earnings per Share
|
UTMD’s
net income increased to $2,003 in 3Q 2006 compared to $1,789 in 3Q 2005, and
to
$6,098 in 9M 2006 compared to $5,645 in 9M 2005. Net profit margins (NPM),
which
are net income (after tax) expressed as a percentage of sales, were 28.6% in
3Q
2006 compared to 25.6% in 3Q 2005, and 28.5% in 9M 2006 compared to 27.3% in
9M
2005. The 2006 income tax provision, which is the percentage of EBT estimated
to
be owed in combined federal and state income taxes, has been and will continue
to be substantially higher than in the previous year because of the one-time
tax
benefit that UTMD received in 2005 from The American Jobs Creation Act of 2004
(the Act). The Act allowed a temporary tax deduction on prior accumulated
foreign earnings, limited to 2005. In 3Q and 9M 2006, the income tax provision
was 33.3% and 33.8% of EBT, respectively, compared to 20.2% and 27.0% in 3Q
and
9M 2005. Tax provisions on 2005 earnings were reduced following guidance
provided by FASB Staff Position No. FAS 109-2. UTMD estimates that its
consolidated income tax provision for the year 2006 will be almost eight
percentage points higher than in the previous year, which was 26.1%.
9
UTMD’s
net income divided by weighted average outstanding shares for the applicable
reporting period, diluted for unexercised employee and director options,
provides earnings per share (EPS):
3Q
2006
|
|
3Q
2005
|
|
9M
2006
|
|
9M
2005
|
|||||||
Earnings
Per Share (EPS)
|
$
|
.498
|
$
|
.436
|
$
|
1.508
|
$
|
1.338
|
|||||
Shares
(000), Diluted
|
4,021
|
4,104
|
4,045
|
4,219
|
Diluted
3Q 2006 Earnings per Share (EPS) increased 14% compared to 3Q 2005. Diluted
9M
2006 EPS increased 13% compared to 9M 2005. The changes in diluted shares
resulted from share repurchases and from exercises of options. UTMD repurchased
7,132 shares in 3Q 2006 and 58,764 shares in 9M 2006. Exercises of employee
options in 3Q 2006 added 11,393 shares and 136,279 shares in 9M 2006 (net of
4,563 and 149,962 shares swapped or traded in 3Q and 9M, respectively, by
individuals in payment of the exercise price of the options and related tax
withholding). Market increases and decreases in UTMD’s stock price affect EPS as
a result of the dilution calculation for unexercised options (with exercise
prices below the average stock market value during each period). The dilution
calculation added 92,000 and 102,000 shares to actual weighted average shares
outstanding in 3Q and 9M 2006 respectively, compared to 222,000 and 224,000
in
3Q and 9M 2005. The decrease in dilution is primarily due to fewer unexercised
options outstanding. Actual outstanding common shares as of the end of 3Q 2006
were 3,933,900 compared to 3,881,900 at the end of 3Q 2005.
h) |
Return
on Equity
|
Return
on
equity (ROE) is the portion of net income retained by UTMD (after payment of
dividends) to internally finance its growth, divided by the average accumulated
shareholder equity for the applicable time period. Annualized ROE (after payment
of dividends) for 9M 2006 was 16% compared to 15% for 9M 2005. The higher ROE
in
9M 2006 was due to higher net profits. Share repurchases have a beneficial
impact on ROE as long as the Company sustains net profit performance, because
shareholder equity is reduced by the cost of the shares repurchased. Although
UTMD expects higher net profits in 2006, ROE for the year may be about the
same
as in 2005 as a result of increased dividends to shareholders coupled with
higher average shareholders’ equity. The ROE in 2006 will be sufficient to
internally-finance UTMD’s revenue growth.
Liquidity
and Capital Resources
i) |
Cash
flows
|
Cash
flows from operating activities, including adjustments for depreciation and
other non-cash operating expenses, along with changes in working capital and
the
tax benefit attributable to exercise and subsequent sale of employee and
director stock options, totaled $8,443 in 9M 2006 compared to $4,613 in 9M
2005.
A $1,931 larger tax benefit from exercise of employee and outside director
stock
options in 9M 2006 compared to 9M 2005 was the most significant difference
in
the two periods. Accrued expenses contributed $105 in 9M 2006 after using $1,243
in 9M 2005, a $1,348 larger contribution in 9M 2006. The 9M 2005 decrease in
accrued expenses resulted primarily from a $901 decrease in litigation payable
as accrued expenses associated with the FDA litigation were paid.
Cash
flows from investing activities primarily result from purchases and sales of
short-term investments, in an effort to achieve a prudent return for excess
cash
balances. Capital expenditures for property and equipment were $361 in 9M 2006
compared to 286 in 9M 2005. This rate of investing in new property and equipment
is required to keep facilities, equipment and tooling in good working
condition.
In
9M
2006, UTMD received $533 and issued 136,279 shares of stock upon the exercise
of
employee and director stock options. Option exercises in 9M 2006 were at an
average price of $10.14 per share. Employees and directors exercised a total
of
286,241 option shares in 9M 2006, with 149,962 shares immediately being retired
as a result of the individuals trading the shares in payment of the exercise
price of the options and related tax withholding. UTMD used $2,488 in cash
during 9M 2006 to meet tax withholding requirements on options exercised. For
comparison, the Company received $646 from issuing 75,488 shares of stock on
the
exercise of employee stock options in 9M 2005, net of 8,264 shares retired
upon
employees trading those shares in payment of the stock option exercise price.
UTMD repurchased 58,764 shares of its stock in the open market at a cost of
$1,804 during 9M 2006, an average cost of $30.69 per share including commissions
and fees. For comparison, UTMD repurchased 299,099 shares of stock in the open
market at a cost of $6,503 during 9M 2005.
10
UTMD
Ltd.
(Ireland subsidiary) made payments of $711 on its note payable during 9M 2006.
UTMD Ltd. did not have any bank debt in 9M 2005. UTMD (U.S.) did not utilize
its
bank line of credit with US Bank during 9M 2005. UTMD (U.S.) did use its US
bank
credit line in 2006 to provide a loan guarantee on the Ireland debt. UTMD paid
$2,116 in cash dividends to shareholders in 9M 2006 compared to $1,842 in 9M
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 2006 are expected to be
approximately $150 to keep facilities, equipment and tooling in good working
order. In addition to capital expenditures, UTMD plans to use cash in 2006
for
selective infusions of technological, marketing or product manufacturing rights
to broaden the Company's product offerings; for continued share repurchases
if
the price of the stock is undervalued; and if available for a reasonable price,
acquisitions that may strategically fit UTMD’s business and are accretive to
performance. The US Bank revolving line of credit will continue to be available
for liquidity when the timing of acquisitions or repurchases of stock require
a
large amount of cash in a short period of time not otherwise available from
UTMD’s existing cash and investment balances.
j) |
Assets
and Liabilities
|
September
30, 2006 total assets were $1,824 higher than at December 31, 2005. Current
assets increased $1,803. The increases resulted from a $2,401 increase in cash
and investments despite significant uses of cash including payment of $2,116
in
dividends and $1,804 to repurchase shares. Receivables declined $603 primarily
due to a $498 decrease in income taxes receivable. One important subset of
receivables, trade accounts receivable, net of allowance for doubtful accounts,
increased $153, yielding approximately 47 days in customer receivables using
3Q
2006 shipments as the denominator. Other receivables declined $258. Inventories
increased $74 and other current assets decreased $69.
Working
capital was $24,430 at September 30, 2006, a $1,747 increase from 2005 year-end.
Working capital remains in excess of UTMD’s normal operating needs. The increase
in working capital was essentially due to an increase in cash & equivalents
generated by operating profits. Current liabilities increased $56 primarily
because of increases in income taxes payable. As a result of the working capital
change, UTMD’s current ratio increased to 8.6 on September 30, 2006 from 8.1 on
December 31, 2005 and 6.7 on September 30, 2005.
Net
property and equipment increased $187 in 9M 2006 despite an increase in
accumulated depreciation of $439 because of capital spending of $361and an
increase in the dollar-denominated value of Ireland P&E. The U.S. dollar
increased about 6% relative to the EURO during 9M 2006. Goodwill resulting
from
prior acquisitions remained the same. Net intangible assets excluding goodwill
decreased $166 as a result of amortization of patents and other intellectual
property, including the 2Q 2006 $130 write-off of intellectual property. At
September 30, 2006, net intangible assets including goodwill were 17.2% of
total
assets compared to 18.3% at year-end 2005.
UTMD’s
long term liabilities are comprised of the Ireland loan ($4,989 on September
30,
2006) and deferred income taxes ($190 on September 30, 2006). As of December
31,
2005, those long term liabilities were $5,336 and $274, respectively. As of
September 30, 2006, UTMD’s total debt ratio (total liabilities/ total assets)
decreased to 19% from 21% on December 31, 2005. On September 30, 2005, UTMD’s
total debt ratio, prior to the Ireland loan required to repatriate foreign
profits in 2005, was 9%.
k) |
Management's
Outlook
|
As
expressed at the beginning of the year, management’s operating plan for 2006 is
to
1)
increase sales and marketing efforts after finally resolving a four-year long
dispute with the FDA in late 2005;
2)
reinvigorate internal new product development;
3)
continue outstanding operating performance;
4)
look for new acquisitions to augment sales growth; and
5)
utilize current cash balances in shareholders’ best long-term interest.
The
actual financial performance in 9M 2006 indicates good progress in achieving
the
2006 plan. In the first nine months of 2006, the Company realized increases
in
labor and raw materials costs, which will provide a profit margin challenge
going forward because prices for UTMD’s finished products are relatively
inelastic due to established long term fixed U.S. hospital pricing agreements
and a very competitive marketplace worldwide for medical devices.
11
l) |
Accounting
Policy Changes
|
In
June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an
interpretation of FASB Statement No. 109.” This statement clarifies the
accounting for uncertainty in income tax positions. The provisions of FIN 48
will be effective for UTMD starting in First Quarter 2007, with the cumulative
effect of the change in accounting principle recorded as an adjustment to
opening retained earnings. The impact of adopting FIN 48 on the consolidated
financial statements is currently unknown.
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 0.7896
EURO per USD as of September 30, 2006, and 0.8328 EURO per USD as of September
30, 2005. 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 Principal Financial Officer, evaluated the
effectiveness of the company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of
September 30, 2006. Based on this evaluation, the Chief Executive Officer and
Principal Financial Officer concluded that, as of September 30, 2006, 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 September 30, 2006, that have materially
affected, or are reasonably likely to materially affect, the company’s internal
controls over financial reporting.
12
PART
II -
OTHER INFORMATION
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, 2005, 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.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
The
following table details purchases by UTMD of its own securities during 3Q
2006.
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)
|
||||
7/01/06
- 7/31/06
|
7,132
|
$
29.93
|
7,132
|
|||||
8/01/06
- 8/31/06
|
-
|
-
|
-
|
|||||
9/01/06
- 9/30/06
|
-
|
-
|
-
|
|||||
Total
|
7,132
|
$
29.93
|
7,132
|
(1)
In
3Q
2006 UTMD repurchased the above shares pursuant to a continued open market
repurchase program initially announced in August 1992. Since 1993 through 3Q
2006, the Company has repurchased 6.3 million shares at an average cost of
$11.62 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 9.1 million of its shares at an average price of $11.05 per share
since 1993. To complete the picture relating to current shares outstanding,
since 1993 the Company’s employees and directors have exercised and purchased
1.5 million option shares at an average price of $8.78 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
Global Market listing.
13
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. §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. §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: 11/3/06
|
By:
|
/s/ Kevin L. Cornwell
|
Kevin
L. Cornwell
|
||
CEO
|
||
Date: 11/3/06
|
By:
|
/s/ Paul O. Richins
|
Paul
O. Richins
|
||
Principal
Financial Officer
|
14