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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORMFORM 10-Q

UTAH MEDICAL PRODUCTS INC

(Exact name of Registrant as specified in its charter)

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.   Yes ☒   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).   Yes ☒   No ☐ 

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.   

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 ☐   No ☒ 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of August 5, 2021: 3,646,611.May 10, 2022: 3,644,987. 

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UTAH MEDICAL PRODUCTS, INC.

INDEX TO FORM 10-Q

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

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UTAH MEDICAL PRODUCTS, INC.

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(unaudited)

(1) The unaudited financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States.  These statements should be read in conjunction with the financial statements and notes included in the Utah Medical Products, Inc. ("UTMD" or "the Company") annual report on Form 10-K for the year ended December 31, 2020.2021.  In the opinion of management, the accompanying financial statements include all adjustments (consisting only of normal recurring adjustments) necessary to summarize fairly the Company's financial position and results of operations.  Currency amounts are in thousands except per-share amounts and where noted.

(2) Recent Accounting Standards.

The Company has determined that recently issued accounting standards will either have no material impact on its consolidated financial position, or results of operations or cash flows, or will not apply to its operations.

(3) Inventories at June 30, 2021March 31, 2022 and December 31, 20202021 consisted of the following:

(4) Stock-Based Compensation. At June 30, 2021,March 31, 2022, the Company has stock-based employee compensation plans which authorize the grant of stock options to eligible employees and directors.  The Company accounts for stock compensation under FASB Accounting Standards Codification (“ASC”) 718, Compensation - Stock Compensation.  This statement requires the Company to recognize compensation cost based on the grant date fair value of options granted to employees and directors.  In the quarters ended June 30,March 31, 2022 and 2021, and 2020, the Company recognized $41and $49,$43 and $41, respectively, in stock based compensation cost.  In the six months ended June 30, 2021 and 2020, the Company recognized $82 and $72, respectively, in stock based compensation cost.

(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, no warranty reserve was made at December 31, 20202021 or June 30, 2021.March 31, 2022.

(6)  Global 2Q 20211Q 2022 global revenues (USD) by product category:

Global 1H 2021 revenues (USD) by product category:

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(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 10 years and on the automobile is 6 months.  There are no options to extend or terminate the leases.  UTMD has no other leases yet to commence.  As neither lease contains implicit rates, UTMD’s incremental borrowing rate, based on information available at adoption date, was used to determine the present value of the leases.

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(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 $21,000 purchase price representedrepresents an identifiable intangible asset which is being straight-line amortized and recognized as part of G&A expenses over athe now 1.58 year remaining 2.33 year life as of June 30, 2021 of the prior CSI distribution agreement with Femcare.

(9)

(8) Earnings Per Share. Basic earnings per share is calculated by dividing net income attributable to the common stockholders of the company by the weighted average number of common shares outstanding during the period.  Diluted earnings per share is calculated by assuming the exercise of stock options at the closing price of stock on June 30, 2021.at the end of first quarter 2022.

The following table reconciles the numerator and the denominator used to calculate basic and diluted earnings per share:

(10)

(9) Subsequent Events.  UTMD has evaluated subsequent events through the date the financial statements were issued, and concluded there were no other events or transactions during this period that required recognition or disclosure in its financial statements.

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations

General

Utah Medical Products, Inc. (UTMD) manufactures and markets a well-established range of specialty medical devices.  The Company’s Form 10-K Annual Report for the year ended December 31, 2020 provides2021 provided 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 second quarter (2Q) 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, the 2Q 2021 comparison with 2Q 2020 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; AUD = Australia Dollars; £ or GBP = UK Pound Sterling; C$ or CAD = Canadian Dollars; and € or EUR = Euros.  

Analysis of Results of Operations

a)a)  Overview 

As many of the gynecology devices provided by UTMD are used in “nonessential” or “elective” procedures, as medical procedures were classified during the COVID-19 pandemic, the Company’s financial performance, particularly during 2Q 2020, reflected a substantial negative change relative to 2019. On the other side of the coin, when sales recovered in 2Q and 1H 2021, financial performance reflected a significant positive change relative to the same periods in 2020.  Income statement results in 2Q and 1H 2021the first quarter (1Q) of 2022 compared to the same periods of 20201Q 2021 were as follows:

The comparisons of 2Q and 1H 2021 results with the resultsProfit margins in the same periods of 2020, according to U.S. Generally Accepted Accounting Principles (US GAAP), were affected by long term deferred tax liability increases on the balance of Femcare intangible assets (the amortization of which is not tax-deductible in the UK) in both 2Q 2021 and 2Q 2020.  The 2Q 2020 $225 increase in deferred UK taxes over the next six years resulted from the fact that the UK decided to not reduce its corporate income tax rate from 19% to 17% beginning in 2Q 2020, as was previously enacted.  The 2Q 2021 $390 increase in deferred UK taxes over the next five years resulted from the fact that the UK decided to increase its corporate income tax rate from 19% to 25% beginning on April 1, 2023.  Therefore, the remaining amortization of Femcare intangible assets from April 1, 2023 through March 11, 2026 will have a 6% ($390) higher income tax impact.  According to US GAAP, a deferred tax liability increase must be booked in the quarter in which the tax law change is enacted. UTMD management believes that the presentation of results excluding the unfavorable deferred tax liability adjustments to its 2020 and 2021 income tax provisions provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results in 20211Q 2022 compared to 2020. Please note that the non-US GAAP exclusion of tax provision adjustments only affects Net Income and Earnings Per Diluted Share (EPS), as follows:1Q 2021 follow:

Although a minor impact relative to the device demand increase after the 2020 depression, USD sales in 2021 were helped by a weaker USD compared to other currencies. A favorable foreign currency exchange (FX) rate impact increased total consolidated 2Q 2021 sales by 2.7% (+$329) and 1H 2021 sales by 2.5% (+$581).

U.S. domesticDomestic sales in 2Q 20211Q 2022 were 46% higher than in 2Q 2020.  Sales to customersup 18%, and sales outside the U.S. (OUS) were 40% higherup 4%, compared to 1Q 2021.  Using the same foreign currency exchange (FX) rates for sales not invoiced in USD, terms.i.e. in “constant currency” terms, sales outside the U.S. (OUS) were up 7%. Because 24% of consolidated sales were invoiced in foreign currencies, the change in FX rates for OUS sales did have an impact on period-to-period relative financial results. FX rates for income statement purposes are transaction-weighted averages. The average FX rates from the applicable foreign currency to USD during 1Q 2022 and 1Q 2021 follow:  

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Gross profits (GP) increased more than revenues primarily due to better absorption of fixed manufacturing overhead costs.  On the operating income line, not only did a higher GP margin (GP divided

The weighted-average negative impact on foreign currency sales was 5.0%, reducing reported USD sales by sales) help, but also keeping operating expenses approximately the same further leveraged the improvement$152 relative to the prior year’s same periods.foreign currency sales in 1Q 2021.  In constant currency terms, total consolidated 1Q 2022 sales were up $1,512 (+14%).

Despite UTMD increasing the unit prices of its devices and components approximately 6% across-the-board, its 1Q 2022 Gross Profit Margin (GPM) suffered as the result of significantly higher incremental direct labor, direct materials and manufacturing overhead costs in the U.S.   

UTMD’s Operating Income Margin benefitted from higher sales given that a significant portion of operating expenses are fixed. The same$1,105 per quarter straight-line amortization of the $21,000 purchase price that UTMD paid CSI in early 2019 to acquire the remaining 4.75 years’ exclusive U.S. Filshie distribution rights was 9.0% of 1Q 2022 sales compared to 10.1% of 1Q 2021 sales. The purchase price of CSI’s remaining exclusive distribution rights was recognized as an identifiable intangible asset (IIA) which will be fully amortized in 3Q 2023. IIA amortization expense in total, including that remaining from the 2011 Femcare acquisition, which comprises a significant portion of $1,105 in both 2Q 2021 and 2Q 2020, and $2,210 in both 1H 2021 and 1H 2020, resulting from UTMD’s February 2019 acquisitionGeneral & Administrative (G&A) operating expenses, was 13.3% of CooperSurgical Inc’s (CSI’s) U.S. exclusive distribution rights for the Filshie Clip System,  represented 8.8% of1Q 2022 consolidated sales in 2Q 2021 compared to 12.6%15.1% of sales1Q 2021 consolidated sales.  In other words, UTMD’s Operating Income Margin excluding IIA amortization expense was 50.0% in 2Q 2020, and 9.4% of sales in 1H 20211Q 2022 compared to 11.2% of sales50.6% in 1H 2020.  1Q 2021.

A comparison of 1Q period-to-period Income Before Tax (EBT) was consistent with the Operating Income comparison as 1Q 2022 non-operating income was $8 compared to $10 in 1Q 2021. UTMD’s Net Income Margin in 2Q1Q 2022 was higher than in 1Q 2021 increased more than the increase in operating income asdue to a result of $60 higher non-operating income and a lowercombined income tax provision rate.rate in 1Q 2022 that was 22.0% compared to 22.4% of EBT in 1Q 2021. The increase in Net Income in 1H 2021 was aboutprimary reason for the same as the increase in 1H 2021 operating income as 1H 2021 non-operating income was $54 lower than in 1H 2020 and the income tax provision rate was slightly higher.  The consolidated average income tax rates (income tax provision divided by Earnings Before Taxes) follow:

The impactthe distribution mix of the respective 2Q deferred tax adjustments are apparent when comparing the US GAAP income tax provision rates with the non-US GAAP rates.subsidiary EBT.

The percentage increases in 2021 EPS compared to the same periods in 2020 were slightly higher than the increases in Net Income because of UTMD shares repurchased in 2020.

UTMD profit margins in 2Q 2021 and 1H 2021 compared to 2Q 2020 and 1H 2020 follow:

UTMD’s June 30, 2021March 31, 2022 Balance Sheet, in the absence of debt, continued to strengthen.remained strong.  Ending Cash and Investments were $59.5$65.9 million on June 30, 2021March 31, 2022 compared to $51.6$61.0 million on December 31, 2020, after paying $2.1 million in cash dividends to stockholders during 1H 2021. Stockholders’ Equity (SE) increased $4.5was up $2.0 million in the sixfirst three month calendar period from December 31, 2020 despite the fact that dividends reduce SE. Compared to June 30, 2020, one year earlier, cash increased $17.2 million and SE increased $12.1 million.

Foreign currency exchange (FX)2021.  FX rates for Balance Sheet purposes are the applicable rates at the end of each reporting period. The FX rates from the applicable foreign currency to USD for assets and liabilities at the end of 2Q 2021 compared to the end of calendar year 20201Q 2022 and the end of 2Q 20201Q 2021 follow:

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b)b)  Revenues 

Terms of sale are established in advance of UTMD’s acceptance of customer orders.  In the U.S., Ireland, UK, France, Canada, Australia and New Zealand, UTMD acceptsgenerally accepted orders directly from and shipsshipped directly to end user medicalclinical facilities, as well as third party medical/surgical distributors, under UTMD’s Standard Terms and Conditions (T&C) of Sale. UTMD’s T&C of Sale to end user facilities are substantially the same in the U.S. and OUS. UTMD also has standard T&C of Sale for OEM customers, other medical device and non-medical device customers for components manufactured by UTMD, which are substantially the same, except that prices are generally quoted prior to acceptance of each order.

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during 1Q 2022. UTMD may have separate discounted pricing agreements with a specific clinical facility or group of affiliated facilities or large OEM customers based on volume of purchases.  Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities, or OEM customers, if applicable, are established in advance of orders accepted or shipments made. For existing customers, past actual shipment volumes typically determine the fixed price by part number for the next agreement period of one year. For new customers, the customer’s best estimate of volume is usually accepted by UTMD for determining the ensuing fixed prices for the agreement period. Prices are not adjusted after an order is accepted. For the sake of clarity, the separate pricing agreements 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 20211Q 2022 UTMD worldwide (WW) sales were $3,817$1,360 (+43.4%12.4%) higher than in 2Q 2020.1Q 2021. Constant currency sales were $3,487$1,512 (+39.7%13.8%) higher. U.S. domestic sales were 46%17.7% higher and outside the U.S. (OUS) sales were 40% higher. Without the help of a weaker USD in converting foreign currency sales, OUS sales were 30%3.8% higher (i.e. constant currency sales). Despite the WW excellent double-digit percentage recovery in sales, 2Q U.S. domestic sales continued to improve faster than OUS sales.despite an average 5% stronger USD. 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.

Domestic U.S. sales in 2Q 20211Q 2022 were $8,023$7,984 compared to $5,513$6,783 in 2Q 2020.  Domestic sales are invoiced in USD and not subject to FX rate fluctuations.1Q 2021.  The components of domestic sales include 1) “direct other device sales” of UTMD’s medical devices to user facilities (and med/surg stocking distributors for hospitals), excluding Filshie device sales, 2) “OEM sales” of components and other products manufactured by UTMD for other medical device and non-medical device companies, and 3) “direct Filshie“Filshie device sales”. UTMD separates Filshie device sales from other medical device sales direct to medical facilities because of their significance,, manufactured by Femcare and distributed in the acquisition history. U.S. by UTMD.

1)Direct other device sales, representing 47%50% of total domestic sales, were $926$593 (+33%17.5%) higher in 2Q 20211Q 2022 than in 2Q 2020. 1Q 2021.   

2)OEM sales, representing 33%34% of total domestic sales, were $1,126$782 (+72%41.1%) higher.  Direct

3)Filshie device sales representing 20% of total domestic sales, were $457 (+40%$174 (11.7%) higherlower in 2Q 20211Q 2022 compared to 2Q 2020.1Q 2021.   

OUS sales in 2Q 20211Q 2022 were 40% higher at $4,581$4,339 compared to $3,274$4,181 in 2Q 2020. The increase in USD-denominated1Q 2021. OUS sales is overstated as a result of a weaker USD which added $329 to OUS sales that were invoiced in GBP, EUR, AUD and CAD foreign currencies (inwere $152 lower as a result of changes in FX rates resulting from an average 5% stronger USD.  In other words, constant currency terms).  “Constant currency”OUS sales means exchanging foreign currency sales into USD-denominated sales at the same FX rate aswere $4,492, which was 7.4% higher than in the previous period of time being compared. FX rates for income statement purposes are transaction-weighted averages.1Q 2021.  The average FX rates from the applicable foreign currency to USD during 2Q 2021 and 2Q 2020 for revenue purposes follow:  

The weighted average favorable impact on 2Q 2021 foreign currency OUS sales in 1Q 2022 were $2,906, which was 10.8%, increasing reported USD sales by $329 relative to the same foreign currency sales in 2Q 2020.  In constant currency terms, foreign currency sales in 2Q 2021 were 92.9% higher than in 2Q 2020. The portion67% of OUS sales invoiced in foreign currencies in USD terms were 27%and 24% of total consolidated 2Q 2021 sales compared to 18% in 2Q 2020.

OUS sales invoiced in foreign currencies are due to direct end-user sales in Ireland, the UK, France, Canada, Australia and New Zealand, and to shipments to OUS distributors of products manufactured by UTMD subsidiaries in Ireland and the UK.  Export sales from the U.S. to OUS distributors are invoiced in USD.  Direct to end-user OUS 2Q 2021 sales in USD terms were 101% higher in Ireland, 71% higher in Canada, 146% higher in France and 247% higher in the UK. Direct to end-user sales in Australia, which included New Zealand in 2Q 2021 but not in 2Q 2020, were 80% higher. Sales to OUS distributors were 9% higher in 2Q 2021 than in 2Q 2020.

Total consolidated 1H 2021 UTMD worldwide (WW) sales were $3,879 (+19.7%) higher than in 1H 2020. Constantsales.  Foreign currency sales were $3,298 (+16.8%) higher. U.S. domestic sales were 24% higher and OUS sales were 13% higher. Without the help of a weaker USD in converting foreign currency sales, OUS sales were 6% higher.  

Domestic U.S. sales in 1H 2021 were $14,805 compared to $11,956 in 1H 2020.  Direct other device sales, representing 48% of total domestic sales, were $952 (+15%) higher in 1H 2021 than in 1H 2020. OEM sales, representing 31% of total domestic sales, were $1,646 (+56%) higher. Direct Filshie device sales, representing 21% of total domestic sales, were $251 (+9%) higher in 1H 2021 compared to 1H 2020.

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OUS sales in 1H1Q 2021 were 13% higher at $8,762 compared to $7,733 in 1H 2020. The increase in USD-denominated 1H 2021 OUS sales is overstated as a result of a weaker USD$3,032, which added $581 to OUS sales that were invoiced in GBP, EUR, AUD and CAD foreign currencies (in constant currency terms).  FX rates for income statement purposes are transaction-weighted averages. The average FX rates from the applicable foreign currency to USD during 1H 2021 and 1H 2020 for revenue purposes follow:  

The weighted average favorable impact on 1H 2021 foreign currency OUS sales was 10.0%, increasing reported USD sales by $581 relative to the same foreign currency sales in 1H 2020.  In constant currency terms, OUS sales in 1H 2021 were 5.8% higher than in 1H 2020. The portion73% of OUS sales invoiced in foreign currencies in USD terms was 27%and 28% of total consolidated 1H 2021 sales compared to 23% in 1H 2020. Direct to end-user OUS 1H 2021 sales in USD terms were 26% higher in Ireland, 8% higher in Canada, 27% higher in France and 17% higher in the UK.  Direct to end-user sales in Australia, which included New Zealand in 1H 2021 but not in 1H 2020, were 32% higher. Sales to OUS distributors were 9% higher in 1H 2021 than in 1H 2020.WW sales.  

The following table provides USD-denominatedUSD consolidated sales amounts divided into general product categories for total revenuesworldwide sales and the subset of OUS revenues:sales:

GlobalWW revenues (USD) by product category:

OUS revenues (USD) by product category:

*includes molded components sold to OEM customers. 

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OUS revenues by product category:

c)* includes assemblies and molded components sold to OEM customers.Gross Profit 

UTMD believes that the continued recovery for its medical devices will be related primarily to government policy responses, at all levels, to the corona virus pandemic in each of its major markets rather than clinical need. Some jurisdictions have recently mandated the use of masks for fully-vaccinated people in response to the fear of a delta variant infection flare-up. Sydney Australia, for example, is in full lock-down as of late July. Although the 1H 2021 sales results were much better than expected and cause for optimism looking forward, some of the higher sales may have been for “catch-up” procedures. Sales in 2H 2020 were 14% higher than in 1H 2020. For that reason and because of an apparent negative impact from the continued corona virus pandemic, UTMD would not expect 2H 2021 revenues to experience the dramatic growth that occurred in 1H 2021.  OEM domestic sales, which were 56% higher in 1H 2021 compared to 1H 2020, will continue to grow, but not as fast as UTMD is now production capacity limited for those products. The recent weakening of the USD may continue to help 2H 2021 OUS foreign currency sales. In general, if UTMD is able to duplicate its 1H 2021 revenues in the 2H, sales for the 2021 year would be up about 12% compared to the 2020 year.

c)  Gross Profit (GP) 

GP results from subtracting the costs of manufacturing quality assurance and receiving materials from suppliers.shipping products to customers. UTMD’s GPGross Profit was $2,835$586 (+57.3%8.4%) higher in 2Q 20211Q 2022 than in 2Q 2020,1Q 2021.  Gross Profit did not increase as much as revenues due primarily to the increases in raw material and $2,946 (+25.0%) higherincoming freight costs exceeding 20%. In addition, about half of the lower Gross Profit Margin in 1H 2021 than in 1H 2020.  The primary contribution1Q 2022 was due to an expanded GP Margin (GPM) was much greater dilutionunfavorable experience in U.S. employee medical costs, for which UTMD self-insures. Otherwise, the Company maintained the productivity of fixedits direct labor and manufacturing overhead costs by 43% higher sales in 2Q 2021, and 20% higher sales in 1H 2021. The greater percentage increase in GP than in sales is due to the ability to leverage fixed costs. Incremental direct labor costs did increase as a result of competition for a limited number of people currently seeking work. Also during 2Q 2021, UTMD experienced double-digit percentage cost increases in a number of raw materials, as well as in the freight cost to receive the materials. The growing administrative burden of compliance with regulatory requirements, particularly OUS, continues to pressure UTMD’s GPM. Managing variable manufacturing costs will continue to be a significant challenge for the rest of 2021.raising product prices.  

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d)d)  Operating Income  

Operating Income results from subtracting Operating Expenses from GP. After subtracting Operating Expenses from substantially higher 2Q and 1H 2021 GP, Operating Income in 2Q 2021 was $4,765 compared to $1,977 in 2Q 2020, an increase of 141%, and was $8,652 in 1H 2021 compared to $5,840 in 1H 2020, an increase of 48%. Despite Operating Expenses in USD being slightly higher in 2021 than in the same 2020 time periods, as shown in the table below, the period-to-same period increases in 2021 GP were further leveraged as a result of better Operating Expense absorption (lower percentage of sales).

Gross Profit. Operating Expenses are comprised of SalesG&A expenses, sales and Marketingmarketing (S&M) expenses General and Administrative (G&A) expenses and Product Developmentproduct development (R&D) expenses.  The following table summarizesConsolidated Operating Expenses were $3,010 in 1Q 2022 (24.4% of sales) compared to $3,059 in 1Q 2021 (27.9% of sales).  Ignoring the portion of Operating Expenses that were non-cash IIA amortization expenses, Operating Expenses in 2Q and 1H 20211Q 2022 were 11.1% of consolidated sales compared to the same periods in 2020 by Operating Expense category:

Although a weaker USD helped increase consolidated USD12.8% of sales in 2021, it also1Q 2021.  A stronger USD in this instance helped increase the USD-denominated Operating Expenses of UTMD’s foreign subsidiariesIncome performance by $109 in 2Q 2021 and $169 in 1H 2021. The following table summarizes “constant currency”reducing OUS Operating Expenses in 2QUSD terms by $33, comprised of reducing IIA amortization expense by $16 and 1H 2021all other OUS Operating Expenses by $17.  

Consolidated G&A expenses were $2,551 (20.7% of sales) in 1Q 2022 compared to the same periods$2,545 (23.2% of sales) in 2020 by Operating Expense category:

In other words, 2021 Operating Expense converted to USD at the same FX rate were actually lower than in 2020. Holding Operating Expenses constant while dramatically increasing revenues with a higher GPM had a huge favorable impact on Operating Income.

1Q 2021. The change in FX rates increased 2Q 2021 OUS S&M expenses by $12, and 1H 2021 OUS S&M expense by $19. The lower constant currency S&M expenses were due primarily to a reduction of outside sales representatives in the UK.   

A division of G&A expenses by location follows. G&A expenses includein 1Q 2022 included $532 (4.3% of sales) of non-cash expensesexpense from the amortization of IIA associated with the Filshie Clip System, which is also separated out below:

About two-thirds of G&A expenses in all periods above wereresulting from the non-cash2011 Femcare acquisition, which were $550 (5.0% of sales) in 1Q 2021.  The lower USD IIA amortization expense was mainly the result of amortizing IIA related toa stronger USD, as the Filshie Clip System. OUS G&A expenses were $871Femcare amortization expense in 2Q 2021GBP was only £1 lower in 1Q 2022 compared to $782 in 2Q 2020. OUS G&A expenses were $1,750 in 1H 2021 compared to $1,587 in 1H 2020.  Per the table below which identifies “constant currency” OUS G&A expenses for 2Q and 1H 2021 compared to the same periods in 2020, virtually all of the increases in OUS1Q 2021. In addition, G&A expenses in both periods included $1,105 IIA amortization expense resulting from the purchase of the CSI remaining U.S. exclusive Filshie distribution rights, which represented 9.0% of 1Q 2022 sales compared to 10.1% of 1Q 2021 sales.  Excluding the non-cash IIA amortization expenses, G&A expenses were due$914 (7.4% of sales) in 1Q 2022 compared to $890 (8.1% of sales) in 1Q 2021.  The change in FX rate changes:rates reduced 1Q 2022 OUS G&A expenses by $28, comprised of reducing IIA amortization expense by $16 and all other G&A expenses by $12.

S&M expenses were $336 (2.7% of sales) in 1Q 2022 compared to $384 (3.5% of sales) in 1Q 2021.  The change in FX rates reduced 1Q 2022 OUS S&M expenses by $5.   

R&D expenses in 1Q 2022 were $123 (1.0% of sales) compared to $130 (1.2% of sales) in 1Q 2021. Since all R&D expense was incurred in the U.S., there was no FX impact.   

Summary comparison of (USD) consolidated Operating Expenses:

In summary, Operating Income in 1Q 2022 was $4,522 (36.7% of sales) compared to $3,887 (35.5% of sales) in 1Q 2021.  The greater absorption of relatively fixed Operating Expenses allowed expansion of an 8% growth in Gross Profit to a 16% increase in Operating Income.

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Period to period product development (R&D) expenses varied slightly depending on specific project costs. Since almost all R&D is being carried out in the U.S., there was negligible FX rate impact.

e)e)  Non-operating expense/ Non-operating income 

Non-operatingNet non-operating expense, includes bank fees andor net non-operating income, results from the combination of 1) expenses from loan interest and bank fees; 2) expenses or income from losses if applicable,or gains 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)terms; and 3) 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.other miscellaneous income.  Net non-operating income in 2Q1Q 2022 was $8 compared to $10 in 1Q 2021.  The primary difference, despite higher cash balances in 1Q 2022 compared to 1Q 2021, was $60 compareddue to $0the fact that UTMD received $68 less in 2Q 2020. Netinvestment and other miscellaneous income. UTMD received $54 higher non-operating income in 1H 2021 was $71 compared to $125 in 1H 2020.

The main difference in non-operating income during 2Q was due to rental income received in Ireland1Q 2022 from renting underutilized warehouse spaceproperty compared to a third party distributor. Because UTMD owns its own facilities with space in excess of current needs, this sort of opportunistic income results from time to time. The main difference in1Q 2021, and $5 higher non-operating income during 1H resulted from remeasuredroyalties. UTMD realized a loss of $3 at the end of 1Q 2022 from remeasurement of foreign currency balances.  A $5 gain on remeasured foreign currencybank balances was recognized in 2Q 2021 compared to a $10 loss at the end of $1 in 2Q 2020.  In 1H 2021, a loss of $5 on remeasured foreign currency balances was recognized compared to a gain of $42 in 1H 2020.  Royalties received were $0 in 2Q 2021 and 1H 2021 compared to $5 in 2Q 2020 and 1H 2020.  Interest earned on cash balances was $7 in 2Q 2021 compared to $(2) in 2Q 2020.  Interest earned on cash balances was $25 in 1H 2021 compared to $62 in 1H 2020.  Income from rent of underutilized property was $60 in 2Q 2021 compared to $8 in 2Q 2020.  Income from rent of underutilized property was $72 in 1H 2021 compared to $35 in 1H 2020. Bank fees were $18 in 2Q 2021 compared to $15 in 2Q 2020. Bank fees were $35 in 1H 2021 compared to $29 in 1H 2020.1Q 2021.

f)f)  Income Before Income Taxes (EBT) 

Consolidated EBT results from subtracting net non operating expense or adding net non-operatingNon-operating income from or to as applicable, Operating Income. Consolidated 2Q 20211Q 2022 EBT was $4,825 (38.3%$4,530 (36.8% of sales) compared to $1,977 (22.5%$3,898 (35.6% of sales) in 2Q 2020. Consolidated 1H 20211Q 2021. The $632 (+16.2%) higher 1Q 2022 EBT was $8,723 (37.0% of sales) compared to $5,965 (30.3% of sales) in 1H 2020.1Q 2021 was consistent with the higher Operating Income.     

The EBT of Utah Medical Products, Inc. in the U.S. was $5,466$2,916 in 1H 20211Q 2022 compared to $3,963$2,453 in 1H 2020.1Q 2021. The EBT of Utah Medical Products, Ltd (Ireland) was EUR 3,1221,806 in 1H 20211Q 2022 compared to EUR 2,0621,731 in 1H 2020. The increase in Ireland EBT was primarily due to beginning to ship Filshie Sterishot kits, which are manufactured in Ireland, directly to France medical facilities rather than distributed from Femcare in the UK (after sold intercompany to the UK from Ireland), as it was done in 1H 2020.  The change was made because the Republic of Ireland and France are both in the EU, which avoids bureaucratic obstacles and costs which have resulted from BREXIT.1Q 2021. The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was (GBP 295)GBP (159) in 1H 20211Q 2022 compared to (GBP 235)GBP (231) in 1H 2020.  Although 1H 2021 revenues in the UK recovered well, the loss of the revenues to France in 1H 2021 compared to 1H 2020 offset EBT gains.1Q 2021. The 1Q 2022 EBT of Utah Medical Products Canada, Inc. (dba Femcare Canada) was CAD 303154 in 1H 20211Q 2022 compared to CAD 331150 in 1H 2020.  Canada has been slow to recover compared to UTMD’s other subsidiaries. EBT of subsidiaries includes the result of intercompany shipments which are netted out of consolidated results.1Q 2021.

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.  Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 2Q 20211Q 2022 consolidated EBT excluding the remeasured bank balance currency gain or loss and interest expense (“adjusted consolidated EBITDA”) was $6,695$6,371 compared to $3,800$5,776 in 2Q 2020.  Adjusted consolidated EBITDA was $12,471 in 1H 2021 compared to $9,572 in 1H 2020. Adjusted consolidated EBITDA for the previous four calendar quarters (TTM) was $24,024 as of June 30, 2021.  Based on the better than expected 2Q 2021 operating results, management expects that adjusted consolidated EBITDA of $25 million is likely achievable for the full year1Q 2021.  UTMD’s adjusted consolidated EBITDA as a percentage of sales was 53.1%51.7% in 2Q 20211Q 2022 compared to 43.2%52.7% in 2Q 2020.  UTMD’s adjusted consolidated1Q 2021.  The slightly lower EBITDA as a percentagepercent of sales was 52.9% in 1H 2021 compareddue to 48.6% in 1H 2020. Achieving substantially higher revenues with an expanded GPM while keeping operating expenses about the same obviously had a very positive effect on this key profitability metric.lower Gross Profit Margin.  Management believes that this operating performance metric provides meaningful supplemental information to both management and investors and confirms UTMD’s ongoingcontinued excellent financial operating performance, as well as its substantial recovery from 2020.performance.

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UTMD’s non-US GAAP adjusted consolidated EBITDA is the sum of the elements in the following table, each element of which is a US GAAP number:

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All UTMD income statement measures from GP through EBT (and including non-US GAAP adjusted consolidated EBITDA above) for both 2021 and 2020 time periods were unaffected by the enacted changes in the UK corporate income tax rate.

g)g)  Net Income 

US GAAP Net Income in 2Q 20211Q 2022 of $3,426 (27.2% of sales)$3,534 was 161.0%16.9% higher than the US GAAP Net Income of $1,313 (14.9% of sales)$3,024 in 2Q 2020. Obviously, 2Q 2020 was the low point for UTMD during the COVID-19 pandemic.1Q 2021. UTMD’s Net Income in both periods was affected by an additional tax provision expense required to be recorded in the quarter inMargin, which a tax change is enacted, as a result of an adjustment to UTMD’s deferred tax liability (DTL).  The DTL results from the tax effect of not being able to deduct the remaining future amortization expense of Femcare IIA.  In 2Q 2020, 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 represented the additional tax which would be paid in the UK over the remaining six year life of the 2011 Femcare acquisition IIA, based on a 19% rate. In 2Q 2021, because the UK reset its corporate tax rate from 19% to 25% beginning with 2Q 2023, it caused UTMD to have to book an additional $390 in its 2Q 2021 income tax provision that represents the additional tax which will be paid in the UK over the now remaining five year life of the 2011 Femcare acquisition IIA. Excluding the $390 DTL increase in 2Q 2021 and the $225 DTL increase in 2Q 2020, both of which reduced Net Income divided by those same amounts, non-US GAAP 2Q 2021 Net Incomeconsolidated sales, was $3,817 (30.3% of sales), 148.3% higher than non-US GAAP 2Q 2020 Net Income of $1,537 (17.5% of sales). Excluding the tax provision increases due to the DTL adjustment, non-US GAAP 1H 2021 Net Income was $6,840 (29.0% of sales), 46.3% higher than non-US GAAP 1H 2020 Net Income of $4,677 (23.8% of sales).

The average consolidated income tax provisions (as a % of the same period EBT) per US GAAP28.7% in 2Q 20211Q 2022 and 2Q 2020 were 29.0% and 33.6% respectively, and were 26.1% and 25.4%27.6% in 1H 2021 and 1H 2020 respectively. As these tax rates for both 2021 and 2020 periods are not directly related to EBT generated in the same periods, UTMD provides the following tax rates excluding the 2Q 2021 $390 tax provision adjustment and the 2Q 2020 $225 income tax provision adjustment:  The resulting non-GAAP consolidated average income tax provision rates were 20.9% and 22.2% for 2Q 2021 and 2Q 2020 respectively, and were 21.6% for both 1H 2021 and 1H 2020.

1Q 2021. The average consolidated income tax provision rates (as a % of EBT) in 1Q 2022 and 1Q 2021 were 22.0% and 22.4%, respectively. The slightly lower provision rate varies asresulted from the distribution mix in taxable income among U.S. and foreignof EBT of UTMD’s subsidiaries withsubject to differing income tax rates differs from period to period.rates. The basic corporate income tax rates in each of the sovereignties were the same as in the prior year.

h)  Earnings Per Share (EPS) 

EPS are consolidated Net Income divided by the weighted average 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 diluted

Diluted EPS in 2Q1Q 2022 were 16.6% higher than in 1Q 2021, were $0.937 comparedconsistent with the increase in Net Income because diluted shares used to $0.359 in 2Q 2020, a 161.3% increase. US GAAP diluted EPS in 1H 2021 were $1.765 compared to $1.207 in 1H 2020, a 46.2% increase. Excluding the “one-time” income tax provision increases due to the DTL adjustments, non-US GAAP diluted EPS in 2Q 2021 were $1.044 compared to $0.420 in 2Q 2020, a 148.5% increase, and non-US GAAP diluted EPS in 1H 2021 were $1.871 compared to $1.268 in 1H 2020, a 47.6% increase. In either case, the increases incalculate EPS were substantial as a result of the improvement in operating results.only slightly higher. Diluted shares were 3,655,3193,664,915 in 2Q 20211Q 2022 compared to 3,658,6263,655,256 in 2Q 2020.1Q 2021.  The lowerslightly higher diluted shares in 2Q 20211Q 2022 were the result of shares repurchasedemployee option exercises during 2020the previous four calendar quarters offset by employee options exercised, and a slightly lower dilution factor for unexercised options. The number of shares added as a dilution factor in 1Q 2022 was 10,125 compared to 11,168 in 1Q 2021.

Outstanding shares at the end of 1Q 2022 were 3,654,987 compared to 3,654,737 at the end of calendar year 2021. The difference was due to employee option exercises during 1Q 2022. Outstanding shares were 3,645,760 at the end of 1Q 2021. The number of shares used for calculating EPS was higher than ending shares because of a time-weighted calculation of average outstanding shares plus dilution from unexercised employee and director options.  Outstanding shares at the end of 2Q 2021 were 3,645,798 compared to 3,643,035 at the end of calendar year 2020. The difference was due to 2,763 shares in employee option exercises during 1H 2021. For comparison, outstanding shares were 3,642,946 at the end of 2Q 2020. The total number of outstanding unexercised employee and outside director options at June 30, 2021March 31, 2022 was 63,87451,283 at an average exercise price of $68.38,$69.17, including shares awarded but not yet vested.  This compares to 76,62551,858 unexercised option shares at the end of 2Q 20202021 at an average exercise price of $64.72/$69.24/ share, including shares awarded but not vested. No options were awarded in 1Q 2022 or in all of calendar year 2021.

The number of shares added asUTMD did not pay a dilution factor in 2Q 2021 was 9,526 compared to 16,040 in 2Q 2020. The number of shares added as a dilution factor in 1H 2021 was 10,569 compared to 15,342 in 1H 2020. In March 2020, 26,300 option shares were awarded to 48 employees at an exercise price of $77.05 per share. No options have been awarded to date in 2021.  UTMD paid $1,039 ($0.285/share) in dividendscash dividend to stockholders in 2Q1Q 2022 because the special $7,309 ($2.00/share) dividend, which was declared in 4Q 2021, compared to $1,035 ($0.280/ share)was paid in 2Q 2020. DividendsDecember before the end of the 2021 calendar year instead of in January 2022. In 1Q 2021, a $1,038 ($0.285/ share) dividend, which was declared in 4Q 2020, was paid to stockholders during 2Q 2021 were 27% of non-US GAAP Net Income. UTMD paid $2,077 ($0.285/share) in dividends to stockholders in 1H 2021 compared to $2,077 ($0.280/ share) paid in 1H 2020. The increase in the per share dividend was offset by share repurchases. Dividends paid to stockholders during 1H 2021 were 30% of non-US GAAP Net Income.stockholders.    

In March 2020,During 1Q 2022 and all of calendar year 2021, UTMD repurchased 80,000 ofdid not repurchase its shares in the open market at $80.32/ share. In September 2020, UTMD repurchased 7,000 shares at $78.67/ share.  No shares have been repurchased to date in 2021.shares. The Company retains the strong desire and financial ability for repurchasing its shares at a price it believes is attractive for remaining stockholders. UTMD’s closing share price at the end of 2Q 20211Q 2022 was $85.04,$89.86, down 10% from the closing price of $86.60 at the end of 1Q 2021 despite an increase in cash of $.95/ outstanding share and an increase in stockholders’ equity of $.68/ share during the quarter. The 2Q 2021 ending share price was up less than 1% from the $84.30$100.00 closing price at the end of 2020.2021.  The closing share price at the end of 2Q 20201Q 2021 was $88.62.$86.60.

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i) Return on Equity (ROE) 

ROE is the portion of net incomeNet Income retained by UTMD to internally finance its growth, divided by the average accumulated stockholders’ equityStockholders’ Equity for the applicable time period. Annualized ROE (using non-GAAP net income and before(before stockholder dividends) in 1H1Q 2022 was 13% and in 1Q 2021 was 13% compared to 10% in 1H 2020.12%.  The higher ROE in 1H 20211Q 2022 was due to the17% higher 1H 2021 net income, despite being dilutedNet Income divided by 4% higher Stockholder’s Equity as a result of build-up of cash.average Stockholders’ Equity. Targeting a high ROE of 20% remains a key financial objective for UTMD management.  ROE can be increased by increasing net income, Net Income, and/or by reducing stockholders’ equityStockholders’ Equity by paying cash dividends to stockholders or by repurchasing shares.   

Liquidity and Capital Resources

j)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 $10,225$5,046 in 1H 20211Q 2022 compared to $9,352$5,533 in 1H 2020.  A $8731Q 2021.  Net Income provided $511 more to cash in 1Q 2022 than in 1Q 2021.  Other differences in cash provided during the two periods were a $643 higher increase in operating cash was due toaccounts payable and a $1,998$157 lower increase in US GAAP Net Income, plus working capital change differences. The most significant working capital change differences included 1) a $489accrued expenses, offset by an $809 increase in accounts receivable compared to a $862 decrease in 1H 2020, 2) only a $75 decrease in inventories compared to $387a $207 decrease in 1H 2020, 3)1Q 2021 and a $398$521 greater increase in trade accounts payable compared to a $528 decrease in 1H 2020, and 4) just a $34 increase in accrued expenses compared to a $386 increase in 1H 2020.receivable.