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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 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 11,November 9, 2022: 3,624,932.3,627,583. 

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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 K10-K for the year ended December 31, 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 other 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 JuneSeptember 30, 2022, and December 31, 2021, consisted of the following:

(4) Stock-Based Compensation. At JuneSeptember 30, 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.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 JuneSeptember 30, 2022, and 2021, the Company recognized $40$38 and $41, respectively, in stock based compensation cost.  In the sixnine months ended JuneSeptember 30, 2022, and 2021, the Company recognized $83$121 and $82,$123, 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, 2021, or JuneSeptember 30, 2022.

(6) Global 2Q3Q 2022 revenues (USD) by product category:

Global 1H9M 2022 revenues (USD) by product category:

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(7) Distribution Agreement Purchase. UTMD completed the purchase of exclusive U.S. distribution rights for the Filshie®Filshie Clip System from CooperSurgical, Inc. (CSI) on February 1, 2019. The $21,000 purchase price represented an identifiable intangible asset which is being straight-line amortized and recognized as part of G&A expenses over a remaining 1.331.08 year life as of JuneSeptember 30, 2022 of the prior CSI distribution agreement with Femcare.Femcare Ltd.

(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,at the end of 3rd quarter 2022.

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

(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, 2021, provides a detailed description of products, technologies, markets, regulatory issues, business initiatives, resources and business risks, among other details, and should be read in conjunction with this report. Because of the relatively short span of time, results for any given three or six month period in comparison with a previous three or six month period may not be indicative of comparative results for the year as a whole.  

Currency amounts in the report are in thousands, except per share amounts or where otherwise noted.  Currencies in this report are denoted as $ or USD = U.S. Dollars; A$ or AUD = Australia Dollars; £ or GBP = UK Pound Sterling; C$ or CAD = Canadian Dollars; and € or EUR = Euros.  

Analysis of Results of Operations

a)a)  Overview  

Income statement results in 2Q3Q and 1H9M 2022 compared to the same periods of 2021 were as follows:

Worldwide consolidated revenues were higher for all four major product categories in 3Q 2022 compared to 3Q 2021, despite a much stronger USD.  The comparisonssame was true for 9M 2022, except for gynecology category sales which were less than 1% lower than in 9M 2021.  Sales invoiced in foreign currencies represented 19% of 2Qtotal WW consolidated 3Q 2022 sales (when expressed in USD) and 1H24% of 9M 2022 results withtotal WW consolidated sales.  

Using the resultssame foreign currency exchange (FX) rates for converting foreign currency sales into USD would have resulted in 3Q 2022 sales up 6%, and 9M 2022 sales up 10%, compared to the same periods in 2021 respectively.

UTMD profit margins in 3Q 2022 and 9M 2022 compared to the same periods in the prior year follow:

During 3Q 2022, the Company continued to realize substantial increases in manufacturing costs, highlighted by incoming freight on raw materials which doubled compared to 2021.  Part of the large increase in freight costs is due to UTMD’s decision to purchase larger quantities of raw materials in order to hedge against continuing high cost inflation, minimize risk of disruption from unpredictable supplier performance and gain available quantity discounts.  Thankfully, UTMD’s cash position supports this sort of longer-term decision.

Although UTMD has lost almost no production capacity in 2022 as a result of COVID-19 infections in its workforce, the effect of government policies and spending during the pandemic which resulted in limited willing workers continues to linger. The war in Ukraine has had no discernible direct impact on UTMD or its subsidiaries.

Although UTMD’s gross profit margin has been squeezed, the same 38% operating income margin in 9M 2022 as in 9M 2021 accordingsuggests that management has been able to respond to the challenge of the negative headwinds. In this instance, a stronger USD helped by reducing foreign currency operating expenses in USD terms, including the GBP amortization of Identifiable Intangible Assets (IIA). The unfortunate increase in UTMD’s litigation costs, which are part of General and Administrative (G&A) operating expenses, has been offset by UTMD’s inability in 2022 to hire replacements for departed G&A employees.

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Income before tax (EBT) increased more than operating income increased as a result of higher interest rates on higher average cash balances as well as higher rent income in Ireland from renting underutilized warehouse space.  The increase in 9M 2022 Net Income per U.S. Generally Accepted Accounting Principles (US GAAP), were affected by a long term deferred tax liability increase on the balance was further leveraged because of Femcare intangible assets (the amortization of which is not tax-deductible in the UK) in 2Q 2021.  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 2021 income tax provisions provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results in 2022 compared to 2021. Please note that the non-US GAAP exclusion of tax provision adjustments only affects Net Income and Earnings Per Diluted Share (EPS), as follows:

The non-US GAAP comparisons of Net Income and EPS with the prior year’s same periods were consistent with the Income Before Tax comparisons.  Income Before Tax obviously is not affected by income tax provisions.

Consolidated USD sales were 6.5% higher in 2Q 2022 and 9.3% higher in 1H 2022 higher compared to the same periods in 2021, despite the fact that sales invoiced in foreign currencies in 2022 were hindered by a stronger USD compared to other currencies. An unfavorable foreign currency exchange (FX) rate impact decreased total consolidated 2Q 2022 USD sales by 3.3% ($456) and 1H 2022 sales by 2.3% ($608). Sales invoiced in foreign currencies represented 29% of total consolidated sales (when expressed in USD) during 2Q 2022, and 26% during 1H 2022.

Sales in all product categories, except for sales of the Filshie Clip System which declined in the U.S., were up in 2Q and 1H 2022 compared to the same periods in 2021.

U.S. domestic sales in 2Q 2022 were 2.4% lower than in 2Q 2021, and 6.8% higher in 1H 2022 than in 1H 2021.  Sales in 2Q 2022 to customers outside the U.S. (OUS) were 22.2% higher in USD terms, but 32.2% higher using the same FX rates as in 2Q 2021 (“constant currency”).   Sales in 1H 2022 to OUS customers were 13.4% higher in USD terms, but 20.4% higher in constant currency.  

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Gross profits (GP) increased less than revenues primarily due to inflation in the variable costs of manufacturing, despite better absorption of fixed manufacturing overhead costs with higher sales.  On the Operating Income line, the lower GP margins (GP divided by sales) in both 2Q and 1H periods were offset by the impact of a stronger USD on the foreign currency expenses of UTMD’s overseas subsidiaries, as well as better absorption of USD fixed identifiable intangible asset (IIA) amortization expenses which resulted from UTMD’s February 2019 acquisition of CooperSurgical Inc’s (CSI’s) U.S. exclusive distribution rights for the Filshie Clip System.  Operating Income represented 37.7% of sales in 2Q 2022 compared to 37.8% of sales in 2Q 2021, and 37.2% of sales in 1H 2022 compared to 36.7% of sales in 1H 2021. UTMD was able to maintain consistent Operating Income margins despite the lower GPMs and litigation expenses which it did not have in the prior year.  

Net Income and Earnings per Diluted Share (EPS) per US GAAP increased 19.7% and 19.9% respectively in 2Q 2022 compared to 2Q 2021. Net Income and EPS per US GAAP increased 18.4% and 18.3% respectively in 1H 2022 compared to 1H 2021.   Non-US GAAP Net Income and EPS, which ignores the $390an additional income tax provision adjustmentaccrued in 2021 increased 7.5% and 7.7% respectivelywhich was not repeated in 2Q 2022, compared to a 2Q 2021 normal non-US GAAP operating result.  Non-US GAAP Net Income and EPS increased 11.7% and 11.6% respectivelyas further explained below. Earnings Per Share benefited in 1H 2022 compared to a 1H 2021 non-US GAAP operating result.  The non-US GAAP increases in operating income were greater than the increases in sales as a result of $82 higher non-operating income in 2Q 2022 compared to 2Q 2021, and $79 higher non-operating income in 1H 2022 compared to 1H 2021. The consolidated average income tax rates (income tax provision divided by Earnings Before Taxes) follow:

The impact of the 2Q 2021 deferred tax adjustment is apparent when comparing the US GAAP income tax provision rates with the non-US GAAP rates.

The percentage increase in 2Q 2022 EPS compared to 2Q 2021 EPS was slightly higher than the increase in Net Income because ofaddition from 30,105 UTMD shares repurchased in 2Q 2022.

UTMD profit margins in 2Q 2022 and 1H 2022 compared to 2Q 2021 and 1H 2021 follow:

UTMD’s June 30, 2022 Balance Sheet continued strong, with no debt. Ending Cash and Investments were $66.2 million on June 30, 2022 compared to $61.0 million on December 31, 2021.  The June 30, 2022 cash balance resulted after paying $1.1 million in cash dividends to stockholders and repurchasing $2.5 million in UTMD stock during 2Q 2022. During the last twelve months (TTM) since June 30, 2021, UTMD has returned $12,943 to stockholders in the form of cash dividends and UTMD share repurchases.

Foreign currency exchange (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 2Q3Q 2022 compared to the end of calendar year 2021 and the end of 2Q3Q 2021 werefollow:

UTMD’s September 30, 2022 Balance Sheet, in the absence of debt, continued to strengthen with total assets up $2.8 million from the end of 2021. Ending Cash and Investments were $69.5 million on September 30, 2022 compared to $61.0 million on December 31, 2021, after paying $2.1 million in cash dividends to stockholders, purchasing $2.5 million in UTMD stock and increasing inventories $1.7 million during 9M 2022.  UTMD’s cash balance increased $2.35/ outstanding share at September 30, 2022 from the end of 2021 with a 12% increase in US GAAP Net Income, while the stock price declined $14.69/ share. Stockholders’ Equity (SE) increased $1.0 million in the nine-month period from December 31, 2021 despite the fact that $4.6 million in dividends and share repurchases reduced SE.

b)b)  Revenues (sales) 

Terms of sale are established in advance of UTMD’s acceptance of customer orders.  InFor the U.S., Ireland, UK, France, Canada, Australia and New Zealand, UTMD generally accepts orders directly from and ships 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. About 14% of UTMD’s domestic end user sales, excluding Filshie device sales, go through third party med/surg distributors which contract separately with clinical facilities to provide purchasing, storage and scheduled delivery functions for the applicable facility.  UTMD’s T&C of Sale to end user facilities are substantially the same for customers 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 substantiallyoutside the same, except that prices are generally quoted prior to acceptance of each order.U.S. (OUS).

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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.year or less. 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.  

2QTotal UTMD WW consolidated 3Q 2022 Sales

Total consolidated 2Q 2022 UTMD worldwide (WW) sales were $824$383 (+6.5%3.0%) higher than in 2Q 2021. Without the negative impact of a stronger USD in converting foreign currency sales, WW constant currency sales were $1,280 higher (+10.2%) than in 2Q 2021, which was the second highest sales quarter of3Q 2021. “Constant currency” sales means exchanging foreign currency sales into USD-denominated sales at the same FX rate as was in the previous period of time being compared.

Overall 2Q WW 3Q 2022 constant currency sales were $737 (+5.9%) higher. U.S. domestic sales were 2.4% lower11.2% higher (obviously without any FX impact), and outside the U.S. (OUS) sales were 22.2% higher, despite an FX rate $456 (10.6%) negative impact on sales invoiced in foreign currencies. In other words, 2Q 2022 constant currency OUS sales were 32.2% higher than10.0% lower. Without the harm of a stronger USD in 2Q 2021. In 2021, U.S. domesticconverting foreign currency sales, recovered from the COVID-19 pandemic faster than OUS sales.  In 2022, it appears that OUS sales are catching up with the U.S. recovery.were just 2.7% lower.   

Domestic U.S. sales in 2Q3Q 2022 were $7,829$8,615 compared to $8,023$7,749 in 2Q3Q 2021.  Domestic sales are invoiced in USD and not subject to FX rate fluctuations. The components of domestic sales include 1) “direct non-Filshieother 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) “domestic“direct Filshie device sales”. UTMD separates domestic Filshie device sales from other medical device sales direct to medical facilities because UTMD is simply a distributor for Femcare inof their significance, and the U.S.acquisition history. Direct non-Filshieother device sales, representing 51%47% of total domestic sales, were $266$342 (+7.1%9.2%) higher in 2Q3Q 2022 than in 2Q3Q 2021. Domestic OEM sales, representing 34%35% of total domestic sales, were $16 (0.6%$591 (+24.0%) lower. Domestichigher. Direct Filshie device sales, representing 15%17% of total domestic sales, were $444 (27.9%$68 (4.4%) lower in 2Q3Q 2022 compared to 2Q3Q 2021.

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OUS sales in 2Q3Q 2022 were $5,59910.0% lower at $4,340 compared to $4,581$4,823 in 2Q3Q 2021. The increasedecrease in USD-denominated OUS sales is understated in constant currency terms.  Thewas leveraged as a result of a stronger USD which subtracted $456$354 from 2Q 2022 OUS sales that were invoiced in GBP, EUR, AUD and CAD currencies.foreign currencies in constant currency terms.  FX rates for income statement purposes are transaction-weighted averages. The averageweighted-average FX rates from the applicable foreign currency to USD during 2Q3Q 2022 and 2Q3Q 2021 for revenue purposes follow:

The weighted average unfavorable impact on 2Q3Q 2022 foreign currency OUS sales was 10.6%.12.4%, reducing reported USD sales by $354 relative to the same foreign currency sales in 3Q 2021.  In constant currency terms, foreign currency sales in 2Q3Q 2022 were 32.2% higher2.7% lower than in 2Q3Q 2021. The portion of OUS sales invoiced in foreign currencies in USD terms were 29%19.3% of total consolidated 2Q3Q 2022 sales compared to 27%26.7% in 2Q3Q 2021.

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 foreign currency OUS 2Q3Q 2022 sales in USD terms (including the negative impact of FX rate differences) were 11%4.9% lower in Ireland, with the EUR FX rate down 12%, 1%16.2% lower in Canada, with the CAD FX rate down 3%, about the same28.1% lower in France, 14.8% lower in AUS/NZ and 1.3% higher in the UK with the GBP FX rate down 10%, 23% lowerthan in Australia/New Zealand with the AUD FX rate down 7%, and 15% higher in France with the EUR FX rate down 12%.3Q 2021. Sales to OUS distributorsdistributors/ international OEM customers were 41% higher9.3% lower in 2Q3Q 2022 than in 2Q3Q 2021.

1HTotal 9M 2022 Sales

Total consolidated 1H 2022 UTMD WW consolidated sales were $2,184$2,567 (+9.3%7.1%) higher than in 1H9M 2021. Constant currency sales were $2,792$3,529 (+11.8%9.8%) higher.higher than in 9M 2021. U.S. domestic sales were 6.8%8.3% higher and OUS sales were 13.4% higher5.1% higher. Without the harm of a stronger USD in 1H 2022 compared to 1H 2021. In constantconverting foreign currency terms, 1H 2022sales, OUS sales were up 20.4%.12.2% higher..   

Domestic U.S. sales in 1H9M 2022 were $15,813$24,429 compared to $14,805$22,555 in 1H9M 2021.  Direct non-Filshieother device sales, representing 51%49% of total domestic sales, were $859$1,202 (+12.0%11.1%) higher in 1H9M 2022 than in 1H 2021, led by an increase in domestic neonatal device sales.9M 2021. OEM sales, representing 34%35% of total domestic sales, were $767$1,358 (+16.7%19.2%) higher. DomesticDirect Filshie device sales, representing 15%16% of total domestic sales, were $618 (20.1%$685 (14.8%) lower in 1H9M 2022 compared to 1H9M 2021.

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OUS sales in 1H9M 2022 were $9,9385.1% higher at $14,278 compared to $8,762$13,585 in 1H9M 2021. The increase in USD-denominated OUS sales is understated in constant currency terms.  Thewas diminished as a result of a stronger USD which subtracted $608$962 from 1H 2022 OUS sales that were invoiced in GBP, EUR, AUD and CAD currencies.foreign currencies (in constant currency terms).  FX rates for income statement purposes are transaction-weighted averages. The transaction-weighted averageweighted-average FX rates from the applicable foreign currency to USD during 1H9M 2022 and 1H9M 2021 for revenue purposes follow:

The weighted-average FX rate negativeunfavorable impact on 1H9M 2022 foreign currency OUS sales was 8.3%.9.4%, reducing reported USD sales by $962 relative to the same foreign currency sales in 9M 2021.  In constant currency terms, foreign currencyOUS sales in 1H9M 2022 were 20.4%9.8% higher than in 1H9M 2021. The portion of OUS sales invoiced in foreign currencies in USD terms were 26%was 23.9% of total consolidated 1H9M 2022 sales compared to 27%27.0% in 1H9M 2021. Direct to end-user foreign currency OUS 1H9M 2022 sales in actual USD terms were 5%1.9% higher in Ireland, with a 10% lower EUR, 8%10.9% lower in Canada, with a 2% lower CAD, 3%11.2% lower in France, with a 10% lower EUR, 23%14.4% higher in the UK with a 7% lower GBP, and 28%23.5% lower in Australia/New Zealand with a 7% lower AUD.AUS/NZ. Sales to OUS distributorsdistributors/OEM customers were 24%12.0% higher in 1H9M 2022 than in 1H9M 2021.

The volatility of FX rates for OUS sales when consolidated in USD terms continues to impact period-to-period relative financial results because of UTMD’s significant percentage of foreign currency sales.  

UTMD segments sales into the following general product categories:  gynecology/ electrosurgery, labor & delivery, neonatal critical care, and miscellaneous including blood pressure monitoring kits and accessories as well as related OEM products.

In 3Q 2022 compared to 3Q 2021, WW gynecology/ electrosurgery sales were up 3%, WW neonatal device sales were up 11%, WW labor & delivery device sales were up 2%, and WW blood pressure monitoring and related OEM product sales were up 1%.  In 9M 2022 compared to 9M 2021, WW gynecology/ electrosurgery device sales were less than 1% lower, WW labor & delivery device sales were up 3%, WW neonatal device sales were up 15% and WW blood pressure monitoring and related OEM product sales were up 16%.  The 9M 2022 increases were after losing $962 in sales from the impact of converting foreign currency sales into USD.

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

Global 3Q 2022 revenues (USD) by product category:

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OUSGlobal 9M 2022 revenues (USD) by product category:

*includes assemblies and molded components sold to OEM customers. 

UTMD continues to be assembly labor limited in the U.S., in addition to continuing supply chain disruption worldwide for timely providing raw materials needed in manufacturing operations.  Also, a continued strengthening of the USD would create a drag on improved 2H 2022 OUS foreign currency sales.  

Looking forward, without any additional price increases for UTMD devices (which is unlikely based on continuing cost increases), if UTMD is able to duplicateexpects that its 1H4Q 2022 revenues in the 2H, sales for the 2022and year would be up about 5% compared to the 2021 year.

c)  Gross Profit (GP) 

GP results from subtracting the costs of production, manufacturing engineering, depreciation of equipment, maintenance and repairs, quality assurance including regulatory compliance, and purchasing including freight for receiving materials from suppliers. As expected, despite dilution of fixed overhead costs from higher sales, the 2Q and 1H significant inflationary increases in UTMD’s variable manufacturing costs squeezed UTMD’s GP Margin (GPM). UTMD’s 2Q 2022 GP was $365 (+4.7%) higher than in 2Q 2021. UTMD’s 1H 2022 GP was $951 (+6.5%) higher than in 1H 2021.  Although revenue was up more than GP in both 1Q and 1H periods, the resulting lower GPMs remained consistent with UTMD’s long term profitability goals.  Incremental direct labor costs increased significantly as a result of competition for a limited number of people currently seeking work, and the Company’s efforts to help mitigate the negative impact of inflation on its long-term employees. UTMD also experienced double-digit percentage cost increases in raw materials costs.  Incoming freight costs to receive raw materials doubled. The growing administrative burden of compliance with regulatory requirements, particularly OUS, continued to pressure UTMD’s GPM.  Although managing the rapid rise in variable manufacturing costs2023 organic device Revenues will apparently continue to be a significant challenge for the rest of 2022, the 1H 2022 GPM helps confirm that UTMD is likely to be able to successfully manage it.improve.  

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c)Gross Profit 

Gross Profit results from subtracting the costs of manufacturing, quality assurance and receiving materials from suppliers from revenues. UTMD’s Gross Profit was $113 (+1.4%) higher in 3Q 2022 than in 3Q 2021, and $1,065 (+4.7%) higher in 9M 2022 than in 9M 2021. The percentage increases in Gross Profit were less than the percentage increases in Revenues, however, which resulted in lower Gross Profit Margins (Gross Profit divided by sales) in the table above. UTMD does not have long-term fixed price agreements. Near the end of 2021, UTMD generally increased product prices across-the-board by about 6.5%. With the exception of OEM devices unique to specific customers, UTMD has not increased product prices further in 2022, resisting additional increases in order to not participate in helping cause systemic inflation. However, UTMD retains the ability to raise prices on its specialized devices if manufacturing costs continue to increase faster than sales.  

Variable manufacturing costs, including wages, raw materials and freight, all increased by double-digit percentages during 9M 2022, much more rapidly than UTMD’s price increases. Fixed costs were diluted by higher sales. Over time, management expects that some of the 2022 cost increases will prove transient, and to be able to adjust Gross Profit Margin performance to be more consistent with UTMD’s typical Gross Profit Margins of the past.

d)Operating Income 

Operating Income results from subtracting Operating Expenses (OE) from GP. After subtracting OE from higher 2QGross Profit. Operating Expenses, comprised of sales and 1Hmarketing (S&M) expenses, product development (R&D) expenses and general and administrative (G&A) expenses, were 23.5% of sales in 3Q 2022 GP, Operating Income in 2Q 2022 was $5,057 compared to $4,76523.7% of sales in 2Q 2021, an increase3Q 2021.  Operating Expenses were 23.6% of 6.1%, representing a healthy Operating Income Margin (Operating Income as a percentage of sales) of 37.7%.  Operating Incomesales in 1H9M 2022 was $9,579 compared to $8,65225.1% of sales in 1H 2021, an increase9M 2021.  UTMD’s tight control of 10.7%, representing an Operating Income MarginExpenses is a primary financial differentiation from other companies.

Comparison of 37.2%.  The increase in(USD) consolidated Operating Income was almostExpenses:

In the same as the increase in sales despite a lower GPM and higher litigation expenses (included in G&A OE) because of two offsetting factors; 1) better absorption of fixed IIA amortization expenses (i.e. a lower percentage of sales for relatively fixed non-cash expenses), and 2) a reduction in USD-denominated foreign currency OE of foreign subsidiaries as a result ofway a stronger USD (i.e. lower FX rates forreduced consolidated USD sales in 2022, it also reduced the EUR, GBP, AUDUSD-denominated Operating Expenses of UTMD’s foreign subsidiaries by $130 in 3Q 2022 and CAD expenses).

OE are comprised of Sales and Marketing (S&M) expenses, General and Administrative (G&A) expenses and Product Development (R&D) expenses.$267 in 9M 2022. The following table summarizes OE“constant currency” Operating Expenses (this is a non-US GAAP measure that UTMD management believes provides supplemental information of interest to investors) in 2Q3Q and 1H9M 2022 compared to the same periods in 2021 by OEOperating Expense category: