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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, 2022: 3,624,932.10, 2023: 3,629,525. 

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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, 2021.2022.  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, 20222023 and December 31, 20212022 consisted of the following:

(4) Stock-Based Compensation. At June 30, 2022,2023, 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 June 30, 20222023 and 2021,2022, the Company recognized $40$50 and $41,$40, respectively, in stock based compensation cost.  In the six months ended June 30, 20222023 and 2021,2022, the Company recognized $83$100 and $82,$83, 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, 20212022 or June 30, 2022.2023.

(6) Global 2Q 20222023 revenues (USD) by product category:

Global 1H 20222023 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® 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 1.33 year4-month life as of June 30, 20222023 of the prior CSI distribution agreement with Femcare.

(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, 2022.2023.

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, 20212022 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 threethree- or six monthsix-month period in comparison with a previous threethree- or six monthsix-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; AUD = Australia Dollars; £ or GBP = UK Pound Sterling; CAD = Canadian Dollars; and € or EUR = Euros.  

Analysis of Results of Operations

a)  Overview 

Income statement results in 2Qsecond calendar quarter (2Q) and 1H 2022first half (1H) 2023 compared to the same periods of 20212022 were as follows:

Consolidated total 1H 2023 revenues were only $366 lower compared to 1H 2022 despite $630 lower biopharmaceutical OEM sales post COVID-pandemic, which was anticipated at the beginning of the year. Despite the lower sales, and combined with continued supply chain disruption challenges, UTMD’s 1H Gross Profit margin (GPM) improved, yielding total Gross Profit almost the same for the first half of the year. Operating Income, however, declined $715 as a result of unusual litigation expenses related to yet unresolved Filshie clip product liability claims in the U.S. However, because UTMD realized $1,236 higher interest income on its cash balances, Net Income for 1H 2023 was up $776 compared to 1H 2022.

Profit margins in 2Q and 1H 2023 compared to 2Q and 1H 2022 follow:

The comparisonslower 2Q consolidated revenues were primarily attributable to a decline in sales to UTMD’s biopharmaceutical OEM customer, although the Company was also not able to meet certain direct U.S. demand due to lack of 2Qraw materials and third-party sterilization capacity constraints. Half of the lower 1H 2022 resultsrevenues resulted from a stronger USD when converting foreign currency sales to USD. UTMD was able to achieve its targeted GPM with the resultshelp of recent price increases. The dilution in Operating Income margin was due to $463 higher 1H 2023 litigation costs which are included in Operating Expense per US GAAP. However, interest income included in 1H $1,278 higher non-operating income more than offset the same periods of 2021, according to U.S. Generally Accepted Accounting Principles (US GAAP), were affected by a long term deferred tax liability increase on the balance of Femcare intangible assets (the amortization of which is not tax-deductiblelitigation costs, and allowed an expansion in the UK)Income Before Tax. The additional expansion 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 was 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, thea 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 $390 additionalestimated income tax provision adjustment in 2021, increased 7.5%rate and 7.7% respectively infewer diluted shares due to share repurchases during 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% respectively 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 2021.2022. The consolidated average income tax rates (income tax provision divided by EarningsIncome 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 of 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, 20222023 Balance Sheet continued strong, with no debt. Ending Cash and Investments were $66.2$84.6 million on June 30, 20222023 compared to $61.0$75.1 million on December 31, 2021.2022.  The June 30, 20222023 cash balance resulted after paying $1.1$2.1 million in cash dividends to stockholders, increasing non-cash working capital by $0.1 million (including inventories by $1.3 million) and repurchasing $2.5making $0.4 million in UTMD stockcapital expenditures during 2Q 2022. During the last twelve months (TTM) since June 30, 2021, UTMD has returned $12,943 to stockholders in the form1H 2023.  

Table of cash dividends and UTMD share repurchases.Contents

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 2Q 20222023 compared to the end of calendar year 20212022 and the end of 2Q 2021 were2022 follow:

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 accepts orders directly from and ships directly to end user medical 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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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 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.  

2Q 20222023 Sales

Total consolidated 2Q 20222023 UTMD worldwide (WW) sales in USD terms were $824$562 (4.2%) lower than in 2Q 2022. In 2Q 2023, OUS sales growth continued to outperform domestic sales growth. In 2Q 2023 compared to 2Q 2022, OUS sales were $250 (+6.5%4.5%) higher and U.S. domestic sales were $812 (10.4%) lower.  $445 of the $562 lower total 2Q sales were sales of pressure monitoring devices and accessories to UTMD’s largest OEM customer, shipped from both the U.S. and Ireland.  WW 2Q Filshie device sales were $94 (+3.1%) higher.

The portion of OUS sales invoiced in foreign currencies in USD terms were 33% of total WW consolidated 2Q 2023 sales compared to 29% in 2Q 2022. An average lower USD foreign currency exchange (FX) rate added $35 (+0.3%) for 2Q sales invoiced in foreign currencies. Actually, a stronger EUR by itself added $70.  The GBP was about the same, and both the CAD and AUD were weaker.  FX rates for income statement purposes are transaction-weighted averages. The average FX rates from the applicable foreign currency to USD during 2Q 2023 and 2Q 2022 for revenue purposes follow:  

The $35 weighted average favorable impact on 2Q 2023 foreign currency OUS sales was 0.8%.  In constant currency terms, foreign currency sales in 2Q 2023 were 3.8% 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 of 2021.2022. “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. With a weaker USD in converting 2Q EUR foreign currency sales, WW constant currency sales were $597 lower (4.4%) than in 2Q 2022, which was the second highest sales quarter of 2022.

OverallTotal OUS sales in 2Q 2022 U.S. domestic sales2023 were 2.4% lower and outside the U.S. (OUS) sales were 22.2% higher, despite an FX rate $456 (10.6%) negative impact on$5,849 compared to $5,599 in 2Q 2022. OUS sales invoiced in foreign currencies. In other words,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 2022 constant currency2023 sales in USD terms (including the impact of FX rate differences) were 13% higher in Ireland with the EUR FX rate up about 3%, 18% lower in Canada with the CAD FX rate down 5%, 10% higher in the UK with the GBP FX rate about the same, 19% lower in Australia/New Zealand with the AUD FX rate down 7%, and 3% higher in France with the EUR FX rate up 3%. USD-denominated sales to OUS salesdistributors were 32.2%8% higher in 2Q 2023 than in 2Q 2021. In 2021, U.S. domestic 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.2022.

Domestic U.S. sales in 2Q 20222023 were $7,829$7,017 compared to $8,023$7,829 in 2Q 2021.2022.  Domestic sales are invoiced in USD and not subject to FX rate fluctuations. The components of domestic sales include 1) “direct non-Filshie device sales” of UTMD’s medical devices to user facilities (and med/surg stocking distributors for hospitals), 2) “OEM sales” of components and other products manufactured by UTMD for other medical device and non-medical device companies, and 3) “domestic 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 in the U.S.  Direct non-Filshie device sales, representing 51%52% of total domestic sales, were $266 (+7.1%$326 (8.1%) higherlower in 2Q 20222023 than in 2Q 2021.2022. Direct U.S. sales, particularly for NICU devices, were hindered by continuing supply chain disruption on the availability of raw materials and a lack of third party sterilization capacity. Domestic OEM sales, representing 34%31% of total domestic sales, were $16 (0.6%$525 (19.6%) lower. Domestic Filshie device sales, representing 15%17% of total domestic sales, were $444 (27.9%$38 (+3.3%) lowerhigher in 2Q 20222023 compared to 2Q 2021.2022.

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1H 2023 Sales

Total consolidated 1H 2023 UTMD WW sales in USD terms were $366 (1.4%) lower than in 1H 2022. Because an average stronger USD reduced 1H foreign currency sales by $188 (0.7%), constant currency 1H 2023 consolidated total sales were just $178 (0.7%) lower. Combined sales of pressure monitoring devices and accessories to UTMD’s largest OEM customer, shipped from the U.S. and Ireland were $630 lower in 1H 2023 compared to 1H 2022, more than accounting for the lower total sales. WW 1H 2023 Filshie device sales were $407 (+6.7%) higher.  

In 1H 2023, OUS sales growth continued to outperform domestic sales growth. In 1H 2023 compared to 1H 2022, OUS sales were $1,245 (+12.5%) higher and U.S. domestic sales were $1,611 (10.2%) lower.

Total OUS sales in 2Q 20221H 2023 were $5,599$11,184 compared to $4,581$9,938 in 2Q 2021.1H 2022. The increase in USD-denominated OUS sales is understated in constant currency terms.  The stronger USD subtracted $456 from 2Q 2022portion of OUS sales invoiced in GBP, EUR, AUD and CAD currencies.foreign currencies in USD terms were 31% of total WW consolidated 1H 2023 sales compared to 26% in 1H 2022. FX rates for income statement purposes are transaction-weighted averages. The average FX rates from the applicable foreign currency to USD during 2Q1H 2023 and 1H 2022 and 2Q 2021 for revenue purposes follow:  

The weighted average unfavorable impact on 2Q 2022 foreign currency OUS sales was 10.6%.  In constant currency terms, foreign currency sales in 2Q 2022 were 32.2% higher than in 2Q 2021. The portion of OUS sales invoiced in foreign currencies in USD terms were 29% of total consolidated 2Q 2022 sales compared to 27% in 2Q 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 OUS 2Q 2022 sales in USD terms (including the negative impact of FX rate differences) were 11% lower in Ireland with the EUR FX rate down 12%, 1% lower in Canada with the CAD FX rate down 3%, about the same in the UK with the GBP FX rate down 10%, 23% lower in Australia/New Zealand with the AUD FX rate down 7%, and 15% higher in France with the EUR FX rate down 12%. Sales to OUS distributors were 41% higher in 2Q 2022 than in 2Q 2021.

1H 2022 Sales

Total consolidated 1H 2022 UTMD WW sales were $2,184 (+9.3%) higher than in 1H 2021. Constant currency sales were $2,792 (+11.8%) higher.  U.S. domestic sales were 6.8% higher and OUS sales were 13.4% higher in 1H 2022 compared to 1H 2021. In constant currency terms, 1H 2022 OUS sales were up 20.4%.  

Domestic U.S. sales in 1H 2022 were $15,813 compared to $14,805 in 1H 2021.  Direct non-Filshie device sales, representing 51% of total domestic sales, were $859 (+12.0%) higher in 1H 2022 than in 1H 2021, led by an increase in domestic neonatal device sales. OEM sales, representing 34% of total domestic sales, were $767 (+16.7%) higher.  Domestic Filshie device sales, representing 15% of total domestic sales, were $618 (20.1%) lower in 1H 2022 compared to 1H 2021.

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OUS sales in 1H 2022 were $9,938 compared to $8,762 in 1H 2021. The increase in USD-denominated OUS sales is understated in constant currency terms.  The stronger USD subtracted $608 from 1H 2022 OUS sales invoiced in GBP, EUR, AUD and CAD currencies. The transaction-weighted average FX rates from the applicable foreign currency to USD during 1H 2022 and 1H 2021 for revenue purposes follow:  

The weighted-average FX rate negative impact on 1H 20222023 foreign currency OUS sales was 8.3%2.4%. In constant currency terms, foreign currency sales in 1H 20222023 were 20.4%18.2% higher than in 1H 2021. The portion of2022.  In constant currency terms, 1H 2023 OUS total sales invoiced in foreign currencies in USD terms were 26% of total consolidated 1H 2022 sales compared to 27% in 1H 2021. up 14.4%.

Direct to end-user OUS 1H 20222023 sales in actual USD terms (including the impact of FX rate differences) were 5% higherabout the same in Ireland with athe EUR FX rate also about the same, 10% lower EUR, 8% lower in Canada with a 2% lowerthe CAD 3% lower in France with a 10% lower EUR, 23%FX rate down 6%, 24% higher in the UK with a 7% lowerthe GBP and 28%FX rate down 4%, 11% lower in Australia/New Zealand with a 7% lower AUD.  Salesthe AUD FX rate down 6%, and 10% higher in France with the EUR FX rate about the same as in 1H 2022. USD-denominated sales to OUS distributors were 24%15% higher in 1H 20222023 than in 1H 2021.2022.

Domestic U.S. sales in 1H 2023 were $14,202 compared to $15,813 in 1H 2022. Direct non-Filshie device sales, representing 51% of total domestic sales, were $698 (8.7%) lower in 1H 2023 than in 1H 2022, led by a $567 decline in domestic neonatal device sales due to continued supply chain disruption. Domestic OEM sales, representing 32% of total domestic sales, were $900 (16.8%) lower.  Domestic Filshie device sales, representing 17% of total domestic sales, were $13 (0.5%) lower in 1H 2023 compared to 1H 2022.

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

Global revenues by product category:

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OUS revenues by product category:

* includes assemblies and molded components sold to OEM customers. 

Looking forward to the 2H remainder of 2023, in view of ongoing lack of input from its largest OEM customer, UTMD continues to be assembly labor limited inanticipate lower biopharmaceutical manufacturing pressure control device sales, now likely yielding full year revenues closer to the U.S., in additionlow end of UTMD’s $50 to continuing supply chain disruption worldwide for timely providing raw materials needed in manufacturing operations.  Also, a continued strengthening$52 million beginning 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 duplicate its 1H 2022 revenues in the 2H, sales for the 2022 year would be upprojection, or about 5% lower compared to the 2021 year.2022 revenues.

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c)  Gross Profit  (GP) 

GPGross Profit results from subtracting the cost of goods sold (CGS), comprised of costs of production, manufacturing engineering, depreciation of equipment, maintenance and repairs, quality assurance including regulatory compliance, and purchasing materials including freight for receiving materials from suppliers. As expected, despite dilution ofsuppliers, from revenues. CGS is divided into three categories: direct labor, raw materials and manufacturing overhead (MOH).  Direct labor and raw materials are predominantly variable costs, i.e. vary directly with revenues.  MOH contains predominantly fixed overhead costs from higher sales,relative to the 2QCompany’s infrastructure, for example, supervision and 1H significant inflationary increases in UTMD’s variable manufacturing costs squeezed UTMD’s GP Margin (GPM). engineering personnel.

UTMD’s 2Q 2022 GP2023 Gross Profit was $365 (+4.7%$412 (5.1%) higherlower than in 2Q 2021. UTMD’s2022 due to a lower GPM on 4.2% lower sales. The 2Q 2023 GPM was 60.1% compared to 60.7% in 2Q 2022. 1H 20222023 GP was $951 (+6.5%just $102 (0.7%) higherlower than in 1H 2021.  Although revenue2022, although sales were 1.4% lower, because UTMD’s GPM was up morehigher in 1H 2023 than GP in both 1Q and 1H periods, the resulting lower2022. The 1H 2023 GPM was 61.4% compared to 60.9% in 1H 2022.  UTMD’s 2023 GPMs remained consistent with UTMD’s long termlong-term profitability goals.  Incremental direct labor

Higher MOH costs increased significantlywith lower sales was the primary reason for the 2Q 2023 lower GPM, as a result of competitionadding production supervision, engineering and management personnel, in addition to two cost-of-living increases for a limited numberall manufacturing employees since the end 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.2Q 2022.  Incoming freight costs stabilized.  Direct labor productivity was consistent with past periods of time, despite the cost-of-living increases due to receiveprice increases. Purchases of higher quantities of 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 manufacturinghelped keep incremental raw material costs 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.under relative control.  

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d)  Operating Income  

Operating Income results from subtracting Operating Expenses (OE) from GP. After subtracting OE from higher 2Q and 1H 2022 GP,Gross Profit.  Operating Income in 2Q 2022 was $5,057 compared to $4,765 in 2Q 2021, an increase of 6.1%, representing a healthy Operating Income Margin (Operating Income as a percentage of sales) of 37.7%.  Operating Income in 1H 2022 was $9,579 compared to $8,652 in 1H 2021, an increase of 10.7%, representing an Operating Income Margin of 37.2%.  The increase in Operating Income was almost 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 of a stronger USD (i.e. lower FX rates for the EUR, GBP, AUD and CAD expenses).

OEExpenses are comprised of Sales and Marketing (S&M) expenses, General and Administrative (G&A) expenses and Product Development (R&D) expenses.

Operating Income in 2Q 2023 of $4,425 was $632 (12.5%) lower compared to 2Q 2022 Operating Income of $5,057.  The $632 lower Operating Income can be explained by $412 lower Gross Profit combined with $115 higher litigation expense (captured in the G&A Operating Expense category) and $125 higher salaries included in WW Operating Expense categories (including payroll taxes and medical plan expense) for about the same number of employed people as in 2Q 2022. UTMD’s 2Q 2023 Operating Income Margin (Operating Income as a percentage of sales) remained a healthy 34.4%.

Operating Income in 1H 2023 was $8,864 compared to $9,579 in 1H 2022, a decrease of $715 (7.5%), representing a healthy 1H 2023 Operating Income margin of 34.9%.  The decrease in 1H 2023 Operating Income can be explained by $102 lower Gross Profit combined with $463 higher litigation expense and $207 higher salaries included in WW Operating Expense categories for about the same number of employed people as in 1H 2022.  The higher salaries were from cost-of-living adjustments necessary to mitigate high inflation.

The following table summarizes OEOperating Expense in 2Q and 1H 20222023 compared to the same periods in 20212022 by OEOperating Expense (OE) category:

AAn average stronger USD helped decreasereduce foreign currency OEOperating Expense when converted to USD by $100$4 in 2Q 20222023 and $135$85 in 1H 2022.2023. The following table summarizes “constant currency” OEOperating Expense in 2Q and 1H 20222023 compared to the same periods in 20212022 by OEOperating Expense category:

OUS OE when converted to USD were decreased 10% in 2Q 2022 and 7% in 1H 22 by the FX rate change. Constant currency 2Q 2022 OE were 6% higher than in 2Q 2021, and 3% higher in 1H 2022 than in 1H 2021. In other words, the FX rate change which decreased foreign OE in USD terms almost offset the higher G&A expenses in the U.S.

The change in FX rates decreased 2Q 2022 OUS S&M expenses by $9, and 1H 2022 OUS S&M expense by $14. The lower constant currency S&M expenses were due primarily to a reductiondominate UTMD’s Operating Expenses, largely because of outside sales representatives in the UK.   

A segmentation of USD-denominated G&A expenses by subsidiary location follows. Note that over 60% of G&A expenses were non-cash expenses from the amortization of IIAIdentifiable Intangible Assets (IIA) associated with the Filshie Clip System:System, which were about 57% of G&A expenses in 2023.  A segmentation of USD-denominated G&A Operating Expenses by subsidiary follows:

OUS G&A expensesOperating Expenses were $802 in 2Q 2023 compared to $804 in 2Q 20222022. OUS G&A Operating Expenses were $1,599 in 1H 2023 compared to $871$1,635 in 1H 2022. A stronger USD reduced OUS G&A Operating Expenses by$2 in 2Q 2021. OUS G&A expenses were $1,6342023 and by $76 in 1H 2022 compared to $1,750 in 1H 2021.2023. The table below identifies “constant currency” OUS G&A expensesOperating Expenses for 2Q and 1H 20222023 compared to the same periods in 2021:2022:

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