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 November 9, 2022: 3,627,583.May 4, 2023: 3,628,067. 

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

(3) Inventories at September 30, 2022,March 31, 2023 and December 31, 2021,2022 consisted of the following:

(4) Stock-Based Compensation. At September 30, 2022,March 31, 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.  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 September 30,March 31, 2023 and 2022, and 2021, the Company recognized $38$50 and $41,$43, respectively, in stock based compensation cost.  In the nine months ended September 30, 2022, and 2021, the Company recognized $121 and $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, 2021,2022 or September 30, 2022.

March 31, 2023.

(6)  Global 3Q 20221Q 2023 global revenues (USD) by product category:

Global 9M 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 FilshieFilshie® 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 7 month remaining 1.08 year life, as of September 30, 2022the end of 1Q 2023, of the prior CSI distribution agreement with Femcare Ltd.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 at the end of 3rdfirst quarter 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, 2021, provides2022 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 monththree-month period in comparison with a previous three monththree-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)Overview 

Income statement results in 3Q and 9M 2022the first quarter (1Q) of 2023 compared to the same periods of 20211Q 2022 were as follows:

Worldwide consolidated revenues were higher for all four major product categoriesProfit margins in 3Q 20221Q 2023 compared to 3Q 2021, despite a much stronger USD.  The same was true for 9M1Q 2022 except for gynecology categoryfollow:

Domestic sales whichin 1Q 2023 were less than 1%10% lower, thanbut sales outside the U.S. (OUS) were up 23% in 9M 2021.  Sales invoiced in foreign currencies represented 19% of total WW consolidated 3Q 2022 sales (when expressed in USD) and 24% of 9M 2022 total WW consolidated sales.  

USD terms compared to 1Q 2022.  Using the same foreign currency exchange (FX) rates for convertingsales not invoiced in USD, i.e. in “constant currency” terms, OUS sales were up 28%. Because 28% of consolidated USD 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 2023 and 1Q 2022 follow:  

The weighted-average negative impact on foreign currency sales intowas 5.9%, reducing reported USD would have resulted in 3Q 2022 sales up 6%, and 9M 2022 sales up 10%, comparedby $223 relative to the same periodsforeign currency sales in 2021 respectively.1Q 2022.  In constant currency terms, total consolidated 1Q 2023 sales were up $420 (+3.4%).

Due mostly to better absorption of manufacturing overhead costs in Ireland and lower employee healthcare plan costs in the U.S., UTMD profit margins in 3Q 2022 and 9M 2022was able to increase its 1Q 2023 Gross Profit Margin (GPM), gross profits/sales, 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.1Q 2022.   

Although UTMD has lost almost no production capacityConsolidated OI in 1Q 2023 at $4,439 (35.5% of sales) was $84 lower than 1Q 2022 as a resultOI of COVID-19 infections in its workforce, the effect$4,522 (36.7% 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.

sales).  Although UTMD’s gross profit margin has been squeezed, the same 38% operating income margin in 9M 2022 as in 9M 2021 suggests that management has been able to respond to the challenge of the negative headwinds. In this instance,1Q 2023 Operating Income Margin (OIM) benefitted from higher sales, a higher GPM and a stronger USD helped by reducing foreign currencywhich reduced OUS operating expenses in USD terms includingby $80, it suffered more from the GBP$348 (2.8% of sales) higher litigation expenses compared to 1Q 2022.  The $1,105 per quarter straight-line amortization of Identifiable Intangible Assetsthe $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 8.8% of 1Q 2023 sales compared to 9.0% of 1Q 2022 sales. The purchase price of CSI’s remaining exclusive distribution rights was recognized as an identifiable intangible asset (IIA). The unfortunate increase which will be fully amortized in UTMD’s litigation costs,October 2023. IIA amortization expense in total, including that remaining from the 2011 Femcare acquisition, which are partcomprises a significant portion of General and& Administrative (G&A) operating expenses, has been offset bywas 12.7% of 1Q 2023 consolidated sales compared to 13.3% of 1Q 2022 consolidated sales. In other words, UTMD’s inabilityOIM excluding IIA amortization and litigation expense was 51.4% in 20221Q 2023 compared to hire replacements for departed G&A employees.

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Income before taxBefore Tax (EBT) increased more than operatingbenefitted from much higher interest income increased ason UTMD’s cash reserves.   Non-operating income (NOI) in 1Q 2023, in which interest income is captured, was $681 compared to $8 in 1Q 2022. As a result of $589 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) was further leveraged because of an additionalEBT and a lower income tax provision accruedrate due to a portion of NOI received from tax exempt interest, UTMD’s Net Income Margin (NIM) in 2021 which1Q 2023 at 33.7% was not repeatedsubstantially higher than the 28.7% NIM in 2022, as further explained below.1Q 2022.  UTMD’s consolidated income tax provision rate in 1Q 2023 was 17.7% of EBT compared to 22.0% in 1Q 2022. The result was that 1Q 2023 NI was 19.2% higher, and 1Q 2023 Earnings Per Share benefitedwere 20.2% higher, than in addition from 30,105 UTMD shares repurchased in 2Q1Q 2022.

Foreign currency exchange (FX)UTMD’s March 31, 2023 Balance Sheet, in the absence of debt, remained strong.  Ending Cash and Investments were $80.9 million on March 31, 2023 compared to $75.1 million on December 31, 2022. Stockholders’ Equity was up $3.8 million in the first three-month calendar period from December 31, 2022.  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 3Q 2022 compared to the end of calendar year 20211Q 2023 and the end of 3Q 20211Q 2022 follow:

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UTMD’s September 30, 2022 Balance Sheet, in the absenceTable 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.Contents

b)Revenues (sales) 

Terms of sale are established in advance of UTMD’s acceptance of customer orders.  ForIn the U.S., Ireland, UK, France, Canada, Australia and New Zealand, UTMD generally acceptsaccepted orders directly from and shipsshipped directly to end user clinical 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, storageSale during both 1Q 2023 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 outside the U.S. (OUS).

1Q 2022.  UTMD may have separate discounted pricing agreements with a specific clinical facility or group of affiliated facilities based on volume of purchases.  Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities, 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 or less.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 1Q 2023 UTMD WW consolidated 3Q 2022 salesrevenues (sales) were $383$197 (+3.0%1.6%) higher than in 3Q 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. WW 3Q 2022 constant1Q 2022. Constant currency sales were $737$420 (+5.9%3.4%) higher. U.S. domestic sales were 11.2% higher (obviously without any FX impact),10.0% lower and OUS sales were 10.0% lower. Without22.9% higher despite an average 5.9% stronger USD. Because of the harmrelatively short span of time, results for any given three-month period in comparison with a stronger USD in converting foreign currency sales, OUS sales were just 2.7% lower.   previous three-month period may not be indicative of comparative results for the year as a whole.

Domestic U.S. sales in 3Q 20221Q 2023 were $8,615$7,185 compared to $7,749$7,984 in 3Q 2021.  Domestic sales are invoiced in USD and not subject to FX rate fluctuations.1Q 2022.  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 $342 (+9.2%$372 (9.3%) higherlower in 3Q 20221Q 2023 than in 3Q 2021. 1Q 2022.  This was due to continuing supply chain disruption, in particular independent sterilizer capacity constraints.   

2)OEM sales, representing 35%32% of total domestic sales, were $591 (+24.0%$375 (14.0%) higher. Direct lower. U.S. sales to UTMD’s largest OEM customer which had grown rapidly in recent years were $391 lower in 1Q 2023 compared to 1Q 2022.  

3)Filshie device sales representing 17% of total domestic sales, were $68 (4.4%$51 (3.9%) lower in 3Q 20221Q 2023 compared to 3Q 2021.

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OUS sales in 3Q 20221Q 2023 were 10.0% lower at $4,340$5,335 compared to $4,823$4,339 in 3Q 2021. The decrease in USD-denominated1Q 2022. OUS sales was leveraged as a result of a stronger USD which subtracted $354 from OUS sales that were invoiced in GBP, EUR, AUD and CAD foreign currencies were reduced $223 as a result of changes in FX rates resulting from an average 5.9% stronger USD.  In other words, constant currency terms.  FX rates for income statement purposes are transaction-weighted averages.OUS sales were $5,558, which was 28.1% higher than in 1Q 2022.  The weighted-average FX rates from the applicable foreign currency to USD during 3Q 2022 and 3Q 2021 for revenue purposes follow:

The weighted average unfavorable impact on 3Q 2022 foreign currency OUS sales in 1Q 2023 were $3,558, which was 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 3Q 2022 were 2.7% lower than in 3Q 2021. The portion67% of OUS sales invoiced in foreign currencies in USD terms were 19.3%and 28% of total consolidated 3Q 2022 sales compared to 26.7% in 3Q 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 foreignsales.  Foreign currency OUS 3Q 2022 sales in USD terms were 4.9% lower in Ireland, 16.2% lower in Canada, 28.1% lower in France, 14.8% lower in AUS/NZ and 1.3% higher in the UK than in 3Q 2021. Sales to OUS distributors/ international OEM customers were 9.3% lower in 3Q 2022 than in 3Q 2021.  

Total 9M 2022 UTMD WW consolidated sales were $2,567 (+7.1%) higher than in 9M 2021. Constant currency sales were $3,529 (+9.8%) higher than in 9M 2021. U.S. domestic sales were 8.3% higher and OUS sales were 5.1% higher. Without the harm of a stronger USD in converting foreign currency sales, OUS sales were 12.2% higher..   

Domestic U.S. sales in 9M 2022 were $24,429 compared to $22,555 in 9M 2021.  Direct other device sales, representing 49% of total domestic sales, were $1,202 (+11.1%) higher in 9M 2022 than in 9M 2021. OEM sales, representing 35% of total domestic sales, were $1,358 (+19.2%) higher. Direct Filshie device sales, representing 16% of total domestic sales, were $685 (14.8%) lower in 9M 2022 compared to 9M 2021.

OUS sales in 9M1Q 2022 were 5.1% higher at $14,278 compared to $13,585 in 9M 2021. The increase in USD-denominated OUS sales$2,906, which was diminished as a result of a stronger USD which subtracted $962 from 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 weighted-average FX rates from the applicable foreign currency to USD during 9M 2022 and 9M 2021 for revenue purposes follow:

The weighted-average unfavorable impact on 9M 2022 foreign currency OUS sales was 9.4%, reducing reported USD sales by $962 relative to the same foreign currency sales in 9M 2021.  In constant currency terms, OUS sales in 9M 2022 were 9.8% higher than in 9M 2021. The portion67% of OUS sales invoiced in foreign currencies in USD terms was 23.9%and 24% of total consolidated 9M 2022 sales compared to 27.0% in 9M 2021. Direct to end-user foreign currency OUS 9M 2022 sales in USD terms were 1.9% higher in Ireland, 10.9% lower in Canada, 11.2% lower in France, 14.4% higher in the UK and 23.5% lower in AUS/NZ. Sales to OUS distributors/OEM customers were 12.0% higher in 9M 2022 than in 9M 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 consolidated sales amounts divided into general product categories for total worldwide sales and the subset of OUS sales:

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

Global 9M 2022OUS revenues (USD) by product category:

*includes molded components sold to OEM customers. 

Looking forward, UTMD expects that its 4Q 2022 and year 2023 organic device Revenues will continue to improve.  

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c)Gross Profit 

Gross Profit results from subtracting the costs of manufacturing products, including quality assurance and freight for receiving raw materials from suppliersvendors, from revenues. UTMD’s Gross Profit was $113$310 (+1.4%4.1%) higher in 3Q 20221Q 2023 than in 3Q 2021, and $1,065 (+4.7%) higher in 9M 2022 than in 9M 2021. The percentage increases in1Q 2022.  Gross Profit were lessincreased more than the percentage increasesrevenues due primarily to two favorable period-to-period differences: better absorption of manufacturing overhead costs in Revenues, however,Ireland as a result of production which resulted inincreased more than overhead costs increased, and 2) much 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 increasedhealthcare costs for U.S. employees compared to 1Q 2022 under UTMD’s self-funded plan. The Company selectively raised product prices across-the-board by about 6.5%. Withduring 1Q 2023 based on specific input costs from vendors. As another cost-of-living pay adjustment for employees becomes effective in April 2023, the exception of OEM devices uniqueCompany still expects 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 retainsmaintain its GPM for 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 moreyear as a whole consistent with UTMD’s typical Gross Profit Margins of the past.2022.  

d)Operating Income  

Operating Income results from subtracting Operating Expenses from Gross Profit. Operating Expenses are comprised of G&A (G&A) expenses, sales and marketing (S&M) expenses and product development (R&D) expenses. Consolidated Operating Expenses were $3,404 in 1Q 2023 (27.2% of sales) compared to $3,010 in 1Q 2022 (24.4% of sales).  Ignoring the portion of Operating Expenses that were litigation expenses and general and administrative (G&A)non-cash IIA amortization expenses, consolidated Operating Expenses in 1Q 2023 were 23.5%11.2% of consolidated sales compared to 10.6% of sales in 3Q 20221Q 2022.  A stronger USD in 1Q 2023 compared to 23.7% of sales in 3Q 2021.1Q 2022 helped Operating Income performance by reducing OUS Operating Expenses in USD terms by $80, comprised of reducing IIA amortization expense by $49 and all other OUS Operating Expenses by $31.  

Consolidated G&A expenses were 23.6%$2,873 (22.9% of salessales) in 9M 20221Q 2023 compared to 25.1%$2,551 (20.7% of sales) in 1Q 2022. G&A expenses include litigation costs which were $409 in 1Q 2023 compared to $61 in 1Q 2022. The G&A expenses in 1Q 2023 included $483 (3.9% of sales) of non-cash expense from the amortization of IIA resulting from the 2011 Femcare acquisition, which were $532 (4.3% of sales) in 1Q 2022.  The lower USD IIA amortization expense was the result of a stronger USD, as the Femcare amortization expense in GBP in 1Q 2023 was the same as in 1Q 2022. 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 8.8% of 1Q 2023 sales compared to 9.0% of 1Q 2022 sales.  Excluding the litigation and non-cash IIA amortization expenses, G&A expenses were $876 (7.0% of sales) in 9M 2021.  UTMD’s tight control1Q 2023 compared to $853 (6.9% of Operating Expenses is a primary financial differentiation fromsales) in 1Q 2022.  The change in FX rates reduced 1Q 2023 OUS G&A expenses by $74, comprised of reducing IIA amortization expense by $49 and all other companies.G&A expenses by $24.

ComparisonS&M expenses were $387 (3.1% of sales) in 1Q 2023 compared to $336 (2.7% of sales) in 1Q 2022.  The change in FX rates reduced 1Q 2023 OUS S&M expenses by $6.   

R&D expenses in 1Q 2023 were $144 (1.1% of sales) compared to $123 (1.0% of sales) in 1Q 2022.  The change in FX rates reduced 1Q 2023 OUS R&D expenses by $1.

In summary, Operating Income in 1Q 2023 was $4,439 (35.5% of sales) compared to $4,522 (36.7% of sales) in 1Q 2022.  The lower Operating Income Margin was due primarily to the $348 higher litigation expenses.   

A summary comparison of (USD) consolidated Operating Expenses:Expenses follows:

In the same wayAfter adjustment of OUS Operating Expenses for a stronger USD, reduced consolidated USD salesthe increases in 2022, it also reduced the USD-denominated Operating Expenses of UTMD’s foreign subsidiaries by $130 in 3Q 2022S&M, R&D and $267 in 9M 2022. The following table summarizes “constant currency” Operating Expenses (this is a non-US GAAP measure that UTMD management believes provides supplemental information of interestAll Other G&A expenses (excluding litigation and IIA amortization) were essentially due to investors) in 3Q and 9M 2022 compared to the same periods in 2021 by Operating Expense category:cost-of-living increases for employees.

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S&M expenses were higher in 3Q and 9M 2022 because of higher shipping costs in the U.S. The change in FX rates reduced USD-denominated 3Q 2022 OUS S&M expense by $10, and 9M 2022 OUS S&M expense by $24.

R&D expenses varied only by specific project expenses.  As almost all new product development is being carried out in the U.S., the FX rate impact on R&D expenses was negligible.    

A division of G&A expenses by location follows. G&A expenses include non-cash expenses from the amortization of Identifiable Intangible Assets (IIA) associated with the Filshie Clip System, which is also separated out below:

Over 60% of UTMD’s consolidated G&A expenses in all periods above were from the non-cash expense of amortizing IIA related to the Filshie Clip System. In other words, G&A IIA amortization expense declined to 12.1% of sales in 3Q 2022 from 13.2% of sales in 3Q 2021; and similarly declined to 12.5% of sales in 9M 2022 from 13.8% of sales in 9M 2021.  Fixed USD IIA amortization expense is diluted as a percentage of sales as Revenues increase.  The UK GBP IIA amortization expense was further diminished as a percentage of USD sales as a result of the lower USD/GBP FX rate.

U.S. Operating Expenses, “Other-US” in the table above (which does not include IIA amortization expense from the acquisition of Filshie U.S. Distribution Rights from CooperSurgical Inc in 2019) were higher as a result of $220 in litigation expenses in 3Q 2022 and $409 in 9M 2022, compared to $10 in 3Q and 9M 2021. The 2022 expenses were a result of ten product liability lawsuits regarding commonplace Filshie clip migration, set up in ten states by a single Texas law firm. In each case, UTMD has filed a motion to dismiss that is currently under consideration by each applicable Federal Court. Previously, over forty years’ span of time implanting 13 million Filshie clips in women worldwide, there was only one other clip migration lawsuit by a single plaintiff located in Canada, which case was dismissed before discovery began. UTMD remains confident in the excellent safety and effectiveness of the Filshie clip system, but unfortunately may have to continue to incur significant legal expenses until the current litigation is resolved.

OUS G&A expenses in USD terms were $745 in 3Q 2022 compared to $869 in 3Q 2021. OUS G&A expenses were $2,379 in 9M 2022 compared to $2,619 in 9M 2021. The constant currency table below shows how the stronger USD diminished OUS G&A expenses for 3Q 2022 by $120 and 9M 2022 by $243:

In summary, Operating Income in 3Q 2022 was $5,141 (39.7% of sales) compared to $5,098 (40.6% of sales) in 3Q 2021, an increase of 0.8%; and was $14,720 (38.0% of sales) in 9M 2022 compared to $13,750 (38.0% of sales) in 9M 2021, an increase of 7.1%.  In addition to the reduction of all foreign currency Operating Expenses due to a stronger USD, the lower IIA amortization expenses in the G&A category explains how UTMD was able to maintain its Operating Income Margin the same in 9M 2022 as in 9M 2021 despite litigation costs in 9M 2022 which were not present in 9M 2021.

Because of the significance of the IIA amortization expenses, and to remind stockholders of the history, the initial IIA amount of the 2011 Femcare UK purchase was £23,998.  After 11.5 years of amortization, the IIA balance is £5,505 as of the end of 3Q 2022.  For both 3Q 2022 and 3Q 2021 in GBP terms, the IIA amortization expenses were £397.  For 9M 2022 and 9M 2021, the IIA amortization expenses were £1,192 and £1,193 respectively. The converted USD amortization expense in each period then varied according to the USD/GBP FX rate, which explains almost all the difference in IIA amortization expense in IIA “Amort-UK” row in the table above.

The initial amount of IIA for the 2019 acquisition of 4.75 years’ remaining exclusive U.S. Filshie device distribution

rights from CooperSurgical Inc (CSI) was $21,000.  The straight-line amortization of the IIA is $1,105/ calendar quarter over the remaining 4.75 years of the prior distribution agreement at the time of acquisition. After 36 months of amortization, the CSI IIA balance as of September 30, 2022 is $4,789.  The CSI IIA amortization expenses were the same in both years’ 3Q and 9M periods.

Because the non-cash IIA amortization expenses represent a majority of UTMD’s Operating Expenses, UTMD provides the following table that separates the IIA amortization expenses from all other Operating Expenses:

Therefore, when the two Filshie-related IIA balances are fully amortized, stockholders can look forward to a substantial increase in EBT. The Femcare acquisition IIA amortization expense has 3.5 more years to run at about $468 per quarter using the same USD/GBP FX rate as in 3Q 2022.  The CSI IIA amortization expense has only 1.1 more years to run at $1,105 per quarter.

e)Non-operating expense/ Non-operating income 

Non-operatingNet non-operating expense, includesor net non-operating income, results from the combination of 1) expenses from loan interest and bank fees; 2) expenses or income from losses or gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms; and 3) losses from disposition of assets.  Non-operating income includes 1) investment income from cash balances; 2) rent of underutilized property; 3)property, investment income, royalties received from licensing the Company’s technology; 4) gains from dispositions of assets;technology and 5) gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms.  

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UTMD’s net Non-operating income in 3Q 2022 was $198 compared to $59 in 3Q 2021.other miscellaneous income.  Net non-operating income in 9M 20221Q 2023 was $348$681 compared to $130$8 in 9M 2021.      

In 3Q1Q 2022.  The primary difference was due to higher average cash balances in 1Q 2023 compared to 1Q 2022 losseswith higher interest rates, which resulted in $646 higher interest income. UTMD also received $9 higher non-operating income in 1Q 2023 from remeasurementrenting underutilized property compared to 1Q 2022, and the same non-operating income from royalties. UTMD realized a slight gain in 1Q 2023 compared to a loss of $3 at the valueend of 1Q 2022 from remeasurement of foreign currency bank balances were $2 compared to $7 in 3Q 2021. In 9M 2022, UTMD recognized a $7 loss from remeasurement of the value of foreign currency bank balances compared to $13 in 9M 2021.  Royalties received were $5 in 3Q 2022 compared to $10 in 3Q 2021, and $15 in 9M 2022 compared to $10 in 9M 2021. Interest earned on cash balances were $152 and $211 in 3Q and 9M 2022 respectively, compared to interest of $6 and $31 in 3Q and 9M 2021 respectively.  balances.

f)Income Before Income Taxes (EBT) 

EBT results from subtracting net Non operating expense or adding net Non-operatingnon-operating income from or to as applicable, Operating Income. Consolidated 3Q 20221Q 2023 EBT was $5,339 (41.2%$5,119 (40.9% of sales) compared to $5,157 (41.0%$4,530 (36.8% of sales) in 3Q 2021.  Consolidated 9M 20221Q 2022. The $589 (+13.0%) higher 1Q 2023 EBT was $15,068 (38.9% of sales) compared to $13,880 (38.4%1Q 2022 was the result of sales) in 9M 2021.$673 higher non-operating income. In other words, the $646 higher interest income more than offset UTMD’s $348 higher litigation expenses.     

The EBT of Utah Medical Products, Inc. in the U.S. was $9,607$2,562 in 9M 20221Q 2023 compared to $8,736$2,916 in 9M 2021.1Q 2022. The EBT of Utah Medical Products, Ltd (Ireland) was EUR 5,0741,962 in 9M 20221Q 2023 compared to EUR 4,6621,806 in 9M 2021.1Q 2022. The US GAAP EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP (279)23 in 9M 20221Q 2023 compared to GBP (361)(159) in 9M 2021.1Q 2022. The 1Q 2023 EBT of Utah Medical Products Canada, Inc. (dba Femcare Canada) was CAD 443158 in 9M 20221Q 2023 compared to CAD 450154 in 9M 2021. The EBT of UTMD’s manufacturing subsidiaries varies as a result of intercompany shipments which are eliminated in the consolidation of financial results.1Q 2022.

EBITDA is a non-US GAAP metric that UTMD management believes is of interest to investors because it provides meaningful supplemental information to both management and investors that representsmeasures profitability performance without factoring in effects of financing, accounting decisions regarding non-cash expenses, capital expenditures or tax environments.  AlthoughExcluding the U.S. Securitiesnoncash effects of depreciation, amortization of intangible assets and Exchange Commission advisesstock option expense, 1Q 2023 consolidated EBT excluding the remeasured bank balance currency gain or loss and interest expense (“adjusted consolidated EBITDA”) were $6,919 compared to $6,371 in 1Q 2022, an 8.6% increase. Management believes that the 1Q 2023 EBITDA operating performance provides a start that is a non-US GAAP metric,consistent with achieving its financial objectives for the calendar year 2023, as previously provided in its 2022 SEC 10-K Report. UTMD’s non-US GAAPtrailing last twelve-month EBITDA is the sum of the following elements in the table below, each of which is a US GAAP number:was $28,439.

UTMD’s non-US GAAP adjusted consolidated EBITDA asis the sum of the elements in the following table, each element of which is a percentage of sales was 54.9% in 3Q 2022 compared to 55.9% in 3Q 2021, reflecting the lower GPM.  Similarly, UTMD’s non-USUS GAAP adjusted consolidated EBITDA as a percentage of sales was 52.9% in 9M 2022 compared to 53.9% in 9M 2021. Based on 9M 2022 actual operating results, management expects non-US GAAP adjusted consolidated EBITDA of about $28 million for the full year 2022, consistent with previous projections.number:  

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g)Net Income 

Net Income is EBT minus a provision for income taxes.  Net Income in 3Q 20221Q 2023 of $4,280 (33.0% of sales)$4,214 was 1.8%19.2% higher than the Net Income of $4,206 (33.5% of sales)$3,534 in 3Q 2021.

1Q 2022. UTMD’s Net Income in 9M 2022 of $11,918 (30.8% of sales) was 11.8% higher than the US GAAPMargin, Net Income of $10,656 (29.5% of sales)divided by consolidated sales, was 33.7% in 9M 2021. Net Income per US GAAP1Q 2023 and 28.7% in 9M 2021 was reduced by an additional tax provision expense required to be recorded in the quarter in 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 remaining future amortization expense of Femcare IIA.  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 represented the additional tax which will be paid in the UK over the then remaining five year life of the 2011 Femcare acquisition IIA. Excluding the $390 DTL and tax provision increases in 2Q 2021, which reduced 9M 2021 Net Income by that same amount, 9M 2022 Net Income was 7.9% higher than 9M 2021 non-US GAAP Net Income of $11,047 (30.6% of sales), which management believes is more indicative of operating results.

1Q 2022. The average consolidated income tax provisionsprovision rates (as a % of the same period EBT) per US GAAP in 3Q1Q 2023 was 17.7% and in 1Q 2022 and 3Q 2021 were 19.8% and 18.4% respectively, and were 20.9% and 23.2% in 9M 2022 and 9M 2021 respectively. Please recall that the 9M 2021 income tax provision was inflated by $390 for the 2Q 2021 DTL adjustment.22.0%. The non-US GAAP income taxlower provision rate was 20.4% for 9M 2021.in 1Q 2023 resulted primarily from a portion of interest income that is tax-exempt.

The consolidated income tax provision rate varies as the mix in taxable income among U.S. and foreign subsidiaries with differing income tax rates differs from period to period. UTMD has consistently paid millions of dollars in income taxes annually. The basic corporate income tax rates in each of the sovereignties were the same as in the prior year.

UTMD management believes that the presentation of results excluding the unfavorable deferred tax liability adjustment to its 9M 2021 income tax provision provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results. The non-US GAAP exclusion only affects Net Income and Earnings Per Share.

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