SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For quarter ended: March 31, 1996 Commission File No. 0-11178
UTAH MEDICAL PRODUCTS, INC.
(Exact name of Registrant as specified in its charter)
UTAH 87-0342734
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7043 South 300 West
Midvale, Utah 84047
Address of principal executive offices
Registrant's telephone number: (801) 566-1200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and; (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-
The number of shares outstanding of the registrant's common stock as of May
13, 1996: 9,296,104
UTAH MEDICAL PRODUCTS, INC.
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INDEX TO FORM 10-Q
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PART I - FINANCIAL INFORMATION PAGE
----
Item 1. Financial Statements
Balance Sheets as of March 31, 1996
and December 31, 1995 1
Statements of Operations for the three months
ended March 31, 1996 and March 31, 1995 2
Statements of Cash Flows for the three months ended
March 31, 1996 and March 31, 1995 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 8
SIGNATURES 8
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL
STATEMENTS
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
------------------------------------------
BALANCE SHEETS AS OF MARCH 31, 1996 AND
---------------------------------------
DECEMBER 31, 1995
-----------------
(unaudited)
ASSETS MARCH 31, 1996 DECEMBER 31,1995
-------------- ----------------
CURRENT ASSETS:
Cash $8,398,387 $5,064,913
Investments 7,343,850 8,173,500
Accounts receivable - net 5,538,785 6,473,810
Accrued interest and other 177,902 221,662
Inventories 3,618,724 3,277,982
Prepaid expenses 296,296 244,675
Deferred income taxes 435,325 372,899
------------- ------------
Total current assets 25,809,269 23,829,441
PROPERTY AND EQUIPMENT - NET 9,555,909 8,866,359
INTANGIBLE ASSETS - NET 586,119 634,579
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TOTAL $ 35,951,297 $33,330,379
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable $ 1,694,992 $ 1,783,840
Accrued expenses:
Payroll and payroll taxes 1,002,296 1,197,692
Reserve for litigation
expense 427,464 314,619
Income taxes payable 1,227,662 105,024
Other 240,590 220,750
Deferred revenue 85,600 85,600
------------- ------------
Total current liabilities 4,678,604 3,707,525
DEFERRED REVENUE 151,779 173,208
DEFERRED INCOME TAXES 344,294 245,289
------------- ------------
Total liabilities 5,174,677 4,126,022
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STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value;
authorized - 5,000,000
shares; no shares issued
or outstanding
Common stock - $.01 par value;
authorized - 50,000,000
shares; issued - March 31, 1996,
9,727,341 shares
December 31, 1995, 9,790,937
shares 97,273 97,909
Unrealized gain on
investments
available-for-sale, net of tax 23,610 32,707
Retained earnings 30,655,737 29,073,741
------------- ------------
Total stockholders' equity 30,776,620 29,204,357
------------- ------------
TOTAL $35,951,297 $33,330,379
============= ============
see notes to consolidated
financial statements
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
------------------------------------------
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS
---------------------------------------------
ENDED MARCH 31, 1996 AND MARCH 31, 1995
---------------------------------------
(unaudited)
THREE MONTHS ENDED
MARCH 31,
-----------------------------
1996 1995
------------- --------------
NET SALES $9,967,590 $9,754,041
COST OF SALES 5,372,531 5,382,678
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GROSS MARGIN 4,595,059 4,371,363
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EXPENSES:
Selling, general and administrative 1,448,347 1,422,878
Research & development 358,874 417,337
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Total 1,807,221 1,840,215
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INCOME FROM OPERATIONS 2,787,838 2,531,148
OTHER INCOME 1,098,758 269,646
------------- --------------
INCOME BEFORE INCOME TAX EXPENSE 3,886,596 2,800,794
INCOME TAX EXPENSE 1,403,061 980,277
------------- --------------
NET INCOME $2,483,535 $1,820,517
============= ==============
EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE $0.25 $0.18
============= ==============
EARNINGS PER COMMON SHARE
ASSUMING FULL DILUTION $0.25 $0.18
============= ==============
WEIGHTED AVERAGE NUMBER OF
COMMON AND COMMON EQUIVALENT SHARES 10,041,513 10,069,086
============= ==============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES ASSUMING FULL
DILUTION 10,041,513 10,069,086
============= ==============
see notes to consolidated
financial statements
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARY
------------------------------------------
STATEMENTS OF CASH FLOWS
------------------------
FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND MARCH 31, 1995
------------------------------------------------------------
(unaudited)
MARCH 31,
--------------------------
1996 1995
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,483,535 $1,820,517
------------ ------------
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 341,807 408,678
Provision for losses on accounts 11,385 5,621
receivable
Loss on disposal of assets 372,311 5,171
Deferred income taxes 42,114 74,013
Tax benefit attributable to
exercise and disposition
of incentive stock options and
stock purchase rights 56,383 18,978
Changes in operating assets and liabilities:
Accounts receivable - trade 923,641 981,226
Accrued interest and other receivables 7,105 (32,780)
Inventories (340,741) 117,062
Prepaid expenses (14,966) (200,606)
Accounts payable (88,849) (288,591)
Accrued expenses 1,059,928 378,152
Deferred revenue (21,429) (21,249)
----------- -----------
Total adjustments 2,348,689 1,445,675
------------ ------------
Net cash provided by operating 4,832,224 3,266,192
------------ ------------
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (1,100,277) (384,335)
Intangible assets (250,240) (7,754)
Purchases of investments (2,232,923) (500,000)
Proceeds from sale of:
Investments 3,035,000 1,010,000
Property and equipment 8,250
------------ -----------
Net cash provided by (used in)
investing activities (540,190) 117,911
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 160,063 105,148
Common stock purchased and retired (1,118,623) (881,081)
----------- -----------
Net cash used in financing activities (958,560) (775,933)
----------- -----------
NET INCREASE IN CASH 3,333,474 2,608,170
CASH AT BEGINNING OF PERIOD 5,064,913 1,579,121
------------ ------------
CASH AT END OF PERIOD $8,398,387 $4,187,291
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for $182,245 $143,436
income taxes
see notes to consolidated financial
statements
UTAH MEDICAL PRODUCTS, INC.
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NOTES TO FINANCIAL STATEMENTS
-----------------------------
(unaudited)
(1) The unaudited financial statements presented herein 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 generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto included in the Utah Medical Products, Inc.
("UTMD", or "the Company") annual report on form 10-K for the year ended
December 31, 1995. The accompanying financial statements have not been examined
by independent accountants in accordance with generally accepted auditing
standards, but in the opinion of management such financial statements include
all adjustments (consisting only of normal recurring adjustments) necessary to
summarize fairly the Company's financial position and results of operations.
The results of operations for the three months ended March 31, 1996 may not be
indicative of the results that may be expected for the year ending December 31,
1996.
(2) Inventories at March 31, 1996 and December 31, 1995 consisted of the
following:
March 31, December 31,
1996 1995
--------- -------------
Finished goods $998,900 $ 872,419
Work-in-process 893,459 687,746
Raw materials 1,726,365 1,717,817
--------- ---------
Total $3,618,724 $3,277,982
========== ==========
(3) In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, "Accounting for Stock-Based Compensation," which defines a fair value based
method of accounting for stock based employee compensation plans. Under SFAS
No. 123, companies are encouraged, but are not required, to adopt the fair value
method for fiscal years beginning after December 15, 1995 for all employee
awards granted after the beginning of such year. Companies are permitted to
account for such transactions under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," (APB No. 25), but must, in future
years, disclose in a note to the financial statements proforma net income and
earnings per share as if SFAS No. 123 had been applied. The Company has
determined it will not adopt the fair value method and therefore will continue
to account for stock-based compensation under APB No. 25.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Results of Operations
Because of the relatively short span of time, results for any given
three month period in comparison with a previous three month period may not be
indicative of comparative results for the year as a whole.
a) Overview
First quarter (1Q) 1996 revenues were up 2.2% from 1Q 1995, while net income
set a new record as it increased 36.4% over the same period. Net income growth
out-paced revenue growth due to higher gross and operating margins, as well as
much higher non-operating income due to an extraordinary payment received for
use of UTMD's pressure monitoring technology. Earnings per share (EPS)
benefited modestly from the Company's continuing share repurchase program. EPS
in 1Q 1996 grew 36.8% compared with 1Q 1995.
b) Revenues
UTMD divides revenues into three product-line categories: 1) critical care,
which is comprised primarily of components used in invasive blood pressure
monitoring, but also includes components for other types of pressure
monitoring, as well as disposable respiratory products used in hospitals; 2)
obstetrics, which is comprised mainly of devices for monitoring intrauterine
pressure during labor and delivery, although to a lesser extent electrodes for
fetal heart rate monitoring as well as other labor and delivery supplies, and a
new product which unifies and improves clinician safety in the multiple step
procedure of clamping, cutting, and drawing blood samples from the umbilical
cord immediately following childbirth; and 3) gynecology, which is comprised of
an electrosurgery system used in a procedure called LETZ(R), tools used in other
minimally invasive surgical procedures including diagnostic laparoscopies, and a
device for the conservative treatment of urinary incontinence. In these three
areas, UTMD's primary revenue contributors generally: 1) are the accepted
standard of care, 2) enjoy a number one or number two market share, and 3)
have important product features protected by patents.
Critical care product revenues represented 58% of total revenue in 1Q 1996,
the same percentage as in 1Q 1995. In the U.S., this is a mature business
dominated by two large suppliers, Baxter and Abbott. About a third of the blood
pressure monitoring market is for the disposable pressure transducers ("DPT")
and accessories which UTMD manufactures and two thirds is for catheters. UTMD
participates only in the DPT and accessories niche. Overseas, the market is
much more fragmented with DPTs still growing in acceptance. UTMD's Baxter OEM
revenue (all of which are included in the critical care category) represented
about 66% of critical care revenue (about 38% of total revenues), and grew by 1%
in 1Q 1996 over 1Q 1995. Sales of critical care products in 1Q 1996 were
$5,790,000, compared with $5,670,000 in 1Q 1995. Sales to Baxter in 1Q 1996
were $3,794,000 compared to $3,743,000 in 1Q 1995. If , as previously
announced, Baxter purchases what their forecasts currently indicate, shipments
to Baxter in all of 1996 will be about $11 million, down from $15 million in
1995.
The obstetrics revenue category declined 1.5% in 1Q 1996 over the same
quarter of 1995 and represented 35% of total sales. Sales of obstetrics
products in 1Q 1996 were $3,445,000 compared to $3,498,000 in 1Q 1995. Fetal
monitoring sales continue to be dominated by INTRANTM, UTMD's sensor-tipped
intrauterine pressure catheter. During 1Q 1996, UTMD's largest U.S.
distributor, KOL Biomedical (whose purchases are typically over 75% in the
obstetrics category) purchased about $800,000 less than expected due to an
inventory adjustment.
The third category, gynecology products, includes Liberty(R), a system for
conservatively treating urinary incontinence, and LuminTM, a unique tool used in
laparoscopic procedures to manipulate the uterus, and EpitomeTM, a unique
ceramic scalpel, in addition to UTMD's product line of electrosurgery equipment
and disposable electrodes. Gynecology revenues increased 23% to $732,000 in 1Q
1996 from $594,000 in 1Q 1995, and represented 7% of total revenues. UTMD's
past successes with its gynecology products resulted from providing physician
training along with equipment and tools designed for specific procedures.
Effective marketing of new products launched in the past year represent
significant challenges for UTMD's marketing resources, and will require
innovative distribution approaches.
First quarter 1996 foreign sales were $2,750,000 compared to $2,562,000 in
1Q 1995. Practically all international sales have been critical care products,
for which sales the Company has relied heavily on the efforts of other medical
device companies. Critical care products represented 92% of international sales
in 1Q 1996 compared to 96% in 1Q 1995.
UTMD believes it has substantial sales potential for its products in
international markets, and therefore plans to continue to commit its resources
to international business expansion, including a new manufacturing facility in
Ireland, which should be ready for operation in late 1996.
c) Gross Profit
Gross margins (profit after subtracting costs of manufacturing products from
revenues) in 1Q 1996, were 46.1% compared to 44.8% in 1Q 1995. The improvement
in 1Q 1996 is primarily due to manufacturing efficiencies relative to 1Q 1995.
Because of anticipated faster sales growth in the obstetrics and gynecology
product lines which have higher margins relative to UTMD's other products, and
because of declining business with Baxter, the Company foresees continued gross
margin improvements.
d) Income from Operations
Operating profit, or income from operations, is the profit achieved after
subtracting operating expenses from gross profit. Operating expenses are
subdivided into sales, general and administrative (SG&A) expenses and research
and development (R&D) expenses. UTMD further divides SG&A into the two
categories of sales and marketing (S&M) expenses and general and administrative
(G&A) expenses.
As a percentage of sales, operating expenses declined to 18.1% in 1Q 1996
compared to 18.9% in 1Q 1995. Operating expenses for 1Q, in dollars, were down
2% in 1996 from 1995. The portion allocated to R&D declined 14% relative to 1Q
1995. Evidence that R&D efforts over the recent past have been productive is
becoming apparent, as UTMD has launched, or is in the process of launching, the
following six significant new products: Cordguard(R), Lumin, Liberty,
FiltresseTM, Epitome and Deltran IVTM. The FDA is currently reviewing another
four submissions for products yet unannounced. In addition, new line extensions
include a neonatal ICU torso length respiratory hood, generic loop electrodes
for overseas markets and fetal monitoring chart paper.
First quarter 1996 selling, general and administrative (SG&A) expenses
increased 2% from the amounts spent in 1995, but, as a percentage of sales,
declined slightly in 1Q 1996 from 1Q 1995, to 14.5% of sales in 1Q 1996 from
14.6% of sales in 1995. The Company's goal for 1996 is to hold operating
expenses to less than 19% of sales.
First quarter 1996 R&D expenses were 3.6% of sales compared to 4.3% in 1995.
Many R&D expenses are external costs relating to both process and product
validations, which costs can vary from period to period. The Company employs
its R&D resources not only to internally develop its own new product ideas, but
also, through joint development agreements, licensing of technology,
acquisitions and other arrangements, to enhance and complete commercialization
projects initiated by others. R&D expenses as a percentage of sales will likely
continue in 1996 at a rate similar to 1Q 1996. First quarter 1996 income from
operations was $2,788,000 compared to $2,531,000 in 1Q 1995. First quarter 1996
operating margins were 28.0% compared to 25.9% for the same quarter in 1995.
e) Non-operating Income
Non-operating income for UTMD includes principally royalties from licensing
UTMD's technology to other companies, interest and capital gains from investing
the Company's cash, and gains or losses from the sale of other assets. The
major contributor to non-operating income in 1Q 1996 was a one-time
extraordinary payment for the use of UTMD's pressure monitoring technology.
Non-operating income increased $829,000 to $1,099,000 in 1Q 1996 from $270,000
in 1Q 1995. Royalties from other medical device companies and investment income
from cash balances continue to make substantial contributions to non-operating
income. Excluding the 1Q one-time payment, royalty income during 1996 should be
about the same as in 1995.
f) Net Income and EPS
After income taxes, 1Q 1996 net income was $2,483,535, compared to
$1,820,517 in 1Q 1995. The effective income tax rate in 1Q 1996 was 36.1%
compared to 35.0% in 1Q 1995. The higher rate in 1Q 1996 is due to a higher mix
of taxable income due to the large one-time non-operating income item versus
other tax exempt income, as well as other factors.
Shareholder value is improved by increasing EPS. EPS is net income divided
by the weighted number of shares of stock outstanding (fully-diluted to include
stock options awarded which have exercise prices below the current market
value). Future EPS can be increased by investing current net income to increase
future net profits through expanded marketable new product offerings and
profitable business operations, or by repurchasing stock from the marketplace,
thereby reducing the number of outstanding shares.
Fully diluted 1Q 1996 EPS were up 36.8% to $.25 compared to $.18 in 1Q 1995.
First quarter 1996 ending weighted average number of common shares assuming full
dilution (the number used to calculate EPS) were 10,041,513 shares compared to
10,069,086 in 1Q 1995. The dilution calculation added about 255,000 shares to
weighted actual shares outstanding in 1Q 1996, compared to about 96,000 for 1Q
1995, due to quarter ending share prices of $16.75 in 1Q 1996 compared to $9.63
in 1Q 1995. Actual outstanding common shares as of March 31, 1996 were
9,727,341.
g) Return on Equity
Return on shareholders' equity (ROE) is the portion of net income retained
by UTMD to internally finance its growth, divided by average accumulated
shareholders' equity during the period. The ROE ratio determines how fast the
Company can grow without external financing. For example, a 30% ROE would
support 30% growth in revenues. Achieving growth in revenues and EPS without
diluting shareholder interests maximizes shareholders' value. ROE in 1Q 1996
(annualized) was 33%, and has averaged about 30% during the last 7 years. It is
management's objective to maintain ROE in excess of the 25% per annum EPS growth
target so that UTMD can afford to grow at a 25% rate without diluting
shareholders' interests. External equity financing would only be considered if
an exceptional business growth opportunity presents itself that would allow
long term increased EPS at the same time that the number of shares are also
expanded.
h) Cash Flows
Cash and investments balances were $15.7 million at the end of 1Q 1996, an
increase of $2.5 million from December 31, 1995. The increase was achieved
despite continuation of the share repurchase program which used $1,119,000
during the quarter.
Cash provided by operating activities, including adjustments for
depreciation and other non-cash operating expenses, along with changes in
working capital, totaled $4,832,224 in 1Q 1996, up from $3,266,192 in 1Q 1995.
Apart from net income, which contributed over half of the 1Q 1996 total, an
increase of $1.1 million in income taxes payable (part of accrued expenses) and
a decrease of $924 thousand in accounts receivable were responsible for a major
portion of the improvement compared to 1Q 1995. As of March 31, 1996, net
accounts receivable balances were $5.5 million which equates to 50 days in
receivables (based on 1Q sales), compared to end-of-year accounts receivable of
$6.5 million which equates to about 55 days in receivables. Inventory balances
are $341,000 higher than at the end of 1995, with inventory turns now at 5.9
times based on 1Q cost of sales.
Cash of $1.1 million was used for capital expenditures in property and
equipment, with an additional $250 thousand used to purchase intangible assets.
Capital expenditures during 1Q 1996 were made, primarily, in the new Ireland
facility, but also in automation of key assembly operations, and in new product
tooling and equipment. Net purchases and sales of investments provided $802
thousand to 1Q 1996 cash.
First quarter 1996 financing activities used cash of $959,000 after
repurchases of shares are netted against sales of shares from option exercises,
compared to $776,000 in the same period of 1995. The Company repurchased its
own common stock during 1Q 1996 in the amount of $1,119,000, up from $881,000
used in 1Q 1995. To the end of 1Q 1996, UTMD had spent about $21.9 million in
repurchasing 2,525,000 of its common shares since November 1992. In 1Q 1996,
the Company received $160,000 from issuing stock (on exercise of employee
options), compared to $105,000 in 1Q 1995. The Company did not enter into any
long-term debt agreements during the first quarter of 1996.
Management believes that current cash balances plus future income from
operations will provide the liquidity needed to finance growth plans. In
addition to the capital expenditures outlined above, UTMD plans to use cash
during the remainder of 1996 for completion of the manufacturing plant in
Ireland, for continued share repurchases and for selective infusions of
technological, marketing or product manufacturing rights to broaden the
Company's product offerings.
Other
On February 2, 1996, the board of directors approved stock option awards
representing a total of 190,000 shares to 50 employees. Of this total, 95,000
were awarded to senior management. An objective of the ongoing share repurchase
program is to reduce or eliminate any dilutive effect that may result from
awarding employee stock options.
A number of the forward-looking factors discussed in this filing are subject
to a high degree of uncertainty, particularly in light of the Company's high
growth objectives and a rapidly changing healthcare environment. Investors are
encouraged to consider all of these factors in that actual results may differ
materially from those projected by management.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits: None
b) Reports on Form 8-K: None
SIGNATURES
Pursuant to the requirements of the Securities Exchanges Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTAH MEDICAL PRODUCTS, INC.
---------------------------
REGISTRANT
Date: By:/S/
May 14, 1996 -------------------------------------
/s/ Kevin L. Cornwell
President and CEO
Date: By:/S/
May 14, 1996 --------------------------------------
/s/ Kevin L. Cornwell
Secretary and CFO