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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-07 · 258 added, 274 removed, 74 unchanged (88% of the section changed)

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The Company’s Form 10-K Annual Report for the year ended December 31, 2019, provides a detailed description of products, technologies, markets, regulatory issues, business initiatives, resources and business risks, among other details, and should be read in conjunction with this report.

Because of the relatively short span of time, results for any given three or six month period in comparison with a previous three or six month period may not be indicative of comparative results for the year as a whole.

In the current year of 2020, because of government mandates for hospitals to not perform certain “elective” procedures in order to theoretically preserve capacity for treating COVID-19 infected patients, it is likely that the 2Q 2020 comparison with 2Q 2019 will not be indicative of comparative results for the year as a whole.

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.

Currency amounts in the report are in thousands, except per share amounts or where otherwise noted.

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Analysis of Results of Operations

As many of the gynecology devices provided by UTMD are used in “nonessential” or “elective” procedures, as medical procedures have been reclassified during the COVID-19 pandemic, the Company’s financial performance in the second calendar quarter (2Q) and first half (1H) of 2020 reflects a substantial negative change relative to the same periods in 2019.

Income statement results in 2Q and 1H 2020 compared to the same periods of 2019 were as follows:

Income statement results in 3Q and 9M 2020 compared to the same periods of 2019 were as follows:

Operating Income

Income Before Tax

Net Income (US GAAP)

Earnings per Diluted Share

The comparison of 2Q and 1H 2020 results with the results in the same periods of 2019, according to U.S.

Generally Accepted Accounting Principles (US GAAP), was affected by a long term deferred tax liability increase on the balance of Femcare intangible assets (the amortization of which is not tax-deductible in the UK).

This $225 increase in deferred UK taxes over the next six years, according to US GAAP, must be booked in the quarter in which the tax law change is enacted.

The UK decided to not reduce its corporate income tax rate from 19% to 17% beginning in 2Q 2020, as was previously enacted.

UTMD management believes that the presentation of results excluding the unfavorable deferred tax liability adjustment to its 2Q 2020 and 1H 2020 income tax provision provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results in 2020 compared to 2019.

The non-US GAAP 2Q 2020 and 1H 2020 exclusion only affects Net Income and Earnings Per Share (EPS), as follows:

Net Income (non-US GAAP)

EPS (non-US GAAP)

Although a minor impact compared to the device demand loss resulting from the COVID-19 pandemic, USD sales in 2020 continued to be hampered by a stronger USD compared to other currencies.

The unfavorable foreign currency exchange (FX) rate impact lowered total consolidated 2Q 2020 sales by 0.5% ($43) and 1H 2020 sales by 0.6% ($121).

The FX rate impact during 2Q 2020 was also smaller because outside the U.S.

(OUS) medical device demand invoiced in foreign currencies were more negatively impacted by the COVID-19 virus than inside the U.S.

domestic sales in 2Q 2020 were 21% lower than in 2Q 2019, compared to 32% lower OUS.

This geographical difference resulted not only from the fact that medical procedure shutdowns started in Europe before the U.S., but also from the fact that Filshie sales comprise a larger proportion of OUS sales (31% in 2Q 2020, and 52% in 2Q 2019) than of domestic sales (21% in 2Q 2020, and 28% in 2Q 2019).

For example, in the two key UK and France markets where Femcare Ltd sells directly to medical device user facilities, 2Q 2020 sales were 72.5% lower in USD terms than in 2Q 2019.

Gross profits (GP) declined more than revenues due to 1) additional manufacturing costs related to managing COVID-19 as the Company continued to work as an “essential” business without any U.S.

government subsidy, 2) less absorption of fixed manufacturing overhead costs and 3) a product sales mix difference with lower margin OEM product sales continuing to grow.

On the operating income (OI) line, the same identifiable intangible asset (IIA) amortization expense of $1,105 in both 2Q 2020 and 2Q 2019 from UTMD’s February 2019 acquisition of CooperSurgical Inc’s (CSI’s) U.S.

exclusive distribution rights for the Filshie Clip System represented 12.6% of sales in 2Q 2020 compared to 9.3% of sales in 2Q 2019.

In other words, half of the 22 percentage point more negative change in OI compared to the change in GP was the result of the lower absorption (decline in the sales denominator) of fixed IIA amortization expense.

The other half of the greater decline in OI compared to GP was due to lower absorption of operating expenses (OE), which in absolute dollars were lower but did not decline nearly as much as sales declined.

Except for the 2Q 2020 income tax provision addition required for a UK tax rate increase on non-deductible IIA amortization expense over the next six years, 2Q 2020 NI declined in the same proportion as OI.

Lower Non-Operating Income (NOI) from the lack of interest on cash balances in 2Q 2020 was offset by a lower consolidated income tax provision rate.

In 1H 2020 compared to 1H 2019, NOI was about the same but non-US GAAP NI declined less than OI as a result of a lower estimated tax provision rate.

EPS in 2Q and 1H 2020 improved relative to the decline in NI from the March 2020 repurchase of 80,000 UTMD shares.

UTMD profit margins in 2Q 2020 and 1H 2020 compared to 2Q 2019 and 1H 2019 follow:

Net Income (NI)

Earnings per Diluted Share (EPS)

UTMD management believes that the presentation of sequential 2020 quarterly results provides meaningful supplemental information to both management and investors.

Keeping in mind that 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, the following table shows the percent changes in 2020 quarterly results compared to the same periods of time in 2019:

Consolidated Income Statement

Worldwide Revenues

Operating Income

Earnings Before Income Tax

Earnings Per Share

Revenues [USD denominated]

domestic (excluding OEM)

Canada domestic

Ireland domestic

France domestic

Australia domestic

Subtotal, Direct to End User:

All Other OUS (Sales to Int’l Distributors)

Worldwide Revenues

UTMD subsidiary direct domestic sales in Canada, Ireland, the United Kingdom, France and Australia are invoiced in foreign currencies.

Foreign currency exchange (FX) rates for income statement purposes are transaction-weighted averages.

The average rates from the applicable foreign currency to USD during 3Q 2020 and 9M 2020 compared to the same periods in 2019 follow:

Although 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, the FX rate impact in 9M 2020 was less significant than in the recent past.

Except for the CAD FX rate which had not changed as significantly as other currencies, a healthy 3Q 2020 decline in the USD offset its strengthening during the first half of the year.

Foreign currency revenues in 3Q 2020 were increased by $85 as a result of a weaker USD compared to 3Q 2019.

In contrast, the difference in period-to-period FX rates reduced revenues by $36 in 9M 2020.

Foreign currency sales as a percentage of total sales were 21.0% of total sales in 3Q 2020 and 22.0% of total sales in 9M 2020.

UTMD’s 3Q 2019 and 9M 2019 revenues invoiced in foreign currencies represented 23.6% and 27.2% of total consolidated USD sales respectively.

Other factors that affected period-to-period revenue comparisons included

1) International distributors’ quarter-to-quarter orders fluctuate more than domestic end user orders.

2) 1Q 2019 was a partial quarter of U.S.

domestic Filshie Clip System (Filshie device) sales, as the UTMD acquisition of the Cooper Surgical Inc.

(CSI) exclusive Filshie device distribution rights took effect February 1, 2019.

UTMD profit margins in 3Q 2020 and 9M 2020 compared to 3Q 2019 and 9M 2019 follow:

Gross Profit Margin (gross profits/ sales):

Operating Income Margin (operating profits/ sales):

Net Income Margin (US GAAP):

Net Income Margin (Non-US GAAP, B4 DTL Adj):

The Net Income Margin is NI after subtracting a provision for taxes divided by sales.

Net Income Margin (profit after taxes/ sales):

Gross Profit in 3Q 2020 declined less than the sales decline primarily as a result of sales mix.

The 9M 2020 gross profit margin (GPM), gross profit divided by sales, was lower than in 9M 2019 despite the better 3Q GPM because 14% lower sales during 9M 2020 absorbed marginally less of UTMD’s fixed critical mass of manufacturing overhead.

Because UTMD believes that the lower sales are transitory, knows it can remain very profitable even at the lower sales levels experienced during the pandemic and has a significant cash reserve relative to operational needs, management will not cut important resources and sacrifice future capabilities just to maintain short term profit margins.

Operating Income declined more than gross profit in both 3Q 2020 and 9M 2020 because UTMD’s non-cash identifiable intangible asset (IIA) amortization expense included in operating expenses was 15.5% of sales in 3Q 2020 compared to 12.8% of sales in 3Q 2019, and 16.0% in 9M 2020 compared to 12.7% in 9M 2019.

This was due not only to the lower sales in 2020 (less absorption of a fixed expense) but also the GBP FX rate difference in the 3Q and the timing of beginning the CSI IIA amortization in 2019.

Earnings before tax (EBT) declined more than operating income simply because UTMD did not receive interest on its cash balances in 2020 like it did in 2019, although average cash balances were about 20% higher during 9M 2020.

Net Income declined slightly more than EBT as a result of the sovereignty mix of taxable profits in 2020 compared to 2019.

The lowest tax regimes of Ireland and the UK had the greatest declines in EBT.

Finally, Earnings Per Share (EPS) declined less than net income as a result of the benefit of share repurchases in 2020.

UTMD’s 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 June 2020 and the end of June 2019 follow:

June 30, 2020

June 30, 2019

UTMD’s June 30, 2020 Balance Sheet, in the absence of debt, remains solid.

Ending Cash and Investments were $42.4 million on June 30, 2020 compared to $42.8 million on December 31, 2019, after investing $0.7 million in new equipment, paying $2.1 million in cash dividends to stockholders and repurchasing $6.4 million in UTMD stock during 1H 2020.

Stockholders’ Equity was down just $5.8 million in the six month period from December 31, 2019 after netting a combined $8.5 million in dividends and stock repurchases which reduce Stockholders’ Equity.

The FX rates from the applicable foreign currency to USD for assets and liabilities at the end of September 2020 and the end of September 2019 follow:

UTMD’s September 30, 2020 Balance Sheet remained strong with an absence of debt.

During 2020, inventories declined $0.6 million despite much lower sales, which is an indication of good manufacturing planning and control.

Due to the increase in value of the GBP, EUR and AUD noted above, despite depreciation of fixed assets, the USD net book value of fixed assets in the UK, Ireland and Australia increased $0.6 million as of September 30, 2020 from September 30, 2019.

Over the one year period of time, the intangible asset balance declined $5.5 million, about 12%.

Ending cash and investments were $46.3 million on September 30, 2020 compared to $42.8 million on December 31, 2019, after paying $3.1 million in cash dividends to stockholders and repurchasing $7.0 million in UTMD stock during 9M 2020.

After reducing stockholders’ equity a combined $10.1 million in 9M 2020 stockholder dividends and share repurchases, September 30, 2020 stockholders’ equity was down only $2.7 million from December 31, 2019.

Beginning on January 1, 2018, the Company adopted ASU 2014-09, the new revenue recognition accounting standard.

Management completed an extensive assessment and implementation of the standard, including UTMD’s various contracts with customers and associated performance obligations and the Company’s conclusions regarding its revenue recognition practices and procedures.

Other items like commissions and rights of return were also evaluated by the Company.

Management is confident that the Company has properly evaluated the standard’s requirements and has arrived at appropriate conclusions in recognizing revenue in accordance with the new standard.

Those practices and procedures the Company will use to recognize revenue under the new standard are not significantly different than the methods used previously since UTMD has traditionally recognized revenue upon shipping a physical product to a customer, which is also when the Company has met its performance obligations under contracts it has with its customers that represent over 99% of its revenue.

While the Company’s revenue not associated with shipping a physical product is immaterial, management believes the Company’s practices in recognizing that revenue is also in accordance with ASU 2014-09.

Terms of sale are established in advance of UTMD’s acceptance of customer orders.

In the U.S., Ireland, UK and Australia prior to 2017, UTMD generally accepted orders directly from and shipped 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.

The same was true in 2017 with the addition of direct shipments to end user facilities in Canada and France.

About 14% of UTMD’s domestic end user sales, excluding Femcare’s Filshie Clip System sales to its exclusive U.S.

distributor, CooperSurgical Inc.

(CSI), go through third party med/surg distributors which contract separately with clinical facilities to provide purchasing, storage and scheduled delivery functions for the applicable facility.

UTMD’s T&C of Sale to end user facilities are substantially the same in the U.S., Canada, Ireland, UK, France and Australia.

In the U.S., Ireland, UK, France, Canada and Australia, UTMD generally accepts orders directly from and ships 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, storage and scheduled delivery functions for the applicable facility.

UTMD’s T&C of Sale to end user facilities are substantially the same in the U.S., Ireland, UK, France, Canada and Australia.

UTMD may have separate discounted pricing agreements with a specific clinical facility or group of affiliated facilities based on volume of purchases.

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For the sake of clarity, the separate pricing agreements with clinical facilities based on volume of purchases disclosure is not inconsistent with UTMD’s disclosure that the selling price is fixed prior to the acceptance of a specific customer order.

Total consolidated 2Q 2020 UTMD revenues (sales) were $3,059 (25.8%) lower than in 2Q 2019.

Total consolidated 3Q 2020 UTMD sales were $2,016 (16.1%) lower than in 3Q 2019.

Constant currency sales were $2,101 (16.8%) lower.

Total consolidated 1H 2020 UTMD sales were $2,890 (12.8%) lower than in 1H 2019.

Constant currency sales in 1H 2020 were $2,769 (12.3%) lower than in 1H 2019.

The negative impact on sales due to the COVID-19 virus began in March.

Total consolidated 9M 2020 UTMD sales were $4,905 (14.0%) lower than in 9M 2019.

Constant currency sales in 9M 2020 were $4,869 (13.9%) lower than in 9M 2019.

In 3Q 2020 compared to 3Q 2019, U.S.

domestic sales were 8% lower and OUS sales were 28% lower.

In general, 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.

In the current year of 2020, because of government mandates for hospitals to not perform certain procedures in order to theoretically preserve capacity for treating COVID-19 infected patients, it is likely that the comparison with 2Q 2019 will not be indicative of comparative results for the year as a whole.

In 1H 2020 compared to 1H 2019, U.S.

In 9M 2020 compared to 9M 2019, U.S.

domestic sales were 7% lower and OUS sales were 23% lower.

Domestic sales in 3Q 2020 were $6,950 compared to $7,575 in 3Q 2019.

Domestic sales in 1H 2020 were $11,956 compared to $12,791 in 1H 2019.

The components of domestic sales include 1) “direct sales” of UTMD’s medical devices to user facilities (and med/surg stocking distributors for hospitals), excluding Filshie sales, 2) “OEM sales” of components and other products manufactured by UTMD for other medical device and non-medical device companies, and 3) “Filshie sales”, for which UTMD in the U.S.

is simply a distributor for Filshie Clip System devices manufactured OUS.

Domestic direct sales in 2Q 2020 (excluding Filshie sales), representing 51% of total domestic sales, were $775 (22%) lower than in 2Q 2019.

The lower decline was due to the fact that many of the Company’s critical care devices used in L&D, the NICU and the ICU departments of U.S.

hospitals were still clearly needed, although order patterns for these devices were disrupted.

Domestic direct sales in 1H 2020 (excluding Filshie sales), representing 52% of total domestic sales, were $900 (13%) lower than in 1H 2019.

OEM sales in 2Q 2020, representing 28% of total domestic sales, were $136 (+9%) higher than in 2Q 2019.

OEM sales in 1H 2020, representing 25% of total domestic sales, were $145 (+5%) higher than in 1H 2019.

Demand for UTMD’s biopharmaceutical manufacturing control system customer is increasing due to the pandemic.

Filshie sales direct to U.S.

domestic end-user facilities were $845 (43%) lower in 2Q 2020 compared to Filshie sales in 2Q 2019.

Filshie sales direct to U.S.

domestic end-user facilities were $80 (3%) lower in 1H 2020 compared to domestic Filshie sales in 1H 2019.

The Filshie device implantation is performed in the hospital, and in the COVID-19 pandemic environment, has been deemed an “elective” procedure.

During 2Q 2020, U.S.

Filshie sales improved each month with sales in June 136% higher than April Filshie sales.

Domestic sales in 9M 2020 were $18,906 compared to $20,366 in 9M 2019.

The components of domestic sales include 1) “direct sales” of UTMD’s medical devices to user facilities (and med/surg stocking distributors for hospitals), excluding Filshie Clip System (“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) Filshie device sales direct to U.S.

medical facilities starting in February 2019.

Domestic direct sales in 3Q 2020 excluding Filshie devices, representing 50% of total domestic sales, were $178 (5%) lower than in 3Q 2019.

Domestic direct sales in 9M 2020 excluding Filshie devices, representing 51% of total domestic sales, were $1,078 (10%) lower than in 9M 2019.

OEM sales in 3Q 2020, representing 25% of total domestic sales, were $172 (9%) lower than in 3Q 2019.

OEM sales in 9M 2020, also representing 25% of total domestic sales, were $27 (1%) lower than in 9M 2019.

Filshie device sales direct to U.S.

domestic end-user facilities were $275 (14%) lower in 3Q 2020 compared to sales in 3Q 2019.

Filshie device sales direct to U.S.

domestic end-user facilities were $355 (7%) lower in 9M 2020 compared to Filshie device sales in 9M 2019.

Because Filshie device sales are a significant portion of UTMD’s domestic business and a UTMD device most affected by the COVID-19 pandemic, management believes the following table might help to see the overall 2020 pandemic impact and recovery trend:

Filshie device sequential quarterly USD domestic direct sales in the U.S.

OUS sales in 3Q 2020 were $3,528 compared to $4,919 in 3Q 2019.

OUS sales in 1H 2020 were $7,733 compared to $9,788 in 1H 2019.

OUS sales invoiced in GBP, EUR, AUD and CAD currencies were $43 lower in 2Q 2020 and $121 lower in 1H 2020 as a result of changes in FX rates.

In other words, 3% of the lower 2Q 2020 OUS sales and 6% of the lower 1H 2020 OUS sales were due to a stronger USD.

The foreign currency OUS sales in 2Q 2020 were $1,583, which was 48% of all OUS sales and 18% of total consolidated sales.

OUS sales in 9M 2020 were $11,262 compared to $14,707 in 9M 2019.

OUS sales invoiced in GBP, EUR, AUD and CAD currencies were $85 higher in 3Q 2020 and $36 lower in 9M 2020 as a result of changes in FX rates.

Foreign currency OUS sales in 3Q 2020 were $2,205, which was 62% of all OUS sales and 21% of total consolidated sales.

In comparison, foreign currency OUS sales in 3Q 2019 were $2,944, which was 60% of all OUS sales and 24% of total consolidated sales.

The large period-to-period percentage difference was due to the fact that UTMD’s foreign currency sales occur in countries where UTMD subsidiaries primarily sell Filshie devices directly to user facilities.

Foreign currency OUS sales in 1H 2020 were $4,448, which was 58% of all OUS sales and 23% of total consolidated sales.

Foreign currency OUS sales in 1H 2019 were $6,590, which was 67% of all OUS sales and 29% of total consolidated sales.

In 2Q 2020 compared to 2Q 2019, OUS Filshie sales (in USD terms) were 60% lower and domestic Filshie sales were 43% lower.

Although the lower performance OUS hurt 2Q 2020 overall performance disproportionately, the Company expects that the sales recovery rate during the remainder of 2020 will also likely be disproportionately higher OUS.

Although only a minor negative FX rate impact occurred compared to the COVID-19 impact, the volatility of foreign currency exchange (FX) rates for sales and expenses OUS did continue to have an impact on period-to-period relative financial results.

FX rates for income statement purposes are transaction-weighted averages.

For the record, the average rates from the applicable foreign currency to USD during 2Q 2020 and 1H 2020 compared to the same periods in 2019 follow:

Trade sales are sales to third parties, excluding sales from one UTMD entity to another (intercompany sales).

USD-denominated OUS trade sales are affected by the change in FX rates.

UTMD’s revenues invoiced in the above foreign currencies represented only 18.0% of total consolidated USD sales in 2Q 2020, and 22.6% in 1H 2020.

The weighted average negative impact on all foreign currency sales from the change in FX rates was 2.7% in both 2Q 2020 and 1H 2020, reducing reported USD sales in 2Q 2020 by $43 relative to the same FX rates in 2Q 2019 and by $121 in 1H 2020 relative to the same FX rates in 1H 2019.

Ireland subsidiary USD-denominated trade sales were 46% of OUS sales in 2Q 2020 compared to 33% of OUS sales in 2Q 2019.

Ireland subsidiary USD-denominated trade sales were 34% of OUS sales in 1H 2020 compared to 30% of OUS sales in 1H 2019.

The much higher portion of OUS sales by Ireland in 2Q 2020 was due to a combination of a positive fluctuation in international distributor demand for pressure monitoring kits, which varies from quarter-to-quarter due to larger purchase quantities, and substantially lower Filshie device sales in larger OUS direct markets than in Ireland.

In its native currency, Ireland (EUR) 2Q 2020 trade sales were 4% lower than in 2Q 2019.

USD-denominated trade sales by UTMD’s UK subsidiary, Femcare Limited (Femcare UK), were 12% of OUS sales in 2Q 20 and 21% in 1H 2020, compared to 26% of OUS sales in 2Q19 and 27% in 1H 2019.

Included in the Femcare UK sales were the direct sales to end users in France which comprised 4% of OUS sales in 2Q 2020 and 7% of OUS sales in 1H 2020, compared to 9% of OUS sales in 2Q 2019 and 10% of OUS sales in 1H 2019.

In native currencies, UK (GBP) 2Q 2020 trade sales were 69% lower than in 2Q 2019, and France (EUR) 2Q 2020 trade sales were 72% lower than in 2Q 2019.

This was UTMD’s poorest 2Q 2020 sales performance in all geographical regions as a result of the negative impact of the COVID-19 virus pandemic on Filshie device sales.

USD-denominated sales by UTMD’s Australia subsidiary to Australia end user facilities were 8% of OUS sales in both 2Q 2020 and 1H 2020, compared to 9% of OUS sales in both 2Q 2019 and 1H 2019.

Native currency Australia

(AUD) trade sales were 40% lower in 2Q 2020 than in 2Q 2019.

USD-denominated sales by UTMD’s Canada subsidiary direct to Canada end user facilities were 6% of OUS sales in 2Q 2020 and 8% in 1H 2020, compared to 12% of OUS sales in both 2Q 2019 and 1H 2019.

Native currency Canada (CAD) trade sales were 62% lower in 2Q 2020 than in 2Q 2019.

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:

The foreign currency OUS sales in 9M 2020 were $6,653, which was 59% of all OUS sales and 22% of total consolidated sales.

In comparison, foreign currency OUS sales in 9M 2019 were $9,534, which was 65% of all OUS sales and 27% of total consolidated sales.

Because Filshie device sales are also a significant portion of UTMD’s OUS business and an implanted device most affected by the COVID-19 pandemic, management believes the following table might help to see the overall 2020 pandemic impact and recovery trend:

Filshie device OUS sequential quarterly USD-denominated sales:

OUS Filshie sales obviously took a deeper hit from the pandemic than in the U.S.

UTMD segments sales into the following general product categories:

gynecology/ electrosurgery, labor & delivery, neonatal, and miscellaneous including blood pressure monitoring kits and accessories as well as related OEM products.

In 3Q 2020 compared to 3Q 2019, worldwide gynecology/ electrosurgery device sales were down 21%, worldwide labor & delivery device sales were essentially the same, worldwide neonatal device sales were down 6% and worldwide blood pressure monitoring and related OEM product sales were down 18%.

Devices in the gynecology/ electrosurgery category were mostly classified as “nonessential” during the pandemic.

In the blood pressure monitoring category, UTMD’s largest OUS distributor took a double quarterly shipment in 3Q 2019.

In 9M 2020 compared to 9M 2019, worldwide gynecology/ electrosurgery device sales were down 22%, worldwide labor & delivery device sales were down 13%, worldwide neonatal device sales were down 2% and worldwide blood pressure monitoring and related OEM product sales were down 3%.

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

Global 3Q 2020 revenues (USD) by product category:

Gynecology/Electrosurgery/Urology

Blood Pressure Monitoring and Accessories*

OUS revenues by product category:

Global 9M 2020 revenues (USD) by product category:

Gynecology/Electrosurgery/Urology

Blood Pressure Monitoring and Accessories*

*includes assemblies and molded components sold to OEM customers.

Additional comments on the above revenue tables:

1) In addition to surgical sterilization procedures, other medical procedures which include significant use of UTMD’s Gynecology/ Electrosurgery/ Urology devices were deemed “elective” in 2Q 2020 during the COVID-19 pandemic, e.g.

loop excision of the transformation zone, tonsillectomy, uvulopalatoplasty, breast augmentation, ureteroscopic stone ablation and urethral catheterization.

2) The Filshie Clip System sales loss had a disproportionate impact, representing 24% of 2Q 2020 consolidated sales and 30% in 1H 2020, compared to 38% of 2Q 2019 consolidated sales and 36% in 1H 2019.

3) Management does not have a clear explanation for lower obstetrics device category sales worldwide and neonatal device sales in the U.S.

during 2Q 2020, as the gestation period for women already pregnant was not extended by the corona virus.

It is evident, however, that all medical device order patterns of hospitals were substantially disrupted in 2Q 2020.

Looking forward, UTMD believes that the slope of a recovery curve for its gynecology/ electrosurgery/ urology devices will be driven primarily by government policy responses, at all levels, to the corona virus pandemic in each of its major markets rather than clinical need.

After experiencing a nice increase in June and early July Filshie device sales, U.S.

demand has slowed again as of this report writing in late-July.

UTMD also expects 2H 2020 OEM domestic sales, which were 5% higher in 1H 2020 compared to 1H 2019, to continue to grow, as its primary customer is utilizing UTMD pressure monitoring devices in its pharmaceutical and bioprocess control systems, which are experiencing greater demand in the current environment.

The recent weakening of the USD may help 2H 2020 OUS foreign currency sales.

More generally, UTMD expects 2H 2020 sales to be lower than in 2H 2019, but probably not as low as the 26% decline in 2Q 2020 compared to 2Q 2019.

It might take some time for patients to regain confidence in going to a hospital.

c) Gross Profit (GP)

GP results from subtracting the costs of manufacturing and shipping products to customers.

UTMD’s GP was $2,550 (34.0%) lower in 2Q 2020 than in 2Q 2019, and $2,487 (17.4%) lower in 1H 2020 than in 1H 2019.

A change in the mix of products sold represented about half of the eight percentage point higher decline in GP relative to the decline in sales.

The Company’s critical care and OEM devices have lower GP margins (GPM, GP divided by sales) than its proprietary gynecology/urology devices which experienced the large decline in sales.

Manufacturing overhead costs including supervision, quality assurance, engineering, depreciation on equipment and facilities, and other facility costs such as utilities and property taxes, did not decline in the same proportion as the decline in sales.

The Company carefully cleaned, disinfected, monitored employees’ health, subsidized quarantined employees without government help (except for a few employees in the UK), purchased masks and other PPE, and reorganized work centers to ensure proper social distancing, thus incurring a negative impact on overall productivity.

In addition, UTMD paid incentive bonuses to manufacturing personnel, 10% of whom are over the age of sixty-five, who continued to come to work to produce important “essential” medical devices when the news media and government officials were strongly encouraging people to stay at home and collect government subsidies for not working.

*includes molded components sold to OEM customers.

Looking forward, although an increase in COVID-19 infections is likely in the winter months of 4Q 2020 in the northern hemisphere, assuming no significant new lockdowns or prohibitions of “nonessential procedures” are imposed by governments, UTMD expects that its 4Q 2020 sales will continue to recover and be higher than in 3Q 2020.

c) Gross Profit

Gross Profit results from subtracting the costs of manufacturing and shipping products to customers from revenues.

Gross Profit was $883 (12.0%) lower in 3Q 2020 than in 3Q 2019, and $3,369 (15.6%) lower in 9M 2020 than in 9M 2019.

UTMD’s 3Q 2020 GPM improved to 62.0% compared to 59.1% in 3Q 2019 so that the decline in 3Q Gross Profit was not as significant as the 3Q decline in sales.

Sales to international distributors are at lower prices for the same devices because the distributor incurs direct marketing expenses instead of UTMD.

Sales to international distributors were only 18% of total sales in 3Q 2020 compared to 23% in 3Q 2019.

The 3Q 2019 GPM was also exceptionally low because of a “double” shipment of blood pressure monitoring kits to UTMD’s China distributor.

For 9M 2020 compared to 9M 2019, Gross Profit declined slightly more than the sales decline as a result of UTMD not cutting critical manufacturing overhead resources, and providing special incentives in 2Q 2020 for employees to come to work.

Nevertheless, the 60.6% GPM for the 2020 year to date has met management’s long term objective.

d) Operating Income

Operating income results from subtracting operating expenses from GP.

Operating expenses, comprised of General and Administrative (G&A) expenses, sales and marketing (S&M) expenses and product development (R&D) expenses, were $2,973 in 2Q 2020 (33.8% of sales) compared to $3,019 in 2Q 2019 (25.5% of sales).

It’s evident that although 2Q 2020 operating expenses were somewhat lower in absolute dollar terms, they did not decline in proportion to the sales decline which leveraged a 34% decline in GP into a 56% decline in operating income.

Operating expenses were $5,946 in 1H 2020 (30.2% of sales) compared to $5,691 in 1H 2019 (25.2% of sales).

Operating expenses in absolute dollar terms were $255 higher in 1H 2020 than in 1H 2019 because the amortization of the CSI IIA occurred for only a portion of 1Q 2019, yielding $368 higher IIA amortization expense in G&A.

Ignoring the identifiable intangible asset (IIA) amortization expense from purchasing the CSI exclusive U.S.

distribution agreement in early 2019, 2Q 2020 operating expenses were $1,868 (21.3% of sales) compared to 2Q 2019 operating expenses of $1,914 (16.2% of sales), and 1H 2020 operating expenses were $3,735 (19.0% of sales) compared to 1H 2019 operating expenses of $3,849 (17.0% of sales).

In 2Q 2020 compared to 2Q 2019, a stronger USD reduced OUS operating expenses excluding Femcare IIA amortization expense in USD terms by $15.

The £399 Femcare IIA amortization expense in both 2Q 2020 and 2Q 2019 was reduced by $17.

In 1H 2020 compared to 1H 2019, a stronger USD reduced OUS operating expenses excluding Femcare IIA amortization expense in USD terms by $27.

The constant £798 Femcare IIA amortization expense was reduced by $25.

Consolidated G&A expenses were $2,433 (27.7% of sales) in 2Q 2020 compared to $2,440 (20.6% of sales) in 2Q 2019.

The G&A expenses in 2Q 2020 included $495 (5.6% of sales) of non-cash expense from the amortization of IIA resulting from the 2011 Femcare acquisition, which were $512 (4.3% of sales) in 2Q 2019.

The lower USD amortization expense was the result of the stronger USD, as the Femcare amortization expense in GBP was £399 in both periods.

In addition, 2Q 2020 G&A expenses included a $1,105 (12.6% of sales) IIA amortization expense resulting from the purchase of the CSI U.S.

exclusive Filshie devices distribution rights.

The same $1,105 CSI IIA amortization expense in 2Q 2019 represented 9.3% of 2Q 2019 sales.

Excluding the Filshie-related non-cash IIA amortization expenses, G&A expenses were $833 (9.5% of sales) in 2Q 2020 compared to $823 (6.9% of sales) in 2Q 2019.

The change in FX rates reduced 2Q 2020 OUS G&A expenses excluding IIA amortization expense by $9.

Consolidated G&A expenses were $4,852 (24.6% of sales) in 1H 2020 compared to $4,580 (20.3% of sales) in 1H 2019.

The 1H 2020 G&A expense $272 increase was due to $368 higher IIA amortization expense resulting from the purchase of the CSI exclusive U.S.

Filshie Clip System distribution rights.

The CSI IIA amortization expense was $368 lower in 1Q 2019 than in 1Q 2020 because the purchase occurred part way through 1Q 2019.

The CSI IIA amortization expense in 1H 2020 was $2,211 (11.2% of sales) compared to $1,842 (8.2% of sales) in 1H 2019.

Also included in 1H 2020 G&A expenses was $1,007 (5.1% of sales) of non-cash expense from the amortization of IIA resulting from the 2011 Femcare acquisition, which was $1,032 (4.6% of sales) in 1H 2019.

The $25 lower USD amortization expense was the result of the stronger USD, as the Femcare amortization expense in GBP was £798 in both 1H periods.

Excluding the Filshie-related non-cash IIA amortization expenses, consolidated G&A expenses were $1,634 (8.3% of sales) in 1H 2020 compared to $1,706 (7.6% of sales) in 1H 2019.

The change in FX rates reduced 1H 2020 OUS G&A expenses excluding IIA amortization expense by $17.

Consolidated S&M expenses were $424 (4.8% of sales) in 2Q 2020 compared to $466 (3.9% of sales) in 2Q 2019.

S&M expenses were $844 (4.3% of sales) in 1H 2020 compared to $883 (3.9% of sales) in 1H 2019.

The lower S&M expenses, which occurred in the 2Q, were due to UTMD not attending planned trade shows, which were cancelled due to the COVID-19 virus.

Although the Company received from the UK government approximately 80% of the compensation paid to four S&M employees in the UK who were furloughed for a portion of 2Q 2020, the subsidy was less than the severance and statutory notice compensation accrued for two of the UK employees who were permanently laid off.

The change in FX rates reduced 2Q 2020 OUS S&M expenses by $6, and 1H 2020 OUS S&M expenses by $10.

UTMD promises prospective customers that it will provide, at no charge in reasonable quantities, copies of instruction materials developed for the use of its products.

UTMD provides customer support from offices in the U.S., Canada, the UK, Ireland and Australia by telephone, and employed representatives on a geographically dispersed basis, to answer user questions and help troubleshoot any user issues.

Occasionally, on a case-by-case basis, UTMD may utilize the services of an independent practitioner to provide educational assistance to clinicians.

All inservice and training expenses are routinely expensed as they occur.

All of these services are allocated from S&M overhead costs included in operating expense.

Historically, marginal consulting costs have been immaterial to financial results.

R&D expenses in 2Q 2020 were $116 (1.3% of sales) compared to $113 (1.0% of sales) in 2Q 2019.

R&D expenses in 1H 2020 were $250 (1.3% of sales) compared to $228 (1.0% of sales) in 1H 2019.

Since almost all R&D is being carried out in the U.S., the FX rate impact was negligible.

Operating Income results from subtracting Operating Expenses from Gross Profit.

Operating Expenses, comprised of general and administrative (G&A) expenses, sales and marketing (S&M) expenses and product development (R&D) expenses, were 27.8% of sales in 3Q 2020 compared to 24.1% of sales in 3Q 2019.

Operating Expenses were 29.4% of sales in 9M 2020 compared to 24.8% of sales in 9M 2019.

Although the operating expense percentage of sales increased due to the 2020 short term pandemic reduction in sales, management continued to tightly manage operating expenses without sacrificing resources needed for longer term growth.

Summary comparison of (USD) consolidated operating expenses:

Total Operating Expenses:

Lower S&M expenses were due primarily to the lack of trade show expenses during the pandemic.

S&M expenses were 3.4% of sales in both 3Q 2020 and 3Q 2019.

S&M expenses were 4.0% of sales in 9M 2020 compared to 3.7% of sales in 9M 2019.

R&D expenses were consistent with the prior year’s same periods of time, varying only by specific project expenses.

R&D expenses were 1.2% of sales in 3Q 2020 compared to 1.0% of sales in 3Q 2019.

R&D expenses in 9M 2020 were also 1.2% of sales compared to 1.0% of sales in 9M 2019.

The higher G&A expense in 9M 2020 was due to amortization expense of the CSI IIA for a full quarter in 1Q 2020 compared to a partial quarter in 1Q 2019.

Consolidated G&A expenses were 23.2% of sales in 3Q 2020 compared to 19.7% of sales in 3Q 2019.

Consolidated G&A expenses were 24.1% of sales in 9M 2020 compared to 20.1% of sales in 9M 2019.

G&A expenses included non-cash expense from the amortization of IIA resulting from the March 2011 Femcare Group Ltd (UK) acquisition and the amortization of IIA from the purchase of the CSI U.S.

exclusive Filshie devices distribution rights effective in February 2019.

The initial amount of IIA for the 2011 Femcare UK purchase was £23,998.

After 9.5 years of amortization, the IIA balance is £8,686.

For both years of 2020 and 2019, the amortization expense rate was a constant £399 per calendar quarter.

The USD amortization expense amount in each period, however, varied according to the USD/GBP FX rate.

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

Filshie device distribution rights from CSI was $21,000.

The straight-line amortization of this IIA is $1,105/ calendar quarter over the remaining 4.75 years of the prior distribution agreement.

After 20 months of amortization, the CSI IIA balance as of September 30, 2020 is $13,632.

The difference in 9M CSI IIA amortization expense is due to the start of the amortization in February 2019, i.e.

9 months of expense in 2020 through September versus 8 months in 2019.

Because the IIA amortization expenses represent a significant portion of UTMD’s G&A expenses, UTMD provides the following table that separates the IIA amortization expenses from all other G&A expenses:

IIA amortization expense

All other G&A expense

Total G&A Expenses:

Percent of Sales:

IIA amortization expense

All other G&A expense

Total G&A Expenses:

Eventually, 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 5.5 more years to run at about $516 per quarter using the same 1.295 USD/GBP FX rate as in 3Q 2020.

The CSI IIA amortization expense has 3.1 more years to run at $1,105 per quarter.

Stockholders will appreciate that, although cash flow will not be affected, annualized reported EPS will increase $.90 after another 3.1 years, based on current shares outstanding and if current U.S.

and Utah income tax rates remain the same.

Similarly, after another 5.5 years annualized EPS would be $1.36 higher based on current shares outstanding and unchanged income tax rates.

Other G&A expenses were lower in both periods primarily because UTMD’s CEO has taken 50% salary in 2020 compared to 2019, and 2020 management bonuses based on the projected 2020 annual EBT have been accrued at a lower rate than in 2019.

In summary, Operating Income in 3Q 2020 was $3,588 (34.2% of sales) compared to $4,371 (35.0% of sales) in 3Q 2019.

The $2,504 lower operating income in 2Q 2020 was the clear result of substantially lower sales and GP, since 2Q 2020 operating expenses themselves were lower than in 2Q 2019.

The Company did not make drastic cuts to its 2Q 2020 operating expenses to match lower sales activity in the short run because those expenses represent critical resources needed to support the business as it is expected to recover.

In any case, stockholders should be aware that a 22.5% operating income margin represents a solid business enterprise, even though not up to UTMD standards of performance.

Operating income in 2Q 2020 remained high enough to support UTMD’s ongoing stockholder dividend.

Operating income in 1H 2020 was $5,840 (29.7% of sales) compared to $8,582 (38.0% of sales) in 1H 2019.

The year-to-year 1H difference was not as extreme as in 2Q since the COVID-19 negative impact on UTMD device demand did not appear to begin until March.

Operating Income in 9M 2020 was $9,428 (31.3% of sales) compared to $12,954 (36.9% of sales) in 9M 2019.

Lower gross profits in 2020 were leveraged down further by higher IIA amortization expense absorbed by fewer sales.

In any event, the operating income margins achieved in 2020 were excellent compared to industry peers.

e) Non-operating expense/ Non-operating income

Non-operating expense includes bank fees and expenses from losses, if applicable, from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms.

Non-operating income includes 1) income from rent of underutilized property, 2) investment income (interest on cash balances), 3) royalties received from licensing the Company’s technology, and 4) income from gains, if applicable, from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms.

Non-operating income or expense can also include gains or losses from the disposition of assets from time to time.

Net non-operating income is non-operating income minus non-operating expense during a particular time period.

Net non-operating income in 2Q 2020 was $0 compared to $85 in 2Q 2019.

Net non-operating income in 1H 2020 was $125 compared to $120 in 1H 2019.

The loss on remeasured foreign currency balances in 2Q 2020 was $1 compared to a gain of $3 in 2Q 2019.

In 1H 2020, a gain of $42 on remeasured foreign currency balances was recognized compared to a loss of $46 in 1H 2019.

Royalties received were $5 in 2Q 2020 compared to $4 in 2Q 2019, and $5 in 1H 2020 compared to $6 in 1H 2019.

Interest earned on cash balances was $(2) in 2Q 2020 compared to $59 in 2Q 2019.

Interest earned on cash balances was $62 in 1H 2020 compared to $139 in 1H 2019.

Income from rent of underutilized property was $8 in 2Q 2020 compared to $24 in 2Q 2019.

Income from rent of underutilized property was $35 in 1H 2020 compared to $35 in 1H 2019.

Bank fees were $15 in 2Q 2020 compared to $11 in 2Q 2019.

Bank fees were $29 in 1H 2020 compared to $21 in 1H 2019.

Non-operating expense includes 1) bank fees;

2) losses 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 deposit balances;

2) rent of underutilized property;

3) royalties received from licensing the Company’s technology;

4) gains from dispositions of assets;

and 5) gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms.

UTMD’s net non-operating income in 3Q 2020 was less than $1 compared to $76 in 3Q 2019.

Net non-operating income in 9M 2020 was $126 compared to $196 in 9M 2019.

In 3Q 2020 and 3Q 2019, gains or losses from remeasurement of the value of foreign currency bank balances were negligible.

In 9M 2020, UTMD recognized a $41 gain from remeasurement of the value of foreign currency bank balances compared to a $44 loss in 9M 2019.

Royalties received were $5 in 3Q 2020 compared to $0 in 3Q 2019, and $10 in 9M 2020 compared to $6 in 9M 2019.

Interest earned on cash balances were $2 and $64 in 3Q and 9M 2020 respectively, compared to interest of $61 and $199 in 3Q and 9M 2019 respectively.

f) Income Before Income Taxes (EBT)

Consolidated EBT results from subtracting net non-operating expense or adding net non-operating income from or to, as applicable, operating income.

EBT results from subtracting net non-operating expense or adding net non-operating income from or to, as applicable, Operating Income.

Consolidated 3Q 2020 EBT was $3,588 (34.2% of sales) compared to $4,448 (35.6% of sales) in 3Q 2019.

Consolidated 1H 2020 EBT was $5,965 (30.3% of sales) compared to $8,702 (38.5% of sales) in 1H 2019.

Consolidated 9M 2020 EBT was $9,553 (31.7% of sales) compared to $13,150 (37.5% of sales) in 9M 2019.

The EBT of Utah Medical Products, Inc.

was $3,963 in 1H 2020 compared to $5,515 in 1H 2019.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 2,062 in 1H 2020 compared to EUR 1,479 in 1H 2019.

The increase in Ireland EBT was primarily due to intercompany shipments of Filshie devices to the U.S.

In 1H 2019, there were no Filshie shipments from Ireland to the U.S.

as UTMD in the U.S.

was selling Filshie inventory acquired from CSI.

The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was (GBP 235) in 1H 2020 compared to GBP 1,172 in 1H 2019.

The negative 1H 2020 Femcare Group EBT was primarily the result of a 52% drop in Group revenues and operating expense overhead in the UK about an order of magnitude higher than UTMD’s other foreign subsidiaries.

The 1H 2020 EBT of Utah Medical Products Canada, Inc.

(dba Femcare Canada) was CAD 331 in 1H 2020 compared to CAD 732 in 1H 2019.

EBT of subsidiaries includes the result of intercompany shipments which are netted out of consolidated results.

EBITDA is a non-US GAAP metric that measures profitability performance without factoring in effects of financing, accounting decisions regarding non-cash expenses, capital expenditures or tax environments.

Management believes that this operating metric provides meaningful supplemental information to both management and investors.

Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 2Q 2020 consolidated EBT excluding the remeasured bank balance currency gain or loss and interest expense (“adjusted consolidated EBITDA”) were $3,800 compared to $6,397 in 2Q 2019, representing only a 40.6% decline in EBITDA compared to a 55.9% decline in operating income.

Despite the substantial negative change in 2Q financial results compared to the prior year, 2Q 2020 EBITDA at 43.2% of sales represents a functionally healthy company.

Of course, 2Q 2019 EBITDA at 54.0% of sales represented an even more healthy company.

1H 2020 adjusted consolidated EBITDA were $9,572 (48.6% of sales) compared to $12,062 (53.4% of sales) in 1H 2019, down only 20.6% compared to a 32.0% decline in 1H operating income.

was $6,469 in 9M 2020 compared to $8,674 in 9M 2019.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 2,393 in 9M 2020 compared to EUR 2,157 in 9M 2019.

The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP (297) in 9M 2020 compared to GBP 1,449 in 9M 2019.

The 9M 2020 EBT of Utah Medical Products Canada, Inc.

(dba Femcare Canada) was CAD 565 in 9M 2020 compared to CAD 926 in 9M 2019.

The EBT of UTMD’s manufacturing subsidiaries varies as a result of intercompany shipments which are eliminated in the consolidation of results.

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 represents profitability performance without factoring in effects of financing, accounting decisions regarding non-cash expenses, capital expenditures or tax environments.

Although the U.S.

Securities and Exchange Commission advises that EBITDA is a non-GAAP metric, UTMD’s non-US GAAP EBITDA is the sum of the following elements in the table below, each of which is a US GAAP number:

Component of EBITDA

Depreciation of fixed assets

Amortization of patent expenses

Amortization of Femcare IIA

Amortization of CSI distribution agreement IIA

Stock option compensation expense

Remeasured currency (gains) or losses

Adjusted Consolidated EBITDA:

Management believes that the non-US GAAP EBITDA decline is more indicative of the COVID-19 negative impact on UTMD’s 2020 operating results than the change represented by EBT.

g) Net Income

Net Income is EBT minus a provision for income taxes.

US GAAP net income in 2Q 2020 of $1,313 (14.9% of sales) was 62.8% lower than the net income of $3,525 (29.8% of sales) in 2Q 2019.

Because the UK reset its corporate tax rate from 17% to 19% going forward, it caused UTMD to have to book an additional $225 in income taxes that represents the additional tax which will be paid in the UK over the remaining six year life of the 2011 Femcare acquisition IIA, which are not tax deductible.

Excluding the $225 deferred tax liability (DTL) increase which reduced 2Q 2020 net income by $225, non-US GAAP 2Q 2020 net income of $1,537 (17.5% of sales) was 56.4% lower than net income in 2Q 2019, consistent with the decline in operating income.

The average consolidated income tax provisions (as a % of EBT) per US GAAP in 2Q 2020 and 2Q 2019 were 33.6% and 22.8%, respectively.

Because the $225 DTL adjustment included in the 2Q 2020 tax provision does not relate to 2Q 2020 EBT, the non-US GAAP 2Q 2020 income tax provision rate of 22.2% is more indicative relative to the 22.8% rate in 2Q 2019.

US GAAP net income in 1H 2020 of $4,452 (22.6% of sales) was 33.2% lower than the net income of $6,664 (29.5% of sales) in 1H 2019.

Again, excluding the $225 DTL adjustment, non-US GAAP 1H 2020 net income of $4,677 (23.8% of sales) was 29.8% lower than 1H 2019 net income, and more indicative of comparative period-to-period net income results.

The smaller net income percentage decline relative to 1H operating income is a result of higher 1Q 2020 NOI.

The average consolidated income tax provisions (as a % of EBT) in 1H 2020 per US GAAP and in 1H 2019 were 25.4% and 23.4%, respectively.

A comparison of provision tax rates excluding the $225 DTL adjustment is 21.6% in 1H 2020 compared to 23.4% in 1H 2019.

Net Income in 3Q 2020 was $2,933 (28.0% of sales) compared to $3,705 (29.7% of sales) in 3Q 2019.

The average consolidated income tax provision (as a % of EBT) in 3Q 2020 was 18.3% compared to 16.7% in 3Q 2019.

Net Income in 9M 2020 was $7,386 (24.5% of sales) compared to Net Income of $10,369 (29.6% of sales) in 9M 2019.

Net Income in 9M 2020 included a 2Q 2020 unfavorable $225 tax provision increase for a future UK income tax increase on non-deductible IIA amortization expense over the next six years.

The average consolidated income tax provisions (as a % of EBT) in 9M 2020 and 9M 2019 were 22.7% and 21.1%, respectively.

h) Earnings Per Share (EPS)

EPS are consolidated Net Income divided by the number of shares of stock outstanding (diluted to take into consideration stock option awards which are “in the money,” i.e., have exercise prices below the applicable period’s weighted average market value).

US GAAP EPS of $.359 in 2Q 2020 were 62.0% lower than $.944 in 2Q 2019, and US GAAP EPS of $1.207 in 1H 2020 were 32.3% lower than $1.783 in 1H 2019.

Excluding the deferred tax liability (DTL) increase which reduced 2Q and 1H 2020 net income by $225, non-US GAAP 2Q 2020 EPS of $.420 were 55.5% lower than $.944 in 2Q 2019, and non-US GAAP EPS of $1.268 in 1H 2020 were 28.9% lower than $1.783 in 1H 2019.

Diluted shares were 3,658,626 in 2Q 2020 compared to 3,735,070 in 2Q 2019, and 3,689,878 in 1H 2020 compared to 3,736,872 in 1H 2019.

The lower diluted shares in 2020 were the combined result of 80,000 shares repurchased in 1Q 2020, 1,189 shares employee option exercises, a 26,300 share option award in March 2020 and a lower dilution factor for unexercised options due to a lower share price.

Diluted EPS in 3Q 2020 were $.803 compared to $.991 in 3Q 2019.

Diluted EPS in 9M 2020 were $2.008 compared to $2.774 in 9M 2019.

According to U.S.

GAAP, the UK tax law change in 2Q 2020 which increased UTMD’s deferred tax liability, to be amortized over the next six years, was recognized as an income tax provision increase in the 2Q 2020 income statement.

Without the 2Q 2020 $225 tax provision adjustment, 9M 2020 EPS were $2.069.

Diluted shares were 3,653,500 in 3Q 2020 compared to 3,737,335 in 3Q 2019, and 3,678,210 in 9M 2020 compared to 3,738,056 in 9M 2019.

The lower diluted shares in 9M 2020 were the combined result of 80,000 shares repurchased in 1Q 2020, 7,000 shares repurchased in 3Q 2020, 5,614 employee option exercises in 9M 2020 and an employee option award of 26,300 shares in March 2020.

Outstanding shares at the end of 3Q 2020 were 3,640,371 compared to 3,721,757 at the end of calendar year 2019.

The change was due to employee option exercises of 1,189 offset by 80,000 shares repurchased in the open market during 1H 2020.

Outstanding shares were 3,719,106 at the end of 2Q 2019.

The number of shares used for calculating EPS was higher than ending shares because of a time-weighted calculation of average outstanding shares plus dilution from unexercised employee and director options.

The total number of outstanding unexercised employee and outside director options at June 30, 2020 was 76,625 at an average exercise price of $64.72, including shares awarded but not yet vested.

This compares to 51,689 unexercised option shares at the end of 2019 at an average exercise price of $58.50/ share, including shares awarded but not vested.

In 1H 2020, 26,300 option shares were awarded to 48 employees at an exercise price of $77.05 per share.

No options were awarded in 1H 2019.

The difference was due to employee option exercises of 5,614 during 9M 2020 offset by 87,000 shares repurchased in the open market.

Outstanding shares were 3,720,344 one year ago at the end of 3Q 2019.

The number of shares used for calculating diluted EPS was higher than ending shares because of a time-weighted calculation of average outstanding shares plus dilution from unexercised employee and director options.

The total number of outstanding unexercised employee and outside director options at September 30, 2020 was 71,700 at an average exercise price of $65.80, including shares awarded but not yet vested.

This compares to 51,690 unexercised option shares at the end of 2019 at an average exercise price of $58.50/ share, including shares awarded but not yet vested.

The number of shares added as a dilution factor in 3Q 2020 was 11,130 compared to 17,588 in 3Q 2019.

The number of shares added as a dilution factor in 1H 2019 was 15,342 compared to 15,404 in 1H 2019.

The number of shares added as a dilution factor in 9M 2020 was 14,514 compared to 16,435 in 9M 2019.

In March 2020, 26,300 option shares were awarded to 48 employees at an exercise price of $77.05 per share.

No options were awarded in 2019.

UTMD paid $1,020 ($0.280/share) in dividends to stockholders in 3Q 2020 compared to $1,028 ($0.275/ share) paid in 3Q 2019.

Dividends paid to stockholders during 2Q 2020 were 79% of US GAAP net income and 67% of non-US GAAP net income.

UTMD paid $2,077 ($0.280/share) in dividends to stockholders in 1H 2020 compared to $2,055 ($0.275/ share) paid in 1H 2019.

Dividends paid to stockholders during 1H 2020 were 47% of US GAAP net income and 44% of non-US GAAP net income.

i) Return on Equity (ROE)

Dividends paid to stockholders during 3Q 2020 were 35% of 3Q 2020 Net Income.

UTMD paid $3,097 ($0.280/share) in dividends to stockholders in 9M 2020 compared to $3,083 ($0.275/ share) paid in 9M 2019.

Dividends paid to stockholders during 9M 2020 were 41% of 9M 2020 Net Income.

In March 2020, UTMD repurchased 80,000 of its shares in the open market at $80.32/ share.

In September 2020, UTMD repurchased 7,000 of its shares in the open market at $78.67/ share.

The total 87,000 shares repurchased in 9M 2020 were at an average price of $80.19/ share.

In May 2019, UTMD repurchased 5,000 shares at $79.52/ share.

No other shares were repurchased in 2019.

The Company retains the strong desire and financial ability for repurchasing its shares at a price it believes is attractive for remaining stockholders.

i) Return on Stockholder Equity (ROE) and Stock Value

ROE is the portion of Net Income retained by UTMD to internally finance its growth, divided by the average accumulated stockholders’ equity for the applicable time period.

Annualized ROE (using non-GAAP net income and before stockholder dividends) in 1H 2020 was 10% compared to 15% in 1H 2019.

The lower ROE in 1H 2020 was due to the lower 2Q 2020 net income.

Targeting a high ROE of 20% remains a key financial objective for UTMD management.

ROE can be increased by increasing net income, or by reducing stockholders’ equity by paying cash dividends to stockholders or by repurchasing shares.

After payment of cash dividends to stockholders, annualized ROE in 9M 2020 was 6% compared to annualized ROE of 11% in 9M 2019.

Before the payment of dividends, annualized ROE in 9M 2020 was 10% compared to 15% in 9M 2019.

The lower ROE before dividends in 9M 2020 was due to an 8% increase in average accumulated stockholders’ equity together with a 29% decrease in Net Income.

Targeting a high ROE of 20% (before dividends) remains a key financial objective for UTMD management.

UTMD’s closing share price at the end of 3Q 2020 was $79.87, down 26% from the $107.90 closing price at the end of 2019.

The closing share price at the end of 3Q 2019 was $95.84.

Liquidity and Capital Resources

j) Cash flows

Net cash provided by operating activities, including adjustments for depreciation and amortization and other non-cash expenses along with changes in working capital, totaled $9,352 in 1H 2020 compared to $5,043 in 1H 2019.

The $4,309 higher increase in operating cash, despite a $2,211 lower increase in net income, was due to working capital change differences:

1) an $862 decrease in accounts receivable compared to a $1,255 increase in 1H 2019, 2) a $387 decrease in inventories compared to $2,323 increase in 1H 2019, primarily as a result of the purchase of remaining Filshie device inventories from CSI, and 3) a $386 increase in accrued expenses compared to a $1,011 decrease in 1H 2019.

Capital expenditures for property and equipment (PP&E) were $711 in 1H 2020 compared to $130 in 1H 2019.

The large increase was primarily due to installing a new $327 roof on UTMD’s 110,000 SF Midvale facility, and investing $249 in new equipment for Ireland to eventually be able to manufacture Filshie clips in-house.

Depreciation of PP&E was $335 in 1H 2020 compared to $355 in 1H 2019.

UTMD made cash dividend payments of $2,077 in 1H 2020 compared to $2,055 in 1H 2019.

The difference was due to a 1.8% annual increase in the dividend, and 0.5% lower average shares outstanding due to the March 2020 80,000 share repurchase offset slightly by 1H 2020 employee option exercises of 1,189 shares.

In 1H 2020, UTMD received $79 and issued 1,189 shares of its stock upon the exercise of employee and director stock options.

Option exercises in 1H 2020 were at an average price of $66.62 per share.

In comparison, in 1H 2019, UTMD received $170 and issued 4,391 shares of its stock upon the exercise of employee and director stock options.

Option exercises in 1H 2019 were at an average price of $38.83 per share.

The $2,944 higher cash provided by operating activities in 9M 2020 was due primarily to a $6,187 difference from 1) 1,184 decreased trade accounts receivable and inventories compared to a $2,588 increase in 9M 2019, yielding a significant $3,772 working capital change difference in the two periods, 2) a $651 increase in accrued expenses compared to a $1,023 decrease in 9M 2019, yielding another $1,674 working capital change difference in the two periods, 3) $363 higher intangible asset amortization expense, and 4) $378 lower decrease in deferred income taxes, minus 1) $2,983 lower net income and 2) $251 higher decrease in accounts payable.

Capital expenditures for property and equipment (PP&E) were $806 in 9M 2020 compared to $251 in 9M 2019.

The higher capital expenditures were due to a new roof on the Midvale facility and investment in new manufacturing capabilities in Ireland.

There were no capital expenditures for intangible assets in 9M 2020 compared to $21,000 in 9M 2019 for the purchase of the remaining life of CSI’s exclusive U.S.distribution rights for the Filshie Clip System.

UTMD made cash dividend payments of $3,097 in 9M 2020 compared to $3,083 in 9M 2019.

The Company used $6,976 of its cash to repurchase 87,000 of its own shares in 9M 2020 compared to using $398 of its cash to repurchase 5,000 of its own shares during 9M 2019.

In 9M 2020, UTMD received $282 and issued 5,614 shares of its stock upon the exercise of employee and director stock options.

Option exercises in 9M 2020 were at an average price of $50.15 per share.

In comparison, in 9M 2019 the Company received $222 and issued 5,629 shares of stock on the exercise of employee and director stock options.

Option exercises in 9M 2019 were at an average price of $39.53 per share.

Management believes that current cash balances, income from operations and effective management of working capital will provide the liquidity needed to finance internal growth plans.

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k) Assets and Liabilities

June 30, 2020 total consolidated assets were $103,545, a decrease of $6,242 from December 31, 2019.

The decrease was due to the combination of a $4,557 decrease in net intangible assets (from 1H 2020 IIA amortization and a lower FX rate on the Femcare IIA balance), together with a $333 decrease in inventories, a $950 decrease in accounts receivable and a $435 decrease in cash and investments.

June 30, 2020 total consolidated liabilities were $8,258, a decrease of $437 from December 31, 2019.

Significant changes in liabilities included a $538 reduction in accounts payable, a $356 increase in accrued liabilities, a $105 decrease in the deferred tax liability associated with the UK amortization of acquired Femcare identifiable intangible assets (IIA) in 2011 (despite the $225 increase from the UK tax law change in 2Q 2020), and a $137 decrease in the transition (REPAT) tax still due resulting from the U.S.

“Tax Cuts and Jobs Act” enacted in December 2017 .

UTMD’s Ireland subsidiary EUR-denominated assets and liabilities were translated into USD at an FX rate 0.1% higher (slightly stronger EUR) than the FX rate at the end of 2019.

September 30, 2020 total consolidated assets were $107,072, a net decrease of $2,715 from December 31, 2019.

Net intangible assets declined by $5,397, inventories declined by $609 and receivables declined by $466.

Offsetting that combined $6,472 asset decline was a $3,507 increase in cash and a $308 increase in PP&E net of $495 in depreciation.

As a result of the increase in cash, consolidated current assets increased $2,375.

UTMD’s Ireland subsidiary EUR-denominated assets and liabilities on September 30, 2020 were translated into USD at an FX rate 4.4% higher (stronger EUR relative to the USD) than the FX rate at the end of 2019.

UTMD’s UK subsidiary GBP-denominated assets were translated into USD at an FX rate 2.6% lower (weaker GBP) than the FX rate at the end of 2019.

UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 2.0% lower (weaker AUD) than the FX rate at the end of 2019.

UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 1.9% higher (stronger AUD) than the FX rate at the end of 2019.

UTMD’s Canada subsidiary CAD-denominated assets were translated into USD at an FX rate 2.7% lower (weaker CAD) than the FX rate at the end of 2019.

The net book value of consolidated property, plant and equipment increased $84 at June 30, 2020 from the end of 2019 due to the net effect of period-ending changed FX rates, $711 in new asset purchases minus $335 in depreciation, including right of use assets totaling $395 (which were $414 at December 31, 2019).

Working capital (current assets minus current liabilities) was $49,873 at June 30, 2020 compared to $51,438 at December 31, 2019.

Cash balances were $42,352 of the June 30, 2020 working capital.

Current assets at June 30, 2020 compared to December 31, 2019 were $1,769 lower primarily as the result of a $435 decrease in cash and investments, a $950 decrease in receivables and a $333 decrease in inventories.

Current liabilities were $204 lower at June 30, 2020 compared to December 31, 2019 primarily as the result of a $538 decrease in accounts payable offset by a $357 increase in accrued liabilities.

UTMD management believes that its working capital remains sufficient to meet normal operating needs, new capital expenditures and projected cash dividend payments to stockholders.

June 30, 2020 net intangible assets (goodwill plus other intangible assets) declined $4,557 from the end of 2019 as a result of $3,242 in amortization and a weaker FX rate on foreign intangible asset balances.

At June 30, 2020, net intangible assets including goodwill were 38% of total consolidated assets compared to 40% at year-end 2019, and 45% at June 30, 2019.

The deferred tax liability balance for Femcare IIA ($9,084 on the date of the acquisition), was $2,135 at June 30, 2020 compared to $2,239 at December 31, 2019 and $2,339 at June 30, 2019.

Reduction of the deferred tax liability occurs as the book/tax difference of amortization is eliminated over the remaining useful life of the Femcare IIA, i.e.

as Femcare pays its taxes in the UK without the benefit of a deduction for IIA amortization expense.

UTMD’s total debt ratio (total liabilities/ total assets) both as of June 30, 2020 and at December 31, 2019 was 8%.

UTMD’s total debt ratio as of June 30, 2019 was 9%.

The net book value of consolidated property, plant and equipment increased $308 at September 30, 2020 from the end of 2019 due to period-ending changed FX rates, $806 in new asset purchases and $495 in depreciation.

Working capital (current assets minus current liabilities) was $53,632 at September 30, 2020 compared to $51,438 at December 31, 2019.

Consolidated receivables and inventories declined $466 and $609, respectively, but cash increased $3,507.

Accrued liabilities increased $649, primarily from $550 higher income taxes payable as UTMD had over-accrued income taxes payable by $514 at the end of 2019, and $244 higher customer deposits as a result of the timing of international distributor shipments in 4Q 2020 requiring prepayment.

UTMD management believes that its working capital remains sufficient to meet normal operating needs, new capital expenditures and continued cash dividend payments to stockholders.

September 30, 2020 net intangible assets (goodwill plus other intangible assets less amortization) declined $5,397 from the end of 2019.

No new intangible assets were acquired in 9M 2020.

At September 30, 2020, net intangible assets including goodwill were 36% of total consolidated assets compared to 40% at year-end 2019, and 42% at September 30, 2019.

The long term deferred tax liability (DTL) balance for Femcare IIA ($9,084 on the date of the acquisition) was $2,132 (£1,650) at September 30, 2020, compared to $2,239 (£1,688) at December 31, 2019, and $2,170 (£1,764) at September 30, 2019.

Reduction of the DTL occurs as the book/tax difference of IIA amortization is eliminated over the remaining useful life of the Femcare IIA (because the amortization expense is not tax deductible in the UK).

The DTL only declined $107 at September 30, 2020 from December 31, 2019, despite 9M 2020 amortization expense of $1,523, which reduced the DTL balance by $289.

The difference was due to a 2Q 2020 UK tax law change which increased the DTL balance by $225 (£182) plus the change in ending FX rates.

The UK decided to not reduce its corporate income tax rate from 19% to 17% beginning in 2Q 2020, as previously enacted.

(The $225 increase in deferred UK taxes over the following six years was also booked in the 2Q 2020 tax provision, reducing 9M 2020 net income $225.)

UTMD’s total debt ratio (total liabilities/ total assets) as of September 30, 2020 was 8%, including a remaining $2,074 REPAT tax liability payable over another five years.

The total debt ratio as of December 31, 2019 was also 8%, and as of September 30, 2019 was 9%.

The $2,715 decrease in total liabilities and equity (same as total assets) was primarily due to a $2,677 September 30, 2020 ending decrease in stockholders’ equity compared to December 31, 2019.

Stockholders’ equity was reduced during 9M 2020 by $10,074 from share repurchases and dividends paid to stockholders, offset by $7,386 net profit accumulated during 9M 2020.

l) Management's Outlook

As outlined in its December 31, 2019 SEC 10-K report, UTMD’s plan for 2020 was to

As outlined in its December 31, 2019 SEC 10-K report, UTMD’s general plan for 2020 was to

1) exploit distribution and manufacturing synergies by further integrating capabilities and resources in its multinational operations;

2) focus on effective direct marketing of the benefits of the Filshie® Tubal Ligation System in the U.S.;

2) focus on effective direct marketing of the benefits of the Filshie Clip System in the U.S;

3) introduce additional products helpful to clinicians through internal new product development;

4) continue to achieve excellent overall financial operating performance;

5) utilize positive cash generation to continue providing cash dividends to stockholders and making open market share repurchases if/when the UTMD share price seems undervalued;

5) utilize positive cash generation to continue providing cash dividends to stockholders and make open market share repurchases if/when the UTMD share price seems undervalued;

6) be vigilant for accretive acquisition opportunities which may be brought about by difficult burdens on small, innovative companies.

Despite the economic challenges created by government reaction to the COVID-19 pandemic, the Company continues to execute its plan as outlined above.

Although not on its plan relative to specific financial numbers due to the COVID-19 pandemic, the Company continues to effectively execute its general plan outlined above.

m) Accounting Policy Changes

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis