Item 7. Management’s Discussion and Analysis
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Currency amounts are in thousands except per-share amounts and where noted. Currencies are abbreviated as follows: the U.S. Dollar (USD or $), the Great Britain Pound (GBP or £), the Euro (EUR or €), the Australian Dollar (AUD or A$), the New Zealand Dollar (NZD) and the Canadian Dollar (CAD or C$).
The following comments should be read in conjunction with the accompanying financial statements.
Overview .
The final calendar quarter (4Q) of 2020 continued a trend of financial recovery from the “COVID-19 depression” in 2Q 2020 caused by government policies restricting medical procedures deemed nonessential, such as tubal ligation and loop excision of the transformation zone in which a significant portion of the products of Utah Medical Products, Inc. (Nasdaq: UTMD) are focused.
UTMD management believes that the presentation of sequential 2020 quarterly comparisons provides meaningful supplemental information to both management and investors. Results for any given three month period in comparison with a previous year’s same three month period may vary as a result of several factors: foreign currency exchange rates for sales invoiced in foreign currencies, uneven international distributor and OEM customer order patterns as a result of purchasing larger quantities of devices at a time, and the timing of ups and downs in government restrictions during the pandemic. The following table provides the sequential quarterly percentage changes in financial results for each income statement category, comparing the same periods in 2020 and 2019:
Consolidated Income Statement
1Q
2Q
3Q
4Q
Year
Worldwide Revenues
+ 1.6%
(25.8%)
(16.1%)
+ 1.5%
(10.1%)
Gross Profit
+ 0.9%
(34.0%)
(12.0%)
( 7.0%)
(13.3%)
Operating Income
( 5.8%)
(55.9%)
(17.9%)
( 8.5%)
(22.3%)
Earnings Before Income Tax
( 3.6%)
(56.7%)
(19.3%)
( 9.5%)
(22.6%)
Net Income (US GAAP)
-
(62.8%)
(20.8%)
(21.7%)
(26.7%)
Earnings Per Share (US GAAP)
+ 0.4%
(62.0%)
(19.0%)
(19.8%)
(25.4%)
In summary, 4Q 2020 was UTMD’s best revenue quarter of the year, almost 2% higher than the pre-pandemic 4Q 2019. Consolidated total worldwide revenues for the 2020 year were 10% lower than in 2019, after being down 26% in 2Q 2020. Direct to end user sales, which drive UTMD’s overall profitability, were 14% lower for the 2020 year after being down 39% in the dismal 2Q 2020.
A comparison of 4Q and Year 2020 results with the results in the same periods of 2019, according to U.S. Generally Accepted Accounting Principles (US GAAP), is affected by some income tax provision adjustments not related to normal operations: 1) 4Q 2019 net income was increased $582 ($.156 increase in EPS) as a result of final adjustments made to state of Utah tax estimates following the December 2017 U.S. “Tax Cuts and Jobs Act” (TCJA), enacted in late 2017, and 2) 2Q 2020 net income was decreased $225 ($.061 decrease in EPS) 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) as a result of a change in the UK income tax rate. The $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 was 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 net income and the favorable tax-related adjustments to 4Q 2019 net income 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 exclusion only affects Net Income and Earnings Per Share. All other income statement categories at and above the EBT line were unaffected by the tax provision adjustments.
Excluding the 2Q 2020 deferred tax liability increase and concomitant “one-time” income statement tax provision increase resulting from the enactment of the UK corporate income tax change, and favorable tax provision adjustments in 4Q 2019 related to the U.S. TCJA, UTMD’s non-US GAAP Net Income and Earnings Per Share (EPS) quarterly percentage changes follow:
Consolidated Income Statement
1Q
2Q
3Q
4Q
Year
Net Income (Non-US GAAP)
-
(56.4%)
(20.8%)
( 9.7%)
(22.1%)
EPS (Non-US GAAP)
+ 0.4%
(55.5%)
(19.0%)
( 7.5%)
(20.7%)
In other words, ignoring the income tax provision adjustments in 4Q 2019 and 2Q 2020, all income statement categories improved sequentially during 2020 following the 2Q pandemic depression, compared to the same time periods in 2019.
Income statement results for the year 2020 compared to 2019 were as follows:
2020
2019
Change
Net Sales
$42,178
$46,904
(10.1%)
Gross Profit (GP)
25,548
29,466
(13.3%)
Operating Income
13,708
17,632
(22.3%)
Income Before Tax (EBT)
13,840
17,884
(22.6%)
Net Income before tax adjustments
11,023
14,145
(22.1%)
Net Income per US GAAP
10,798
14,727
(26.7%)
EPS before tax adjustments
3.002
3.784
(20.7%)
Earnings per Share (EPS) per US GAAP
2.941
3.939
(25.4%)
Sales outside the U.S. (OUS) were more negatively affected by the reaction to the pandemic than inside the U.S., and have recovered more slowly. UTMD maintained its manufacturing operations in the U.S. and Ireland throughout the pandemic, without government assistance, in order to support important clinical needs of patients. Gross profit declined more than sales as a result of less absorption of fixed overheads and marginal costs associated with the pandemic including personal protective equipment for employees, cleaning supplies, extra pay to encourage employees to come to work, pay continuation beyond normal sick pay and accrued vacation pay for those quarantined with symptoms or exposed to someone with symptoms, lower productivity as a result of social distancing and higher costs levied by some suppliers and service providers.
The associated key 2020 profit margins (profits as a percentage of sales) compared to the 2019 calendar year follow:
2020
2019
Gross Profit Margin (GPM)
60.6%
62.8%
Operating Income Margin
32.5%
37.6%
Income Before Tax Margin
32.8%
38.1%
Net Income Margin before TCJA tax adjusts
26.1%
30.2%
Net Income Margin per US GAAP
25.6%
31.4%
Operating Income, EBT and non-GAAP Net Income were leveraged further down from the lower GP due primarily to the fixed $6,470 noncash expense in 2020 resulting from amortizing Identifiable Intangible Assets (IIA) which resulted from the purchase of Femcare in 2011 and the remaining life of the U.S. exclusive distribution rights for the Filshie Clip System from CooperSurgical Inc. (CSI) in 2019. The IIA amortization expense in 2019 was only $6,089 because of a partial year of CSI IIA amortization and a stronger USD which reduced fixed GBP IIA amortization expense. Non-GAAP EPS declined less than Net Income due to share repurchases in 2020.
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Net Income and EPS per U.S. Generally Accepted Accounting Principles (US GAAP) in both 2020 and 2019 were affected by a change in UTMD’s estimate of the IRC 965 Transition (REPAT) Tax initially booked in 2017 resulting from the U.S. “Tax Cuts and Jobs Act” (TCJA) enacted by Congress in December 2017, and the concomitant ensuing Global Intangible Low-Taxed Income (GILTI) tax and Foreign-Derived Intangible Income (FDII) tax credit which liability began in 2018. US GAAP Net Sales, GP, Operating Income and EBT were not affected by the TCJA tax estimate-related adjustments in 2020 or 2019. Because of the tax estimate adjustments, in UTMD management’s view, a comparison of US GAAP Net Income and EPS between 2020 and 2019 does not provide stockholders with meaningful insight about UTMD’s financial performance. The non-GAAP results presented above eliminate the tax estimate adjustments from Net Income and EPS.
Measures of the Company’s liquidity and overall financial condition improved as of the end of 2020 compared to the end of 2019 as the result of continued strong positive cash flow from normal operations, despite the negative performance comparison with the prior year. The Company’s continued excellent positive cash flow in 2020 allowed it to increase cash dividends paid to stockholders, repurchase 87,000 UTMD shares in the open market and use $860 in cash to invest in new manufacturing equipment for a future need in addition to maintaining Property, Plant and Equipment (PP&E) in good working order.
In spite of a combined $11,952 in share repurchases, stockholder dividends and capital expenditures, UTMD’s cash equivalent balances at the end of 2020 increased $8,804 to $51,590 from $42,787 at the end of 2019. Working capital increased $7,034 to $58,471at the end of 2020 from $51,438 at the end of 2019. Total liabilities increased $229. The Company remained without debt. UTMD’s total debt ratio (total liabilities to total assets) was 8% at the end of both 2020 and 2019. Stockholders’ Equity increased to $102,822 from $101,092 at the end of 2019, despite the $4,116 in 2020 cash dividends to stockholders and use of $6,976 for 2020 share repurchases, both of which reduce Stockholders’ Equity.
Productivity of Fixed Assets and Working Capital Assets .
Assets .
Year-end 2020 total consolidated assets were $111,745 comprised of $62,262 in current assets, $11,326 in consolidated net PP&E and $38,157 in net intangible assets. This compares to $109,787 total assets at the end of 2019 comprised of $54,885 in current assets, $10,728 in consolidated net PP&E and $44,173 in net intangible assets. Total asset turns (total consolidated sales divided by average total assets for the year) in 2020 were 38% compared to 45% in 2019, as sales declined while assets increased.
Current assets increased $7,377 due to an $8,804 increase in year-end cash and investments, offset by $638 lower accounts and other receivables and $691 lower year-end inventories. Year-end 2020 and 2019 cash and investment balances were $51,590 and $42,787, representing 46% and 39% of total assets, respectively. Net (after allowance for doubtful accounts) year-end trade accounts receivable (A/R) balances were $592 lower at the end of 2020 compared to 2019. This was in spite of the fact that 4Q 2020 sales were higher than in 4Q 2019. Average days in A/R from date of invoice on December 31, 2020 was 31 compared to 36 days at December 31, 2019, based on 4Q 2020 and 4Q 2019 shipments respectively. A/R over 90 days from invoice date declined to less than 2% of total A/R at the end of 2020 from 3% at the end of 2019. The Company believes any older A/R will be collected or are within its reserve balances for uncollectible amounts. Although reducing inventories is difficult with a sudden decline in sales, UTMD was able to reduce its 2020 year-end inventories by 10% from the end of 2019, keeping pace with the 10.1% decline in annual sales.
Working capital (current assets minus current liabilities) at year-end 2020 was 14% higher at $58,471 compared to $51,438 at year-end 2019. Consistent with Federal and State rules, the TCJA repatriation tax current liability was only $80 at the end of 2020. The end of 2020 working capital significantly exceeds UTMD’s needs for normal operations, funding future organic growth and timely payment of accrued tax liabilities, in addition to allowing for substantial funding of any future acquisition without diluting stockholder interest, as well as continued payment of stockholder dividends and repurchase of UTMD shares.
December 31, 2020 net $11.3 million total PP&E includes Utah, Ireland and England manufacturing molds, production tooling and equipment, test equipment, and product development laboratory equipment. In addition, PP&E includes computers and software, warehouse equipment, furniture and fixtures, facilities and real estate for all five locations in Utah, Ireland, UK, Canada and Australia. Manufacturing facilities in Utah, Ireland and the UK are standalone buildings with a combined 220,000 square feet on 15 acres of land. The distribution facilities in Australia and Canada with a combined 8,000 square feet are part of larger industrial condominiums. Management estimates the fair market value of the five owned facilities to be at least $22 million excluding the contents, the fungible value of which increases stockholder enterprise value relative to most of UTMD’s industry peers which lease their facilities.
Ending 2020 net consolidated PP&E (depreciated book value of all fixed assets) increased $598 as a result of the combination of capital expenditures of $860, depreciation of $655 and the effect of FX rates on year-end foreign subsidiary asset balances.
The following end-of-year foreign currency exchange (FX) rates in USD were applied to assets and liabilities of each applicable foreign subsidiary:
12-31-20
12-31-19
EUR
1.2228
1.1227
GBP
1.3663
1.3268
AUD
0.7708
0.7030
CAD
0.7841
0.7715
The year-end 2020 net book value (after accumulated depreciation) of consolidated PP&E was 33% of purchase cost. End-of-year PP&E turns (Net Sales divided by Net PP&E) was 3.7 in 2020 compared to 4.4 in 2019 due to 10% lower 2020 sales, higher USD asset values of foreign subsidiaries and investment in new PP&E assets needed for the future which are not in use yet. A future leverage in productivity of fixed assets which will not have to be further increased to support new business activity will be a source of incremental profitability.
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Net intangible assets (after accumulated amortization) are comprised of the capitalized costs of obtaining patents and other intellectual property, as well as the value of identifiable intangible assets (IIA) and goodwill resulting from acquisitions. Net intangible assets were $38,157 (34% of total assets) at the end of 2020 compared to $44,173 (40% of total assets) at the end of 2019. Per US GAAP, intangible assets are categorized as either 1) IIA, which are amortized over the estimated useful life of the assets, or 2) goodwill, which is not amortized or expensed until the associated economic value of the acquired asset becomes impaired. The two categories of Femcare intangibles at year-end 2020 were net IIA of $11,410 and goodwill of $6,972. The accumulated amortization of Femcare IIA as of December 31, 2020 since the March 18, 2011 acquisition was $21,494. The remaining Femcare IIA will be fully amortized in 5 more years. The goodwill portion of intangible assets resulting from the Femcare acquisition, which is not amortized, increased $202 due to a stronger GBP at year-end. The GBP FX rate at December 31, 2020 increased 3.0% from December 31, 2019. In early 2019, UTMD acquired an additional $21,000 IIA from the purchase of the remaining life of exclusive U.S. distribution rights for the Filshie Clip System from CSI, of which $8,474 has been amortized through year-end 2020. The remaining CSI IIA will be fully amortized in less than 3 more years. UTMD’s goodwill balance from prior acquisitions including Femcare, Columbia Medical, Gesco and ABCorp was $14,163 at the end of 2020, 37% of total net intangibles.
Because the products associated with UTMD’s acquisitions of Columbia Medical in 1997, Gesco in 1998, Abcorp in 2004 and Femcare in 2011 continue to be viable parts of UTMD’s overall business, UTMD does not expect the current goodwill value associated with the four acquisitions to become impaired in 2021. Amortization of IIA was $6,515 in 2020 compared to $6,144 in 2019. The difference was essentially a full year of amortization of the $21,000 IIA resulting from the acquisition of CSI remaining Filshie Clip System exclusive U.S. distribution rights compared to 11 months of amortization in 2019. The 2020 non-cash amortization expense of Femcare IIA was $2,049 (£1,595) compared to $2,037 (£1,595) in 2019. The Femcare IIA amortization USD difference was again due to the change in USD/GBP FX rate. The 2021 non-cash amortization expense (included as part of consolidated G&A operating expenses) of Femcare IIA will be £1,591, or $2,147 if the USD/GBP average FX rate is 1.35. In other words, the 2021 Femcare IIA amortization expense, despite a slightly lower GBP amount, will be about $100 higher because of a projected stronger GBP relative to the USD. The 2020 non-cash amortization expense of CSI IIA was $4,421 compared to $4,053 in 2019. The 2021 operating expense resulting from amortization of CSI IIA will again be $4,421.
Liabilities .
The remaining $2,074 balance of UTMD’s $2,792 total repatriation tax liability from the TCJA is 74% instead of 76% (after the allowed 24% in the first three years of eight years’ pay out), because the initial Federal and State payments were based on an initial estimate which was conservatively too high at $6,288 compared to the final adjusted estimate of $2,792. The Federal and State REPAT tax payment requirement is 8% of the respective REPAT tax liability per year for the first five years, 15% in the sixth year, 20% in the seventh year and 25% in the eighth year.
Year-end 2020 current liabilities were $343 higher than at the end of 2019. Ending accrued liabilities were $653 higher due to higher taxes payable and higher customer deposits. Total liabilities were $229 higher at the end of 2020 compared to the end of 2019. The resulting 2020 year-end total debt ratio at 8% was the same as at the end of 2019 because total assets in 2020 were proportionately higher.
The year-end 2020 DTL balance created as a result of the fifteen-year deferred tax consequence of the amortization of Femcare’s IIA was $2,151, down from $2,239 at the end of 2019. The relatively small decline in this DTL considering the $2,049 in 2020 amortization of IIA was due to a 3% stronger GBP compared to the USD at the end of 2020 and the UK tax law change in 2Q 2020 which increased the remaining DTL $225. In addition to liabilities stated on the balance sheet, UTMD has operating lease and purchase obligations described in Note 14 and Note 12, respectively, to the financial statements.
Results of Operations .
a) Revenues .
Under accounting standards applicable for 2020, the Company believed that revenue should be recognized at the time of shipment as title generally passes to the customer at the time of shipment, or completion of services performed under contract. Revenue recognized by UTMD is based upon documented arrangements and fixed contracts in which the selling price is fixed prior to acceptance and completion of an order. Revenue from product or service sales is generally recognized at the time the product is shipped or service completed and invoiced, and collectibility is reasonably assured. Over 99% of UTMD’s revenue is recognized at the time UTMD ships a physical device to a customer’s designated location, where the selling price for the item shipped was agreed prior to UTMD’s acceptance and completion of the customer order. There are no post-shipment obligations which have been or are expected to be material to financial results.
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There are circumstances under which revenue may be recognized when product is not shipped, which have met the criteria of ASC 606: the Company provides engineering services, for example, design and production of manufacturing tooling that may be used in subsequent UTMD manufacturing of custom components for other companies. This revenue is recognized when UTMD’s service has been completed according to a fixed contractual agreement.
Beginning on January 1, 2018, the Company adopted ASU 2014-09, a 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 device to a customer’s designated location, 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, France, Australia and Canada since the beginning of 2017, UTMD has 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. About 9% of UTMD’s domestic end-user sales went 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 medical facilities are substantially the same in the U.S., Canada, Ireland, UK, France, Australia and New Zealand.
UTMD may allow separate discounted pricing agreements with a specific clinical facility or group of affiliated facilities based on volume of purchases. Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities, if applicable, are established in advance of orders accepted or shipments made. For existing customers, past actual shipment volumes typically determine the fixed price by part number for the next agreement period of one year. For new customers, the customer’s best estimate of volume is usually accepted by UTMD for determining the ensuing fixed prices for the agreement period. Prices are not adjusted after an order is accepted. For the sake of clarity, the separate pricing agreements with clinical facilities based on volume of purchases disclosure is not inconsistent with UTMD’s disclosure above that the selling price is fixed prior to the acceptance of a specific customer order.
UTMD’s global consolidated trade sales are comprised of domestic and OUS sales. Domestic sales in 2020 included 1) direct domestic sales, sales of finished devices to end-user facilities and med/surg distributors in the U.S., and 2) domestic OEM sales, sales of components or finished products, which may not be medical devices, to other companies for inclusion in their products. OUS sales are export sales from UTMD in the U.S. to customers outside the U.S. invoiced in USD, and sales from UTMD subsidiaries in Ireland, Canada, Australia and the UK which may be invoiced in EUR, GBP, CAD, AUD, NZD or USD. The term “trade” means sales to customers which are not part of UTMD. Each UTMD entity had 2020 intercompany sales of components and/or finished devices to other UTMD entities.
The following table shows the percent changes in 2020 quarterly revenues by sales channel compared to the same periods of time in 2019. Australia domestic sales included sales directly to New Zealand medical facilities beginning in 4Q 2020:
Revenues [USD denominated]
1Q
2Q
3Q
4Q
Year
U.S. domestic (excluding OEM)
+ 14.5%
(29.1%)
(8.0%)
(2.7%)
( 7.5%)
Canada domestic
(21.7%)
(62.9%)
( 5.6%)
(23.0%)
(29.7%)
Ireland domestic
(26.2%)
(48.6%)
(18.1%)
(31.3%)
(31.0%)
UK domestic
(11.2%)
(72.8%)
(34.4%)
(29.5%)
(36.2%)
France domestic
(11.8%)
(72.1%)
(12.3%)
(22.5%)
(29.8%)
Australia domestic
( 8.6%)
(43.0%)
(13.6%)
( 1.2%)
(16.7%)
Subtotal, Direct to End-User:
+4.2%
(39.1%)
(11.1%)
( 8.8%)
(14.3%)
All Other OUS (Sales to Int’l Distributors)
( 5.2%)
( 4.5%)
(34.7%)
+ 39.9%
(3.4%)
U.S. OEM Sales
+ 0.7%
+ 9.5%
( 8.9%)
( 1.3%)
( 0.8%)
Worldwide Revenues
+ 1.6%
(25.8%)
(16.1%)
+ 1.5%
(10.1%)
Global consolidated trade sales in 2020 were $42,178 compared to $46,904 in 2019 and $41,998 in 2018. The $4,726 (10.1%) lower sales in 2020 were primarily the result of restrictions on medical procedures that government officials worldwide deemed nonessential during the COVID-19 pandemic, presumably to conserve medical facility capacity. Total U.S. domestic sales were down $1,627 (5.9%) in 2020, at $25,866 compared to $27,493 in 2019. OUS sales were down $3,099 (16.0%) at $16,312 compared to $19,411 in 2019.
Domestic Sales .
U.S. domestic sales in 2020 were $25,866 (61% of total sales) compared to $27,493 (59% of total sales) in 2019. The components of the $1,627 lower 2020 domestic sales were $484 (7.1%) lower sales of the Filshie Clip System devices in the U.S., $51 (0.8%) lower sales of components and finished devices used in other companies’ products (OEM customers), and $1,092 (7.7%) lower direct sales of all other UTMD non-Filshie finished devices to domestic end-users. Domestic sales in 2018 were $21,192.
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Domestic Filshie Clip System sales in 2020 were 24% of total U.S. domestic sales compared to 25% in 2019. The month of April during 2Q 2020 had dramatically the lowest sales after the initial pandemic scare. The last seven months of 2020 were more consistent with 2019 monthly sales except for the month of October, at which time another scare seemed to occur. Looking forward to 2021, UTMD expects U.S. Filshie device sales will recover to an amount greater than in 2019, as only 11 months out of twelve in 2019 were direct to end-user sales. Unfortunately, a third scare seemed to occur in January as January 2021 sales took a dip lower than in any prior month in 2020 except for April and May.
Domestic OEM sales in 2020 were 25% of total U.S. domestic sales compared to 24% in 2019. UTMD sold components and finished devices to 139 different U.S. companies in 2020 compared to 147 companies in 2019 for use in their product offerings. Sales to UTMD’s largest OEM customer represented 75% of total domestic OEM sales in both 2020 and 2019, with the slightly lower sales UTMD projected at the beginning of 2020 due to the customer’s inventory build-up in 2019. Looking forward based on early fixed orders, UTMD expects that a substantial OEM sales increase will lead its domestic rebound in 2021.
Domestic direct (end-user) sales excluding the Filshie Clip System were about 51% of total U.S. domestic sales in both 2020 and 2019. Of UTMD’s three main domestic direct product categories, neonatal products were $4,379 (6% lower), labor & delivery (L&D) products were $3,677 (9% lower), and gynecology/ electrosurgery/ urology products excluding the Filshie Clip System were $4,304 (11% lower).
OUS Sales .
Sales OUS in 2020 were $16,312 (16.0% lower) compared to $19,411 in 2019. OUS sales were $20,806 in 2018. Europe was particularly affected by government restrictions. In the UK, the region with the greatest decline in sales for the 2020 year, citizens are individually being told by government officials when they can leave their homes.
Because a significant portion of UTMD’s sales are invoiced in foreign currencies, changes in FX rates can potentially have a material effect on period-to-period USD-denominated sales. Although in recent years a stronger USD was responsible for lower OUS sales, the FX rate impact in 2020 was not a significant factor compared to the impact of the pandemic. UTMD’s FX rates for income statement purposes are transaction-weighted averages. The average rates from the applicable foreign currency to USD during 2020 compared to 2019 follow:
2020
2019
Change
GBP
1.291
1.277
+1.1%
EUR
1.146
1.119
+2.4%
AUD
0.692
0.696
(0.6%)
CAD
0.751
0.754
(0.3%)
Sales weighted FX rate average change:
+0.2%
Consolidated sales in 2020 increased $99 due to the FX rate change.
Fifty-eight percent of (USD denominated) 2020 OUS sales were invoiced in foreign currencies compared to 66% in 2019. As a portion of total USD consolidated sales, 22% of UTMD’s USD-equivalent sales were invoiced in foreign currencies in 2020 compared to 27% in 2019. The GBP, EUR, AUD and CAD converted sales represented 6%, 10%, 3% and 3% of total 2020 USD sales, respectively. This compares to 8% GBP, 11% EUR, 4% AUD and 4% CAD of total 2019 USD sales.
USD-denominated trade (excludes intercompany) sales of devices to OUS customers by UTMD’s Ireland facility (UTMD Ltd) were $5,347 in 2020 (9% lower) compared to $5,894 in 2019. As the EUR was 2.4% higher relative to the USD in 2020, the FX impact added $67 to Ireland 2020 sales. In other words, constant currency sales were $5,279 (10% lower).
In 2020, UTMD’s UK subsidiary, Femcare Ltd., had $3,437 trade sales of devices to domestic UK, domestic France and international distributor customers, down 36% compared to $5,382 in 2019. The FX impact added $47 in USD terms.
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USD-denominated sales of devices to end-users in Australia by Femcare’s Australia distribution subsidiary (Femcare Australia Pty Ltd) were 17% lower in 2020 compared to 2019. With a slightly weaker AUD (0.6%) in 2020, constant currency sales were down 16%.
USD-denominated sales of devices to end-users in Canada by UTMD’s Canada distribution subsidiary (Utah Medical Products Canada, Inc.) were 30% lower in 2020 compared to 2019. The CAD was also only slightly weaker (0.3%) in 2020, so that constant currency sales were 29% lower.
UTMD groups its sales into four general product categories: 1) obstetrics, comprised of labor and delivery management tools for monitoring fetal and maternal well-being, for reducing risk in performing difficult delivery procedures and for improving clinician and patient safety; 2) gynecology/ electrosurgery/ urology, comprised of tools for gynecological procedures associated primarily with cervical/ uterine disease including LETZ, endometrial tissue sampling, transvaginal uterine sonography, diagnostic laparoscopy, surgical contraception and other MIS procedures; specialty excision and incision tools; conservative urinary incontinence therapy devices; and urology surgical procedure devices; 3) neonatal critical care, comprised of devices that provide developmentally-friendly care to the most critically ill babies, including providing vascular access, enteral feeding, administering vital fluids, oxygen therapy while maintaining a neutral thermal environment, providing protection and assisting in specialized applications; and 4) blood pressure monitoring/ accessories/ other, comprised of specialized transducers and components as well as molded parts and assemblies sold on an OEM basis to other companies. In these four categories, UTMD’s primary revenue contributors enjoy significant brand awareness by clinical users.
Global revenues by product category:
2020
%
2019
%
2018
%
Obstetrics
$4,523
11
$5,000
11
$4,447
11
Gynecology/ Electrosurgery/ Urology
20,552
49
25,354
54
23,167
55
Neonatal
5,870
14
6,066
13
6,436
15
Blood Pressure Monitoring and Accessories*
11,233
26
10,484
22
7,948
19
Total:
$42,178
100
$46,904
100
$41,998
100
OUS revenues by product category:
2020
%
2019
%
2018
%
Obstetrics
$ 846
5
$ 947
5
$ 698
3
Gynecology/ Electrosurgery/ Urology
9,934
61
13,731
71
15,022
72
Neonatal
1,490
9
1,412
7
2,252
11
Blood Pressure Monitoring and Accessories*
4,042
25
3,321
17
2,834
14
Total:
$ 16,312
100
$ 19,411
100
$20,806
100
* includes molded components and finished medical and non-medical devices sold to OEM customers.
Looking forward to 2021, the ability for medical facilities to return to more normal “nonessential” procedure rates remains highly uncertain due to ever changing government policies in combating a continuing coronavirus pandemic. After recovering well during the last seven months of 2020, U.S. Filshie device sales had another significant dip in January 2021. UTMD expects that, except for Canada, higher 2021 FX rates for its subsidiaries’ foreign currency (GBP, EUR, AUD) sales will increase foreign currency sales in USD terms by about 4%. U.S. OEM sales, which have longer lead times due to less frequent larger orders, are more predictable and appear likely to be at least 10% higher in 2021. Although OUS distributor order patterns vary, UTMD’s largest OUS distributor has placed its 2021 order for BPM devices that is $325 higher than in 2020. In summary, although UTMD has the capacity and is hoping to return to its $46.9 million consolidated revenue level realized in 2019, management’s best estimate at this time is 2021 consolidated revenues between $45 and $46 million (compared to $42.2 million in 2020).
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b) Gross Profit (GP) .
UTMD’s 2020 consolidated GP, the surplus after subtracting costs of manufacturing, which includes purchasing raw materials, forming components, assembling, inspecting, testing, packaging and sterilizing products, from net revenues, was $25,548 (60.6% of sales) compared to $29,466 in 2019 (62.8% of sales) and $26,306 (62.6% of sales) in 2018. GP in 2020 declined $3,918 (13.3%) with a 10.1% decline in revenues.
The greater decline in GP than in sales was a result of UTMD’s decision to not cut important manufacturing overhead resources in the same proportion as the decline in sales, which would sacrifice future capabilities just to maintain a short term GP margin (GPM). GPM = GP divided by sales. Although lower, the 60.6% GPM in 2020 margin remains healthy. With higher sales in 2021 and fewer costs associated with the pandemic, UTMD expects its consolidated 2021 GPM to improve to closer to that of 2019 and 2018.
In addition to the lower absorption of fixed manufacturing overhead costs in 2020, there were two other categories of increased costs that reduced the 2020 GPM by more than one percentage point: 1) marginal costs associated with the coronavirus pandemic including personal protective equipment for employees, cleaning supplies, extra pay to encourage employees to come to work, pay continuation beyond normal sick pay and accrued vacation pay for those quarantined with symptoms or exposed to someone with symptoms, lower productivity as a result of social distancing and higher prices levied by some suppliers and service providers, and 2) an unusually unfavorable year for UTMD’s self-insured health care plan in the U.S.
UTMD’s Ireland subsidiary’s (UTMD Ltd’s) GP was EUR 4,198 in 2020 compared to EUR 2,908 in 2019 and EUR 3,606 in 2018. The associated GPMs were 54.4% in 2020, 43.1% in 2019 and 49.8% in 2018. Femcare UK GP was GBP 1,495 in 2020 compared to GBP 3,884 in 2019 and GBP 5,010 in 2018. The UK 2020 GPM was 56.0% compared to 70.2% in 2019 and 71.7% in 2018. Femcare Australia and Femcare Canada are purely distribution facilities for UTMD finished devices in their respective countries. GP is the result of subtracting intercompany purchase prices of devices from sales. Australia GP was AUD 1,194 in 2020 (58.1% of sales) compared to AUD 1,415 in 2019 (57.7% of sales) and AUD 1,526 in 2018 (58.7% of sales). Canada GP was CAD 1,128 in 2020 (57.2% of sales), CAD 1,670 in 2019 (54.5% of sales) and CAD 1,999 in 2018 (60.0% of sales). In the U.S., GP was $17,043 in 2020, $19,180 in 2019 and $13,065 in 2018. UTMD U.S. GPMs were 54.2% in 2020, 57.1% in 2019 and 54.1% in 2018. A summation of the above GP of each subsidiary will not yield UTMD’s consolidated total GP because of elimination of profit in inventory of intercompany goods.
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c) Operating Income .
Operating Income results from subtracting operating expenses from GP. Operating Income in 2020 was $13,708 (32.5% of sales) compared to $17,632 (37.6% of sales) in 2019 and $18,697 (44.5% of sales) in 2018. On top of a lower GPM, the lower 2020 Operating Income margin additionally primarily reflected IIA amortization expense, included in General and Administrative (G&A) operating expenses, which was 15.3% of sales in 2020 compared to 13.0% in 2019. Excluding the non-cash Femcare and CSI IIA amortization expenses, UTMD consolidated operating expenses were $5,370 (12.7% of sales) in 2020 compared to $5,744 (12.2% of sales) in 2019 and $5,478 (13.0% of sales) in 2018. Even though UTMD was able to reduce 2020 operating expenses (excluding the IIA amortization) substantially, the lower operating expenses still diluted UTMD’s Operating Income Margin slightly as they did not decline as much as sales declined.
The UTMD Ltd (Ireland) Operating Income margin in 2020 was 50.5% compared to 38.5% in 2019 and 45.9% in 2018. Femcare UK’s 2020 Operating Income margin per US GAAP, which includes the IIA amortization expense of the 2011 acquisition, was negative compared to 27.8% in 2019 and 38.1% in 2018. Femcare Australia’s 2020 Operating Income margin was 41.7% compared to 38.6% in 2019 and 45.4% in 2018. Femcare Canada’s 2020 Operating Income margin was 40.7% compared to 41.9% in 2019 and 49.1% in 2018. UTMD’s 2020 Operating Income margin in the U.S. was 28.5% compared to 33.7% in 2019 and 39.1% in 2018. For clarity, the CSI IIA amortization expense hit the U.S. Operating Income margin, and the Femcare IIA amortization expense hit the Femcare UK Operating Income margin.
Operating expenses include sales and marketing (S&M) expenses, product development (R&D) expenses and G&A expenses. Consolidated operating expenses were $11,840 (28.1% of sales) in 2020, $11,834 (25.2% of sales) in 2019 and $7,608 (18.1% of sales) in 2018. The following table provides a comparison of operating expense categories, as well as further segmentation of G&A expenses, for the last three years.
2020
2019
2018
S&M expenses
$ 1,554
$ 1,738
$ 1,708
R&D expenses
486
483
454
G&A expenses:
a) litigation expense provision
-
16
(8)
b) corporate legal
14
32
32
c) outside directors fees
116
118
109
d) stock option compensation
160
113
64
e) management bonus accrual
587
653
639
f) outside accounting audit/tax
223
216
238
g) Femcare IIA amortization
2,049
2,037
2,131
h) CSI IIA amortization
4,421
4,053
-
i) property & liability insurance premiums
95
91
126
j) all other G&A expenses
2,135
2,284
2,116
G&A expenses – total
9,800
9,613
5,447
Total Consolidated Operating Expense:
$ 11,840
$ 11,834
$ 7,608
Percent of sales:
28.1%
25.2%
18.1%
Description of Operating Expense Categories:
i) S&M expenses:
S&M expenses in 2020 were $1,554 (3.7% of 2020 sales) compared to $1,738 in 2019 (3.7% of 2019 sales) and $1,708 in 2018 (4.1% of 2018 sales). Due to social distancing, UTMD’s trade show and associated travel expenses were $140 lower in 2020 than in 2019.
S&M expenses are the costs of communicating UTMD’s differences and product advantages, providing training and other customer service in support of the use of UTMD’s solutions, attending clinical meetings and medical trade shows, administering customer agreements, advertising, processing orders, shipping, and paying commissions to outside independent representatives. In markets where UTMD sells directly to end-users, which in 2018-2020 included the U.S., Ireland, UK, Australia, France and Canada, the largest components of S&M expenses were the cost of employing direct sales representatives, including associated costs of attending trade shows, travel, subsistence and communications; the cost of customer service required to timely process orders; and the distribution costs associated with shipping products. A trade-off for the higher GP obtained from selling directly at end-user prices is higher S&M expenses.
S&M expenses include all customer support costs including training. In general, training is not required for UTMD’s products since they are well-established and have been clinically widely used. Written “Instructions For Use” are packaged with all finished devices. Although UTMD does not have any explicit contracts with customers to provide training, it does provide hospital in-service and clinical training as required and reasonably requested.
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UTMD promises prospective customers that it will provide, at no charge in reasonable quantities, electronic media and other instructional materials developed for the use of its products. UTMD provides customer support from offices in the U.S., Canada, Ireland, UK and Australia by telephone 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 in-service and training expenses are routinely expensed as they occur. Except for the consulting services of independent practitioners and occasional use of marketing consultants, all of these services are allocated from fixed S&M overhead costs. Historically, additional consulting costs have been immaterial to financial results, which is also UTMD’s expectation for the future.
ii) R&D expenses:
R&D expenses were $486 (1.2% of sales) in 2020 compared to $483 (1.0% of sales) in 2019 and $454 (1.1% of sales) in 2018. R&D expenses include the costs of investigating clinical needs, developing innovative concepts, testing concepts for viability, validating methods of manufacture, completing any necessary premarketing clinical trials, regulatory documentation and other activities required for design control, responding to customer requests for product enhancements, and assisting manufacturing engineering on an ongoing basis in developing new processes or improving existing processes. Although no new UTMD devices were launched in 2020, R&D played a significant and continuing role in manufacturing process improvements that were needed to support fast growing OEM product sales, in addition to continuing work on new product projects. UTMD does not pre-announce new devices that are being developed.
iii) G&A expenses:
G&A expenses in 2020 were $9,800 (23.2% of sales) compared to $9,613 (20.5% of sales) in 2019 and $5,447 (13.0% of sales) in 2018. G&A expenses include the “front office” functional costs of executive management and outside directors, finance and accounting, corporate information systems, human resources, stockholder relations, corporate risk management, corporate governance, protection of intellectual property, amortization of identifiable intangibles and legal costs. The table above helps identify certain specific categories of G&A expenses which might be of interest to stockholders. The management bonus expense in 2020 also included accruals for special bonuses paid during the year related to the COVID-19 pandemic, particularly to encourage employees to come to work in early 2020 when government incentives and media pressure was high for employees to stay at home. Actual management bonuses paid at the end of the year were on the average 25% lower than in 2019, which reflected a 23% lower consolidated EBT.
Amortization of the 2011 acquired Femcare IIA is part of G&A expenses. Although the IIA GBP amortization expense in 2020 was the same as in 2019, because of a slightly stronger GBP for the year as a whole, the USD 2020 IIA amortization expense was $12 higher than in 2019. The main impact was less absorption of the fixed GBP expense because of 10% lower sales in 2020. The resulting G&A noncash amortization expense of Femcare IIA was 4.9% of 2020 total consolidated sales compared to 4.3% of total consolidated 2019 sales and 5.1% of total 2018 sales. The Femcare IIA amortization expense will continue until March 2026 (or until the value of any remaining IIA becomes impaired). UTMD estimates that the Femcare IIA amortization expense in 2021 may be as much as $100 higher due to a stronger GBP.
The early 2019 $21,000 purchase of CSI exclusive Filshie Clip System U.S. distribution rights also represents an IIA which is being amortized on a straight line basis over the remaining life of the Femcare distribution agreement with CSI which would have been through 3Q 2023. This CSI IIA amortization expense is included in U.S. G&A expenses. In 2020, the CSI IIA amortization expense was $4,421 (10.5% of sales) compared to $4,053 in 2019 (8.6% of total sales), lowering UTMD’s Operating Income margin by almost two full percentage points. This was the result of 10% lower sales in 2020 and one month less amortization expense in 2019. In 2021, the CSI IIA amortization expense will again be $4,421, but hopefully diluted by higher sales.
d) Non-operating income/Non-operating expense, and Earnings Before Taxes (EBT) .
Non-operating income includes royalties from licensing UTMD’s technology, rent from leasing underutilized property to others, income earned from investing the Company’s excess cash and gains from the sale of assets. Non-operating expense includes interest on bank loans, bank service fees, excise taxes and losses from the sale of assets. Also, the period-to-period remeasured value of EUR cash balances held in the UK, and GBP balances held in Ireland, generates a gain or loss which is booked at reporting period end as non-operating income or expense, as applicable.
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Net non-operating income (combination of non-operating income and non-operating expense) was $132 in 2020 compared to $252 in 2019 and $761 in 2018. The non-operating income in 2018 included a $450 gain from the sales of assets which did not recur in 2019 or 2020. The lower non-operating income in 2020 compared to 2019 was essentially due to lower interest rates on UTMD’s cash balances. A description of components of UTMD’s non-operating income or expense follows:
1) Interest Expense. There was no interest expense in 2018-2020. Absent an acquisition or large repurchase of shares that requires new borrowing, UTMD does not expect any interest expense in 2021.
2) Investment of excess cash. Consolidated investment income (including gains and losses on sales of investments) was $64 in 2020 compared to $255 in 2019 and $248 in 2018. Interest rates in 2020 were practically zero. UTMD is not expecting this to change much in 2021.
3) Royalties. Royalties in 2020 were $20 compared to $5 in 2019 and $76 in 2018. Femcare received a royalty from licensing the use of the Filshie Clip System intangibles to CSI as part of its U.S. exclusive distribution agreement which was terminated in 2019. UTMD did not receive any royalty in 2019 after January because of the purchase of the CSI distribution agreement. Presently, there is one other arrangement which began in 2020 under which UTMD is receiving royalties on its technology.
4) Gains/ losses from remeasured currency in bank accounts. UTMD recognized $45 non-operating income in 2020 compared to an expense of $76 in 2019 and income of $13 in 2018 from gains or losses on remeasured foreign currency bank balances. EUR and AUD currency cash balances in the UK, and GBP currency cash bank balances in Ireland, are subject to remeasured currency translation gains/ losses as a result of period to period changes in FX rates.
5) Other non-operating income or expense. Income received from renting unused warehouse space in Ireland and parking lot space in Utah for a cell phone tower, offset by bank fees, and other miscellaneous non-operating expenses resulted in a net non-operating expense of $10 in 2020 compared to $85 in 2019 and $3 in 2018.
EBT results from adding net non-operating income or subtracting net non-operating expense from Operating Income. Consolidated EBT was $13,840 (32.8% of sales) in 2020 compared to $17,884 (38.1% of sales) in 2019 and $19,458 (46.3% of sales) in 2018. The 2020 EBT of UTMD Ltd. (Ireland) was €3,728 (48.3% of sales) compared to €2,577 (38.2% of sales) in 2019 and €3,144 (43.4% of sales) in 2018. Femcare UK’s 2020 EBT was (£593) compared to £1,566 (28.3% of sales) in 2019 and £2,896 (41.5% of sales) in 2018. Femcare AUS’s 2020 EBT was AUD 857 (41.8% of sales) compared to AUD 952 (38.8% of sales) in 2019 and AUD 1,183 (45.5% of sales) in 2018. Femcare Canada’s 2020 EBT was CAD 798 (40.5% of sales) compared to CAD 1,280 (41.8% of sales) in 2019 and CAD 1,632 (49.0% of sales) in 2018.
As a side note for clarity of financial results, UTMD’s EBT, as well as all other income statement measures above the EBT line in the Income Statements, were unaffected by 2018 and 2019 adjustments to tax estimates of the repatriation tax and associated GILTI tax and FDII tax credit, all of which resulted from the TCJA enacted in December 2017, or the income tax rate change in the UK enacted in 2Q 2020 which increased UTMD’s long term deferred tax liability.
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. If the Company were to need to borrow to pay for a major asset or acquisition, the projected EBITDA metric would be of primary interest to a lending institution to determine UTMD’s credit worthiness. 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:
2020
2019
2018
EBT
$13,840
$17,884
$19,458
Depreciation Expense
655
700
765
Femcare IIA Amortization Expense
2,049
2,037
2,130
CSI IIA Amortization Expense
4,421
4,053
0
Other Non-Cash Amortization Expense
45
54
60
Stock Option Compensation Expense
160
113
64
Remeasured Foreign Currency Balances
(45)
76
(13)
UTMD non-US GAAP EBITDA:
$21,125
$24,917
$22,464
In summary, UTMD’s 2020 non-US GAAP EBITDA declined 15.2% compared to 2019, more in line with the change in GP than with the change in Operating Income or Net Income. This metric will also grow faster than an increase in sales in 2021.
e) Net Income, Earnings Per Share (EPS) and Return on Equity (ROE) .
Net Income
Net Income results after subtracting a provision for estimated income taxes from EBT. UTMD’s US GAAP Net Income in 2020 was $10,798 (25.6% of sales) compared to $14,727 (31.4% of sales) in 2019 and $18,555 (44.2% of sales) in 2018. Because of changes in tax estimates for the years 2018-2019 due to the TCJA enacted in December 2017, as well as an UK income tax change enacted in 2020, management does not believe either that the estimated tax provisions have a direct relationship to sales in the same periods, or that the year-to-year changes in US GAAP Net Income is indicative of UTMD’s financial performance. Ignoring the income tax adjustments, 2020 non-US GAAP Net Income was $11,023 (26.1% of sales) compared to $14,145 (30.2% of sales) in 2019 and $15,504 (36.9% of sales) in 2018. Please see the table below which presents Net Income both according to US GAAP and also prior to recognition of the various tax estimate adjustments.
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The US GAAP consolidated income tax provision rate for 2020 was 22.0% compared to 17.7% of EBT in 2019 and 4.6% of EBT in 2018. The non-US GAAP consolidated combined income tax provision rate for 2020 was 20.4% compared to 20.9% of EBT in 2019 and 20.3% of EBT in 2018. For clarity, the UK income tax rate change in 2020 from 17% to 19% added $225 to UTMD’s 2020 income tax provision, representing the increased tax which will be due over the remaining life of amortization of Femcare’s IIA, which is not a tax deductible expense in the UK. The income tax adjustment in 2019 subtracted $582 from UTMD’s 2019 income tax provision, and the tax adjustment in 2018 subtracted $3,051 from UTMD’s 2018 income tax provision. As described in more detail in last year’s SEC Form 10-K, the favorable 2018 and 2019 adjustments were due to UTMD’s initial estimates of the income tax impact of the TCJA which were too high.
More normally and in general, year-to-year fluctuations in the combined tax provision rate will result from variation in EBT contribution from subsidiaries in jurisdictions with different corporate income tax rates. Taxes in foreign subsidiaries are based on taxable EBT in those sovereignties, which can be different from the contribution to consolidated EBT per US GAAP. For the three years 2018-2020, the non-US GAAP combined income tax rates ranged from 20.3% to 20.9%.
The UK had an income tax rate of 19% for all three years 2018-2020. The UK also allowed a tax deduction for sales of UK patented products which varied from year-to-year based on somewhat complicated rules which are sorted out for UTMD by independent UK tax specialists. The income tax rate for AUS was 30% for all three years. The income tax rate for Canada was about 26% for the three years. Profits of the Ireland subsidiary were taxed at a 12.5% rate on exported manufactured products, and a 25% rate on rental and other types of income including income from sales of medical devices in Ireland domestically. As UTMD stockholders likely remember, in the U.S. the Federal income tax rate was changed after 2017 to 21% from 34% prior to the TCJA. Federal taxes are not 21% of U.S. EBT, however, as income taxes paid to the State are a deductible expense for Federal tax purposes, other expenses are not deductible and there remains an R&D tax credit along with other credits, not to mention a GILTI tax related to foreign income and FDII tax credit related to profits on export sales. The State income tax rate declined to 4.95% from 5% prior to the TCJA, and the State enacted income apportionment rules that provide for additional tax relief.
EPS
EPS are 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). Diluted EPS in 2020 per US GAAP were $2.941 ($3.002 prior to the UK deferred tax liability adjustment) compared to $3.939 ($3.784 prior to the State TCJA tax correction) in 2019 and $4.950 ($4.136 prior to the TCJA tax corrections) in 2018. Due to the COVID-19 pandemic, the 2020 non-US GAAP EPS result did not meet management’s projection at the beginning of the year.
The 2020-ending weighted average number of diluted common shares (the number used to calculate diluted EPS) was 3,672 (in thousands) compared to 3,739 in 2019 and 3,749 in 2018. Dilution for “in the money” unexercised options for the year 2020 was 14 (in thousands) compared to18 shares in both 2019 and 2018. Actual outstanding common shares as of December 31, 2020 were 3,643.
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UTMD management believes the presentation of Net Income and EPS results excluding the tax liability estimate adjustments in 2020, 2019 and 2018 provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s bottom line results for comparison purposes.
US GAAP :
2020
2019
2018
Net Income
$10,798
$14,727
$18,555
Net Income Margin
25.6%
31.4%
44.2%
EPS
$ 2.941
$ 3.939
$ 4.950
Non-US GAAP (excluding 2020 UK DTL change and TCJA tax adjustments in 2019 and 2018) :
2020
2019
2018
Net Income
$11,023
$14,145
$15,504
Net Income Margin
26.1%
30.2%
36.9%
EPS
$ 3.002
$ 3.784
$ 4.136
Please note: The tax provision adjustments only affected UTMD’s income tax provision, Net Income and EPS, not consolidated revenues (sales), GP, Operating Income or EBT.
The non-US GAAP financial measures also facilitate management’s internal comparisons for purposes of planning future performance. The non-US GAAP financial measures disclosed by UTMD should not be considered a substitute for or superior to financial measures calculated in accordance with US GAAP, and the financial results calculated in accordance with US GAAP and reconciliations to those financial statements should be carefully evaluated.
To summarize 2020 financial results, UTMD realized a substantial decline in revenues due to government restrictions of medical procedures in which UTMD’s devices are used, particularly OUS. UTMD remained operating throughout the pandemic in 2020, without government subsidies (except in the UK), while incurring significant marginal expenses. Management decided to not cut overhead expenses in proportion to (what it has perceived as a relative short-term) decline in 2020 sales in order to protect the longer term interests of employees, suppliers, customers and stockholders.
Looking forward to 2021, because the COVID-19 and its variants do not recognize time periods, a significant lack of predictability of demand for UTMD’s medical devices remains. Nevertheless, management believes that 2021 sales are likely to be higher than in 2020 but probably not as high as in 2019. Higher sales will allow an expansion of UTMD’s GPM, and better absorption of the fixed IIA amortization expenses, giving leverage to profits. For the sake of specificity and as an example, UTMD estimates that an 8% increase in sales in 2021 will yield an 18% increase in EBT compared to 2020 results.
ROE
Maintaining a high ROE remains a key management objective for UTMD in order to grow without diluting stockholder interest. ROE is the quotient of Net Income divided by average Stockholders’ Equity, but more specifically it is the product of the Net Income margin, productivity of assets and financial leverage. Although UTMD’s high Net Income margin is the primary factor that continues to drive its ROE, cash dividends to stockholders and repurchase of shares help in lowering average Stockholders’ Equity, reducing the denominator in calculating ROE. The income tax estimate adjustments in all three years had an impact on the overall ROE ratios using US GAAP Net Income. UTMD’s 2020 ROE before stockholder dividends (with US GAAP Net Income) was 10.6%. In comparison, 2019 ROE was 15.5% and 2018 ROE was 22.2%.
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Before dividends, UTMD’s 2020 ROE (using non-US GAAP Net Income) was 10.8% compared to 14.9% in 2019 and 18.6% in 2018, excluding the effect of the tax adjustments on Net Income. The lower 2020 ROE was the result of 22.1% lower non-US GAAP Net Income and 7.3% higher average Stockholders’ Equity. Average Stockholders’ Equity was $101,957 in 2020 compared to $95,042 in 2019 and $83,557 in 2018. UTMD’s Stockholders’ Equity has tripled over the last ten years despite being reduced by $37 million in dividends and $14 million in share repurchases over that same period of time.
Maintaining a high ROE with the dilutive effect of rapidly growing Average Stockholders’ Equity (despite reductions from dividends and stock repurchases), while maintaining excellent Net Income results, suggests an excellent increase in stockholder value. UTMD’s average ROE over the last 28 years was 25%.
Liquidity and Capital Resources
Cash Flows .
Although Net Profit was $3,930 lower in 2020 compared to 2019, net cash provided by operating activities in 2020, including adjustments for depreciation and other non-cash operating expenses, along with changes in working capital and the tax benefit attributable to exercise of employee incentive stock options, was $3,080 higher than in 2019. Net cash provided by operating activities totaled $20,136 in 2020 compared to $17,056 in 2019 and $16,834 in 2018. Changes in 2020 cash from operating activities compared to 2019 changes (second order derivative) were largely related to the lower business activity resulting from restrictions on nonessential medical procedures during the pandemics, i.e. 1) a $1,354 higher amount of cash provided in 2020 compared to 2019 as a result of reducing trade accounts receivable (A/R) $617 instead of the $737 increase in 2019, and 2) a $2,609 higher amount of cash provided as a result of reducing inventories $923 instead of the $1,686 increase in 2019. Also related to less business activity, but offsetting cash provided by lower inventories and A/R, was a $422 reduction in cash provided as a result of a $308 decline in accounts payable instead of a $114 increase in 2019. Other activities which provided more cash in 2020 than in 2019 were 1) $371 higher noncash amortization expense, 2) $369 less reduction of deferred income taxes, 3) a $330 smaller reduction in the long term repatriation tax payable, and 4) $47 higher noncash stock-based compensation expense. A $607 increase in accrued expenses at the end of 2020 instead of a $1,651 decrease in 2019 also helped provide $2,259 more cash than in 2019.
In investing activities, during 2020 UTMD used $860 to purchase new molds and manufacturing equipment for new capabilities as well as to maintain and improve existing operating capabilities, compared to using $540 in 2019. On the other hand, in 2019 UTMD used $21,000 to purchase the remaining life of CSI’s exclusive U.S. distribution rights for the Filshie Clip System. There was no similar acquisition in 2020.
In 2020 UTMD received $358 and issued 8,278 shares of stock upon the exercise of employee and director stock options. Option exercises in 2020 were at an average price of $43.26 per share. The Company received a $7 tax benefit from option exercises in 2020. UTMD repurchased 87,000 shares of its stock in the open market during 2020 at an average cost of $80.19 per share.
In comparison, in 2019 UTMD received $283 and issued 7,042 shares of stock upon the exercise of employee and director stock options. Employees and directors exercised a total of 7,110 option shares in 2019, with 68 shares immediately being retired as a result of optionees trading the shares in payment of the exercise price of the options. Option exercises in 2019 were at an average price of $40.80 per share. The Company received a $23 tax benefit from option exercises in 2019. UTMD repurchased 5,000 shares of its stock in the open market during 2019 at an average cost of $79.52 per share.
In 2018 UTMD received $454 and issued 13,283 shares of stock upon the exercise of employee and director stock options. Employees and directors exercised a total of 15,722 option shares in 2018, with 2,439 shares immediately being retired as a result of optionees trading the shares in payment of the exercise price of the options. Option exercises in 2018 were at an average price of $43.22 per share. The Company received a $49 tax benefit from option exercises in 2018, which is reflected in net income as a result of adopting a new accounting standard in 2017. UTMD repurchased 15,000 shares of its stock in the open market during 2018 at an average cost of $80.35 per share.
UTMD did not borrow in any of the three years 2018-2020. Cash dividends paid to stockholders were $4,116 in 2020 compared to $4,096 in 2019 and $4,026 in 2018.
Management believes that future income from operations and effective management of working capital will provide the liquidity needed to finance internal growth plans. In an uncertain economic environment, UTMD’s cash balances allow management to operate with the long-term best interest of stockholders in mind. Planned 2021 capital expenditures for ongoing operations are expected to be about the same in magnitude as depreciation of PP&E.
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Management plans to utilize cash not needed to support normal operations in one or a combination of the following: 1) in general, to continue to invest at opportune times in ways that will enhance future profitability; 2) to make additional investments in new technology and/or processes; and/or 3) to acquire a product line or company that will augment revenue and EPS growth and better utilize UTMD’s existing infrastructure. If there are no better strategic uses for UTMD’s cash, the Company will continue to return cash to stockholders in the form of dividends and share repurchases when the stock appears undervalued.
Management's Outlook.
UTMD remains relatively small compared to many other companies, but its employees are experienced and remain diligent in their work. UTMD’s passion is in providing differentiated clinical solutions that will help improve the effectiveness of medical procedures and reduce health risks, particularly for women and their babies.
The safety, reliability and performance of UTMD’s medical devices are high and represent significant clinical benefits while providing minimum total cost of care. UTMD will continue to leverage its reputation as a device innovator which will responsively take on challenges to work with clinicians who use its specialty devices. In doing so, UTMD will continue to differentiate itself, especially from commodity-oriented competitors. In 2021, UTMD again plans to
1) exploit distribution and manufacturing synergies by further integrating capabilities and resources in its multinational operations;
2) focus on effectively direct marketing 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 make open market share repurchases if/when the UTMD share price seems undervalued; and
6) be vigilant for accretive acquisition opportunities which may be brought about by difficult burdens on small, innovative companies.
The Company has a fundamental focus to do an excellent job in meeting clinicians’ and patients’ needs, while providing stockholders with excellent returns. In 2020, the value of UTMD’s stock declined 22%, ending the year at $84.30/ share, while $1.12 in cash dividends/ share were paid. In comparison, the DJIA, S&P 500 and NASDAQ (where UTMD is traded) indices were up 7%, 16% and 44% respectively in 2020.
In comparison, in 2019 the value of UTMD’s stock increased 30%, ending the year at $107.90/ share, while $1.10 in cash dividends/ share were paid. The DJIA, S&P 500 and NASDAQ indices were up 22%, 29% and 35% respectively in 2019.
The UTMD stock price has declined during a calendar year only 5 other times in the last 22 years. The average compounded appreciation in UTMD stock value for the last 22 years, including the 2020 decline, was 12.3% per year, outpacing all of the major indices. Adding dividends, UTMD stockholder value increased at an annually compounded rate of 13.2% over the last 22 years.
Taking a longer term view, as of the end of 2019 from the end of 1998, UTMD’s share price increased 1,544%, representing a 14.3% annually compounded share price increase over the twenty-one year time span. If additional returns to stockholders from cash dividends are added, stockholder value increased 1,780% over the twenty-one year time span, representing 15.0% annually compounded growth in value. In comparison to UTMD’s 1,544% increase in stock value over the past twenty-one years, the NASDAQ Composite Index was up 309%, the S&P 500 Index was up 163% and the DJIA was up 211%.
Combining share price appreciation as a result of a long term profitable financial performance and a capital allocation strategy that includes opportunistic share repurchases with steadily growing quarterly cash dividends paid to stockholders since 2004, longer term UTMD stockholders have experienced excellent returns. Management is committed to continue that performance.
Off Balance Sheet Arrangements
None
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Contractual Obligations
The following is a summary of UTMD’s significant contractual obligations and commitments as of December 31, 2020:
Contractual Obligations and Commitments
Total
2021
2022- 2023
2024-2025
2026 and thereafter
Long-term debt obligations
$ -
$ -
$ -
$ -
$ -
Operating lease obligations
497
62
90
90
255
Purchase obligations
2,794
2,755
39
-
-
Total
$ 3,291
$ 2,817
$ 129
$ 90
$ 255
Critical Accounting Policies and Estimates
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the reported amounts of revenues and expenses during the reporting period.
Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Management has identified the following as the Company’s most critical accounting policies which require significant judgment and estimates. Although management believes its estimates are reasonable, actual results may differ from these estimates under different assumptions or conditions.
· Allowance for doubtful accounts: The majority of the Company’s receivables are with healthcare facilities and medical device distributors. Although the Company has historically not had significant write-offs of bad debt, the possibility exists, particularly with foreign distributors where collection efforts can be difficult or in the event of widespread hospital bankruptcies.
· Inventory valuation reserves: The Company strives to maintain inventory to 1) meet its customers’ needs and 2) optimize manufacturing lot sizes while 3) not tying-up an unnecessary amount of the Company’s capital increasing the possibility of, among other things, obsolescence. The Company believes its method of reviewing actual and projected demand for its existing inventory allows it to arrive at a fair inventory valuation reserve. While the Company has historically not had significant inventory write-offs, the possibility exists that one or more of its products may become unexpectedly obsolete for which a reserve has not previously been created. The Company’s historical write-offs have not been materially different from its estimates.
Accounting Policy Changes
The Company’s management has evaluated the recently issued accounting pronouncements through the filing date of these financial statements and has determined that the application of these pronouncements will not have a material impact on the Company’s financial position and results of operations.
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