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Item 2. Management’s Discussion and Analysis

2021-11-12 compared with 2021-08-06 · 255 added, 282 removed, 58 unchanged (90% of the section changed)

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The Company’s Form 10-K Annual Report for the year ended December 31, 2020, 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 second quarter (2Q) 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, the 2Q 2021 comparison with 2Q 2020 will not be indicative of comparative results for the year as a whole.

Because of government mandates for medical facilities to not perform certain “elective” procedures in order to theoretically preserve capacity for treating COVID-19 infected patients in 2020, the comparison of 2021 performance with the prior year’s same periods of time represents an unusual change.

As a result, UTMD provides an additional summary comparison of 2021 results to the same periods of time in 2019, prior to the pandemic.

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.

Currencies in this report are denoted as $ or USD = U.S.

AUD = Australia Dollars;

A$ or AUD = Australia Dollars;

£ or GBP = UK Pound Sterling;

CAD = Canadian Dollars;

C$ or CAD = Canadian Dollars;

and € or EUR = Euros.

Analysis of Results of Operations

As many of the gynecology devices provided by UTMD are used in “nonessential” or “elective” procedures, as medical procedures were classified during the COVID-19 pandemic, the Company’s financial performance, particularly during 2Q 2020, reflected a substantial negative change relative to 2019.

On the other side of the coin, when sales recovered in 2Q and 1H 2021, financial performance reflected a significant positive change relative to the same periods in 2020.

Income statement results in 2Q and 1H 2021 compared to the same periods of 2020 were as follows:

Income statement results in 3Q and 9M 2021 compared to the same periods of 2020 were as follows:

Operating Income

Income Before Tax

Net Income (US GAAP)

Earnings per Diluted Share

The comparisons of 2Q and 1H 2021 results with the results in the same periods of 2020, according to U.S.

Generally Accepted Accounting Principles (US GAAP), were affected by long term deferred tax liability increases on the balance of Femcare intangible assets (the amortization of which is not tax-deductible in the UK) in both 2Q 2021 and 2Q 2020.

The 2Q 2020 $225 increase in deferred UK taxes over the next six years resulted from the fact that the UK decided to not reduce its corporate income tax rate from 19% to 17% beginning in 2Q 2020, as was previously enacted.

The 2Q 2021 $390 increase in deferred UK taxes over the next five years resulted from the fact that the UK decided to increase its corporate income tax rate from 19% to 25% beginning on April 1, 2023.

Therefore, the remaining amortization of Femcare intangible assets from April 1, 2023 through March 11, 2026 will have a 6% ($390) higher income tax impact.

According to US GAAP, a deferred tax liability increase must be booked in the quarter in which the tax law change is enacted.

UTMD management believes that the presentation of results excluding the unfavorable deferred tax liability adjustments to its 2020 and 2021 income tax provisions provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results in 2021 compared to 2020.

Please note that the non-US GAAP exclusion of tax provision adjustments only affects Net Income and Earnings Per Diluted Share (EPS), as follows:

Net Income (non-US GAAP)

EPS (non-US GAAP)

Although a minor impact relative to the device demand increase after the 2020 depression, USD sales in 2021 were helped by a weaker USD compared to other currencies.

A favorable foreign currency exchange (FX) rate impact increased total consolidated 2Q 2021 sales by 2.7% (+$329) and 1H 2021 sales by 2.5% (+$581).

domestic sales in 2Q 2021 were 46% higher than in 2Q 2020.

Sales to customers outside the U.S.

(OUS) were 40% higher in USD terms.

Gross profits (GP) increased more than revenues primarily due to better absorption of fixed manufacturing overhead costs.

On the operating income line, not only did a higher GP margin (GP divided by sales) help, but also keeping operating expenses approximately the same further leveraged the improvement relative to the prior year’s same periods.

The same identifiable intangible asset (IIA) amortization expense of $1,105 in both 2Q 2021 and 2Q 2020, and $2,210 in both 1H 2021 and 1H 2020, resulting from UTMD’s February 2019 acquisition of CooperSurgical Inc’s (CSI’s) U.S.

exclusive distribution rights for the Filshie Clip System, represented 8.8% of sales in 2Q 2021 compared to 12.6% of sales in 2Q 2020, and 9.4% of sales in 1H 2021 compared to 11.2% of sales in 1H 2020.

Net Income in 2Q 2021 increased more than the increase in operating income as a result of $60 higher non-operating income and a lower income tax provision rate.

The increase in Net Income in 1H 2021 was about the same as the increase in 1H 2021 operating income as 1H 2021 non-operating income was $54 lower than in 1H 2020 and the income tax provision rate was slightly higher.

The consolidated average income tax rates (income tax provision divided by Earnings Before Taxes) follow:

Average Consolidated Income Tax Provision Rate (US GAAP)

Average Consolidated Income Tax Provision Rate (non-GAAP)

The impact of the respective 2Q deferred tax adjustments are apparent when comparing the US GAAP income tax provision rates with the non-US GAAP rates.

The percentage increases in 2021 EPS compared to the same periods in 2020 were slightly higher than the increases in Net Income because of UTMD shares repurchased in 2020.

UTMD profit margins in 2Q 2021 and 1H 2021 compared to 2Q 2020 and 1H 2020 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 Net Income after subtracting a provision for income taxes divided by sales.

UTMD’s June 30, 2021 Balance Sheet, in the absence of debt, continued to strengthen.

Ending Cash and Investments were $59.5 million on June 30, 2021 compared to $51.6 million on December 31, 2020, after paying $2.1 million in cash dividends to stockholders during 1H 2021.

Stockholders’ Equity (SE) increased $4.5 million in the six month period from December 31, 2020 despite the fact that dividends reduce SE.

Compared to June 30, 2020, one year earlier, cash increased $17.2 million and SE increased $12.1 million.

Foreign currency exchange (FX) rates for Balance Sheet purposes are the applicable rates at the end of each reporting period.

The FX rates from the applicable foreign currency to USD for assets and liabilities at the end of 2Q 2021 compared to the end of calendar year 2020 and the end of 2Q 2020 follow:

Net Income (NI)

Earnings per Diluted Share (EPS)

Income statement results in 3Q and 9M 2021 compared to the same periods of 2019 were as follows:

Operating Income

Income Before Tax

Net Income (NI)

Earnings per Diluted Share (EPS)

UTMD profit margins in 3Q 2021 and 9M 2021 compared to the same periods in the prior two years follow:

Gross Profit Margin:

(gross profit/ sales)

Operating Income Margin:

(operating income/ sales)

Net Income Margin:

(profit after taxes/ sales)

Gross Profit in 2021 periods increased more than sales primarily as a result of greater absorption of fixed manufacturing overhead expenses.

Because UTMD believed that lower 2020 sales were transitory, and that it could remain profitable even at the lower sales levels experienced during the pandemic, 2021 results benefited from having the resources the Company needed in 2021 to support the higher sales activity.

Operating Income increased substantially more than the Gross Profit increase in both 2021 periods because UTMD’s non-cash identifiable intangible asset (IIA) amortization expense included in operating expenses was relatively fixed (except for foreign exchange rate difference on GBP), and therefore enjoyed better absorption from higher sales.

IIA amortization expense was 13.1% of 3Q 2021 sales compared to 15.5% of 3Q 2020 sales, and 13.8% of 9M 2021 sales compared to 16.0% of 9M 2020 sales.

Income before tax (EBT) increased slightly differently from the increases in operating income as a result of small differences in period-to-period non-operating income, as explained later in this report.

Similarly, Net Income increased slightly differently from the increase in EBT as a result of the sovereignty mix of taxable profits in 2021 compared to 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 September 2021 and the end of September 2020 follow:

UTMD’s September 30, 2021 Balance Sheet remained strong with an absence of debt.

UTMD’s consolidated cash balances gained $12.7 million from the end of 2020.

September 30, 2021 inventories were essentially the same as one year ago.

September 30, 2021 trade receivables were up just 13% despite the 20% increase in sales.

The USD net book value of fixed assets in the U.S., as well as outside the U.S.

(OUS), remained about the same as of September 30, 2021 from a year earlier.

Over the one year period of time, the net intangible asset balance declined $5.8 million, about 15%.

Ending cash and investments were $64.3 million on September 30, 2021 compared to $51.6 million on December 31, 2020, after paying $3.1 million in cash dividends to stockholders during 9M 2021.

September 30, 2021 stockholders’ equity was up $7.2 million from December 31, 2020.

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

In the U.S., Ireland, UK, France, Canada, Australia and New Zealand, UTMD accepts orders directly from and ships directly to end user medical facilities, as well as third party medical/surgical distributors, under UTMD’s Standard Terms and Conditions (T&C) of Sale.

UTMD’s T&C of Sale to end user facilities are substantially the same in the U.S.

UTMD also has standard T&C of Sale for OEM customers, other medical device and non-medical device customers for components manufactured by UTMD, which are substantially the same, except that prices are generally quoted prior to acceptance of each order.

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

Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities or OEM customers, if applicable, are established in advance of orders accepted or shipments made.

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.

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.

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Prices are not adjusted after an order is accepted.

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

Total consolidated 2Q 2021 UTMD worldwide (WW) sales were $3,817 (+43.4%) higher than in 2Q 2020.

Constant currency sales were $3,487 (+39.7%) higher.

domestic sales were 46% higher and outside the U.S.

(OUS) sales were 40% higher.

Without the help of a weaker USD in converting foreign currency sales, OUS sales were 30% higher (i.e.

constant currency sales).

Despite the WW excellent double-digit percentage recovery in sales, 2Q U.S.

domestic sales continued to improve faster than OUS sales.

Domestic U.S.

sales in 2Q 2021 were $8,023 compared to $5,513 in 2Q 2020.

Domestic sales are invoiced in USD and not subject to FX rate fluctuations.

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

UTMD separates Filshie device sales from other medical device sales direct to medical facilities because of their significance, and the acquisition history.

Direct other device sales, representing 47% of total domestic sales, were $926 (+33%) higher in 2Q 2021 than in 2Q 2020.

OEM sales, representing 33% of total domestic sales, were $1,126 (+72%) higher.

Direct Filshie device sales, representing 20% of total domestic sales, were $457 (+40%) higher in 2Q 2021 compared to 2Q 2020.

OUS sales in 2Q 2021 were 40% higher at $4,581 compared to $3,274 in 2Q 2020.

The increase in USD-denominated OUS sales is overstated as a result of a weaker USD which added $329 to OUS sales that were invoiced in GBP, EUR, AUD and CAD foreign currencies (in constant currency terms).

“Constant currency” sales means exchanging foreign currency sales into USD-denominated sales at the same FX rate as was in the previous period of time being compared.

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

The average FX rates from the applicable foreign currency to USD during 2Q 2021 and 2Q 2020 for revenue purposes follow:

The weighted average favorable impact on 2Q 2021 foreign currency OUS sales was 10.8%, increasing reported USD sales by $329 relative to the same foreign currency sales in 2Q 2020.

In constant currency terms, foreign currency sales in 2Q 2021 were 92.9% higher than in 2Q 2020.

The portion of OUS sales invoiced in foreign currencies in USD terms were 27% of total consolidated 2Q 2021 sales compared to 18% in 2Q 2020.

OUS sales invoiced in foreign currencies are due to direct end-user sales in Ireland, the UK, France, Canada, Australia and New Zealand, and to shipments to OUS distributors of products manufactured by UTMD subsidiaries in Ireland and the UK.

Export sales from the U.S.

to OUS distributors are invoiced in USD.

Direct to end-user OUS 2Q 2021 sales in USD terms were 101% higher in Ireland, 71% higher in Canada, 146% higher in France and 247% higher in the UK.

Direct to end-user sales in Australia, which included New Zealand in 2Q 2021 but not in 2Q 2020, were 80% higher.

Sales to OUS distributors were 9% higher in 2Q 2021 than in 2Q 2020.

Total consolidated 1H 2021 UTMD worldwide (WW) sales were $3,879 (+19.7%) higher than in 1H 2020.

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 3Q 2021 UTMD sales were $2,094 (20.0%) higher than in 3Q 2020.

Constant currency sales were $2,006 (19.1%) higher.

Total consolidated 9M 2021 UTMD sales were $5,972 (19.8%) higher than in 9M 2020.

Constant currency sales in 9M 2021 were $5,303 (17.6%) higher than in 9M 2020.

In 3Q 2021 compared to 3Q 2020, U.S.

domestic sales were 11% higher and OUS sales were 37% higher.

Without the help of a weaker USD in converting foreign currency sales, OUS sales were 6% higher.

Domestic U.S.

sales in 1H 2021 were $14,805 compared to $11,956 in 1H 2020.

Direct other device sales, representing 48% of total domestic sales, were $952 (+15%) higher in 1H 2021 than in 1H 2020.

OEM sales, representing 31% of total domestic sales, were $1,646 (+56%) higher.

Direct Filshie device sales, representing 21% of total domestic sales, were $251 (+9%) higher in 1H 2021 compared to 1H 2020.

OUS sales in 1H 2021 were 13% higher at $8,762 compared to $7,733 in 1H 2020.

The increase in USD-denominated 1H 2021 OUS sales is overstated as a result of a weaker USD which added $581 to OUS sales that were invoiced in GBP, EUR, AUD and CAD foreign currencies (in constant currency terms).

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

The average FX rates from the applicable foreign currency to USD during 1H 2021 and 1H 2020 for revenue purposes follow:

The weighted average favorable impact on 1H 2021 foreign currency OUS sales was 10.0%, increasing reported USD sales by $581 relative to the same foreign currency sales in 1H 2020.

In constant currency terms, OUS sales in 1H 2021 were 5.8% higher than in 1H 2020.

The portion of OUS sales invoiced in foreign currencies in USD terms was 27% of total consolidated 1H 2021 sales compared to 23% in 1H 2020.

Direct to end-user OUS 1H 2021 sales in USD terms were 26% higher in Ireland, 8% higher in Canada, 27% higher in France and 17% higher in the UK.

Direct to end-user sales in Australia, which included New Zealand in 1H 2021 but not in 1H 2020, were 32% higher.

Sales to OUS distributors were 9% higher in 1H 2021 than in 1H 2020.

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:

In 9M 2021 compared to 9M 2020, U.S.

domestic sales were 19% higher and OUS sales were 21% higher.

Domestic sales in 3Q 2021 were $7,749 compared to $6,950 in 3Q 2020.

Domestic sales in 9M 2021 were $22,555 compared to $18,906 in 9M 2020.

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 2021 excluding Filshie devices, representing 48% of total domestic sales, were $277 (+8%) higher than in 3Q 2020.

Domestic direct sales in 9M 2021 excluding Filshie devices, also representing 48% of total domestic sales, were $1,229 (+13%) higher than in 9M 2020.

OEM sales in 3Q 2021, representing 32% of total domestic sales, were $704 (+40%) higher than in 3Q 2020.

OEM sales in 9M 2021, representing 31% of total domestic sales, were $2,350 (+50%) higher than in 9M 2020.

Filshie device sales direct to U.S.

domestic end-user facilities were $182 (10%) lower in 3Q 2021 compared to sales in 3Q 2020.

Filshie device sales direct to U.S.

domestic end-user facilities were $69 (+2%) higher in 9M 2021 compared to Filshie device sales in 9M 2020.

OUS sales in 3Q 2021 were $4,823 (+37%) compared to $3,528 in 3Q 2020.

OUS sales in 9M 2021 were $13,585 (+21%) compared to $11,262 in 9M 2020.

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 2021 and 9M 2021 compared to the same periods in 2020 follow:

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.

Foreign currency revenues in 3Q 2021 were increased by $88 as a result of a weaker USD compared to 3Q 2020.

The difference in period-to-period FX rates increased revenues by $669 in 9M 2021.

Foreign currency sales as a percentage of total sales were 26.7% of total sales in 3Q 2021 and 27.0% of total sales in 9M 2021.

UTMD’s 3Q 2020 and 9M 2020 revenues invoiced in foreign currencies represented 21.0% and 22.0% of total consolidated USD sales respectively.

Foreign currency OUS sales were more affected by the pandemic in 2020 than USD sales.

Foreign currency OUS sales in 3Q 2021 were $3,352, which was 70% of all OUS sales.

In comparison, foreign currency OUS sales in 3Q 2020 were $2,205, which was 62% of all OUS sales.

The foreign currency OUS sales in 9M 2021 were $9,766, which was 72% of all OUS sales.

In comparison, foreign currency OUS sales in 9M 2020 were $6,653, which was 59% of all OUS sales.

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 2021 compared to 3Q 2020, worldwide gynecology/ electrosurgery and neonatal device sales were both up 10%, worldwide labor & delivery device sales were 3% lower, and worldwide blood pressure monitoring and related OEM product sales were up 55%.

In 9M 2021 compared to 9M 2020, worldwide gynecology/ electrosurgery device sales were up 12%, worldwide labor & delivery device sales were up 2%, worldwide neonatal device sales were up 10% and worldwide blood pressure monitoring and related OEM product sales were up 48%.

Medical facility procedures in L&D and the NICU during the 2020 pandemic did not decline as much as procedures utilizing devices in the gynecology/ electrosurgery category.

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

Global 3Q 2021 revenues (USD) by product category:

Gynecology/Electrosurgery/Urology

Blood Pressure Monitoring and Accessories*

OUS revenues by product category:

Global 9M 2021 revenues (USD) by product category:

Gynecology/Electrosurgery/Urology

Blood Pressure Monitoring and Accessories*

* includes assemblies and molded components sold to OEM customers.

UTMD believes that the continued recovery for its medical devices will be related primarily to government policy responses, at all levels, to the corona virus pandemic in each of its major markets rather than clinical need.

Some jurisdictions have recently mandated the use of masks for fully-vaccinated people in response to the fear of a delta variant infection flare-up.

Sydney Australia, for example, is in full lock-down as of late July.

Although the 1H 2021 sales results were much better than expected and cause for optimism looking forward, some of the higher sales may have been for “catch-up” procedures.

Sales in 2H 2020 were 14% higher than in 1H 2020.

For that reason and because of an apparent negative impact from the continued corona virus pandemic, UTMD would not expect 2H 2021 revenues to experience the dramatic growth that occurred in 1H 2021.

OEM domestic sales, which were 56% higher in 1H 2021 compared to 1H 2020, will continue to grow, but not as fast as UTMD is now production capacity limited for those products.

The recent weakening of the USD may continue to help 2H 2021 OUS foreign currency sales.

In general, if UTMD is able to duplicate its 1H 2021 revenues in the 2H, sales for the 2021 year would be up about 12% compared to the 2020 year.

c) Gross Profit (GP)

GP results from subtracting the costs of manufacturing, quality assurance and receiving materials from suppliers.

UTMD’s GP was $2,835 (+57.3%) higher in 2Q 2021 than in 2Q 2020, and $2,946 (+25.0%) higher in 1H 2021 than in 1H 2020.

The primary contribution to an expanded GP Margin (GPM) was much greater dilution of fixed manufacturing overhead costs by 43% higher sales in 2Q 2021, and 20% higher sales in 1H 2021.

The greater percentage increase in GP than in sales is due to the ability to leverage fixed costs.

Incremental direct labor costs did increase as a result of competition for a limited number of people currently seeking work.

Also during 2Q 2021, UTMD experienced double-digit percentage cost increases in a number of raw materials, as well as in the freight cost to receive the materials.

The growing administrative burden of compliance with regulatory requirements, particularly OUS, continues to pressure UTMD’s GPM.

Managing variable manufacturing costs will continue to be a significant challenge for the rest of 2021.

*includes molded components sold to OEM customers.

Looking forward, UTMD expects that its 4Q 2021 and year 2022 organic device sales will continue to improve.

c) Gross Profit

Gross Profit results from subtracting the costs of manufacturing products, including relatively fixed critical mass of overhead expenses associated with quality assurance, engineering and supervision, from revenues.

Gross Profit was $1,576 (+24.3%) higher in 3Q 2021 than in 3Q 2020, and $4,522 (+24.7%) higher in 9M 2021 than in 9M 2020.

UTMD’s 3Q 2021 Gross Profit Margin (GPM) (Gross Profit/ Sales) improved to 64.2% compared to 62.0% in 3Q 2020, and to 63.1% compared to 60.6% in 9M 2021 compared to 9M 2020.

The GPM expansion in both periods allowed a higher increase in Gross Profit than in revenues.

In 2020, UTMD did not reduce critical mass manufacturing overhead expenses in proportion to its temporary pandemic decline in sales.

As a result, the 2021 GPM has expanded as a result of UTMD not needing to increase manufacturing overhead expenses in proportion to the sales recovery.

Looking forward, UTMD management expects new pressure on its GPM as a result of recent increases in raw material and packaging costs in the range of 8%-15%, a more than doubling of freight costs associated with obtaining materials from vendors, a recent 5% cost-of-living adjustment for its direct labor force, and higher sterilization costs, among other cost increases.

Management believes, however, that UTMD does retain the ability to adjust prices for its specialty devices to allow it to continue to achieve its minimum GPM target of 60%.

d) Operating Income

Operating Income results from subtracting Operating Expenses from GP.

After subtracting Operating Expenses from substantially higher 2Q and 1H 2021 GP, Operating Income in 2Q 2021 was $4,765 compared to $1,977 in 2Q 2020, an increase of 141%, and was $8,652 in 1H 2021 compared to $5,840 in 1H 2020, an increase of 48%.

Despite Operating Expenses in USD being slightly higher in 2021 than in the same 2020 time periods, as shown in the table below, the period-to-same period increases in 2021 GP were further leveraged as a result of better Operating Expense absorption (lower percentage of sales).

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

The following table summarizes Operating Expenses in 2Q and 1H 2021 compared to the same periods in 2020 by Operating Expense category:

Expense Category

Although a weaker USD helped increase consolidated USD sales in 2021, it also helped increase the USD-denominated Operating Expenses of UTMD’s foreign subsidiaries by $109 in 2Q 2021 and $169 in 1H 2021.

The following table summarizes “constant currency” Operating Expenses in 2Q and 1H 2021 compared to the same periods in 2020 by Operating Expense category:

Expense Category

2Q 2021 const FX

1H 2021 const FX

In other words, 2021 Operating Expense converted to USD at the same FX rate were actually lower than in 2020.

Holding Operating Expenses constant while dramatically increasing revenues with a higher GPM had a huge favorable impact on Operating Income.

The change in FX rates increased 2Q 2021 OUS S&M expenses by $12, and 1H 2021 OUS S&M expense by $19.

The lower constant currency S&M expenses were due primarily to a reduction of outside sales representatives in the UK.

A division of G&A expenses by location follows.

G&A expenses include non-cash expenses from the amortization of IIA associated with the Filshie Clip System, which is also separated out below:

G&A Expense Sub-Category

IIA Amort– UK:

IIA Amort– CSI:

Total G&A Expense:

About two-thirds of G&A expenses in all periods above were from the non-cash expense of amortizing IIA related to the Filshie Clip System.

OUS G&A expenses were $871 in 2Q 2021 compared to $782 in 2Q 2020.

OUS G&A expenses were $1,750 in 1H 2021 compared to $1,587 in 1H 2020.

Per the table below which identifies “constant currency” OUS G&A expenses for 2Q and 1H 2021 compared to the same periods in 2020, virtually all of the increases in OUS G&A expenses in both periods were due to FX rate changes:

G&A Expense Sub-Category

2Q 2021 const FX

1H 2021 const FX

IIA Amort– UK:

Total G&A Expense:

Period to period product development (R&D) expenses varied slightly depending on specific project costs.

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

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 23.7% of sales in 3Q 2021 compared to 27.8% of sales in 3Q 2020.

Operating Expenses were 25.1% of sales in 9M 2021 compared to 29.4% of sales in 9M 2020.

The operating expense percentage of sales declined in 3Q 2021 as a result of expenses increasing only 2.3% when sales increased 20.0%, and in 9M 2021 when Operating Expense increased only 2.2% when sales increased 19.8%.

Summary comparison of (USD) consolidated operating expenses:

Total Operating Expenses:

A weaker USD helped increase consolidated USD sales in 2021, but it also helped increase the USD-denominated operating expenses of UTMD’s foreign subsidiaries by $49 in 3Q 2021 and $221 in 9M 2021.

In “constant currency” terms, operating expenses in 3Q and 9M 2021 were almost the same as in the prior year:

Total Operating Expenses:

The following lower operating expense ratios in 2021 were essentially due to higher sales, rather than the change in actual expenses.

S&M expenses were 2.6% of sales in 3Q 2021 and 3.4% of sales in 3Q 2020.

S&M expenses were 3.0% of sales in 9M 2021 compared to 4.0% of sales in 9M 2020.

Somewhat lower actual S&M expenses were due primarily to one less sales person in the U.S.

R&D expenses were 1.0% of sales in 3Q 2021 compared to 1.2% of sales in 3Q 2020.

R&D expenses in 9M 2021 were 1.1% of sales compared to 1.2% of sales in 9M 2020.

R&D expenses varied only by specific project expenses.

Consolidated G&A expenses were 20.1% of sales in 3Q 2021 compared to 23.2% of sales in 3Q 2020.

Consolidated G&A expenses were 21.0% of sales in 9M 2021 compared to 24.2% of sales in 9M 2020.

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 exclusive Filshie devices U.S.

distribution rights effective in February 2019.

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

After 10.5 years of amortization, the IIA balance is £7,094.

For 3Q 2021 and 3Q 2020, the IIA amortization expenses were £397 and £399 respectively.

For 9M 2021 and 9M 2020, the IIA amortization expenses were £1,193 and £1,196 respectively.

The USD amortization expense amount in each period, however, varied according to the USD/GBP FX rate which explains the differences in IIA amortization expenses in the table below.

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 32 months of amortization, the CSI IIA balance as of September 30, 2021 is $9,211.

The CSI IIA amortization expenses were the same in both years’ 3Q and 9M periods.

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 4.5 more years to run at about $547 per quarter using the same USD/GBP FX rate as in 3Q 2021.

The CSI IIA amortization expense has 2.1 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 2.1 years, based on current shares outstanding and if current U.S.

and Utah income tax rates remain the same.

Similarly, after another 4.5 years annualized EPS would be $1.35 higher based on current shares outstanding and a 25% income tax rate in the UK beginning in April 2023.

Other G&A expenses were higher in both periods primarily because UTMD’s CEO took 50% salary in 2020, and 2021 employee profit-sharing bonuses based on the projected 2021 annual EBT have been accrued at a higher rate than in 2020.

In summary, Operating Income in 3Q 2021 was $5,098 (40.6% of sales) compared to $3,588 (34.2% of sales) in 3Q 2020.

Operating Income in 9M 2021 was $13,750 (38.0% of sales) compared to $9,428 (31.3% of sales) in 9M 2020.

A higher GPM on higher sales in 2021 was leveraged further by lower Operating Expenses as a ratio of sales.

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 2021 was $60 compared to $0 in 2Q 2020.

Net non-operating income in 1H 2021 was $71 compared to $125 in 1H 2020.

The main difference in non-operating income during 2Q was due to rental income received in Ireland from renting underutilized warehouse space to a third party distributor.

Because UTMD owns its own facilities with space in excess of current needs, this sort of opportunistic income results from time to time.

The main difference in non-operating income during 1H resulted from remeasured foreign currency balances.

A $5 gain on remeasured foreign currency balances was recognized in 2Q 2021 compared to a loss of $1 in 2Q 2020.

In 1H 2021, a loss of $5 on remeasured foreign currency balances was recognized compared to a gain of $42 in 1H 2020.

Royalties received were $0 in 2Q 2021 and 1H 2021 compared to $5 in 2Q 2020 and 1H 2020.

Interest earned on cash balances was $7 in 2Q 2021 compared to $(2) in 2Q 2020.

Interest earned on cash balances was $25 in 1H 2021 compared to $62 in 1H 2020.

Income from rent of underutilized property was $60 in 2Q 2021 compared to $8 in 2Q 2020.

Income from rent of underutilized property was $72 in 1H 2021 compared to $35 in 1H 2020.

Bank fees were $18 in 2Q 2021 compared to $15 in 2Q 2020.

Bank fees were $35 in 1H 2021 compared to $29 in 1H 2020.

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 2021 was $59 compared to less than $1 in 3Q 2020.

Net non-operating income in 9M 2021 was $130 compared to $126 in 9M 2020.

In 3Q 2021 and 3Q 2020, losses from remeasurement of the value of foreign currency bank balances were negligible in both periods.

In 9M 2021, UTMD recognized a $13 loss from remeasurement of the value of foreign currency bank balances compared to a $41 gain in 9M 2020.

Royalties received were $10 in 3Q 2021 compared to $5 in 3Q 2020, and $10 in 9M 2021 compared to $10 in 9M 2020.

Interest earned on cash balances were $6 and $31 in 3Q and 9M 2021 respectively, compared to interest of $2 and $64 in 3Q and 9M 2020 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 2021 EBT was $5,157 (41.0% of sales) compared to $3,588 (34.2% of sales) in 3Q 2020.

Consolidated 1H 2021 EBT was $8,723 (37.0% of sales) compared to $5,965 (30.3% of sales) in 1H 2020.

Consolidated 9M 2021 EBT was $13,880 (38.4% of sales) compared to $9,553 (31.7% of sales) in 9M 2020.

The EBT of Utah Medical Products, Inc.

was $5,466 in 1H 2021 compared to $3,963 in 1H 2020.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 3,122 in 1H 2021 compared to EUR 2,062 in 1H 2020.

The increase in Ireland EBT was primarily due to beginning to ship Filshie Sterishot kits, which are manufactured in Ireland, directly to France medical facilities rather than distributed from Femcare in the UK (after sold intercompany to the UK from Ireland), as it was done in 1H 2020.

The change was made because the Republic of Ireland and France are both in the EU, which avoids bureaucratic obstacles and costs which have resulted from BREXIT.

The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was (GBP 295) in 1H 2021 compared to (GBP 235) in 1H 2020.

Although 1H 2021 revenues in the UK recovered well, the loss of the revenues to France in 1H 2021 compared to 1H 2020 offset EBT gains.

was $8,736 in 9M 2021 compared to $6,469 in 9M 2020.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 4,662 in 9M 2021 compared to EUR 2,393 in 9M 2020.

The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP (361) in 9M 2021 compared to GBP (297) in 9M 2020.

The EBT of Utah Medical Products Canada, Inc.

(dba Femcare Canada) was CAD 303 in 1H 2021 compared to CAD 331 in 1H 2020.

Canada has been slow to recover compared to UTMD’s other subsidiaries.

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.

Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 2Q 2021 consolidated EBT excluding the remeasured bank balance currency gain or loss and interest expense (“adjusted consolidated EBITDA”) was $6,695 compared to $3,800 in 2Q 2020.

Adjusted consolidated EBITDA was $12,471 in 1H 2021 compared to $9,572 in 1H 2020.

Adjusted consolidated EBITDA for the previous four calendar quarters (TTM) was $24,024 as of June 30, 2021.

Based on the better than expected 2Q 2021 operating results, management expects that adjusted consolidated EBITDA of $25 million is likely achievable for the full year 2021.

UTMD’s adjusted consolidated EBITDA as a percentage of sales was 53.1% in 2Q 2021 compared to 43.2% in 2Q 2020.

UTMD’s adjusted consolidated EBITDA as a percentage of sales was 52.9% in 1H 2021 compared to 48.6% in 1H 2020.

Achieving substantially higher revenues with an expanded GPM while keeping operating expenses about the same obviously had a very positive effect on this key profitability metric.

Management believes that this operating performance metric provides meaningful supplemental information to both management and investors and confirms UTMD’s ongoing excellent financial operating performance, as well as its substantial recovery from 2020.

UTMD’s non-US GAAP adjusted consolidated EBITDA is the sum of the elements in the following table, each element of which is a US GAAP number:

Depreciation Expense

Femcare IIA Amortization Expense

CSI IIA Amortization Expense

Other Non-Cash Amortization Expense

(dba Femcare Canada) was CAD 450 in 9M 2021 compared to CAD 565 in 9M 2020.

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

Interest Expense

Remeasured Foreign Currency Balances

UTMD non-US GAAP EBITDA:

All UTMD income statement measures from GP through EBT (and including non-US GAAP adjusted consolidated EBITDA above) for both 2021 and 2020 time periods were unaffected by the enacted changes in the UK corporate income tax rate.

Remeasured currency (gains) or losses

Adjusted Consolidated EBITDA:

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

g) Net Income

US GAAP Net Income in 2Q 2021 of $3,426 (27.2% of sales) was 161.0% higher than the US GAAP Net Income of $1,313 (14.9% of sales) in 2Q 2020.

Obviously, 2Q 2020 was the low point for UTMD during the COVID-19 pandemic.

Net Income in both periods was affected by an additional tax provision expense required to be recorded in the quarter in which a tax change is enacted, as a result of an adjustment to UTMD’s deferred tax liability (DTL).

The DTL results from the tax effect of not being able to deduct the remaining future amortization expense of Femcare IIA.

In 2Q 2020, 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 represented the additional tax which would be paid in the UK over the remaining six year life of the 2011 Femcare acquisition IIA, based on a 19% rate.

In 2Q 2021, because the UK reset its corporate tax rate from 19% to 25% beginning with 2Q 2023, it caused UTMD to have to book an additional $390 in its 2Q 2021 income tax provision that represents the additional tax which will be paid in the UK over the now remaining five year life of the 2011 Femcare acquisition IIA.

Excluding the $390 DTL increase in 2Q 2021 and the $225 DTL increase in 2Q 2020, both of which reduced Net Income by those same amounts, non-US GAAP 2Q 2021 Net Income was $3,817 (30.3% of sales), 148.3% higher than non-US GAAP 2Q 2020 Net Income of $1,537 (17.5% of sales).

Excluding the tax provision increases due to the DTL adjustment, non-US GAAP 1H 2021 Net Income was $6,840 (29.0% of sales), 46.3% higher than non-US GAAP 1H 2020 Net Income of $4,677 (23.8% of sales).

The average consolidated income tax provisions (as a % of the same period EBT) per US GAAP in 2Q 2021 and 2Q 2020 were 29.0% and 33.6% respectively, and were 26.1% and 25.4% in 1H 2021 and 1H 2020 respectively.

As these tax rates for both 2021 and 2020 periods are not directly related to EBT generated in the same periods, UTMD provides the following tax rates excluding the 2Q 2021 $390 tax provision adjustment and the 2Q 2020 $225 income tax provision adjustment:

The resulting non-GAAP consolidated average income tax provision rates were 20.9% and 22.2% for 2Q 2021 and 2Q 2020 respectively, and were 21.6% for both 1H 2021 and 1H 2020.

The average consolidated income tax provision rate varies as the mix in taxable income among U.S.

and foreign subsidiaries with differing income tax rates differs from period to period.

The basic corporate income tax rates in each of the sovereignties were the same as in the prior year.

Net Income is EBT minus a provision for income taxes.

Net Income in 3Q 2021 was $4,206 (33.5% of sales) compared to $2,933 (28.0% of sales) in 3Q 2020.

The average consolidated income tax provision (as a % of EBT) in 3Q 2021 was 18.4% compared to 18.3% in 3Q 2020.

Net Income in 9M 2021 was $10,656 (29.5% of sales) compared to Net Income of $7,386 (24.5% of sales) in 9M 2020.

Net Income in 9M 2021 included a 2Q 2021 unfavorable $390 tax provision increase for a future UK income tax increase on non-deductible IIA amortization expense beginning in 2023.

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 ensuing six years.

The average consolidated income tax provisions (as a % of EBT) in 9M 2021 and 9M 2020 were 23.2% and 22.7%, 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 diluted EPS in 2Q 2021 were $0.937 compared to $0.359 in 2Q 2020, a 161.3% increase.

US GAAP diluted EPS in 1H 2021 were $1.765 compared to $1.207 in 1H 2020, a 46.2% increase.

Excluding the “one-time” income tax provision increases due to the DTL adjustments, non-US GAAP diluted EPS in 2Q 2021 were $1.044 compared to $0.420 in 2Q 2020, a 148.5% increase, and non-US GAAP diluted EPS in 1H 2021 were $1.871 compared to $1.268 in 1H 2020, a 47.6% increase.

In either case, the increases in EPS were substantial as a result of the improvement in operating results.

Diluted shares were 3,655,319 in 2Q 2021 compared to 3,658,626 in 2Q 2020.

The lower diluted shares in 2Q 2021 were the result of shares repurchased during 2020 offset by employee options exercised, and a lower dilution factor for unexercised options.

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.

Outstanding shares at the end of 2Q 2021 were 3,645,798 compared to 3,643,035 at the end of calendar year 2020.

The difference was due to 2,763 shares in employee option exercises during 1H 2021.

For comparison, outstanding shares were 3,642,946 at the end of 2Q 2020.

The total number of outstanding unexercised employee and outside director options at June 30, 2021 was 63,874 at an average exercise price of $68.38, including shares awarded but not yet vested.

This compares to 76,625 unexercised option shares at the end of 2Q 2020 at an average exercise price of $64.72/ share, including shares awarded but not vested.

Diluted EPS in 3Q 2021 were $1.150 compared to $.803 in 3Q 2020.

Diluted US GAAP EPS in 9M 2021 were $2.915 compared to $2.008 in 9M 2020.

According to U.S.

GAAP, the UK tax law change in 2Q 2021 which increased UTMD’s deferred tax liability as a result of the UK corporate tax rate increasing to 25% in 2023, and the UK tax law change in 2Q 2020, resulted in income tax provision increases in both the 2Q 2021 and the 2Q 2020 income statements.

Without the $390 tax provision adjustment in 2Q 2021, 9M 2021 non-US GAAP EPS were $3.021.

Without the $225 tax provision adjustment in 2Q 2020, 9M 2020 non-US GAAP EPS were $2.069.

Diluted shares were 3,657,733 in 3Q 2021 compared to 3,653,500 in 3Q 2020, and 3,656,255 in 9M 2021 compared to 3,678,210 in 9M 2020.

The differences in diluted shares resulted from employee option exercises, shares repurchased during 2020, an employee option award in 2020, and the time-weighted calculation of outstanding shares and options “in the money” at an average applicable period stock price.

The number of shares added as a dilution factor in 3Q 2021 was 10,933 compared to 11,130 in 3Q 2020.

The number of shares added as a dilution factor in 1H 2021 was 10,569 compared to 15,342 in 1H 2020.

The number of shares added as a dilution factor in 9M 2021 was 10,685 compared to 14,514 in 9M 2020.

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

No options have been awarded to date in 2021.

UTMD paid $1,039 ($0.285/share) in dividends to stockholders in 2Q 2021 compared to $1,035 ($0.280/ share) paid in 2Q 2020.

Dividends paid to stockholders during 2Q 2021 were 27% of non-US GAAP Net Income.

UTMD paid $2,077 ($0.285/share) in dividends to stockholders in 1H 2021 compared to $2,077 ($0.280/ share) paid in 1H 2020.

The increase in the per share dividend was offset by share repurchases.

Dividends paid to stockholders during 1H 2021 were 30% of non-US GAAP Net Income.

No options have been awarded in 2021.

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 shares at $78.67/ share.

No shares have been repurchased to date in 2021.

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.

No shares have been repurchased in 2021.

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

UTMD’s closing share price at the end of 2Q 2021 was $85.04, down from the closing price of $86.60 at the end of 1Q 2021 despite an increase in cash of $.95/ outstanding share and an increase in stockholders’ equity of $.68/ share during the quarter.

The 2Q 2021 ending share price was up less than 1% from the $84.30 closing price at the end of 2020.

The closing share price at the end of 2Q 2020 was $88.62.

i) Return on Equity (ROE)

Outstanding shares at the end of 3Q 2021 were 3,648,984 compared to 3,643,035 at the end of calendar year 2020.

The difference was due to employee option exercises of 5,949 shares during 9M 2021.

Outstanding shares were 3,640,371 one year ago at the end of 3Q 2020.

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, 2021 was 59,869 at an average exercise price of $68.74, including shares awarded but not yet vested.

This compares to 71,700 unexercised option shares at the end of 3Q 2020 at an average exercise price of $65.80/ share, including shares awarded but not yet vested.

UTMD distributed $1,039 ($0.285/share) in dividends to stockholders in 3Q 2021 compared to $1,020 ($0.280/ share) distributed in 3Q 2020.

Dividends paid to stockholders during 3Q 2021 were 25% of 3Q 2021 Net Income.

UTMD paid $3,116 ($0.285/share) in dividends to stockholders in 9M 2021 compared to $3,097 ($0.280/ share) paid in 9M 2020.

Dividends paid to stockholders during 9M 2021 were 28% of 9M 2021 Net Income.

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 2021 was 13% compared to 10% in 1H 2020.

The higher ROE in 1H 2021 was due to the higher 1H 2021 net income, despite being diluted by higher Stockholder’s Equity as a result of build-up of cash.

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 2021 was 10% compared to annualized ROE of 6% in 9M 2020.

Before the payment of dividends, annualized ROE in 9M 2021 was 14% compared to 10% in 9M 2020.

The higher ROE in 9M 2021 was due to a 7% increase in average accumulated stockholders’ equity together with a 44% 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 2021 was $92.84, up 10% from the $84.30 closing price at the end of 2020.

The closing share price at the end of 3Q 2020 was $79.87.

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 $10,225 in 1H 2021 compared to $9,352 in 1H 2020.

A $873 higher increase in operating cash was due to a $1,998 increase in US GAAP Net Income, plus working capital change differences.

The most significant working capital change differences included 1) a $489 increase in accounts receivable compared to a $862 decrease in 1H 2020, 2) only a $75 decrease in inventories compared to $387 decrease in 1H 2020, 3) a $398 increase in accounts payable compared to a $528 decrease in 1H 2020, and 4) just a $34 increase in accrued expenses compared to a $386 increase in 1H 2020.

Capital expenditures for property and equipment (PP&E) were $222 in 1H 2021 compared to $711 in 1H 2020.

The amount spent in 1H 2021 was for typical expenditures required to keep facilities and equipment, particularly in molding operations, in good working order.

The larger expenditures in 1H 2020 were 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 $325 in 1H 2021 compared to $335 in 1H 2020.

UTMD made cash dividend payments of $2,077 in both 1H 2021and 1H 2020.

The same amount of cash was used despite a 1.8% annual increase in the per share dividend as a result of share repurchases in 2020.

In 1H 2020, UTMD received $92 and issued 2,763 shares of its stock upon the exercise of employee and director stock options.

Option exercises in 1H 2021 were at an average price of $33.17 per share.

In comparison, 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.

The $1,857 higher cash provided by operating activities in 9M 2021 was due primarily to differences from $3,271 higher net income offset by greater net $1,269 decreases in working capital from 1) $926 decreased trade accounts receivable and inventories compared to a $1,184 increase in 9M 2020, yielding a $2,110 lower working capital change difference in the two periods, and 2) a $1,053 increase in accounts payable and accrued expenses compared to a $212 increase in 9M 2020, yielding a $841 higher working capital change difference in the two periods.

Capital expenditures for property and equipment (PP&E) were $299 in 9M 2021 compared to $806 in 9M 2020.

The higher capital expenditures in 2020 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 either 9M 2021 or 9M 2020.

UTMD made cash dividend payments of $3,116 in 9M 2021 compared to $3,097 in 9M 2020.

There were no share repurchases in 9M 2021.

The Company used $6,976 of its cash to repurchase 87,000 of its own shares in 9M 2020.

In 9M 2021 the Company received $281 and issued 5,949 shares of stock on the exercise of employee and director stock options.

Option exercises in 9M 2021 were at an average price of $47.25 per share.

In comparison, 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.

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.

5 unchanged sentences

k) Assets and Liabilities

June 30, 2021 total consolidated assets were $116,794, an increase of $5,049 from December 31, 2020.

Current assets were $8,325 higher than at December 31, 2020.

The increase in total assets was due to the combination of a $7,916 increase in cash and investments as a result of operating performance, a $3,118 decrease in net intangible assets (from 1H 2021 IIA amortization and 1% higher GBP/USD FX rate on the Femcare UK IIA balance), a $501 increase in accounts receivable due to higher business activity, a $104 decrease in inventories despite higher purchase quantities to help control supplier cost increases, and a $158 decrease in worldwide net fixed assets from depreciation which exceeded capital expenditures by $104, offset by about a 3% weaker USD for Ireland and Australia foreign currency fixed assets which increased those assets in USD terms.

For clarity, the net book value of consolidated property, plant and equipment decreased $158 at June 30, 2021 from the end of 2020 due to the net effect of period-ending changed FX rates, $222 in new asset purchases minus $326 in depreciation, including right of use assets totaling $356 (which were $377 at December 31, 2020).

June 30, 2021 net intangible assets (goodwill plus other intangible assets) declined $3,118 from the end of 2020 as a result of $3,335 in amortization offset by a weaker USD/GBP FX rate on UK intangible asset balances.

At June 30, 2021, net intangible assets including goodwill were 30% of total consolidated assets compared to 34% at year-end 2020, and 38% at June 30, 2020.

Working capital (current assets minus current liabilities) was $66,155 at June 30, 2021 compared to $58,471 at December 31, 2020.

Cash balances were $59,506 of the June 30, 2021 working capital.

Current assets at June 30, 2021 compared to December 31, 2020 were $8,325 higher primarily as the result of a $7,916 increase in cash and investments, a $501 increase in receivables and a $104 decrease in inventories.

Current liabilities were $641 higher at June 30, 2021 compared to December 31, 2020 primarily as the result of a $399 increase in accounts payable and a $165 increase in the current portion of the Repatriation Tax payable.

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

June 30, 2021 total consolidated liabilities were $9,429, an increase of $506 from December 31, 2020.

Current liabilities were $640 higher than at December 31, 2020.

Long term liabilities were $134 lower despite the $390 increase in deferred income tax liability resulting from the UK tax law change in 2Q 2021.

The deferred tax liability balance for Femcare IIA ($9,084 on the date of the acquisition), was $2,355 at June 30, 2021 compared to $2,151 at December 31, 2020 and $2,135 at June 30, 2020.

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.

The increase at June 30, 2021 was due to the UK increasing its income tax rate from 19% to 25% applied for the Femcare’s IIA amortization period of time from April 1, 2023 through March 11, 2026.

UTMD’s total debt ratio (total liabilities/total assets) as of June 30, 2021, December 31, 2020 and June 30, 2020 was 8%.

September 30, 2021 total consolidated assets were $119,752, a net increase of $8,007 from December 31, 2020.

Primarily as a result of the increase in cash, consolidated current assets increased $13,584.

The total asset increase was due to a $12,731 increase in cash plus a $749 increase in net accounts and other receivables, a $77 increase in inventories and a $27 increase in other current assets, offset by decreases of $5,183 in Net Intangible Assets and $394 in net consolidated Property, Plant and Equipment (PP&E).

The decreases in Net Intangibles and PP&E were due to a combination of depreciation exceeding new purchases and amortization of Intangibles combined with changes in FX rates for OUS assets.

UTMD’s Ireland subsidiary EUR-denominated assets and liabilities on September 30, 2021 were translated into USD at an FX rate 5.3% lower (weaker EUR relative to the USD) than the FX rate at the end of 2020.

UTMD’s UK subsidiary GBP-denominated assets were translated into USD at an FX rate 1.4% lower (weaker GBP) than the FX rate at the end of 2020.

UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 6.2% lower (weaker AUD) than the FX rate at the end of 2020.

UTMD’s Canada subsidiary CAD-denominated assets were translated into USD at an FX rate 0.6% higher (stronger CAD) than the FX rate at the end of 2020.

The net book value of PP&E declined $394 at September 30, 2021 from the end of 2020 due to the period-ending changed FX rates above, $299 in new asset purchases and $483 in depreciation.

Working capital (current assets minus current liabilities) was $70,830 at September 30, 2021 compared to $58,471 at December 31, 2020.

The whole source of the working capital increase was from an increase of $12,731 in cash.

Consolidated receivables and inventories increased $749 and $77, respectively, but current liabilities also increased $1,225.

The current liabilities of accounts payable and accrued liabilities increased $238 and $986 respectively, due to higher sales/production activity and higher accrued income taxes.

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, 2021 net intangible assets (goodwill plus other intangible assets less amortization) declined $5,183 from the end of 2020.

No new intangible assets were acquired in 9M 2021.

At September 30, 2021, net intangible assets including goodwill were 28% of total consolidated assets compared to 34% at year-end 2020, and 36% at September 30, 2020.

The long term deferred tax liability (DTL) balance for Femcare IIA ($9,084 on the date of the acquisition) was $2,196 (£1,630) at September 30, 2021, compared to $2,151 (£1,575) at December 31, 2020, and $2,132 (£1,650) at September 30, 2020.

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 increased $45 at September 30, 2021 from December 31, 2020, despite 9M 2021 amortization expense of $1,654, which reduced the DTL balance by $314 (using UK tax rate = 19%).

The difference was due to a UK tax law change enacted in 2Q 2021 which increased the DTL balance by $390 (£283), combined with a change in ending FX rates.

The UK increased its corporate income tax rate from 19% to 25% beginning April 1, 2023, which affects non-deductible amortization expense after March 31, 2023.

(The $390 increase in deferred UK taxes was booked in the 2Q 2021 tax provision, reducing 9M 2021 net income $390.)

UTMD’s total debt ratio (total liabilities/ total assets) as of September 30, 2021 was 8%, including a remaining $2,047 REPAT tax liability payable over another four years.

The total debt ratio as of December 31, 2020, as well as of September 30, 2020, was also 8%.

The $8,007 increase in total liabilities and stockholders’ equity (same as in total assets) was primarily due to a $7,158 September 30, 2021 ending increase in stockholders’ equity compared to December 31, 2020.

Stockholders’ equity was increased during 9M 2021 by $10,656 US GAAP Net Profit minus $3,116 in dividends paid to stockholders.

l) Management's Outlook

As outlined in its December 31, 2020 SEC 10-K report, UTMD’s plan for 2021 was to

1) try to get back to its financial performance in 2019, prior to the COVID-19 pandemic;

As outlined in its December 31, 2020 SEC 10-K report, UTMD’s general plan for 2021 was to

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

3) 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;

6) 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 continuing challenges created by government reaction to the COVID-19 pandemic, including restrictions on certain medical procedures, inflation in costs and lack of availability of workers, the Company continues to effectively execute its plan as outlined above.

The Company has recovered better than expected from the COVID-19 pandemic, exceeding targeted 2019 financial performance prior to the pandemic.

m) Accounting Policy Changes

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What changed 10-Q

Item 2. Management’s Discussion and Analysis