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Item 2. Management’s Discussion and Analysis

2022-05-11 compared with 2021-11-12 · 162 added, 250 removed, 63 unchanged (87% of the section changed)

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(UTMD) manufactures and markets a well-established range of specialty medical devices.

The Company’s Form 10-K Annual Report for the year ended December 31, 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 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.

The Company’s Form 10-K Annual Report for the year ended December 31, 2021 provided a detailed description of products, technologies, markets, regulatory issues, business initiatives, resources and business risks, among other details, and should be read in conjunction with this report.

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

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

A$ or AUD = Australia Dollars;

AUD = Australia Dollars;

£ or GBP = UK Pound Sterling;

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Analysis of Results of Operations

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 (NI)

Earnings per Diluted Share (EPS)

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

Income statement results in the first quarter (1Q) of 2022 compared to 1Q 2021 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.

Earnings per Share

Profit margins in 1Q 2022 compared to 1Q 2021 follow:

Gross Profit Margin (Gross Profit/ sales):

Operating Income Margin (Operating Income/ sales):

EBT Margin (Profits before Income Taxes/ sales):

Net Income Margin (Profit after Taxes/ sales):

Domestic sales in 1Q 2022 were up 18%, and sales outside the U.S.

(OUS) were up 4%, compared to 1Q 2021.

Using the same foreign currency exchange (FX) rates for sales not invoiced in USD, i.e.

in “constant currency” terms, sales outside the U.S.

(OUS) were up 7%.

Because 24% of consolidated sales were invoiced in foreign currencies, the change in FX rates for OUS sales did have an impact on period-to-period relative financial results.

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

The average FX rates from the applicable foreign currency to USD during 1Q 2022 and 1Q 2021 follow:

The weighted-average negative impact on foreign currency sales was 5.0%, reducing reported USD sales by $152 relative to the same foreign currency sales in 1Q 2021.

In constant currency terms, total consolidated 1Q 2022 sales were up $1,512 (+14%).

Despite UTMD increasing the unit prices of its devices and components approximately 6% across-the-board, its 1Q 2022 Gross Profit Margin (GPM) suffered as the result of significantly higher incremental direct labor, direct materials and manufacturing overhead costs in the U.S.

UTMD’s Operating Income Margin benefitted from higher sales given that a significant portion of operating expenses are fixed.

The $1,105 per quarter straight-line amortization of the $21,000 purchase price that UTMD paid CSI in early 2019 to acquire the remaining 4.75 years’ exclusive U.S.

Filshie distribution rights was 9.0% of 1Q 2022 sales compared to 10.1% of 1Q 2021 sales.

The purchase price of CSI’s remaining exclusive distribution rights was recognized as an identifiable intangible asset (IIA) which will be fully amortized in 3Q 2023.

IIA amortization expense in total, including that remaining from the 2011 Femcare acquisition, which comprises a significant portion of General & Administrative (G&A) operating expenses, was 13.3% of 1Q 2022 consolidated sales compared to 15.1% of 1Q 2021 consolidated sales.

In other words, UTMD’s Operating Income Margin excluding IIA amortization expense was 50.0% in 1Q 2022 compared to 50.6% in 1Q 2021.

A comparison of 1Q period-to-period Income Before Tax (EBT) was consistent with the Operating Income comparison as 1Q 2022 non-operating income was $8 compared to $10 in 1Q 2021.

UTMD’s Net Income Margin in 1Q 2022 was higher than in 1Q 2021 due to a combined income tax provision rate in 1Q 2022 that was 22.0% compared to 22.4% of EBT in 1Q 2021.

The primary reason for the lower income tax provision rate was the distribution mix of subsidiary EBT.

UTMD’s March 31, 2022 Balance Sheet, in the absence of debt, remained strong.

Ending Cash and Investments were $65.9 million on March 31, 2022 compared to $61.0 million on December 31, 2021.

Stockholders’ Equity was up $2.0 million in the first three month calendar period from December 31, 2021.

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 1Q 2022 and the end of 1Q 2021 follow:

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

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..

In the U.S., Ireland, UK, Canada, Australia and New Zealand, UTMD generally accepted orders directly from and shipped directly to end user clinical facilities, as well as third party medical/surgical distributors, under UTMD’s Standard Terms and Conditions (T&C) of Sale during 1Q 2022.

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

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Constant currency sales were $1,512 (+13.8%) 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.

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

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

domestic sales were 17.7% higher and OUS sales were 3.8% higher despite an average 5% stronger USD.

Domestic sales in 1Q 2022 were $7,984 compared to $6,783 in 1Q 2021.

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.

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 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”, manufactured by Femcare and distributed in the U.S.

1) Direct sales, representing 50% of total domestic sales, were $593 (+17.5%) higher in 1Q 2022 than in 1Q 2021.

2) OEM sales, representing 34% of total domestic sales, were $782 (+41.1%) higher.

3) Filshie device sales were $174 (11.7%) lower in 1Q 2022 compared to 1Q 2021.

OUS sales in 1Q 2022 were $4,339 compared to $4,181 in 1Q 2021.

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:

OUS sales invoiced in GBP, EUR, AUD and CAD currencies were $152 lower as a result of changes in FX rates resulting from an average 5% stronger USD.

In other words, constant currency OUS sales were $4,492, which was 7.4% higher than in 1Q 2021.

The foreign currency OUS sales in 1Q 2022 were $2,906, which was 67% of OUS sales and 24% of total consolidated worldwide (WW) sales.

Foreign currency OUS sales in 1Q 2021 were $3,032, which was 73% of OUS sales and 28% of total consolidated WW sales.

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

WW revenues (USD) by product category:

Gynecology/ Electrosurgery/ Urology

Blood Pressure Monitoring and Accessories*

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

OUS revenues (USD) by product category:

Gynecology/ Electrosurgery/ Urology

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*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%.

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

UTMD’s Gross Profit was $586 (+8.4%) higher in 1Q 2022 than in 1Q 2021.

Gross Profit did not increase as much as revenues due primarily to the increases in raw material and incoming freight costs exceeding 20%.

In addition, about half of the lower Gross Profit Margin in 1Q 2022 was due to an unfavorable experience in U.S.

employee medical costs, for which UTMD self-insures.

Otherwise, the Company maintained the productivity of its direct labor and manufacturing overhead costs as a result of raising product prices.

d) Operating Income

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%.

Operating Expenses are comprised of G&A expenses, sales and marketing (S&M) expenses and product development (R&D) expenses.

Consolidated Operating Expenses were $3,010 in 1Q 2022 (24.4% of sales) compared to $3,059 in 1Q 2021 (27.9% of sales).

Ignoring the portion of Operating Expenses that were non-cash IIA amortization expenses, Operating Expenses in 1Q 2022 were 11.1% of consolidated sales compared to 12.8% of sales in 1Q 2021.

A stronger USD in this instance helped Operating Income performance by reducing OUS Operating Expenses in USD terms by $33, comprised of reducing IIA amortization expense by $16 and all other OUS Operating Expenses by $17.

Consolidated G&A expenses were $2,551 (20.7% of sales) in 1Q 2022 compared to $2,545 (23.2% of sales) in 1Q 2021.

The G&A expenses in 1Q 2022 included $532 (4.3% of sales) of non-cash expense from the amortization of IIA resulting from the 2011 Femcare acquisition, which were $550 (5.0% of sales) in 1Q 2021.

The lower USD IIA amortization expense was mainly the result of a stronger USD, as the Femcare amortization expense in GBP was only £1 lower in 1Q 2022 compared to 1Q 2021.

In addition, G&A expenses in both periods included $1,105 IIA amortization expense resulting from the purchase of the CSI remaining U.S.

exclusive Filshie distribution rights, which represented 9.0% of 1Q 2022 sales compared to 10.1% of 1Q 2021 sales.

Excluding the non-cash IIA amortization expenses, G&A expenses were $914 (7.4% of sales) in 1Q 2022 compared to $890 (8.1% of sales) in 1Q 2021.

The change in FX rates reduced 1Q 2022 OUS G&A expenses by $28, comprised of reducing IIA amortization expense by $16 and all other G&A expenses by $12.

S&M expenses were $336 (2.7% of sales) in 1Q 2022 compared to $384 (3.5% of sales) in 1Q 2021.

The change in FX rates reduced 1Q 2022 OUS S&M expenses by $5.

R&D expenses in 1Q 2022 were $123 (1.0% of sales) compared to $130 (1.2% of sales) in 1Q 2021.

Since all R&D expense was incurred in the U.S., there was no FX impact.

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:

CSI IIA amortization

Femcare IIA amortization

All Other G&A Expenses

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 1Q 2022 was $4,522 (36.7% of sales) compared to $3,887 (35.5% of sales) in 1Q 2021.

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.

The greater absorption of relatively fixed Operating Expenses allowed expansion of an 8% growth in Gross Profit to a 16% increase in Operating Income.

e) Non-operating expense/ Non-operating income

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.

Net non-operating expense, or net non-operating income, results from the combination of 1) expenses from loan interest and bank fees;

2) expenses or income from losses or gains from remeasuring the value of EUR cash bank balances in the UK, and GBP cash balances in Ireland, in USD terms;

and 3) income from rent of underutilized property, investment income, royalties received from licensing the Company’s technology and other miscellaneous income.

Net non-operating income in 1Q 2022 was $8 compared to $10 in 1Q 2021.

The primary difference, despite higher cash balances in 1Q 2022 compared to 1Q 2021, was due to the fact that UTMD received $68 less in investment and other miscellaneous income.

UTMD received $54 higher non-operating income in 1Q 2022 from renting underutilized property compared to 1Q 2021, and $5 higher non-operating income from royalties.

UTMD realized a loss of $3 at the end of 1Q 2022 from remeasurement of foreign currency bank balances compared to a $10 loss at the end of 1Q 2021.

f) Income Before Income Taxes (EBT)

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

EBT results from adding Non-operating income to Operating Income.

Consolidated 1Q 2022 EBT was $4,530 (36.8% of sales) compared to $3,898 (35.6% of sales) in 1Q 2021.

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

The $632 (+16.2%) higher 1Q 2022 EBT compared to 1Q 2021 was consistent with the higher Operating Income.

The EBT of Utah Medical Products, Inc.

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 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

was $2,916 in 1Q 2022 compared to $2,453 in 1Q 2021.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 1,806 in 1Q 2022 compared to EUR 1,731 in 1Q 2021.

The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP (159) in 1Q 2022 compared to GBP (231) in 1Q 2021.

The 1Q 2022 EBT of Utah Medical Products Canada, Inc.

was CAD 154 in 1Q 2022 compared to CAD 150 in 1Q 2021.

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, 1Q 2022 consolidated EBT excluding the remeasured bank balance currency loss and interest expense (“adjusted consolidated EBITDA”) was $6,371 compared to $5,776 in 1Q 2021.

UTMD’s adjusted consolidated EBITDA as a percentage of sales was 51.7% in 1Q 2022 compared to 52.7% in 1Q 2021.

The slightly lower EBITDA percent of sales was due to the lower Gross Profit Margin.

Management believes that this operating metric provides meaningful supplemental information to both management and investors and confirms UTMD’s continued excellent financial operating performance.

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

Stock Option Compensation Expense

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.

Interest Expense

Remeasured Foreign Currency Balances

UTMD non-US GAAP EBITDA:

g) Net Income

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.

Net Income in 1Q 2022 of $3,534 was 16.9% higher than the Net Income of $3,024 in 1Q 2021.

UTMD’s Net Income Margin, which is Net Income divided by consolidated sales, was 28.7% in 1Q 2022 and 27.6% in 1Q 2021.

The average consolidated income tax provision rates (as a % of EBT) in 1Q 2022 and 1Q 2021 were 22.0% and 22.4%, respectively.

The slightly lower provision rate resulted from the distribution mix of EBT of UTMD’s subsidiaries subject to differing income tax rates.

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

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).

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.

EPS are consolidated Net Income divided by the weighted average 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 1Q 2022 were 16.6% higher than in 1Q 2021, consistent with the increase in Net Income because diluted shares used to calculate EPS were only slightly higher.

Diluted shares were 3,664,915 in 1Q 2022 compared to 3,655,256 in 1Q 2021.

The slightly higher diluted shares in 1Q 2022 were the result of employee option exercises during the previous four calendar quarters offset by a slightly lower dilution factor for unexercised options.

The number of shares added as a dilution factor in 1Q 2022 was 10,125 compared to 11,168 in 1Q 2021.

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 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 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.

Outstanding shares at the end of 1Q 2022 were 3,654,987 compared to 3,654,737 at the end of calendar year 2021.

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.

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 difference was due to employee option exercises during 1Q 2022.

Outstanding shares were 3,645,760 at the end of 1Q 2021.

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

The total number of outstanding unexercised employee and outside director options at March 31, 2022 was 51,283 at an average exercise price of $69.17, including shares awarded but not yet vested.

This compares to 51,858 unexercised option shares at the end of 2021 at an average exercise price of $69.24/ share, including shares awarded but not vested.

No options were awarded in 1Q 2022 or in all of calendar year 2021.

UTMD did not pay a cash dividend to stockholders in 1Q 2022 because the special $7,309 ($2.00/share) dividend, which was declared in 4Q 2021, was paid in December before the end of the 2021 calendar year instead of in January 2022.

In 1Q 2021, a $1,038 ($0.285/ share) dividend, which was declared in 4Q 2020, was paid to stockholders.

During 1Q 2022 and all of calendar year 2021, UTMD did not repurchase its shares.

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 1Q 2022 was $89.86, down 10% from the $100.00 closing price at the end of 2021.

The closing share price at the end of 1Q 2021 was $86.60.

i) Return on Equity (ROE)

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 (before stockholder dividends) in 1Q 2022 was 13% and in 1Q 2021 was 12%.

The higher ROE in 1Q 2022 was due to 17% higher Net Income divided by 4% higher average Stockholders’ Equity.

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

ROE can be increased by increasing Net Income, and/or by reducing Stockholders’ Equity by paying cash dividends to stockholders or by repurchasing shares.

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 $16,217 in 9M 2021 compared to $14,359 in 9M 2020.

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.

The Company may utilize cash not needed to support normal operations in one or a combination of the following:

Net Income provided $511 more to cash in 1Q 2022 than in 1Q 2021.

Other differences in cash provided during the two periods were a $643 higher increase in accounts payable and a $157 lower increase in accrued expenses, offset by an $809 increase in inventories compared to a $207 decrease in 1Q 2021 and a $521 greater increase in trade accounts receivable.

Capital expenditures for property and equipment (PP&E) were $237 in 1Q 2022 compared to $10 in 1Q 2021 as UTMD continues to invest in equipment for manufacturing specialized pressure transducers for its bio-pharmaceutical OEM customer.

During the remainder of 2022, UTMD intends to make additional investments in increasing capacity for the same OEM customer.

Depreciation of PP&E was $149 in 1Q 2022 compared to $163 in 1Q 2021.

Cash dividends paid to stockholders in 1Q 2022 were zero compared to $1,038 in 1Q 2021 because the special $7,309 dividend declared in 4Q 2021 was paid in December 2021 instead of in January 2022.

In 1Q 2022, UTMD received $19 and issued 250 shares of its stock upon the exercise of employee stock options.

Option exercises in 1Q 2022 were at an average price of $76.33 per share.

In comparison, in 1Q 2021 UTMD received $89 and issued 2,725 shares of its stock upon the exercise of employee stock options.

Option exercises in 1Q 2021 were at an average price of $32.59 per share.

Management believes that current cash balances, income from operations and effective management of working capital will provide the liquidity needed to meet the challenges of the current economic environment in achieving operating objectives, to maintain the capability to make opportunistic investments that will provide for growth in future profits and to continue to allocate capital in a way that will maximize stockholder value over time.

During the remainder of 2022 the Company may utilize cash not needed to support normal operations in one or a combination of the following:

1) in general, to continue to invest at an opportune time in ways that will enhance future profitability;

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k) Assets and Liabilities

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.

UTMD’s March 31, 2022 Balance Sheet, in the absence of debt, continued to strengthen.

March 31, 2022 total consolidated assets increased $4,167 from December 31, 2021 to $119,803.

The increase was due to a $4,898 increase in cash and investments and a $1,425 increase in current assets other than cash, offset by $70 lower net fixed assets (property, plant and equipment) and $2,086 lower net intangible assets.

The increase in cash was due to cash generated from operations and the fact that a dividend to stockholders normally paid in 1Q 2022 was paid in 4Q 2021, lowering 2021 year-end cash, plus some changes in working capital.

Current assets as a whole increased $6,323 while current liabilities as a whole increased $2,353, yielding a $3,970 increase in working capital to $73,383.

The increase in current assets other than cash resulted primarily from a $589 increase in receivables and a $771 increase in consolidated inventories.

Average inventory turns were 2.7 in 1Q 2022 compared to 2.8 for the 2021 year.

Accounts receivable increased $589 due to slower collections with the average age of trade receivables at 42 days from date of invoice at March 31, 2022 compared to 36 days at December 31, 2021.

Despite the working capital increase, UTMD’s extraordinary 19.5 current ratio at December 31, 2021 declined to 13.0 at March 31, 2022 primarily due to current assets which increased 9% when current liabilities increased 63%.

The much higher current liability increase resulted from a lower accrued liabilities balance on December 31, 2021 from the early payment of a stockholder dividend before the end of 2021, and a much higher accounts payable balance on March 31, 2022 from building inventory to hedge against supply chain disruption.

The $70 lower net fixed assets at March 31, 2022 compared to December 31, 2021 resulted from $237 in capital expenditures, $149 in depreciation and the impact of the period-to-period foreign currency exchange (FX) rates for assets OUS.

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 1Q 2022 and the end of 2021 follow:

At March 31, 2022, net Intangible Assets decreased to 24.5% of total consolidated assets from 27.2% on December 31, 2021 because of the 1Q 2022 $1,646 amortization of identifiable intangibles, a lower FX rate for remaining GBP intangible assets in the UK and aided by higher period end total asset denominator.

Current liabilities increased $2,353 as a result of a $1,660 increase in accrued liabilities and a $693 increase in accounts payable.

Long term liabilities declined $216 to $4,537 primarily as a result of $159 lower deferred tax liability for the Femcare Ltd GBP IIA to $1,946 at March 31, 2022 compared to $9,084 on the date of the 2011 acquisition.

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

UTMD’s total debt ratio (total liabilities/total assets) as of March 31, 2022 was 8.9% compared to 7.3% as of December 31, 2021.

l) Management's Outlook

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

Based on the first quarter of 2022 results, UTMD expects to achieve its plan for 2022 as a whole, as described in its 2021 Form SEC 10-K.

UTMD’s objectives for 2022 remain to

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

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

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;

4) continue to achieve profitable overall financial operating performance and a stable working environment for employees;

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.

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

6) be vigilant for accretive acquisition opportunities which may be brought about by the current challenging economic environment on companies with more limited resources.

m) Accounting Policy Changes

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What changed 10-Q

Item 2. Management’s Discussion and Analysis