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Item 2. Management’s Discussion and Analysis

2022-11-10 compared with 2022-08-12 · 266 added, 256 removed, 81 unchanged (87% of the section changed)

3 unchanged sentences

The Company’s Form 10-K Annual Report for the year ended December 31, 2021, 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.

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

Income statement results in 2Q and 1H 2022 compared to the same periods of 2021 were as follows:

Income statement results in 3Q and 9M 2022 compared to the same periods of 2021 were as follows:

Operating Income

Income Before Tax

Net Income (US GAAP)

Earnings per Diluted Share

The comparisons of 2Q and 1H 2022 results with the results in the same periods of 2021, according to U.S.

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

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 2021 income tax provisions provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results in 2022 compared to 2021.

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)

The non-US GAAP comparisons of Net Income and EPS with the prior year’s same periods were consistent with the Income Before Tax comparisons.

Income Before Tax obviously is not affected by income tax provisions.

Consolidated USD sales were 6.5% higher in 2Q 2022 and 9.3% higher in 1H 2022 higher compared to the same periods in 2021, despite the fact that sales invoiced in foreign currencies in 2022 were hindered by a stronger USD compared to other currencies.

An unfavorable foreign currency exchange (FX) rate impact decreased total consolidated 2Q 2022 USD sales by 3.3% ($456) and 1H 2022 sales by 2.3% ($608).

Sales invoiced in foreign currencies represented 29% of total consolidated sales (when expressed in USD) during 2Q 2022, and 26% during 1H 2022.

Sales in all product categories, except for sales of the Filshie Clip System which declined in the U.S., were up in 2Q and 1H 2022 compared to the same periods in 2021.

domestic sales in 2Q 2022 were 2.4% lower than in 2Q 2021, and 6.8% higher in 1H 2022 than in 1H 2021.

Sales in 2Q 2022 to customers outside the U.S.

(OUS) were 22.2% higher in USD terms, but 32.2% higher using the same FX rates as in 2Q 2021 (“constant currency”).

Sales in 1H 2022 to OUS customers were 13.4% higher in USD terms, but 20.4% higher in constant currency.

Gross profits (GP) increased less than revenues primarily due to inflation in the variable costs of manufacturing, despite better absorption of fixed manufacturing overhead costs with higher sales.

On the Operating Income line, the lower GP margins (GP divided by sales) in both 2Q and 1H periods were offset by the impact of a stronger USD on the foreign currency expenses of UTMD’s overseas subsidiaries, as well as better absorption of USD fixed identifiable intangible asset (IIA) amortization expenses which resulted from UTMD’s February 2019 acquisition of CooperSurgical Inc’s (CSI’s) U.S.

exclusive distribution rights for the Filshie Clip System.

Operating Income represented 37.7% of sales in 2Q 2022 compared to 37.8% of sales in 2Q 2021, and 37.2% of sales in 1H 2022 compared to 36.7% of sales in 1H 2021.

UTMD was able to maintain consistent Operating Income margins despite the lower GPMs and litigation expenses which it did not have in the prior year.

Net Income and Earnings per Diluted Share (EPS) per US GAAP increased 19.7% and 19.9% respectively in 2Q 2022 compared to 2Q 2021.

Net Income and EPS per US GAAP increased 18.4% and 18.3% respectively in 1H 2022 compared to 1H 2021.

Non-US GAAP Net Income and EPS, which ignores the $390 additional income tax provision adjustment in 2021, increased 7.5% and 7.7% respectively in 2Q 2022 compared to a 2Q 2021 normal non-US GAAP operating result.

Non-US GAAP Net Income and EPS increased 11.7% and 11.6% respectively in 1H 2022 compared to a 1H 2021 non-US GAAP operating result.

The non-US GAAP increases in operating income were greater than the increases in sales as a result of $82 higher non-operating income in 2Q 2022 compared to 2Q 2021, and $79 higher non-operating income in 1H 2022 compared to 1H 2021.

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 2Q 2021 deferred tax adjustment is apparent when comparing the US GAAP income tax provision rates with the non-US GAAP rates.

The percentage increase in 2Q 2022 EPS compared to 2Q 2021 EPS was slightly higher than the increase in Net Income because of shares repurchased in 2Q 2022.

UTMD profit margins in 2Q 2022 and 1H 2022 compared to 2Q 2021 and 1H 2021 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, 2022 Balance Sheet continued strong, with no debt.

Ending Cash and Investments were $66.2 million on June 30, 2022 compared to $61.0 million on December 31, 2021.

The June 30, 2022 cash balance resulted after paying $1.1 million in cash dividends to stockholders and repurchasing $2.5 million in UTMD stock during 2Q 2022.

During the last twelve months (TTM) since June 30, 2021, UTMD has returned $12,943 to stockholders in the form of cash dividends and UTMD share repurchases.

Net Income (NI)

Earnings per Diluted Share (EPS)

Worldwide consolidated revenues were higher for all four major product categories in 3Q 2022 compared to 3Q 2021, despite a much stronger USD.

The same was true for 9M 2022, except for gynecology category sales which were less than 1% lower than in 9M 2021.

Sales invoiced in foreign currencies represented 19% of total WW consolidated 3Q 2022 sales (when expressed in USD) and 24% of 9M 2022 total WW consolidated sales.

Using the same foreign currency exchange (FX) rates for converting foreign currency sales into USD would have resulted in 3Q 2022 sales up 6%, and 9M 2022 sales up 10%, compared to the same periods in 2021 respectively.

UTMD profit margins in 3Q 2022 and 9M 2022 compared to the same periods in the prior year follow:

Gross Profit Margin:

(gross profit/ sales)

Operating Income Margin:

(operating income/ sales)

Net Income Margin:

(profit after taxes/ sales)

During 3Q 2022, the Company continued to realize substantial increases in manufacturing costs, highlighted by incoming freight on raw materials which doubled compared to 2021.

Part of the large increase in freight costs is due to UTMD’s decision to purchase larger quantities of raw materials in order to hedge against continuing high cost inflation, minimize risk of disruption from unpredictable supplier performance and gain available quantity discounts.

Thankfully, UTMD’s cash position supports this sort of longer-term decision.

Although UTMD has lost almost no production capacity in 2022 as a result of COVID-19 infections in its workforce, the effect of government policies and spending during the pandemic which resulted in limited willing workers continues to linger.

The war in Ukraine has had no discernible direct impact on UTMD or its subsidiaries.

Although UTMD’s gross profit margin has been squeezed, the same 38% operating income margin in 9M 2022 as in 9M 2021 suggests that management has been able to respond to the challenge of the negative headwinds.

In this instance, a stronger USD helped by reducing foreign currency operating expenses in USD terms, including the GBP amortization of Identifiable Intangible Assets (IIA).

The unfortunate increase in UTMD’s litigation costs, which are part of General and Administrative (G&A) operating expenses, has been offset by UTMD’s inability in 2022 to hire replacements for departed G&A employees.

Income before tax (EBT) increased more than operating income increased as a result of higher interest rates on higher average cash balances as well as higher rent income in Ireland from renting underutilized warehouse space.

The increase in 9M 2022 Net Income per U.S.

Generally Accepted Accounting Principles (US GAAP) was further leveraged because of an additional income tax provision accrued in 2021 which was not repeated in 2022, as further explained below.

Earnings Per Share benefited in addition from 30,105 UTMD shares repurchased in 2Q 2022.

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 2022 compared to the end of calendar year 2021 and the end of 2Q 2021 were

The FX rates from the applicable foreign currency to USD for assets and liabilities at the end of 3Q 2022 compared to the end of calendar year 2021 and the end of 3Q 2021 follow:

UTMD’s September 30, 2022 Balance Sheet, in the absence of debt, continued to strengthen with total assets up $2.8 million from the end of 2021.

Ending Cash and Investments were $69.5 million on September 30, 2022 compared to $61.0 million on December 31, 2021, after paying $2.1 million in cash dividends to stockholders, purchasing $2.5 million in UTMD stock and increasing inventories $1.7 million during 9M 2022.

UTMD’s cash balance increased $2.35/ outstanding share at September 30, 2022 from the end of 2021 with a 12% increase in US GAAP Net Income, while the stock price declined $14.69/ share.

Stockholders’ Equity (SE) increased $1.0 million in the nine-month period from December 31, 2021 despite the fact that $4.6 million in dividends and share repurchases reduced SE.

b) Revenues (sales)

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.

For existing customers, past actual shipment volumes typically determine the fixed price by part number for the next agreement period of one year.

For the U.S., Ireland, UK, France, Canada, Australia and New Zealand, 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 for customers in the U.S.

and outside the U.S.

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 or less.

For new customers, the customer’s best estimate of volume is usually accepted by UTMD for determining the ensuing fixed prices for the agreement period.

Prices are not adjusted after an order is accepted.

For the sake of clarity, the separate pricing agreements 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.

2Q 2022 Sales

Total consolidated 2Q 2022 UTMD worldwide (WW) sales were $824 (+6.5%) higher than in 2Q 2021.

Without the negative impact of a stronger USD in converting foreign currency sales, WW constant currency sales were $1,280 higher (+10.2%) than in 2Q 2021, which was the second highest sales quarter of 2021.

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

Total UTMD WW consolidated 3Q 2022 sales were $383 (+3.0%) higher than in 3Q 2021.

“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.

Overall 2Q 2022 U.S.

domestic sales were 2.4% lower and outside the U.S.

(OUS) sales were 22.2% higher, despite an FX rate $456 (10.6%) negative impact on sales invoiced in foreign currencies.

In other words, 2Q 2022 constant currency OUS sales were 32.2% higher than in 2Q 2021.

In 2021, U.S.

domestic sales recovered from the COVID-19 pandemic faster than OUS sales.

In 2022, it appears that OUS sales are catching up with the U.S.

WW 3Q 2022 constant currency sales were $737 (+5.9%) higher.

domestic sales were 11.2% higher (obviously without any FX impact), and OUS sales were 10.0% lower.

Without the harm of a stronger USD in converting foreign currency sales, OUS sales were just 2.7% lower.

Domestic U.S.

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

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

UTMD separates domestic Filshie device sales from other medical device sales direct to medical facilities because UTMD is simply a distributor for Femcare in the U.S.

Direct non-Filshie device sales, representing 51% of total domestic sales, were $266 (+7.1%) higher in 2Q 2022 than in 2Q 2021.

Domestic OEM sales, representing 34% of total domestic sales, were $16 (0.6%) lower.

Domestic Filshie device sales, representing 15% of total domestic sales, were $444 (27.9%) lower in 2Q 2022 compared to 2Q 2021.

OUS sales in 2Q 2022 were $5,599 compared to $4,581 in 2Q 2021.

The increase in USD-denominated OUS sales is understated in constant currency terms.

The stronger USD subtracted $456 from 2Q 2022 OUS sales invoiced in GBP, EUR, AUD and CAD currencies.

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 $342 (+9.2%) higher in 3Q 2022 than in 3Q 2021.

OEM sales, representing 35% of total domestic sales, were $591 (+24.0%) higher.

Direct Filshie device sales, representing 17% of total domestic sales, were $68 (4.4%) lower in 3Q 2022 compared to 3Q 2021.

OUS sales in 3Q 2022 were 10.0% lower at $4,340 compared to $4,823 in 3Q 2021.

The decrease in USD-denominated OUS sales was leveraged as a result of a stronger USD which subtracted $354 from 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 2Q 2022 and 2Q 2021 for revenue purposes follow:

The weighted average unfavorable impact on 2Q 2022 foreign currency OUS sales was 10.6%.

In constant currency terms, foreign currency sales in 2Q 2022 were 32.2% higher than in 2Q 2021.

The weighted-average FX rates from the applicable foreign currency to USD during 3Q 2022 and 3Q 2021 for revenue purposes follow:

The weighted average unfavorable impact on 3Q 2022 foreign currency OUS sales was 12.4%, reducing reported USD sales by $354 relative to the same foreign currency sales in 3Q 2021.

In constant currency terms, foreign currency sales in 3Q 2022 were 2.7% lower than in 3Q 2021.

The portion of OUS sales invoiced in foreign currencies in USD terms were 19.3% of total consolidated 3Q 2022 sales compared to 26.7% in 3Q 2021.

2 unchanged sentences

to OUS distributors are invoiced in USD.

Direct to end-user OUS 2Q 2022 sales in USD terms (including the negative impact of FX rate differences) were 11% lower in Ireland with the EUR FX rate down 12%, 1% lower in Canada with the CAD FX rate down 3%, about the same in the UK with the GBP FX rate down 10%, 23% lower in Australia/New Zealand with the AUD FX rate down 7%, and 15% higher in France with the EUR FX rate down 12%.

Sales to OUS distributors were 41% higher in 2Q 2022 than in 2Q 2021.

1H 2022 Sales

Total consolidated 1H 2022 UTMD WW sales were $2,184 (+9.3%) higher than in 1H 2021.

Constant currency sales were $2,792 (+11.8%) higher.

domestic sales were 6.8% higher and OUS sales were 13.4% higher in 1H 2022 compared to 1H 2021.

In constant currency terms, 1H 2022 OUS sales were up 20.4%.

Direct to end-user foreign currency OUS 3Q 2022 sales in USD terms were 4.9% lower in Ireland, 16.2% lower in Canada, 28.1% lower in France, 14.8% lower in AUS/NZ and 1.3% higher in the UK than in 3Q 2021.

Sales to OUS distributors/ international OEM customers were 9.3% lower in 3Q 2022 than in 3Q 2021.

Total 9M 2022 UTMD WW consolidated sales were $2,567 (+7.1%) higher than in 9M 2021.

Constant currency sales were $3,529 (+9.8%) higher than in 9M 2021.

domestic sales were 8.3% higher and OUS sales were 5.1% higher.

Without the harm of a stronger USD in converting foreign currency sales, OUS sales were 12.2% higher..

Domestic U.S.

sales in 1H 2022 were $15,813 compared to $14,805 in 1H 2021.

Direct non-Filshie device sales, representing 51% of total domestic sales, were $859 (+12.0%) higher in 1H 2022 than in 1H 2021, led by an increase in domestic neonatal device sales.

sales in 9M 2022 were $24,429 compared to $22,555 in 9M 2021.

Direct other device sales, representing 49% of total domestic sales, were $1,202 (+11.1%) higher in 9M 2022 than in 9M 2021.

OEM sales, representing 35% of total domestic sales, were $1,358 (+19.2%) higher.

Domestic Filshie device sales, representing 15% of total domestic sales, were $618 (20.1%) lower in 1H 2022 compared to 1H 2021.

OUS sales in 1H 2022 were $9,938 compared to $8,762 in 1H 2021.

The increase in USD-denominated OUS sales is understated in constant currency terms.

The stronger USD subtracted $608 from 1H 2022 OUS sales invoiced in GBP, EUR, AUD and CAD currencies.

The transaction-weighted average FX rates from the applicable foreign currency to USD during 1H 2022 and 1H 2021 for revenue purposes follow:

The weighted-average FX rate negative impact on 1H 2022 foreign currency OUS sales was 8.3%.

In constant currency terms, foreign currency sales in 1H 2022 were 20.4% higher than in 1H 2021.

The portion of OUS sales invoiced in foreign currencies in USD terms were 26% of total consolidated 1H 2022 sales compared to 27% in 1H 2021.

Direct to end-user OUS 1H 2022 sales in actual USD terms were 5% higher in Ireland with a 10% lower EUR, 8% lower in Canada with a 2% lower CAD, 3% lower in France with a 10% lower EUR, 23% higher in the UK with a 7% lower GBP, and 28% lower in Australia/New Zealand with a 7% lower AUD.

Sales to OUS distributors were 24% higher in 1H 2022 than in 1H 2021.

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:

Direct Filshie device sales, representing 16% of total domestic sales, were $685 (14.8%) lower in 9M 2022 compared to 9M 2021.

OUS sales in 9M 2022 were 5.1% higher at $14,278 compared to $13,585 in 9M 2021.

The increase in USD-denominated OUS sales was diminished as a result of a stronger USD which subtracted $962 from 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 weighted-average FX rates from the applicable foreign currency to USD during 9M 2022 and 9M 2021 for revenue purposes follow:

The weighted-average unfavorable impact on 9M 2022 foreign currency OUS sales was 9.4%, reducing reported USD sales by $962 relative to the same foreign currency sales in 9M 2021.

In constant currency terms, OUS sales in 9M 2022 were 9.8% higher than in 9M 2021.

The portion of OUS sales invoiced in foreign currencies in USD terms was 23.9% of total consolidated 9M 2022 sales compared to 27.0% in 9M 2021.

Direct to end-user foreign currency OUS 9M 2022 sales in USD terms were 1.9% higher in Ireland, 10.9% lower in Canada, 11.2% lower in France, 14.4% higher in the UK and 23.5% lower in AUS/NZ.

Sales to OUS distributors/OEM customers were 12.0% higher in 9M 2022 than in 9M 2021.

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.

UTMD segments sales into the following general product categories:

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

In 3Q 2022 compared to 3Q 2021, WW gynecology/ electrosurgery sales were up 3%, WW neonatal device sales were up 11%, WW labor & delivery device sales were up 2%, and WW blood pressure monitoring and related OEM product sales were up 1%.

In 9M 2022 compared to 9M 2021, WW gynecology/ electrosurgery device sales were less than 1% lower, WW labor & delivery device sales were up 3%, WW neonatal device sales were up 15% and WW blood pressure monitoring and related OEM product sales were up 16%.

The 9M 2022 increases were after losing $962 in sales from the impact of converting foreign currency sales into USD.

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

Global 3Q 2022 revenues (USD) by product category:

Labor & Delivery

Gynecology/Electrosurgery/Urology

Blood Pressure Monitoring and Accessories*

OUS revenues by product category:

Global 9M 2022 revenues (USD) by product category:

Labor & Delivery

Gynecology/Electrosurgery/Urology

Blood Pressure Monitoring and Accessories*

* includes assemblies and molded components sold to OEM customers.

UTMD continues to be assembly labor limited in the U.S., in addition to continuing supply chain disruption worldwide for timely providing raw materials needed in manufacturing operations.

Also, a continued strengthening of the USD would create a drag on improved 2H 2022 OUS foreign currency sales.

Looking forward, without any additional price increases for UTMD devices (which is unlikely based on continuing cost increases), if UTMD is able to duplicate its 1H 2022 revenues in the 2H, sales for the 2022 year would be up about 5% compared to the 2021 year.

c) Gross Profit (GP)

GP results from subtracting the costs of production, manufacturing engineering, depreciation of equipment, maintenance and repairs, quality assurance including regulatory compliance, and purchasing including freight for receiving materials from suppliers.

As expected, despite dilution of fixed overhead costs from higher sales, the 2Q and 1H significant inflationary increases in UTMD’s variable manufacturing costs squeezed UTMD’s GP Margin (GPM).

UTMD’s 2Q 2022 GP was $365 (+4.7%) higher than in 2Q 2021.

UTMD’s 1H 2022 GP was $951 (+6.5%) higher than in 1H 2021.

Although revenue was up more than GP in both 1Q and 1H periods, the resulting lower GPMs remained consistent with UTMD’s long term profitability goals.

Incremental direct labor costs increased significantly as a result of competition for a limited number of people currently seeking work, and the Company’s efforts to help mitigate the negative impact of inflation on its long-term employees.

UTMD also experienced double-digit percentage cost increases in raw materials costs.

Incoming freight costs to receive raw materials doubled.

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

Although managing the rapid rise in variable manufacturing costs will apparently continue to be a significant challenge for the rest of 2022, the 1H 2022 GPM helps confirm that UTMD is likely to be able to successfully manage it.

*includes molded components sold to OEM customers.

Looking forward, UTMD expects that its 4Q 2022 and year 2023 organic device Revenues will continue to improve.

c) Gross Profit

Gross Profit results from subtracting the costs of manufacturing, quality assurance and receiving materials from suppliers from revenues.

UTMD’s Gross Profit was $113 (+1.4%) higher in 3Q 2022 than in 3Q 2021, and $1,065 (+4.7%) higher in 9M 2022 than in 9M 2021.

The percentage increases in Gross Profit were less than the percentage increases in Revenues, however, which resulted in lower Gross Profit Margins (Gross Profit divided by sales) in the table above.

UTMD does not have long-term fixed price agreements.

Near the end of 2021, UTMD generally increased product prices across-the-board by about 6.5%.

With the exception of OEM devices unique to specific customers, UTMD has not increased product prices further in 2022, resisting additional increases in order to not participate in helping cause systemic inflation.

However, UTMD retains the ability to raise prices on its specialized devices if manufacturing costs continue to increase faster than sales.

Variable manufacturing costs, including wages, raw materials and freight, all increased by double-digit percentages during 9M 2022, much more rapidly than UTMD’s price increases.

Fixed costs were diluted by higher sales.

Over time, management expects that some of the 2022 cost increases will prove transient, and to be able to adjust Gross Profit Margin performance to be more consistent with UTMD’s typical Gross Profit Margins of the past.

d) Operating Income

Operating Income results from subtracting Operating Expenses (OE) from GP.

After subtracting OE from higher 2Q and 1H 2022 GP, Operating Income in 2Q 2022 was $5,057 compared to $4,765 in 2Q 2021, an increase of 6.1%, representing a healthy Operating Income Margin (Operating Income as a percentage of sales) of 37.7%.

Operating Income in 1H 2022 was $9,579 compared to $8,652 in 1H 2021, an increase of 10.7%, representing an Operating Income Margin of 37.2%.

The increase in Operating Income was almost the same as the increase in sales despite a lower GPM and higher litigation expenses (included in G&A OE) because of two offsetting factors;

1) better absorption of fixed IIA amortization expenses (i.e.

a lower percentage of sales for relatively fixed non-cash expenses), and 2) a reduction in USD-denominated foreign currency OE of foreign subsidiaries as a result of a stronger USD (i.e.

lower FX rates for the EUR, GBP, AUD and CAD expenses).

OE 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 OE in 2Q and 1H 2022 compared to the same periods in 2021 by OE category:

A stronger USD helped decrease foreign currency OE when converted to USD by $100 in 2Q 2022 and $135 in 1H 2022.

The following table summarizes “constant currency” OE in 2Q and 1H 2022 compared to the same periods in 2021 by OE category:

Operating Income results from subtracting Operating Expenses from Gross Profit.

Operating Expenses, comprised of sales and marketing (S&M) expenses, product development (R&D) expenses and general and administrative (G&A) expenses, were 23.5% of sales in 3Q 2022 compared to 23.7% of sales in 3Q 2021.

Operating Expenses were 23.6% of sales in 9M 2022 compared to 25.1% of sales in 9M 2021.

UTMD’s tight control of Operating Expenses is a primary financial differentiation from other companies.

Comparison of (USD) consolidated Operating Expenses:

In the same way a stronger USD reduced consolidated USD sales in 2022, it also reduced the USD-denominated Operating Expenses of UTMD’s foreign subsidiaries by $130 in 3Q 2022 and $267 in 9M 2022.

The following table summarizes “constant currency” Operating Expenses (this is a non-US GAAP measure that UTMD management believes provides supplemental information of interest to investors) in 3Q and 9M 2022 compared to the same periods in 2021 by Operating Expense category:

3Q 2022 const FX

1H 2022 const FX

OUS OE when converted to USD were decreased 10% in 2Q 2022 and 7% in 1H 22 by the FX rate change.

Constant currency 2Q 2022 OE were 6% higher than in 2Q 2021, and 3% higher in 1H 2022 than in 1H 2021.

In other words, the FX rate change which decreased foreign OE in USD terms almost offset the higher G&A expenses in the U.S.

The change in FX rates decreased 2Q 2022 OUS S&M expenses by $9, and 1H 2022 OUS S&M expense by $14.

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

A segmentation of USD-denominated G&A expenses by subsidiary location follows.

Note that over 60% of G&A expenses were non-cash expenses from the amortization of IIA associated with the Filshie Clip System:

9M 2022 const FX

S&M expenses were higher in 3Q and 9M 2022 because of higher shipping costs in the U.S.

The change in FX rates reduced USD-denominated 3Q 2022 OUS S&M expense by $10, and 9M 2022 OUS S&M expense by $24.

R&D expenses varied only by specific project expenses.

As almost all new product development is being carried out in the U.S., the FX rate impact on R&D expenses was negligible.

A division of G&A expenses by location follows.

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

G&A Expense Category

1 unchanged sentence

IIA Amort– CSI:

OUS G&A expenses were $804 in 2Q 2022 compared to $871 in 2Q 2021.

OUS G&A expenses were $1,634 in 1H 2022 compared to $1,750 in 1H 2021.

The table below identifies “constant currency” OUS G&A expenses for 2Q and 1H 2022 compared to the same periods in 2021:

Over 60% of UTMD’s consolidated G&A expenses in all periods above were from the non-cash expense of amortizing IIA related to the Filshie Clip System.

In other words, G&A IIA amortization expense declined to 12.1% of sales in 3Q 2022 from 13.2% of sales in 3Q 2021;

and similarly declined to 12.5% of sales in 9M 2022 from 13.8% of sales in 9M 2021.

Fixed USD IIA amortization expense is diluted as a percentage of sales as Revenues increase.

The UK GBP IIA amortization expense was further diminished as a percentage of USD sales as a result of the lower USD/GBP FX rate.

Operating Expenses, “Other-US” in the table above (which does not include IIA amortization expense from the acquisition of Filshie U.S.

Distribution Rights from CooperSurgical Inc in 2019) were higher as a result of $220 in litigation expenses in 3Q 2022 and $409 in 9M 2022, compared to $10 in 3Q and 9M 2021.

The 2022 expenses were a result of ten product liability lawsuits regarding commonplace Filshie clip migration, set up in ten states by a single Texas law firm.

In each case, UTMD has filed a motion to dismiss that is currently under consideration by each applicable Federal Court.

Previously, over forty years’ span of time implanting 13 million Filshie clips in women worldwide, there was only one other clip migration lawsuit by a single plaintiff located in Canada, which case was dismissed before discovery began.

UTMD remains confident in the excellent safety and effectiveness of the Filshie clip system, but unfortunately may have to continue to incur significant legal expenses until the current litigation is resolved.

OUS G&A expenses in USD terms were $745 in 3Q 2022 compared to $869 in 3Q 2021.

OUS G&A expenses were $2,379 in 9M 2022 compared to $2,619 in 9M 2021.

The constant currency table below shows how the stronger USD diminished OUS G&A expenses for 3Q 2022 by $120 and 9M 2022 by $243:

G&A Expense Category

3Q 2022 const FX

1H 2022 const FX

9M 2022 const FX

IIA Amort– UK:

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.

Total OUS G&A:

In summary, Operating Income in 3Q 2022 was $5,141 (39.7% of sales) compared to $5,098 (40.6% of sales) in 3Q 2021, an increase of 0.8%;

and was $14,720 (38.0% of sales) in 9M 2022 compared to $13,750 (38.0% of sales) in 9M 2021, an increase of 7.1%.

In addition to the reduction of all foreign currency Operating Expenses due to a stronger USD, the lower IIA amortization expenses in the G&A category explains how UTMD was able to maintain its Operating Income Margin the same in 9M 2022 as in 9M 2021 despite litigation costs in 9M 2022 which were not present in 9M 2021.

Because of the significance of the IIA amortization expenses, and to remind stockholders of the history, the initial IIA amount of the 2011 Femcare UK purchase was £23,998.

After 11.5 years of amortization, the IIA balance is £5,505 as of the end of 3Q 2022.

For both 3Q 2022 and 3Q 2021 in GBP terms, the IIA amortization expenses were £397.

For 9M 2022 and 9M 2021, the IIA amortization expenses were £1,192 and £1,193 respectively.

The converted USD amortization expense in each period then varied according to the USD/GBP FX rate, which explains almost all the difference in IIA amortization expense in IIA “Amort-UK” row in the table above.

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

Filshie device distribution

rights from CooperSurgical Inc (CSI) was $21,000.

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

After 36 months of amortization, the CSI IIA balance as of September 30, 2022 is $4,789.

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

Because the non-cash IIA amortization expenses represent a majority of UTMD’s Operating Expenses, UTMD provides the following table that separates the IIA amortization expenses from all other Operating Expenses:

IIA amortization expense

All other Operating expense

Total Operating Expenses:

Percent of Sales:

IIA amortization expense

All other G&A expense

Total G&A Expenses:

Therefore, 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 3.5 more years to run at about $468 per quarter using the same USD/GBP FX rate as in 3Q 2022.

The CSI IIA amortization expense has only 1.1 more years to run at $1,105 per quarter.

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 2022 was $142 compared to $60 in 2Q 2021.

Net non-operating income in 1H 2022 was $150 compared to $71 in 1H 2021.

The main difference in net non-operating income during both 2Q and 1H 2022 was due to greater rental income received from renting underutilized warehouse space in Ireland to a third party, and to more interest received on cash bank balances.

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

UTMD Ireland realized $17 more in 2Q 2022 rental income than in 2Q 2021, and $69 more in 1H 2022 rental income than in 1H 2021.

With higher cash balances and higher interest rates in 2022 compared to 2021, UTMD received $90 more in 2Q 2022 interest income and $34 more in 1H interest income.

In 2Q 2022, a loss of $2 on remeasured foreign currency balances was recognized compared to a gain of $5 in 2Q 2021.

In both 1H 2022 and 1H 2021, a loss of $5 on remeasured foreign currency balances was recognized.

Royalties received were $5 in 2Q 2022 and $10 in 1H 2022 compared to $0 in both 2Q and 1H 2021.

Bank fees were $25 in 2Q 2022 compared to $18 in 2Q 2021.

Bank fees were $49 in 1H 2022 compared to $35 in 1H 2021.

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 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 2022 was $198 compared to $59 in 3Q 2021.

Net non-operating income in 9M 2022 was $348 compared to $130 in 9M 2021.

In 3Q 2022 losses from remeasurement of the value of foreign currency bank balances were $2 compared to $7 in 3Q 2021.

In 9M 2022, UTMD recognized a $7 loss from remeasurement of the value of foreign currency bank balances compared to $13 in 9M 2021.

Royalties received were $5 in 3Q 2022 compared to $10 in 3Q 2021, and $15 in 9M 2022 compared to $10 in 9M 2021.

Interest earned on cash balances were $152 and $211 in 3Q and 9M 2022 respectively, compared to interest of $6 and $31 in 3Q and 9M 2021 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 2022 EBT was $5,339 (41.2% of sales) compared to $5,157 (41.0% of sales) in 3Q 2021.

Consolidated 1H 2022 EBT was $9,729 (37.8% of sales) compared to $8,723 (37.0% of sales) in 1H 2021.

Consolidated 9M 2022 EBT was $15,068 (38.9% of sales) compared to $13,880 (38.4% of sales) in 9M 2021.

The EBT of Utah Medical Products, Inc.

was $5,981 in 1H 2022 compared to $5,466 in 1H 2021.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 3,825 in 1H 2022 compared to EUR 3,122 in 1H 2021.

The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was (GBP 232) in 1H 2022 compared to (GBP 295) in 1H 2021.

was $9,607 in 9M 2022 compared to $8,736 in 9M 2021.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 5,074 in 9M 2022 compared to EUR 4,662 in 9M 2021.

The US GAAP EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP (279) in 9M 2022 compared to GBP (361) in 9M 2021.

The EBT of Utah Medical Products Canada, Inc.

(dba Femcare Canada) was CAD 332 in 1H 2022 compared to CAD 303 in 1H 2021.

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

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

Management believes that this operating performance metric provides meaningful supplemental information to both management and investors and confirms UTMD’s ongoing excellent financial operating performance, as well as its ability to sustain performance during a challenging economic time.

Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 2Q 2022 consolidated EBT excluding the remeasured bank balance currency gain or loss (“adjusted consolidated EBITDA”) was $7,005 (+4.6%) compared to $6,695 in 2Q 2021.

Adjusted consolidated EBITDA at $13,376 in 1H 2022 was 7.3% higher compared to $12,471 in 1H 2021.

Adjusted consolidated TTM EBITDA was $27,435 as of June 30, 2022.

TTM EBITDA as of June 30, 2021, a year earlier, was $3,411 lower.

UTMD’s non-US GAAP adjusted consolidated EBITDA as a percentage of sales (EBITDA margin) was 52.2% in 2Q 2022 compared to 53.1% in 2Q 2021.

UTMD’s EBITDA margin was 51.9% in 1H 2022 compared to 52.9% in 1H 2021.

The lower 2022 EBITDA margins reflect the 2022 GPM squeeze.

Nevertheless, management believes that current EBITDA margins demonstrate continued outstanding 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

(dba Femcare Canada) was CAD 443 in 9M 2022 compared to CAD 450 in 9M 2021.

The EBT of UTMD’s manufacturing subsidiaries varies as a result of intercompany shipments which are eliminated in the consolidation of financial 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-US 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, including non-US GAAP adjusted consolidated EBITDA, for both 2022 and 2021 time periods were unaffected by the 2Q 2021 enacted change in the UK corporate income tax rate.

Remeasured currency (gains) or losses

Adjusted Consolidated EBITDA:

UTMD’s non-US GAAP adjusted consolidated EBITDA as a percentage of sales was 54.9% in 3Q 2022 compared to 55.9% in 3Q 2021, reflecting the lower GPM.

Similarly, UTMD’s non-US GAAP adjusted consolidated EBITDA as a percentage of sales was 52.9% in 9M 2022 compared to 53.9% in 9M 2021.

Based on 9M 2022 actual operating results, management expects non-US GAAP adjusted consolidated EBITDA of about $28 million for the full year 2022, consistent with previous projections.

g) Net Income

Net Income in 2Q 2022 of $4,103 (30.6% of sales) was 19.7% higher than the US GAAP Net Income of $3,426 (27.2% of sales) in 2Q 2021.

Excluding the “one-time” income tax provision increase recognized in 2Q 2021 as a result of a future UK tax rate increase and resulting DTL adjustment, diluted Net Income in 2Q 2022 was $4,103 (30.6% of sales) compared to non-US GAAP Net Income of $3,817 (30.3% of sales) in 2Q 2021, a 7.7% increase, which is consistent with the increase in EBT per US GAAP.

As a reminder, 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 would be paid in the UK over the remaining IIA amortization life of the 2011 Femcare acquisition.

Excluding the $390 DTL increase in 2Q 2021 which reduced Net Income by that same amount, 2Q 2021 non-US GAAP Net Income was $3,817 (30.3% of sales) compared to 2Q 2021 US GAAP Net Income of $3,427 (27.2% of sales).

Excluding the same tax provision increase in 1H 2021 due to the DTL adjustment, non-US GAAP 1H 2021 Net Income was $6,840 (29.0% of sales), compared to US GAAP 1H 2021 Net Income of $6,450 (27.4% of sales).

The average consolidated income tax provisions (as a % of the same period EBT) per US GAAP in 2Q 2022 and 2Q 2021 were 21.1% and 29.0% respectively, and were 21.5% and 26.1% in 1H 2022 and 1H 2021 respectively.

As the tax rates for 2Q and 1H 2021 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:

The resulting non-GAAP income tax provision rates were 21.1% and 20.9% for 2Q 2022 and 2Q 2021 respectively, and were 21.5% and 21.6% for 1H 2022 and 1H 2021 respectively.

Net Income is EBT minus a provision for income taxes.

Net Income in 3Q 2022 of $4,280 (33.0% of sales) was 1.8% higher than Net Income of $4,206 (33.5% of sales) in 3Q 2021.

Net Income in 9M 2022 of $11,918 (30.8% of sales) was 11.8% higher than the US GAAP Net Income of $10,656 (29.5% of sales) in 9M 2021.

Net Income per US GAAP in 9M 2021 was reduced 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 remaining future amortization expense of Femcare IIA.

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 represented the additional tax which will be paid in the UK over the then remaining five year life of the 2011 Femcare acquisition IIA.

Excluding the $390 DTL and tax provision increases in 2Q 2021, which reduced 9M 2021 Net Income by that same amount, 9M 2022 Net Income was 7.9% higher than 9M 2021 non-US GAAP Net Income of $11,047 (30.6% of sales), which management believes is more indicative of operating results.

The average consolidated income tax provisions (as a % of the same period EBT) per US GAAP in 3Q 2022 and 3Q 2021 were 19.8% and 18.4% respectively, and were 20.9% and 23.2% in 9M 2022 and 9M 2021 respectively.

Please recall that the 9M 2021 income tax provision was inflated by $390 for the 2Q 2021 DTL adjustment.

The non-US GAAP income tax provision rate was 20.4% for 9M 2021.

The 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.

UTMD has consistently paid millions of dollars in income taxes annually.

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

UTMD management believes that the presentation of results excluding the unfavorable deferred tax liability adjustment to its 9M 2021 income tax provision provides meaningful supplemental information to both management and investors that is more clearly indicative of UTMD’s operating results.

The non-US GAAP exclusion only affects Net Income and Earnings Per Share.

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 2Q 2022 were $1.124 compared to US GAAP diluted EPS of $0.937 in 2Q 2021, a 19.9% increase.

Excluding the “one-time” income tax provision increase recognized in 2Q 2021 as a result of a future UK tax rate increase and a DTL adjustment, diluted EPS in 2Q 2022 were $1.124 compared to non-US GAAP diluted EPS of $1.044 in 2Q 2021, 7.7% higher, consistent with the increase in EBT.

Diluted EPS in 1H 2022 were $2.088 compared to US GAAP diluted EPS of $1.765 in 1H 2021, an 18.3% increase.

Excluding the “one-time” income tax provision increase recognized in 2Q 2021 as a result of a future UK tax rate increase and a DTL adjustment, diluted EPS in 1H 2022 were $2.088 compared to non-US GAAP diluted EPS of $1.871 in 1H 2021, an 11.6% increase, also consistent with the increase in EBT per US GAAP.

Diluted EPS in 3Q 2022 were $1.178 compared to $1.150 in 3Q 2021, a 2.4% increase.

Diluted EPS in 9M 2022 were $3.265 compared to US GAAP diluted EPS of $2.915 in 9M 2021, a 12.0% increase.

Backing out the 2021 “one-time” income tax provision increase due to the DTL adjustment, non-US GAAP diluted EPS in 9M 2021 were $3.021.

The 8.1% increase in 9M 2022 diluted EPS compared to non-US GAAP diluted EPS in 9M 2021 was consistent with the increase in EBT, given a slightly higher average consolidated income tax rate.

Diluted shares were 3,634,235 in 3Q 2022 compared to 3,657,733 in 3Q 2021.

Diluted shares were 3,657,864 in 1H 2022 compared to 3,655,514 in 1H 2021.

The lower diluted shares in 2Q 2022 were the result of shares repurchased during 2Q 2022 offset by employee options exercised, and a lower dilution factor for unexercised options.

The number of shares added as a dilution factor in 2Q 2022 was 7,375 compared to 9,526 in 2Q 2021.

The number of shares added as a dilution factor in 1H 2022 was 9,069 compared to 10,569 in 1H 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 lower diluted shares in 3Q 2022 were the result of UTMD shares repurchased in 2Q 2022, offset slightly by employee options exercised.

The number of shares used for calculating 3Q 2022 EPS was higher than September 30, 2022 actual outstanding 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 3Q 2022 were 3,625,195 compared to 3,654,737 at the end of calendar year 2021.

The difference was due to 300 shares added from employee option exercises during 1H 2022, offset by 30,105 shares repurchased in the open market and retired during 2Q 2022.

For comparison, outstanding shares were 3,645,798 at the end of 2Q 2021.

The total number of outstanding unexercised employee and outside director options at June 30, 2022 was 50,408 at an average exercise price of $69.07, including shares awarded but not yet vested.

The difference was due to 30,105 shares repurchased in 2Q 2022 less 563 shares in employee option exercises during 9M 2022.

For comparison, actual outstanding shares were 3,648,984 at the end of 3Q 2021.

The total number of outstanding unexercised employee and outside director options at September 30, 2022 was 49,895 at an average exercise price of $69.00, including shares awarded but not yet vested.

This compares to 59,869 unexercised option shares at the end of 3Q 2021 at an average exercise price of $68.74/ share, including shares awarded but not vested.

No options were awarded in 2021 and to date in 2022.

UTMD paid $1,060 ($0.290/share) in dividends to stockholders in 2Q 2022 compared to $1,039 ($0.285/ share) paid in 2Q 2021.

The dividends paid to stockholders during 2Q 2022 were 26% of NI.

UTMD paid $1,060 ($0.290/share) in dividends to stockholders in 1H 2022 compared to $2,077 ($0.285/ share) paid in 1H 2021.

The 1H 2022 dividend total excludes a dividend normally paid in January.

A special dividend of $7,309 ($2.00/share) was paid in December 2021 in lieu of January 2022.

In 2Q 2022, UTMD repurchased 30,105 of its shares for $2,495, an average cost of $82.88/ share.

No UTMD shares were repurchased in 2021.

The number of shares added as a dilution factor for 3Q 2022 was 9,220 compared to 10,933 in 3Q 2021.

The number of shares added as a dilution factor for 9M 2022 was 9,424 compared to 10,685 in 9M 2021.

No options were awarded in 2021 or through 9M 2022.

No UTMD shares were purchased in the open market in 2021.

In 2Q 2022, the Company purchased 30,105 UTMD shares at an average cost of $82.88/ share.

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 2022 was $85.90, down 4.4% from the closing price of $89.86 at the end of 1Q 2022, and down 14.1% from the closing price of $100.00 at the end of 2021.

The closing share price one year ago at the end of 2Q 2021 was $85.04.

i) Return on Equity (ROE)

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 in 2021 and before stockholder dividends) in 1H 2022 was 14% compared to 13% in 1H 2021.

The higher ROE in 1H 2022 was due to the higher 1H 2022 net income, despite being diluted by higher average Stockholder’s Equity.

Targeting a high ROE of 20% remains a 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 2022 was 12% compared to annualized ROE of 10% in 9M 2021.

Before the payment of dividends, annualized ROE in 9M 2022 was 15% compared to 14% in 9M 2021.

The higher ROE in 9M 2022 was due to a 1% increase in average accumulated stockholders’ equity divided into a 12% increase in Net Income.

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

UTMD paid $1,051 ($0.290/share) in dividends to stockholders in 3Q 2022 compared to $1,039 ($0.285/ share) paid in 3Q 2021.

Dividends paid to stockholders during 3Q 2022 were 25% of 3Q 2022 Net Income.

UTMD paid $2,111 ($0.290/share) in dividends to stockholders in 9M 2022 compared to $3,116 ($0.285/ share) paid in 9M 2021.

The difference was due to an earlier payment of a special dividend at the end of 2021 instead of in 1Q 2022.

UTMD’s closing share price at the end of 3Q 2022 was $85.31, down from the closing price of $85.90 three months earlier at the end of 2Q 2022, and the closing price of $100.00 nine months earlier at the end of 2021.

Liquidity and Capital Resources

j) Cash flows

Net cash provided by operating activities, including adjustments for depreciation and amortization and other non-cash expenses along with changes in working capital, totaled $9,878 in 1H 2022 compared to $10,225 in 1H 2021.

Although UTMD achieved a $1,187 higher increase in US GAAP Net Income in 1H 2022 and a $591 higher contribution to cash provided by a $102 decrease in accounts receivable compared to a $489 increase in 1H 2021, a $347 lower net increase in operating cash in 1H 2022 than in 1H 2021 was due to offsetting working capital change differences including 1) a $929 increase in inventories compared to a $75 decrease in 1H 2021, 2) a $357 decrease in accrued expenses compared to a $34 increase in 1H 2021, 3) a $335 smaller increase in accounts payable than in 1H 2021, and 4) a $286 decrease in deferred income taxes compared to a $22 increase in 1H 2021.

Capital expenditures for property and equipment (PP&E) were $450 in 1H 2022 compared to $222 in 1H 2021.

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 capital expenditures in 1H 2022 were primarily due to purchasing new equipment and tooling needed to expand production capacity for UTMD’s largest OEM customer.

Depreciation of PP&E was $302 in 1H 2022 compared to $325 in 1H 2021.

UTMD made cash dividend payments of $1,060 in 1H 2022 compared to $2,077 in 1H 2021.

The difference was due to an earlier payment of a special dividend in December 2021, which in the prior year was paid in January 2021.

UTMD’s normal quarterly dividend in 1H 2022 was 1.8% higher per share than in the previous year (excluding the 2021 year-end special dividend).

In 1H 2022, UTMD received $23 and issued 300 shares of its stock upon the exercise of employee and director stock options.

Option exercises in 1H 2022 were at an average price of $76.25 per share.

In comparison, in 1H 2021, 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.

The $750 lower cash provided by operating activities in 9M 2022, despite $1,261 higher Net Income, was due primarily to working capital differences from 1) a $1,904 greater increase in inventories in 9M 2022 compared to 9M 2021, 2) a $306 greater increase in trade accounts receivable and 3) a $249 larger decrease in deferred income taxes, which were offset by 1) a $297 greater increase in accounts payable and 2) a $264 larger increase in accrued expenses.

Capital expenditures for property and equipment (PP&E) were $771 in 9M 2022 compared to $299 in 9M 2021.

The higher capital expenditures in 2022 were due to investment in new manufacturing equipment in both Utah and Ireland.

Capital expenditures for intangible assets were $9 in 9M 2022 compared to none in 9M 2021.

UTMD made cash dividend payments of $2,111 in 9M 2022 compared to $3,116 in 9M 2021.

The dividend declared in 4Q 2020 was paid in January 2021.

The special dividend declared in 4Q 2021 was paid earlier in December 2021 instead of January 2022.

There were $2,495 in share repurchases in 9M 2022 compared to no share repurchases in 9M 2021.

In 9M 2022 the Company received $43 and issued 563 shares of stock on the exercise of employee and director stock options.

Option exercises in 9M 2022 were at an average price of $75.98 per share.

In comparison, in 9M 2021, UTMD received $281 and issued 5,949 shares of its stock upon the exercise of employee and director stock options.

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

At June 30, 2022 compared to the end of 2021, UTMD’s cash and investments increased $5,249 to $66,224 primarily as a result of 1H 2022 Net Income of $7,638 less $3,555 use of cash for dividends to stockholders and UTMD share repurchases.

At June 30, 2022, net Intangible Assets decreased to 22.9% of total consolidated assets from 27.2% on December 31, 2021 due in part to a stronger USD which lowers the USD value of Femcare’s GBP IIA.

UTMD’s still strong 17.8 current ratio at June 30, 2022 was lower than the 19.5 current ratio at December 31, 2021 as a result of $636 higher accrued liabilities.

The average age of trade receivables was 33 days from date of invoice at June 30, 2022 compared to 36 days at December 31, 2021 based on the most recent calendar quarter of sales.

Average inventory turns declined slightly to 2.9 in 2Q 2022 compared to 3.0 for the last quarter of 2021 due to increasing safety stocks of raw material.

June 30, 2022 total consolidated assets were $116,149, an increase of $513 from December 31, 2021.

Current assets were $5,795 higher than at December 31, 2021 primarily because of a $5,249 increase in cash and a $741 increase in inventories.

The modest increase in total assets despite the large increase in current assets was primarily due to a $4,806 decline in net intangible assets from 1H 2022 IIA amortization and a 10% lower GBP/USD FX rate on the Femcare UK intangible asset balance, in addition to a $462 USD-value decline in UK and Ireland Property and Equipment from the difference in the foreign currency exchange (FX) rate at December 31, 2021 and June 30, 2022.

For clarity, the net book value of consolidated property, plant and equipment decreased $476 at June 30, 2022 from the end of 2021 due to the net effect of period-ending changed FX rates, $450 in new asset purchases minus $302 in depreciation, including right of use assets totaling $420 (which were $449 at December 31, 2021).

June 30, 2022 net intangible assets (goodwill plus other intangible assets) declined $4,806 from the end of 2021 as a result of $3,240 in amortization and a 10.2% stronger USD/GBP FX rate on UK intangible asset balances.

At June 30, 2022, net intangible assets including goodwill were 23% of total consolidated assets compared to 27% at year-end 2021 and 30% at June 30, 2021.

Working capital (current assets minus current liabilities) was $74,514 at June 30, 2022 compared to $69,412 at December 31, 2021.

Cash balances were $66,224 of the June 30, 2022 working capital.

Current assets at June 30, 2022 compared to December 31, 2021 were $5,795 higher primarily as the result of a $5,249 increase in cash and investments and a $742 increase in inventories.

Current liabilities were $693 higher at June 30, 2022 compared to December 31, 2021 as the result of a $636 increase in accrued liabilities and $57 higher accounts payable.

The higher accrued liabilities resulted from no stockholder dividend, which was paid earlier than normal in December 2021, accrued at the end of 2021, whereas at the end of 2Q 2022 a $1,060 dividend, which was paid in July, was included in June 30, 2022 accrued liabilities.

The increase in accrued liabilities was less than the $1,060 accrued dividend primarily because the accrued profit-sharing bonus at the end of 2021, based on 2021 full year results, was $349 higher than the profit-sharing bonus accrued at June 30, 2022 based on 6 months’ results.

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, 2022 total consolidated liabilities were $8,679, an increase of $180 from December 31, 2021.

Current liabilities were $693 higher than at December 31, 2021.

Long term liabilities were $513 lower primarily as a result of the deferred tax liability balance resulting from non-tax deductible Femcare remaining IIA amortization expense being $397 lower.

The deferred tax liability balance for Femcare IIA ($9,084 on the date of the acquisition), was $1,707 at June 30, 2022 compared to $2,105 at December 31, 2021 and $2,355 at June 30, 2021.

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

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

UTMD’s total debt ratio (total liabilities/total assets) as of June 30, 2022 and December 31, 2021 was 7%, compared to June 30, 2021 at 8%.

September 30, 2022 total consolidated assets were $118,413, a net increase of $2,777 from December 31, 2021.

Consolidated Current Assets alone increased $11,084, as cash increased $8,537, inventories increased $1,713 and receivables increased $903.

The smaller total asset increase was due to an offsetting $8,307 decrease in long term assets, Net Intangible Assets and Property, Plant & Equipment (PP&E).

Net Intangible Assets declined $7,498 as a result of amortization combined with a weaker GBP for remaining Femcare IIA.

OUS PP&E declined $1,074, also as a result of a combination of depreciation and weaker quarter-ending foreign currencies for remaining OUS PP&E assets.

UTMD’s Ireland subsidiary EUR-denominated assets and liabilities on September 30, 2022 were translated into USD at an FX rate 14.0% lower (weaker EUR relative to the USD) than the FX rate at the end of 2021.

UTMD’s UK subsidiary GBP-denominated assets were translated into USD at an FX rate 17.8% lower (weaker GBP) than the FX rate at the end of 2021.

UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 11.4% lower (weaker AUD) than the FX rate at the end of 2021.

UTMD’s Canada subsidiary CAD-denominated assets were translated into USD at an FX rate 8.0% lower (weaker CAD) than the FX rate at the end of 2021.

The net book value of WW consolidated PP&E declined $809 at September 30, 2022 from the end of 2021 due to the period-ending changed FX rates above, $771 in new asset purchases and $454 in depreciation.

Working capital (Current Assets minus Current Liabilities) was $77,972 at September 30, 2022 compared to $69,412 at December 31, 2021.

The sources of the working capital increase were from consolidated increases of $8,537 in cash, $1,713 in inventories and $903 in receivables.

A $2,524 increase in consolidated Current Liabilities essentially offset the increases in inventories and receivables.

The Current Liabilities of accounts payable and accrued liabilities increased $528 and $1,996 respectively, due to higher sales/production activity, higher accrued income taxes and the fact that the 4Q 2021 declared dividend was already paid rather than in accrued liabilities at the end of 2021.

Management believes that UTMD’s working capital remains sufficient to meet normal operating needs, as well as providing a cushion for unpredictable short-term negative events, new capital expenditures and continued cash dividend payments to stockholders..

September 30, 2022 Net Intangible Assets (goodwill plus other intangible assets, less amortization) declined $7,498 from the end of 2021.

New Intangible Assets of $9 were acquired in 9M 2022.

At September 30, 2022, Net Intangible Assets including goodwill were 20% of consolidated Total Assets compared to 27% at year-end 2021, and 28% one year ago at September 30, 2021.

The long-term deferred tax liability (DTL) balance for Femcare IIA ($9,084 on the date of the acquisition) was $1,479 (£1,328) at September 30, 2022, compared to $2,105 (£1,555) at December 31, 2021, and $2,196 (£1,630) at September 30, 2021.

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 declined $626 at September 30, 2022 from December 31, 2021, as a result of 9M 2022 amortization expense of $1,497, which reduced the DTL balance by $284 (using UK tax rate = 19%).

The remaining difference was due to the FX rate when converting the weaker GBP to USD at September 30, 2022.

UTMD’s total debt ratio (Total Liabilities/ Total Assets) as of September 30, 2022 was 9%, including a remaining $1,895 REPAT tax liability payable over another three years.

The total debt ratio as of December 31, 2021, was 7% because of the early dividend payment, and was 8% as of September 30, 2021.

The $2,777 increase in Total Liabilities and Stockholders’ Equity (same as increase in Total Assets) was primarily due to the $2,524 increase in Current Liabilities.

Stockholders’ Equity increased $1,048 at September 30, 2022 from December 31, 2021.

Stockholders’ equity increased during 9M 2022 by $11,918 in Net Profit, but was also reduced by $2,111 in dividends paid to stockholders, $2,495 in share repurchases and the effect of FX rate changes on OUS assets.

l) Management's Outlook

7 unchanged sentences

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

Despite continuing economic challenges created by government reaction to the COVID-19 pandemic, especially including inflation in costs and lack of availability of workers, the Company continues to effectively execute its 2022 plan as outlined above.

Despite continuing economic challenges created by government reaction to the COVID-19 pandemic, especially including hyperinflation in costs and lack of availability of quality workers, the Company continues to effectively execute its 2022 plan as outlined above.

m) Accounting Policy Changes

7 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis