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Item 2. Management’s Discussion and Analysis

2023-11-13 compared with 2023-08-11 · 258 added, 241 removed, 86 unchanged (85% of the section changed)

2 unchanged sentences

(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, 2022 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.

The Company’s Form 10-K Annual Report for the year ended December 31, 2022, 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.

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 second calendar quarter (2Q) and first half (1H) 2023 compared to the same periods of 2022 were as follows:

Income statement results in 3Q and 9M 2023 compared to the same periods of 2022 were as follows:

Operating Income

Income Before Tax

Net Income (US GAAP)

Earnings per Diluted Share

Consolidated total 1H 2023 revenues were only $366 lower compared to 1H 2022 despite $630 lower biopharmaceutical OEM sales post COVID-pandemic, which was anticipated at the beginning of the year.

Despite the lower sales, and combined with continued supply chain disruption challenges, UTMD’s 1H Gross Profit margin (GPM) improved, yielding total Gross Profit almost the same for the first half of the year.

Operating Income, however, declined $715 as a result of unusual litigation expenses related to yet unresolved Filshie clip product liability claims in the U.S.

However, because UTMD realized $1,236 higher interest income on its cash balances, Net Income for 1H 2023 was up $776 compared to 1H 2022.

Profit margins in 2Q and 1H 2023 compared to 2Q and 1H 2022 follow:

Gross Profit Margin (Gross Profit/ sales):

Operating Income Margin (Operating Income/ sales):

Income Before Tax Margin (Income B4 Tax/ sales):

Net Income Margin (Net Income/ sales):

The lower 2Q consolidated revenues were primarily attributable to a decline in sales to UTMD’s biopharmaceutical OEM customer, although the Company was also not able to meet certain direct U.S.

demand due to lack of raw materials and third-party sterilization capacity constraints.

Half of the lower 1H revenues resulted from a stronger USD when converting foreign currency sales to USD.

UTMD was able to achieve its targeted GPM with the help of recent price increases.

The dilution in Operating Income margin was due to $463 higher 1H 2023 litigation costs which are included in Operating Expense per US GAAP.

However, interest income included in 1H $1,278 higher non-operating income more than offset the litigation costs, and allowed an expansion in Income Before Tax.

The additional expansion in Net Income and Earnings Per Diluted Share (EPS) was due to a lower estimated income tax provision rate and fewer diluted shares due to share repurchases during 2Q 2022.

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

Average Consolidated Income Tax Provision Rate

UTMD’s June 30, 2023 Balance Sheet continued strong, with no debt.

Ending Cash and Investments were $84.6 million on June 30, 2023 compared to $75.1 million on December 31, 2022.

The June 30, 2023 cash balance resulted after paying $2.1 million in cash dividends to stockholders, increasing non-cash working capital by $0.1 million (including inventories by $1.3 million) and making $0.4 million in capital expenditures during 1H 2023.

Net Income (NI)

Earnings per Diluted Share (EPS)

Worldwide (WW) consolidated sales in 3Q 2023 were $450 lower than in 3Q 2022, and were $816 lower in 9M 2023 compared to 9M 2022.

This essentially was because 3Q 2023 biopharmaceutical OEM sales were $1,217 lower than in 3Q 2022, and were $1,847 lower in 9M 2023 compared to 9M 2022.

Sales invoiced in foreign currencies, which did not include any biopharmaceutical OEM sales, represented 25% of total WW consolidated 3Q 2023 sales (when expressed in USD) and 29% of 9M 2023 total WW consolidated sales.

Constant currency sales, U.S.

dollar sales using the same foreign currency exchange (FX) rates as in the prior year’s same periods, were $155 higher in 3Q 2023 as a result of a stronger EUR and GBP compared to 3Q 2022, but $33 lower for 9M 2023 because of a weaker AUS and CAD, despite a stronger EUR, for 9M 2023 year-to-date.

Profit margins in 3Q and 9M 2023 compared to 3Q and 9M 2022 follow:

Gross Profit Margin (GP/ sales):

Operating Income Margin (OI/ sales):

EBT Margin (EBT/ sales):

Net Income Margin (NI/ sales):

EBT = Income Before Taxes = (Operating Income + Non-Operating Income)

In 9M 2023, UTMD achieved its targeted GP margin (GPM), although somewhat lower than in 9M 2022 due to planned higher manufacturing overhead costs with less absorption because of lower sales.

The lower 3Q 2023 GPM was a good example of this.

In addition to the lower absorption of higher overhead costs, the Company had an unfavorable product mix due to much higher foreign distributor sales compared to 3Q 2022, and experienced higher than normal medical expenses in its self-funded U.S.

health care plan.

International distributor prices are lower than prices of products sold directly to medical facilities WW.

In addition to the 4.4 percentage-point lower 3Q 2023 GPM and the 1.2 percentage-point lower 9M 2023 GPM, the Operating Income margins in both periods were reduced another 2.8 percentage points by 2023 litigation expenses captured in General & Administrative (G&A) expenses.

The Operating Income margins are Operating Income in the applicable time period divided by sales in the same period.

Due primarily to interest earned on cash balances which are included in Non-operating income, UTMD was able to achieve higher Income Before Tax, Net Income and Earnings per Diluted Share in 9M 2023 compared to 9M 2022.

UTMD’s September 30, 2023 Balance Sheet, in the absence of debt, continued to strengthen with total assets up $0.8 million from the end of 2022.

Ending Cash and Investments were $88.2 million on September 30, 2023 compared to $75.1 million on December 31, 2022, after paying $3.2 million in cash dividends to stockholders and purchasing $0.5 million in new Property and Equipment in 9M 2023.

UTMD’s cash balance increased $3.62/ outstanding share at September 30, 2023 from the end of 2022 with a 4% increase in Net Income, while the stock price declined $14.53/ share.

Stockholders’ Equity (SE) increased $9.4 million in the nine-month period from December 31, 2022 despite the fact that $3.2 million in dividends reduced SE.

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 3Q 2023 compared to the end of calendar year 2022 and the end of 3Q 2022 follow:

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 2023 Sales

Total consolidated 2Q 2023 UTMD worldwide (WW) sales in USD terms were $562 (4.2%) lower than in 2Q 2022.

In 2Q 2023, OUS sales growth continued to outperform domestic sales growth.

In 2Q 2023 compared to 2Q 2022, OUS sales were $250 (+4.5%) higher and U.S.

domestic sales were $812 (10.4%) lower.

$445 of the $562 lower total 2Q sales were sales of pressure monitoring devices and accessories to UTMD’s largest OEM customer, shipped from both the U.S.

WW 2Q Filshie device sales were $94 (+3.1%) higher.

The portion of OUS sales invoiced in foreign currencies in USD terms were 33% of total WW consolidated 2Q 2023 sales compared to 29% in 2Q 2022.

An average lower USD foreign currency exchange (FX) rate added $35 (+0.3%) for 2Q sales invoiced in foreign currencies.

Actually, a stronger EUR by itself added $70.

The GBP was about the same, and both the CAD and AUD were weaker.

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 WW UTMD consolidated 3Q 2023 sales were $450 (3.0%) lower than in 3Q 2022.

WW constant currency sales were $605 (4.7%) lower.

domestic sales were 15.7% lower (obviously without any FX impact), and outside the U.S.

(OUS) sales were 20.8% higher.

Without the benefit of a weaker USD in converting foreign currency sales, 3Q 2023 OUS sales were 17.2% higher.

Domestic U.S.

sales in 3Q 2023 were $7,265 compared to $8,615 in 3Q 2022.

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

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

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

Domestic direct other device sales, representing 56% of total domestic sales, were $9 (+0.2%) higher in 3Q 2023 than in 3Q 2022.

Domestic OEM sales, representing 28% of total domestic sales, were $1,019 (33.4%) lower, including $1,103 lower U.S.

biopharmaceutical OEM sales.

Direct Filshie device sales, representing 16% of total domestic sales, were $341 (23.0%) lower in 3Q 2023 compared to 3Q 2022.

OUS sales in 3Q 2023 were 20.8% higher at $5,240 compared to $4,340 in 3Q 2022.

The increase in USD-denominated OUS sales was leveraged as a result of a weaker USD relative to the EUR and GBP, which added $155 to OUS sales that were invoiced in GBP, EUR, AUD and CAD foreign currencies in constant currency terms.

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

The average FX rates from the applicable foreign currency to USD during 2Q 2023 and 2Q 2022 for revenue purposes follow:

The $35 weighted average favorable impact on 2Q 2023 foreign currency OUS sales was 0.8%.

The weighted-average FX rates from the applicable foreign currency to USD during 3Q 2023 and 3Q 2022 for revenue purposes follow:

The weighted average favorable FX rate difference impact on 3Q 2023 foreign currency OUS sales was 5.2%, increasing reported USD sales by $155 relative to the same foreign currency sales in 3Q 2022.

In constant currency terms, foreign currency sales in 3Q 2023 were 17.2% higher than in 3Q 2022.

“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.

With a weaker USD in converting 2Q EUR foreign currency sales, WW constant currency sales were $597 lower (4.4%) than in 2Q 2022, which was the second highest sales quarter of 2022.

Total OUS sales in 2Q 2023 were $5,849 compared to $5,599 in 2Q 2022.

The portion of OUS sales invoiced in foreign currencies in USD terms were 25.0% of total consolidated 3Q 2023 sales compared to 19.3% in 3Q 2022.

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

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to OUS distributors are invoiced in USD.

Direct to end-user OUS 2Q 2023 sales in USD terms (including the impact of FX rate differences) were 13% higher in Ireland with the EUR FX rate up about 3%, 18% lower in Canada with the CAD FX rate down 5%, 10% higher in the UK with the GBP FX rate about the same, 19% lower in Australia/New Zealand with the AUD FX rate down 7%, and 3% higher in France with the EUR FX rate up 3%.

USD-denominated sales to OUS distributors were 8% higher in 2Q 2023 than in 2Q 2022.

Direct to end-user foreign currency OUS 3Q 2023 sales in USD terms were 19.6% higher in Ireland, 21.6% lower in Canada, 8.2% higher in France, 30.8% lower in AUS/NZ and 17.2% higher in the UK than in 3Q 2022.

Sales to OUS distributors/ international OEM (including biopharmaceutical) customers were 35.5% higher in 3Q 2023 than in 3Q 2022.

Total consolidated 9M 2023 UTMD WW consolidated sales were $816 (2.1%) lower than in 9M 2022.

Constant currency 9M 2023 sales were $33 (+0.1%) lower due to a slightly stronger USD year-to-date.

domestic sales were 12.1% lower and OUS sales were 15.0% higher.

Domestic U.S.

sales in 2Q 2023 were $7,017 compared to $7,829 in 2Q 2022.

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 52% of total domestic sales, were $326 (8.1%) lower in 2Q 2023 than in 2Q 2022.

sales, particularly for NICU devices, were hindered by continuing supply chain disruption on the availability of raw materials and a lack of third party sterilization capacity.

sales in 9M 2023 were $21,467 compared to $24,429 in 9M 2022.

Direct other device sales, representing 53% of total domestic sales, were $689 (5.7%) lower in 9M 2023 than in 9M 2022.

The lower direct other device sales year-to-date resulted from continued supply chain disruption.

Domestic OEM sales, representing 30% of total domestic sales, were $1,919 (22.8%) lower.

Domestic Filshie device sales, representing 17% of total domestic sales, were $38 (+3.3%) higher in 2Q 2023 compared to 2Q 2022.

1H 2023 Sales

Total consolidated 1H 2023 UTMD WW sales in USD terms were $366 (1.4%) lower than in 1H 2022.

Because an average stronger USD reduced 1H foreign currency sales by $188 (0.7%), constant currency 1H 2023 consolidated total sales were just $178 (0.7%) lower.

Combined sales of pressure monitoring devices and accessories to UTMD’s largest OEM customer, shipped from the U.S.

and Ireland were $630 lower in 1H 2023 compared to 1H 2022, more than accounting for the lower total sales.

WW 1H 2023 Filshie device sales were $407 (+6.7%) higher.

In 1H 2023, OUS sales growth continued to outperform domestic sales growth.

In 1H 2023 compared to 1H 2022, OUS sales were $1,245 (+12.5%) higher and U.S.

domestic sales were $1,611 (10.2%) lower.

Total OUS sales in 1H 2023 were $11,184 compared to $9,938 in 1H 2022.

The portion of OUS sales invoiced in foreign currencies in USD terms were 31% of total WW consolidated 1H 2023 sales compared to 26% in 1H 2022.

The biopharmaceutical portion of domestic OEM sales were $1,963 (28.2%) lower.

Direct domestic Filshie device sales, representing 17% of total domestic sales, were $354 (9.0%) lower in 9M 2023 compared to 9M 2022 due to lower demand.

OUS sales in 9M 2023 were 15.0% higher at $16,424 compared to $14,278 in 9M 2022.

The increase in 9M 2023 USD-denominated OUS sales was only slightly diminished as a result of a stronger USD which subtracted $33 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 1H 2023 and 1H 2022 for revenue purposes follow:

The weighted-average FX rate negative impact on 1H 2023 foreign currency OUS sales was 2.4%.

In constant currency terms, foreign currency sales in 1H 2023 were 18.2% higher than in 1H 2022.

In constant currency terms, 1H 2023 OUS total sales were up 14.4%.

Direct to end-user OUS 1H 2023 sales in USD terms (including the impact of FX rate differences) were about the same in Ireland with the EUR FX rate also about the same, 10% lower in Canada with the CAD FX rate down 6%, 24% higher in the UK with the GBP FX rate down 4%, 11% lower in Australia/New Zealand with the AUD FX rate down 6%, and 10% higher in France with the EUR FX rate about the same as in 1H 2022.

USD-denominated sales to OUS distributors were 15% higher in 1H 2023 than in 1H 2022.

Domestic U.S.

sales in 1H 2023 were $14,202 compared to $15,813 in 1H 2022.

Direct non-Filshie device sales, representing 51% of total domestic sales, were $698 (8.7%) lower in 1H 2023 than in 1H 2022, led by a $567 decline in domestic neonatal device sales due to continued supply chain disruption.

Domestic OEM sales, representing 32% of total domestic sales, were $900 (16.8%) lower.

Domestic Filshie device sales, representing 17% of total domestic sales, were $13 (0.5%) lower in 1H 2023 compared to 1H 2022.

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

Global revenues by product category:

The weighted-average FX rates from the applicable foreign currency to USD during 9M 2023 and 9M 2022 for revenue purposes follow:

The weighted-average unfavorable impact on 9M 2023 foreign currency OUS sales was just 0.3%, reducing reported USD sales by $33 relative to the same foreign currency sales in 9M 2022.

In constant currency terms, OUS sales in 9M 2023 were 15.3% higher than in 9M 2022.

The portion of OUS sales invoiced in foreign currencies in USD terms was 28.8% of total consolidated 9M 2023 sales compared to 23.9% in 9M 2022.

Direct to end-user foreign currency OUS 9M 2023 sales in USD terms were 5.3% higher in Ireland, 14.1% lower in Canada, 9.5% higher in France, 21.7% higher in the UK and 18.2% lower in AUS/NZ.

Sales to OUS distributors/OEM (including biopharmaceutical) customers were 21.2% higher in 9M 2023 than in 9M 2022.

Since shipments to OEM customers and OUS distributors typically have long lead times, the current order backlog added to 9M 2023 sales results for those segments provides a fair estimate for 2023 sales as a whole, barring new unresolved raw material supply constraints and further third-party sterilization capacity limits.

Based on the current backlog, management expects that WW biopharmaceutical OEM sales to its largest customer will be about $3 million lower in 2023 than in 2022, representing about 17% of 2023 total consolidated sales compared to 22% in 2022.

This projection is consistent with management’s beginning of year 2023 sales estimates, and suggests a net total annual 2023 consolidated sales decline of about $2 million.

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 2023 compared to 3Q 2022, WW gynecology/ electrosurgery sales were 6% lower, WW neonatal device sales were 3% higher, WW labor & delivery device sales were 12% higher and WW blood pressure monitoring and related OEM product sales were 8% lower.

In 9M 2023 compared to 9M 2022, WW gynecology/ electrosurgery device sales were 4% higher, WW labor & delivery device sales were about the same, WW neonatal device sales were 10% lower and WW blood pressure monitoring and related OEM product sales were 7% lower.

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

Global 3Q 2023 revenues (USD) by product category:

Labor & Delivery

Gynecology/Electrosurgery/Urology

Blood Pressure Monitoring and Accessories*

OUS revenues by product category:

Global 9M 2023 revenues (USD) by product category:

Labor & Delivery

Gynecology/Electrosurgery/Urology

Blood Pressure Monitoring and Accessories*

* includes assemblies and molded components sold to OEM customers.

Looking forward to the 2H remainder of 2023, in view of ongoing lack of input from its largest OEM customer, UTMD continues to anticipate lower biopharmaceutical manufacturing pressure control device sales, now likely yielding full year revenues closer to the low end of UTMD’s $50 to $52 million beginning of year projection, or about 5% lower compared to 2022 revenues.

*includes molded components sold to OEM customers.

c) Gross Profit

Gross Profit results from subtracting the cost of goods sold (CGS), comprised of costs of production, manufacturing engineering, depreciation of equipment, maintenance and repairs, quality assurance including regulatory compliance, and purchasing materials including freight for receiving materials from suppliers, from revenues.

CGS is divided into three categories:

direct labor, raw materials and manufacturing overhead (MOH).

Direct labor and raw materials are predominantly variable costs, i.e.

vary directly with revenues.

MOH contains predominantly fixed costs relative to the Company’s infrastructure, for example, supervision and engineering personnel.

UTMD’s 2Q 2023 Gross Profit was $412 (5.1%) lower than in 2Q 2022 due to a lower GPM on 4.2% lower sales.

The 2Q 2023 GPM was 60.1% compared to 60.7% in 2Q 2022.

1H 2023 GP was just $102 (0.7%) lower than in 1H 2022, although sales were 1.4% lower, because UTMD’s GPM was higher in 1H 2023 than in 1H 2022.

The 1H 2023 GPM was 61.4% compared to 60.9% in 1H 2022.

UTMD’s 2023 GPMs remained consistent with long-term profitability goals.

Higher MOH costs with lower sales was the primary reason for the 2Q 2023 lower GPM, as a result of adding production supervision, engineering and management personnel, in addition to two cost-of-living increases for all manufacturing employees since the end of 2Q 2022.

Incoming freight costs stabilized.

Direct labor productivity was consistent with past periods of time, despite the cost-of-living increases due to price increases.

Purchases of higher quantities of raw materials helped keep incremental raw material costs under relative control.

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

UTMD’s Gross Profit was $827 (10.1%) lower in 3Q 2023 than in 3Q 2022, and $929 (3.9%) lower in 9M 2023 than in 9M 2022.

UTMD price increases to customers since early 2022 were substantially lower than its continued cost increases, with continued “sticky” inflation.

Although direct labor productivity in 3Q 2023 remained consistent with the past, raw material costs continued to increase and higher manufacturing overhead costs were less absorbed by lower revenues.

About half of the 4.4 percentage-point lower Gross Profit margin (GPM) in 3Q 2023 compared to 3Q 2022 was due to $1,039 (+52%) higher sales to OUS distributors.

d) Operating Income

Operating Income results from subtracting Operating Expenses from Gross Profit.

Operating Income in 3Q 2023 was $3,969 compared to $5,141 in 3Q 2022, a $1,171 (22.8%) decline;

and was $12,833 in 9M 2023 compared to $14,720 in 9M 2022, a $1,887 (12.8%) decline.

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

Operating Income in 2Q 2023 of $4,425 was $632 (12.5%) lower compared to 2Q 2022 Operating Income of $5,057.

The $632 lower Operating Income can be explained by $412 lower Gross Profit combined with $115 higher litigation expense (captured in the G&A Operating Expense category) and $125 higher salaries included in WW Operating Expense categories (including payroll taxes and medical plan expense) for about the same number of employed people as in 2Q 2022.

UTMD’s 2Q 2023 Operating Income Margin (Operating Income as a percentage of sales) remained a healthy 34.4%.

Operating Income in 1H 2023 was $8,864 compared to $9,579 in 1H 2022, a decrease of $715 (7.5%), representing a healthy 1H 2023 Operating Income margin of 34.9%.

The decrease in 1H 2023 Operating Income can be explained by $102 lower Gross Profit combined with $463 higher litigation expense and $207 higher salaries included in WW Operating Expense categories for about the same number of employed people as in 1H 2022.

The higher salaries were from cost-of-living adjustments necessary to mitigate high inflation.

The following table summarizes Operating Expense in 2Q and 1H 2023 compared to the same periods in 2022 by Operating Expense (OE) category:

An average stronger USD helped reduce foreign currency Operating Expense when converted to USD by $4 in 2Q 2023 and $85 in 1H 2023.

The following table summarizes “constant currency” Operating Expense in 2Q and 1H 2023 compared to the same periods in 2022 by Operating Expense category:

The following table summarizes Operating Expenses in 3Q and 9M 2023 compared to the same periods in 2022 by Operating Expense (OE) category:

Changes in foreign currency exchange rates did not have a significant impact on consolidated financial results in 2023.

A stronger EUR and GBP in 3Q 2023 helped increase OUS S&M expense by $3 and OUS G&A expense by $51.

An average slightly stronger USD for 9M 2023, reduced OUS S&M expenses by $4, OUS G&A expenses by $26 and OUS R&D expenses by $1.

The following table summarizes “constant currency” Operating Expenses in 3Q and 9M 2023 compared to the same periods in 2022 by Operating Expense (OE) category:

3Q 2023 const FX

1H 2023 const FX

G&A expenses dominate UTMD’s Operating Expenses, largely because of non-cash expenses from the amortization of Identifiable Intangible Assets (IIA) associated with the Filshie Clip System, which were about 57% of G&A expenses in 2023.

A segmentation of USD-denominated G&A Operating Expenses by subsidiary follows:

G&A OE Category

9M 2023 const FX

S&M and R&D expenses were higher primarily as a result of cost-of-living adjustments to employee salaries.

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

IIA Amort– UK:

IIA Amort– CSI:

Total G&A OE:

OUS G&A Operating Expenses were $802 in 2Q 2023 compared to $804 in 2Q 2022.

OUS G&A Operating Expenses were $1,599 in 1H 2023 compared to $1,635 in 1H 2022.

A stronger USD reduced OUS G&A Operating Expenses by$2 in 2Q 2023 and by $76 in 1H 2023.

The table below identifies “constant currency” OUS G&A Operating Expenses for 2Q and 1H 2023 compared to the same periods in 2022:

G&A OE Category

Although the IIA amortization expense in either USD or GBP, depending on the location where expensed, was the same as in the prior year’s same periods, the 3Q 2023 Operating Income margin was diluted by 0.7 percentage points, and the 9M 2023 Operating Income margin was diluted by 0.2 percentage points, due to a lower sales denominator and the GBP FX rate difference.

Non-cash IIA amortization expense was 57% of total G&A expenses in both 3Q 2023 and 9M 2023.

Litigation expenses, included in the Other-US G&A Expense category above, were about 2.8% of sales in both 3Q 2023 and 9M 2023.

Litigation expenses were 1.4% of sales in 3Q 2022 and 1.1% of sales in 9M 2022.

In other words, higher litigation expenses reduced UTMD’s Operating Income margin by another 1.4 percentage-points in 3Q 2023, and another 1.7 percentage-points in 9M 2023.

OUS G&A expenses in USD terms were $818 in 3Q 2023 compared to $745 in 3Q 2022.

OUS G&A expenses were $2,416 in 9M 2023 compared to $2,379 in 9M 2022.

The constant currency table below shows how the changes in FX rates affected reported OUS G&A expenses for 3Q 2023 ($51 higher) and 9M 2023 ($26 lower):

G&A Expense Category

3Q 2023 const FX

1H 2023 const FX

9M 2023 const FX

IIA Amort– UK:

Total G&A OE:

S&M Operating Expenses were $48 and $99 higher in 2Q 2023 and 1H 2023 compared to the same periods in 2022 respectively.

The differences were due to one additional S&M employee in the U.S.

combined with cost-of-living adjustments for all S&M employees, offset slightly by $1 and $7 lower OUS S&M Operating Expenses in 2Q 2023 and 1H 2023 respectively due to a stronger USD.

Period to period R&D Operating 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, UTMD’s Operating Income margin in 3Q 2023 was 31.7% of sales compared to 39.7% of sales in 3Q 2022;

and was 33.9% of sales in 9M 2023 compared to 38.0% of sales in 9M 2022.

An explanation for changes in 3Q and 9M 2023 Operating Income margins from the prior year’s same periods follows:

Expense Category

3Q Pct-Point Reduction

9M Pct-Point Reduction

GPM difference:

Litigation Expense (G&A)

IIA Amortization Expense (G&A)

All Other Operating Expenses

Reduction in Operating Income margin:

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 12.5 years of amortization, the IIA balance is £3,915 as of the end of 3Q 2023.

For both 3Q 2023 and 3Q 2022 in GBP terms, the IIA amortization expenses were £397.

For both 9M 2023 and 9M 2022, the IIA amortization expenses were £1,192.

The converted USD amortization expense in each period then varied according to the USD/GBP FX rate, which explains 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 and intellectual property 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 4.67 years of amortization, the CSI IIA balance as of September 30, 2023 is $368.

The CSI IIA amortization expenses were the same in both 2023 and 2022 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 just 2.5 more years to run at about $503 per quarter using the same USD/GBP FX rate as in 3Q 2023.

The CSI IIA amortization expense will be fully amortized in 4Q 2023 with just a $368 remaining expense.

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 2023 was $747 compared to $142 in 2Q 2022.

Net non-operating income in 1H 2023 was $1,427 compared to $150 in 1H 2022.

The main difference in net non-operating income during both 2Q and 1H 2023 was due to greater interest income received on cash bank balances.

With higher cash balances and higher interest rates in 2023 compared to 2022, UTMD received $590 more in 2Q interest income and $1,236 more in 1H interest income.

Ireland received €58 in warehouse rental income in both 2Q 2023 and 2Q 2022, but €116 in 1H 2023 compared to €108 in 1H 2022.

In 2Q 2023, a loss of $8 on remeasured foreign currency balances was recognized compared to a loss of $2 in 2Q 2022.

In 1H 2023, a loss of $8 on remeasured foreign currency balances was recognized compared to a loss of $5 in 1H 2022.

Royalties received were $5 in 2Q and $10 in 1H in both 2023 and 2022.

Bank fees were $9 in 2Q 2023 compared to $25 in 2Q 2022.

Bank fees were $17 in 1H 2023 compared to $49 in 1H 2022.

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 2023 was $811 compared to $198 in 3Q 2022.

Net non-operating income in 9M 2023 was $2,239 compared to $348 in 9M 2022.

In 3Q 2023 a gain of $1 resulted from remeasurement of the value of foreign currency bank balances compared to a $2 loss in 3Q 2022.

UTMD recognized a $6 loss from remeasurement of the value of foreign currency bank balances in both 9M 2023 and 9M 2022.

Royalties received were $0 in 3Q 2023 compared to $5 in 3Q 2022, and $10 in 9M 2023 compared to $15 in 9M 2022.

Interest earned on cash balances were $743 and $2,038 in 3Q and 9M 2023 respectively, compared to interest of $152 and $211 in 3Q and 9M 2022 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 2023 EBT was $4,781 (38.2% of sales) compared to $5,339 (41.2% of sales) in 3Q 2022.

Consolidated 1H 2023 EBT was $10,291 (40.5% of sales) compared to $9,729 (37.8% of sales) in 1H 2022.

Consolidated 9M 2023 EBT was $15,072 (39.8% of sales) compared to $15,068 (38.9% of sales) in 9M 2022.

The EBT of Utah Medical Products, Inc.

was $5,023 in 1H 2023 compared to $5,981 in 1H 2022.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 4,391 in 1H 2023 compared to EUR 3,825 in 1H 2022.

The EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was (GBP 20) in 1H 2023 compared to (GBP 232) in 1H 2022.

was $7,955 in 9M 2023 compared to $9,607 in 9M 2022.

The EBT of Utah Medical Products, Ltd (Ireland) was EUR 6,279 in 9M 2023 compared to EUR 5,074 in 9M 2022.

The US GAAP EBT of Femcare Group Ltd (Femcare Ltd., UK and Femcare Australia Pty Ltd) was GBP (53) in 9M 2023 compared to GBP (279) in 9M 2022.

The EBT of Utah Medical Products Canada, Inc.

(dba Femcare Canada) was CAD 330 in 1H 2023 compared to CAD 332 in 1H 2022.

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

(dba Femcare Canada) was CAD 474 in 9M 2023 compared to CAD 443 in 9M 2022.

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 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 2023 consolidated EBT excluding the remeasured bank balance currency gain or loss (“adjusted consolidated EBITDA”) was $6,996 compared to $7,005 in 2Q 2022.

Adjusted consolidated EBITDA at $13,916 in 1H 2023 was 4% higher compared to $13,376 in 1H 2022.

Adjusted consolidated trailing twelve months’ (TTM) EBITDA was $28,431 as of June 30, 2023.

UTMD’s adjusted consolidated EBITDA as a percentage of sales (EBITDA margin) was 54.4% in 2Q 2023 compared to 52.2% in 2Q 2022.

UTMD’s EBITDA margin was 54.8% in 1H 2023 compared to 51.9% in 1H 2022.

The higher 2023 EBITDA margins reflect that the increase in interest income on cash balances (non-operating income) was substantially higher than the increase in litigation expenses (G&A OE).

Management believes that current EBITDA margins demonstrate continued outstanding operating performance.

Excluding the noncash effects of depreciation, amortization of intangible assets and stock option expense, 3Q 2023 consolidated EBT excluding the remeasured bank balance currency gain or loss and interest expense (“adjusted consolidated EBITDA”) was $6,604 compared to $7,111 in 3Q 2022.

Adjusted consolidated EBITDA was $20,520 in 9M 2023 compared to $20,487 in 9M 2022.

Adjusted consolidated EBITDA for the previous four calendar quarters (TTM) was $27,924 as of September 30, 2023.

UTMD’s adjusted consolidated EBITDA as a percentage of sales was 52.8% in 3Q 2023 compared to 54.9% in 3Q 2022, reflecting the lower 3Q 2023 GPM.

UTMD’s adjusted consolidated EBITDA as a percentage of sales was 54.2% in 9M 2023 compared to 52.9% in 9M 2022.

Management believes that this non-US GAAP operating performance metric provides meaningful supplemental information to both management and investors and confirms UTMD’s ongoing excellent financial operating performance during a difficult economic period of time.

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:

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g) Net Income

Despite slightly lower EBT, Net Income in 2Q 2023 of $4,200 (32.6% of sales) was 2.3% higher than the Net Income of $4,103 (30.6% of sales) in 2Q 2022.

The higher Net Income was due to a greater proportion of UTMD’s EBT generated in Ireland with the lowest corporate income tax rate and a portion of U.S.

non-operating income being federally tax-exempt, offset by a higher UK corporate tax rate beginning with 2Q 2023.

The average consolidated income tax provision rate (as a % of the same period EBT) in 2Q 2023 was 18.8% compared to 21.1% in 2Q 2022.

Because 1H 2023 EBT was 5.8% higher than in 1H 2022, 1H 2023 Net Income of $8,414 (33.1% of sales) obtained further leverage yielding 10.2% higher Net Income than the Net Income of $7,638 (29.7% of sales) in 1H 2022.

The average consolidated income tax provision rate (as a % of the same period EBT) in 1H 2023 was 18.2% compared to 21.5% in 1H 2022.

Net Income is EBT minus a provision for income taxes.

Net Income in 3Q 2023 of $3,935 (31.5% of sales) was 8.1% lower than Net Income of $4,280 (33.0% of sales) in 3Q 2022.

Net Income in 9M 2023 of $12,349 (32.6% of sales) was 3.6% higher than Net Income of $11,918 (30.8% of sales) in 9M 2022.

The average consolidated income tax provisions (as a % of the same period EBT) in 3Q 2023 and 3Q 2022 were 17.7% and 19.8% respectively, and were 18.1% and 20.9% in 9M 2023 and 9M 2022 respectively.

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.

Except for the UK, in which the corporate income tax rate changed to 25% from 19% on April 1, 2023, the basic corporate income tax rates in each of the sovereignties were the same as in the prior year.

The lower 2023 tax provision rates resulted from the EBT of Utah Medical Products, Ltd (Ireland), with the lowest sovereignty corporate income tax rate, growing disproportionately more than UTMD’s EBT from other sovereign entities, and a portion of UTMD’s 2023 Non-operating Income generated from interest on high grade tax-exempt municipal bonds.

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, except for the UK.

The UK corporate income rate changed from 19% to 25% on April 1, 2023.

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 2023 were $1.154 compared to diluted EPS of $1.124 in 2Q 2022, a 2.7% increase.

Diluted EPS in 1H 2023 were $2.313 compared to diluted EPS of $2.088 in 1H 2022, a 10.8% increase.

The increases in EPS were higher than the increases in NI as a result of fewer diluted shares.

Diluted EPS in 3Q 2023 were $1.081 compared to $1.178 in 3Q 2022, an 8.2% decrease.

Diluted EPS in 9M 2023 were $3.394 compared to diluted EPS of $3.265 in 9M 2022, a 4.0% increase.

Diluted shares were 3,638,723 in 3Q 2023 compared to 3,634,235 in 3Q 2022.

Diluted shares were 3,637,715 in 1H 2023 compared to 3,657,864 in 1H 2022.

The lower diluted shares in both periods of 2023 were the result of shares repurchased during 2Q 2022, offset by employee options exercised and a slightly higher dilution factor for unexercised options.

The number of shares added as a dilution factor in 2Q 2023 was 10,288 compared to 7,375 in 2Q 2022.

The number of shares added as a dilution factor in 1H 2023 was 9,660 compared to 9,069 in 1H 2022.

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

The higher diluted shares in 3Q 2023 were the result of exercise of employee options.

The number of shares used for calculating 3Q 2023 EPS was higher than September 30, 2023 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 2023 were 3,629,525 compared to 3,627,767 at the end of calendar year 2022.

The difference was due to 1,221 shares added from employee option exercises during 1H 2023.

For comparison, outstanding shares were 3,624,932 at the end of 2Q 2022.

The total number of outstanding unexercised employee and outside director options at June 30, 2023 was 66,025 at an average exercise price of $73.78, including shares awarded but not yet vested.

The difference was due to 1,758 shares in employee option exercises during 9M 2023.

For comparison, actual outstanding shares were 3,625,195 at the end of 3Q 2022.

The total number of outstanding unexercised employee and outside director options at September 30, 2023 was 65,301 at an average exercise price of $73.83, including shares awarded but not yet vested.

This compares to 49,895 unexercised option shares at the end of 3Q 2022 at an average exercise price of $69.00/ share, including shares awarded but not vested.

Option awards totaling 20,600 shares were made to 40 employees in October 2022 at an exercise price of $82.60.

The number of shares added as a dilution factor for 3Q 2023 was 9,309 compared to 9,220 in 3Q 2022.

The number of shares added as a dilution factor for 9M 2023 was 9,918 compared to 9,424 in 9M 2022.

In October 2022, 20,600 option shares were awarded to 40 employees at an exercise price of $82.60.

No options have been awarded in 2023.

UTMD paid $1,071 ($0.295/share) in dividends to stockholders in 3Q 2023 compared to $1,051 ($0.290/ share) paid in 3Q 2022.

The dividends paid to stockholders during 2Q 2023 were 25% of NI.

UTMD paid $2,140 ($0.295/share) in dividends to stockholders in 1H 2023 compared to $1,060 ($0.290/ share) paid in 1H 2022.

The dividends paid to stockholders during 1H 2023 were also 25% of NI.

The 1H 2022 dividend total excluded 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.

UTMD has not repurchased its shares since 2Q 2022.

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

Those were the only share repurchases in 2022.

Dividends paid to stockholders during 3Q 2023 were 27% of 3Q 2023 Net Income.

UTMD paid $3,211 ($0.295/share) in dividends to stockholders in 9M 2023 compared to $2,111 ($0.290/ share) paid in 9M 2022.

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

No UTMD shares have been purchased in the open market in 2023.

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 2023 was $93.20, down 1.7% from the closing price of $94.77 at the end of 1Q 2023, and down 7.3% from the closing price of $100.53 at the end of 2022.

The closing share price one year ago at the end of 2Q 2022 was $85.90.

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 in 1H 2023 (before stockholder dividends) was 14%, the same as in 1H 2022, despite being diluted by 10% higher average Stockholder’s Equity.

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

Carrying a high cash balance with less than a 20% return obviously hinders management’s ability to reach the target.

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

Unfortunately, U.S.

“tax-and-spend” legislators under the so-called “Inflation Reduction Act of 2022” have reduced UTMD stockholders’ (which include pension and other retirement funds along with individual investors) future returns by imposing a 1% excise tax on stock repurchases beginning in 2023.

The excise tax reduces returns to stockholders by making buy-backs more expensive.

It is a fundamental obligation for U.S.

public corporations to maximize returns to stockholders, and stock buy-backs remain a key tool in accomplishing that objective.

After payment of cash dividends to stockholders, annualized ROE in 9M 2023 was 10% compared to annualized ROE of 12% in 9M 2022.

Before the payment of dividends, annualized ROE in 9M 2023 was 14% compared to 15% in 9M 2022.

The lower ROE in 9M 2023 was due to an 11% increase in average accumulated stockholders’ equity divided into Net Income that grew only 4%.

The larger increase in average stockholders’ equity was due to accumulation of cash.

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

UTMD paid $1,071 ($0.295/share) in dividends to stockholders in 3Q 2023 compared to $1,051 ($0.290/ share) paid in 3Q 2022.

Dividends paid to stockholders during 3Q 2023 were 27% of 3Q 2023 Net Income.

UTMD paid $3,211 ($0.295/share) in dividends to stockholders in 9M 2023 compared to $2,111 ($0.290/ share) paid in 9M 2022.

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

Dividends paid to stockholders during 9M 2023 were 26% of 9M 2023 Net Income.

UTMD’s closing share price at the end of 3Q 2023 was $86.00, down from the closing price of $93.20 three months earlier at the end of 2Q 2023, and the closing price of $100.53 nine months earlier at the end of 2022.

UTMD’s closing share price at the end of 3Q 2022 was $85.31.

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 $11,828 in 1H 2023 compared to $9,878 in 1H 2022.

The $1,950 higher increase in cash provided by operating activities included a $776 increase in Net Income in 1H 2023 along with $1,915 greater decrease in trade accounts receivable and a $149 lower decline in deferred income taxes compared to 1H 2022.

Those higher contributions to cash were partially offset by a $634 greater decline in accrued liabilities and a $316 higher increase in inventories.

Capital expenditures for property and equipment (PP&E) were $363 in 1H 2023 compared to $450 in 1H 2022.

The amount spent in both years exceeded depreciation as UTMD invested in new equipment and tooling to increase its manufacturing capabilities for biopharmaceutical manufacturing control sensors, in addition to typical expenditures required to keep facilities and equipment, particularly in molding operations, in good working order.

Depreciation of PP&E was $310 in 1H 2023 compared to $302 in 1H 2022.

Future depreciation will increase as new equipment is placed in service.

UTMD made cash dividend payments to stockholders of $2,140 in 1H 2023 compared to $1,060 in 1H 2022.

The difference was due to an earlier payment of a special dividend in December 2021 rather than at the normal time of January 2022.

UTMD’s normal quarterly dividends in 1H 2023 were 1.7% higher per share than in the previous year (excluding consideration of the 2021 year-end special dividend).

In 1H 2023, UTMD received $81 and issued 1,221 shares of its stock upon the exercise of employee and director stock options.

Option exercises in 1H 2023 were at an average price of $66.52 per share.

In comparison, 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.

The $1,483 higher cash provided by operating activities in 9M 2023 was due to $431 higher Net Income and to working capital differences from 1) a $1,141 smaller increase in inventories in 9M 2023 compared to 9M 2022 and 2) a $2,133 decrease in trade accounts receivable in 9M 2023 instead of a $1,071 increase in 9M 2022, which were offset by 1) a $711 decrease in accounts payable instead of a $540 increase in 9M 2022 and 2) a $1,093 decrease in accrued expenses instead of a $1,075 increase in 9M 2022.

Capital expenditures for property and equipment (PP&E) were $549 in 9M 2023 compared to $771 in 9M 2022.

The capital expenditures in both years were due to expansion in manufacturing equipment in both Utah and Ireland.

Capital expenditures for intangible assets were none in 9M 2023 compared to $9 in 9M 2022.

UTMD made cash dividend payments of $3,211 in 9M 2023 compared to $2,111 in 9M 2022.

A 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 2023.

In 9M 2023 the Company received $117 and issued 1,758 shares of stock on the exercise of employee and director stock options.

Option exercises in 9M 2023 were at an average price of $66.40 per share.

In comparison, 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.

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

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

At June 30, 2023 compared to the end of 2022, UTMD’s cash and investments increased $9,567 to $84,619 primarily as a result of 1H 2023 Net Income of $8,414 and a $1,960 reduction in trade accounts receivable, less other working capital changes and $2,140 use of cash for dividends to stockholders.

At June 30, 2023, net Intangible Assets declined to 16.2% of total consolidated assets from 19.2% on December 31, 2022 due in part to higher cash assets.

UTMD’s strong 19.2 current ratio at June 30, 2023 was higher than the 15.1 current ratio at December 31, 2022 as a result of the higher cash balance combined with $816 lower current liabilities.

The average age of trade receivables was 25 days from date of invoice at June 30, 2023 compared to 37 days at December 31, 2022 based on the most recent calendar quarter of sales.

Average inventory turns declined to 2.0 in 2Q 2023 compared to 2.5 for the last quarter of 2022 due to a continued increase in safety stocks of raw material.

June 30, 2023 total consolidated assets were $130,475, an increase of $6,602 from December 31, 2022.

Current assets were $8,889 higher than at December 31, 2022 primarily because of the increase in cash.

A $1,304 increase in inventories was offset by a $1,935 decrease in total receivables.

Net fixed assets (property, plant and equipment) in Utah increased $234 as new acquisitions exceeded depreciation.

OUS subsidiary net fixed assets increased $84 because FX rates for foreign currency-valued assets in Ireland, the UK and Canada were stronger at the end of 1H 2023 than at the end of 2022.

For clarity, the net book value of consolidated property, plant and equipment increased $317 at June 30, 2023 from the end of 2022 due to the net effect of period-ending changed FX rates, $363 in new asset purchases minus $310 in depreciation.

June 30, 2023 net intangible assets (goodwill plus other intangible assets) declined $2,605 from the end of 2022 as a result of $3,207 in amortization and a 5% weaker USD/GBP FX rate on UK intangible asset balances.

At June 30, 2023, net intangible assets including goodwill were 16% of total consolidated assets compared to 19% at year-end 2022 and 23% at June 30, 2022.

Working capital (current assets minus current liabilities) was $93,663 at June 30, 2023 compared to $83,959 at December 31, 2022.

Cash balances were 90% of the June 30, 2023 working capital.

Current assets at June 30, 2023 compared to December 31, 2022 were $8,889 higher primarily as the result of the $9,567 increase in cash combined with a $1,304 increase in inventories, offset by a $1,935 decrease in total receivables.

Current liabilities were $816 lower at June 30, 2023 compared to December 31, 2022 as the result of a $933 decrease in accrued liabilities and $117 higher accounts payable.

The lower accrued liabilities resulted mainly from a $339 lower employee profit-sharing bonus accrual at mid-year 2023 compared to the prior end-of-year accrual, $108 lower customer deposits and $452 lower accrued income taxes.

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, 2023 total consolidated liabilities were $8,714, a decline of $906 from December 31, 2022.

Current liabilities were $816 lower than at December 31, 2022.

Long term liabilities were $90 lower primarily as a result of the deferred tax liability balance resulting from non-tax deductible Femcare remaining IIA amortization expense being $143 lower.

The deferred tax liability balance for Femcare IIA ($9,084 on the date of the acquisition), was $1,370 at June 30, 2023 compared to $1,513 at December 31, 2022 and $1,707 at June 30, 2022.

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) at June 30, 2023 was 7%, at December 31, 2022 was 8%, and at June 30, 2022 was also 7%.

September 30, 2023 total consolidated assets were $131,243, a net increase of $7,369 from December 31, 2022.

Consolidated Current Assets alone increased $11,928, as cash increased $13,157 and inventories increased $895, while receivables declined by $2,051.

The smaller total asset increase was due to an offsetting $4,559 decrease in long term assets, Net Intangible Assets and Property, Plant & Equipment (PP&E).

Net Intangible Assets declined $4,682 as a result of amortization but combined with a stronger GBP for remaining Femcare IIA.

OUS PP&E decreased $199, primarily as a result of $179 in USD-denominated depreciation, but also, except for the GBP, weaker quarter-ending foreign currencies for remaining OUS PP&E assets.

UTMD’s Ireland subsidiary EUR-denominated assets and liabilities on September 30, 2023 were translated into USD at an FX rate 1.0% lower (weaker EUR relative to the USD) than the FX rate at the end of 2022.

UTMD’s UK subsidiary GBP-denominated assets were translated into USD at an FX rate 1.1% higher (stronger GBP) than the FX rate at the end of 2022.

UTMD’s Australia subsidiary AUD-denominated assets were translated into USD at an FX rate 5.2% lower (weaker AUD) than the FX rate at the end of 2022.

UTMD’s Canada subsidiary CAD-denominated assets were translated into USD at an FX rate about the same as the FX rate at the end of 2022.

The net book value of WW consolidated PP&E increased $123 at September 30, 2023 from the end of 2022 due to the period-ending changed FX rates above, $549 in new asset purchases and $465 in depreciation.

Working capital (Current Assets minus Current Liabilities) was $97,670 at September 30, 2023 compared to $83,959 at December 31, 2022.

The primary sources of the $13,711 working capital increase were from consolidated increases of $13,157 in cash and $895 in inventories together with decreases of $707 in Accounts Payable and $1,076 in Accrued Liabilities, offset by a $2,051 decline in receivables.

In other words, independently from the change in cash, a $1,783 decrease in consolidated Current Liabilities together with the $895 inventory increase offset the $2,051 decrease in receivables.

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, 2023 Net Intangible Assets (goodwill plus other intangible assets, less amortization) declined $4,682 from the end of 2022.

No new intangible assets were acquired in 9M 2023.

At September 30, 2023, Net Intangible Assets including goodwill were less than 15% of consolidated Total Assets compared to 19% at year-end 2022, and 20% one year ago at September 30, 2022.

The long-term deferred tax liability (DTL) balance for Femcare IIA ($9,084 on the date of the acquisition) was $1,195 (£979) at September 30, 2023, compared to $1,513 (£1,253) at December 31, 2022, and $1,479 (£1,328) at September 30, 2022.

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 $318 at September 30, 2023 from December 31, 2022, as a result of 9M 2023 amortization expense of $1,484, which reduced the DTL balance by $371 (using UK tax rate = 25%).

The remaining difference was due to the FX rate when converting the GBP to USD at September 30, 2023.

UTMD’s total debt ratio (Total Liabilities/ Total Assets) as of September 30, 2023 was less than 6%, including a remaining $1,675 Repatriation Tax liability from the 2017 “Tax Cuts and Jobs Act” payable over another two years.

UTMD’s total debt ratio as of December 31, 2022 was 8%, and as of September 30, 2022 was 9%.

The $7,369 increase in Total Liabilities and Stockholders’ Equity (same as the increase in Total Assets) at September 30, 2023 from December 31, 2022 was due to an increase in Stockholders’ Equity, as Total Liabilities declined $2,079.

Stockholders’ Equity increased $9,448 at September 30, 2023 from December 31, 2022.

Stockholders’ equity increased during 9M 2023 from $12,349 in Net Profit, but was reduced by $3,211 in dividends paid to stockholders.

l) Management's Outlook

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1) leverage distribution and manufacturing synergies by further integrating capabilities and resources in UTMD’s multinational operations;

2) expand manufacturing capacity at a time when resources are particularly scarce;

2) expand manufacturing capacity at a time when resources are scarce;

3) focus on effectively differentiating the benefits of the Filshie Clip System in the U.S.;

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

4) introduce additional products helpful to clinicians through product development;

5) continue to achieve excellent overall financial operating performance;

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

Despite uncertainty regarding revenues, primarily as a result of declining demand from UTMD’s largest OEM customer, and continued litigation costs, the Company expects to achieve excellent overall financial results, albeit significantly lower Operating Income than in 2022.

With the substantial help of higher interest rates and higher cash balances, however, management continues to expect to be able to at least match 2022 Net Income and EPS in 2023 as a whole.

Generally, the Company continues to execute its 2023 plan outlined above.

In 9M 2023, UTMD achieved higher Net Income and EPS, achieving continued excellent overall financial performance.

As expected, 2023 OEM revenues substantially declined and “sticky” inflation on manufacturing costs challenged UTMD’s GPM.

But the increase in Non-operating Income from higher interest on cash reserves more than offset the decline in Operating Income from a lower GPM combined with inflation in Operating Expenses including higher litigation expenses.

m) Accounting Policy Changes

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis