Item 7. Management’s Discussion and Analysis
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Currency amounts are in thousands except per-share amounts and where noted. Currencies are abbreviated as follows: the U.S. Dollar (USD or $), the Great Britain Pound (GBP or £), the Euro (EUR or €), the Australian Dollar (AUD or A$), the New Zealand Dollar (NZD) and the Canadian Dollar (CAD or C$).
The following comments should be read in conjunction with the accompanying financial statements.
Overview .
In 2023, Utah Medical Products, Inc. (Nasdaq: UTMD) was able to achieve higher Net Income and Earnings Per Share (EPS) despite 4% lower consolidated total revenues caused by $3 million lower sales to its largest OEM customer. A lower Gross Profit Margin from less absorption of manufacturing overhead costs together with ongoing challenges related to supply chain disruption and higher input costs from inflation, together with higher litigation costs, resulted in Operating Income, although very respectable at 33.4% of sales, that was 15% lower than in the prior year. However, higher non-operating income together with a lower income tax provision rate offset the higher operating costs, allowing a UTMD record annual EPS of $4.57.
Consolidated Income Statement
2023
2023 Compared to 2022
2022
Worldwide Revenues
$ 50,224
(3.9%)
$ 52,281
Gross Profit
30,038
(6.7%)
32,196
Operating Income
16,777
(15.2%)
19,790
Earnings Before Income Tax
20,089
(2.8%)
20,659
Net Income (US GAAP)
16,635
+1.0%
16,473
Earnings Per Share (US GAAP)
$ 4.574
+1.2%
$ 4.522
Changes in foreign currency exchange (FX) rates on sales and expenses, in contrast to recent prior years, did not have a significant impact on financial results in 2023. Using the prior year’s FX rates, annual outside the U.S. (OUS) foreign currency sales would have been 1% lower and OUS operating expenses 1% lower.
Key profit margins (profits as a percentage of sales) in 2023 compared to 2022 follow:
2023
2022
Gross Profit Margin (GPM)
59.8%
61.6%
Operating Income Margin
33.4%
37.9%
Income Before Tax Margin
40.0%
39.5%
Net Income Margin
33.1%
31.5%
Measures of the Company’s liquidity and overall financial condition improved as of the end of 2023 compared to the end of 2022 with year-end working capital up 21% and Stockholders’ Equity up 12% despite $4,282 in dividends paid to stockholders which reduced both cash and Stockholders’ Equity. The improvement was the result of continued strong positive cash flow from normal operations. In comparison, UTMD paid $3,163 in stockholder cash dividends and used another $2,495 cash for share repurchases in 2022. The Company also used $639 in cash in 2023 along with $809 in 2022 to invest in new manufacturing equipment and fixtures, as well as maintaining existing Property, Plant and Equipment (PP&E) in good working order. The two-year capital expenditures exceeded depreciation by $213.
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Productivity of Fixed Assets and Working Capital Assets .
Assets .
Year-end 2023 total consolidated assets were $135,458 comprised of $106,269 in current assets, $10,551 in consolidated net PP&E and $18,637 in net intangible assets. This compares to $123,874 total assets at the end of 2022 comprised of $89,919 in current assets, $10,224 in consolidated net PP&E and $23,731 in net intangible assets. Total asset turns (total consolidated sales divided by average total assets for the year) in 2023 were 39% compared to 44% in 2022, as sales decreased while average assets (primarily cash) increased.
Current assets increased $16,350 due to the $17,817 increase in year-end cash and investments and $768 higher inventories, offset by $2,148 lower accounts and other receivables and $87 lower other current assets. Year-end 2023 and 2022 cash and investment balances were $92,869 and $75,052, representing 69% and 61% of total assets, respectively. Net (after allowance for doubtful accounts) year-end trade accounts receivable (A/R) balances were $2,148 lower at the end of 2023 compared to 2022 due to 4Q 2023 sales $1,242 lower than in 4Q 2022, and average days in A/R of 24 days based on 4Q trade sales instead of 37 days at the end of 2022. A/R over 90 days from invoice date declined from 4.2% of total A/R at the end of 2022 to 3.3% at the end of 2023. The Company believes any older A/R will be collected or are within its reserve balances for uncollectible amounts. Inventories net of reserves for obsolescence at 2023 year-end were 9% higher from the end of 2022.
Working capital (current assets minus current liabilities) at year-end 2023 was 21% higher at $101,559 compared to $83,959 at year-end 2022. Consistent with Federal and State rules, the TCJA repatriation tax current liability at the end of 2023 was $558 compared to $419 at the end of 2022, as the payment percentage ramps up at the end of the payout period. The end of 2023 working capital exceeds UTMD’s needs for normal operations in an uncertain economic environment, funding of future organic growth and timely payment of accrued tax liabilities, in addition to allowing for substantial funding of any future acquisition without diluting stockholder interest, as well as continued payment of stockholder dividends and repurchase of UTMD shares. Despite a negative impact on Return on Stockholders’ Equity of retaining a high cash balance, UTMD believes that in times of high economic uncertainty and change, maintaining substantial cash balances increases its likelihood of being able to take advantage of opportunities that will benefit stockholders in the longer term, and retain key resources that will help ensure UTMD’s continued excellent long-term performance.
December 31, 2023 net $10,552 total PP&E includes Utah, Ireland and England manufacturing molds, production tooling and equipment, test equipment, and product development laboratory equipment. In addition, PP&E includes computers and software, warehouse equipment, furniture and fixtures, facilities and real estate for all five locations in Utah, Ireland, UK, Canada and Australia. Manufacturing facilities in Utah, Ireland and the UK are standalone buildings with a combined 220,000 square feet on 15 acres of land. The distribution facilities in Australia and Canada with a combined 8,000 square feet are part of larger industrial condominiums. Management estimates the fair market value of the five owned facilities to be at least $35 million excluding the contents, the fungible value of which increases stockholder enterprise value relative to most of UTMD’s industry peers which lease their facilities.
Ending 2023 net consolidated PP&E (depreciated book value of all fixed assets) increased $328 as a result of the combination of capital expenditures of $639, depreciation of $623 and the effect of foreign currency exchange (FX) rates on year-end foreign subsidiary asset balances.
The following end-of-year FX rates to USD were applied to assets and liabilities of each applicable foreign subsidiary:
12-31-23
12-31-22
EUR
1.1059
1.0694
GBP
1.2739
1.2077
AUD
0.6825
0.6805
CAD
0.7573
0.7390
The year-end 2023 net book value (after accumulated depreciation) of consolidated PP&E was 31% of purchase cost. End-of-year PP&E turns (Net Sales divided by Net PP&E) was 4.8 in 2023 compared to 5.1 in 2022 due to 4% lower 2023 sales and higher USD asset values of foreign subsidiaries, together with investment in new PP&E assets needed for the future which are not in use yet. A future leverage in productivity of fixed assets which will not have to be further increased to support new business activity will be a source of incremental profitability.
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Net intangible assets (after accumulated amortization) are comprised of the capitalized costs of obtaining patents and other intellectual property, as well as the value of identifiable intangible assets (IIA) and goodwill resulting from acquisitions. Net intangible assets were $18,637 (14% of total assets) at the end of 2023 compared to $23,731 (19% of total assets) at the end of 2022. Per US GAAP, intangible assets are categorized as either 1) IIA, which are amortized over the estimated useful life of the assets, or 2) goodwill, which is not amortized or expensed until the associated economic value of the acquired asset becomes impaired. Those two categories of Femcare intangibles at year-end 2023 were net IIA of $4,561 and goodwill of $6,500. The accumulated amortization of Femcare IIA as of December 31, 2023 since the March 18, 2011 acquisition was $26,088. The remaining Femcare IIA will be fully amortized in 2 more years. The goodwill portion of intangible assets resulting from the Femcare acquisition, which is not amortized, increased $338 due to a stronger GBP at year-end, i.e. the different FX rate on fixed goodwill in GBP terms. In early 2019, UTMD acquired an additional $21,000 IIA from the purchase of the remaining life of exclusive U.S. distribution rights for the Filshie Clip System from CSI, all of which has now been amortized through 2023. UTMD’s goodwill balance from prior acquisitions including Femcare, Columbia Medical, Gesco and Abcorp was $13,692 at the end of 2023.
Because the products associated with UTMD’s acquisitions of Columbia Medical in 1997, Gesco in 1998, Abcorp in 2004 and Femcare in 2011 continue to be viable parts of UTMD’s overall business, UTMD does not expect the current goodwill value associated with the four acquisitions to become impaired in 2024. Amortization of IIA was $5,692 in 2023 compared to $6,417 in 2022. The difference was mainly due to the CSI IIA becoming fully-amortized in October 2023, resulting in $737 lower 2023 expense. The 2023 non-cash amortization expense of CSI IIA was $3,684 compared to $4,421 in 2022. The Femcare IIA amortization expense was the same in both 2023 and 2022 at £1,589. But because of a difference in FX rates, the 2023 non-cash amortization expense of Femcare IIA was $1,977 compared to $1,965 in 2022. The 2024 non-cash amortization expense (included as part of consolidated G&A operating expenses) of Femcare IIA will also be £1,589, or $2,002 if the USD/GBP average FX rate is 1.26. In other words, UTMD expects the GBP to be stronger against the USD in 2024 than it was in 2023.
Liabilities .
As a reminder, payments for the Federal and State repatriation (REPAT) tax liability which resulted from the U.S. TCJA enacted in 2017 were 8% of the respective tax liability per year for the first five years, 15% in the sixth year, and will be 20% in the seventh year and 25% in the eighth year. UTMD’s total REPAT tax liability was $2,792. Calendar year 2024 represents the seventh year, so $558 is the current liability at 20% of the total liability, and $698 is the long-term REPAT tax liability to be paid in 2025, representing the remaining 25%.
Year-end 2023 current liabilities were $1,250 lower than at the end of 2022. Ending accrued liabilities were $940 lower due primarily to $781 lower customer deposits. Total liabilities were $2,475 lower at the end of 2023 compared to the end of 2022. The resulting 2023 year-end total debt ratio was just 5% compared to 8% at the end of 2022.
The year-end 2023 Deferred Tax Liability balance created as a result of the fifteen-year deferred tax consequence of the amortization of Femcare’s IIA was $1,120, down from $1,513 at the end of 2022. The difference in the $393 decline compared to the $494 tax effect of 25% (current UK tax rate) times $1,977 in 2023 amortization of IIA was due to the difference in the GBP FX rate on the remaining DTL balance at the end of 2023 as well as the USD/GBP currency exchange conversion of the IIA amortization during 2023. In addition to liabilities stated on the balance sheet, UTMD has operating lease and purchase obligations described in Note 14 and Note 12, respectively, to the financial statements.
Results of Operations .
a) Revenues .
Under accounting standards applicable for 2023, the Company believed that revenue should be recognized at the time of shipment as title generally passes to the customer at the time of shipment, or completion of services performed under contract. Revenue recognized by UTMD is based upon documented arrangements and fixed contracts in which the selling price is fixed prior to acceptance and completion of an order. Revenue from product or service sales is generally recognized at the time the product is shipped or service completed and invoiced, and collectability is reasonably assured. Over 99% of UTMD’s revenue is recognized at the time UTMD ships a physical device to a customer’s designated location, where the selling price for the item shipped was agreed prior to UTMD’s acceptance and completion of the customer order. There are no post-shipment obligations which have been or are expected to be material to financial results.
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There are circumstances under which revenue may be recognized when product is not shipped, which have met the criteria of ASC 606: the Company provides engineering services, for example, design and production of manufacturing tooling that may be used in subsequent UTMD manufacturing of custom components for other companies. This revenue is recognized when UTMD’s service has been completed according to a fixed contractual agreement.
Terms of sale are established in advance of UTMD’s acceptance of customer orders. In the U.S., Ireland, UK, France, Australia and Canada since the beginning of 2017, UTMD has generally accepted orders directly from and shipped directly to end-user clinical facilities, as well as third party medical/surgical distributors, under UTMD’s Standard Terms and Conditions (T&C) of Sale. About 13% of UTMD’s domestic end-user sales went through third party med/surg distributors which contract separately with clinical facilities to provide purchasing, storage and scheduled delivery functions for the applicable facility. UTMD’s T&C of Sale to end-user medical facilities are substantially the same in the U.S., Canada, Ireland, UK, France, Australia and New Zealand.
UTMD may allow separate discounted pricing agreements with a specific clinical facility or group of affiliated facilities based on volume of purchases. Pricing agreements which are documented arrangements with clinical facilities, or groups of affiliated facilities, if applicable, are established in advance of orders accepted or shipments made. For existing customers, past actual shipment volumes typically determine the fixed price by part number for the next agreement period. For new customers, the customer’s best estimate of volume is usually accepted by UTMD for determining the ensuing fixed prices for the agreement period. Prices are not adjusted after an order is accepted. For the sake of clarity, the separate pricing agreements with clinical facilities based on volume of purchases disclosure is not inconsistent with UTMD’s disclosure above that the selling price is fixed prior to the acceptance of a specific customer order.
UTMD’s global consolidated trade sales are comprised of domestic and OUS sales. Domestic sales in 2023 included 1) direct domestic sales, sales of finished devices to end-user facilities and med/surg distributors in the U.S., and 2) domestic OEM sales, sales of components or finished products, which may not be medical devices, to other companies for inclusion in their products. OUS sales are export sales from UTMD in the U.S. to customers outside the U.S. invoiced in USD, and sales from UTMD subsidiaries in Ireland, Canada, Australia and the UK which may be invoiced in EUR, GBP, CAD, AUD, NZD or USD. The term “trade” means sales to customers which are not part of UTMD. Each UTMD manufacturing entity had 2023 intercompany sales of components and/or finished devices to other UTMD entities.
The following table shows the 2023 USD-denominated revenues by sales channel compared to 2022. Because domestic sales in foreign countries were invoiced in native currencies, the comparison in USD terms includes the change in foreign currency translation (FX) rates. In other words, just the FX rate relative to the USD in 2023 compared to 2022 reduced Canada domestic sales by 3.6% and Australia sales by 3.9%. On the other hand, the FX rate difference increased Ireland domestic sales by 3.0%, UK domestic sales by 1.2% and France domestic sales by 2.6%.
Revenue [USD denominated]
2023
2023 Compared to 2022
2022
U.S. domestic (excluding OEM)
$19,758
(6.3%)
$21,087
Canada domestic
1,102
(14.8%)
1,294
Ireland domestic
508
+14.1%
445
UK domestic
3,320
+20.8%
2,748
France domestic
1,318
+6.8%
1,235
Australia domestic
1,050
(17.2%)
1,267
Subtotal, Direct to End-User:
$27,056
(3.6%)
$28,076
All Other OUS (Sales to Int’l Distributors)
14,722
+10.5%
13,321
U.S. OEM Sales
8,446
(22.4%)
10,884
Worldwide Revenues
$50,224
(3.9%)
$52,281
In summary, UTMD total worldwide (WW) consolidated USD sales in 2023 at $50,224 were $2,057 (4%) lower than in 2022 at $52,281. The decline essentially resulted from the fact that 2023 WW shipments by UTMD to its largest OEM customer were $2,925 (25%) lower. Total U.S. domestic sales including OEM were $3,767 (11.8%) lower in 2023 at $28,204 compared to $31,971 in 2022. On the other hand, OUS sales including sales to foreign distributors were up $1,710 (+8.4%) at $22,020 compared to $20,310 in 2022. Constant currency OUS sales were up 7.6%.
Domestic Sales .
Domestic U.S. sales in 2023, which were $3,767 (11.8%) lower than in 2022, were $28,204 (56.2% of total sales) compared to $31,971 (61.2% of total sales) in 2022. All three categories of domestic sales were lower, led by U.S. OEM sales which were $2,438 (22.4%) lower than in 2022. Domestic sales to UTMD’s biopharma OEM customer were $2,581 (28.7%) lower. Aggregate sales to 128 other U.S. OEM customers were $143 higher. Domestic Filshie device sales, representing 17% of total domestic sales, were $470 (9.0%) lower in 2023 compared to 2022.
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Direct device sales other than Filshie, representing 53% of total domestic sales, were $859 (5.4%) lower in 2023 than in 2022. In this category, domestic neonatal device sales alone were $866 lower, predominantly in 2Q 2023 as a result of continued raw materials and sterilization supply chain disruption. The nature of NICU sales is low volume, specialized configuration devices for which hospitals need quick delivery based on their changing patient needs. If preferred devices are unavailable for quick delivery, a hospital NICU must find a substitute to meet immediate needs, and those sales are lost to UTMD. This is what happened especially in early 2023 when UTMD could not obtain medical grade silicone from a validated supplier, and twice in 2023 when its contract sterilizer had to shut down its operations. UTMD expects 2024 domestic direct sales of its well-established devices to increase at a low single-digit percentage rate.
Filshie sales have not recovered as well as the other domestic sales categories since the COVID-19 pandemic. There appears to be some negative impact on patient choice as a result of attorneys advertising on social media. Nevertheless, UTMD expects U.S. Filshie device sales in 2024 will remain about the same as in 2023 based on surgeons’ understanding of the safety and effectiveness of the device.
Domestic OEM sales in 2023 were 30% of total U.S. domestic sales compared to 34% in 2022. UTMD sold components and finished devices to 129 different U.S. companies in 2023 compared to 146 different companies in 2022, for use in their product-market offerings. Sales to UTMD’s largest domestic OEM customer represented 76% of total domestic OEM sales in 2023 compared to 83% of total domestic OEM sales in 2022. UTMD’s largest OEM customer markets biopharmaceutical manufacturing control systems which previously exclusively utilized UTMD’s pressure monitoring sensors and other components. But in 2023, domestic sales to this customer declined $2.6 million domestically. Looking forward to 2024, UTMD expects domestic demand from this customer may decline another $3.7 million as it seeks to vertically integrate manufacturing of its products.
OUS USD-denominated sales in 2023 were $1,710 (+8.4%) higher at $22,020 compared to $20,310 in 2022. OUS sales in all product categories were higher. Sales invoiced in foreign currencies, which were $14,871 when converted to USD, represented 68% of OUS sales and 30% of consolidated total sales. A net slightly weaker USD added $166 in OUS foreign currency sales compared to 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 2023 and 2022 for revenue purposes follow:
2023
2022
Change
GBP
1.2428
1.2287
+1.2%
EUR
1.0808
1.0520
+2.7%
AUD
0.6660
0.6932
(3.9%)
CAD
0.7409
0.7683
(3.6%)
The combined weighted-average favorable FX impact on 2023 foreign currency OUS sales was 1.1%, increasing reported USD sales by $166 (+0.3% of total consolidated 2023 sales) relative to the same foreign currency sales in 2022. In constant currency terms, OUS sales in 2023 were 7.6% higher than OUS sales in 2022. The portion of OUS sales invoiced in foreign currencies in USD terms was 30% of total consolidated 2023 USD sales compared to 25% in 2022. Including the impact of changed FX rates, OUS 2023 direct to end-user sales in USD terms were 14% higher in Ireland, 15% lower in Canada, 7% higher in France and 21% higher in the UK. Direct to end-user sales in Australia, which included New Zealand, were 17% lower. USD denominated sales to OUS distributors were 11% higher in 2023 than in 2022.
Sixty-eight percent of (USD denominated) 2023 OUS sales were invoiced in foreign currencies compared to 64% in 2022. As a portion of total USD WW consolidated sales, 30% of UTMD’s USD-equivalent sales were invoiced in foreign currencies in 2023 compared to 25% in 2022. The GBP, EUR, AUD and CAD converted sales represented 8%, 18%, 2% and 2% of total 2023 USD sales, respectively. This compares to 6%, 14%, 2% and 3% of total 2022 USD sales.
USD-denominated trade (excludes intercompany) sales of devices to OUS customers (excluding France) by UTMD’s Ireland facility (UTMD Ltd) were $10,686 in 2023 (13% higher) compared to $9,478 in 2022. In addition, UTMD Ltd also sold devices that it had manufactured directly to France in 2023 due to BREXIT, which earlier were sold to Femcare Ltd in the UK on an intercompany basis and then sold by Femcare Ltd directly to French medical facilities. USD-denominated sales to France in 2023 were $1,319 (7% higher) compared to $1,235 in 2022. The total FX rate difference in 2023 relative to 2022 increased Ireland’s USD-denominated sales by $244.
In 2023, UTMD’s UK subsidiary, Femcare Ltd., had $3,347 trade sales of devices to domestic UK and certain international distributor customers, which was 20% higher compared to $2,781 in 2022. The total FX rate change increased the UK’s USD-denominated sales in 2023 by $10.
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USD-denominated sales of devices to end-users in Australia and New Zealand by Femcare’s Australia distribution subsidiary (Femcare Australia Pty Ltd) were $1,050 (17% lower) in 2023 compared to $1,267 in 2022. A weaker AUD in 2023 reduced USD-denominated Australia sales by $46.
UTMD’s Canada distribution subsidiary (Utah Medical Products Canada, Inc.) USD-denominated sales of devices to end-users in Canada were $1,102 (15% lower) compared to $1,294 in 2022. A weaker CAD reduced Canada sales by $43.
UTMD groups its sales into four general product categories: 1) obstetrics, comprised of labor and delivery management tools for monitoring fetal and maternal well-being, for reducing risk in performing difficult delivery procedures and for improving clinician and patient safety; 2) gynecology/ electrosurgery/ urology, comprised of tools for gynecological procedures associated primarily with cervical/ uterine disease including LETZ, endometrial tissue sampling, transvaginal uterine sonography, diagnostic laparoscopy, surgical contraception and other MIS procedures; specialty excision and incision tools; conservative urinary incontinence therapy devices; and urology surgical procedure devices; 3) neonatal critical care, comprised of devices that provide developmentally-friendly care to the most critically ill babies, including providing vascular access, enteral feeding, administering vital fluids, oxygen therapy while maintaining a neutral thermal environment, providing protection and assisting in specialized applications; and 4) blood pressure monitoring/ accessories/ other, comprised of specialized transducers and components as well as molded parts and assemblies sold on an OEM basis to other companies. In these four categories, UTMD’s primary revenue contributors enjoy significant brand awareness by clinical users.
Global revenues by product category:
2023
%
2022
%
Obstetrics
$4,592
9
$4,661
9
Gynecology/ Electrosurgery/ Urology
22,300
44
21,841
42
Neonatal
6,863
14
7,567
14
Blood Pressure Monitoring and Accessories*
16,469
33
18,212
35
Total:
$50,224
100
$52,281
100
OUS revenues by product category:
2023
%
2022
%
Obstetrics
$ 1,041
5
$ 676
3
Gynecology/ Electrosurgery/ Urology
11,992
54
11,603
57
Neonatal
1,678
8
1,517
8
Blood Pressure Monitoring and Accessories*
7,309
33
6,514
32
Total:
$ 22,020
100
$ 20,310
100
* includes molded components and finished medical and non-medical devices sold to OEM customers.
Looking forward to 2024, UTMD’s largest OEM customer representing $8.6 million in 2023 WW consolidated revenues, including 76% of $8,446 total U.S. OEM sales and 22% of Ireland’s $10,178 international distributor sales, has not provided visibility for demand for the last half of 2024, despite knowledge of significant lead times required for UTMD to obtain necessary custom raw materials. Consequently, UTMD management is conservatively projecting another $5.5 million reduction in annual sales to this OEM customer in 2024. Worst case would be a $6.5 million decline if no more orders were placed in 2024. In addition, UTMD’s largest OUS distributor, located in China, representing $4.0 million 2023 sales of BPM kits manufactured in Ireland, has placed an annual order for 2024 which is $1.6 million lower than in 2023. On the basis of these two largest 2023 customers, if net other revenues are flat, 2024 revenues would be about $7.1 million lower than in 2023.
Another key to 2024 sales results will be retaining U.S. Filshie device sales at a similar level as in 2023 with the continuing cloud of unresolved product liability lawsuits. UTMD prefers to not raise prices in 2024, given cost pressures on U.S. hospitals which are dealing with open U.S. immigration. In summary, with a higher level of uncertainty than in the recent past, management’s best estimate at this time is that 2024 consolidated WW revenues may be in the range of $42 to $43 million, a 14-16% decline. This projection does not include UTMD’s potential success in entering the biopharmaceutical manufacturing controls market directly, or acquiring another source of revenues not currently in UTMD’s portfolio.
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b) Gross Profit (GP) .
UTMD’s 2023 consolidated GP, the surplus after subtracting costs of manufacturing, which includes purchasing and transporting raw materials, forming components, assembling, inspecting, testing, packaging and sterilizing products, from net revenues, was $30,038 (59.8% of sales) compared to $32,196 (61.6% of sales) in 2022. GP in 2023 was $2,158 (6.7%) lower with a 3.9% decrease in revenues.
The Gross Profit Margin (GPM), which is GP divided by sales, although still very heathy, contracted 1.4 percentage points in 2023 due to the fact manufacturing overhead costs increased while sales decreased. This overhead dilution effect will continue in 2024, as happened during the COVID-19 pandemic in 2020 when sales declined, because management has decided to not reduce important manufacturing overhead resources in the same proportion as the expected decline in sales. Doing so would sacrifice future UTMD capabilities to grow the Company. UTMD generally did not increase prices after February 2023, except on a specific case-by-case basis for custom OEM work. Although supplier costs for raw materials have continued to increase while the Company also implemented further cost-of-living salary adjustments during 2023 for direct labor employees, management expects to be able to control the productivity of variable manufacturing costs in 2024 consistent with the past after severance is paid for some employees. In addition, quality assurance costs included in manufacturing overhead are projected to be substantially higher from implementing required clinical reviews under the new Medical Device Regulation for devices used OUS. The resulting 2024 GPM might be five percentage points lower than in 2023, resulting in a decline in GP in the range of 20-23%.
UTMD’s Ireland subsidiary’s (UTMD Ltd’s) 2023 GP was EUR 8,084 compared to EUR 8,538 in 2022. The associated GPMs were 58.9% in 2023 and 60.0% in 2022. Femcare UK 2023 GP was GBP 1,579 compared to GBP 1,297 in 2022. The 2023 UK GPM was 55.3% compared to 52.0% in 2022. A substantial increase in UK Filshie device sales diluted UK manufacturing overhead expense, as UK manufacturing overhead costs are relatively fixed. Femcare Australia and Femcare Canada are simply distribution facilities for UTMD finished devices in their respective countries. GP is the result of subtracting intercompany purchase prices of devices, plus incoming freight, from revenues. Australia 2023 GP was AUD 841 (53.0% of sales) compared to AUD 940 (51.4% of sales) in 2022. Canada 2023 GP was CAD 874 (58.6% of sales) compared to CAD 870 (51.7% of sales) in 2022. In the U.S., GP was $17,750 in 2023 compared to $20,699 in 2022. The U.S. GPM was 51.2% in 2023 compared to 54.8% in 2022. A summation of the above GP of each subsidiary will not yield UTMD’s consolidated total GP because of elimination of profit in inventory of intercompany sales.
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c) Operating Income .
Operating Income results from subtracting Operating Expenses from GP. For the year 2023, Operating Income was $16,777 compared to $19,790 in 2022, a 15.2% decrease. The $3,012 decrease in Operating Income was from a combination of $2,158 lower GP and $854 higher Operating Expenses.
The UTMD Ltd (Ireland) Operating Income margin in 2023 was 55.9% compared to 57.2% in 2022. Femcare UK’s Operating Income margin per US GAAP, which includes the IIA amortization expense of the 2011 acquisition, was negative in both 2023 and 2022. Femcare Australia’s 2023 Operating Income margin was 32.2% compared to 30.9% in 2022. Femcare Canada’s 2023 Operating Income margin was 41.8% compared to 37.3% in 2022. UTMD’s 2023 Operating Income margin in the U.S. was 23.5% compared to 31.2% in 2022. For clarity, the CSI IIA amortization expense hit the U.S. Operating Income margin, and the Femcare IIA amortization expense hit the Femcare UK Operating Income margin.
Operating expenses include sales and marketing (S&M) expenses, product development (R&D) expenses and general and administrative (G&A) expenses. Consolidated WW operating expenses were $13,261 (26.4% of sales) in 2023 compared to $12,407 (23.7% of sales) in 2022. The following table provides a comparison of operating expense categories, as well as further segmentation of G&A expenses:
2023
2022
S&M expenses
$ 1,685
$ 1,507
R&D expenses
560
493
G&A expenses:
a) litigation expense provision
1,660
670
b) corporate legal
13
4
c) outside directors fees
144
131
d) stock option compensation
225
183
e) profit-sharing bonus accrual
718
746
f) outside accounting audit/tax
224
188
g) Femcare IIA amortization
1,977
1,965
h) CSI IIA amortization
3,684
4,421
i) property & liability insurance premiums
108
101
j) all other G&A expenses
2,263
1,998
G&A expenses – total
11,016
10,407
Total Consolidated Operating Expense:
$ 13,261
$ 12,407
Percent of sales:
26.4%
23.7%
Description of Operating Expense Categories:
i) S&M expenses:
S&M expenses in 2023 were $1,685 (3.4% of sales) compared to $1,507 (2.9% of sales) in 2022. The higher expenses were primarily due to higher salaries from cost-of-living adjustments. Consolidated OUS S&M expenses in 2023 compared to 2022 were not affected by FX rate changes as stronger EUR and GBP currency expenses were offset by weaker CAD and AUD expenses.
S&M expenses are the costs of communicating UTMD’s differences and product advantages, providing training and other customer service in support of the use of UTMD’s solutions, attending clinical meetings and medical trade shows, administering customer agreements, advertising, processing orders, shipping, and paying commissions to outside independent representatives. In markets where UTMD sells directly to end-users, which in 2022-2023 included the U.S., Ireland, UK, Australia, New Zealand, France and Canada, the largest components of S&M expenses were the cost of customer service required to timely process orders and the distribution costs associated with shipping products.
S&M expenses include all customer support costs including training. In general, training is not required for UTMD’s products since they are well-established and have been clinically widely used. Written “Instructions For Use” are packaged with all finished devices. Although UTMD does not have any explicit contracts with customers to provide training, it does provide hospital in-service and clinical training as required and reasonably requested.
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UTMD promises prospective customers that it will provide, at no charge in reasonable quantities, electronic media and other instructional materials developed for the use of its products. UTMD provides customer support from offices in the U.S., Canada, Ireland, UK and Australia by telephone to answer user questions and help troubleshoot any user issues. Occasionally, on a case-by-case basis, UTMD may utilize the services of an independent practitioner to provide educational assistance to clinicians. All in-service and training expenses are routinely expensed as they occur. Except for the consulting services of independent practitioners and occasional use of marketing consultants, all of these services are allocated from fixed S&M overhead costs. Historically, additional consulting costs have been immaterial to financial results, which is also UTMD’s expectation for the future.
ii) R&D expenses:
R&D expenses in 2023 were $560 (1.1% of sales) compared to $493 (0.9% of sales) in 2022. R&D expenses include the costs of investigating clinical needs, developing innovative concepts, testing concepts for viability, validating methods of manufacture, completing any necessary premarketing clinical trials, regulatory documentation and other activities required for design control, responding to customer requests for product enhancements, and assisting manufacturing engineering on an ongoing basis in developing new processes or improving existing processes. Product development (R&D) expenses increased as a result of cost-of-living adjustments. R&D also played a significant role in manufacturing process improvements. No new UTMD devices were launched in 2023. Due to stringent materials validation requirements for the biopharmaceutical manufacturing industry, UTMD projects R&D expenses in 2024 will be more than 40% higher than in 2023 and represent approximately 2% of revenues.
iii) G&A expenses:
G&A expenses in 2023 were $11,016 (21.9% of sales) compared to $10,407 (19.9% of sales) in 2022. G&A expenses include the “front office” functional costs of executive management and outside directors, finance and accounting, corporate information systems, human resources, stockholder relations, corporate risk management, corporate governance, protection of intellectual property, amortization of identifiable intangibles and legal costs. The table above helps identify certain specific categories of G&A expenses which might be of interest to stockholders.
The increase in G&A expenses was due to $990 higher U.S. litigation costs, as well as higher salaries (except the CEO) due to cost-of-living adjustments. Stronger EUR and GBP relative to the USD increased net foreign currency G&A expenses by $30, compared to what they would have been in 2022. This includes an FX rate change unfavorable USD impact of $24 (out of the $30 total) from the amortization of Femcare acquisition IIA, which was £1,589 in both 2023 and 2022.
As stockholders likely remember, the non-cash IIA amortization expense related to the Filshie Clip System includes IIA from both the 2011 acquisition of Femcare Group Ltd and the 2019 purchase of the CSI exclusive U.S. distribution rights for the Filshie Clip System. The combined IIA amortization expense in 2023 was 11.3% of total WW consolidated sales ($5,661) compared to 12.2% in 2022 ($6,386). The decline in percent of sales was due to the completion of the CSI IIA amortization expense in October 2023.
The Femcare IIA amortization expense will continue at the same £397 per calendar quarter rate ending in 1Q 2026 (or until the value of any remaining IIA becomes impaired), subject to changes in the FX rate when converted to USD.
Excluding the non-cash Femcare and CSI IIA amortization expenses, UTMD consolidated operating expenses were $7,599 (15.1% of sales) in 2023 compared to $6,021 (11.5% of sales) in 2022. The difference was mainly due to $990 higher litigation expenses. Without the IIA amortization and litigation expenses, UTMD consolidated operating expenses were $5,940 (11.8% of sales) in 2023 compared to $5,351 (10.2% of sales) in 2022.
As none of the U.S. Filshie product liability lawsuits has gone to trial yet, and UTMD’s summary judgement motions remain undecided, projecting 2024 litigation expenses remains difficult if not impossible. With that said, for purposes of creating a conservative operating plan, management is projecting $2,432 in 2024 litigation expenses compared to $1,660 in 2023.
In summary, with lower revenues, a lower GPM, higher litigation and R&D expenses, offset by the lack of amortization expense of CSI identifiable intangible assets completed in 2023, management projects 2024 Operating Income 24-27% lower than in 2023.
d) Non-operating income/ Non-operating expense, and Income Before Taxes (EBT) .
Non-operating income includes royalties from licensing UTMD’s technology, rent from leasing underutilized property to others, income earned from investing the Company’s excess cash and gains from the sale of assets. Non-operating expense includes interest on bank loans, bank service fees, excise taxes and losses from the sale of assets. Also, the period-to-period remeasured value of EUR cash balances held in the UK, and GBP balances held in Ireland, generates a gain or loss which is booked at reporting period end as non-operating income or expense, as applicable.
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Net non-operating income (combination of non-operating income and non-operating expense) was $3,312 in 2023 and $869 in 2022. The higher non-operating income in 2023 compared to 2022 was due to higher interest income on UTMD’s cash balances. A description of components of UTMD’s non-operating income or expense follows:
1) Interest Expense. There was no interest expense in 2023 or 2022. Absent an acquisition or large repurchase of shares that requires new borrowing, UTMD does not expect any interest expense in 2024.
2) Investment of excess cash. Consolidated investment income (including gains and losses on sales of investments) was $3,036 in 2023 compared to $661 in 2022. Average cash balances were almost $16 million higher in 2023 than in 2022, with average interest rates higher. UTMD is projecting current interest rates to continue in 2024, leading to another substantial increase in non-operating income if cash is not used to repurchase shares at an attractive price, or acquire another entity or product line. Although UTMD has been repurchasing shares during 1Q 2024, for purposes of providing an estimate of 2024 financial results, management has included $1,000 higher interest income in 2024 compared to 2023.
3) Royalties. Royalties in both 2023 and 2022 were $20. Presently, there is only one arrangement which began in 2020 under which UTMD is receiving royalties on its technology.
4) Gains/ losses from remeasured currency in bank accounts. UTMD recognized a $5 loss in 2023 compared to a $20 loss in 2022 from losses on remeasured foreign currency bank balances. EUR currency cash balances in the UK, and GBP currency cash bank balances in Ireland, are subject to remeasured currency translation gains/ losses as a result of period-to-period changes in FX rates.
5) Other non-operating income or expense. Income received from renting unused warehouse space in Ireland and parking lot space in Utah for a cell phone tower, offset by bank fees, and other miscellaneous non-operating expenses resulted in net non-operating income of $254 in 2023 compared to a net non-operating income of $196 in 2022.
EBT results from adding net non-operating income to or subtracting net non-operating expense from Operating Income. Consolidated EBT was $20,089 (40.0% of sales) in 2023 compared to $20,659 (39.5% of sales) in 2022. In other words, despite the inflationary cost pressures diluting UTMD’s GPM and much higher litigation expenses, the Company expanded its EBT Margin (EBT as a percentage of sales) on 3.9% lower sales, yielding just a 2.8% decrease in EBT. In essence, in 2023 higher non-operating income offset lower gross profits from a lower GPM on lower sales and higher litigation expenses. With much uncertainty surrounding the projections for income and expense categories above, management is estimating about a 16% decline in 2024 EBT compared to 2023.
The 2023 EBT of UTMD Ltd. (Ireland) was €7,680 (56.0% of sales) compared to €8,013 (56.3% of sales) in 2022. Femcare Ltd’s (UK) 2023 EBT was (£469) compared to (£574) in 2022. Femcare Ltd, as the legal manufacturer of the Filshie Clip System, supports worldwide regulatory requirements in addition to absorbing the IIA amortization expense of the 2011 Femcare Group acquisition. Femcare AUS’s 2023 EBT was AUD 544 (34.3% of sales) compared to AUD 573 (31.3% of sales) in 2022. Femcare Canada’s 2023 EBT was CAD 620 (41.6% of sales) compared to CAD 622 (36.9% of sales) in 2022.
EBITDA is a non-US GAAP metric that UTMD management believes is of interest to investors because it provides meaningful supplemental information to both management and investors that represents profitability performance without factoring in effects of financing, accounting decisions regarding non-cash expenses, capital expenditures or tax environments. If the Company were to need to borrow to pay for a major asset or acquisition, the projected EBITDA metric would be of primary interest to a lending institution to determine UTMD’s credit worthiness. Although the U.S. Securities and Exchange Commission advises that EBITDA is a non-GAAP metric, UTMD’s non-US GAAP EBITDA is the sum of the following elements in the table below, each of which is a US GAAP number:
2023
2022
EBT
$20,089
$20,659
Depreciation Expense
623
612
Femcare IIA Amortization Expense
1,977
1,965
CSI IIA Amortization Expense
3,684
4,421
Other Non-Cash Amortization Expense
31
31
Stock Option Compensation Expense
225
183
Remeasured Foreign Currency Balances
6
20
UTMD non-US GAAP EBITDA:
$26,635
$27,891
In summary, UTMD’s 2023 non-US GAAP EBITDA declined 4.5% compared to 2022. With the above projections for 2024 financial performance in mind, non-US GAAP EBITDA in 2024 is expected to be in the range of $19-20 million.
e) Net Income, Earnings Per Share (EPS) and Return on Equity (ROE) .
i) Net Income
Net Income results after subtracting a provision for estimated income taxes from EBT. UTMD’s Net Income in 2023 was $16,635 (33.1% of sales) compared to $16,473 (31.5% of sales) in 2022. The higher Net Income, despite 2.8% lower EBT, resulted from a lower income tax provision rate, which was 17.2% in 2023 compared to 20.3% in 2022. The primary reason for the lower rate was due to a portion of UTMD’s significant interest income being non-taxable.
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In general, year-to-year fluctuations in the combined average income tax provision rate will result from variation in EBT contribution from subsidiaries in jurisdictions with different corporate income tax rates. Taxes in foreign subsidiaries are based on taxable EBT in those sovereignties, which can be different from the contribution to consolidated EBT per US GAAP. UTMD estimates, barring any new tax law changes which are currently unknown, and assuming cash will be allocated as previously invested, that its combined income tax rate for 2024 will be within the 18%-19% range, yielding Net Income approximately 17% lower than in 2023.
The UK had a corporate income tax rate of 19% for 2022 and 1Q 2023, followed by a 25% rate for the last nine months of 2023. The UK also allowed a tax deduction for sales of UK patented products which varied from year-to-year based on somewhat complicated rules which are sorted out for UTMD by independent UK tax specialists. The income tax rate for AUS was 30% for both 2023 and 2022. The income tax rate for Canada was about 27.5% for both years. Profits of the Ireland subsidiary were taxed at a 12.5% rate on exported manufactured products, and a 25% rate on rental and other types of income including income from sales of medical devices in Ireland domestically. As UTMD stockholders likely remember, in the U.S., the Federal income tax rate was changed after 2017 to 21% from 34% prior to the 2017 Tax Cut and Jobs Act (TCJA). Federal taxes are not 21% of U.S. EBT, however, as income taxes paid to the State are a deductible expense for Federal tax purposes, other expenses are not deductible and there remains an R&D tax credit along with other credits, not to mention a special GILTI tax related to foreign income and FDII tax credit related to profits on export sales. The Utah state income tax rate declined to 4.95% from 5% prior to the 2017 TCJA, and the State of Utah enacted income apportionment rules that provide for additional tax relief.
ii) Earnings Per Share (EPS)
EPS are Net Income divided by the number of shares of stock outstanding (diluted to take into consideration stock option awards which are “in the money,” i.e., have exercise prices below the applicable period’s weighted average market value). Diluted EPS in year 2023 were $4.574 compared to $4.522 in 2022, a 1.2% increase. The increase in EPS was in contrast to a decrease in Operating Income as a result of the 2023 net non-operating income and a stock buy-back in 2Q 2022. Diluted shares were 3,637,071 for the year 2023 compared to 3,643,256 in 2022. Dilution for “in the money” unexercised options for the year 2023 was 8,303 shares compared to 5,934 shares in 2022. Actual outstanding common shares as of December 31, 2023 were 3,629,525. The 2023 EPS exceeded management’s projection at the beginning of the year.
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iii) ROE
Achieving a high ROE remains a key management objective for UTMD in order to grow without diluting stockholder interest. ROE is the quotient of Net Income divided by average Stockholders’ Equity, but more specifically it is the product of the Net Income margin, productivity of assets and financial leverage. UTMD’s high Net Income margin is the primary factor that continues to drive its ROE, with low financial leverage and decreasing asset productivity as cash balances rapidly grow. Cash dividends to stockholders and repurchase of shares, on the other hand, help in lowering average Stockholders’ Equity, reducing the denominator in calculating ROE. Building cash balances that increase Stockholders’ Equity, without proportionately increasing Net Income, reduces ROE. UTMD’s 2023 ROE before stockholder dividends was 13.7%. In comparison, 2022 ROE was 14.9%.
The lower 2023 ROE compared to 2022 was the result of 1.0% higher Net Income coupled with 9.6% higher average Stockholders’ Equity. Average Stockholders’ Equity was $121,284 in 2023 compared to $110,696 in 2022. UTMD’s Stockholders’ Equity has more than doubled over the last eleven years to $128 million at the end of 2023, despite being reduced by $50 million in dividends plus $16 million in share repurchases over that same period of time. UTMD’s average ROE over the last 31 years was 24%.
Looking forward to 2024, it will obviously be a rebuilding year as it appears likely that revenues from UTMD’s two previous largest customers are likely to be at least $7 million lower. If so, this will pressure UTMD’s GPM as much as five percentage points lower as a result of less absorption of fixed manufacturing overheads which are important resources to retain for the future. In addition, although impossible to predict reliably, litigation expenses may be another $1 million higher than in 2023 given the slowness of the U.S. judicial system, particularly if some cases eventually go to trial. Offsetting those negative impacts on financial performance, non-cash CSI IIA amortization expense will be $3.6 million lower than in 2023 and non-operating income from cash balances may be as much as $1 million higher, assuming that a substantial new investment or stock buy-back is not implemented to increase long-term stockholder value. Although with a high level of uncertainty, management is estimating that UTMD consolidated revenues and net income in 2024 will be about 15% lower and 17% lower, respectively. Despite a difficult year in comparison to the recent past, the Company expects to continue to operate at a high level in terms of profitability and positive cash generation.
Liquidity and Capital Resources
Cash Flows .
Net cash provided by operating activities in 2023 totaled $22,281 compared to $21,147 in 2022. Net Income at $162 higher in 2023 compared to 2022 allowed net cash provided by operating activities in 2023, including adjustments for depreciation and other non-cash operating expenses, along with changes in working capital and the tax benefit attributable to exercise of employee incentive stock options, to be $1,134 higher than in 2022. Along with higher Net Income, working capital changes help fund operating activities. Accounts receivable had a $2,780 lower use of cash as a result of decreasing trade accounts receivable (A/R) $2,270 instead of the $511 increase in 2022, and inventories had a $1,683 lower use of cash with just a $670 increase in 2023 compared to a $2,353 increase in 2022 (second order derivatives). On the other hand, uses of cash included 1) a $1,422 decline in 2023 year-ending accrued expenses instead of a $252 increase at year-end 2022, 2) $714 lower depreciation and amortization in 2023 compared to 2022 and 3) a $293 greater decline in deferred income taxes. The inventory increase was a hedge against continued supply chain disruption.
In investing activities, during 2023 UTMD used $639 in capital expenditures to purchase new molds and manufacturing equipment and fixtures for expanded capabilities as well as to maintain and improve existing operating capabilities, compared to investing $809 in 2022. Capital expenditures in 2023 exceeded depreciation by $16.
In 2023 UTMD received $117 and issued 1,758 shares of stock upon the exercise of employee stock options. Option exercises in 2023 were at an average price of $66.40 per share. The Company received a $12 tax benefit from option exercises in 2023. UTMD did not repurchase shares of its stock in the open market during 2023.
In comparison, in 2022 UTMD received $174 and issued 3,135 shares of stock upon the exercise of employee and director stock options. Employees exercised a total of 3,501 option shares in 2022, with 366 shares immediately being retired as a result of optionees trading the shares in payment of the exercise price of the options. Option exercises in 2022 were at an average price of $60.34 per share. The Company received a $6 tax benefit from option exercises in 2022. UTMD repurchased 30,105 shares of its stock in the open market during 2022 at an average cost of $82.88 per share.
UTMD did not borrow in the years 2023 and 2022. Cash dividends paid to stockholders were $4,282 in 2023 compared to $3,162 in 2022.
Management believes that future income from operations and effective management of working capital will continue to provide the liquidity needed to finance internal growth plans. In an uncertain economic environment, UTMD’s cash balances allow management to operate with the long-term best interest of stockholders in mind. Planned 2024 capital expenditures for ongoing operations are expected to be less than depreciation of PP&E, although additional capital expenditure opportunities are being considered.
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Management plans to opportunistically utilize cash not needed to support normal operations in one or a combination of the following: 1) in general, to continue to invest at opportune times in ways that will enhance future profitability; 2) to make additional investments in new technology and/or processes; and/or 3) to acquire a product line or company that will augment revenue and EPS growth and better utilize UTMD’s existing infrastructure. If there are no better strategic uses for UTMD’s cash, the Company will continue to return cash to stockholders in the form of dividends and share repurchases when the stock appears undervalued.
Management's Outlook.
UTMD remains small compared to many other companies, but its employees are experienced and remain diligent in their work. UTMD’s passion is in providing differentiated clinical solutions that will help improve the outcomes of medical procedures and reduce health risks, particularly for women and their babies.
The safety, reliability and performance of UTMD’s medical devices are consistently high and represent significant clinical benefits while providing minimum total cost of care. UTMD will continue to leverage its reputation as a device innovator and reliable manufacturer which will responsively take on challenges to work with clinicians who use its specialty devices. In doing so, UTMD will continue to differentiate itself, especially from its commodity-oriented competitors. In 2024, UTMD plans to
1) exploit its pre-qualified status to introduce a line of high-pressure process control transducer configurations directly to biopharmaceutical manufacturers;
2) continue to leverage OUS distribution and manufacturing synergies by further integrating capabilities and resources in multinational operations;
3) focus on defending the proven safety and effectiveness of the Filshie Clip System in the U.S.;
4) introduce additional products helpful to clinicians through product development;
5) continue to achieve excellent overall financial operating performance despite a contraction in revenues;
6) utilize positive cash generation to continue providing cash dividends to stockholders and make open market share repurchases if/ when the UTMD share price seems undervalued; and
7) remain vigilant for affordable accretive acquisition opportunities which may be brought about by difficult economic conditions on small, innovative companies.
The Company has a fundamental focus to do an excellent job in meeting clinicians’ and patients’ needs, while providing stockholders with excellent returns. In the combined form of cash dividends and share repurchases, UTMD “returned” $4,282 (26% of Net Income) in 2023 compared to $5,658 (34% of Net Income) in 2022 to stockholders.
In 2023, the value of UTMD’s stock declined 16%, ending the year at $84.22/ share, while $1.18 in cash dividends/ share were paid to stockholders. The DJIA, S&P 500 and NASDAQ Composite (where UTMD is traded) indices were all higher in 2023, respectively by 14%, 24% and 43%.
In comparison, in 2022, the value of UTMD’s stock increased , albeit less than 1%, ending the year at $100.53/ share, while $0.87 in cash dividends/ share were paid to stockholders. The DJIA, S&P 500 and NASDAQ (where UTMD is traded) indices were all lower in 2022, respectively by 9%, 19% and 33%.
The average annually compounded appreciation in UTMD stock value for the last 25 years was 11% per year, substantially outpacing all of the major indices. Adding dividends, UTMD stockholder value increased at an annually compounded rate of 11.8% over the last 25 years since 1998.
Combining share price appreciation as a result of a long-term financial performance and a capital allocation strategy that includes opportunistic share repurchases with steadily growing quarterly cash dividends paid to stockholders since 2004, longer-term UTMD stockholders have experienced excellent returns. Management is committed to continue that performance.
Off Balance Sheet Arrangements
None
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Contractual Obligations
The following is a summary of UTMD’s significant contractual obligations and commitments as of December 31, 2023:
Contractual Obligations and Commitments
Total
2024
2025-2026
2027-2028
2029 and thereafter
Long-term debt obligations
$ -
$ -
$ -
$ -
$ -
Operating lease obligations
381
57
97
97
130
Purchase obligations
4,152
4,152
-
-
-
Total
$ 4,533
$ 4,209
$ 97
$ 97
$ 130
Critical Accounting Policies and Estimates
The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as well as the reported amounts of revenues and expenses during the reporting period.
Management bases its estimates and judgments on historical experience, current economic and industry conditions and on various other factors that are believed to be reasonable under the circumstances. This forms the basis for making judgments about the carrying values of assets and liabilities that are not readily available from other sources. Management has identified the following as the Company’s most critical accounting policies which require significant judgment and estimates. Although management believes its estimates are reasonable, actual results may differ from these estimates under different assumptions or conditions.
· Allowance for doubtful accounts: The majority of the Company’s receivables are with healthcare facilities and medical device distributors. Although the Company has historically not had significant write-offs of bad debt, the possibility exists, particularly with foreign distributors where collection efforts can be difficult or in the event of widespread hospital bankruptcies.
· Inventory valuation reserves: The Company strives to maintain inventory to 1) meet its customers’ needs and 2) optimize manufacturing lot sizes while 3) not tying-up an unnecessary amount of the Company’s capital increasing the possibility of, among other things, obsolescence. The Company believes its method of reviewing actual and projected demand for its existing inventory allows it to arrive at a fair inventory valuation reserve. While the Company has historically not had significant inventory write-offs, the possibility exists that one or more of its products may become unexpectedly obsolete for which a reserve has not previously been created. The Company’s historical write-offs have not been materially different from its estimates.
Accounting Policy Changes
The Company’s management has evaluated the recently issued accounting pronouncements through the filing date of these financial statements and has determined that the application of these pronouncements will not have a material impact on the Company’s financial position and results of operations.
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