UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d) of
The Securities Exchange Act of 1934
For quarter ended: September 30, 1998 Commission File No. 1-12575
UTAH MEDICAL PRODUCTS, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
UTAH 87-0342734
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7043 South 300 West
Midvale, Utah 84047
----------------------------------------------------
Address of principal executive offices
Registrant's telephone number: (801) 566-1200
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and; (2) has been subject to such
filing requirements for the past 90 days. Yes X No
The number of shares outstanding of the registrant's common stock as of
November 6, 1998: 8,213,036
<PAGE>
UTAH MEDICAL PRODUCTS, INC.
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Condensed Balance Sheets as of
September 30, 1998 and December 31, 1997 1
Consolidated Condensed Statements of Income for the
three and nine months ended September 30, 1998 and
September 30, 1997 2
Consolidated Condensed Statements of Cash Flows for the
nine months ended September 30, 1998 and
September 30, 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 11
SIGNATURES 11
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(unaudited)
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ -----------
ASSETS
CURRENT ASSETS:
Cash $ 2,631,916 $ 951,084
Accounts receivable - net 5,122,653 4,653,805
Inventories 4,662,161 5,792,058
Other current assets 591,616 655,433
----------- -----------
Total current assets 13,008,346 12,052,380
PROPERTY AND EQUIPMENT - NET 12,755,595 13,340,105
INTANGIBLE ASSETS - NET 9,074,292 6,066,751
----------- -----------
TOTAL $34,838,233 $31,459,236
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 757,139 $ 843,199
Accrued expenses 2,007,224 1,840,357
Deferred revenue 23,176 85,600
----------- -----------
Total current liabilities 2,787,539 2,769,156
REVOLVING LINE OF CREDIT 5,612,064 5,562,933
DEFERRED REVENUE 0 1,774
DEFERRED INCOME TAXES 399,489 489,989
----------- -----------
Total liabilities 8,799,092 8,823,852
----------- -----------
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value;
authorized - 5,000,000 shares; no
shares issued or outstanding
Common stock - $.01 par value;
authorized - 50,000,000 shares;
issued - September 30, 1998,
8,228,736 shares December 31,
1997, 8,305,036 shares 82,287 83,050
Cumulative foreign currency
translation adjustment (483,864) (656,345)
Retained earnings 26,440,718 23,208,679
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Total stockholders' equity 26,039,141 22,635,384
----------- -----------
TOTAL $34,838,233 $31,459,236
=========== ===========
see notes to consolidated financial statements
<PAGE>
[CAPTION]
<TABLE>
UTAH MEDICAL PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF INCOME FOR THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------------------
1998 1997 1998 1997
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $7,150,281 $7,018,810 $20,310,930 $17,292,781
COST OF SALES 3,429,895 3,340,105 9,982,670 8,235,269
---------- ---------- ----------- -----------
GROSS MARGIN 3,720,386 3,678,705 10,328,260 9,057,512
---------- ---------- ----------- -----------
EXPENSES:
Selling, general and
administrative 1,706,748 1,757,085 4,918,814 4,468,769
Research & development 231,422 230,173 696,664 721,674
---------- ---------- ----------- -----------
Total 1,938,170 1,987,258 5,615,478 5,190,443
---------- ---------- ----------- -----------
INCOME FROM OPERATIONS 1,782,216 1,691,447 4,712,782 3,867,069
OTHER INCOME 209,103 123,189 836,467 945,090
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAX
EXPENSE 1,991,319 1,814,636 5,549,249 4,812,159
INCOME TAX EXPENSE 700,944 661,787 1,973,216 1,723,940
---------- ---------- ----------- -----------
NET INCOME $1,290,375 $1,152,849 $3,576,033 $3,088,219
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.16 $ 0.14 $ 0.43 $ 0.36
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.16 $ 0.14 $ 0.43 $ 0.36
========== ========== ========== ==========
SHARES OUTSTANDING - BASIC 8,297,000 8,370,000 8,305,000 8,490,000
========== ========== ========== ==========
SHARES OUTSTANDING -
DILUTED 8,317,000 8,422,000 8,320,000 8,547,000
========== ========== ========== ==========
see notes to financial statements
</TABLE>
<PAGE>
UTAH MEDICAL PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND SEPTEMBER 30, 1997
(unaudited)
SEPTEMBER 30,
-----------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $3,576,033 $3,088,219
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,518,591 1,059,650
Provision for (recovery of) losses on 25,930 (10,176)
accounts receivable
(Gain)/Loss on disposal of assets 438,627 (95,114)
Deferred income taxes (23,972) 185,928
Tax benefit attributable to exercise and
disposition of incentive stock options
and stock purchase rights - 26,767
Changes in operating assets and liabilities:
Accounts receivable - trade 255,477 645,684
Accrued interest and other receivables (726,644) 396,643
Inventories 1,717,329 (1,044,269)
Prepaid expenses (2,711) (32,209)
Accounts payable (94,038) (416,289)
Accrued expenses 162,858 (160,630)
Deferred revenue (64,200) (114,287)
---------- ----------
Total adjustments 3,207,248 441,697
---------- ----------
Net cash provided by operating activities 6,783,281 3,529,916
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (337,037) (1,162,275)
Intangible assets (289,415) (369,184)
Purchases of investments - (112,200)
Proceeds from sale and maturities of
investments - 1,577,238
Proceeds from sale of property and equipment 10,575 3,510
Net cash paid in acquisition (4,188,465) (7,299,561)
--------- ---------
Net cash provided by (used in) investing
activities (4,804,342) (7,362,472)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 58,000 226,637
Common stock purchased and retired (447,734) (4,909,174)
Proceeds from (repayment of) note payable 49,131 7,480,062
--------- ---------
Net cash used in financing activities (340,603) 2,797,525
--------- ---------
Effect of exchange rate changes on cash 42,496 -
NET INCREASE (DECREASE) IN CASH 1,680,832 (1,035,032)
CASH AT BEGINNING OF PERIOD 951,084 3,038,956
--------- ---------
CASH AT END OF PERIOD $2,631,916 $2,003,924
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $1,606,474 $1,563,727
Interest $242,716 $128,359
see notes to financial statements
<PAGE>
UTAH MEDICAL PRODUCTS, INC.
NOTES TO FINANCIAL STATEMENTS
(unaudited)
(1) The unaudited financial statements presented herein have been prepared in
accordance with the instructions to form 10-Q and do not include all of the
information and note disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes included in the Utah Medical Products, Inc. ("UM" or "the
Company") annual report on form 10-K for the year ended December 31, 1997.
Although the accompanying financial statements have not been examined by
independent accountants in accordance with generally accepted auditing
standards, in the opinion of management, such financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
summarize fairly the Company's financial position and results of operations.
(2) Inventories at September 30, 1998 and December 31, 1997 consisted of the
following:
September 30, December 31,
1998 1997
------------- ------------
Finished goods $ 1,221,241 $ 1,231,584
Work-in-process 906,191 1,204,873
Raw materials 2,534,728 3,355,601
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Total $ 4,662,161 $ 5,792,058
=========== ===========
(3) The Company adopted Statement of Financial Accounting Standards (SFAS) No.
128, Earnings per Share during the year ended December 31, 1997. This standard
requires companies to present basic earnings per share (EPS) and diluted
earnings per share, including restating historical results, instead of the
primary and fully diluted EPS as previously required. The new standard also
makes modifications to the previously applicable EPS calculations found in APB
Opinion No. 15.
(4) The Company has adopted SFAS No. 130, Reporting Comprehensive Income. This
standard requires companies to disclose certain changes in equity not
represented in net income such as foreign currency translation adjustments and
unrealized gains/losses on available-for-sale securities. These items are
components of other comprehensive income which, when added to net income,
represent total comprehensive income. The Company translates the currency of
its Ireland subsidiary which comprises the only element of other comprehensive
income. Total comprehensive income for the quarter ending September 30, 1998
and YTD 1998 is as follows:
3rd Quarter YTD
1998 1998
----------- -----------
Total Comprehensive Income $ 1,743,458 $ 3,793,493
(5) Forward-Looking Information
This report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of management as well as
assumptions made by, and information currently available to, management. When
used in this document, the words "anticipate," "believe," "should," "project,"
"estimate," "expect," "intend" and similar expressions, as they relate to the
Company or its management, are intended to identify forward-looking statements.
Such statements reflect the current view of the Company respecting future events
and are subject to certain risks, uncertainties, and assumptions, including the
risks and uncertainties noted throughout the document. Although the Company has
attempted to identify important factors that could cause the actual results to
differ materially, there may be other factors that cause the forward statement
not to come true as anticipated, believed, projected, expected, or intended.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may differ materially
from those described herein as anticipated, believed, projected, estimated,
expected, or intended.
General risk factors that may impact the Company's revenues include the
market acceptance of competitive products, obsolescence caused by new
technologies, the possible introduction by competitors of new products that
claim to have many of the advantages of UM's products at lower prices, the
timing and market acceptance of UM's own new product introductions, UM's ability
to efficiently manufacture its products, including the reliability of suppliers,
success in gaining access to important global distribution channels, marketing
success of UM's distribution and sales partners, budgetary constraints, the
timing of regulatory approvals for newly introduced products, and third party
reimbursement.
Risk factors, in addition to the risks outlined in the previous paragraph
that may impact the Company's assets and liabilities, as well as cash flows,
include risks inherent to companies manufacturing products used in health care
including claims resulting from the improper use of devices and other product
liability claims, defense of the Company's intellectual property, productive use
of assets in generating revenues, management of working capital including
inventory levels required to meet delivery commitments at a minimum cost, and
timely collection of accounts receivable.
Additional risk factors that may affect non-operating income include the
continuing viability of the Company's technology license agreements, actual cash
and investment balances, asset dispositions, and acquisition activities that may
require external funding.
(6) Events subsequent to September 30, 1998:
UM has modified its unsecured revolving promissory note with First
Security Bank, N.A. Modifications include an increase from $10,000,000 to
$12,500,000 in the maximum amount UM may borrow and an extension of one year on
the due date of the note, now March 25, 2000. Other terms remain the same.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Analysis of Results of Operations
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.
a) Overview
All key measures of UM's financial performance were positive in 3Q 1998
compared to 3Q 1997. Total sales in 3Q 1998 increased 2% relative to sales in
3Q 1997. Third quarter 1998 includes about two months of sales from UM's July
1998 acquisition of the neonatal product line of Gesco International Inc. and
Bard Access Systems, Inc. Critical Care sales increased 5% relative to 3Q 1997,
while Ob/Gyn sales increased 1%. Gross profit dollars were up 1% in 3Q 1998
compared to 3Q 1997, while operating profit margins increased to 25% of sales in
3Q 1998 from 24% in the same period of 1997. Operating expenses were down from
28% of sales in 3Q 1997 to 27% of sales in 3Q 1998. Other income increased
$86,000 in 3Q 1998 from the same period in 1997, due mainly to a payment from
other's use of UM's technology. Net income, at $1,290,000 in 3Q 1998, increased
$138,000, or 12%, from the third quarter of 1997. Earnings per share (eps) of
15.5c in 3Q 1998 compared with 13.8c in 3Q 1997 were aided by 105,000 fewer
diluted shares outstanding in 3Q 1998. Results for the first nine months (9M)
of 1998 compared to 9M 1997 were significantly more favorable than the quarterly
results comparisons detailed above, due mainly to the much lower sales base in
the first and second quarters of 1997. Columbia Medical, Inc. (CMI) sales were
included in UM's results for the first time in third quarter 1997.
b) Revenues
UM divides revenues into two broad product use categories: Ob/Gyn and
Critical Care. Ob/Gyn consists of 1) obstetrics, including a full line of
equipment and supplies used in hospitals' labor & delivery departments for fetal
monitoring, operative vacuum delivery, umbilical cord management, and meconium
aspiration, as well as other needs; and 2) gynecology/ urology/ electrosurgery
(ES) equipment and tools used especially for a gynecologic electrosurgical
procedure called LETZR, but also other electrosurgical procedures including
endoscopic procedures, and other non-gynecological procedures such as
tonsillectomies by otolaryngologists, abdominal reconstructions and breast
reductions by plastic surgeons, mammary artery grafts by thoracic surgeons,
nevus excision by dermatologists, and tumor excisions by all surgeons; other
tools used in other minimally invasive surgical procedures including diagnostic
laparoscopies; urinary incontinence management devices; and urology pumps.
Critical care consists of 1) disposable components used in invasive blood
pressure and intracranial pressure monitoring, 2) products used in neonatal
intensive care units including Gesco products such as: umbilical vessel
catheters, feeding tubes, a urinary drainage system, a disposable blood
filtration system, lumbar puncture supplies, an oral protection appliance, a
disposable peritoneal dialysis system, chest tubes, and general purpose
catherization trays, along with UM's disposable respiratory hoods, and 3)
subcontract molding.
Sales of obstetrics products in 3Q 1998 were $3,880,000 compared to
$3,741,000 in 3Q 1997. Starting in the third quarter of 1997, revenues from CMI
were included in UM's business, including operative vacuum delivery systems.
Intran sales increases, partially offset by lower vacuum assisted delivery
system sales in 3Q 1998 compared to 3Q 1997 largely explain the sales
differences. Vacuum assisted delivery system sales have been improving during
each successive quarter in 1998. First nine months 1998 obstetric sales were
$10,911,000 compared to $8,167,000 in 9M 1997. In the first half of 1997, UM's
Intran sales were lower than they otherwise would have been due to UM's
conversion of two distributors to direct sales representatives, allowing time
for the distributors to sell off inventory, and UM's subsequent repurchase of
the remaining inventory in second quarter 1997. As a percentage of total UM
sales, obstetrics product revenues represented 54% in 3Q 1998 compared to 53% in
3Q 1997. Gynecology/ urology/ ES product sales were $1,072,000 in 3Q 1998
compared to $1,175,000 in 3Q 1997. Recently introduced products in this
category, include EpitomeR, a unique ES scalpel; LibertyR, a conservative
therapy for female urinary incontinence; and Pathfinder Plus , an irrigation
device for endoscopic procedures. Decreased sales of CMI's vacuum erection
pumps, likely due to Viagra's initial success, are largely responsible for the
sales decline. Other factors include stronger Liberty and Pathfinder sales, but
lower ES sales. First nine months 1998 sales in this category were $3,154,000
compared to $2,778,000 in 9M 1997. As in the obstetrics category, the 1997
distributor terminations reduced gynecology product sales during first half
1997. Gynecology/ urology/ES revenues represented between 15-17% of total UM
sales in 3Q and 9M of both 1997 and 1998. A number of the gynecology products
are designed for use in physicians' offices or outpatient clinics, and therefore
represent diversification from UM's main hospital-based business. In late
October, 1998, UM introduced its new contoured cervical loop excision electrode,
designed to completely excise cervical lesions without removing excessive
healthy cervical tissue.
Critical care revenues were $2,199,000 in 3Q 1998 compared to $2,103,000 in
3Q 1997. First nine months 1998 critical care sales were $6,246,000, compared
to $6,348,000 in 9M 1997. Included in this category are transducers and other
components used in blood pressure monitoring sold to Baxter, which sales in 3Q
1998 were $151,000 compared to $252,000 in 3Q 1997, and $384,000 in 9M 1998
compared to $1,099,000 in 9M 1997. The decline in Baxter sales, along with a
decrease in international DPT and accessories sales of about $170,000 was more
than offset by two months of Gesco sales in third quarter 1998. Going forward,
Gesco sales are expected to contribute more, not only because Gesco was included
for just two months in 3Q 1998, but also because of higher sales prices as
customers are converted to direct sales representatives from distributors. That
conversion will be a critical task for UM over the next six months.
Third quarter and first nine months 1998 foreign sales were $1,084,000 and
$3,561,000, respectively, compared to $1,228,000 and $3,763,000 in the same
periods of 1997. None of the 9M 1998 foreign sales were to Baxter, compared to
$43,000 and $202,000 in 3Q and 9M 1997, respectively. The decline in 3Q 1998
foreign sales was in critical care products, which represented 76% and 80% of
foreign sales in 3Q and 9M 1998, respectively, compared to 84% in both 3Q and 9M
1997. UM believes the 1998 decreases are due to a general declinein
international economic activity. UM continues to believe it has substantial
sales potential for its products in international markets.
c) Gross Profit
Gross margins (profit after subtracting costs of manufacturing products from
revenues) in 3Q and 9M 1998, were 52% and 51%, respectively, compared to 52% in
both 3Q and 9M 1997. Gross margins improved in 3Q 1998 from earlier in 1998 due
mainly to better overhead absorption and maintaining average selling prices.
Gross margins may be impacted from period to period by sales product mix,
inventory changes, and exchange rates, among other factors. A current challenge
for UM is absorption of manufacturing overhead given the sales volumes and
depreciation related to prior increases in fixed assets. With the addition of
the Gesco products into UM's previously under-utilized manufacturing operations,
the Company should see gross margin improvements extending into 1999.
Gross margin improvements can also be achieved if UM can further increase
sales activity to better absorb its overhead expenses. On the other hand,
management expects continued competitive pressure for its established products
that may reduce average selling prices and therefore put additional pressure on
future gross profit margins.
d) Income from Operations
Operating profits, or income from operations, are the profits achieved after
subtracting operating expenses from gross profits. Operating profits in 3Q and
9M 1998 were $1,782,000 and $4,713,000, respectively, compared to $1,691,000 and
$3,867,000 in 3Q and 9M 1997, respectively. Third quarter and 9M 1998 operating
profits increased to 25% and 24% of sales, respectively, from 24% and 22% of
sales in 3Q and 9M 1997, respectively. Third quarter 1998 operating expenses in
dollars decreased $49,000 from 3Q 1997, while 9M 1998 operating expenses
increased $425,000, relative to 9M 1997. Third quarter 1998 includes
amortization of goodwill on the Gesco acquisition for the first time.
Operating expenses are subdivided into sales, general and administrative
expenses (SG&A) and research and development expenses (R&D). UM further divides
SG&A into the two categories of sales and marketing expenses (S&M) and general
and administrative expenses (G&A).
SG&A expenses in 3Q and 9M 1998 were 24% and 25% of revenues, respectively,
compared to 24% and 26% in 3Q and 9M 1997, respectively. The primary changes in
SG&A are amortization of goodwill associated with new acquisitions and sales
commissions on increased direct sales. Third quarter 1998 included expenses of
about 0.5% of sales due to amortization of Gesco goodwill. UM expects SG&A
expenses as a percentage of sales to decline modestly in the last quarter of
1998.
UM's S&M expenses are driven primarily by the direct sales portion of its
business. S&M expenses in 3Q and 9M 1998 were $995,000 and $2,908,000,
respectively, compared to $1,070,000 and $2,722,000 in 3Q and 9M 1997,
respectively. Although UM desires to increase its OEM customers for its blood
pressure monitoring products and other products which serve markets that are
outside UM's sales focus, management expects that the direct portion of UM's
business will grow faster than the OEM portion, which direct portion represented
86% of total sales in 3Q 1998 compared to 82% in 3Q 1997. The 1997 distribution
mix changes that had a positive impact on gross margins had an offsetting
negative effect on selling expenses. Management believes that achieving closer
contact with end-users of its specialty products, as well as having closer
control of how its sales resources spend limited time, are key elements to
implementing its value-added niche marketing strategies.
G&A expenses increased $25,000 to $712,000 in 3Q 1998, relative to 3Q 1997,
and $264,000 to $2,011,000 in 9M 1998 relative to 9M 1997. Included in 9M 1998
G&A expenses was amortization of goodwill related to the CMI and Gesco
acquisitions of $290,000, compared to $64,000 in 9M 1997. Despite the addition
of G&A expenses related to CMI and Gesco added together with amortization of
goodwill from those purchases, UM expects G&A expenses to decline as a
percentage of sales for 1998 as a whole, compared to 1997.
R&D expenses were $231,000 and $697,000 in 3Q and 9M 1998, respectively,
compared to $230,000 and $722,000 in 3Q and 9M 1997. As a percentage of sales,
R&D expenses were 3% in both periods of 1998, compared to 3% and 4% in 3Q and 9M
1997, respectively. A large portion of UM's current internal product
development expenditures are focused on its fetal pH monitoring project. Other
projects include the Fowler Endocurette, new products and enhancements to the
Gesco neonatal line of products, electrosurgery electrodes, incontinence
products, specialty gynecology products for uterine or cervical disease and
continued development of umbilical cord management devices. Products acquired
in the 1997 purchase of CMI are being enhanced or further developed. UM not
only obtains new products through internal development, but also through
cooperative development with others, licensing of others' products, and
acquisitions.
e) Non-operating (Other) income.
Non-operating income includes royalties from licensing UM's technology to
other companies, interest and capital gains from investing the Company's cash
(offset by interest on UM's debt obligations), and gains or losses from the sale
of assets. Non-operating income increased $86,000 in 3Q 1998 from 3Q 1997, but
declined $109,000 in 9M 1998 compared to 9M 1997. In 3Q 1998, UM enjoyed a one-
time payment from others' use of its technology. Non-operating income in 3Q
1998 represented about 11% of pretax income, compared to 7% in 3Q 1997. For
the first nine months, non-operating income represented 15% of pretax income in
1998, compared to 20% in 1997. Interest expense, due to debt financing used in
the acquisitions of CMI and Gesco, was $86,000 and $243,000 in 3Q and 9M 1998,
respectively, compared to $115,000 and $128,000 in 3Q and 9M 1997, respectively.
Lower earnings from investments of cash also contributed to the lower non-
operating income in 1998 compared with the previous year. In both periods,
payments for the use of UM's technology comprised the largest portion of non-
operating income, including royalties from other medical device companies.
Royalties received vary from period to period depending on the interest in UM's
patents and/or success of other companies in selling licensed product concepts.
Management estimates non-operating income for the last quarter of 1998 will be
substantially less than the quarterly average over the first nine months of the
year due to higher expected interest payments associated with the Gesco purchase
as well as lower payments for the use of UM's technology.
f) Earnings Before Income Taxes and Net Income
Earnings before income taxes (EBT) result from adding non-operating and
operating income together. EBT, as a percentage of sales, were 28% and 27% in
3Q and 9M 1998, respectively, compared to 26% and 28% in the same periods of
1997, respectively.
Net income is EBT minus income taxes. Net income in 3Q and 9M 1998 was
$1,290,000 and $3,576,000, respectively, compared to $1,153,000 and $3,088,000
in 3Q and 9M 1997, respectively. Net income as a percentage of sales, at 18% in
both 1998 periods and 16% and 18% in 3Q and 9M 1997, respectively, ranks UM in
the top profitability tier of U.S. publicly traded companies. UM's effective
income tax rate was 35% and 36% in 3Q and 9M 1998, respectively, compared to 36%
in both periods of 1997. UM's effective rate includes federal and state income
taxes in the U.S., as well as taxes overseas. The tax rates reflect the non-
deductibility of goodwill for tax purposes associated with the CMI acquisition
(Gesco goodwill amortization is tax deductible), a difference in the
distribution of state taxes, a smaller amount of non-operating income coming
from tax-exempt securities, and other fluctuations associated with the use of a
foreign sales corporation and R&D tax credits.
g) Earnings per share (EPS).
EPS is net income divided by the number of shares of stock outstanding
(diluted to take effect for stock options awarded which have exercise prices
below the current market value). Diluted EPS for 3Q 1998 were $.155 compared to
$.137 for 3Q 1997. For the first nine months, diluted EPS were $.430 in 1998,
compared to $.361 in 1997. Weighted average diluted shares in 3Q 1998 were
8,317,000 compared to 8,422,000 in 3Q 1997. Actual outstanding common shares as
of September 30, 1998 were 8,228,736 compared to 8,355,036 as of September 30,
1997. The dilution calculation added about 19,000 shares to basic shares
outstanding in 3Q 1998, compared to about 52,000 in 3Q 1997.
h) Return on shareholders' equity (ROE).
ROE is the portion of net income retained by UM to internally finance its
growth, divided by average accumulated shareholders' equity during the period.
This ratio determines how fast the Company can afford to grow without external
financing that would dilute shareholder interests. For example, a 20% ROE will
support 20% growth in sales activity. ROE in both 3Q and 9M 1998, at 20%, along
with ROE of 21% and 18% in 3Q and 9M 1997, respectively, was below management's
long term target of 25%. The primary factor that lowered ROE in the periods was
the lower number of asset turns, that is, the level of sales activity relative
to total assets was below management targets. Including 1997, ROE has averaged
30% over the prior twelve years.
i) Cash Flows
EBDIT (EBT, adjusted for non-cash depreciation and amortization expenses,
asset write-offs, and interest expense) are the measure of UM's ability to
generate cash. 9M 1998 EBDIT were $7,749,000 compared to $5,905,000 in 9M 1997,
or as a ratio of sales, 38% in 9M 1998 and 34% in 9M 1997. EBDIT has averaged
34% of sales over the last five years. Generating cash at a rate above one-
third of sales provides UM with a powerful financial engine for growth. The
Company obtained additional financing starting in second quarter 1997 through
its revolving line of credit (LOC), which as of September 30, 1998, provided an
additional $5,612,000 in cash to facilitate the timing of the Gesco acquisition.
Cash (and equivalent) balances were $2,632,000 at September 30, 1998, an
increase of $1,681,000 from December 31, 1997. UM's cash balances are currently
comprised of amounts held to meet operating requirements in Ireland, and amounts
set aside as a litigation reserve and as required to meet potential obligations
from put sales associated with the Company's stock repurchase program. The most
significant use of cash in 9M 1998 was $4,188,000 paid to acquire Gesco. Net
working capital changes provided $1,248,000 in 9M 1998 cash, with the major
contribution being a $1,717,000 reduction in inventories (adjusted for exchange
rate changes). In contrast, working capital changes used $725,000 in cash,
dominated by increases in inventories, during 9M 1997.
During 9M 1998, in addition to the cash spent on Gesco, UM used $289,000 on
the purchase of technology rights and prosecution of new patents, and $337,000
on improvements to property and equipment. During 9M 1997, UM spent $1,531,00
on capital purchases, including costs associated with completing the Irish
manufacturing facility. Excluding other acquisitions and additional share
repurchases, UM plans for capital expenditures during the remainder of 1998 to
be less than during 1997, and significantly less than current depreciation
rates.
Financing activities in 9M 1998 resulted in a cash decrease of $341,000
compared to a increase of $2,798,000 in 9M 1997. In 9M 1998 the decrease
resulted from stock repurchases, while in 9M 1997 the increase resulted from
increases in the LOC, offset by stock repurchases. The Company received $58,000
in 9M 1998 from issuing stock (on exercise of an employee option), compared to
$227,000 in 9M 1997. In October 1998, UM modified its LOC, including increasing
the maximum amount UM may borrow to $12,500,000 and extending the due date on
the loan to March 25, 2000. Amounts borrowed under the LOC are unsecured.
j) Management's Outlook
UM's challenge is to grow its niche-oriented business by successfully
introducing and selling products which cost effectively meet the needs of
patients and clinicians. The Gesco product line acquisition is an example of
products that the Company feels can help meet that challenge. In late October,
1998, UM introduced its new contoured cervical loop excision electrode, designed
to completely excise cervical lesions without removing excessive healthy
cervical tissue that may be lost in a cone biopsy. UM will continue to look for
ways to increase the rate of adoption of new products for specific disease
states where innovations can become the most recognized cost-effective clinical
solution. The Fowler Endocurette for uterine biopsies is an example of such a
device. UM plans to begin marketing the Endocurette in early 1999 after
receiving FDA premarketing concurrence.
YEAR 2000
State of Readiness
UM believes it will experience no material adverse consequences from the "Year
2000 (Y2K) Problem", and is taking appropriate actions to see that it is
prepared. UM has developed a complete Y2K plan it is using to identify and
solve potential Y2K problems.
The Company has determined that all of the products it sells are Y2K compliant
since none of them use or process dates in any form.
A complete inventory of all internal systems (both IT and Non-IT) is in
progress, to be followed by testing of all systems. Solutions to problems
identified are expected to be in place, along with Company-wide Y2K compliance
by July 31, 1999.
In August, 1998 UM surveyed those outside vendors it considers critical to its
business, including utilities and other providers of auxiliary systems,
regarding their Y2K readiness. Response assessment and implementation of
appropriate remedial action is ongoing.
An informal review of the systems UM relies on to manufacture, test, assemble,
and package its products indicates that most, but not all, such systems are Y2K
compliant. Notably, the version of the integrated manufacturing control
software (Dataworks) UM currently uses is not Y2K compliant. However, a Y2K
compliant version of Dataworks has been received and loaded and is being tested
by users, with an expected launch in late 1998.
Costs
UM does not expect its Y2K costs to be material. UM's products are all
compliant and its major software systems are now or should soon be compliant
with upgrades provided under maintenance contracts. Some software and older
systems must be replaced, with the total cost expected to be under $50,000.
Risks
As UM's products do not incorporate date codes, Y2K risks based on its
products are minor. Because the major internal systems UM relies on have either
been confirmed compliant or will be upgraded to a compliant version prior to
July 31, 1999, the risk of these systems failing also appears to be low.
However, a complete inventory of all systems has not been completed, and
although considered unlikely, it is possible that a major problem might be
identified. UM has competent employees who it believes can find solutions to
problems identified. Perhaps the greatest internal risk would be from a Y2K
issue that remains hidden despite diligent testing. If such a problem developed
either shortly before or after January 1, 2000, UM could face delays and costs
that might be material to its business.
External Y2K problems constitute a higher magnitude of risk to its business,
UM believes. If mission critical vendors do not timely and accurately report to
UM their Y2K readiness, or adequately solve Y2K problems as anticipated, the
Company's business could be materially impacted. If alternate vendors cannot be
identified and qualified in time to replace vendors who will not be Y2K
compliant, UM's business could be negatively impacted.
The failure of communications, financial and transportation systems could have
a major negative impact on UM, as would the failure of local utilities to
deliver water, natural gas, and electricity.
Contingency Plans
Execution of the Company's Y2K plan is UM's most important contingency plan.
It will not only identify what Y2K risks it faces, but provide a framework for
how to solve them. For example, UM is prepared to switch vendors, install Y2K
compliant systems and stock excess raw material and finished goods inventory to
mitigate Y2K risks. UM employs skilled individuals who have the technical know-
how to solve most challenges likely to be presented by the Y2K problem.
UM believes that the most likely worst-case scenario would involve business
interruptions of up to one or two weeks. UM believes it could solve such
problems before they became major risks to its business. UM does not believe it
can develop contingency plans to adequately deal with major external
infrastructure failures such as in communications, transportation, or utilities.
However, such failures would likely not impact UM any worse than it would other
businesses.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits:
SEC
Exhibit # Reference # Title of Document
- --------- ----------- -----------------
1 27 Financial data schedule
b) Reports on Form 8-K:
On August 7, 1998, UM filed a report on Form 8-K, Item 2, Acquisition or
Disposition of Assets, related to the purchase of the neonatal product line
assets, including manufacturing processes, intellectual property rights and
business, of Gesco International Inc. and Bard Access Systems Inc., both of
which were subsidiaries of C.R. Bard, Inc.
SIGNATURES
Pursuant to the requirements of the Securities Exchanges Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UTAH MEDICAL PRODUCTS, INC.
REGISTRANT
Date: 11/6/98 By: /s/ Kevin L. Cornwell
CEO and CFO
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
BALANCE SHEET AS OF SEPTEMBER 30, 1998, AND STATEMENTS OF OPERATIONS FOR THE
QUARTER ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,631,916
<SECURITIES> 0
<RECEIVABLES> 5,195,259
<ALLOWANCES> (72,606)
<INVENTORY> 4,662,161
<CURRENT-ASSETS> 13,008,346
<PP&E> 22,096,836
<DEPRECIATION> (9,341,241)
<TOTAL-ASSETS> 34,838,233
<CURRENT-LIABILITIES> 2,787,539
<BONDS> 0
<COMMON> 0
0
82,287
<OTHER-SE> 25,956,854
<TOTAL-LIABILITY-AND-EQUITY> 34,838,233
<SALES> 20,310,930
<TOTAL-REVENUES> 20,310,930
<CGS> 9,982,670
<TOTAL-COSTS> 5,615,478
<OTHER-EXPENSES> (1,079,183)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 242,716
<INCOME-PRETAX> 5,549,249
<INCOME-TAX> 1,973,216
<INCOME-CONTINUING> 3,576,033
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<NET-INCOME> 3,576,033
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