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: June 30, 1998 Commission File No. 1-12575
UTAH MEDICAL PRODUCTS, INC.
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
UTAH 87-0342734
------------------------------ ------------------
(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 August
11, 1998: 8,313,036
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
UTAH MEDICAL PRODUCTS, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS AS OF
JUNE 30, 1998 AND DECEMBER 31, 1997
(unaudited)
December 31,
June 30, 1998 1997
ASSETS -------------- --------------
CURRENT ASSETS:
Cash $ 2,404,757 $ 951,084
Accounts receivable - net 4,493,456 4,653,805
Inventories 4,537,948 5,792,058
Other current assets 529,163 655,433
------------- ------------
Total current assets 11,965,324 12,052,380
PROPERTY AND EQUIPMENT - NET 12,633,252 13,340,105
INTANGIBLE ASSETS - NET 6,059,839 6,066,751
------------- ------------
TOTAL $ 30,658,415 $ 31,459,236
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 741,855 $ 843,199
Accrued expenses 1,405,904 1,840,357
Revolving line of credit (due within
one year) 3,292,247 0
Deferred revenue 44,577 85,600
------------- ------------
Total current liabilities 5,484,583 2,769,156
REVOLVING LINE OF CREDIT 0 5,562,933
DEFERRED REVENUE 0 1,774
DEFERRED INCOME TAXES 430,414 489,989
------------- ------------
Total liabilities 5,914,997 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 - June 30, 1998, 8,313,036
shares December 31, 1997,
8,305,036 shares 83,130 83,050
Cumulative foreign currency (894,557) (656,345)
translation adjustment
Retained earnings 25,554,845 23,208,679
------------- ------------
Total stockholders' equity 24,743,418 22,635,384
------------- ------------
TOTAL $ 30,658,415 $ 31,459,236
see notes to consolidated financial statements
<PAGE>
UTAH MEDICAL PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS FOR THE
THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ -------------------------
1998 1997 1998 1997
---------- ---------- ----------- -----------
NET SALES $6,786,111 $5,100,577 $13,160,649 $10,273,971
COST OF SALES 3,366,254 2,429,370 6,552,775 4,895,164
---------- ---------- ----------- -----------
GROSS MARGIN 3,419,857 2,671,207 6,607,874 5,378,807
---------- ---------- ----------- -----------
EXPENSES:
Selling, general and
administrative 1,601,701 1,334,546 3,212,066 2,711,684
Research & development 256,395 253,563 465,242 491,501
---------- ---------- ----------- -----------
Total 1,858,096 1,588,109 3,677,308 3,203,185
INCOME FROM OPERATIONS 1,561,761 1,083,098 2,930,566 2,175,622
OTHER INCOME 171,165 293,500 627,364 821,901
---------- ---------- ----------- -----------
INCOME BEFORE INCOME TAX
EXPENSE ,732,926 1,376,598 3,557,930 2,997,523
INCOME TAX EXPENSE 606,146 481,213 1,272,272 1,062,153
---------- ---------- ----------- -----------
NET INCOME $1,126,780 $ 895,385 $2,285,658 $1,935,370
========== ========== ========== ==========
BASIC EARNINGS PER SHARE $ 0.14 $ 0.11 $ 0.28 $ 0.23
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE $ 0.14 $ 0.10 $ 0.27 $ 0.22
========== ========== ========== ==========
SHARES OUTSTANDING - BASIC 8,313,000 8,470,000 8,309,000 8,551,000
========== ========== ========== ==========
SHARES OUTSTANDING -
DILUTED 8,342,000 8,535,000 8,331,000 8,622,000
========== ========== ========== ==========
see notes to financial statements
<PAGE>
UTAH MEDICAL PRODUCTS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND JUNE 30, 1997
(unaudited)
June 30,
-----------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,285,658 $1,935,370
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 979,504 620,078
Provision for (recovery of) losses on
accounts receivable 26,220 (18,716)
(Gain)/Loss on disposal of assets 39,848 (49,834)
Deferred income taxes 63,838 125,517
Tax benefit attributable to exercise and
disposition of incentive stock options and 16,359
stock purchase rights
Changes in operating assets and liabilities:
Accounts receivable - trade 226,724 731,660
Accrued interest and other receivables (119,070) 493,044
Inventories 1,179,753 (1,639,003)
Prepaid expenses 2,856 (81,861)
Accounts payable (92,624) (201,184)
Accrued expenses (434,178) (436,919)
Deferred revenue (42,800) (92,858)
---------- ----------
Total adjustments 1,830,071 (533,718)
---------- ----------
Net cash provided by operating activities 4,115,729 1,401,652
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures for:
Property and equipment (224,987) (902,469)
Intangible assets (234,645) (327,622)
Purchases of investments (112,200)
Proceeds from sale and maturities of investments 1,401,001
Proceeds from sale of property and equipment 10,575 3,500
---------- ----------
Net cash provided by (used in) investing
activities (449,057) 62,209
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 58,000 108,812
Common stock purchased and retired (4,321,673)
Proceeds from (repayment of) note payable (2,270,686) 2,150,000
---------- ----------
Net cash used in financing activities (2,212,686) (2,062,861)
---------- ----------
Effect of exchange rate changes on cash (313)
NET INCREASE (DECREASE) IN CASH 1,453,673 (599,000)
CASH AT BEGINNING OF PERIOD 951,084 3,038,956
---------- ----------
CASH AT END OF PERIOD $2,404,757 $2,439,956
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for income taxes $1,106,291 $1,155,710
Interest $ 156,927 $ 13,858
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 June 30, 1998 and December 31, 1997 consisted of the
following:
June 30, December 31,
1998 1997
----------- -----------
Finished goods $1,291,652 $1,231,584
Work-in-process 854,092 1,204,873
Raw materials 2,392,204 3,355,601
---------- ----------
Total $4,537,948 $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 June
30, 1998 and YTD 1998 is as follows:
2nd Quarter YTD
1998 1998
----------- -----------
Total Comprehensive Income $ 1,270,842 $ 2,050,035
(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 June 30, 1998:
On July 29, 1998, UM purchased the neonatal product line assets, including
manufacturing processes, intellectual property rights and business, of Gesco
International Inc. and Bard Access Systems Inc., both subsidiaries of C.R. Bard,
Inc. The purchase price was $4.2 million, paid in cash, plus a future $0.3
million milestone payment if 1999 revenues exceed a targeted amount, plus a one
percent royalty on net Gesco neonatal sales for five years. The initial cash
payment was financed using available credit on a $10,000,000 unsecured revolving
promissory note with First Security Bank. The acquisition will be considered a
purchase for accounting purposes. Goodwill resulting from the asset purchase
will be tax deductible.
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
or six month period in comparison with a previous three or six month period may
not be indicative of comparative results for the year as a whole.
a) Overview
Total sales in 2Q 1998 increased 33.0% relative to sales in 2Q 1997. Ob/Gyn
sales increased 61.9% relative to 2Q 1997, while critical care sales decreased
4.9%. The addition of Columbia Medical, Inc. (CMI) sales to 2Q 1998 results,
and absence of the 2Q 1997 short-term negative impact from switching to direct
sales representatives from stocking distributors in two regions of the U.S.
primarily explains the 2Q 1998 Ob/Gyn sales increase relative to 2Q 1997. Sales
to Baxter of $124,000 in 2Q 1998 compared to $393,000 in 2Q 1997 are responsible
for the decrease in critical care sales. Gross margins were lower at 50.4% of
sales in 2Q 1998 compared to 52.4% in 2Q 1997, while operating profit margins
increased to 23.0% of sales in 2Q 1998 from 21.2% in the same period of 1997.
Gross margins in 2Q 1998 were negatively impacted by significant reductions in
inventories. Operating margins benefitted from higher sales volume relative to
stable operating expenses. Operating expenses were down from 31.1% of sales in
2Q 1997 to 27.4% of sales in 2Q 1998. Actual operating expenses were $270,000
higher in 2Q 1998 due mainly to the acquisition of CMI, including new G&A
expense from amortization of goodwill of $84,000. Operating income increased
$479,000, or 44.2%, from the 2Q 1997. Other income decreased $122,000 in 2Q
1998 from the same period in 1997, due mainly to higher interest expense and
lower earnings on investments in 1998. Net income, at $1,127,000 in 2Q 1998,
increased $231,000, or 25.8%, from the second quarter of 1997. Earnings per
share (eps) of 13.5c in 2Q 1998 compared with 10.5c in 2Q 1997 were aided by
193,000 fewer diluted shares outstanding in 2Q 1998. Results for the first half
(1H) of 1998 compared to 1H 1997 in a similar way with the quarterly results
comparisons detailed above.
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 disposable respiratory hoods and the newly
acquired Gesco product line, and 3) subcontract molding.
Sales of obstetrics products in 2Q 1998 were $3,633,000 compared to
$2,091,000 in 2Q 1997. Starting in the third quarter of 1997, revenues from CMI
were included in UM's business, including operative vacuum delivery systems.
First half 1998 obstetric sales were $7,031,000 compared to $4,426,000 in 1H
1997. In 1H 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 2Q 1997. In 2Q 1998, sales of Intran
represented 76% of obstetrics sales compared to 96% in 2Q 1997. As a percentage
of total UM sales, obstetrics product revenues represented 54% in 2Q 1998
compared to 43% in 2Q 1997. Gynecology/ urology/ ES product sales were
$1,059,000 in 2Q 1998 compared to $807,000 in 2Q 1997. First half 1998 sales in
this category were $2,082,000 compared to $1,604,000 in 1H 1997. As in the
obstetrics category, the 1997 distributor terminations reduced gynecology
product sales during 1H 1997. Several new products are aiding growth in this
category, including EpitomeR, a unique ES scalpel; LibertyR, a conservative
therapy for female urinary incontinence; Pathfinder Plus , an irrigation device
for endoscopic procedures; and CMI's urology pumps. In 2Q and 1H of both 1997
and 1998, gynecology/ urology revenues represented 16% of total UM sales. 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.
Critical care revenues were $2,095,000 in 2Q 1998 compared to $2,203,000 in
2Q 1997. First half 1998 critical care sales were $4,047,000, compared to
$4,244,000 in 1H 1997. Included in this category are transducers and other
components used in blood pressure monitoring sold to Baxter, which sales in 2Q
1998 were $124,000 compared to $393,000 in 2Q 1997, and $233,000 in 1H 1998
compared to $847,000 in 1H 1997. The decline in sales to Baxter was partially
offset by higher sales of pressure monitoring devices to other similar
customers. The July 29, 1998 purchase of Gesco's neonatal product line (see
note 6 on page 5, above) will increase revenue in the critical care category and
strengthen UM's presence in Neonatal Intensive Care Units of hospitals.
Second quarter and first half 1998 foreign sales were $1,235,000 and
$2,477,000, respectively, compared to $1,340,000 and $2,535,000 in the same
periods of 1997. None of the 1H 1998 foreign sales were to Baxter, compared to
$45,000 and $159,000 of foreign sales to Baxter in 2Q and 1H 1997, respectively.
Critical care products represented 81% and 83% of international sales in 2Q and
1H 1998, respectively, compared to 86% and 85% in 2Q and 1H 1997, respectively.
Foreign sales comprised 18% and 19% of total non-Baxter sales in 2Q and 1H 1998,
respectively, compared to 28% and 25% in 2Q and 1H 1997, respectively. 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 both 2Q and 1H 1998, were 50% compared to 52% in both 2Q and 1H
1997. Gross margins were lower in the 1998 periods because of an unfavorable
mix of international blood pressure monitoring sales, the impact of exchange
rates on those sales, and unfavorable costs from reducing slower moving
inventory. A shorter-term challenge for UM is absorption of manufacturing
overhead given the current 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 beginning in late 1998 and 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 2Q and
1H 1998 were $1,562,000 and $2,931,000, respectively, compared to $1,083,000 and
$2,176,000 in 2Q and 1H 1997, respectively. Even though gross margins declined
as a percentage of sales, 2Q and 1H 1998 operating profits increased to 23% and
22% of sales, respectively, from 21% of sales in both 2Q and 1H 1997. Second
quarter and 1H 1998 operating expenses in dollars increased by $270,000 and
$474,000, respectively, relative to 2Q and 1H 1997, including amortization of
goodwill increasing G&A expenses by about $84,000 per quarter.
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 2Q and 1H 1998 decreased to 24% of revenues compared to 26%
in both 2Q and 1H 1997. Higher sales in 2Q and 1H 1998 compared to 2Q and 1H
1997 more than offset the impact of increased goodwill amortization associated
with the July 1997 CMI acquisition. UM expects SG&A expenses as a percentage of
sales to decline modestly in the last half of 1998 due to the addition of Gesco,
whose 1998 sales will continue to be through Gesco's previous distributors.
UM's S&M expenses are driven primarily by the direct sales portion of its
business. S&M expenses in 2Q and 1H 1998 were $969,000 and $1,913,000,
respectively, compared to $820,000 and $1,652,000 in 2Q and 1H 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
83% of total sales in 2Q 1998 compared to 78% in 2Q 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. At the beginning of 1Q
1998, UM terminated one additional distributor, further decreasing the
percentage of total direct U.S. sales through stocking distributors versus UM's
own directly employed sales representatives.
G&A expenses increased $119,000 to $633,000 in 2Q 1998, relative to 2Q 1997,
and $239,000 to $1,299,000 in 1H 1998 relative to 1H 1997. Included in 1H 1998
G&A expenses was amortization of goodwill related to the CMI acquisition of
$168,000. UM plans to hold its 1998 G&A dollar expenses in Utah and Ireland
consistent with 1997, but the addition of G&A expenses related to CMI and Gesco
added together with amortization of goodwill from those purchases will likely
result in G&A expenses as a percentage of sales approximately the same in 1998
as in 1997.
R&D expenses were $256,000 and $465,000 in 2Q and 1H 1998, respectively,
compared to $254,000 and $492,000 in 2Q and 1H 1997. As a percentage of sales,
R&D expenses were 4% in both periods of 1998, compared to 5% in both periods of
1997. A major portion of UM's current internal product development expenditures
are focused on its fetal pH monitoring project. Other projects include the
Fowler Endocurette, 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. Beginning in 3Q 1998, products
acquired in the recent Gesco acquisition will be further enhanced and 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 declined $122,000 and $195,000 in 2Q and 1H
1998, respectively, from the same periods in 1997. Non-operating income in 2Q
1998 represented about 10% of pretax income, compared to 21% in 2Q 1997. For
the first half, non-operating income represented 18% of pretax income in 1998,
compared to 27% in 1997. Because of debt financing used in the 2H 1997
acquisition of CMI, interest payments were higher by $52,000 and $143,000 in 2Q
and 1H 1998, 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 half of 1998 will be substantially less than the first half 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 26% and 27% in
2Q and 1H 1998, respectively, compared to 27% and 29% in the same periods of
1997, respectively.
Net income is EBT minus income taxes. Net income in 2Q and 1H 1998 was
$1,127,000 and $2,286,000, respectively, compared to $895,000 and $1,935,000 in
2Q and 1H 1997, respectively. Net income as a percentage of sales, at 17% in
both 1998 periods and 18% in both 1997 periods, ranks UM in the top
profitability tier of U.S. publicly traded companies. UM's effective income tax
rate was 35% and 36% in 2Q and 1H 1998, respectively, compared to 35% 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 rate in 1H 1998 reflects the
non-deductibility of goodwill for tax purposes associated with the CMI
acquisition, 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 2Q 1998 were $.135 compared to
$.105 for 2Q 1997. For the first half, diluted EPS were $.274 in 1998, compared
to $.224 in 1997. Weighted average diluted shares in 2Q 1998 were 8,342,000
compared to 8,535,000 in 2Q 1997. Actual outstanding common shares as of June
30, 1998 were 8,313,036 compared to 8,388,786 as of June 30, 1997. The dilution
calculation added about 29,000 shares to basic shares outstanding in 2Q 1998,
compared to about 65,000 in 2Q 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 30% ROE will
support 30% growth in sales activity. ROE in both 2Q and 1H 1998, at 19%, along
with ROE of 16% and 17% in 2Q and 1H 1997, respectively, was below management's
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. 1H 1998 EBDIT were $4,734,000 compared to $3,631,000 in 1H 1997,
or as a ratio of sales, 36% in 1H 1998 and 35% in 1H 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 2Q 1997 through its revolving
line of credit (LOC), which as of June 30, 1998, provided an additional
$3,292,000 in cash to facilitate the timing of the CMI acquisition.
Cash (and equivalent) balances were $2,405,000 at June 30, 1998, an increase
of $1,454,000 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 2Q 1998 was $2,271,000 to pay down the LOC, which was
also reclassified as a short-term liability from long-term during 1H 1998
because the remaining term on the LOC is under 12 months as of June 30, 1998.
Net working capital changes provided $721,000 in 1H 1998 cash, with the major
contribution being a $1,180,000 reduction in inventories (adjusted for exchange
rate changes). Working capital changes used $1,227,000 in cash, dominated by
increases in inventories, during 1H 1997.
During 1H 1998, UM used cash of $235,000 on the purchase of technology
rights and prosecution of new patents, and $225,000 on improvements to property
and equipment. During 1H 1997, UM spent $1,230,00 on capital purchases,
including costs associated with completing the Irish manufacturing facility.
Excluding the Gesco acquisition and other acquisitions along with additional
share repurchases, UM plans for capital expenditures during the remainder of
1998 to be less than during 1997, and less than current depreciation rates.
Financing activities in 1H 1998 resulted in a cash decrease of $2,213,000
compared to a decrease of $2,063,000 in 1H 1997. In 1H 1998 the decrease
resulted from reducing UM's LOC balance, while in 1Q 1997 the decrease was the
result of stock repurchases, offset by increases in the LOC. The Company
received $58,000 in 1H 1998 from issuing stock (on exercise of an employee
option), compared to $109,000 in 1H 1997. Amounts borrowed under the LOC are
unsecured and are due March 25, 1999.
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, announced on July
30, 1998, is an example of products that the Company feels can meet those needs.
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 1998 after receiving FDA premarketing concurrence.
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 April 7, 1998, UM filed a report on Form 8-K, Item 6, Resignation of
Registrant's Directors, reporting that Perry L. Lane resigned as a director,
effective April 1, 1998.
Subsequent to June 29, 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. (see note 6 on
page 5, above).
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: 8/11/98 By: /s/ Kevin L. Cornwell
Kevin L. Cornwell
CEO and CFO
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<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET AS OF JUNE 30, 1998, AND STATEMENTS OF OPERATIONS FOR THE QUARTER ENDED
JUNE 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
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<SECURITIES> 0
<RECEIVABLES> 4,566,352
<ALLOWANCES> (72,896)
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<SALES> 13,160,649
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<CGS> 6,552,775
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<OTHER-EXPENSES> (784,291)
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<INTEREST-EXPENSE> 156,927
<INCOME-PRETAX> 3,557,930
<INCOME-TAX> 1,272,272
<INCOME-CONTINUING> 2,258,658
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